Half Yearly Report

RNS Number : 7384P

Aurora Investment Trust PLC

29 October 2012

 



AURORA INVESTMENT TRUST plc

Half Yearly Financial Report

For the six months ended 31 August 2012

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 STATEMENT

 

A year ago I wrote my first Half Yearly Report, as the newly appointed Chairman of Aurora Investment Trust, with a degree of optimism that the problems facing the world economy were sufficiently serious as to be addressed with urgency. In the event the intractable nature of many of the problems - and in particular the Eurozone - has led to disappointing progress and, in turn, lacklustre equity markets.

The half year returns were:

		31/08/12			29/2/12		Change		At 31/08/11
Net Asset Value per share		171.36p			214.84p		-20.2%		220.72p
Share price		147.00p			175.75p		-16.4%		177.00p
Discount		14.2%			18.2%		4.0%		19.8%
Gearing (net)		16.5%			18.4%		1.9%		18.2%

Review of the period

Weak investor confidence continued to weigh on equity markets and the performance of stocks of a defensive nature produced the better returns.  Growth companies remained out of favour. Against this background, over the half year, the Trust's net asset value has declined by 20.2% compared with the UK market decline of 2.3%.  In turn, the discount has also remained wide. As I have commented previously, this environment is particularly difficult for a Trust with Aurora's "high beta" strategy.

Of the global features which have depressed investor sentiment, the problems of the Eurozone and the interplay of domestic economic and political factors affecting growth have remained key. Global confidence has also been exacerbated by the impending US Presidential election and the potential US$600 billion "fiscal cliff" which is scheduled to be addressed at the end of the calendar year. This and the imminent "changing of the guard" in China have slowed decision making and left most of any policy impetus to the Central Banks.

Within the Eurozone, it has become apparent, as I anticipated, and the IMF has now confirmed, that the requirement of the uncompetitive, largely Southern European countries to implement internal devaluation, austerity measures has led to a much larger recession multiplier effect than expected, also worsening the public finances.  The German-led programme for internal devaluation for those European economies which have become seriously uncompetitive looks unlikely to be able to restore adequate competitiveness and is causing a downward economic spiral and political crises.

At the end of the period, equity markets reacted positively to European Central Bank proposals to buy Spanish and Italian Bonds, essentially seeking to cap their Bond yields, but the qualification for such support is that the relevant economies implement the promised austerity measures, which it is becoming ever more difficult for them so to do.  The Eurozone crisis looks likely to drag on with the ECB resorting to QE money creation measures by buying Government Bonds to avoid collapse, but it is unlikely to be resolved until there is a major currency reorganisation.

The optimist could, however, propose a scenario when the period of political vacuum in the US and China is over, Spain has asked for or accepted a bail out, the Eurozone stabilised, at least temporarily, and the QE creation of money in the US, UK and the Eurozone drives up equity markets in the New Year. The chances of this more favourable scenario appear better than even. Also, in spite of persistent downgrading of growth expectations across the world for both 2012 and 2013, economic growth is forecast by the IMF to be 3.3% and 3.6% for the two years respectively. Many growth companies are now valued on considerably lower multiples than twelve months ago.  It is also apparent that generally equities represent the best value amongst the asset classes of bonds, property and equities.

Over the six-month period, volatile and cautious stock-market conditions have depressed the value of the Company's investments, but I remain convinced that the Company's investment strategy has large upside potential to be released when markets normalise.

Tender

A circular setting out the Tender Offer is being sent to shareholders with this report, fulfilling the Trust's commitment so to do, in order to control the discount.  The Board has honoured in 2012 the commitment made in 2010 and 2011, but while we will keep the situation under review going forward as to whether such tenders would be appropriate in future years, there is no ongoing commitment to repeat a tender offer.

Lord Flight

Chairman

29 October 2012

INTERIM MANAGEMENT REPORT

MANAGER'S REVIEW

Against a background of the continuing crisis in the eurozone, and a sharp slow-down in the global economy, the net asset value has, I regret to report, continued to  decline and under-perform the UK stock-market during the company's first six months of the new financial year.

The  'flight to safety' has continued as the great majority of the investment community continues to sit on its hands, remaining risk averse and unwilling to venture far from the market leading stocks; the net  result is  that many large favoured companies are currently rated at multi-decade record levels, despite their relatively unappealing growth prospects. Meanwhile lesser capitalised stocks, with much better long-term prospects, languish at almost derisory valuations, of which several examples are held in the portfolio.

This was certainly not an environment conducive to out-performance by a manager who takes great pride to select and build a portfolio of low yielding growth stocks suitable for the prevailing macro-economic conditions. Although I apologise profusely for my errors and don sackcloth and ashes to meet the loyal shareholders, I have not lost confidence that sentiment will suddenly change and reveal the huge value embedded in the portfolio. Macro-economic forces are definitely on my side.  Asian and other emerging economies to which the portfolio is exposed are set to produce a far superior performance than the UK or the Eurozone.

Longstanding shareholders will recall that I wrote in the 1998 Report  that a three legged cat had a better chance of swimming the English Channel to safety before the euro became a successful single currency on account of the major deficiencies in its design.

Thus, in the light of having correctly forecast that economic conditions in Europe would endure a lengthy period of economic weakness, I purposefully constructed a portfolio of companies exposed to faster growing economies with scope for both currency appreciation and rising profitability.  So far this year there have been no rewards for my efforts, only considerable anguish. I would have done much better to buy the relevant weighting in the largest ten capitalised stocks and then go on a long fishing holiday!

Investor sentiment always changes and far sighted stock-picking, rather than index weighting, has and will in my opinion become even more relevant following the financial crisis in Western economies, where consumers, banks and governments are preoccupied to deleverage their positions - a situation which only serves to exacerbate the problem of recessionary conditions. Most importantly, my carefully chosen investee companies will benefit from new trends and thrive despite the dismal and difficult global trading conditions.

Accordingly, I have felt it unnecessary to make many changes to the list during the period under review.  I certainly was not tempted to jettison investments with high long term potential to join the herds of sheep-like investors in safe stocks - painful though it may be at the moment.

In brief, for reasons of both size and valuation, the former top holding of BTG has been significantly trimmed - certainly it has been a most rewarding investment during the last year. The holding in Tesco was sold in anticipation of the intensifying competitive consumer environment as manifested through their shocking results; also BAE, in view of forthcoming defence cutbacks.  In addition, the exposure to the mining sector was slightly reduced in view of the long wait for stimulatory measures from a new administration in China. BHP was sold and the holdings in both Antofagasta and Xstrata cut back.

These proceeds were used to add still further to the holding of Asian Citrus, on account of its high visibility of long term growth as the recently planted orange groves mature, producing much larger crops; the company's exceptional cash generating qualities (gross margins are set to increase from their current 45% level) which, despite heavy capital expenditure programmes, will translate into a cash balance within two years equal to the company's current market capitalisation.  Notwithstanding that the results recently announced were slightly disappointing, on account of exceptional rainfall, it has (in my opinion) an extraordinarily low valuation.  As a consequence, it currently features as the largest holding in the portfolio.

The holding in Emblaze, which has a successful and rapidly growing business in China of converting cheap mobile phones into smart phones capable of sending/receiving 'push emails for free', was augmented. The imminent lawsuit in California against Apple Inc. for unpaid royalties on Emblaze's patented data compression technology, used for every iPhone and iPad made to date, could easily add considerably to the company's bulging coffers, which already amount to nearly twice the market capitalisation. Lastly, the holding in Man Group was almost trebled, which I deemed to be severely undervalued and/or an obvious takeover target.

Prospects

Recent moves almost everywhere (China excepted) by major Central Banks have certainly supported stock-markets. In particular, Mr Bernanke's much anticipated policy of quantitative easing for an indefinite period, until employment growth in the US continues to be self-sustaining, added further propulsion to the bull market in US equities at a time of rather mixed signals from the economic indicators. There is, however, a huge "black cloud" on the horizon in the form of the potential US $600BN Fiscal cliff (no less than a staggering 4% of GDP) which needs to be dealt with at the end of the calendar year. Judging by how the politicians dithered over a similar issue early last August the stock-market is set for some long and anxious moments until the matter is resolved.

In midsummer Signor Draghi announced that he would 'save the euro' and has since then described his plans for ensuring that near bankrupt countries like Greece and Spain can borrow at low interest rates from the ECB, on the condition that these countries signed up to further austerity programmes, which have the effect of producing yet more severe recessionary conditions.

The politicians in Brussels appear determined to hold the eurozone together with the help of the printing press, whatever may be the cost for the young unemployed in the Mediterranean countries, who are already suffering from 'austerity fatigue'.  The undoubted consequences will be civil strife and higher inflation - the fear of which has recently stimulated me to increase the exposure to gold (Medusa Mining).  In summary, the future looks bleak indeed in the region for several years to come - hence little exposure to it in the portfolio. Forthcoming election results may prove unexpectedly interesting!

The UK economy, which does some 40% of its trade with Europe, not to mention being hamstrung by European red tape and regulations, is understandably being held back by these recessionary conditions at a time when banking finance is in short supply. There are few bright spots on the horizon, hence my unwillingness to invest in 'run of the mill' domestic oriented stocks.

Meanwhile, China, during the last six months of Premier Wen's rule, has been suffering from near paralysis. The administration has been distracted by a major scandal involving Bo Xilai, as well as being badly caught out by the speed of the decline in the export-led sectors and by the extent of the slow-down in the property sector during the period of tight monetary conditions imposed to combat inflation.

This failure has been greatly to the detriment of this portfolio, which is heavily exposed to the region, whether through the mining sector or individual local stocks.  I did not expect such paralysis from this 'command' economy, which I had hoped would continue to expand for the next five years at a rate at least 7% faster than the UK economy - making a phenomenal difference (40%) by the end of that period.

The new administration, which assumes the reins of power on 5 November, is likely to take rapid action to bolster the flagging economy (but not to the extent of the $4 trillion package issued in 2008).  There is plenty of scope not only to reduce rates from their current level of 6%, whilst the rate of inflation remains at its current 1.8%, but also to reduce the Reserve ratio requirements as well as stimulate the consumer sectors of the economy in order to improve the quality of life.

The developing nations, which now account for some 65% of the world's population, will continue to expand despite the problems in Western economies, albeit at a lesser rate than five years ago.  The migration of population from the countryside to the cities amongst these nations is a trend which will last for several decades to come, thereby requiring huge amounts of additional infrastructure investment.

In summary, as soon as investors who lost confidence in equity markets and who fled with their money to safe havens are given sufficient reason to consider that politicians around the globe are finally getting to grips with the many and diverse problems confronting them, investor sentiment could change dramatically. The timing of this sea-change is uncertain and the catalyst for it is presently unknown but stock-markets cannot, except by the greatest of pessimists, be considered expensive at their current levels.  The manager remains of the view that the Company's portfolio represents excellent value.

MJ Barstow                    

Mars Asset Management Ltd

29 October 2012

ANALYSIS OF NET ASSET VALUE RETURNS

		Movement		Attribution of
		in net assets		change to NAV
		£'000		pence per share
Revenue income		585		5.06
Trading losses		(726)		(6.28)
Expenses, costs and tax		(342)		(2.96)
Dividend paid		(410)		(3.55)
Capital losses		(4,130)		(35.75)
Of which:
Change in market			(645)
Net gearing			1,319
Stock selection			(4,804)
			(4,130)
Total		(5,023)		(43.48)

SECTOR BREAKDOWN

 versus FTSE All-Share Index

As at 31 August 2012

SECTOR	AURORA
	%
Oil & Gas	18.1
Industrials	1.7
Construction & Engineering	7.0
Consumer Goods	18.5
Consumer Services	0.2
Information Technology	8.7
Financials	12.8
Resources (Mining)	22.0
Transport	1.3
	90.3
Fixed Interest Securities	9.7
	100.0

TOP TEN HOLDINGS

Consolidated portfolio

As at 31 August 2012

All holdings shown are of ordinary shares, unless shown otherwise			£'000	Portfolio
Asian Citrus	Food & Drink		1,950	8.9%
Royal Dutch Petroleum 'B'	Oil Integrated		1,590	7.3%
BTG	Health Care		1,541	7.1%
Antofagasta Holding	Mining		1,273	5.8%
Prudential	Financial		1,180	5.4%
Emblaze Systems	Telecommunications		1,152	5.3%
Prosperity Minerals*	Mining		1,188	5.2%
West China Cement	Building		1,121	5.1%
BG Group	Oil & Gas		966	4.4%
Rio Tinto	Mining		821	3.8%
Total top ten holdings			12,782	58.3%
Other investments			10,025	41.7%
Total consolidated portfolio			22,807	100.00

*includes holding in AIT Trading Limited

FORMAL DECLARATIONS

The Chairman's Statement on pages 1 and 2 and the Manager's Review on pages 3 to 6 provide details on the performance of the Company.  Those reports also include an indication of the important events that have occurred during the first six months of the financial year ending 28 February 2013 and the impact of those events on the condensed set of financial statements included in this Half-yearly financial report.

Details of the largest ten investments held at the period end and the structure of the portfolio at the period end are provided above.

Principal Risks and Uncertainties

The Board considers that the main risks and uncertainties faced by the Company fall into the categories of (i) Market risks (ii) Environmental Markets and (iii) Corporate governance and internal control risks.  A detailed explanation of these risks and uncertainties can be found in the Company's most recent Annual Report for the year ended 29 February 2012.  The risks and uncertainties facing the Company remain unchanged from those disclosed in the Annual Report.

Related Party Transactions

Details of the investment management arrangements were provided in the Annual Report.  There have been no changes to the related party transactions described in the Annual Report that could have a material effect on the financial position or performance of the Company.  Amounts payable to the investment manager in the period are detailed in the Income Statement below.

Board of Directors

29 October 2012

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 29 October 2012 and the above responsibility statement was signed on its behalf by:

Lord Flight

Chairman

29 October 2012

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

		6 months to 31 August 2012		6 months to 31 August 2011
		(unaudited)		(unaudited)

		Revenue	Capital	Total		Revenue	Capital	Total
	Notes	£'000	£'000	£'000		£'000	£'000	£'000
Gains/(losses) on investments designated at fair value through profit or loss		(726)	(4,130)	(4,856)		(177)	(5,414)	(5,591)
Income
Investment income		585	-	585		665	-	665
		585	-	585		665	-	665
Expenses
Investment management fees		(48)	(48)	(96)		(70)	(70)	(140)
Other expenses		(124)	-	(124)		(183)	-	(183)
		(172)	(48)	(220)		(253)	(70)	(323)
Profit/(loss) before finance costs and tax		(313)	(4,178)	(4,491)		235	(5,484)	(5,249)
Finance costs		(56)	(56)	(112)		(75)	(75)	(150)
Profit/(loss) before tax		(369)	(4,234)	(4,603)		160	(5,559)	(5,399)
Tax		(10)	-	(10)		(4)	-	(4)
Profit/(loss) and total comprehensive income for the period		(379)	(4,234)	(4,613)		156	(5,559)	(5,403)
Earnings per share	5	(3.28p)	(36.65p)	(39.93p)		1.32p	(47.04p)	(45.72p)

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.

In the annual report there are lines disclosing trading subsidiary gains and losses.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

			Six months Ended		Six months Ended		Year ended
			31 August 2012		31 August 2011		29 February 2012
		Notes
			(unaudited)		(unaudited)		(audited)
			£'000		£'000		£'000
Opening balance			24,819		34,872		34,872
Total comprehensive income for the financial period/year			(4,613)		(5,403)		(6,082)
Purchase of own shares			-		(3,567)		(3,567)
Dividends paid or legally committed to be paid on ordinary shares		6	(410)		(404)		(404)
Closing balance			19,796		25,498		24,819

CONSOLIDATED BALANCE SHEET

	At 31 August 2012		At 31 August 2011		At 29 February 2012
	(unaudited)		(unaudited)		(audited)
	£'000		£'000		£'000
Non-current assets Investments - designated at fair value through profit or loss	21,789		27,943		27,565
Current assets
Investments held for trading	1,018		2,063		1,744
Other receivables	444		240		173
Cash and cash equivalents	740		618		37
	2,202		2,921		1,954
Total assets	23,991		30,864		29,519
Current liabilities
Purchases for future settlements	(140)		-		-
Bank loan/overdraft	(4,000)		(5,250)		(4,616)
Other payables	(55)		(116)		(84)
	(4,195)		(5,366)		(4,700)
Total assets less current liabilities	19,796		25,498		24,819
Equity
Called up share capital	3,598		3,598		3,598
Share premium account	10,997		10,997		10,997
Capital reserves	6,821		11,637		11,055
Revenue reserve	(1,620)		(734)		(831)
	19,796		25,498		24,819

Net asset value per ordinary share (excluding     shares held in Treasury)	171.36p		220.72p		214.84p
No. of ordinary shares in issue (excluding shares     held in Treasury)	11,552,250		11,552,250		11,552,250
No. of ordinary shares held in Treasury	2,839,139		2,839,139		2,839,139

CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 31 August 2012

	2012		2011
	£'000		£'000
	(unaudited)		(unaudited)
Cash flows from operating activities
Cash inflow from disposal of non-current operating assets	3,379		11,023
Cash outflow from purchase of non-current operating assets	(1,686)		(7,446)
Cash inflow from revenue income	524		559
Cash inflow from trading current asset investments	-		180
Cash outflow from expenses	(357)		(354)
Tax paid	(10)		(4)
Net cash flow from operating activities	1,850		3,958
Financing
Purchase of own shares	-		(3,567)
Equity dividends paid	(410)		(404)
Interest and finance charges paid	(121)		(174)
Decrease in bank borrowings	(616)		(626)
Net cash flow from financing activities	(1,147)		(4,771)
Net increase/(decrease) in cash and cash equivalents	703		(813)
Cash and cash equivalents at beginning of period	37		1,431
Increase/(decrease) in cash	703		(813)
Cash and cash equivalents at end of period	740		618

 

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 2012 and 31 August 2011 has not been audited. 

The information for the year ended 29 February 2012 has been extracted from the latest published audited financial statements.  The audited financial statements for the year ended 29 February 2012 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 29 October 2012.  This report is being sent to shareholders and copies will be made available to the public at the registered office of the Group.  The report will be available in electronic format on the Manager's website www.marsassetmanagement.co.uk

2.   Accounting policies

The half-yearly financial information has been prepared in accordance with IAS34 Interim Financial Reporting.  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 purchase any of its own shares during the half year ended 31 August 2012.  A total of 2,839,139 shares are being held in Treasury and are available for re-sale.  

4.   Earnings per share

Returns for the period ended on 31 August 2012 are stated by reference to the weighted average of 11,552,250 shares in issue during the period, excluding shares held in Treasury (2011: 11,818,554  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 of 3.55p per share in respect of the year ending on 29 February 2012 was declared by the Annual General Meeting on 11 July 2012 and was paid on 20 July 2012.  This dividend was not reflected in the financial statements for the year ended 29 February 2012, but is reflected in the financial statements for the half year ended 31 August 2012.

7.   Related party transactions

Fees payable to the Manager are shown in the Consolidated Income Statement.  £36,000 (incl. VAT) was payable to the Administrator in respect of the period.  Fees were accrued of £13,994 to the Manager and £6,000 (incl. VAT) to the Administrator at 31 August 2012; these fees were paid following the period end.

DIRECTORS AND ADVISERS

DIRECTORS	INVESTMENT MANAGER
Lord Flight (chairman)	Mars Asset Management Limited
MJ Barstow FCA	10-11 Charterhouse Square
The Honourable James Nelson	London EC1M 6LQ
RM Martin	Tel:  [phone]
BANKERS	SECRETARY & REGISTERED OFFICE
Coutts & Co	Cavendish Administration Limited
440 Strand	145-157 St John Street
London WC2R 0QS	London EC1V 4RU
CUSTODIAN	ADMINISTRATOR
The Northern Trust Company	Cavendish Administration Limited
50 Bank Street	145-157 St John Street
London E14 5NT	London EC1V 4RU
REGISTRARS	AUDITORS
Capita Registrars	Grant Thornton UK LLP
Northern House	30 Finsbury Square
Woodsome Park	London EC2P 2YU
Fenay Bridge
Huddersfield HD8 0LA

STOCKBROKER                       

Cenkos Securities plc

6.7.8 Tokenhouse Yard

London EC2R 7AS

 

END

 

 

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