Final Results

RNS Number : 0080G

Edinburgh Dragon Trust plc

17 October 2008

 



17 October 2008

EDINBURGH DRAGON TRUST plc

PRELIMINARY RESULTS FOR THE YEAR TO 31 AUGUST 2008

Edinburgh Dragon Trust's objective is long-term capital growth through investment in the Far East (excluding Japan and Australasia). The Company's benchmark is the MSCI All Country Asia (ex Japan) Index.

• In difficult financial markets, the Company performed well for the year to 31 August 2008.

• The Company's net asset value rose 1.5% on a total return basis compared to a fall of 8.8% in the MSCI All Country Asia (ex Japan) Index.

• Dragon's portfolio is well diversified with quality stocks and we remain optimistic that the companies we hold can strengthen their competitive positions. 

• The Company increased its cash levels during the year in order to meet the $80 million loan notes liability due in December 2008. The Board has recently secured a £40 million loan facility to allow the Company to take advantage of gearing when appropriate.  

For further information please contact:-

Peter Hames, Investment Director, Aberdeen Asset Management Asia    0065 6395 2700

Ian Massie, Head of Investment Trust Investor Relations,    0131 528 4000

Aberdeen Asset Management 

  Edinburgh Dragon Trust plc

Chairman's Statement 31 August 2008

Background 

In what were extremely difficult conditions for global financial markets, I am pleased to report that the Company performed well in the year ended 31 August 2008. The net asset value rose by 1.5% on a total return basis, compared with a fall of 8.8% in the benchmark, the MSCI All Country Asia (ex Japan) Index. It is also pleasing to note that our Manager's belief - that valuations in Asian markets and certain sectors were becoming overstretched - has paid off, and that rotation into the more defensive counters this year has resulted in significant outperformance by the Company's portfolio.

During the year under review, the share price rose by 1.2% to 146p, reflecting a marginal narrowing of the discount from 11.1% to 10.7%.

Overview 

For the past year, heightened concerns over a prolonged credit crunch, deteriorating economic prospects and rising inflation have continued to unnerve many investors. In August, September and October last year, Asian markets had ignored events unfolding in the US credit markets. Reality soon set in, however, and from November onwards they tracked the downward path of their Western counterparts.

Questions early this year centered on whether Asian economies and markets had decoupled from the developed world. The performance of equity markets suggested this was not the case. On the other hand, economic growth in Asia throughout the year remained robust, notwithstanding weaker export demand. While the importance of US and European exports has certainly declined in recent years, it is clear intra-Asian trade has to some degree compensated.

At a portfolio level, however, Asia is still very dependent on foreign capital, as evidenced by the strong outflows across markets. That movement, however, appeared more a response to policy failure internationally, since, despite a string of aggressive interest-rate reductions, tax cuts, special liquidity schemes and bank bailouts by the US authorities, any relief rallies quickly fizzled out. 

Inflationary fears have also surfaced, driven by booming commodity prices, and presented a dilemma for many Asian central banks. Most chose to let events take their course, hoping that some modest monetary tightening would suffice to cool prices without damaging growth. That calculation appears increasingly to have paid off, with prices of both hard and soft commodities now weakening, providing some relief for Asian central banks and governments alike.

For the most part, economic growth in the region held up well. While exports softened, domestic consumption, facilitated by relatively low levels of indebtedness, supported expansion. Recent downgrades to growth forecasts, notably from the trade-dependent economies such as Singapore and South Korea, suggest, however, that the economic downturn has indeed spread. 

Overall, South Korea and the Philippines were the main market laggards.  China, however, which had previously been the region's best performer, saw one of the most dramatic falls from its peak. That decline has been driven in part by the global sell-off, and partly by fears that the Chinese government's desire to crack down on an overheating economy could crimp growth.

While the gyrations in equity markets have led to a global re-pricing of risks, the fall in share prices this year has brought valuations back to more realistic levels. Cyclical sectors that were beneficiaries of rising commodity prices have also been sold off. Given the exceptional period preceding the turmoil - up to October last year, stocks had had an almost uninterrupted five-year rally- the pullback was long overdue.  With more irrational and indiscriminate selling now underway, opportunities to pick up quality investments at reasonable prices may become more prevalent.

Discount

The Board monitors closely the discount level of the Company's shares and has in place a buyback mechanism whereby the Manager is authorised to buy back shares within certain limits. The Company bought back 6,122,500 shares for cancellation, at a cost of £9.5 million, enhancing the NAV for continuing shareholders by 0.49p. A resolution to renew the authority to buy back shares for cancellation will be proposed at the Annual General Meeting.

Gearing 

As noted in the last interim report, cash levels have continued to be increased to ensure that there will be sufficient cash available to repay the $80 million loan notes by their redemption date at the end of 2008. Cash held (including cash equivalents) was £42.5 million at 31 August 2008. The Board intends to continue with a gearing facility in place and on 30 September 2008 a £40 million multi-currency loan facility with The Royal Bank of Scotland was put in place. To date, there have been no drawdowns on this facility.

Revenue Account

The revenue return per share was 2.35p, compared to 1.84p in the previous year. The Board recommends the payment of a final dividend of 1.6p per ordinary share which, if approved by shareholders at the Annual General Meeting, will be paid on 19 December 2008.

Stocklending

As shareholders are aware, in order to supplement its income, the Trust has for some time lent stock from its portfolio. Early in 2008, however, the Board became concerned about the outlook for this practice. In order to preserve the interests of the shareholders of the Trust, it was decided to withdraw from this activity. That decision has been fully vindicated by subsequent events in the stockmarkets.

Annual General Meeting

In accordance with the corporate governance procedures endorsed by the Board, all directors who have attained more than nine years' service or are aged over 70 years will retire from the Board and submit themselves for re-election on an annual basis. Messrs Cassidy, Frame, Gairns, Tyrie and Watt will retire and be proposed for re-election at the annual general meeting. Following an appraisal of each director, including the Chairman, the Board is satisfied that each director's performance continues to be effective, that the Board has the requisite range of expertise and experience and that it is compliant with the AIC guidelines on independence. The Board recommends that shareholders vote in favour of the re-election of directors at the Annual General Meeting.  

Outlook 

At the time of writing, equity and credit markets were in critical condition indicating rapidly deteriorating confidence.

Fears of a devastating collapse in demand and output resulting from the stalled credit markets were continuing to play havoc with emerging markets, particularly those that rely heavily on exports to developed nations.

The immediate prospects for Asian equities therefore remain muted. With demand slowing and still high input costs depressing margins, earnings are expected to remain under pressure. In this challenging environment, Dragon's portfolio is well diversified with quality stocks, and we remain optimistic that the companies we hold can strengthen their competitive positions as weaker firms struggle. On the political front, however, leaders in Thailand, Malaysia and South Korea have to varying extent lost their grip in the face of popular opposition, which could undermine sentiment further. 

With the current market turbulence, our Manager is looking to top-up preferred holdings and buy into those well run companies that were previously deemed too expensive. This should help Dragon's portfolio, comprising companies with responsible management and healthy balance sheets, to be positioned well for the long term. 

Tony Cassidy

Chairman

  INCOME STATEMENT (audited)

	2008			2007
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments	-	805	805	-	76,931	76,931
Currency (losses)/gains	-	(980)	(980)	-	2,240	2,240
Income	14,316	-	14,316	12,585	-	12,585
Investment management fee	(4,025)	-	(4,025)	(3,614)	-	(3,614)
Administration expenses	(1,162)	-	(1,162)	(1,065)	-	(1,065)
	_______	_______	______	_______	_______	______
Net return before finance costs and taxation	9,129	(175)	8,954	7,906	79,171	87,077
Interest payable and similar charges	(2,985)	-	(2,985)	(2,936)	-	(2,936)
	_______	_______	______	_______	_______	______
Return on ordinary activities before taxation	6,144	(175)	5,969	4,970	79,171	84,141
Taxation on ordinary activities	(642)	-	(642)	(604)	-	(604)
	_______	_______	______	_______	_______	______
Return on ordinary activities after taxation	5,502	(175)	5,327	4,366	79,171	83,537
	_______	_______	______	_______	_______	______
Return per share (pence):	2.35	(0.07)	2.28	1.84	33.37	35.21
	_______	_______	______	_______	_______	______
The total column of this statement represents the profit and loss account of the Company. A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses have been reflected in the Income Statement. All revenue and capital items in the above statement derive from continuing operations. The accompanying notes are an integral part of the financial statements.

  BALANCE SHEET (audited)

	As at	As at
	31 August 2008	31 August 2007
	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	378,173	416,089
Current Assets
Loans and receivables	2,614	1,056
Certificates of deposit	27,419	-
Cash and short term deposits	15,069	8,990
	_________	_________
	45,102	10,046
	_________	_________
Creditors: amounts falling due within one year
Foreign currency loans	(43,861)	-
Other creditors	(1,627)	(1,983)
	_________	_________
	(45,488)	(1,983)
	_________	_________
Net current (liabilities)/assets	(386)	8,063
	_________	_________
Total assets less current liabilities	377,787	424,152
Creditors: amounts falling due after more than one year
Foreign currency loans	-	(39,631)
	_________	_________
Net assets	377,787	384,521
	_________	_________
Share capital and reserves
Called-up share capital	46,190	47,415
Share premium account	4,285	4,285
Special reserve	75,770	85,242
Capital redemption reserve	10,017	8,792
Capital reserve	234,246	234,421
Revenue reserve	7,279	4,366
	_________	_________
Equity Shareholders' funds	377,787	384,521
	_________	_________
Adjusted net asset value per Ordinary share (pence)	163.58	162.18
	_________	_________

  RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS (audited)

For the year ended 31 August 2008
		Share		Capital
	Share	premium	Special	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2007 (restated)	47,415	4,285	85,242	8,792	234,421	4,366	384,521
Return on ordinary activities after taxation	-	-	-	-	(175)	5,502	5,327
Dividends paid	-	-	-	-	-	(2,589)	(2,589)
Purchase of Ordinary shares for cancellation	(1,225)	-	(9,472)	1,225	-	-	(9,472)
	_____	_____	_____	_____	_____	_____	_____
Balance at 31 August 2008	46,190	4,285	75,770	10,017	234,246	7,279	377,787
	_____	_____	_____	_____	_____	_____	_____
For the year ended 31 August 2007
		Share		Capital
	Share	premium	Special	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2006	47,455	4,285	85,520	8,752	155,250	291	301,553
Return on ordinary activities after taxation	-	-	-	-	79,171	4,366	83,537
Dividends paid	-	-	-	-	-	(291)	(291)
Purchase of Ordinary shares for cancellation	(40)	-	(278)	40	-	-	(278)
	_____	_____	_____	_____	_____	_____	_____
Balance at 31 August 2007 (restated)	47,415	4,285	85,242	8,792	234,421	4,366	384,521
	_____	_____	_____	_____	_____	_____	_____
The revenue reserve represents the amount of the Company's reserves distributable by way of dividend. The accompanying notes are an integral part of the financial statements.

  CASHFLOW STATEMENT (audited)

	Year ended		Year ended
	31 August 2008		31 August 2007
	£'000	£'000	£'000	£'000
Net cash inflow from operating activities		8,835		8,077
Servicing of finance
Bank and loan interest paid		(2,915)		(2,968)
Taxation
Overseas tax paid		(601)		(685)
Financial investment
Purchases of investments	(17,306)		(44,727)
Sales of investments	54,327		37,824
	_______		_______
Net cash inflow from financial investment		37,021		(6,903)
Equity dividend paid		(2,589)		(291)
		_______		_______
Net cash inflow before use of liquid resources and financing		39,751		(2,770)
Net cash outflow from management of liquid resources		-		-
		_______		_______
Net cash inflow before financing		39,751		(2,770)
Financing
Buy back of Ordinary shares (including expenses)		(9,472)		(278)
		_______		_______
Increase/(decrease) in cash		30,279		(3,048)
		_______		_______
Reconciliation of net cash inflow to movements in net debt
Increase/(decrease) in cash as above		30,279		(3,048)
Amortised Loan Note expenses		(31)		(31)
Exchange movements		(980)		2,240
		_______		_______
Movement in net debt in the year		29,268		(839)
Net debt at 1 September 2007		(30,641)		(29,802)
		_______		_______
Net debt at 31 August 2008		(1,373)		(30,641)
		_______		_______

  NOTES:

1.	Accounting policies
	(a)	Basis of accounting
		The financial statements have been prepared under the historical cost convention as modified to include the revaluation of fixed asset investments, and in accordance with applicable United Kingdom Accounting Standards and with the Statement of Recommended Practice for 'Financial Statements of Investment Trust Companies' (December 2005) ('the SORP'). They have also been prepared on the assumption that approval as an investment trust will continue to be granted.
		The financial statements, and the net asset value per share figures, have been prepared in accordance with UK Generally Accepted Accounting Practice ('UK GAAP').
		During the year the Company adopted FRS 29 ' Financial Instruments: Disclosures'. This standard primarily concerns the disclosure of financial instruments and risks.
	(b)	Investments
		Listed investments have been designated upon initial recognition as fair value through profit and loss. Investments are recognised and de-recognised on the trade date at cost. Subsequent to initial recognition, investments are valued at fair value, which for listed investments is deemed to be bid market prices. Gains and losses arising from changes in fair value are included as a capital item in the Income Statement and are ultimately recognised in the capital reserve - unrealised except to the extent where it is readily convertible to cash.
	(c)	Income
		Dividends (other than special dividends), including taxes deducted at source, are included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are reviewed on a case-by-case basis and may be credited to capital, if circumstances dictate. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company's right to receive payment is established. Fixed returns on non-equity shares are recognised on a time-apportioned basis so as to reflect the effective yield on shares. Other returns on non-equity are recognised when the right to return is established. The fixed return on a debt security, if material, is recognised on a time apportioned basis so as to reflect the effective yield on each security. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend is recognised as income. Any excess in the value of the shares received over the amount of cash dividend is recognised in capital reserves. Interest receivable on bank balances is dealt with on an accruals basis.
	(d)	Expenses
		All expenses are accounted for on an accruals basis. Expenses are charged through the revenue column of the Income Statement except as follows:
		- expenses directly relating to the acquisition or disposal of an investment, in which case, they are added to the cost of the investment or deducted from the sale proceeds. Such transaction costs are disclosed in accordance with the SORP. These expenses are charged to the capital column of the Income Statement.
	(e)	Deferred taxation
		Deferred taxation is provided on all timing differences, that have originated but not reversed at the Balance Sheet date, where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Balance Sheet date, measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the accounts which are capable of reversal in one or more subsequent periods. Due to the Company's status as an investment trust company, and the intention to continue to meet the conditions required to obtain approval for the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
	(g)	Capital reserves
		Gains and losses on realisation of investments and changes in fair values of investments which are readily convertible to cash, without accepting adverse terms, are transferred to the capital reserve - realised.
	(h)	Foreign currency
		Assets and liabilities in foreign currencies are translated at the rates of exchange ruling on the Balance Sheet date. Transactions involving foreign currencies are converted at the rate ruling on the date of the transaction. Gains and losses on the realisation of foreign currencies are recognised in the Income Statement and are then transferred to the realised capital reserve.
	(i)	Dividends payable
		Final dividends are dealt with in the period in which they are paid.
	(j)	Certain comparative amounts have been reclassified to conform to the current year's presentation.

		2008	2007
2.	Income	£'000	£'000
	Income from investments
	UK dividend income	218	158
	Overseas dividends	13,209	12,071
	Scrip dividends	10	81
		_______	_______
		13,437	12,310
		_______	_______
	Other income
	Deposit interest	844	235
	Stock lending income	35	40
		_______	_______
		879	275
		_______	_______
	Total income	14,316	12,585
		_______	_______
	Income from investments
	Listed UK	218	158
	Listed overseas	13,219	12,152
		_______	_______
		13,437	12,310

3.    The proposed final dividend of 1.6p per ordinary share in respect of the year ended 31 August 2008 will be paid on 19 December 2008 to shareholders on the register at the close of business on 21 November 2008. The ex-dividend date is 19 November 2008.

4.    The income statement, balance sheet, reconciliation of movements in shareholder funds and cashflow statement set out above do not represent full statutory accounts in accordance with Section 240 of the Companies Act 1985. The financial information for the year ended 31 August 2007 has been extracted from the Annual Report and Accounts of the company which have been filed with the Registrar of Companies. The auditors' report on those accounts was unqualified. The statutory accounts for 2008 contain an unqualified auditors' report and will be delivered to the Registrar of Companies following the company's Annual General Meeting which will be held at 40 Princes Street, Edinburgh on 17 December 2008 at 11.00am.

5.    The Annual Report will be posted to shareholders in November 2008 and copies will be available from the registered office.

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise and may be affected by exchange rate movements. Investors may not get back the amount they originally invested. Where investment is made in emerging markets, their potential volatility may increase the risk to the value of the investment.

For Edinburgh Dragon Trust plc

Edinburgh Fund Managers plc, Secretary

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