Final Results
Athelney Trust PLC
02 April 2008
Embargoed 7 am Wednesday April 2 2008
ATHELNEY TRUST plc: PRELIMINARY RESULTS
Athelney Trust plc ('Athelney'), the AIM-listed investor in junior markets and
small companies, announces its audited preliminary results for the year ended
December 31 2007.
Highlights:
• Recommended dividend of 3.5p per share (2006 recommended: 3.25p), a rise
of 7.7 per cent
• Net Asset Value at 173.1p per share, down 8.8 per cent (2006: 189.7p)
• Gross revenue increased by 26 per cent to £120,488 (2006: £95,614)
• Like for like basis revenue up 18.3 pe rcent, dividend
income up by 17.6 per cent
• Revenue return per ordinary share at 3.9p up 18.2 per cent (2006: 3.3p)
Athelney Chairman, Hugo Deschampsneufs, said: 'Everything that could go wrong
with 2007 did. The result was a very poor equity market in the second half of
the year which undid all the good work of the first.
'Here we are right in the middle of a credit crisis which originated not in
Lombard Street but in the trailer parks of the United States. How did we get
into this mess? How is it that we have not had a run on a bank for 141 years,
yet pictures of solid British subjects queuing outside branches of Northern Rock
have flashed round the world to the apparent amusement of everyone who wanted to
take business away from the City of London?
'Mr G Brown, ex-Chancellor of the Exchequer, is to my mind the culprit. He took
away the Bank of England's historic role as guardian of the City and spread
responsibility between the Bank, the Financial Services Authority and the
Treasury. This did not seem very clever at the time and has subsequently proved
so.
'There is a danger that we can just become too gloomy about everything. It is
worth bearing in mind that in the midst of the Great Depression up to 50 per
cent of mortgages in America were in default - today's equivalent figure is six
per cent. Mr Ben Bernanke, Chairman of the US Federal Reserve Board has
announced seven initiatives since August. His aim is to improve substantially
both liquidity and solvency.
'One can only blush at the British Chancellor's statement that the UK is better
placed than other leading economies to cope with a slowdown. With 30 per cent of
output coming from the City of London, finance and business services how can
this be anything other than dangerous complacency?
'Yes I do believe that Mr Bernanke will succeed in his laudable ambitions and,
yes, I do believe that recovery prospects in equity markets are excellent - but
patience will be required!'
-ends-
For further information:
Robin Boyle, Managing Director
Athelney Trust plc 020 7628 7937
Paul Quade 07947 186694
CityRoad Communications 020 7248 8010
John Riddell, Director
Noble & Company Ltd 020 77632200
Chairmans's statement and business review
I announce the audited results for the year ended 31 December 2007. The salient
points are as follows:
• Recommended dividend of 3.5p per share (2006 recommended: 3.25p), an
increase of 7.7 per cent
• Audited Net Asset Value ('NAV') is 173.1p per share (31 December 2006:
189.7p), a fall of 8.8 per cent.
• Gross Revenue increased by 26 per cent to £120,488 (31 December 2006:
£95,615).
• On a like-for-like basis revenue increased by 18.3 per cent and dividend
income rose by 17.6 per cent.
• Revenue return per ordinary share was 3.9p, an increase of 18.2 per cent
(31 December 2006: 3.3p).
Review of 2007
The year 2007 turned out to be a particularly disappointing and frustrating
period in that Athelney's unaudited NAV as at 30 June 2007 was up by 6.1 per
cent but we finished the year down by 8.8 per cent.
The second half of the year will principally be remembered for those Three
Amigos, sub-prime lending, the credit crunch and Northern Rock which caused a
disorderly retreat from small caps into blue chips and the latter into gilts and
cash. More of the Three later.
A good place to start a review of the year is with the international situation
but, rather than list a long liturgy of trouble-spots, allow me to mention two
places which exemplify just what a dangerous world we live in today. On 6
September, Israeli jets bombed a mysterious site near Deir-ez-Zor on the
Euphrates River, eastern Syria: could it have been missiles on their way to
Hezbollah, the Shia movement that Syria backs in Lebanon? Or was it perhaps a
nuclear reactor in the early stages of construction and were North Korean
technicians involved? Was the raid an indirect way for Israel and its American
ally to warn the Iranians of what might happen if they continue to enrich
uranium? Or simply an Israeli exercise to test Syria's air defence system, said
to have been upgraded by the Russians? George W. Bush, who obviously knows what
is happening, is saying nothing: 'This is not my first rodeo' he stalled at a
press conference in October.
Meanwhile, in the Swat Valley in Pakistan, an area famous in that part of the
world for its beautiful mountains and lakes and superb skiing has reputedly been
over-run by a combustible cocktail of local malcontents, al Qaeda and the
Taliban even though the area is being patrolled by 20,000 less-than-enthusiastic
Pakistani soldiers. All this is happening less than two hours' drive from the
capital Islamabad - the chilling thought is accompanied by another, namely that
Pakistan is a nuclear power. 'It seems that' mused a member of the Musharraf
Government a few short weeks before the assassination of Benazir Bhutto 'we have
a University of Terrorism in the Tribal Areas as good as Harvard, in its field.'
Everything that could go wrong with 2007 did. What started with unsound
sub-prime mortgages, spread to collateralized debt obligations (CDOs) in which
those mortgages were wrapped, endangered municipal bond insurance and threatened
to unravel the credit default swap (CDSs) market. Furthermore, investment banks'
commitments to leveraged buyouts (LBOs) became liabilities and hedge funds
designed to be market-neutral turned out not to be and had to be unwound. The
asset-backed commercial paper market came to a standstill and the special
investment vehicles (SIVs) set up by the banks to move mortgages off balance
sheet could no longer obtain outside financing. Worst of all, inter-bank
lending, which is central to the financial system, was badly disrupted because
banks had to conserve resources and no longer knew which of the other banks to
trust. As a consequence, the central banks had to inject an unprecedented amount
of liquidity into the system and extend credit on a much wider range of
securities than ever before. Thus the credit crunch trundled onwards.
Away from the world of high finance, we in the UK had three rises in interest
rates - most or all of them ill-advised in my opinion - with which to cope, plus
floods, foot and mouth, blue tongue, avian 'flu (twice) and an unsuccessful
terrorist attack.
The result of all this was a very poor equity market in the second half of the
year which undid all the good work of the first so that the FT Small Cap Index
fell by 12.4 per cent over the twelve-month period and, as far as the whole
market was concerned, the median share fell by 10.1 per cent. Some popular
sectors did far worse, for example: retailers 26 per cent; house-builders (my
estimate) 45 per cent; commercial property 38 per cent; banks 21 per cent and so
on. Compare and contrast with the Shanghai and Indian indices, which jumped by
95.6 per cent and 46.5 per cent respectively as investors strove to buy into
those nations' sparkling economic growth.
So here we are right in the middle of a credit crisis which originated, not in
Lombard Street, but in the trailer parks of the United States, and how did we
get into this mess? How is it that we have not had a run on a bank for 141
years, yet pictures of solid British subjects queuing up outside branches of
Northern Rock have flashed round the world to the apparent amusement of everyone
who wanted to take business away from the City of London? Mr. G. Brown,
ex-Chancellor of the Exchequer, is to my mind the culprit.
In 1866, the firm of Overend, Gurney & Co. had, next to the Bank of England
itself, the biggest balance sheet in London and took deposits from all over the
country. However, it was not sound and had taken speculative and disastrous
interests in shipbuilding, steel, land and so on through a complex web of over
200 companies. When the run started, the Bank appointed a committee of three
wise men to have a look at Overend, Gurney's books who reported back that the
latter was 'rotten to the core' and that nothing could be saved. That was the
end of Overend, Gurney but the Bank next day lent secretly the then-amazing sum
of £4m to banks, discount houses and merchants to see them over any difficulty.
This was entirely successful.
Coming up to date, the sums involved are very much larger, of course, but surely
the principle is the same isn't it? No, the man some call Mr Tinkerman from his
constant habit of messing and tinkering with things and yet not improving them,
became Chancellor of the Exchequer in 1997 and everyone remembers how he gave
independence to the Bank of England - except that he didn't. Or rather, he gave
responsibility to the Bank for monetary policy (i.e. setting interest rates) but
took away the Bank's historic role as guardian of the City and spread
responsibility between the Bank, the Financial Services Authority and the
Treasury. This did not seem very clever at the time and has subsequently proved
to be so. The highly public support operation for Northern Rock had the same
effect as a lion ambling up to a herd of wildebeest: a mass depositor stampede
which has destroyed so much value for Ordinary shareholders and holders of the
12.625% Subordinated Loan Notes.
Was Northern Rock as unsound as Overend, Gurney was 141 years ago? No, Northern
Rock was solvent, profitable but illiquid, had a low number of slow payers and
was the most efficient lender in the market-place. What it couldn't do was
borrow money quietly from the Bank when the credit crisis skipped continents.
The consequences of all this are profound: a financial institution that had
underpinned the economy and self-image of one of England's poorest regions, the
North East, has been destroyed, the reputation of a good central bank governor
has been tarnished and an internationally admired regulatory system has fallen
into disrepute.
The trouble with taking out a mortgage these days is that you don't know where
it is going to end up - before you can say knife, your bank has thrown it in
with a few thousand others, sliced, diced and wrapped them into a package and
sold them on to other parties or perhaps to its own trading desk. This process
is known as securitization which, for a brief moment, turned investment banks
into mega-growth stocks but now threatens to bring them back down to mortal
status. CDOs repackaged mortgages, CLOs did the same for leveraged (geared)
corporate loans and there are also specialist products involving both student
and auto loans. Structured investment vehicles (SIVs) are also full of danger:
they borrow short-term to invest in long-dated assets but investors will no
longer tolerate such a mismatch and so banks have had to bring back over $136
billion onto their books. That comes on top of $160 billion so far, and possibly
$400 billion in total sub-prime write-downs. This practice of securitization has
exposed four deep flaws: severing the link between those who scrutinise
borrowers and those who lose when the borrower defaults has resulted in a lack
of accountability; second, the new products are opaque and incredibly complex;
third, some securities were badly structured and their risks not fully
understood and, fourth, investors relied too much on the rating agencies who
were themselves compromised from the start by being paid for their research by
the seller not the buyer.
Essentially, there are only three Nationally Recognised Rating Organizations
(ratings agencies): Standard & Poor's (S&P); Moody's and Fitch. All three rate
securities using a nine-point scale which they label differently. S&P and Fitch
use: AAA, AA, A, BBB, BB, etc. whereas Moody's prefers: Aaa, Aa, A, Baa, Ba, and
so on. Many think that AAA/Aaa means armour-plated, BBB/Baa is riskier and CCC/
Caa suggests that you run for the hills. Oh, were it so simple: first, there are
many ways to measure credit risk; second, S&P and Moody's employ different
approaches so that the former rates are based on default probability with a BBB
rating, for instance, reflecting a 7.1% default probability. Moody's, on the
other hand, goes by expected loss, which is calculated as default probability
multiplied by the severity of the loss.
So much for the methodology but the fact of the matter is that that the ratings
agencies have earned huge fees by offering opinions on the creditworthiness of
an alphabet soup of mortgage-related securities created by over-eager banks. As
the market expanded, so did the agencies' profits - Moody's net income rose from
$289 million in 2002 to $754 million in 2006. Did these huge fees lead to a drop
in standards? I am sure that the agencies would say not but if a security is
trading at 70 cents on the dollar, it is no use saying that S&P rates it AAA -
the extra 30 cents will not magically appear just because the agency says so.
The solution, in my opinion, is to force brokers and investors to pay for the
ratings - that way there can be no doubt as to whether there is a conflict of
interest.
Another obscure corner of the world of high finance is surely needing a bold
rescue plan. So-called monoline insurers guarantee the capital and interest on
municipal bonds, in effect renting out their AAA ratings in return for a fee.
For a long time, this business was dull, boring but nicely profitable. As
competition grew, however, the monolines were attracted by the higher returns of
insuring CDOs and the rest of the alphabet soup. But as mortgage defaults rose
so did monoline losses - two such insurers wrote off $8.5 billion in the last
quarter of the year. The monolines' thin capital cover, perfectly adequate when
they were doing only safe municipal business, now looks to be worryingly
threadbare. Unless they raise more capital, it is likely that the ratings
agencies will downgrade them with the inevitable consequence that all the paper
that they have insured will have to be downgraded as well. Holders of downgraded
bonds will have to mark them down in value under 'fair value' accounting rules
and some investors, who are only allowed to hold highest-grade bonds, may become
forced sellers. Investment banks that were active in the CDO market may think
that it would be cheaper for them to ride to the rescue of the monolines rather
than let the worst happen - perhaps a plan will have been hatched by the time
that you read this.
In May, 2006 Alan Greenspan, the former Federal Reserve chairman, noted, 'The
credit default swap is probably the most important instrument in
finance......What CDS did is lay off all the risk of highly leveraged
institutions - and that's what banks are, highly leveraged - on stable American
and international institutions.' Reality may prove different: in recent months
whole swathes of investors have suddenly realized just how opaque many of the
new complex instruments are. However, at its simplest, the CDS is similar to
credit insurance. The buyer of protection (typically a bank) transfers the risk
of default by one of its borrower clients to a protection seller (perhaps a
monoline insurer or hedge fund) who for a fee indemnifies the protection buyer
against a credit loss. It seems to me that there are two problems at the moment:
first, these contracts were taken out when credit was easy to obtain and default
rates were therefore very low. Expect default rates to shoot up now that credit
conditions are tight; second, there is a danger that the selling party may not
be able to keep its part of the bargain. Monoline insurers, as we have already
discovered, are in dire straits. What is the damage? Anything between $30
billion and $150 billion, it has been estimated. With the more complex stuff,
frankly it is anybody's guess.
There are three more worrying factors to mention before I close, the first being
the increasing number of profit warnings. The 107 profit warnings from companies
in the last quarter of 2007 was the highest number since 2001 and represents a
22 per cent increase on 2006.
The pound suffered its weakest annual performance for 15 years in 2007, falling
6.1 per cent in the past year which is the biggest annual decline since 1992 -
the year in which Britain was ejected from the European Exchange Rate Mechanism.
The Sterling Exchange Rate Index, which compares the pound with a comprehensive
basket of currencies, finished the year at 97.9 having weakened by 6.7 per cent
in the second half of the year.
No review of 2007 would be complete without a paragraph on commodities, the
prices of many of which have now been in an upswing for several years - crude
oil, for instance has surged by 450 per cent in the current cycle with the rally
now more than six years old, the most powerful and durable ever. Copper had a
trough-to-peak rise of 570 per cent between November 2001 and May 2006 - while
the rise in gold and silver has not yet surpassed the events of the 1970s in
percentage terms, it has been the most durable on record as the cycle approaches
its seventh year. In 2007, wheat prices more than doubled and almost every crop
under the sun - maize, milk, oilseeds and so on - is at or near a peak in
nominal terms having risen on average by 26 per cent last year: even in real
terms, food prices have risen by 75 per cent since 2005. Dearer food is likely
to persist for many years: that is because 'agflation' is underpinned by changes
in diet that accompany the growing wealth of emerging economies such as China
and India - the Chinese consumer who ate 20kg of meat in 1985 now gets through
over 50kg. This in turn pushes up demand for grain since, for instance, it takes
8kg of grain to produce one of beef. But the rise in prices is also the result
of American over-generous ethanol subsidies. This year biofuels will take a
third of America's huge maize crop - fill up an SUV's fuel tank and you have
used up enough maize to feed a person for a year. At the moment, there are
something like nine cars to every 1,000 people in China compared with more than
900 in America - there is quite a lot of catching up to do. As far as uranium is
concerned, there are 442 nuclear reactors in the world needing 180 million lbs
each year but only 110 million lbs was mined in 2005. There is a similar story
for gold: in India, gold is often used for wedding gifts and, with increasing
prosperity, there has been a huge rise in demand. And even with 23 new gold
mines coming on stream world-wide, supply may not be enough. So, the era of
cheap food has gone for good and increasing demand for metals and minerals is
likely, in many cases, to underpin high prices.
Results
Gross Revenue increased by 26 per cent compared to 2006. A breakdown of the
companies paying dividends is given below:
Number
Companies paying dividends 95
Companies sold (therefore no true comparison) 13
Companies purchased (therefore no true comparison) 24
Increased total dividends in the year 50
Reduced total dividends in the year 6
No change in dividend 2
Corporate Activity
Six of our companies were taken over for cash: Enterprise; European Motor
Holdings; City Lofts; Hitachi Capital, Ben Bailey and Domestic & General
producing a profit of 698 per cent, 242 per cent, 30.3 per cent, 9.5 per cent,
83.8 per cent and 88.1 per cent respectively.
Portfolio Review
Holdings of Aero Inventory, Umeco, Character Group, Prime People, Renew
Holdings, Smallbone, H&T Group, Ambrian Capital, FDM Group, Finsbury Food, M&C
Saatchi, Quarto Group, Trifast, Creston, LSL Property Services, Avesco Group,
Financial Objects and OPD Group were all purchased for the first time. Blacks
Leisure, Johnson Service, AT Communications, Erinaceous Group, City of London
and Speymill were all sold. In addition, a total of twenty-seven holdings were
top-sliced to provided capital for the new purchases.
Dividend
The Board is pleased to recommend an increased annual dividend of 3.5p per
ordinary share (2007: 3.25p). This represents an increase of 7.7 per cent over
the previous year. Subject to shareholder approval at the Annual General Meeting
on 14 May 2008, the dividend will be paid on 16 May 2008 to shareholders on the
register on 18 April 2008.
Update
The unaudited NAV at 29 February 2008 was 160.3p whereas the share price on the
same day stood at 169.5p. Further updates can be found on
www.athelneytrust.co.uk
Outlook
When I look at the world-wide equity market, I am reminded of Winston
Churchill's famous phrase 'It is a riddle, wrapped in a mystery, inside an
enigma ........' No matter that he was talking about something completely
different (Russia's attitude to the war in October 1939) it remains a telling
description of where we are now. But it is to a well-known American that we must
turn rather than a famous Englishman, so please step forward Mr. Ben Bernanke.
So far, the Chairman of the U.S. Federal Reserve Board has announced seven
initiatives since last August including steep interest rate cuts, extra
borrowing facilities and is now offering Treasury securities in exchange for
AAA-rated mortgage-backed investments (poor old American tax-payer!). His aim is
to improve substantially both liquidity and solvency - the former so that banks
will start to lend to each other again and the latter so that such as Bear
Sterns are not overwhelmed by their losses in CDOs and CDSs (over 100 CDOs and
SIVs are in default already) although hedge funds will be allowed to go to the
wall and are starting so to do.
Of course there is a danger that we can just become too gloomy about everything;
it is worth bearing in mind that in the midst of the Great Depression up to 50
per cent of mortgages in America were in default - today's equivalent figure is
6 per cent. On the other hand, one can only blush at the British Chancellor's
assertion that the U.K. is better placed than other leading economies to cope
with a slow-down. With 30 per cent of output coming from the City of London,
finance and business services how can this be anything other than dangerous
complacency?
Yes, I do believe that Mr. Bernanke will succeed in his laudable ambitions and,
yes, I do believe that recovery prospects in equity markets are excellent - but
patience will be required!
H.B. Deschampsneufs
Chairman
2 April 2008
ATHELNEY TRUST PLC
STATEMENT OF TOTAL RETURN
(incorporating the revenue account)
FOR THE YEAR ENDED 31 DECEMBER 2007
Audited Results to 31 December 2007 Audited Results to 31 December 2006
Revenue Capital Total Revenue Capital Total
£ £ £ £ £ £
Profits on
investments - (362,778) (362,778) - 708,480 708,480
Income 120,488 - 120,488 95,615 - 95,615
Investment
management
expenses (9,893) (28,979) (38,872) (8,216) (24,164) (32,380)
Other
expenses (52,362) - (52,362) (35,355) - (35,355)
________ _________ _________ ________ ________ _________
Return on
ordinary
activities
before
taxation 58,233 (391,757) (333,524) 52,044 684,316 736,360
Taxation 12,295 81,248 93,543 8,278 (122,442) (114,164)
________ ________ _________ ________ ________ _________
Return on
ordinary
activities
after
taxation 70,528 (310,509) (239,981) 60,322 561,874 622,196
________ ________ _________ ________ ________ _________
Return per
ordinary
share 3.9p (17.2)p (13.3)p 3.3p 31.2p 34.5p
Dividend
paid per
ordinary
share
- Final
dividend 3.25p 2.5p
The revenue column of this statement is the profit and loss account for the
Company.
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued during the above financial years.
There have been no recognised gains or losses, other than the results for the
financial years shown above.
ATHELNEY TRUST PLC
BALANCE SHEET
AS AT 31 DECEMBER 2007
2007 2006
(audited) (audited)
£ £
Fixed assets
Investments 3,167,818 3,706,392
_________ _________
Current assets
Debtors 205,773 105,603
Cash at bank and in hand 45,335 32,486
_________ _________
251,108 138,089
Creditors: amounts falling due within one year (41,921) (50,797)
_________ _________
Net current assets 209,187 87,292
_________ _________
Total assets less current liabilities 3,377,005 3,793,684
Provisions for liabilities and charges (256,283) (374,390)
_________ _________
Net assets 3,120,722 3,419,294
_________ _________
Capital and reserves
Called up share capital 450,700 450,700
Share premium account 405,605 405,605
Other reserves - non distributable
Capital reserve - realised 892,893 719,086
Capital reserve - unrealised 1,239,083 1,723,399
Revenue reserve 132,441 120,504
_________ _________
Shareholders' funds - all equity 3,120,722 3,419,294
_________ _________
Net Asset Value per share 173.1p 189.7p
ATHELNEY TRUST PLC
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2007
2007 2006
(audited) (audited)
£ £ £ £
Net cash inflow from
operating activities (69,440) 68,111
Servicing of finance
Dividends paid (58,591) (45,070)
________ ________
Net cash (outflow) from
servicing of finance (58,591) (45,070)
Taxation
Corporation tax paid (34,916) (18,613)
Investing activities
Purchases of investments (1,247,174) (1,103,978)
Sales of investments 1,422,970 1,091,988
________ ________
Net cash (outflow)/inflow
from investing activities 175,796 (11,990)
________ ________
Decrease increase in cash 12,849 (7,562)
in the year ________ ________
Notes:
1. The figures included in the above statement are an abridged version of
Athelney's audited results for the year ended 31 December 2007 and do not
constitute statutory accounts within the meaning of Section 240 of the
Companies Act 1985, as amended. The figures for the year ended 31 December
2006 are extracted from the statutory accounts filed with the Registrar of
Companies and which contained an unqualified audit report.
2. The calculation for the return per ordinary share is based on the return
on ordinary activities after taxation shown below and on the average
weighted number of shares in issue during the period of 1,802,802 (2006:
1,802,802).
2007 2006
Revenue Capital Total Revenue Capital Total
£ £ £ £ £ £
70,528 (310,509) (239,981) 60,322 561,874 622,196
3. Dividend information:
Ex dividend date 16 April 2008
Dividend payable to shareholders registered on 18 April 2008
Dividend payable on 16 May 2008
4. Copies of this announcement are available, free of charge, for a period
of one month from Athelney's Nominated Advisor:
Noble & Company Limited, 76 George Street, Edinburgh, EH2 3BU
Copies of the full financial statements will be available on Athelney's website
www.athelneytrust.co.uk on 02 April 2008. Paper copies of the full financial
statements specifically requested by some shareholders will be posted on 02
April 2008.
02 April 2008
END
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