Annual Financial Report

RNS Number : 3122C

British Assets Trust PLC

15 January 2015

 



BRITISH ASSETS TRUST PLC

Date:  15 January 2015

Results for the year ended 30 September 2014

Highlights

·      Net asset value total return of 6.6 per cent

·      Share price total return of 6.3 per cent

·      Benchmark total return of 7.3 per cent

·      Discount at the year end of 3.8 per cent (on an ex-income NAV with debt at market value basis)

·      Dividend increase of 3.0 per cent

·      Dividend yield of 4.8 per cent based on the year-end share price

·      On 30 October 2014 the Board announced important proposals regarding the future of your Company:

o Firstly, to seek shareholder approval to change the Company's existing investment objective and policy to a new investment objective and policy which will be set out within a separate shareholder circular which is expected to be posted on or around 21 January 2015;

o Secondly, to appoint BlackRock Fund Managers Limited  as the Company's new investment manager; and

o Thirdly, to seek shareholder approval to implement a tender offer.

·      Assuming the proposals receive the necessary shareholder support, the Company will be re-named BlackRock Income Strategies Trust plc to reflect the Board's commitment to income generation for shareholders as part of delivering a total portfolio return of UK Consumer Price Index ('CPI') + 4 per cent per annum (before ongoing charges) over the medium term (five to seven years), as well as the range of approaches that will be deployed to achieve these outcomes.

·      The Board believes that the proposed changes represent a unique opportunity to transform the Company into a strongly differentiated and relevant vehicle focused on delivering a highly attractive offering in the rapidly changing lifetime savings and pensions market.

Chairman's Statement

Overview

Since the year-end your Board has proposed some important changes. On 30 October 2014, following a review of the new opportunities that we expect to be created by the rapidly changing environment for the UK savings and pension market, and to recognise what we believe shareholders of British Assets value most, we have decided to do the following:-

·      Firstly, to seek shareholder approval to change the Company's existing investment objective and policy to a new multi-asset investment objective and policy;

·      Secondly, to appoint BlackRock Fund Managers Limited as the Company's new investment manager; and

·      Thirdly, to seek shareholder approval to implement a tender offer.

Your Board believes that these proposals are attractive for all shareholders, including investors through the F&C Savings Plans, for the following reasons:

·      The new investment policy will continue to offer an attractive level of income. We expect to continue paying dividends at least at the current level of 6.44 pence per share per annum and to grow the dividend in line with inflation.

·      The focus of the Company will be on delivering greater capital stability than an equity only portfolio, with an objective of achieving a total portfolio return of UK Consumer Price Index ('CPI') + 4 per cent per annum (before ongoing charges) over the medium term (five to seven years).

·      The Board has selected the highly-rated BlackRock multi-asset team which currently manages over £15 billion of assets and is very well positioned to manage the Company's portfolio and deliver the returns we intend for shareholders. BlackRock is the world's largest fund manager and has a strong performance track record, brand and reputation.

·      As part of our strategy to improve liquidity in the Company's shares, the Board intends to enable any shareholders who wish to sell their shares at a price close to Net Asset Value to do so by implementing a tender offer prior to 31 August 2015 for up to 20 per cent of shares in issue at that time (excluding any shares held in treasury) at a 2 per cent discount to the cum income Net Asset Value per share (with debt at market value) less costs and expenses. This tender offer is subject to shareholder approval.

·      The Board believes that the new investment policy, combined with BlackRock's investment management and marketing expertise, should result in higher demand for the shares which will, in turn, lead to a re-rating of the shares by narrowing towards zero the current discount to Net Asset Value. Your Board believes that it is in the best interests of all our shareholders that the Company's shares trade at a price as close as possible to their underlying cum income Net Asset Value per Share (with debt at market value) ("NAV"). In normal market conditions and following the Tender Offer, the Board intends to purchase and issue/re-issue shares in the market to ensure that Shares trade as close as possible to their underlying NAV on a consistent basis. To support this strategy, the Company is seeking to renew the shareholder authority to purchase and issue/re-issue Shares at the forthcoming Annual General Meeting.

·      There will be no change to the management fee paid and therefore BlackRock will be paid an annual management fee of 0.4 per cent on the value of the Company's total assets less current liabilities (excluding loans).

We are very excited by this opportunity for the Company and believe that the proposed changes represent a unique opportunity to transform the Company into a strongly differentiated and relevant vehicle focused on delivering a highly attractive product offering in the rapidly changing lifetime savings and pensions market. We are encouraged by the positive investor and market reaction to the proposals. These proposals represent a material change in the investment objective and policy and therefore require shareholder approval. The Board strongly recommends these Proposals to shareholders.

Details of the Proposals will be contained in a separate circular to shareholders which is expected to posted on or around 21 January 2015 and will be available from the Company's websites (www.britishassetstrust.co.uk or www.british-assets.co.uk) shortly thereafter.  Resolutions relating to the Proposals will be put to shareholders at a separate General Meeting which will be held immediately after the Annual General Meeting on 26 February 2015.

Assuming the Proposals receive the necessary shareholder support, it is intended that the Board will resolve to re-name the Company BlackRock Income Strategies Trust plc to reflect our commitment to income generation for shareholders as part of delivering a total portfolio return of CPI + 4 per cent per annum (before ongoing charges) over the medium term (five to seven years), as well as the range of approaches that will be deployed to ensure these outcomes are achieved.

The Board would like to place on record its sincere appreciation for the services and commitment that

F&C has provided over many years as your investment manager.

Performance

Our net asset value total return of 6.6 per cent for the year ending 30 September 2014 was an acceptable level of absolute return although it fell short of the total return of 7.3 per cent from the composite benchmark (80 per cent FTSE All-Share Index and 20 per cent FTSE World (ex UK) Index).

Over the last 1, 3, 5 and 10 years total return performance vs benchmark has been as set out in the table below. The three months to December 2014 are also shown:-

Years to 30 September, % pa	BAT NAV Total Return	Composite Benchmark Total Return
3 months to 31/12/14	(0.7)	1.4
1 year	6.6	7.3
3 years	13.0	14.4
5 years	8.9	10.0
10 years	7.1	8.4

Earnings and Dividends

The Company's revenue earnings for the year amounted to 7.0 pence per share (2013: 6.6 pence per share).

The Company's ongoing charges for the year were 0.65 per cent of shareholders' funds (2013: 0.70 per cent).

A first quarterly interim dividend of 1.485 pence per share was paid on 11 April 2014, and second and

third quarterly interim dividends of 1.530p per share were paid on 11 July and 10 October 2014 respectively. On 25 November 2014, the Board declared a fourth and final quarterly interim dividend of 1.895 pence per share which will be paid on 30 January 2015 to shareholders on the register on 30 December 2014. This brings the total dividends for the year to 6.440 pence per share, representing an increase of 3.0 per cent as compared to the total dividends for the year ended 30 September 2013

of 6.2522 pence per share.

The new investment policy will continue to offer an attractive level of income. We expect to continue to pay dividends at least at the current level of 6.440 pence per annum and to grow the dividend in line with inflation.

Gearing

At the end of the year, the Company's level of gearing, net of cash, was 14.9 per cent. This was represented by 3.4 per cent of equity gearing and 11.5 per cent in corporate bonds.

The Company's borrowings currently comprise £60 million 6.25 per cent Bonds which are due for redemption in 2031, and a £50 million bank facility which matures in March 2016. The bank facility was put in place in March 2013 to replace the previous £60 million facility which matured at that time. The new facility includes terms which are typical for a facility of this nature, and the principal covenants are similar to those previously in place. £20.0 million of the bank facility was drawn down at the end of the year.

Discount Control Policy

No shares were bought back by the Company in the financial year ended 30 September 2014. Since the year-end the Company has acquired 1.0 million shares on 14 October 2014 which are now held in Treasury.

As explained in more detail in my Overview at the beginning of this statement, following the Tender Offer the Board intends to purchase and issue shares so that in normal market conditions the Company's shares trade at a price close to their underlying Net Asset Value on a consistent basis.

Board Composition

All of the Directors are standing for re-election at the Annual General Meeting. For the last four years I

have been a director of another investment company managed by BlackRock and  therefore  in accordance with the rules of the UK Listing Authority I will step down as your Chairman. Subject to re-election by shareholders, I will remain a Director of the Company. James Long will become the new Chairman and Ian Russell will become the Chairman of the Audit Committee.

Annual General Meeting

The Annual General Meeting will be held at Drapers' Hall, Throgmorton Street, London EC2N 2AN on

Thursday 26 February 2015 at 10.30am. It will include a presentation from Adam Ryan of BlackRock who will manage the portfolio in the event that the Proposals are approved. This is an excellent opportunity for shareholders to meet both the Board and the proposed investment managers.

Investment Outlook

Global economic growth will likely remain positive but muted over the next three to six months. However this masks considerable disparity amongst regions and even countries, as US and UK momentum continues whilst continental Europe and certain emerging economies face headwinds. It remains difficult to see where inflationary pressures may emerge and, consequently, it is expected that monetary policy will remain accommodative. Even in economies where growth is pushing down unemployment, policy makers remain reluctant to increase interest rates amid fears that sentiment remains fragile. This backdrop should continue to be supportive of risk assets, such as equities and corporate bonds, provided companies are able to produce decent earnings growth to support valuations which are no longer cheap.

The consensus among central banks to support growth via asset purchase programmes and fiscal stimulus will likely start to fracture as policy makers in the US and UK anticipate rate rises. On the continent, renewed deflationary fears support continued action although the European Central Bank has thus far stopped short of full-on quantitative easing. Recent Japanese GDP figures disappointed those who believed Prime Minister Abe's "Three Arrows" policies to be having a stimulative effect and it is likely that further structural reform is needed to sustain growth. Finally, in China - one of the mainstays of global demand in recent years - growth is slowing as the economy adjusts from being export-led to one more driven by domestic consumption. Against this background of mixed growth, it should also be noted that sentiment over the next six months will also be dominated by oil as OPEC production continues despite a near 50 per cent price drop in price. At the same time, geopolitical tension in Eastern Europe and the Middle East will continue to affect market performance.

It is the Board's view that the proposed new investment approach is better suited to such a market environment. The proposed Investment Manager will be allowed greater asset allocation flexibility to better preserve capital and grow the dividend during such periods of uncertainty, and a wider set of investment tools with which to deliver our desired performance outcomes for our shareholders.

Lynn Ruddick

Chairman

Income Statement

For the Year ended 30 September 2014

	Notes	2014	2014	2014
		Revenue	Capital	Total
		£'000	£'000	£'000
Gains on investments		-	9,596	9,596
Exchange differences		-	969	969
Income		23,608	-	23,608
Management expenses		(700)	(1,301)	(2,001)
Other expenses		(711)	-	(711)
Net return before finance costs & taxation		22,197	9,264	31,461
Finance costs		(1,460)	(2,711)	(4,171)
Return on ordinary activities before tax		20,737	6,553	27,290
Tax on ordinary activities		(439)	-	(439)
Return attributable to shareholders		20,298	6,553	26,851
Return per share	3	7.0p	2.3p	9.3p

The total column of this statement is the Profit and Loss Account of the Company.  The supplementary revenue and capital columns are both prepared under guidance published by The Association of Investment Companies.

All revenue and capital items in the above Income Statement derive from continuing operations.

No operations were acquired or discontinued in the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above Income Statement.

Income Statement

For the Year ended 30 September 2013

		2013	2013	2013
	Notes	Revenue	Capital	Total
		£'000	£'000	£'000
Gains on investments		-	41,028	41,028
Exchange differences		-	(154)	(154)
Income		22,382	-	22,382
Management expenses		(671)	(1,246)	(1,917)
Other expenses		(870)	-	(870)
Net return before finance costs & taxation		20,841	39,628	60,469
Finance Costs		(1,465)	(2,720)	(4,185)
Return on ordinary activities before tax		19,376	36,908	56,284
Tax on ordinary activities		(359)	-	(359)
Return attributable to shareholders		19,017	36,908	55,925
Return per share	3	6.6p	12.7p	19.3p

Reconciliation of Movements in Shareholders' Funds

For the year ended 30 September 2014          

	Called up Share Capital	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Shareholders' Funds
	£'000	£'000	£'000	£'000	£'000
Opening shareholders' funds	72,778	15,563	296,437	33,567	418,345
Dividends paid	-	-	-	(18,331)	(18,331)
Return attributable to ordinary shareholders	-	-	6,553	20,298	26,851
Closing shareholders' funds	72,778	15,563	302,990	35,534	426,865

Reconciliation of Movements in Shareholders' Funds

For the year ended 30 September 2013

	Called up Share Capital	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Shareholders' Funds
	£'000	£'000	£'000	£'000	£'000
Opening shareholders' funds	72,778	15,563	261,772	32,422	382,535
Share buy-backs	-	-	(2,243)	-	(2,243)
Dividends paid	-	-	-	(17,872)	(17,872)
Return attributable to ordinary shareholders	-	-	36,908	19,017	55,925
Closing shareholders' funds	72,778	15,563	296,437	33,567	418,345

Balance Sheet

As at 30 September 2014        

	2014	2013
	£'000	£'000
Fixed assets
Investments at fair value through profit or loss	490,690	488,278
Current assets
Debtors	5,420	23,072
Cash in bank and on deposit	14,790	14,594
	20,210	37,666
Creditors: amounts falling due within one year	(24,482)	(48,072)
Net current liabilities	(4,272)	(10,406)
Total assets less current liabilities	486,418	477,872
Creditors: amounts falling due after more than one year	(59,553)	(59,527)
Net assets	426,865	418,345
Capital and reserves
Called-up share capital	72,778	72,778
Capital redemption reserve	15,563	15,563
Capital reserve	302,990	296,437
Revenue reserve	35,534	33,567
Equity shareholders' funds	426,865	418,345
Net asset value per share	147.5p	144.5p

Cash Flow Statement

For the Year Ended 30 September 2014

	2014	2013
	£'000	£'000
Operating activities
Investment income received	23,753	21,823
Deposit interest received	32	29
Option premiums received	114	409
Underwriting commission received	27	39
Management expenses paid	(2,001)	(1,917)
Other cash payments	(708)	(897)
Net cash inflow from operating activities	21,217	19,486
Servicing of finance
Interest on 6.25 per cent Bonds 2031	(3,750)	(3,750)
Interest on revolving advance facility	(402)	(422)
Net cash outflow from servicing of finance	(4,152)	(4,172)
Capital expenditure and financial investment
Purchases of investments	(351,175)	(344,520)
Sales of investments	356,482	344,617
Net cash inflow from capital expenditure and financial investment	5,307	97
Equity dividends paid	(18,331)	(17,872)
Net cash inflow/(outflow) before financing	4,041	(2,461)
Financing
Revolving advance facility (repaid)/drawndown	(5,023)	5,015
Ordinary Shares purchased to be held in treasury	-	(2,243)
Net cash (outflow)/inflow from financing	(5,023)	2,772
(Decrease)/increase in cash	(982)	311
Reconciliation of net cash flow to movement in net debt
(Decrease)/increase in cash in the year	(982)	311
Revolving advance facility repaid/(drawndown)	5,023	(5,015)
Change in net debt resulting from cash flows	4,041	(4,704)
Currency gains/(losses)	1,132	(187)
Increase in 6.25 per cent Bonds 2031 liability	(26)	(27)
Movement in net debt in the period	5,147	(4,918)
Opening net debt	(69,886)	(64,968)
Closing net debt	(64,739)	(69,886)

Principal Risks and Risk Management

The Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council, and has established an ongoing process designed to meet the particular needs of the Company in managing the risks and uncertainties to which it is exposed.

The principal risks and uncertainties faced by the Company are described below and in note 2 which provides detailed explanations of the risks associated with the Company's financial instruments.

·    Market - the Company's fixed assets consist almost entirely of listed securities and it is therefore exposed to movements in the prices of individual securities and the market generally.

·    Investment and strategic - incorrect investment strategy, asset allocation, stock selection and the use of gearing could all lead to poor returns for shareholders.

·    Regulatory - breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties, or a qualified audit report.  Loss of investment trust status could lead to the Company being subject to tax on capital gains.

·    Operational - failure of the Managers' accounting systems or disruption to its business, or that of other third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.

·    Financial - inadequate controls by the Managers or other third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations. Breaching bond and loan covenants or being unable to replace maturing borrowing facilities could lead to a loss of shareholders' confidence and financial loss for shareholders.

The Board seeks to mitigate and manage these risks through continual review, policy setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company's investment portfolio. Investment risk is spread through holding a wide range of securities in different countries and industrial sectors. The Managers monitor investment risk and the Board receives quarterly risk reports.

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge, in respect of the Annual Report for the year ended 30 September 2014, of which this statement of results is an extract:

·      The financial statements have been prepared in accordance with applicable UK Accounting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Annual Report includes a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      The Annual Report includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

Lynn Ruddick

Director

Notes

1.         The financial statements have been prepared under UK Generally Accepted Accounting Practice ('UK GAAP') and in accordance with guidelines set out in the Statement of Recommended Practice ('SORP') for investment trust companies and venture capital trusts, issued in January 2009 by the Association of Investment Companies, except as disclosed in the following paragraph.

            Expenses which are allocated to capital are available to reduce the Company's liability to corporation tax.  The SORP recommends that the benefit of that tax relief should be allocated to capital and a corresponding charge made to revenue.  This is known as the 'marginal method' of allocating tax relief between capital and revenue.  The Company does not adopt the marginal method for two reasons.  Firstly, the Company has only one class of share and any allocation of tax relief between capital and revenue would have no impact on shareholders' funds.  Secondly, the significant unutilised management expenses and interest carried forward make it unlikely that the Company will be liable to corporation tax in the foreseeable future.  Had this allocation been made, the charge to revenue and corresponding credit to capital for the year ended 30 September 2014 would have been £102,000 (2013: £165,000).

2.         Financial instruments

The Company's financial instruments comprise equity and fixed interest investments, foreign currency exchange contracts, cash balances, bonds, a bank loan and debtors and creditors that arise directly from its operations. As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company makes use of borrowings with a view to achieving improved performance in markets. The risk of borrowings may be reduced by raising the level of cash balances held.  The Company also has the ability to enter into derivative transactions in the form of financial currency contracts and futures and options, subject to Board approval, for the purpose of managing currency and market risk arising from the Company's portfolio, and enhancing income. 

Fixed asset investments held are valued at fair value. For listed securities this is either bid price or the last traded price depending on the convention of the exchange on which the investment is listed.  Unquoted investments are valued by the Directors on the basis of all information available to them at the time of valuation.   

The main risks that the Company faces arising from its financial instruments are:

(i)         market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

            (ii)         interest rate risk, being the risk that the value of financial instruments will fluctuate or that the future cash flows of financial instruments will fluctuate because of changes in market interest rates;

(iii)        credit risk, being the risk that a counterparty to a financial instrument will fail to       discharge an obligation or commitment that it has entered into with the Company;

(iv)        liquidity risk, being the risk that that the Company may not be able to liquidate its investments quickly enough to meet its ongoing financial commitments; and

(v)         foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales and income will fluctuate because of movements in currency rates.

Market price risk

The management of market price risk is part of the fund management process and is typical of equity -investment. The bond portfolio is exposed to movements in price due to fluctuations in interest rates. The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with an objective of maximising overall returns to shareholders. Derivatives may be used from time to time to hedge - specific market risk, to gain exposure to a specific market or to enhance income.

Interest rate risk

(a)  Floating rate

Interest payments are received on cash balances by reference to the bank base rate for the relevant currency for each deposit.

(b)  Fixed rate

The Company holds fixed interest investments and has fixed interest liabilities.

The Company's 6.25 per cent Bonds 2031 are denominated in sterling. In the event that the Company decides to repay the bonds before their maturity date the terms of issue may result in a penalty for early repayment.

Credit risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The carrying amounts of financial assets best represents the maximum credit risk exposure at the balance sheet date.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the diversity of counterparties used.

All the assets of the Company which are traded on a recognised exchange are held by JPMorgan Chase Bank, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited. The Board monitors the Company's risk by reviewing the custodian's internal control reports.  The Managers have a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis.

The credit risk on liquid funds and derivative financial instruments is controlled through the Managers' process for approving counterparties, which incorporates both a quantitative and qualitative review in order to achieve an overview of the credit worthiness of all counterparties. Bankruptcy or insolvency of such counterparties may cause the Company's ability to access cash placed on deposit to be delayed, limited or lost. 

Liquidity risk

The Company maintains sufficient investments in cash and readily realisable securities to pay expenses as they fall due. Short term flexibility is achieved, where necessary, through the use of overdraft facilities.  The Company's liquidity risk is managed on an ongoing basis by the Managers.

Foreign currency risk

The Company invests in overseas securities and holds foreign currency cash balances which give rise to currency risks. In the year to 30 September 2013, the Company entered into US Dollar and Euro foreign currency contracts with a view to partially hedging these currency risks

3.         Return per Ordinary Share is based on a weighted average of 289,412,282 (2013: 290,245,981) Ordinary Shares in issue during the year. 

4.         The fourth interim dividend of 1.895p per Ordinary Share will be paid on 30 January 2015 to shareholders on the register at close of business on 30 December 2014.

            The last date for receipt of mandate instructions for those shareholders who wish to join the Dividend Reinvestment Plan is 9 January 2015.

5.         The Company had 289,412,282 (2013: same) Ordinary Shares in issue as at 30 September 2014, excluding these shares bought back and held in treasury.

6.         The Company's geographic exposure as a percentage of ordinary shareholders' funds at 30 September 2014 was as follows (comparative figures are for 30 September 2013).

	2014	2013
UK Equities	74.6	78.1
International Equities: - Developed Americas - Developed Europe - Japan - Other Developed Emerging Markets	12.0 9.0 3.1 0.5 4.2	6.7 8.3 0.8 0.4 9.6
Corporate Bonds	11.5	12.8
Gearing	(14.9)	(16.7)
Total	100.0	100.0

7.         This announcement is not the Company's statutory accounts.  The statutory accounts for the year ended 30 September 2013 have been delivered to the Registrar of Companies and received an audit report which was unqualified and did not contain any emphasis of matter.

The Annual Report for the year ended 30 September 2014, including the Notice of the Annual General Meeting, will be posted to shareholders and is available for inspection at 80 George Street, Edinburgh EH2 3BU, the registered office of the Company, and on the Company's websites, www.britishassetstrust.co.uk or www.british-assets.co.uk.

For further information please contact:

F&C Investment Business Ltd:

Gordon Hay Smith                     [phone] 

Cenkos Securities plc:

Sapna Shah                              [phone]

Will Rogers                               [phone]

 

END

 

 

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