Half Yearly Report

RNS Number : 2061V

Aurora Investment Trust PLC

28 October 2010

 



AURORA INVESTMENT TRUST plc

Half Yearly Financial Report

For the six months ended 31 August 2010

Investment Policy

The policy of the Company is to achieve capital appreciation through investments listed mainly on the London Stock Exchange, predominantly comprising equities but allowing exposure to fixed interest and equity related securities.  A distinctive feature is an emphasis on investments in companies with exposure to economies growing at a faster rate than the UK.

CHAIRMAN'S REVIEW AND

HALF YEARLY MANAGEMENT REPORT

Half year to 31^st August 2010

 

The Half Year Returns:                                                                                                 

(as at 31^st August 2010)                

		Net Asset Value:		224.7p;	+ 33.2p;		+ 17.3%
		Share Price:		194.0p;	+ 34.5p;		+21.6%
		Discount:		13.7%;		(v. 16.7%)
		Benchmark:		2,696.7;			-1.5%

 

The Net Asset Value:

The start of the first six months of our current year (ending 28 February 2011) saw stock markets take a bit of a hammering in the wake of the Euro crisis which unfolded in May and June.  However since then - and most particularly during the last two months since the end of August - markets have recovered their confidence slowly but surely.  It has to be said that it is largely because of the absence of another crisis and the continued easy monetary conditions that prevail in most parts of the world rather than because of any startlingly good economic developments.

By 25 May the FTSE All-share Index (the popular proxy for the UK stock market and also our benchmark) hit a low of 2,547.3 - 7½% lower than the start, but thereafter it gradually recovered, reaching 2,696.7 by 31 August 2010.  However the real progress has been made since then and as of last Friday (22 October) it had risen to a further 10% to 2,967, 8½% higher than at the beginning of the period.  The mood is markedly more optimistic at the time of writing.

I am particularly pleased to be able to report some very good progress that has been made by Aurora.  In the six months the net asset value rose by 17.3% from 191.5p per share to 224.7p per share.  Anytime that we can earn a return of such a figure over six months we have cause to be pleased.  Aurora's return beats that of the benchmark (-1.5%) rather handsomely and as a matter of fact puts Aurora ahead of its peer group for the six months.  I should add, however, that the last thing that we need to be is complacent after such success.  We will have to continue to work hard to keep the progress going and - I should emphasise - we will not be able to deliver such returns each and every reporting period.

There were three major contributors to the increase in the net asset value, being West China Cement (a major producer of cement in China, adding circa 16p to Aurora's net asset value per share), GCM resources (with its potential coal mine in Bangladesh, adding circa 15p) and Petro Matad (a company listed on AIM involved in exploration and production of oil in Mongolia, adding circa 12p).  Although there were also losers in the portfolio over the period none of them was on a significant scale - the two biggest having been BP (losing circa 3p) and China Shoto (produces back up batteries in China, losing circa 4p).

I would like to emphasise that the turnaround in the Company's performance is not an accident.  Because we have had periods of poor performance, we took stock of ourselves and set about determining how to make that money back.  We reconsidered some of the themes that we were invested in (discarding some and adopting some others) and we repositioned the portfolio with a particular emphasis on China and other emerging markets.  We backed some big blue chip plays (notably mining stocks) and we made a few special situation investments (including West China Cement, Asian Citrus).  Finally, we retained a concentrated portfolio which would give shareholders the opportunity to earn particularly good returns.  While the vast majority of the credit must go to James Barstow for his portfolio management, I would like to give some credit to both Stephen Wood, who advises  James on the portfolio, and to my other director colleagues who have worked alongside James and helped him with his efforts.

The Share Price:

It is also gratifying to be able to report that the Company's share price rose even more than either the net asset value or the benchmark - rising by 21.6% to 194p.  That increase meant the share price's discount to the underlying net asset value fell from 16.7% to 13.7%.  The discount has continued to decline - not wholly unexpectedly in the circumstances - into the next 7½ weeks and currently stands at circa 10%.  I will comment more below on the matter of the discount and its sister issue, the liquidity of the Company's shares.

Shareholder Proposals:

I would like to make all shareholders aware that the Board of Directors has received a request from certain shareholders containing three proposals.  Before doing so I would like to thank those shareholders for the thought and effort that has gone into their proposals.  Interaction between boards and shareholders is to be welcomed.  The three proposals are:

1.    To appoint Mr Brett Miller as a director of the Company.

The Board of Directors considered the proposal carefully taking into account the following matters: 

It has just appointed a new director to the Board, Mr Richard Martin.  Mr Martin is an experienced investor and a respected investment company director.  He is an independent director and has already made a considerable contribution to the governance of the Company.  The Directors feel that, for a small investment trust company, it has enough directors and that their skills and experiences cover those necessary for the governance of the Company. 

There is to be a continuation vote next summer.  If shareholders vote for winding up, Mr Miller's skills and experience may be valuable, but as of now our focus is on building upon our success, which we believe is the view of the majority of the Company's shareholders.

Given the above, the Board of Directors do not believe that the appointment of Mr Miller would be in the interest of all shareholders and have informed the proposers accordingly.

2.    To consider a range of discount management measures.

The Board of Directors has recently undertaken a strategic review in relation to the discount volatility and the liquidity of the shares.  It considered many different options including winding up the Company, tender offers and continuation votes. The proposers want a new review to be carried out with certain objectives to be considered, including the liquidation of the Company.  In talking to shareholders the Directors have concluded that there is not a majority of shareholders wishing to wind up the Company; this is especially the case given the excellent returns that have been earned in the last eighteen months.  Consequently the conclusions and decisions arising from the review were based on a going concern assumption.  An announcement on the conclusions of the review was made on 1 October 2010.  The reasoning behind the decisions involved with the review is as follows:

In the Chairman's statement in the recent annual report, reference was made to the "two volatilities", being the net asset value and the discount and to the fact that many investors find volatility in share prices difficult to live with.  It has made the shares unappealing to those investors and it is an issue that the Board of Directors has had to address.  To complicate matters further the list of shareholders of the Company is rather concentrated at the top (at our year end the top seven groupings of shareholders accounted for 69% of the Company's issued share capital), making it very difficult for any of those shareholders to sell their shareholdings should they need to do so.  So the Board of Directors were faced with making the shares more appealing (better returns and less net asset value and discount volatility) and with promoting, if it could, better liquidity for existing shareholders.

(a)  Better Returns:  We have clearly produced much better returns over the last eighteen months (NAV + 101.0%; FTSE All-share Index + 39.7%, both to 31 August 2010); the share price rose by 139.5% and as a consequence the discount halved, falling from 27.6% to 13.7%.   This very positive performance has continued since 31 August; at the close of 22 October the NAV stood at an all time high of 271p per share.

(b)  Net asset value volatility:  we are sensitive to the issue of past net asset value volatility and indeed it is something that I commented upon in the last annual report's Chairman's statement.  We are acutely conscious of the need to make capital gains and retain them; it forms an ever more important part of our board meeting portfolio review.

In dealing with the matters of the discount volatility and the liquidity of our shares, we undertook a review in order to see if we could put in place some arrangements which would address these two issues and we made an announcement on 1 October to the effect that:

·     The AGM continuation vote would be brought forward from 2012 to 2011 and held every three (rather than five) years thereafter.

·     The Company would institute an annual tender offer for 10% of its shares at a discount of 9% if the daily average discount has exceeded 10% over the previous six months.

(c)   Discount volatility:  the Board of Directors considers that it is not possible for it to control the discount on a day to day basis.  It is very well aware that many investment trusts have made discount control promises that they could not and therefore did not keep - with detrimental consequences - and it does not wish to put itself in such a position.  As a consequence it is not operating a policy of regularly buying back shares solely for the purpose of discount minimisation in the short term.  However, in an effort to keep at least an annual cap on the discount of 9% - it would offer a tender in the event that the discount had been consistently wider than what might be considered desirable.

In deciding what discount level to tender at - a matter that gave rise to a lot of debate - the Board decided that a tender would facilitate those wishing to sell to receive a sum based on a discount that was better than the average year end discount that has obtained over the life of the Trust (c. 13%).  Although not a large benefit, there would be a small gain to be made for those who elected to remain as shareholders. 

(d)  Liquidity of Aurora's shares:  Even if the Company's net asset value continues to do very well and if the shares trade on a low discount, the liquidity in the Company's shares will remain restricted by the overall market capitalisation (circa £30 million) and by the concentrated shareholder list.  It is difficult to buy or sell a substantial holding.  Continuing to buy in shares only makes that worse - and as a matter of fact it also raises the total expense ratio.  So it was that the Board felt that, if enough shareholders decided that they wished to sell, then it would be sensible to wind the Company up, the resulting much smaller company being too small to be viable.

It is the duty of any board of directors to govern the company on a going concern basis in the interests of the shareholders as one group.  The Directors do not believe that a new review would serve the interests of shareholders as one group and it would not come to any different conclusion to that already reached after much careful deliberation.

3.    To remove Mr James Barstow as a director of the Company:

Mr Barstow was re-elected as a director of the Company at the annual general meeting in July.  The Directors can see no justification for putting forward such a proposal so shortly after the shareholders have already made it clear that they want him to serve as a director.

The independent directors believe that it is most important that Mr Barstow serve as a director of the Company.  He, through Mars Asset Management, is responsible for the management of the Company's portfolio and they believe that it is important that he shares responsibility and accountability for the success or failure of the Company with his independent non-executive directors.  He is bound into the moral and fiduciary governance of the Company and that is the way it should be.

Furthermore Mr Barstow has always been a responsible director of the Company and, with his relatively large shareholding, has always had the interest of all shareholders at heart.  I believe it fair to say that few of today's investment trust portfolio managers have the same personal financial commitment to the trusts they manage as has James Barstow.  There is absolutely no doubt about his commitment.

The Board of Directors is not therefore proposing to remove Mr Barstow as a director of the Company.

I hope that the above gives a full and reasoned explanation as to why the board of Directors does not believe that the proposals are in the interests of all shareholders as one group.

Prospects:

I have repeated many times that our prospects depend largely on ourselves.  The world's stock markets are operating in a hazardous environment and crises happen rather regularly and remain volatile.  However, after over a decade of little or no gain from most of the world's major stock markets, there are now undoubtedly some good opportunities for investors in individual countries, sectors and companies.  To us it seems clear that China's economy - amongst other emerging national economies - offers exciting opportunities for both certain global sectors (natural resources being an obvious point in case) and for individual companies in a position to reap the rewards from China and others successes.  I believe we have a portfolio positioned to benefit from these developments and, notwithstanding the stock market risks inherent in today's uncertain and volatile world, shareholders should be able to look forward to good returns - over the long-term I must re-emphasise.

Alex Hammond-Chambers

Chairman

28 October 2010

DIRECTORS STATEMENT OF RESPONSIBILITY

FOR THE HALF YEARLY REPORT

The Directors confirm to the best of their knowledge that:

·     The condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting"; and

·     The interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FSA's Disclosure and Transparency Rules.

The half yearly financial report was approved by the Board on 28 October 2010 and the above responsibility statement was signed on its behalf by:

Alex Hammond-Chambers

Chairman

28 October 2010

SECTOR BREAKDOWN

 versus FTSE All-Share Index

As at 31 August 2010 (excluding AIT Trading Ltd)

SECTOR	AURORA	FTSE All-Share
	%	%
Oil & Gas	14.8	15.8
Industrials	12.6	7.2
Consumer Goods	7.2	11.5
Health care	7.6	8.0
Consumer Services	0.1	9.9
Telecommunications	2.4	6.3
Information Technology	2.1	1.7
Financials	14.4	24.0
Resources (Mining)	31.2	11.6
Utilities	2.5	4.0
	94.9	100.00
Fixed Interest Securities	5.1	-
	100.00	100.00

TOP TEN HOLDINGS

As at 31 August 2010

Stock	Description		Valuation	% of
All holdings shown are of ordinary shares, unless shown otherwise			£'000	Portfolio
West China Cement	Building		3,568	11.3
GCM Resources plc	Mining		3,510	11.1
BTG	Health Care		2,289	7.2
Asian Citrus	Food & Drink		2,054	6.5
Petro Matad Limited	Oil Exploration		1,757	5.6
Antofagasta Holding	Mining		1,445	4.6
Standard Chartered	Banks, retail		1,310	4.2
Kazakhmys	Mining		1,272	4.0
Royal Dutch Petroleum 'B'	Oil Integrated		1,168	3.7
Rio Tinto	Mining		1,089	3.5
Total top ten holdings			19,462	61.7
Other investments			12,110	38.3
Total fixed asset investments			31,572	100.0
Current asset investments	AIT Trading Ltd portfolio		2,031

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

		6 months to 31 Aug. 2010	6 months to 31 Aug. 2010	6 months to 31 Aug. 2010		6 months to 31 Aug.2009	6 months to 31 Aug. 2009	6 months to 31 Aug. 2009
		(unaudited)	(unaudited)	(unaudited)		(unaudited)	(unaudited)	(unaudited)
		Revenue	Capital	Total		Revenue	Capital	Total
	Notes	£'000	£'000	£'000		£'000	£'000	£'000
Gains and losses on investments
Gains/(losses) on fair value through profit or loss investments		(210)	4,786	4,576		229	6,716	6,945
Income
Investment income		414	-	414		524	-	524
Expenses
Investment management fees		(60)	(60)	(120)		(40)	(40)	(80)
Other expenses		(92)	-	(92)		(86)	-	(86)
		(152)	(60)	(212)		(126)	(40)	(166)
Profit before finance costs and tax		52	4,726	4,778		627	6,676	7,303
Finance costs		(21)	(21)	(42)		(21)	(21)	(42)
						(21)	(21)	(42)
Profit before tax		31	4,705	4,736		606	6,655	7,261
Tax recovered		7	-	7		7	-	7
Profit for the period		38	4,705	4,743		613	6,655	7,268
Earnings per share	4	0.29p	36.33p	36.62p		4.73p	51.38p	56.11p

The total column of this statement represents the Group's Income Statement, prepared in accordance with IFRS.  The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.  All items in the above statement derive from continuing operations.  All income is attributable to the equity holders of the parent company.  There are no minority interests.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

			Six months ended		Six months ended		Year ended
			31 August 2010		31 August 2009		28 February 2010
		Notes
			(unaudited)		(unaudited)		(audited)
			£'000		£'000		£'000
Opening balance			24,806		14,488		14,488
Total comprehensive income for the financial period/year			4,743		7,268		10,965
Dividends paid or legally committed to be paid on ordinary shares		5	(447)		(647)		(647)
Closing balance			29,102		21,109		24,806

CONSOLIDATED BALANCE SHEET

	At 31 August 2010		At 31 August 2009		At 28 February 2010
	(unaudited)		(unaudited)		(audited)
	£'000		£'000		£'000
Non-current assets Investments - fair value through profit or loss	31,572		24,618		29,659
Current assets
Investments held for trading	2,031		742		-
Other receivables	181		219		86
Cash and cash equivalents	171		579		101
	2,383		1,540		187
Current liabilities
Bank overdraft	(4,698)		(4,967)		(4,958)
Other payables	(155)		(82)		(82)
	(4,853)		(5,049)		(5,040)
Total assets less current liabilities	29,102		21,109		24,806
Equity
Share capital	3,598		3,598		3,598
Share premium account	10,997		10,997		10,997
Capital reserves	14,829		6,377		10,124
Revenue reserve	(322)		137		87
Total equity	29,102		21,109		24,806

Net asset value per ordinary share	224.69p		162.98p		191.52p
No. of ordinary shares in issue (excluding shares     held in Treasury)	12,952,250		12,952,250		12,952,250
No. of ordinary shares held in Treasury	1,439,139		1,439,139		1,439,139

CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 31 August 2010

	2010		2009
	£'000		£'000
	(unaudited)		(unaudited)
Cash flows from operating activities
Cash inflow from disposal of non-current operating assets	5,876		5,311
Cash outflow from purchase of non-current operating assets	(2,953)		(8,974)
Cash inflow from revenue income	362		407
Cash inflow/(outflow) from trading current asset investments	(2,241)		(513)
Cash outflow from revenue expenses	(232)		(174)
Tax recovered	7		7
Net cash flow from operating activities	819		(3,936)
Cash flows from financing activities
Equity dividends paid	(447)		(647)
Interest paid	(42)		(38)
(Decrease)/increase in bank borrowings	(260)		4,292
Net cash flow from financing activities	(749)		3,607
Net increase/(decrease) in cash and cash equivalents	70		(329)
Cash and cash equivalents at beginning of period	101		908
Increase/(decrease) in cash	70		(329)
Cash and cash equivalents at end of period	171		579

NOTES

1.   Status of the financial statements

These financial statements are not the Group's statutory accounts as defined in section 434 of the Companies Act 2006. The financial information for the half years ended 31 August 2010 and 31 August 2009 has not been audited. 

The information for the year ended 28 February 2010 has been extracted from the latest published audited financial statements.  The audited financial statements for the year ended 28 February 2010 have been filed with the Registrar of Companies.  The report of the auditors on those accounts contained no qualification or statement under section 498(2) or (3) of the Companies Act 2006.  

The directors approved the half-yearly report on 28 October 2010.  This report is being sent to shareholders and copies will be made available to the public at the registered office of the Group.

2.   Accounting policies

The half-yearly financial information has been prepared on the basis of the recognition and measurement requirements of International Financial Reporting Standards (IFRS).  The accounting policies are unchanged from those used in the last annual financial statements except where otherwise stated.

3.   Purchase of own shares

The Company did not make any further purchases of its own shares during the period ended 31 August 2010.  A total of 1,439,139 shares are being held in Treasury and are available for re-sale.  

4.   Earnings per share

Returns for the period ended on 31 August 2010 are stated by reference to 12,952,250 shares in issue during the period, excluding shares held in Treasury (2009: 12,952,250 shares in issue, excluding shares held in Treasury). 

5.   Dividends

In accordance with the stated policy of the Group, the directors do not recommend an interim dividend. 

The final dividend in respect of the year ending on 28 February 2010 was declared by the Annual General Meeting on 28 July 2010 and was paid on 6 August 2010.  This dividend was not reflected in the financial statements as at 28 February 2010, but is reflected in the financial statements as at 31 August 2010.

6.   Related party transactions

Fees payable to the Manager are shown in the Consolidated Income Statement.  £23,670 was payable to the Administrator in respect of the period.  Fees were accrued of £20,990 to the Manager and £4,110 to the Administrator at 31 August 2010.

DIRECTORS AND ADVISERS

DIRECTORS	INVESTMENT MANAGER
RA Hammond-Chambers (chairman)	Mars Asset Management Limited
MJ Barstow FCA	10-11 Charterhouse Square
R Robinson	London EC1M 6LQ
R Martin (appointed 8 September2010)	Tel:  [phone]
STOCKBROKER	SECRETARY & REGISTERED OFFICE
Cenkos Securities plc	Cavendish Administration Limited
6,7,8 Tokenhouse Yard	145-157 St John Street
London EC2R 7AS	London EC1V 4RU
BANKERS	ADMINISTRATORS
Coutts & Co	Cavendish Administration Limited
440 Strand	145-157 St John Street
London WC2R 0QS	London EC1V 4RU
CUSTODIAN	AUDITORS
The Northern Trust Company	Grant Thornton UK LLP
50 Bank Street	30 Finsbury Square
London E14 5NT	London EC2P 2YU
REGISTRARS
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield HD8 0LA

Enquiries to:

Chris Lunn, Cenkos Securities plc 0207 397 1912                                          

Alex Hammond-Chambers 0131 228 2233

John Luetchford, Cavendish Administration Limited, 0207 490 4355

 

END

 

 

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