Annual Financial Report
BRITISH EMPIRE TRUST PLC
('British Empire' or the 'Company')
LEI: 213800QUODCLWWRVI968
Annual Financial Report for the year ended 30 September 2017
A copy of the Company's Annual Report for the year ended 30 September 2017 will shortly be available to view and download from the Company's website, http://www.british-empire.co.uk. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
Printed copies of the Annual Report will be sent to shareholders shortly. Additional copies may be obtained from the Corporate Secretary, Link Company Matters Limited, on 01392 477500.
The Annual General Meeting ('AGM') of the Company will be held on 20 December 2017 at 11.00am at 11 Cavendish Square, London, W1G 0AN
The Directors have proposed the payment of a final dividend of 10.0p per Ordinary Share which, if approved by shareholders at the forthcoming AGM, will be payable on 5 January 2018 to shareholders whose names appear on the register at the close of business on 8 December 2017 (ex-dividend 7 December 2017).
The following text is copied from the Annual Report and Accounts (page references refer to pages in the Annual Report and Accounts):
STRATEGIC REPORT
COMPANY PERFORMANCE
Financial Highlights
- Net asset value ('NAV') per share on a total return basis increased by 18.8%
- Benchmark1 index increased by 16.3%
- Final dividend increased by 3.1% to 10.0p
- Share price total return of 18.7%
Performance Summary
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Net asset value per share (total return) for the year to 30 September 20172 |
18.8% |
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Share price total return for the year to 30 September 2017 |
18.7% |
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30 September 2017 |
30 September 2016 |
% change |
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Indices |
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MSCI All Country World ex-US Index (£ adjusted total return)1 |
450.81 |
387.51 |
16.33% |
|
MSCI All Country ex-US Value Index (£ adjusted total return) |
268.74 |
227.08 |
18.35% |
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|
|
|
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Discount |
|
|
|
|
(difference between share price and net asset value)3 |
-9.92% |
-9.64% |
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Year to 30 September 2017 |
Year to 30 September 2016 |
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Earnings and Dividends |
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Investment income |
£17.39m |
£20.69m |
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Revenue earnings per share |
10.44p |
14.32p |
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|
Capital earnings per share |
106.99p |
141.72p |
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Total earnings per share |
117.43p |
156.04p |
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Ordinary dividends per share |
12.00p |
11.70p |
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Special dividends per share |
- |
2.80p |
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Ongoing Charges Ratio |
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Management, marketing and other expenses (as percentage of average shareholders' funds) |
0.87% |
0.89% |
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2017 Year's Highs/Lows |
High |
Low |
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Net asset value per share |
799.17p |
673.85p |
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Net asset value per share (debt at fair value) |
794.06p |
661.83p |
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Share price (mid market) |
711.00p |
600.00p |
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1 The lead benchmark is the MSCI All Country World ex-US Index.
2 As per guidelines issued by the AIC, performance is calculated using net asset values per share inclusive of accrued income and debt marked to fair value.
3 As per guidelines issued by the AIC, the discount is calculated using the net asset value per share inclusive of accrued income and with the debt at fair value.
Buy-backs
During the year, the Company purchased 9,715,122 Ordinary Shares, all of which have been placed into treasury, at a cost of £64.6m.
Alternative Performance Measures
For all Alternative Performance Measures included in this Strategic Report, please see definitions in the glossary in the Annual Report and Accounts.
CHAIRMAN'S STATEMENT
This report covers the period from 1 October 2016 to 30 September 2017.
Investment Performance
Your Company delivered strong performance over the year, with a net asset value total return of 18.8%, which was 2.5 percentage points higher than the benchmark, the MSCI All Country World ex-US Index.
Over the past two years, your Company's investment portfolio has been more concentrated and reflects greater conviction on the part of the Investment Manager about opportunities for return. Following this statement, his report sets out the factors affecting investment returns during the year (including changes in underlying asset value, discount levels, shareholder activism and corporate events). The report also assesses in detail the positioning of the key constituents of the portfolio and their outlook. It also sets out the major contributors and detractors to performance over the year.
Income and Dividend
Your Board has elected to increase the final dividend to 10.0p per share, which will result in a total dividend for the year of 12.0p per share. The investment approach of your Investment Manager is to look to realise the value of the often heavily discounted underlying assets in the investee companies. This is typically achieved through corporate action where the timing of resulting revenues in any given year is uncertain. However, the Company has substantial revenue reserves and, as part of the final dividend, some 1.2p per share will be distributed from reserves. The Board would expect in future years at least to maintain the level of ordinary dividend paid to shareholders.
Amendments to the Articles of Association
As part of the business to be proposed at the Annual General Meeting, the Board is seeking shareholder approval for the adoption of new articles of association. Recent amendments to the regulations governing investment trusts removed the requirement for the articles of association of an investment company to prohibit the distribution of capital profits. Accordingly, the Board is seeking authority at the Annual General Meeting to amend the articles of association to allow the Company to distribute capital profits. The Board believes that the removal of this restriction will give the Company greater flexibility in the long term as it will enable the Company to make distributions from any surplus arising from the realisation of any investment. However, the Board has no intention of exercising this authority at the current time.
The Board is also taking the opportunity to propose some additional amendments to the articles of association to reflect other recent regulatory changes. These changes are further detailed on page 40.
Gearing
While we are mindful of the extended rally in many markets since the global financial crisis, long-term debt remains available at interest rates which appear very attractive by historical standards. The Investment Manager also believes that there continue to be significant investment opportunities available at attractive valuations. The Board has therefore approved a further modest increase in debt, of €20m unsecured private placement loan notes which were issued after the year end on 1 November 2017. If all of this debt is deployed, gearing will be 7.9% of net assets, based on the value of your assets as at the date of issue.
Discount
The discount at which the Company's shares trade has generally been in the range of 10% to 12% over the year and at the year end was 9.9%.
Your Board continues to believe that it is in the best interests of shareholders to use share buybacks with the aim of limiting the volatility in the discount and this year some 9.7 million shares were bought back. One direct effect of the buybacks was to increase NAV per share for remaining shareholders by 0.8% over the accounting year.
While share buybacks seek to address any oversupply of shares, equally important is stimulating demand. The Investment Manager, with support from external advisers, has continued its efforts to explain its unique investment philosophy to relevant investment audiences and it is encouraging to see a number of new shareholders.
Corporate Broker
On 3 April 2017, we announced the appointment of Jefferies Hoare Govett as the Company's corporate broker. As part of its role, Jefferies executes share buybacks on the Company's behalf.
Board
On 9 October 2017, we announced that, following my retirement from the Board after this year's Annual General Meeting ('AGM'), Susan Noble will assume the role of Chairman.
It has been a huge privilege for me to have contributed to British Empire's continuing success over the last 15 years and during such an interesting period in the Company's 126 year history, including the global financial crisis. I am confident that I leave the Company in good hands, with a strong and capable Board and an excellent team of portfolio managers at AVI, ably led by Joe Bauernfreund.
Susan's appointment as Chairman is part of a process of refreshing the Board. We announced in March the appointment of Calum Thomson as a non-executive Director of the Company. Subsequently, Calum succeeded Andrew Robson as Chair of the Audit Committee when Andrew retired on 31 May 2017. We thank Andrew for his substantial contribution over several years as a Director and as Chairman of the Audit Committee.
My colleagues are at an advanced stage in the process of seeking a new Director with the assistance of professional search consultants and an appointment will be announced shortly.
Outlook
Equity markets have proved to be remarkably resilient and the US market in particular has had a long period of strength, despite uncertainty surrounding the trend of interest rates and political issues worldwide.
The underlying performance of most of the core portfolio companies continues to improve and there remains the prospect, given British Empire's strict investment process, that asset values may rise and discounts contract further. The increased exposure to Japan through a basket of well-placed smaller companies with strong cash and market positions has done well so far.
The policy of continuing to stick to our knitting has proved to be the right one and there is also clear evidence that AVI's well thought out active involvement in some portfolio companies has improved shareholder value significantly over time. AVI's continued thorough research into the underlying value of the Company's core investments and other opportunities, together with corporate activity and shareholder activism, should enhance the prospect of discounts narrowing further.
Looking further ahead, we are confident that there are sufficient opportunities for investment to have added modestly to the Company's long-term gearing levels.
Annual General Meeting
I look forward to seeing shareholders at the AGM, which this year will be held on Wednesday, 20 December at 11.00am at 11 Cavendish Square, London W1G 0AN.
This Statement forms part of the Strategic Report. The Strategic Report has been approved and signed on the Board's behalf.
Strone Macpherson
Chairman
10 November 2017
OVERVIEW OF STRATEGY
Total returns to 30 September 2017
|
Company |
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|
1 Year |
10 Years |
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18.8% |
85.0% |
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Benchmark |
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MSCI All Country World ex-US Index |
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1 Year |
10 Years |
|
16.3% |
80.5% |
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|
|
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Discount |
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|
30 September 2017 |
30 September 2016 |
|
9.9% |
9.6% |
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Estimated Percentage added to Net Asset Value per Share from Buybacks |
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|
2017 |
2016 |
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0.8% |
0.8% |
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Ongoing Charges Ratio |
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|
2017 |
2016 |
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0.87% |
0.89% |
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Core Positions the Company Typically Holds |
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25-35 |
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Top Ten Investments Represent |
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47.0% |
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of total assets less current liabilities |
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Company Purpose
The Company is an investment trust. Its investment objective is to achieve capital growth through a focused portfolio of mainly listed investments, particularly in companies whose shares stand at a discount to estimated underlying net asset value.
Strategy
Our strategy is to seek out-of-favour companies whose assets are misunderstood by the market or under-researched, and which trade significantly below their intrinsic value or where pressure can be brought to bear to enact change to release value for shareholders.
Investment Approach
As an investment trust, the Company's most important relationship is with the Investment Manager.
The Company's assets are managed by AVI. AVI aims to deliver superior returns and specialises in investment in securities that for a number of reasons may be selling on anomalous valuations.
The Investment Manager has the flexibility to invest around the world and is not constrained by any fixed geographic or sector weightings, but does seek to maintain a concentrated yet diversified portfolio. No more than 10% of the Company's investments may be in unlisted securities. AVI's investment philosophy is described in more detail in the Annual Report and the Company's Investment Policy.
Key Performance Indicators ('KPIs')
The Company uses KPIs as an effective measurement of the development, performance or position of the Company's business, in order to set and measure performance reliably. These include Net Asset Value Total Return, Discount to Net Asset Value and Value for Money.
The Company's Board of Directors meets regularly and at each meeting reviews performance against a number of key measures.
Net asset value total return
The Directors regard the Company's net asset value total return as being the overall measure of value delivered to shareholders over the long term. Total return reflects both the net asset value growth of the Company and also dividends paid to shareholders. The Investment Manager's investment style is such that performance is likely to deviate materially from that of any broadly based equity index. The Board considers the most important comparator to be the MSCI All Country World ex-US Index, which was adopted as the Company's benchmark from 1 October 2013.
A full description of performance and the investment portfolio is contained in the Investment Review, commencing on page 16 of the Annual Report.
The discount at which the Company's shares trade compared with net asset value
The Board believes that an important driver of an investment trust's discount or premium over the long term is investment performance. However, there can be volatility in the discount or premium. Therefore, the Board seeks shareholder approval each year to buy back and issue shares with a view to limiting the volatility of the share price discount or premium.
During the year under review, the discount has moved generally in a range from 10% to 12%, with a high of 13.6% and a low of 8.3%, based on closing prices and, as at 30 September 2017, stood at 9.9%.
During the year under review, no new shares were issued and 9.7m shares were bought back and placed into treasury, adding an estimated 0.8% to net asset value per share to the benefit of continuing shareholders. The shares were bought back at an average discount of 11.4%.
Value for money
The Board continues to be conscious of expenses and works hard to maintain a sensible balance between good service and costs.
For the year ended 30 September 2017, the ongoing charges ratio was 0.87%, down slightly from the previous year.
Principal Risks
When considering the total return of the investments, the Board must also take account of the risk which has been taken in order to achieve that return. There are many ways of measuring investment risk, and the Board takes the view that understanding and managing risk is much more important than setting any numerical target. The Board looks at risk from many different angles, an overview of which is set out below. It has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
The Investment Manager presents reports on portfolio returns and a set of contribution and risk statistics at each Board meeting. The objective of using these techniques is not to be prescriptive, but to understand levels of risk and how they have changed over time. The purpose of this focus on risk is to ensure that the returns earned are commensurate with the risks assumed. The investment approach followed by the Investment Manager aims, over the long term, to achieve returns in excess of those produced by the market.
Portfolio diversification
Conventional wisdom holds that the most effective way of reducing risk is to hold a diversified portfolio of assets. The Company typically now holds 25-35 core positions. This range could be considered a relatively concentrated (and therefore risky) portfolio. It is important to note that, in line with its investment objective, the Company's holdings are mostly in stocks which are themselves owners of multiple underlying businesses. Thus, the portfolio is much more diversified on a look-through basis than if it were invested in companies with a single line of business. For the same reason, the top ten portfolio positions, representing 47.0% of total assets at the year end, are in practice highly diversified on a look-through basis. This diversification is evident at country, sector and currency levels.
Investment strategy
The Investment Manager has a clear investment strategy, as set out on page 16. There will be periods when this strategy underperforms in comparison to its benchmark and its peer group. The Board monitors performance at each Board meeting, and reviews the investment process thoroughly at least annually.
Gearing
The Company is permitted to use gearing, and has had a £15m debenture in place for many years. In January 2016, the Company also issued two tranches of fixed-rate, long-dated Loan Notes, denominated in Sterling (£30m) and Euros (€30m).
Taking account of the £15m debenture liability and the Loan Notes, the Company's debt as a percentage of equity as at 30 September 2017 was 7.9% (2016: 8.4%).
A further €20m of Loan Notes were issued on 1 November 2017 for a term of 20 years at a fixed rate of 2.93%.
Subsequent to the issue of the new Loan Notes, the debt as a percentage of equity was 9.5%.
There is a degree of risk associated with gearing. While gearing should enhance investment performance over the long term, it is likely to exacerbate any decline in asset value in the short term. There are covenants attached to both the Loan Notes and the Debenture, which could be breached in extreme market conditions and could require early repayment, which could be expensive. Total return results, when issued on the basis of debt being marked to estimated market value, are likely to be more volatile. The value of the Euro tranche of the Loan Notes will fluctuate with currency movements, although it should be noted that the portfolio contains a significant amount of Euro denominated assets. It is possible that the investment returns will not match the borrowing cost over time, and therefore the gearing will be dilutive.
The Board manages this risk by setting its fixed gearing at a prudent level. It obtained the 20-year borrowing in January 2016 at a blended fixed annualised rate of 3.79%, which the Board and AVI consider to be attractive over the long term. The covenants are set at levels with substantial headroom. The two significant covenants on the Loan Notes are that total indebtedness should not exceed 40% of net assets and net assets should not fall below £300m, whilst the Debenture specifies that borrowings shall not exceed 100% of adjusted capital and reserves. The covenants on the further debt issued on 1 November 2017 are substantially similar to those on the existing Loan Notes.
Foreign exchange
Foreign exchange risk is an integral part of a portfolio which is invested across a range of currencies. This risk is managed by the Investment Manager mainly by way of portfolio diversification but the Investment Manager may, with Board approval, hedge currency risk.
Discount
The shares of investment trusts frequently trade at a discount to their published net asset value. The Board seeks to manage the risk of any widening of the discount by regularly reviewing the level of discount at which the Company's shares trade, and it will, if necessary and appropriate, limit any significant widening through measured buybacks of shares. The value of the Company's shares will additionally be subject to the interaction of supply and demand, prevailing net asset values and the general perceptions of investors. The share price will accordingly be subject to unpredictable fluctuations and the Company cannot guarantee that the share price will appreciate in value.
Other risks
Further risks which can impact on performance are a loss of key personnel (especially within the investment management team); regulatory (principally breaches of either UKLA Listing Rules, Disclosure Guidance and Transparency Rules or Sections 1158/1159 of the Corporation Tax Act 2010) and failure of systems or controls. In managing these risks, the Company reviews staffing and succession planning of the Investment Manager at least annually to ensure that there are adequate qualified staff/capacity available, and in particular requires the Investment Manager to notify the Board promptly of any changes in senior staff. The Company also reviews the relevant systems and controls, including their cyber crime controls, at the Investment Manager and at other third-party suppliers, including the Custodian, Depositary and Administrator. The Board monitors the risks inherent in the changing of a supplier, and also considers the risk controls at new suppliers.
There were no material changes to the Company's risk profile during the year, other than normal movements in market risk.
The principal financial risks are examined in more detail in note 14 to the financial statements on pages 65 to 71.
Environmental, Social and Governance Issues
The Company recognises that social, human rights, community, governance and environmental issues can have an effect on some of its investee companies. AVI's Stewardship Policy also recognises that the social and environmental consequences of corporate activity are important factors in determining the creation and maximisation of shareholder value over the long term.
The Company is an investment trust and so its own direct environmental impact is minimal. The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions-producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.
The Company has no employees. The Directors are satisfied that, to the best of their knowledge, the Company's principal suppliers, which are listed on the inside back cover of this report, comply with the provisions of the UK Modern Slavery Act 2015.
The Directors do not have service contracts. There are five Directors, four male and one female. Further information on the Board's policy on recruitment of new Directors is contained on page 42.
Future Strategy
The Board and the Investment Manager have long believed in their focus on investment in high-quality undervalued assets and that, over time, this style of investment has been well rewarded.
The Company's overall future performance will, inter alia, be affected by: the Investment Manager's decisions; investee companies' earnings, corporate activity, dividends and asset values; and by stock market movements globally. Stock markets are themselves affected by a number of factors, including: economic conditions; central bank and other policymakers' decisions; political and regulatory issues; and currency movements.
The Company's performance relative to its peer group and benchmark will depend on the Investment Manager's ability to allocate the Company's assets effectively, and manage its liquidity or gearing appropriately. More specifically, the Company's performance will be affected by the movements in the share prices of its investee companies in comparison to their own net asset values.
The overall strategy remains unchanged.
TEN LARGEST EQUITY INVESTMENTS
The top ten equity investments make up 47.0% of total assets less current liabilities, with underlying businesses spread across a diverse range of sectors and regions.
1. PARGESA
Nature of business: Investment Holding Company
Valuation: £55.5m
% of total assets less current liabilities: 5.7%
Discount: -32.8%
Through Pargesa's stake in GBL it holds interests in a number of listed companies. The portfolio is concentrated on a limited number of major holdings with the aim of creating long-term value through active ownership.
2. EXOR
Nature of business: Investment Holding Company
Valuation : £50.1m
% of total assets less current liabilities: 5.1%
Discount : -29.4%
EXOR is an Italian-listed holding company run by the Agnelli family, which traces its roots back to the formation of FIAT in 1899. It has exposure to four main assets, three of which are listed: Fiat Chrysler Automobiles, Ferrari and CNH, and one unlisted: PartnerRe.
3. RIVERSTONE ENERGY
Nature of business: Investment Company
Valuation: £47.4m
% of total assets less current liabilities: 4.9%
Discount: -17.7%
A London-listed closed-end fund investing in oil & gas companies, mainly in the US and Canada with a focus on unconventional (shale) assets. Backed by a management team with a strong track record in the sector, Riverstone Energy was able to capitalise on the distress in the sector following the oil price crash to assemble an attractive portfolio concentrated in the lowest-cost basins in North America. The company trades on a 18% discount to NAV.
4. SYMPHONY INTERNATIONAL
Nature of business: Investment Company
Valuation: £47.1m
% of total assets less current liabilities: 4.8%
Discount: -27.9%
Symphony is a London-listed closed-end fund with a focus on the Asian consumer. The shares trade at a deep discount to the value of the investment portfolio, half of which is invested in fast-growing Minor International, a Thai-listed hotels and restaurants group with a global footprint. Other exposures include real estate and healthcare.
5. WENDEL
Nature of business: Investment Holding Company
Valuation: £45.5m
% of total assets less current liabilities: 4.7%
Discount: -27.1%
Wendel is a French-listed holding company with exposure to a diverse range of sectors. Major business lines include certification and inspection services, consumer packaging and mobile telephone infrastructure through their investments in Bureau Veritas, Constantia Flexibles and IHS.
6. JPEL PRIVATE EQUITY
Nature of business: Investment Company
Valuation: £44.4m
% of total assets less current liabilities: 4.6%
Discount: -19.3%
JPEL Private Equity is a London-listed closed-end fund investing in private equity investments primarily in the US and Europe. The portfolio is well-balanced between mature legacy funds and more recent secondary direct investments - the former generate prodigious cash flows that will now be distributed to shareholders under the new realisation policy; the latter are largely high growth companies bought at attractive valuations that have produced strong NAV growth.
7. JARDINE STRATEGIC
Nature of business: Investment Holding Company
Valuation: £43.8m
% of total assets less current liabilities: 4.5%
Discount: -23.5%
An Asian holding company which holds significant interests in Jardine Matheson, Hongkong Land, Jardine Cycle & Carriage, Dairy Farm and Mandarin Oriental by way of a cross shareholding between Jardine Matheson and Jardine Strategic. The group structure, which is controlled by the Keswick family, provides broad exposure to Asian businesses at an attractive discount to the value of their listed underlying holdings, while providing the base for long-term value creation through the stable stewardship of their investee companies.
8. TETRAGON FINANCIAL
Nature of business: Investment Company
Valuation: £43.4m
% of total assets less current liabilities: 4.5%
Discount: -34.1%
A Euronext and London-listed closed-end fund investing in a multi-asset portfolio with exposure to CLO equity, hedge funds, and real estate. Tetragon wholly owns or has substantial stakes in the asset managers that manage its portfolio, and the ultimate IPO of this asset management business is likely to release some of the value found in the company's 34% discount to NAV.
9. ADLER REAL ESTATE
Nature of business: Real Estate Company
Valuation: £42.3m
% of total assets less current liabilities: 4.3%
Discount: -13.6%
Adler Real Estate owns a portfolio of c. 50,000 residential units throughout Germany. The company primarily focuses on affordable housing while improving operating performance of these often undermanaged assets. It is trading on a 14% discount to NAV while peers are trading at or above NAV.
10. PERSHING SQUARE HOLDINGS
Nature of business: Investment Company
Valuation: £38.0m
% of total assets less current liabilities: 3.9%
Discount: -24.1%
A Euronext and London-listed closed-end fund investing in a highly-concentrated, predominantly long portfolio of listed US equities. The manager's reputation has been damaged by the catastrophic losses experienced in their out-sized position in Valeant Pharmaceuticals, but that enabled us to make the investment at a wide discount to NAV despite the manager's long-term track record still being outstanding. The shares trade on a 24% discount to NAV, which we believe is far too wide.
INVESTMENT PORTFOLIO
AT 30 SEPTEMBER 2017
|
Company |
Nature of business |
% of investee company |
Valuation |
% of |
|
Pargesa |
Investment Holding Company |
1.2 |
55,489 |
5.7 |
|
EXOR |
Investment Holding Company |
0.4 |
50,120 |
5.1 |
|
Riverstone Energy |
Investment Company |
4.6 |
47,427 |
4.9 |
|
Symphony International Holdings |
Investment Company |
14.7 |
47,068 |
4.8 |
|
Wendel |
Investment Holding Company |
0.8 |
45,546 |
4.7 |
|
JPEL Private Equity |
Investment Company |
15.1 |
44,392 |
4.6 |
|
Jardine Strategic |
Investment Holding Company |
0.1 |
43,814 |
4.5 |
|
Tetragon Financial |
Investment Company |
4.7 |
43,398 |
4.5 |
|
Adler Real Estate |
Real Estate Company |
6.3 |
42,335 |
4.3 |
|
Pershing Square Holdings |
Investment Company |
1.7 |
38,048 |
3.9 |
|
Top ten investments |
|
|
457,637 |
47.0 |
|
Investor AB 'A' |
Investment Holding Company |
0.3 |
37,399 |
3.8 |
|
NB Private Equity Partners |
Investment Company |
3.7 |
36,132 |
3.7 |
|
Tokyo Broadcasting |
Asset-backed Company |
1.4 |
35,907 |
3.7 |
|
Aberdeen Private Equity |
Investment Company |
25.4 |
35,431 |
3.6 |
|
Aker ASA |
Investment Holding Company |
1.5 |
33,934 |
3.5 |
|
SC Fondul Proprietatea |
Investment Company |
0.1 |
31,646 |
3.3 |
|
Toyota Industries |
Investment Holding Company |
0.2 |
29,237 |
3.0 |
|
Third Point Offshore |
Investment Company |
2.7 |
28,219 |
2.9 |
|
Digital Garage |
Investment Holding Company |
3.4 |
25,424 |
2.6 |
|
Vietnam Phoenix Fund 'C' |
Investment Company |
18.5 |
23,793 |
2.4 |
|
Top twenty investments |
|
|
774,759 |
79.5 |
|
Kinnevik AB 'B' |
Investment Holding Company |
0.4 |
23,725 |
2.4 |
|
Swire Pacific 'B' |
Investment Holding Company |
0.6 |
21,406 |
2.2 |
|
Toshiba Plant Systems |
Asset-backed Company |
1.7 |
21,066 |
2.2 |
|
GP Investments |
Investment Company |
14.6 |
15,000 |
1.5 |
|
Cosan Ltd |
Investment Holding Company |
1.2 |
12,220 |
1.3 |
|
Pasona Group* |
Asset-backed Company |
2.3 |
7,668 |
0.8 |
|
Tachi-S* |
Asset-backed Company |
1.5 |
7,346 |
0.8 |
|
Enplas* |
Asset-backed Company |
1.1 |
6,727 |
0.7 |
|
Hirano Tecseed* |
Asset-backed Company |
3.2 |
6,406 |
0.7 |
|
Nishimatsuya Chain* |
Asset-backed Company |
1.1 |
6,320 |
0.6 |
|
Top thirty investments |
|
|
902,643 |
92.7 |
|
Dragon Capital Vietnam Property |
Investment Company |
15.4 |
5,852 |
0.6 |
|
Nippon Road* |
Asset-backed Company |
1.3 |
5,395 |
0.6 |
|
Yamato Kogyo* |
Asset-backed Company |
0.4 |
5,290 |
0.5 |
|
Kato Sangyo* |
Asset-backed Company |
0.6 |
4,997 |
0.5 |
|
Swire Pacific 'A' |
Investment Holding Company |
0.1 |
4,294 |
0.4 |
|
Better Capital (2009) |
Investment Company |
2.0 |
3,628 |
0.4 |
|
Toa* |
Asset-backed Company |
1.3 |
3,381 |
0.3 |
|
Ashmore Global Opportunities - GBP |
Investment Company |
12.6 |
2,975 |
0.3 |
|
Takamatsu Construction* |
Asset-backed Company |
0.3 |
2,344 |
0.2 |
|
Denyo* |
Asset-backed Company |
0.8 |
2,310 |
0.2 |
|
Top forty investments |
|
|
943,109 |
96.7 |
|
Matsui Construction* |
Asset-backed Company |
0.9 |
1,850 |
0.2 |
|
Daiwa Industries* |
Asset-backed Company |
0.4 |
1,629 |
0.2 |
|
Dai-Dan* |
Asset-backed Company |
0.4 |
1,499 |
0.2 |
|
Nakano* |
Asset-backed Company |
1.0 |
1,418 |
0.1 |
|
EF Realisation |
Investment Company |
8.4 |
1,006 |
0.1 |
|
Total equity investments |
|
|
950,511 |
97.5 |
|
Total investments |
|
|
950,511 |
97.5 |
|
Net current assets |
|
|
23,894 |
2.5 |
|
Total assets less current liabilities |
|
|
974,405 |
100.0 |
* Constituent of Japanese Special Situations basket.
INVESTMENT REVIEW/INVESTMENT MANAGER'S REVIEW
OVERVIEW OF AVI'S INVESTMENT PHILOSOPHY
British Empire is managed by AVI.
The aim of AVI is to deliver superior investment returns. AVI specialises in investing in securities that for a number of reasons may be selling on anomalous valuations.
AVI's investment philosophy is to:
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1 |
Invest in companies trading at discounts to net asset value. Our focus is to find listed companies that own assets such as listed securities, property, cash and other businesses. We then estimate the value of all of those assets. After deducting any liabilities such as debt or pension liabilities, we arrive at an estimate of net asset value for that company. We will consider investing in companies where the discount between the current share price and our estimate of the value of that business is wide.
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|
2 |
Identify good quality underlying assets with appreciation potential at compelling valuations. There are many companies trading at discounts to net asset value. Our aim is to identify companies that own high-quality businesses where there is not only a wide discount, but also where we consider there to be a reasonable likelihood of those assets appreciating in value.
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3 |
Look for events to narrow discounts. Once we find a good quality business on an attractive valuation, we then consider whether it is likely that the discount will narrow. Many companies trade at a discount for a reason and if that reason persists, then the discount may persist. Catalysts differ for the various types of company in which we invest. For example, in the case of a closed-end fund, where we are a large shareholder we can influence a board to pursue a strategy for discount narrowing. In the case of a family controlled company, we would rely on the family to be the activist. Our analysis would involve trying to understand the interests and objectives of the controlling shareholder, and whether our interests were aligned with theirs.
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4 |
Focus on balance sheet strength. Debt works very well when markets are appreciating. However, debt can also destroy a lot of value when markets are falling and the business environment for a particular company deteriorates. We consider very carefully the balance sheet strength of the companies in which we invest. Factors which we look at include the actual quantum of debt relative to the assets of the companies, the maturity profile of the debt and the cashflows that the businesses generate.
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|
5 |
Focus on bottom-up stock picking. We are not asset allocators attempting to invest a pool of money across various asset classes. We are equity investors focusing on a particular style of value investing. We do not hug benchmarks and we will not own a company just because it is in a benchmark. We seek to invest in companies that meet the criteria described above.
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Our focus on buying high-quality businesses trading at wide discounts to their net asset value has served us well over the long term. There are periods of time, however, when our style is out of favour and the types of companies in which we invest are ignored by the broader market. This requires us to be patient and to remain true to our style, so that when other investors begin to appreciate the value in those companies, we are well placed to benefit. In the short term, this means that there could be some volatility in our returns. However, we are confident that we own high-quality businesses, which are trading on cheap valuations.
Members of the investment team at AVI invest their own money in funds which they manage. As at 30 September 2017, AVI's investment team owned 214,364 shares in British Empire Trust plc.
PERFORMANCE REVIEW
Joe Bauernfreund
Joe is Chief Executive Officer and Chief Investment Officer of AVI. Joe has been British Empire's named portfolio manager since 1 October 2015, continuing the natural progression that has seen only three portfolio managers at British Empire in the last 30 years.
Performance
Your Company returned 18.8% during the financial year to 30 September 2017, which is 2.5% ahead of its benchmark the MSCI All Country World ex-US Index.
Key contributors to investment performance were AP Alternative (+3.3%), Wendel (+2.3%), Investor AB (+1.7%), JPEL Private Equity (+1.4%) and Aker (+1.3%).
There were two detractors of note over the period: Hudson's Bay (-1.8%) and Pershing Square (-1.0%).
Portfolio Commentary
It has been a remarkable year in many respects. Equity markets have now extended the rally following the financial crisis to eight years, with many markets reaching all-time highs during 2017. September marked the 11th successive month of gains for the MSCI All Country World Index (in USD terms), which ranks as the second longest period of consecutive gains for the index since its formation in 1969.
What makes these statistics so remarkable is the fact that, over the course of the past 12 months, we have experienced extreme political uncertainty; heightened geopolitical tensions; as well as the prospect of the end of Quantitative Easing and the start of interest rate normalisation. However, although broad equity market valuations are generally elevated compared to their historical levels, bulls will point to low bond yields as support for equity markets. So are we due a correction?
Like everyone else, we do not know with any certainty the answer to this question, nor can we predict if or when markets will decide that risk has been mis-priced and trigger a fall. What we do know, however, is that our investment philosophy has been tried and tested with some success over a 30-year period, and that sensibly sticking to our framework of investing will likely lead to good long-term investment returns. With this in mind, there are several observations about your Company's portfolio that are relevant in formulating a view about the prospects for future returns.
There are three key determinants of returns for an investor in British Empire. Two of them relate to the specifics of our investment strategy - our focus on companies trading at discounts to NAV - whilst the third relates to the currency effects of having a Sterling-based fund that invests largely in overseas companies.
In focusing on companies trading at discounts to NAV, the two most important drivers of returns will be changes in NAV and changes in the discount. When considering an investment, we focus on both aspects of return. Changes in NAV will largely, but not solely, be a function of both earnings and the multiples applied to them by the market, whilst the change in discount can be impacted by shareholder activism and the occurrence of corporate events. The effect of activism on discounts is an independent variable and not driven by market valuations.
We pointed out last year that we were confident about the prospective returns from your Company's portfolio given the 32% weighted average discount, combined with the potential for discount contraction arising from corporate events. It is, therefore, pleasing to be able to report this year that a number of key contributors to performance owe their strong performance to corporate events. These are discussed in detail in coming pages, but we would highlight AP Alternative, Better Capital 2009, DWS Vietnam Fund and Aker ASA as particular beneficiaries of this theme. Each saw their discounts disappear or narrow substantially from the levels at which the investments were made. In addition, in several cases it was our own efforts to engage constructively with boards that initially led to the narrowing of the discount. This type of shareholder activism is an important source of return for us.
Today, the portfolio discount stands at 26%. Whilst that is six percentage points narrower than one year ago, it is still very much wider than the 10% level observed in 2006, which provides some guidance for where discounts could ultimately reach. In addition, the prospect of continued corporate activity and events at many portfolio companies could result in us realising these investments on zero or low single digit discounts, as was the case in three of the examples cited in the previous paragraph. In our view, there is a very real prospect therefore of further discount compression within the existing portfolio. This is an important consideration when assessing the prospective returns from the current holdings.
Turning now to the NAV side of the equation, the considerations are more complex, as "value" will often be determined by reference to market valuations and, if these are highly rated, then it follows that the NAV applied to our investments may also be overpriced. We deal with this by focusing on corporate events that are likely to realise value over a period of time, and by owning high-quality businesses that will likely grow in value over the long run. The portfolio today contains a number of companies that are planning on selling assets or restructuring businesses in the coming year, and we expect the effect of this to be reflected in the NAV and the discount. Examples of this include Wendel selling a number of its private assets, EXOR working on unlocking value from Fiat Chrysler, JPEL Private Equity continuing to realise its portfolio and Symphony selling down part of its listed portfolio. These last two will most likely return the cash proceeds to shareholders. The sale of assets by holding companies, particularly of unlisted assets which are not always accurately valued by many investors, could unlock "hidden value" and provide an unanticipated boost to NAVs.
Reflecting on your Company's portfolio using this analytical framework gives us confidence that the portfolio is in good shape. There is much value to be unlocked from corporate events and shareholder activism and, whilst we are not immune from the vagaries of equity markets, we do believe that this portfolio is more attractively valued than the broad market.
In addition, our global remit means that we are free to evaluate opportunities around the world, and we are not forced to buy companies in a particular sector or region irrespective of their valuation merits. The portfolio of 30 core positions gives the Company exposure to hundreds of underlying companies around the world. These span a variety of countries, sectors and industries. We constantly aim to balance the upside potential from corporate events via discount contraction, with a focus on absolute valuation levels. Mindful of the general rise in multiples, this year has seen an important shift in the portfolio: the weighting in Japan at the year end was almost 20%, whereas it was less than 10% one year ago. The reasons behind the increased exposure to Japan are rooted in valuations.
Japan has a number of characteristics that make it a compelling investment opportunity. From a valuation perspective, it is the one major global stock market where we are able to find many companies trading on cheap valuations. In addition, Japanese company managements are coming under increasing pressure to improve corporate governance and boost shareholder returns. To capitalise on both of these factors, we have created a basket of companies that trade on extremely cheap valuations. Our basket makes up 7.3% of the overall portfolio and contains over a dozen companies that have a substantial proportion of their market cap in net cash. This is a play on the theme of improved corporate governance in Japan. The potential upside to shareholders from improved balance sheet efficiency amongst these companies is substantial. In the four months since we established the basket, it has outperformed the TOPIX by 11.0% and risen by 9.2% in Sterling. Further comment on this can be found on page 30.
In addition to the basket investment, we are also taking a more pro-active approach to engagement with management in Japan. Amongst some of the larger holdings, we have been communicating with boards and making suggestions for ways to improve governance and balance sheet management. We are hopeful that this constructive engagement will yield positive results for all shareholders.
The final piece in the return picture was the effect of currencies. The weakening Pound in the months following the Brexit vote in June 2016 contributed to your Company's returns in the 2016 financial year. Over the past 12 months, the Pound has been a volatile currency reflecting the ongoing uncertainty over Brexit and its impact on the UK economy, as well as other macroeconomic events affecting countries around the world. Whilst the Pound trades at far lower levels than it did before the Brexit referendum, over the past 12 months it has strengthened against the major currencies to which this portfolio is exposed, and thus the overall impact of currencies was to reduce Sterling returns by almost 4%. It is not our policy to hedge currency risk and thus changes in the level of the Pound will continue to have an effect on your Company's returns.
Given the foregoing portfolio characteristics, the investment team at AVI remain convinced that the opportunities across our investment universe are compelling. Consequently, your Company has been fully invested throughout the past 12 months and has been utilising most of the debt available to it. Today, the portfolio is 105% invested. In addition, the portfolio continues to be managed in a high conviction, concentrated manner. The top ten holdings make up 47% of the portfolio, compared to 55% one year ago and 41% two years ago. A number of positions were fully exited during the year - often following some form of corporate event. The proceeds have been reinvested into existing holdings, as well as a number of new investments. In the pages that follow, we describe the investment theses behind some of the main contributors to performance, as well as the two major investments that have not delivered positive returns over the period.
Portfolio Review
Contributors
AP ALTERNATIVE ASSETS/ATHENE
Description: Investment Company
Weight*: No longer held
Total return on position FY17 (local)**: 29.7%
Total return on position FY17 (GBP): 31.8%
Contribution (GBP)***: 332bps
Discount: -
% of investee company: No longer held
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
The position in AP Alternative Assets was by some distance the largest positive contributor over the financial year, adding 332bps to British Empire's NAV as the position climbed in value by 24.5%.
The Company first invested in AP Alternative Assets in mid-2012, attracted by the 40% discount and management's unambiguous message that they saw no better investment than buying back their own shares at such a cheap rating. Launched in 2006 at a time when US private equity and hedge fund managers were coming to Europe in search of permanent capital, AP Alternative Assets was established to co-invest alongside fund manager Apollo's private equity funds and in its credit and hedge funds. Just under a third of its NAV was invested in a privately-held life insurance company called Athene. The financial crisis saw sharp mark-downs in Apollo's heavily-levered private equity investments exacerbated by further leverage at the AP Alternative Assets level. Apollo's response was aggressive, buying up debt issued by their portfolio companies at deep discounts to par, and the portfolio had been much stabilised by the time we invested. Late-2012 saw a restructuring under which AP Alternative Assets injected its investments into Athene in exchange for additional shares in Athene, which became a single asset holding company as a result.
We viewed Athene, a pure-play provider of fixed (mainly equity-indexed) annuities, as an attractive high-growth business with clear and embedded cost of capital and competitive advantages over peers. We added materially to the position in AP Alternative Assets over the years, despite its shares trading at times at premiums approaching 30% to official reported NAVs. As our analysis suggested Athene was appreciably undervalued by the official valuation at which it was held. Athene's successful IPO in the first half of December saw us reduce the position, and we sold the remainder of the combined holding over the next six months as Athene's share price climbed further.
Over the life of this investment, the position recorded a return on investment in US Dollars of 115% and an internal rate of return ('IRR') of 44% (140% and 52% respectively in GBP).
WENDEL
Description: Investment Holding Company
Weight*: 4.7%
Total return on position FY17 (local)**: 32.1%
Total return on position FY17 (GBP): 35.6%
Contribution (GBP)***: 227bps
Discount: -27.1%
% of investee company: 0.8%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
Wendel has been a high conviction investment for over three years now and was your Company's largest position for much of the past year. The share price total return from Wendel over the year was 34%, with 21% of that coming from NAV return and the remainder from the effects of discount contraction.
We have commented in the past about how Wendel's discount stood out as anomalously wide when compared to other European family-controlled holding companies and did not appropriately reflect the high-quality nature of its assets or the prospect of corporate transactions unlocking a great deal of hidden value from their unlisted businesses. One year ago, the discount stood at 33%, whereas today it has narrowed to 25%. Partly, this reflects the increased awareness for potential M&A amongst the four largest unlisted businesses in their portfolio and, additionally, it is also down to action taken by management to reduce gearing at the holding company - something which we have long encouraged management to address.
The likely sale of some of Wendel's unlisted companies is an exciting prospect and was fundamental to our thesis for having such a large investment in the company. It is this part of the portfolio where there is greatest uncertainty about the realisable value and we expect that ultimately the sale of these businesses will occur at prices in excess of reported NAVs. The prospect of unlocking some of this hidden value is an important driver of returns. We believe it will boost the NAV of the Company and also improve sentiment, so reducing the discount.
As the market has started to appreciate this potential, we have taken some partial profits and reinvested the proceeds into other situations where we believe investors have failed to recognise value. Wendel remains too cheap in our view and we maintain that there is plenty of upside to come from NAV growth and further discount contraction.
INVESTOR AB
Description: Investment Holding Company
Weight*: 3.8%
Total return on position FY17 (local)**: 27.9%
Total return on position FY17 (GBP): 28.9%
Contribution (GBP)***: 174bps
Discount: -20.5%
% of investee company: 0.3%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
Investor is one of the greatest illustrations of the advantages and attractions of investing in family-controlled holding companies. The Company has now held a position in Investor for 15 years and during this period it has outperformed the MSCI All Country World ex-US Index by 6.5% on an annualised basis. The fact that, despite this tremendous record, the company still trades at a discount to NAV greater than 20% is baffling to us, particularly when one considers that a number of its peers amongst the Swedish holding company sector with inferior track records trade at narrower discounts. It is encouraging that the discount has narrowed over the past 12 months - from 24% one year ago to 21% today. Nevertheless, it remains wider than is justified by its long-term track record and the quality of its portfolio.
Like Wendel, Investor owns both listed and unlisted assets, but it is in the unlisted portfolio that there is the greatest potential for unlocking hidden value. Reported NAVs are typically out of line with realistic realisable values. It is in this area that we at AVI spend a lot of our research effort trying to identify assets where the market has failed to appreciate the true value. It was therefore very pleasing when Investor this year took steps to publicly disclose their estimated realisable valuations of the unlisted assets in the portfolio. Investments had previously been held at book value; masking the true value in the portfolio and causing an artificially wide discount. The impact from such a disclosure was greater than we had anticipated which saw a narrowing of the discount and an increase in the market's assessment of Investor's NAV, adding 13% of previously hidden value to the reported NAV.
In addition to the improved transparency on unlisted valuations, Investor held its first capital markets day in seven years, with presentations from Investor's largest unlisted assets. These steps towards greater communication with the market were well received and we are encouraged to see such a large family holding company take such interest in minority shareholders.
JPEL PRIVATE EQUITY
Description: Investment Company
Weight*: 4.6%
Total return on position FY17 (local)**: 29.7%
Total return on position FY17 (GBP): 26.8%
Contribution (GBP)***: 144bps
Discount: -19.3%
% of investee company: 15.1%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
JPEL Private Equity has been a strong source of returns, particularly following its move into run-off in early 2016. The position returned 26.8% over the year, adding 144bps to British Empire's NAV. NAV growth of 18% and the discount moving in from 26% to 19% only tells half the story, as two returns of capital were also made at NAV (i.e., at zero discounts).
The first distribution under the new policy, paid via a mandatory redemption of shares at NAV, was announced in November 2016 and was relatively modest at just 4% of NAV. December then saw the sale of Innovia, the company responsible for the new UK plastic five pound notes, to Canadian strategic buyer CCL Industries. Innovia was a co-investment made in 2014 by JPEL Private Equity alongside lead sponsor Arle, and the impressive returns (3.2x invested capital/IRR of 50%) help validate the renewed investment programme begun by JPEL Private Equity at the beginning of 2014. The sale of Innovia came at a 100% uplift to carrying value, boosting JPEL Private Equity's NAV by 3.6%. This was followed in March by the sale of Datamars, the animal tagging business, for a return on invested capital of 3.5x and an IRR of 51%. These realisations helped fund a subsequent return of capital of 19% of NAV.
With the maturity of JPEL Private Equity's Zero Dividend Preference shares at the end of October, substantially all of the proceeds from future portfolio exits will be available for distribution to shareholders, and we expect a further distribution to be made before the end of 2017 given the recently reported sale of a key holding.
Sample metrics for JPEL Private Equity's buy-out portfolio show an average weighted EV/EBITDA carrying value of just 7x, which compares favourably to the average 9.9x EV/EBITDA level recorded for US middle market buy-outs in Q1-17, suggesting that its portfolio is under-valued compared to listed markets. We continue to see upside and further liquidity in JPEL Private Equity's portfolio.
AKER ASA
Description: Investment Holding Company
Weight*: 3.5%
Total return on position FY17 (local)**: 19.1%
Total return on position FY17 (GBP): 16.9%
Contribution (GBP)***: 128bps
Discount: -29.4%
% of investee company: 1.5%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
Aker was by far the greatest contributor to performance in 2016, and was once again a key driver of returns this year. As the market started to price in the recovery in the oil price from the low levels seen in 2016 and to recognise the high quality nature of Aker's portfolio, as well as the proactive approach of management, the discount narrowed from 43% 18 months ago to 18% at some points during the current year. We used this substantial re-rating to reduce the holding in a substantial way for the first time since the initial investment in 2008.
Over the whole year, Aker's NAV, including dividends, appreciated by 21% following on from a NAV return of 55% in the prior year, with AkerBP being the main driver of returns given its 60% weight in Aker's NAV. The focus at AkerBP is the start-up of Johan Sverdrup, one of the five largest oil fields ever found in the Norwegian continental shelf. First oil is expected in late 2019, although the field is now 60% complete and ahead of plan so this may be brought forward, much to the delight of shareholders. AkerBP is a quality operator, consistently beating production expectations and lowering production cost guidance. We trust management to continue in this manner and on a dividend yield of 3.8%, before Johan Sverdrup delivers its first oil, we expect further upside.
The second largest asset in Aker's portfolio is ship leasing business Ocean Yield, accounting for 20% of NAV and returning 19% over the year. It continues to invest in new vessels across a variety of end industries and pay an attractive yield to Aker. One large exposure to a gas producing vessel in India is a concern given its lease maturity at the end of 2018. We believe this uncertainty is suppressing the market price and once the outcome of the contract becomes clear we expect the market to value Ocean Yield on a more favourable yield than the current 8.3%.
Aker has taken full advantage of the oil downturn in some asset categories, investing counter cyclically in unloved sectors. The 30% discount on which Aker trades seems too wide for a company with a predominately listed portfolio. While we wait for this to narrow, we are being paid a 5% yield to invest alongside a family who have shown great investment acumen and in a group of companies that we find attractive in their own right. We will continue to hold a position in Aker while such favourable attributes exist.
EXOR
Description: Investment Holding Company
Weight*: 5.1%
Total return on position FY17 (local)**: 20.3%
Total return on position FY17 (GBP): 22.0%
Contribution (GBP)***: 108bps
Discount: -29.4%
% of investee company: 0.4%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
EXOR is a new investment for your Company and one that we have been adding to heavily since the first purchase in December. It is now your Company's second largest holding and much of the profit we took out of Wendel has been reinvested into EXOR.
EXOR is run by the Agnelli family with a history dating back to the late 19th century. Originally the holding company for FIAT, through value enhancing transactions and a commitment to diversifying the group's assets, Fiat Chrysler Automobiles ('FCA') now accounts for only 31% of EXOR's portfolio. Other assets include reinsurer PartnerRe (26%), Ferrari (19%) and CNH Industrial (17%). Our interest in EXOR was piqued when, in early 2016, its discount widened from the low teens to 35%. The discount subsequently narrowed rapidly to 17% before widening again to 25%, where we made the initial investment. A key element of our investment thesis is the potential upside in FCA. Since Sergio Marchionne became CEO in 2004, it has been transformed from a small loss-making Italian car company to the fifth largest global auto manufacturer by market cap.
With Marchionne's retirement planned for early 2019, FCA has been clear about meeting certain profitability and net debt targets. Annual targets up to and including 2018 were released in 2014 and, despite FCA meeting the targets so far, the market has little faith in the 2018 target. This is evident in that FCA trades on a 2018 guided EV/EBIT multiple of 2.2x. Marchionne has commented numerous times regarding the market valuation of FCA and it is our belief that something will be done to unlock this value, most likely through further spin offs, but potentially through a large merger. Despite FCA almost doubling since the first purchase, we believe there is further valuation upside. The combination of a hated industry, with the accompanying low valuation, and a rational, value-realising CEO skews the risk-reward in the Company's favour. We estimate that the potential value of FCA is substantially higher than the current share price and it is the prospect of a corporate event occurring in the next 12-18 months that has driven our conviction in this investment and made it such a large holding.
Ferrari, accounting for 19% of EXOR's portfolio, has also been an important driver of returns since the initial investment in EXOR, with an increase in its share price of 94%. It has increased in value by 112% since its IPO in 2015.
While we do have our reservations regarding valuation, the quality of Ferrari's business is undeniable and we believe it will generate attractive growth and margins for many years to come. PartnerRe is an interesting investment for EXOR. It is part of the strategy to diversify away from the historic main holding in Fiat. Reinsurance rates have fallen as capital seeking idiosyncratic returns has driven down premiums. It is in such environments that having investment discipline is paramount. Being privately owned by EXOR, who have no requirement to demand short-term targets, is allowing PartnerRe to reduce their level of underwriting and to avoid irrational deals. When the cycle turns, it will be PartnerRe which emerges as a winner, much to the benefit of EXOR.
On a 29% discount we do not believe that the market is accurately reflecting the investment acumen of EXOR or the potential for value accretive deals at FCA.
PARGESA
Description: Investment Holding Company
Weight*: 5.7%
Total return on position FY17 (local)**: 22.4%
Total return on position FY17 (GBP): 18.6%
Contribution (GBP)***: 106bps
Discount: -32.8%
% of investee company: 1.2%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
Pargesa is a Swiss-listed holding company whose sole asset is a stake in Belgian-listed holding company Groupe Bruxelles Lambert ('GBL'): on a look-through basis, the two companies' assets are therefore identical and include stakes in listed companies LafargeHolcim, Imerys, SGS, Adidas, Pernod-Ricard, Umicore, Engie and Ontex.
In September 2015, we sold the Company's position in GBL and invested the proceeds in Pargesa when Pargesa's discount - both absolute and relative to GBL - reached rarely seen levels. At that time, Pargesa's discount was 34% (compared with a long-term average of 25%) and GBL's was 22% (26%), and the 12% spread between the two discounts was the largest that it had been in over a decade - the long-term average spread is 1%.
Pargesa gives the Company exposure to a high-quality portfolio of European listed companies. The active approach of management has delivered good returns over the long term. On an anomalously wide discount of 34% we believe this is an excellent way of getting exposure to European equities, with potential upside coming from a variety of sources - strong European equity markets; discount contraction and active ownership. We have been surprised that the discount has remained at these elevated levels for almost two years, particularly as investors are buying into the same portfolio and the same management via GBL on a far narrower discount. We continue to believe that investors will recognise this at some point. In the meantime, there is no cheaper way to gain access to a diversified portfolio of high quality European names and for this reason, Pargesa is currently your Company's largest position.
NB PRIVATE EQUITY
Description: Investment Company
Weight*: 3.7%
Total return on position FY17 (local)**: 22.9%
Total return on position FY17 (GBP): 20.9%
Contribution (GBP)***: 105bps
Discount: -18.8%
% of investee company: 3.7%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
Your Company's position in NB Private Equity Partners ('NBPE') registered a 21% total return, contributing 105bps.
The long-awaited announcement in March of NBPE's plans to enfranchise its shareholders helped drive the company's discount down. At the time of NBPE's IPO in 2007, the high proportion of US shareholders on its register would have resulted in the company losing its Foreign Private Issuer status (with adverse consequences for its investment flexibility) if shareholders had full voting rights. The change in the shareholder base since the company's listing meant this had ceased to be such an impediment and, having engaged constructively with the board and management of NBPE on the issue over a sustained period of time, we were pleased with the proposed introduction of full voting rights for ordinary shareholders.
The move was accompanied by an upgrade of the company's listing to the Premium segment of the London Stock Exchange which, in tandem with a switch of trading currency from USD to GBP, made the shares eligible to enter the FTSE indices and opened them up to index-tracker buying for the first time. Having begun this reporting period on a 23% discount, NBPE's discount tightened in to a 12%-13% range ahead of the FTSE re-balancing and we took advantage of the re-rating to reduce what had become an out-sized position. By the year-end, the discount had drifted out to almost 20% on the back of selling pressure, but we expect the result of the company's restructuring to be a narrower discount over the long term than would otherwise have been the case.
In terms of NAV growth, NBPE has had a respectable year with a 13% NAV total return (in US Dollars), but we believe there is more to come. The legacy funds portfolio, which has been a relative drag on returns, is now down to just 16% of NAV and its impact should be more muted going forward. Moreover, NBPE has been a particularly active investor over the last few years (60% of its direct equity co-investments were made in 2015 or later), and we expect returns to accelerate on these investments as they move further through the investing cycle. Notably, NBPE's 2014 investments are already held at 1.8x cost.
Another feature of NBPE that we think is under-appreciated by the market is an advantageous fee structure relative to its listed private equity peers. There are no management or performance fees charged on co-investments made by the lead GP sponsor, as compared to funds of funds which typically have a double layer of fees. In addition, the level of NBPE's single layer of fees compares favourably to direct investing peers (7.5% performance fee versus 15-20% for peers). We continue to view NBPE shares as undervalued given the attractive portfolio composition and fee structure.
JARDINE STRATEGIC
Description: Investment Holding Company
Weight*: 4.5%
Total return on position FY17 (local)**: 24.7%
Total return on position FY17 (GBP): 16.5%
Contribution (GBP)***: 102bps
Discount: -23.5%
% of investee company: 0.1%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
Like Investor AB, the Company has been invested in either Jardine Matheson or Jardine Strategic for well over a decade. And like Investor AB, this long-term investment has been justified by returns well in excess of broad equity markets - once again highlighting the very real attractions of investing for the long term in family-controlled holding companies.
Last year, we sold the Company's stake in Jardine Matheson after its discount narrowed to below 10% and reinvested the proceeds in October 2016 into Jardine Strategic. The Keswick family exert control over these two listed companies by way of a complex cross-shareholding structure, but the two companies essentially offer exposure to the same group of underlying listed companies, predominantly in Asia - Dairy Farm, Hongkong Land, Mandarin Oriental and Astra International (via Jardine Cycle & Carriage).
The initial investment in Jardine Strategic was made at a discount of 34% and, over the course of this year, that discount has narrowed to 24% - the narrowest level we have observed since 2009. At the same time, its NAV has grown by 10% so that the total return over the year has been achieved from a combination of both NAV growth and discount contraction. This discount narrowing and NAV growth provided good returns for your Company, as Jardine Strategic contributed slightly over 1% to NAV.
The Jardine Group's long-term focus on creating shareholder value from a concentrated, high-quality portfolio of Asian-focused assets continues to appeal to us even at these narrower discount levels. The valuations of the underlying companies look attractive and we see upside potential in them. This will be an important driver of returns in coming years, notwithstanding any changes in the discount. In addition, it has been interesting to observe that Jardine Matheson has been buying additional shares in Jardine Strategic in recent months, increasing their stake to 84%. This may well have been a factor behind the recent discount contraction and, in addition, we believe it pays to look at what the controlling shareholders are doing. The fact that they are effectively buying up more of their own company is possibly a good indicator of the value they see in their businesses.
BETTER CAPITAL 2009
Description: Investment Holding Company
Weight*: 0.4%
Total return on position FY17 (local)**: 24.2%
Total return on position FY17 (GBP): 24.2%
Contribution (GBP)***: 98bps
Discount: -44.7%
% of investee company: 2.0%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
We added significantly to the Company's position in Better Capital 2009 ('BCAP') over 2016, and reaped the benefits of doing so this year when the sale of its key holding, Gardner Aerospace, came through. The holding in BCAP increased in value by 24%, adding 98 basis points to your Company's NAV; the position is now much smaller following the return of the proceeds from the Gardner sale.
We first invested in BCAP in December 2014 after a material and badly-communicated write-down in one of its previously strong-performing portfolio companies resulted in the evaporation of the premium rating then enjoyed by the company. Having traded at times in excess of a 20% premium, we were able to acquire stock on discounts exceeding 20%. We viewed the holding in Gardner Aerospace, which then accounted for 50% of BCAP's NAV, as an inherently attractive business given four factors: first, its advantaged position as a Tier 1 supplier to Airbus manufacturing a large number of essential parts that accounted for a very low portion of the total cost of an aircraft; second, the visibility on future revenue and earnings growth from the ramping-up of production on contracts already won; third, the high regulatory and technical barriers to entry; and last, strong levels of customer retention.
In November 2016, BCAP announced it was in exclusive discussions with a Chinese buyer. However, the protracted sale process, and scepticism over the credentials of the buyer given other Chinese/International M&A deals falling through led to the shares trading at an implied discount of over 80% to the ex-Gardner rump. The deal completed in June 2017, with BCAP recording a 7x multiple on cost and 35% IRR on its investment. The sale price for Gardner was more than double its carrying value at the time of the initial investment in BCAP.
At the end of June, BCAP returned the proceeds from the sale to shareholders resulting in 83% of the holding being redeemed at NAV. This investment, initiated in December 2014, has registered a 27% IRR to date, driven by the upside we identified in Gardner at the outset in addition to discount narrowing.
Detractors
PERSHING SQUARE HOLDINGS
Description: Investment Company
Weight*: 3.9%
Total return on position FY17 (local)**: -15.4%
Total return on position FY17 (GBP): -18.7%
Contribution (GBP)***: -104bps
Discount: -24.1%
% of investee company: 1.7%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
Despite only being acquired late in the financial year, Pershing Square Holdings ('PSH') was the second largest detractor (-104bps). This was due mainly to discount widening, but also as a result of share price weakness in its holdings in Mondelez and Chipotle Mexican Grill. We welcome a falling share price - particularly when driven largely by an expanding discount - while we are building a new position as it allows us to accumulate additional shares at lower levels. We continued to add to your Company's holding in PSH at discounts approaching 25%, having made the initial purchases at the 15% level.
The reputation of Pershing Square Capital Management, the manager of PSH, has been damaged by the catastrophic losses experienced in their out-sized position in Valeant Pharmaceuticals, but the corollary of this is that we were able to make the investment in PSH at wide discounts to NAV, despite the manager's long-term track record still being outstanding (13.5% annualised returns since inception in 2004 vs 8.3% for the S&P500 index).
We see clear scope for upside in several of PSH's largest holdings, in particular Mondelez. Mondelez has a compelling collection of brands with enviable emerging market exposures, and its sub-par margins (notwithstanding improvements over the last few years) offer a purchaser huge scope for efficiency gains. If M&A is not forthcoming, the prospect of margin expansion is an attractive plan B.
We also believe it is untenable for Pershing Square to preside over a public vehicle trading at a wide discount to NAV given their high profile and vocal championing of shareholder rights during various activist battles over the years. We are pleased to see that steps have been taken to address the rating (improving voting rights, moving to a main market London listing, introducing a buyback), but we will expect further discount control measures to be implemented should the rating not improve materially.
HUDSON'S BAY
Description: Asset-backed Company
Weight*: No longer held
Total return on position FY17 (local)**:-36.0%
Total return on position FY17 (GBP): -35.1%
Contribution (GBP)***: -182bps
Discount: -
% of investee company: No longer held
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the year.
*** Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.
Hudson's Bay was the largest detractor from performance this year, costing your Company 182bps of NAV. We initiated this position in December 2015 because, in addition to owning a number of retail brands (Hudson's Bay, Saks 5th Avenue, Lord & Taylor and Kaufhof), it also owned the real estate from which these brands operated. Management had already started the process of unlocking this real estate value by spinning off a large part of their portfolio into separate joint venture companies, and we had high hopes that this process of monetisation would continue and narrow the very wide gap between the share price and the value of its real estate assets. We were reassured of this by the presence of the Chairman and CEO as the largest single shareholder in the company and were confident his strategy of monetising real estate assets would deliver strong returns for all shareholders.
The investment did not work out as planned and we decided to sell the entire investment this year and realise a loss of £9.4m. Like many retailing businesses around the world, Hudson's Bay has been hit hard by the "Amazonisation" of the retail industry. The massive growth of e-commerce and the scale of Amazon's ambitions has changed the industry enormously. This affected Hudson's Bay as, not only were retail profits under pressure, but at the same time, the value of its real estate assets, which are inextricably linked to the success of the retail operations, were hit hard. One only has to look at the retail REIT sector in the US to see how the market has reacted to this phenomenon. The sharp declines in the share price of Hudson's Bay reflect the reality that it will be very difficult to capture the potential value of those real estate assets at a time when pricing is so weak.
We do not know whether the value of these assets will recover. What we do know, however, is that the timing of the monetisation event will have to be pushed out into the future and that the financial positon of the company will continue to look stretched for as long as retail profits are under pressure. Painful as it was to take the loss, we think there is too much risk in the company for us to maintain a position.
Additional Holdings of Interest
JAPAN SPECIAL SITUATIONS
Description: Asset-backed Companies
Weight*: 6.6%
Discount: -32.0%
* % of total assets less current liabilities.
The Japanese Special Situations basket consists of 15 stocks that have inefficient balance sheets and diversified domestic sector exposure. Really, these should be thought of as one basket - made up of cash and assets that trade at a discount. Our Investment thesis is that with a large portion of their value in net cash, which is being under appreciated by the market, they will outperform, particularly under the pressure of improving corporate governance.
We formed the basket at the beginning of June and it now consists of 15 names with an aggregate 7.3% weight in your Company. We found the most opportunities in small-capitalisation companies which often are not accessible to other large market participants due to lack of liquidity and size. Your Company's fixed base of capital allows us bear this illiquidity risk and to remain agile so that such opportunities can be exploited.
In addition to the focus on highly capitalised balance sheets, we also sought companies with strong cash generation despite a large portion of capital being used inefficiently. By investing in this basket, we have effectively placed 53% of invested capital in cash yet are still receiving a 6.5% Free Cash Flow ('FCF') yield and a dividend yield of 1.5%. If these companies were to return their redundant tangible assets to shareholders, these investments would have a FCF yield of 24%. There are few markets outside Japan where a portfolio with the above statistics could be created.
While the holding period has been short, the performance has been strong, with the basket outperforming the TOPIX index by 11%. We find the changing corporate governance theme in Japan to be an interesting one and believe we have built a compelling basket of companies, at attractive valuations, that should be a beneficiary of such change.
SWIRE PACIFIC A & B
Description: Investment Holding Company
Weight*: 0.4% / 2.2%
Discount: -27.6% / -35.4%
% of investee company: 0.1% / 0.6%
* % of total assets less current liabilities.
Swire Pacific, through both their A and B shares, has had a small negative impact on British Empire's NAV over the 12 months. While the large exposure to their listed property subsidiary, Swire Properties, has provided strong returns, similar to those we saw with Hongkong Land and the Jardine Group, other holdings in Cathay Pacific, HAECO and the Marine Services Division, SPO, have been a drag on performance. In fact, the stub value of the ex-Swire Properties businesses currently has a negative valuation - something that has only occurred once since 2012.
However, while we believe these businesses (including their beverage bottling and distribution business) are worth more than zero, the company needs to do more to improve returns from their investments. After meeting with management in Hong Kong recently, we were pleased to see that they have taken some steps to try to remedy this as the family are clearly displeased about performance in recent years. They have made sweeping changes to the Swire board, removing directors who were representatives of the underlying holdings, enabling a more transparent and rigorous review of their performance. In addition, they brought an external candidate onto the board who has strong experience of corporate deals in China. We believe this greater oversight of performance and ability to look at deals will see movements in the portfolio which we hope will improve performance significantly over the medium term. However, we do have to judge performance on their actions so we will be watching closely.
VIETNAM PHOENIX FUND 'C'
Description: Investment Company
Weight*: 2.4%
Discount: -17.6%
% of investee company: 18.5%
* % of total assets less current liabilities.
While we engage with the boards and management of almost all investee companies, we consider ourselves constructive shareholders and seek to work with companies to find ways to improve the rating on which they trade. On some occasions, however, we are forced to take a more forthright stance. The investment in Vietnam Phoenix Fund (formerly known as DWS Vietnam Fund), which added 80bps over the year, has been one such example.
We first invested in Vietnam Phoenix Fund in July 2013. Despite a successful track record, the company's shares languished on a near 40% discount due to an egregious fee structure, poor corporate governance, a conflicted board and the absence of any discount control measures. An 18% stake was accumulated in the company and we set to work tackling the various issues that were resulting in such a wide discount to NAV. We voted against the three management representatives on the board and had two of our nominees appointed as directors. The company cancelled the 10% of its shares held in treasury and began a new buyback programme. Most significantly, we extracted a public commitment from the board that the manager's contract would not be extended on the same terms and to put forward restructuring proposals to open-end the fund.
In late 2016, the restructuring proposals were approved and Vietnam Phoenix Fund was converted into an open-ended fund (two-thirds of the position) that realised its investments over the next three months and returned cash to shareholders at NAV, and a closed-end fund housing the private equity assets that should do the same over the next two years. We have since added to your Company's holding in the spun-off private equity fund at discounts in excess of 20%. Its major asset is Greenfeed, an animal feed company that we estimate is carried very inexpensively in the fund's NAV, particularly given its strategic positioning and its track record of growing earnings.
Over the life of your Company's investment in Vietnam Phoenix Fund, including the current position in the private equity spin-off, we have recorded a 52% total return and 19% IRR in USD (82% and 29% respectively in GBP).
SYMPHONY INTERNATIONAL HOLDINGS
Description: Investment Company
Weight*: 4.8%
Discount: -27.9%
% of investee company: 14.7%
* % of total assets less current liabilities.
Symphony holds a portfolio of listed and unlisted investments operating in the hospitality, healthcare, leisure and real estate sectors, with its most significant holding being its 6% stake in Thai-listed Minor International, which accounts for approximately half of Symphony's NAV. With over 150 hotels and resorts, 2,000 restaurants and 300 retail trading outlets across 32 countries spread across Asia, Africa, Europe, South America, and the Middle East, Minor is a significant company in terms of scale.
Over the year, Symphony's NAV was essentially flat after adjusting for dividends. Modest increases in the share prices of listed holdings Minor and Parkway Life REIT and small foreign exchange gains were offset by a decline in the share price of IHH Healthcare and a write-down in Christian Liaigre (the high-end furniture retailer) on the back of a weak retail environment in Paris due to the string of terrorist attacks.
However, your Company's position in Symphony benefited from a material contraction in its discount from 39% to 28%. Since we first invested in Symphony in 2012, we have engaged constructively with management to find ways to tackle the excessively wide and persistent discount at which the shares have traded. In 2014, a policy of paying an annual dividend was introduced, with large special dividends being paid for the first three years equivalent to dividend yields of 5.5%, 5.8%, and 8.8%. This year, the special dividend was cut due to limited excess cash being available for distribution and the dividend yield equated to "just" 4.1%. However, a very large additional dividend of $0.10 (equivalent on its own to a 12.4% yield) was declared in September following the full sale of Parkway Life REIT and the partial sale of some of the holding in Minor. Given that dividends effectively represent a return of capital at a zero discount, such payments are highly accretive to shareholders.
Our work with management on ways of reducing the discount also saw the appointment of a new corporate broker with greater expertise in closed-end funds than the previous incumbent, and the initiation of an aggressive buyback that seeks to repurchase at least 10% of shares annually. This buyback has helped narrow the discount, and has been significantly accretive to NAV per share given the wide discount on which shares are being repurchased.
TOP 30 LOOK-THROUGH HOLDINGS
British Empire invests in holding companies and closed-end funds that in turn invest in listed and unlisted companies. We show below the top 30 holdings on a "look-through basis", i.e., the underlying companies to which we have exposure. For example, British Empire owns a stake in Symphony International Holdings, a London-listed private equity fund, that accounts for 4.8% of British Empire's portfolio (5.2% of its NAV). Symphony International's largest holding is Minor International, which accounts for c. 50% of its own NAV. This translates to an effective exposure of British Empire to Minor International of 2.6% of British Empire's NAV. The table below is an indication of the degree of diversification of the portfolio.
|
|
|||
|
Look-through holding |
Parent company |
Underlying look-through weight |
Look-through holding sector |
|
Minor International |
Symphony International Holdings |
2.6% |
Hotels, Resorts & Cruise Lines |
|
Aker BP |
Aker ASA |
2.3% |
Oil & Gas Exploration & Production |
|
Swire Properties |
Swire Pacific Ltd 'A' and 'B' |
2.3% |
Real Estate Operating Companies |
|
Bureau Veritas |
Wendel |
2.2% |
Research & Consulting Services |
|
Fiat Chrysler Automobiles |
EXOR |
2.0% |
Automobile Manufacturers |
|
Toyota Forklifts and Handling Equipment |
Toyota Industries |
1.8% |
Auto Parts & Equipment |
|
Toshiba Plant Operations |
Toshiba Plant |
1.7% |
Construction & Engineering |
|
PartnerRe |
EXOR |
1.7% |
Reinsurance |
|
Canadian Intl Oil Corp |
Riverstone Energy |
1.6% |
Oil & Gas Exploration & Production |
|
Automatic Data Processing |
Pershing Square Holdings |
1.5% |
Data Processing & Outsourced Services |
|
Toyota Motor Corp |
Toyota Industries |
1.4% |
Automobile Manufacturers |
|
Centennial Resource Development |
Riverstone Energy |
1.3% |
Oil & Gas Exploration & Production |
|
Kakaku.com |
Digital Garage |
1.3% |
Internet Software & Services |
|
Jardine Cycle & Carriage |
Jardine Strategic |
1.3% |
Car & Motorbike Distribution - Indonesia |
|
Mondelez |
Pershing Square Holdings |
1.3% |
Packaged Foods & Meats |
|
Hongkong Land |
Jardine Strategic |
1.3% |
Real Estate Operating Companies |
|
Ferrari |
EXOR |
1.2% |
Automobile Manufacturers |
|
Dairy Farm |
Jardine Strategic |
1.2% |
Food Retail |
|
Imerys |
Pargesa |
1.1% |
Construction Materials |
|
CNH Industrial |
EXOR |
1.1% |
Agricultural & Farm Machinery |
|
Cosan |
Cosan Ltd |
1.1% |
Oil & Gas Refining & Marketing |
|
Hidroelectrica SA |
Fondul Proprietatea |
1.1% |
Electric Utilities |
|
Adidas |
Pargesa |
1.1% |
Apparel, Accessories & Luxury Goods |
|
LafargeHolcim |
Pargesa |
1.0% |
Construction Materials |
|
Restaurant Brands International |
Pershing Square Holdings |
0.9% |
Restaurants |
|
Zalando |
Kinnevik B |
0.9% |
Internet & Direct Marketing Retail |
|
Financial Technology (e-payments) |
Digital Garage |
0.9% |
Data Processing & Outsourced Services |
|
FibroGen |
JPEL Private Equity |
0.9% |
Biotechnology |
|
SGS |
Pargesa |
0.9% |
Research & Consulting Services |
|
Tokyo Electron |
Tokyo Broadcasting Systems |
0.8% |
Semiconductor Equipment |
OUTLOOK
The weighted average discount on your Company's portfolio has narrowed over the year as a result of increased levels of corporate events. However, at 26% it remains wide. The prospect for continued corporate activity and shareholder activism suggests that the portfolio discount is likely to narrow further. This will be an important driver of returns in the coming year. The high conviction, concentrated portfolio is well placed to benefit from these trends.
Joe Bauernfreund
Chief Executive Officer
Asset Value Investors Limited
10 November 2017
DIRECTORS
Strone Macpherson - Chairman
Steven Bates - Senior Independent Director
Susan Noble
Nigel Rich FCA
Calum Thomson FCA - Chairman of the Audit Committee
All Directors are non-executive and independent of the Investment Manager.
INVESTMENT OBJECTIVE, POLICY AND RESTRICTIONS
The objective of the Company is to achieve capital growth through a focused portfolio of investments, particularly in companies whose shares stand at a discount to estimated underlying net asset value.
Investments are principally in companies listed on recognised stock exchanges in the UK and/or overseas, which may include investment holding companies, investment trusts and other companies, the share prices of which are assessed to be below their estimated net asset value or intrinsic worth.
Although listed assets make up the bulk of the portfolio, the Company may also invest in unlisted assets with the prior approval of the Board.
The Company generally invests on a long-only basis but may hedge exposures through the use of derivative instruments and may also hedge its foreign currency exposures.
There are no geographic limits on exposure, as the Company invests wherever it considers that there are opportunities for capital growth. Risk is spread by investing in a number of holdings, many of which themselves are diversified companies.
The Company will not invest in any holding that would represent more than 15% of the value of its total investments at the time of investment.
Potential investments falling within the scope of the Company's investment objective will differ over the course of market cycles. The number of holdings in the portfolio will vary depending upon circumstances and opportunities within equity markets at any particular time.
The Company may gear its assets through borrowings which may vary substantially over time according to market conditions but which will not exceed twice the nominal capital and reserves of the Company.
GEARING LEVELS
The Company's Investment Policy, as disclosed above, permits a significant level of gearing, as do the Company's Articles of Association and the limits set under AIFMD (see the Company's website www.british-empire.co.uk/.
Under normal market conditions, it is expected that the portfolio will be fully invested, although net gearing levels may fluctuate depending on the value of the Company's assets and short-term movements in liquidity.
As set out on page 10, the Company's debt as a percentage of equity as at 30 September 2017 was 7.9%. Long-term debt comprised £15m of Debenture Stock and two tranches of Loan Notes, one of £30m and the other €30m.
Subsequent to the year end, on 1 November 2017, the Company issued a further €20m Loan Notes. See Chairman's Statement on page 6 and note 17 on page 71 for further information.
RESULTS AND DIVIDENDS
Company profit for the year was £141,699,000, which included a profit of £12,603,000 attributable to revenue (2016: profit of £204,238,000, which included a profit of £18,747,000 attributable to revenue). The profit for the year attributable to revenue has been applied as follows:
|
|
£'000 |
|
Current year revenue available for dividends |
12,603 |
|
Interim dividend of 2.0p per Ordinary Share paid on 30 June 2017 |
2,380 |
|
Recommended final dividend payable on 5 January 2018 to shareholders on the Register as at 8 December 2017 (ex dividend 7 December 2017): |
|
|
- Final dividend of 10.0p per Ordinary Share |
11,557* |
|
|
|
|
|
13,937 |
* Based on shares in circulation on 9 November 2017.
MANAGEMENT ARRANGEMENTS
AVI is the Company's appointed AIFM, and is engaged under the terms of an Investment Management Agreement ('IMA') dated 17 July 2014. The IMA is terminable by one year's notice from either party, other than for "cause".
The Investment Manager is entitled to a management fee of 0.70% of the net assets of the Company, calculated quarterly by reference to the net assets at the preceding quarter end and paid monthly.
J.P. Morgan Europe Limited was appointed as Depositary under an agreement with the Company and AVI dated 2 July 2014, and is paid a fee on a sliding scale between 0.5 basis points and 4 basis points based on the assets of the Company. The Depositary Agreement is terminable on 90 calendar days' notice from either party.
JPMorgan Chase Bank, National Association, London Branch, has been appointed as the Company's Custodian under an agreement dated 2 July 2014. The agreement will continue for so long as the Depositary Agreement is in effect and will terminate automatically upon termination of the Depositary Agreement, unless the parties agree otherwise.
Link Company Matters Limited (formerly Capita Company Secretarial Services Limited) was appointed as corporate Company Secretary on 1 April 2014. The current annual fee is £65,000, which is subject to an annual RPI increase. The Agreement may be terminated by either party on six months' written notice.
With the Board's consent, AVI has sub-contracted certain fund administration services to Link Asset Services (formerly Capita Asset Services). The cost of these sub-contracted services is borne by AVI from its own resources and not by the Company.
CAPITAL STRUCTURE AS AT 30 SEPTEMBER 2017
The Company's capital structure comprises Ordinary Shares, Debenture Stock and Loan Notes.
Ordinary Shares
At 30 September 2017, there were 129,526,165 (2016: 160,014,089) Ordinary Shares of 10p each in issue, of which 13,372,622 (2016: 34,145,424) were held in treasury and therefore the total voting rights attaching to Ordinary Shares in issue were 116,153,543.
Income entitlement
The profits of the Company (including accumulated revenue reserves) available for distribution and resolved to be distributed shall be distributed by way of interim, final and (where applicable) special dividends among the holders of Ordinary Shares, subject to the payment of interest to the holders of Debenture Stock and Loan Notes.
Capital entitlement
After meeting the liabilities of the Company and the amounts due to Debenture Stock and Loan Note holders on a winding-up, the surplus assets shall be paid to the holders of Ordinary Shares and distributed among such holders rateably according to the amounts paid up or credited as paid up on their shares.
Voting entitlement
Each Ordinary shareholder is entitled to one vote on a show of hands and, on a poll, to one vote for every Ordinary Share held.
The Notice of Meeting and Form of Proxy stipulate the deadlines for the valid exercise of voting rights and, other than with regard to Directors not being permitted to vote their shares on matters in which they have an interest, there are no restrictions on the voting rights of Ordinary Shares.
Transfers
There are no restrictions on the transfer of the Company's shares other than a) transfers by Directors and Persons Discharging Managerial Responsibilities and their connected persons during closed periods under the Market Abuse Regulation or which may constitute insider dealing, b) transfers to more than four joint transferees and c) transfers of shares which are not fully paid up or on which the Company has a lien provided that such would not prohibit dealings taking place on an open and proper basis.
The Company is not aware of any agreements between shareholders or any agreements or arrangements with shareholders which would change in the event of a change of control of the Company.
Debenture Stock
At 30 September 2017, there was in issue £15,000,000 (2016: £15,000,000) 8⅛% Debenture Stock 2023, repayable on 2 July 2023.
Income entitlement
Holders of the Debenture Stock are entitled to interest paid half-yearly at the rate of 8⅛% per annum.
Capital entitlement
The Debenture Stock holders are entitled to repayment of principal and outstanding interest on the redemption date or, if earlier, on the occurrence of an event of default. The Debenture Stock is secured by a floating charge on all of the assets of the Company. If the Company is liquidated the Debenture Stock is redeemable by the Company at a price which is the higher of par and the price at which the Gross Redemption Yield on the date of redemption is equivalent to the yield on a reference UK government bond, together with interest accrued up to and including the date of redemption. Had the Company been liquidated on 30 September 2017, the redemption premium would have amounted to £3.0m over and above the mid-market price.
The mid-market price of the Debenture Stock as at 30 September 2017 was 130.25p (2016: 129.80p).
Voting entitlement
The holders of Debenture Stock have no right to attend or to vote at general meetings of the Company.
Loan Notes
At 30 September 2017, there was in issue fixed rate 20 year unsecured private placement notes (the 'Loan Notes'). The Loan Notes were issued in two tranches on 15 January 2016, Series A: £30m and Series B: €30m.
Income entitlement
Interest is payable half-yearly at 4.184% per annum on the Sterling Loan Notes and 3.249% per annum on the Euro Loan Notes.
Capital entitlement
The Loan Note holders are entitled to repayment of principal and outstanding interest on the redemption date or, if earlier, on the occurrence of an event of default. The Loan Notes are unsecured. If the Company is liquidated the Loan Notes are redeemable by the Company at a price which is the higher of par and, for the Series A Loan Notes, the price at which the Gross Redemption Yield on the date of redemption is equivalent to the yield on a reference UK government bond and, for the Series B Loan Notes, the price at which the Gross Redemption Yield on the date of redemption is equivalent to the yield on a reference German government bond, both together with interest accrued up to and including the date of redemption. Had the Company been liquidated on 30 September 2017, the redemption premium would have amounted to £17.0m over and above the market values.
The estimated market values of the Loan Notes as at 30 September 2017 were Series A: £33.1m and Series B: £27.5m, being £3.2m and £1.2m respectively above the amortised values excluding interest.
Voting entitlement
The holders of the Loan Notes have no right to attend or to vote at general meetings of the Company.
A further issue of €20m Loan Notes was made on 1 November 2017. Interest on these Loan Notes will be payable half-yearly at an annual rate of 2.93% and the principal is repayable on 1 November 2037.
GOING CONCERN
The Directors have carefully reviewed the current financial resources and the projected expenses of the Company for the next 12 months. On the basis of that review and as the majority of net assets are securities which are traded on recognised stock exchanges, the Directors are satisfied that the Company's resources are adequate for continuing in business for the foreseeable future and that it is appropriate to prepare the financial statements on a going concern basis.
VIABILITY
The Directors consider viability as part of their continuing programme of monitoring risk. The Directors believe three years to be a reasonable time horizon to consider the continuing viability of the Company, reflecting a balance between a longer-term investment horizon and the inherent shorter-term uncertainties within equity markets, although they do have due regard to viability over the longer term and particularly to key points outside this time frame, such as the due dates for the repayment of long-term debt. The Company is an investment trust whose portfolio is invested in readily realisable listed securities and with some short-term cash deposits. The following facts support the Directors' view of the viability of the Company:
· In the year under review, expenses (including finance costs and taxation) were adequately covered by investment income.
· The Company has a liquid investment portfolio.
· The Company has long-term debt of £15m which falls due for repayment in 2023 and £30m and €30m which both fall due for repayment in 2036. This debt was covered some 13.7 times as at the end of September 2017 by the Company's total assets. Following the issue of further debt on 1 November 2017, the total debt was covered some 10.5 times by the Company's assets at that date. The Directors are of the view that, subject to unforeseen circumstances, the Company will have sufficient resources to meet the costs of annual interest and eventual repayment of principal on this debt.
· The Company has a large margin of safety over the covenants on its debt.
The Company's viability depends on the global economy and markets continuing to function. The Directors do also consider the possibility of a wide ranging collapse in corporate earnings and/or the market value of listed securities. To the latter point, it should be borne in mind that a significant proportion of the Company's expenses are in ad valorem investment management fees, which would reduce if the market value of the Company's assets were to fall.
In order to maintain viability, the Company has a robust risk control framework which, following guidelines from the FRC, has the objectives of reducing the likelihood and impact of: poor judgement in decision-making; risk-taking that exceeds the levels agreed by the Board; human error; or control processes being deliberately circumvented.
Taking the above into account, and the potential impact of the principal risks as set out on pages 10 and 11, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of approval of this Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and financial statements in accordance with applicable United Kingdom law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare financial statements in accordance with International Financial Reporting Standards as adopted by the EU ('IFRS').
Under Company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit and loss of the Company for that period.
In preparing the financial statements the Directors are required to:
· select suitable accounting policies and apply them consistently in accordance with International Accounting Standard ('IAS') 8 Accounting Policies, Changes in Accounting Estimates and Errors;
· make judgements and estimates which are reasonable and prudent;
· state whether the financial statements have been prepared in compliance with IFRS, subject to any material departures disclosed and explained therein;
· provide additional disclosures where compliance with the specific requirements of IFRS are considered to be insufficient to enable users to understand the impact of particular transactions, events and conditions on the financial position and performance; and
· prepare financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with relevant laws and regulations, and for ensuring that the Annual Report includes information required by the Disclosure Rules of the UK Listing Authority.
The financial statements of the Company are published on the Company's website at www.british-empire.co.uk. The Directors are responsible for ensuring the maintenance and integrity of the information relating to the Company published on this website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
DECLARATION
The Directors listed above, being the persons responsible, hereby confirm to the best of their knowledge:
· that the financial statements have been prepared in accordance with applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
· the Strategic Report and the Investment Manager's Review include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces
In the opinion of the Board, the Annual Report and Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's position and performance, business model and strategy.
By Order of the Board
Link Company Matters Limited
Corporate Secretary
10 November 2017
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's statutory accounts for the year ended 30 September 2017 but is derived from those accounts. Statutory accounts for the year ended 30 September 2017 will be delivered to the Registrar of Companies in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' report can be found in the Company's full Annual Report and Accounts on the Company's website at
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 September 2017
|
|
|
2017 |
2017 |
2017 |
2016 |
2016 |
2016 |
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
|
Income |
|
|
|
|
|
|
|
|
Investment income |
2 |
17,393 |
- |
17,393 |
20,689 |
- |
20,689 |
|
Gains on investments held at fair value |
8 |
- |
137,833 |
137,833 |
- |
196,289 |
196,289 |
|
Foreign exchange forward contract loss |
|
- |
- |
- |
- |
(3,557) |
(3,557) |
|
Exchange losses on currency balances |
|
- |
(1,579) |
(1,579) |
- |
(371) |
(371) |
|
|
|
17,393 |
136,254 |
153,647 |
20,689 |
192,361 |
213,050 |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
Investment management fee |
3 |
(1,856) |
(4,332) |
(6,188) |
(1,511) |
(3,527) |
(5,038) |
|
Other expenses (including irrecoverable VAT) |
3 |
(1,628) |
- |
(1,628) |
(1,524) |
- |
(1,524) |
|
|
|
|
|
|
|
|
|
|
Profit before finance costs and tax |
|
13,909 |
131,922 |
145,831 |
17,654 |
188,834 |
206,488 |
|
Finance costs |
4 |
(997) |
(2,346) |
(3,343) |
(815) |
(1,930) |
(2,745) |
|
Exchange losses on unsecured loan |
4 |
- |
(480) |
(480) |
- |
(2,992) |
(2,992) |
|
|
|
|
|
|
|
|
|
|
Profit before taxation |
|
12,912 |
129,096 |
142,008 |
16,839 |
183,912 |
200,751 |
|
Taxation |
|
(309) |
- |
(309) |
1,908 |
1,579 |
3,487 |
|
|
|
|
|
|
|
|
|
|
Profit for the year |
|
12,603 |
129,096 |
141,699 |
18,747 |
185,491 |
204,238 |
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
10.44p |
106.99p |
117.43p |
14.32p |
141.72p |
156.04p |
The total column of this statement is the Income Statement of the Company prepared in accordance with IFRS, as adopted by the European Union. The supplementary revenue and capital columns are presented in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies ('AIC SORP').
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.
There is no other comprehensive income, and therefore the profit for the year after tax is also the total comprehensive income.
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2017
|
|
Ordinary |
Capital |
Share |
Capital |
Merger |
Revenue |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
|
For the year ended 30 September 2017 |
|
|
|
|
|
|
|
|
Balance as at 30 September 2016 |
16,001 |
2,934 |
28,078 |
717,051 |
41,406 |
38,503 |
843,973 |
|
Ordinary Shares bought back and held in treasury (see note 12) |
- |
- |
- |
(64,592) |
- |
- |
(64,592) |
|
Ordinary Shares held in treasury cancelled (see note 12) |
(3,048) |
3,048 |
- |
- |
- |
- |
- |
|
Total comprehensive income for the year |
- |
- |
- |
129,096 |
- |
12,603 |
141,699 |
|
Ordinary dividends paid (see note 6) |
- |
- |
- |
- |
- |
(17,851) |
(17,851) |
|
|
|
|
|
|
|
|
|
|
Balance as at 30 September 2017 |
12,953 |
5,982 |
28,078 |
781,555 |
41,406 |
33,255 |
903,229 |
|
|
|
|
|
|
|
|
|
|
For the year ended 30 September 2016 |
|
|
|
|
|
|
|
|
Balance as at 30 September 2015 |
16,001 |
2,934 |
28,078 |
573,862 |
41,406 |
35,261 |
697,542 |
|
Ordinary Shares bought back and held in treasury (see note 12) |
- |
- |
- |
(42,302) |
- |
- |
(42,302) |
|
Total comprehensive income for the year |
- |
- |
- |
185,491 |
- |
18,747 |
204,238 |
|
Ordinary dividends paid (see note 6) |
- |
- |
- |
- |
- |
(15,505) |
(15,505) |
|
|
|
|
|
|
|
|
|
|
Balance as at 30 September 2016 |
16,001 |
2,934 |
28,078 |
717,051 |
41,406 |
38,503 |
843,973 |
* Revenue reserve is fully distributable by way of dividend.
The accompanying notes are an integral part of these financial statements.
BALANCE SHEET
as at 30 September 2017
|
|
|
|
|
|
|
|
2017 |
2016 |
|
|
Notes |
£'000 |
£'000 |
|
|
|
|
|
|
Non-current assets |
|
|
|
|
Investments held at fair value through profit or loss |
8 |
950,511 |
886,369 |
|
|
|
|
|
|
|
|
950,511 |
886,369 |
|
|
|
|
|
|
Current assets |
|
|
|
|
Other receivables |
9 |
4,850 |
22,454 |
|
Cash and cash equivalents |
|
25,496 |
13,799 |
|
|
|
|
|
|
|
|
30,346 |
36,253 |
|
|
|
|
|
|
Total assets |
|
980,857 |
922,622 |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Other payables |
10 |
(6,452) |
(7,973) |
|
|
|
|
|
|
|
|
(6,452) |
(7,973) |
|
|
|
|
|
|
Total assets less current liabilities |
|
974,405 |
914,649 |
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
8⅛% Debenture Stock 2023 |
11 |
(14,957) |
(14,950) |
|
4.184% Series A Sterling Unsecured Loan Notes 2036 |
11 |
(29,878) |
(29,871) |
|
3.249% Series B Euro Unsecured Loan Notes 2036 |
11 |
(26,341) |
(25,855) |
|
|
|
|
|
|
|
|
(71,176) |
(70,676) |
|
|
|
|
|
|
Net assets |
|
903,229 |
843,973 |
|
|
|
|
|
|
Equity attributable to equity shareholders |
|
|
|
|
Ordinary share capital |
12 |
12,953 |
16,001 |
|
Capital redemption reserve |
|
5,982 |
2,934 |
|
Share premium |
|
28,078 |
28,078 |
|
Capital reserve |
|
781,555 |
717,051 |
|
Merger reserve |
|
41,406 |
41,406 |
|
Revenue reserve |
|
33,255 |
38,503 |
|
|
|
|
|
|
Total equity |
|
903,229 |
843,973 |
|
|
|
|
|
|
Net asset value per Ordinary Share - basic |
13 |
777.26p |
670.52p |
|
|
|
|
|
|
Number of shares in issue excluding Treasury Shares |
|
116,153,543 |
125,868,665 |
The financial statements were approved by the Board of British Empire Trust plc on 10 November 2017 and were signed on its behalf by:
PSS Macpherson
Chairman
The accompanying notes are an integral part of these financial statements.
Registered in England & Wales No. 28203
STATEMENT OF CASH FLOWS
for the year ended 30 September 2017
|
|
|
2017 |
2016 |
|
|
|
|
|
|
Reconciliation of profit before taxation to net cash inflow from operating activities |
|
|
|
|
Profit before taxation |
|
142,008 |
200,751 |
|
Realised exchange gains on currency balances |
|
- |
(3,180) |
|
Gains on investments held at fair value through profit or loss |
|
(137,833) |
(196,289) |
|
Increase in other receivables |
|
(313) |
(513) |
|
(Decrease)/increase in creditors |
|
(458) |
558 |
|
Taxation paid |
|
(314) |
4,089 |
|
Amortisation of Debenture issue expenses |
|
19 |
16 |
|
|
|
|
|
|
Net cash inflow from operating activities |
|
3,109 |
5,432 |
|
|
|
|
|
|
Investing activities |
|
|
|
|
Purchases of investments |
|
(502,357) |
(431,807) |
|
Sales of investments |
|
594,865 |
433,687 |
|
|
|
|
|
|
Net cash inflow from investing activities |
|
92,508 |
1,880 |
|
|
|
|
|
|
Financing activities |
|
|
|
|
Dividends paid |
6 |
(17,851) |
(15,505) |
|
Issue of loans net of costs |
|
- |
52,726 |
|
Payments for Ordinary Shares bought back and held in treasury |
|
(66,536) |
(40,383) |
|
Exchange loss on Loan Notes |
|
480 |
2,992 |
|
|
|
|
|
|
Cash outflow from financing activities |
|
(83,907) |
(170) |
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
11,710 |
7,142 |
|
|
|
|
|
|
Reconciliation of net cash flow movement in funds: |
|
|
|
|
Cash and cash equivalents at beginning of year |
|
13,799 |
6,649 |
|
|
|
|
|
|
Exchange rate movements |
|
(13) |
8 |
|
Increase in cash and cash equivalents |
|
11,710 |
7,142 |
|
|
|
|
|
|
Increase in net cash |
|
11,697 |
7,150 |
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
25,496 |
13,799 |
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
1. General information and accounting policies
British Empire Trust plc is a company incorporated and registered in England and Wales. The principal activity of the Company is that of an investment trust company within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010 and its investment approach is detailed in the Strategic Report.
The financial statements of the Company have been prepared in accordance with IFRS as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), and as applied in accordance with the provisions of the Companies Act 2006. The annual financial statements have also been prepared in accordance with the AIC SORP for the financial statements of investment trust companies and venture capital trusts, except to any extent where it is not consistent with the requirements of IFRS.
Basis of preparation
The functional currency of the Company is Pounds Sterling because this is the currency of the primary economic environment in which the Company operates. The financial statements are also presented in Pounds Sterling rounded to the nearest thousand, except where otherwise indicated.
Going concern
The financial statements have been prepared on a going concern basis and on the basis that approval as an investment trust company will continue to be met.
The Directors have made an assessment of the Company's ability to continue as a going concern and are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future (being a period of 12 months from the date these financial statements were approved). Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Company's ability to continue as a going concern, having taken into account the liquidity of the Company's investment portfolio and the Company's financial position in respect of its cash flows, debt and investment commitments (of which there are none of significance). Therefore, the financial statements have been prepared on the going concern basis.
Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business. The Company primarily invests in companies listed in the UK and other recognised international exchanges.
Accounting developments
The accounting policies are consistent with those of the previous financial year. The following accounting standards and their amendments were in issue at the period end but will not be in effect until after this financial year end. The Directors are considering the impact of the standards upon the financial statements. The impact of IFRS 9 in future periods will increase disclosure requirements and change the presentation of investments and the allocation of income. This will require the consideration of future expected cash flows in holding financial assets. There should be no material impact on the overall returns of the Company. It is not envisaged that the other standards listed below will have a material effect on the financial statements.
|
International Financial Reporting Standards |
Effective date |
|
IFRS 7 Financial Instruments (IFRS 9 Disclosures) |
1 January 2018 |
|
IFRS 9 Financial Instruments |
1 January 2018 |
|
IFRS 15 Revenue from Contracts with Customers |
1 January 2018 |
|
IFRS 16 Leases |
1 January 2019 |
Critical accounting judgements and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts in the Balance Sheet, the Statement of Comprehensive Income and the disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future period if the revision affects both current and future periods. There were no significant accounting estimates or significant judgements in the current period.
Investments
The Company's business is investing in financial assets with a view to capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis in accordance with the documented investment strategy and information is provided internally on that basis to the Company's Board of Directors.
The investments held by the Company are designated 'at fair value through profit or loss'. All gains and losses are allocated to the capital return within the Statement of Comprehensive Income as 'Gains or losses on investments held at fair value through profit or loss'. Also included within this heading are transaction costs in relation to the purchase or sale of investments. When a purchase or sale is made under a contract, the terms of which require delivery within the timeframe of the relevant market, the investments concerned are recognised or derecognised on the trade date.
All investments are designated upon initial recognition as held at fair value through profit or loss, and are measured at subsequent reporting dates at fair value, which is either the bid price or closing price for Stock Exchange Electronic Trading Service - quotes and crosses ('SETSqx'). The Company derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. On derecognition of a financial asset, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been accumulated in equity is recognised in profit or loss.
Fair values for unquoted investments, or for investments for which the market is inactive, are established by using various valuation techniques in accordance with the International Private Equity and Venture Capital (the 'IPEV') guidelines. These may include recent arm's length market transactions, the current fair value of another instrument that is substantially the same, discounted cash flow analysis, option pricing models and reference to similar quoted companies. Where there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, that technique is utilised. Where no reliable fair value can be estimated for such instruments, they are carried at cost, subject to any provision for impairment. These are constantly monitored for value and impairment. The values and impairment, if any, are approved by the Board.
All investments for which a fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy levels in note 14. A transfer between levels may result from the date of an event or a change in circumstances.
Foreign currency
Transactions denominated in currencies other than Pounds Sterling are recorded at the rates of exchange prevailing on the date of the transaction. Items which are denominated in foreign currencies are translated at the rates prevailing on the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the capital reserve or the revenue account depending on whether the gain or loss is capital or revenue in nature.
Cash and cash equivalents
Cash comprises cash in hand and demand deposits. Cash equivalents are short-term, highly liquid investments and money market funds, that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.
For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts when applicable.
Other receivables and payables
Trade receivables, trade payables and short-term borrowings are measured at amortised cost and balances revalued for exchange rate movements.
Income
Dividends receivable on quoted equity shares are taken to revenue on an ex-dividend basis. 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. Dividends from overseas companies are shown gross of any withholding taxes which are disclosed separately in the Statement of Comprehensive Income.
Special dividends are taken to the revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital or revenue receipt, the Board reviews all relevant information as to the reasons for the sources of the dividend on a case-by-case basis.
When the Company has elected to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend forgone is recognised as income. Any excess in the value of the cash dividend is recognised in the capital column.
All other income is accounted on a time-apportioned accruals basis and is recognised in the Statement of Comprehensive Income.
Expenses and finance costs
All expenses are accounted on an accruals basis. On the basis of the Board's expected long-term split of total returns in the form of capital and revenue returns of 70% and 30% respectively, the Company charges 70% of its management fee and finance costs to capital.
Expenses incurred directly in relation to arranging debt finance are amortised over the term of the finance.
Expenses incurred in buybacks of shares to be held in treasury are charged to the capital reserve through the Statement of Changes in Equity.
Taxation
The charge for taxation is based on the net revenue for the year and takes into account taxation deferred or accelerated because of temporary differences between the treatment of certain items for accounting and taxation purposes.
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes at the reporting date. Deferred tax assets are only recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of timing differences can be deducted. In line with recommendations of the SORP, the allocation method used to calculate the tax relief on expenses charged to capital is the 'marginal' basis. Under this basis, if taxable income is capable of being offset entirely by expenses charged through the revenue account, then no tax relief is transferred to the capital account.
Dividends payable to shareholders
Dividends to shareholders are recognised as a liability in the period in which they are paid or approved in general meetings and are taken to the Statement of Changes in Equity. Dividends declared and approved by the Company after the Balance Sheet date have not been recognised as a liability of the Company at the Balance Sheet date.
Non-current liabilities: Debenture and Loan Notes
The non-current liabilities are valued at amortised cost. Costs in relation to arranging the debt finance have been capitalised and are amortised over the term of the finance. Hence, amortised cost is the par value less the amortised costs of issue.
The Euro Loan Note is shown at amortised cost with the exchange difference on the principal amounts to be repaid reflected. Any gain or loss arising from changes in the exchange rate between Euro and Sterling is included in the capital reserves and shown in the capital column of the Statement of Comprehensive Income.
Further details of the non-current liabilities are set out in notes 11 and 14.
Capital redemption reserve
The capital redemption reserve represents non-distributable reserves that arise from the purchase and cancellation of shares.
Share premium
The share premium account represents the accumulated premium paid for shares issued in previous periods above their nominal value less issue expenses. This is a reserve forming part of the non-distributable reserves. The following items are taken to this reserve:
· costs associated with the issue of equity; and
· premium on the issue of shares.
Capital reserve
The following are taken to the capital reserve through the capital column in the Statement of Comprehensive Income:
Capital reserve - other:
· gains and losses on the disposal of investments;
· amortisation of issue expenses;
· costs of share buybacks;
· exchange differences of a capital nature; and
· expenses, together with the related taxation effect, allocated to this reserve in accordance with the above policies.
Capital reserve - investment holding gains:
· increase and decrease in the valuation of investments held at the year end.
The capital reserve is non-distributable.
Merger reserve
The merger reserve represents the share premium on shares issued on the acquisition of Selective Assets Trust plc on 13 October 1995 and is not distributable.
Revenue reserves
The revenue reserve represents the surplus of accumulated profits and is distributable by the way of dividends.
2. Income
|
|
2017 £'000 |
2016 £'000 |
|
|
|
|
|
Income from investments |
|
|
|
UK dividends |
293 |
2,675 |
|
UK property income distributions |
- |
216 |
|
Overseas dividends |
17,194 |
16,581 |
|
Deposit and fixed interest |
16 |
38 |
|
Underwriting commission |
- |
77 |
|
Interest on recovery of French withholding tax |
29 |
634 |
|
Exchange (losses)/gains on receipt of income* |
(139) |
468 |
|
Total income |
17,393 |
20,689 |
* Exchange movements arise from ex-dividend date to payment date.
3. Investment management fee and other expenses
|
|
2017 |
2017 |
|
2016 |
2016 |
|
|
|
Revenue |
Capital |
2017 |
Revenue |
Capital |
2016 |
|
|
return |
return |
Total |
return |
return |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
Management fee |
1,856 |
4,332 |
6,188 |
1,511 |
3,527 |
5,038 |
|
|
|
|
|
|
|
|
|
|
1,856 |
4,332 |
6,188 |
1,511 |
3,527 |
5,038 |
|
|
|
|
|
|
|
|
|
Other expenses: |
|
|
|
|
|
|
|
Directors' emoluments - fees |
144 |
- |
144 |
133 |
- |
133 |
|
Auditor's remuneration - audit - KPMG LLP |
25 |
- |
25 |
- |
- |
- |
|
Auditor's remuneration - audit - Ernst & Young LLP |
- |
- |
- |
29 |
- |
29 |
|
Auditor's remuneration - taxation |
- |
- |
- |
9 |
- |
9 |
|
Auditor's remuneration - withholding tax, interim review and debenture review services |
8 |
- |
8 |
29 |
- |
29 |
|
Marketing |
400 |
- |
400 |
456 |
- |
456 |
|
Savings scheme costs |
8 |
- |
8 |
80 |
- |
80 |
|
Printing and postage costs |
66 |
- |
66 |
121 |
- |
121 |
|
Registrar fees |
86 |
- |
86 |
77 |
- |
77 |
|
Custodian fees |
159 |
- |
159 |
124 |
- |
124 |
|
Depositary fees |
145 |
- |
145 |
134 |
- |
134 |
|
Advisory and professional fees |
318 |
- |
318 |
187 |
- |
187 |
|
Irrecoverable VAT |
172 |
- |
172 |
73 |
- |
73 |
|
Regulatory fees |
58 |
- |
58 |
38 |
- |
38 |
|
Directors' insurances and other expenses |
39 |
- |
39 |
34 |
- |
34 |
|
|
|
|
|
|
|
|
|
|
1,628 |
- |
1,628 |
1,524 |
- |
1,524 |
For the year ended 30 September 2017, the fee calculated in accordance with the IMA amounted to 0.7% (2016: 0.7%) of the net asset value calculated on a quarterly basis.
Details of the IMA and fees paid to the Investment Manager are set out in the Report of the Directors.
4. Finance costs
|
|
2017 |
2017 |
|
2016 |
2016 |
|
|
|
Revenue |
Capital |
2017 |
Revenue |
Capital |
2016 |
|
|
return |
return |
Total |
return |
return |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
Bank overdraft interest |
- |
- |
- |
1 |
- |
1 |
|
Other expenses |
- |
- |
- |
- |
11 |
11 |
|
|
- |
- |
- |
1 |
11 |
12 |
|
|
|
|
|
|
|
|
|
Loan and debenture interest |
|
|
|
|
|
|
|
8⅛% Debenture Stock 2023 |
366 |
854 |
1,220 |
366 |
858 |
1,224 |
|
4.184% Series A Sterling Unsecured Loan Notes 2036 |
376 |
879 |
1,255 |
268 |
625 |
893 |
|
3.249% Series B Euro Unsecured Loan Notes 2036 |
255 |
594 |
849 |
180 |
420 |
600 |
|
|
997 |
2,327 |
3,324 |
814 |
1,903 |
2,717 |
|
|
|
|
|
|
|
|
|
Amortisation |
|
|
|
|
|
|
|
8⅛% Debenture Stock 2023 |
- |
7 |
7 |
- |
7 |
7 |
|
4.184% Series A Sterling Unsecured Loan Notes 2036 |
- |
7 |
7 |
- |
5 |
5 |
|
3.249% Series B Euro Unsecured Loan Notes 2036 |
- |
5 |
5 |
- |
4 |
4 |
|
|
- |
19 |
19 |
- |
16 |
16 |
|
|
|
|
|
|
|
|
|
Total |
997 |
2,346 |
3,343 |
815 |
1,930 |
2,745 |
|
|
|
|
|
|
|
|
|
Exchange loss on Loan Notes* |
- |
480 |
480 |
- |
2,992 |
2,992 |
* Revaluation of Euro Loan Notes.
5. Taxation
|
|
Year ended 30 September 2017 |
Year ended 30 September 2016 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
Analysis of charge for the year |
|
|
|
|
|
|
|
Overseas tax not recoverable* |
849 |
- |
849 |
1,079 |
- |
1,079 |
|
Overseas tax - reversal of prior year tax withheld** |
- |
- |
- |
- |
(1,579) |
(1,579) |
|
Overseas tax recovered previously expensed*** |
(540) |
- |
(540) |
(2,987) |
- |
(2,987) |
|
|
|
|
|
|
|
|
|
Tax cost/(recovery) for the year |
309 |
- |
309 |
(1,908) |
(1,579) |
(3,487) |
* Tax deducted on payment of overseas dividends by local tax authorities.
** Tax deducted on receipt of capital on acquisition of Westgrund by Adler, subsequently returned.
*** Receipts from the recovery of French and Canadian withholding tax from prior years.
The tax assessed for the year differs from the standard rate of corporation tax in the United Kingdom of 19%. The differences are explained below:
|
|
Year ended 30 September 2017 |
Year ended 30 September 2016 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
Profit before taxation |
12,912 |
129,096 |
142,008 |
16,839 |
183,912 |
200,751 |
|
|
|
|
|
|
|
|
|
Theoretical tax at UK corporation tax rate of 19.5% (2016: 20%)* |
2,518 |
25,174 |
27,692 |
3,368 |
36,782 |
40,150 |
|
|
|
|
|
|
|
|
|
Effects of the non-taxable items: |
|
|
|
|
|
|
|
- UK franked investment income |
(57) |
- |
(57) |
(535) |
- |
(535) |
|
- Tax-exempt overseas investment income |
(3,353) |
- |
(3,353) |
(3,252) |
- |
(3,252) |
|
- Exchange gains/(losses) on revenue items |
27 |
- |
27 |
(93) |
- |
(93) |
|
- (Losses)/gains on investments, exchange gains on capital items and movement on fair value of derivative financial instruments |
- |
(26,476) |
(26,476) |
- |
(37,871) |
(37,871) |
|
- Excess management expenses carried forward |
865 |
1,302 |
2,167 |
505 |
1,089 |
1,594 |
|
- Overseas tax not recoverable |
849 |
- |
849 |
1,068 |
(1,579)** |
(511) |
|
- Overseas tax recovered previously expensed |
(540) |
- |
(540) |
(2,987) |
- |
(2,987) |
|
- Overseas tax expensed as double tax relief |
- |
- |
- |
11 |
- |
11 |
|
- Accrued income taxable on receipt |
- |
- |
- |
7 |
- |
7 |
|
|
|
|
|
|
|
|
|
Tax credit/(recovery) for the year |
309 |
- |
309 |
(1,908) |
(1,579) |
(3,487) |
* Tax rate 20% to 31 March 2017 and 19% from 1 April 2017.
** Tax deducted on receipt of capital on acquisition of Westgrund by Adler, subsequently returned.
At 30 September 2017, the Company had unrelieved management expenses of £59,611,000 (30 September 2016: £48,565,000) that are available to offset future taxable revenue. A deferred tax asset of £10,134,000 has not been recognised because the Company is not expected to generate sufficient taxable income in future periods in excess of the available deductible expenses and accordingly, the Company is unlikely to be able to reduce future tax liabilities through the use of existing surplus losses.
Deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an investment trust company.
6. Dividends
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
|
|
|
|
Amounts recognised as distributions to equity holders in the year: |
|
|
|
Final dividend for the year ended 30 September 2016 of 9.70p (2015: 9.70p) per Ordinary Share |
12,006 |
12,914 |
|
Special dividend for the year ended 30 September 2016 of 2.80p (2015: nil) |
3,465 |
- |
|
Interim dividend for the year ended 30 September 2017 of 2.00p (2016: 2.00p) per Ordinary Share |
2,380 |
2,591 |
|
|
|
|
|
|
17,851 |
15,505 |
Set out below are the interim, final and special dividends paid or proposed on Ordinary Shares in respect of the financial year, which is the basis on which the requirements of Section 1159 of the Corporation Tax Act 2010 are considered.
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
|
|
|
|
Interim dividend for the year ended 30 September 2017 of 2.00p (2016: 2.00p) per Ordinary Share |
2,380 |
2,591 |
|
Proposed final dividend for the year ended 30 September 2017 of 10.00p (2016: 9.70p) per Ordinary Share |
11,557* |
12,057 |
|
Proposed special dividend for the year ended 30 September 2017 of nil (2016: 2.80p) per Ordinary Share |
- |
3,480 |
|
|
|
|
|
|
13,937 |
18,128 |
* Based on shares in circulation on 9 November 2017.
7. Earnings per Ordinary Share
The earnings per Ordinary Share is based on Company net profit after tax of £141,699,000 (2016: (£204,238,000)) and on 120,666,358 (2016: 130,884,588) Ordinary Shares, being the weighted average number of Ordinary Shares in issue (excluding shares in treasury) during the year.
The earnings per Ordinary Share detailed above can be further analysed between revenue and capital as follows:
|
|
2017 |
2016 |
||||
|
Basic and diluted |
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
|
|
|
|
|
|
|
Net profit (£'000) |
12,603 |
129,096 |
141,699 |
18,747 |
185,491 |
204,238 |
|
Weighted average number of Ordinary Shares |
|
|
120,666,358 |
|
|
130,884,588 |
|
|
|
|
|
|
|
|
|
Earnings per Ordinary Share |
10.44p |
106.99p |
117.43p |
14.32p |
141.72p |
156.04p |
There are no dilutive instruments issued by the Company (2016: none).
The distributable reserves of the Company are £33,255,000 (2016: £38,503,000).
8. Investments held at fair value through profit or loss
|
|
30 September |
30 September |
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
|
|
|
|
Securities |
|
|
|
Opening book cost |
718,435 |
733,891 |
|
Opening investment holding gains/(losses) |
167,934 |
(26,844) |
|
|
|
|
|
Opening fair value |
886,369 |
707,047 |
|
|
|
|
|
Movement in the year: |
|
|
|
Purchases at cost: |
|
|
|
Equities |
465,243 |
435,141 |
|
Bonds |
37,995 |
- |
|
Sales - proceeds: |
|
|
|
Equities |
(538,947) |
(406,171) |
|
Bonds |
(37,982) |
(45,937) |
|
- realised gains on sales |
130,171 |
1,512 |
|
Increase in investment holding gains |
7,662 |
194,777 |
|
|
|
|
|
Closing fair value |
950,511 |
886,369 |
|
|
|
|
|
Closing book cost |
774,915 |
718,435 |
|
Closing investment holding gains |
175,596 |
167,934 |
|
|
|
|
|
Closing fair value |
950,511 |
886,369 |
|
|
|
|
|
|
Year ended |
Year ended |
|
|
30 September |
30 September |
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
|
|
|
|
Transaction costs |
|
|
|
Costs on acquisition |
918 |
960 |
|
Costs on disposals |
840 |
790 |
|
|
|
|
|
|
1,758 |
1,750 |
|
Analysis of capital gains |
|
|
|
Gains on sales of securities based on historical cost |
130,171 |
1,512 |
|
Movement in investment holding gains for the year |
7,662 |
194,777 |
|
|
|
|
|
Net gains on investments |
137,833 |
196,289 |
9. Other receivables
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
|
|
|
|
Amounts due from brokers |
500 |
18,422 |
|
Overseas tax recoverable |
2,801 |
2,796 |
|
Prepayments and accrued income |
1,541 |
1,205 |
|
VAT recoverable |
8 |
31 |
|
|
|
|
|
|
4,850 |
22,454 |
Overseas tax recoverable relates to withholding tax in a number of countries, some of which is past due, but is in the process of being reclaimed by the Custodian through local tax authorities and which the Company expects to receive in due course.
No other receivables are past due or impaired.
10. Other payables
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
|
|
|
|
Purchases for future settlement |
4,215 |
3,334 |
|
Amounts owed for share buybacks |
1,116 |
3,059 |
|
Other creditors |
1,121 |
1,580 |
|
|
|
|
|
|
6,452 |
7,973 |
11. Non-current liabilities
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
|
|
|
|
8⅛% Debenture Stock 2023 |
14,957 |
14,950 |
|
4.184% Series A Sterling Unsecured Loan Notes 2036 |
29,878 |
29,871 |
|
3.249% Series B Euro Unsecured Loan Notes 2036 |
26,341 |
25,855 |
|
|
|
|
|
Total |
71,176 |
70,676 |
The amortised costs of issue expenses are set out in note 4.
The market values of the Debenture Stock and the Loan Notes are set out in note 14.
The Debenture Stock is secured by a floating charge over all of the assets of the Company. Under the terms of the Debenture Stock, total borrowings are not to exceed 100% of adjusted capital and reserves.
The Company issued two Loan Notes on 15 January 2016:
£30,000,000 4.184% Series A Sterling Unsecured Loan Notes due 15 January 2036
€30,000,000 3.249% Series B Euro Unsecured Loan Notes due 15 January 2036
Under the terms of the Loan Notes, the net assets of the Company shall not be less than £300,000,000 and total indebtedness shall not exceed 40% of net assets.
Further information on the Debenture Stock and Loan Notes is set out on page 50.
12. Called-up share capital
|
|
Ordinary Shares of 10p each |
|
|
|
|
|
|
|
Number of |
Nominal |
|
|
|
|
|
Allotted, called up and fully paid: |
129,526,165 |
12,953 |
|
|
|
|
|
Treasury Shares: |
|
|
|
Balance at beginning of year |
34,145,424 |
|
|
Buyback of Ordinary Shares into treasury |
9,715,122 |
|
|
Cancellation of Ordinary Shares held in treasury |
(30,487,924) |
|
|
|
|
|
|
Balance at end of year |
13,372,622 |
|
|
|
|
|
|
Total Ordinary Share capital excluding Treasury Shares |
116,153,543 |
|
During the year, 9,715,122 (2016: 8,394,546) Ordinary Shares with a nominal value of £972,000 (2016: £839,000) and representing 7.50% of the issued share capital, were bought back and placed in treasury for an aggregate consideration of £64,592,000 (2016: £42,302,000). No Ordinary Shares were bought back for cancellation (2016: nil). 30,487,924 Ordinary Shares, with a nominal value of £3,049,000, previously held in treasury were cancelled during the year (2016: nil).
The allotted, called up and fully paid shares at 30 September 2016 consisted of 160,014,089 Ordinary Shares.
13. Net asset value
The net asset value per share and the net asset value attributable to the Ordinary Shares at the year end are calculated in accordance with their entitlements in the Articles of Association and were as follows:
|
|
Net asset value per share attributable |
|
|
|
2017 |
2016 |
|
|
|
|
|
|
|
|
|
Ordinary Shares (basic) |
777.62p |
670.52p |
|
|
|
|
|
|
|
|
|
|
Net asset value attributable |
|
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
|
|
|
|
Ordinary Shares (basic) |
903,229 |
843,973 |
Basic net asset value per Ordinary Share is based on net assets and on 116,153,543 Ordinary Shares (2016: 125,868,665), being the number of Ordinary Shares in issue excluding Treasury Shares at the year end.
At the year end, the net asset value per Ordinary Share adjusted to include the Debenture Stock and Loan Notes at fair value was 769.91p (2016: 661.81p).
14. Financial instruments and capital disclosures
Investment objective and policy
The investment objective of the Company is to achieve capital growth through a focused portfolio of investments, particularly in companies whose share prices stand at a discount to estimated underlying net asset value.
The Company's investment objective and policy are detailed on page 38.
The Company's financial instruments comprise equity and fixed-interest investments, cash balances, receivables, payables and borrowings. The Company makes use of borrowings to achieve improved performance in rising markets. The risk of borrowings may be reduced by raising the level of cash balances or fixed-interest investments held.
Risks
The risks identified arising from the financial instruments are market risk (which comprises market price risk, interest rate risk and foreign currency risk), liquidity risk and credit and counterparty risk. The Company may also enter into derivative transactions to manage risk.
The Board and Investment Manager consider and review the risks inherent in managing the Company's assets which are detailed below.
Market risk
Market risk arises mainly from uncertainty about future prices of financial instruments used in the Company's business. It represents the potential loss which the Company might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Investment Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Investment Manager on a regular basis and the Board at quarterly meetings with the Investment Manager.
Market price risk
Market price risk (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments.
The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with the objective of maximising overall returns to shareholders. If the fair value of the Company's investments at the year end increased or decreased by 10%, then it would have had an impact on the Company's capital return and equity of £95,051,000 (2016: £88,637,000).
Foreign currency
The value of the Company's assets and the total return earned by the Company's shareholders can be significantly affected by foreign exchange rate movements as most of the Company's assets are denominated in currencies other than Pounds Sterling, the currency in which the Company's financial statements are prepared. Income denominated in foreign currencies is converted to Pounds Sterling upon receipt.
A 5% rise or decline of Sterling against foreign currency denominated (i.e. non Pounds Sterling) assets and liabilities held at the year end would have increased/decreased the net asset value by £39,898,000 (2016: £36,813,000).
The currency exposure is as follows:
|
Currency risk |
|
|
|
|
|
|
|
|
|
|
GBP |
Euro |
USD |
SEK |
JPY |
NOK |
Other |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
At 30 September 2017 |
|
|
|
|
|
|
|
|
|
Other receivables |
62 |
580 |
109 |
- |
1,505 |
1,903 |
691 |
4,850 |
|
Cash and cash equivalents |
25,496 |
- |
- |
- |
- |
- |
- |
25,496 |
|
Other payables |
(2,058) |
(179) |
(2,651) |
- |
(1,564) |
- |
- |
(6,452) |
|
8⅛% Debenture Stock 2023 |
(14,957) |
- |
- |
- |
- |
- |
- |
(14,957) |
|
4.184% Series A Sterling Unsecured Loan Notes 2036 |
(29,878) |
- |
- |
- |
- |
- |
- |
(29,878) |
|
3.249% Series B Euro Unsecured Loan Notes 2036 |
- |
(26,341) |
- |
- |
- |
- |
- |
(26,341) |
|
|
|
|
|
|
|
|
|
|
|
Currency exposure on net monetary items |
(21,335) |
(25,940) |
(2,542) |
- |
(59) |
1,903 |
691 |
(47,282) |
|
Investments held at fair value through profit or loss - equities |
126,599 |
138,001 |
317,609 |
61,124 |
176,214 |
33,934 |
97,030 |
950,511 |
|
|
|
|
|
|
|
|
|
|
|
Total net currency exposure |
105,264 |
112,061 |
315,067 |
61,124 |
176,155 |
35,837 |
97,721 |
903,229 |
This exposure is representative at the Balance Sheet date and may not be representative of the year as a whole. The balances are shown in the reporting currencies of the investee companies and may not represent the underlying exposures of the investee companies.
|
|
GBP |
Euro |
USD |
SEK |
JPY |
NOK |
Other |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
At 30 September 2016 |
|
|
|
|
|
|
|
|
|
Other receivables |
17,671 |
2,114 |
222 |
- |
431 |
1,668 |
348 |
22,454 |
|
Cash and cash equivalents |
13,689 |
- |
- |
- |
110 |
- |
- |
13,799 |
|
Other payables |
(5,061) |
(185) |
(1,071) |
- |
- |
- |
(1,656) |
(7,973) |
|
8⅛% Debenture Stock 2023 |
(14,950) |
- |
- |
- |
- |
- |
- |
(14,950) |
|
4.184% Series A Sterling Unsecured Loan Notes 2036 |
(29,871) |
- |
- |
- |
- |
- |
- |
(29,871) |
|
3.249% Series B Euro Unsecured Loan Notes 2036 |
- |
(25,855) |
- |
- |
- |
- |
- |
(25,855) |
|
|
|
|
|
|
|
|
|
|
|
Currency exposure on net monetary items |
(18,522) |
(23,926) |
(849) |
- |
541 |
1,668 |
(1,308) |
(42,396) |
|
Investments held at fair value through profit or loss - equities |
121,500 |
140,143 |
255,948 |
91,940 |
80,946 |
61,027 |
134,865 |
886,369 |
|
|
|
|
|
|
|
|
|
|
|
Total net currency exposure |
102,978 |
116,217 |
255,099 |
91,940 |
81,487 |
62,695 |
133,557 |
843,973 |
Interest rate risk
Interest rate movements may affect:
• the fair value of investments in fixed-interest rate securities;
• the level of income receivable on cash deposits;
• the interest payable on variable rate borrowings; and
• the fair value of the Company's long-term debt.
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The Company, generally, does not hold significant cash balances, with short-term borrowings being used when required.
The Debenture Stock and Loan Notes issued by the Company pay a fixed-rate of interest and are carried in the Company's Balance Sheet at amortised cost rather than at fair value. Hence, movements in interest rates will not affect net asset values, as reported under the Company's accounting policies, but may have an impact on the Company's share price and discount/premium.
The exposure at 30 September of financial assets and financial liabilities to interest rate risk is shown by reference to floating interest rates.
|
|
At |
At |
|
|
|
|
|
Exposure to floating interest rates: Cash and cash equivalents |
25,496 |
13,799 |
If the above level of cash was maintained for a year, a 1% increase in interest rates would increase the revenue return and net assets by £255,000 (2016: £138,000). Management proactively manages cash balances. If there was a fall by 1% in interest rates it would potentially impact the Company by turning positive interest to negative interest. The total effect would be a cost increase/revenue reduction of £255,000.
|
|
At 30 September 2017 |
At 30 September 2016 |
||
|
|
Book cost |
Fair value |
Book cost |
Fair value |
|
8⅛% Debenture Stock 2023 |
14,957 |
19,538 |
14,950 |
19,470 |
|
4.184% Series A Sterling Unsecured Loan Notes 2036 |
29,878 |
33,070 |
29,871 |
32,888 |
|
3.249% Series B Euro Unsecured Loan Notes 2036 |
26,341 |
27,518 |
25,855 |
29,284 |
|
|
|
|
|
|
|
Total |
71,176 |
80,126 |
70,676 |
81,642 |
The impact of holding the Debenture Stock and Loan Notes at fair value would be to reduce the Company's net assets by £8,950,000.
The fair value of the Company's Debenture Stock and Loan Notes at the year end was £80,126,000 (2016: £81,642,000). A 1% increase in the applicable interest rates would be expected to increase the fair values of the Debenture Stock and Loan Notes by approximately £8.4m (2016: £9.0m), all other factors being equal. A 1% decrease would decrease the fair values by approximately £9.8m, all other factors being equal. This will impact the market value of the fixed-interest debt.
Liquidity risk
The Company's assets mainly comprise readily realisable securities which can be easily sold to meet funding commitments, if necessary. Unlisted investments, if any, in the portfolio are subject to liquidity risk. The risk is taken into account by the Directors when arriving at their valuation of these items.
The remaining contractual payments on the Company's financial liabilities at 30 September, based on the earliest date at which payment can be required and current exchange rates at the Balance Sheet date, were as follows:
|
|
In 1 year |
In more than 1 |
In more than 2 |
In more than 3 |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
At 30 September 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
8⅛% Debenture Stock 2023 |
(1,219) |
(1,219) |
(1,219) |
(18,352)* |
(22,009) |
|
4.184% Series A Sterling Unsecured Loan Notes 2036 |
(1,255) |
(1,255) |
(1,255) |
(8,786) |
(12,551) |
|
3.249% Series B Euro Unsecured Loan Notes 2036 |
(859) |
(859) |
(859) |
(6,013) |
(8,590) |
|
Other payables |
(6,452) |
- |
- |
- |
(6,452) |
|
|
|
|
|
|
|
|
|
(9,785) |
(3,333) |
(3,333) |
(33,151) |
(49,602) |
|
|
|
|
|
|
|
|
|
In 1 year |
In more than 1 |
In more than 2 |
In more than 3 |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
At 30 September 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
8⅛% Debenture Stock 2023 |
(1,219) |
(1,219) |
(1,219) |
(19,571)* |
(23,228) |
|
4.184% Series A Sterling Unsecured Loan Notes 2036 |
(1,255) |
(1,255) |
(1,255) |
(8,786) |
(12,551) |
|
3.249% Series B Euro Unsecured Loan Notes 2036 |
(843) |
(843) |
(843) |
(5,903) |
(8,432) |
|
Other payables |
(7,973) |
- |
- |
- |
(7,973) |
|
|
|
|
|
|
|
|
|
(11,290) |
(3,317) |
(3,317) |
(34,260) |
(52,184) |
* Comprises the remaining interest payments to 2023, together with the principal to be repaid in 2023.
Credit risk
Credit risk is mitigated by diversifying the counterparties through whom the Investment Manager conducts investment transactions. The credit standing of all counterparties is reviewed periodically with limits set on amounts due from any one counterparty.
The total credit exposure represents the carrying value of fixed-income investments, cash and receivable balances and totals £30,346,000 (2016: £36,253,000).
Fair values of financial assets and financial liabilities
Valuation of financial instruments
The Company measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant assets as follows:
· Level 1 - valued using quoted prices unadjusted in active markets for identical assets or liabilities.
· Level 2 - valued by reference to valuation techniques using observable inputs for the asset or liability other than quoted prices included within Level 1.
· Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data for the asset or liability.
The tables below set out fair value measurements of financial instruments as at the year end, by the level in the fair value hierarchy into which the fair value measurement is categorised.
Financial assets at fair value through profit or loss at 30 September 2017
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
Equity investments |
920,866 |
29,645 |
- |
950,511 |
Financial assets at fair value through profit or loss at 30 September 2016
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
Equity investments |
838,130 |
48,239 |
- |
886,369 |
Level 2 financial assets at fair value through profit or loss at 30 September
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
|
|
|
|
Opening fair value |
48,239 |
4,319 |
|
Transfer from Level 1 to Level 2 |
- |
42,195 |
|
Transfer from Level 2 to Level 3 |
(40,636) |
- |
|
Movement in unrealised appreciation |
22,042 |
1,725 |
|
|
|
|
|
Total |
29,645 |
48,239 |
A Level 2 listed company completed a capital reorganisation, splitting capital between continuation and realisation funds. This was transferred to Level 3 at market value and realised during the year, as set out in the table below.
The valuation of Level 2 financial assets is determined using the average of independent broker traded prices available in the market. The valuation techniques used by the Company are explained in the accounting policies note on page 56.
Level 3 financial assets at fair value through profit or loss at 30 September
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
|
|
|
|
Opening fair value |
- |
- |
|
Transfer from Level 2 to Level 3 |
40,636 |
- |
|
Sales - proceeds |
(33,549) |
- |
|
Total losses included in gains on investments in the Statement of Comprehensive Income on sold assets |
(7,087) |
- |
|
|
|
|
|
Closing fair value |
- |
- |
Financial liabilities
The Company's 8⅛% Debenture Stock 2023 and Loan Notes are carried at amortised cost (see note 1). The other financial assets and financial liabilities of the Company are carried in the Balance Sheet at an approximation to their fair value. The fair value is the amount at which the asset could be sold or the liability transferred in an orderly transaction between market participants, at the measurement date, other than a forced or liquidation sale.
|
|
At 30 September 2017 |
At 30 September 2016 |
||
|
|
Amortised cost |
Fair value |
Amortised cost |
Fair value |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
8⅛% Debenture Stock 2023 |
(14,957) |
(19,538) |
(14,950) |
(19,470) |
|
4.184% Series A Sterling Unsecured Loan Notes 2036 |
(29,878) |
(33,070) |
(29,871) |
(32,888) |
|
3.249% Series B Euro Unsecured Loan Notes 2036 |
(26,341) |
(27,518) |
(25,855) |
(29,284) |
|
Total |
(71,176) |
(80,126) |
(70,676) |
(81,642) |
Quoted market prices have been used to determine the fair value of the Company's Debenture Stock and therefore it would be categorised as Level 1 under the fair value hierarchy. As there is no publicly available price for the Company's Loan Notes, their fair market value has been derived by calculating the relative premium (or discount) of the loan versus the publicly available market price of the reference market instrument and exchange rates. As this price is derived by model, using observable inputs, it would be categorised as Level 2 under the fair value hierarchy.
The financial liabilities in the table below are shown at fair value, being the amount at which the liability may be transferred in an orderly transaction between market participants. The costs of early redemption of the Debenture Stock and Loan Notes are set out on page 50. The Debenture Stock is valued by reference to the price prevailing on an active market, so is determined as Level 1. The market values of the Loan Notes are determined by the calculation above using observable inputs, and they are considered as Level 2.
Financial liabilities at fair value through profit or loss at 30 September 2017
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
Debenture Stock |
(19,538) |
- |
- |
(19,538) |
|
Loan Notes |
- |
(60,588) |
- |
(60,588) |
|
|
|
|
|
|
|
|
(19,538) |
(60,588) |
- |
(80,126) |
Financial liabilities at fair value through profit or loss at 30 September 2016
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
Debenture Stock |
(19,470) |
- |
- |
(19,470) |
|
Loan Notes |
- |
(62,172) |
- |
(62,172) |
|
|
|
|
|
|
|
|
(19,470) |
(62,172) |
- |
(81,642) |
Capital management policies and procedures
The structure of the Company's capital is described in note 12 and details of the Company's reserves are shown in the Statement of Changes in Equity on page 52.
The Company's capital management objectives are:
· to ensure that it will be able to continue as a going concern;
· to achieve capital growth through a focused portfolio of investments, particularly in companies whose share prices stand at a discount to estimated underlying net asset value, through an appropriate balance of equity capital and debt; and
· to maximise the return to shareholders while maintaining a capital base to allow the Company to operate effectively and meet obligations as they fall due.
The Board, with the assistance of the Investment Manager, regularly monitors and reviews the broad structure of the Company's capital on an ongoing basis. These reviews include:
· the level of gearing, which takes account of the Company's position and the Investment Manager's views on the market; and
· the extent to which revenue in excess of that which is required to be distributed should be retained.
The Company's objectives, policies and processes for managing capital are unchanged from last year.
The Company is subject to externally imposed capital requirements:
a) as a public company, the Company is required to have a minimum share capital of £50,000; and
b) in accordance with the provisions of Sections 832 and 833 of the Companies Act 2006, the Company, as an investment company:
i) is only able to make a dividend distribution to the extent that the assets of the Company are equal to at least one and a half times its liabilities after the dividend payment has been made; and
ii) is required to make a dividend distribution each year such that it does not retain more than 15% of the income that it derives from shares and securities.
These requirements are unchanged since last year and the Company has complied with them at all times.
15. Contingencies, guarantees and financial commitments
At 30 September 2017, the Company had no financial commitments (2016: £nil).
At 30 September 2017, the Company had no contingent liability in respect of any investments carrying an obligation for future subscription or underwriting commitments (2016: £nil).
16. Related party disclosures
The related party transaction pursuant to the IMA with AVI is set out in the Report of the Directors on page 39. Management fees for the year amounted to £6,188,000 (2016: £5,038,000).
As at the year end, the following amounts were outstanding in respect of management fees: £nil (2016: £443,000).
Strone Macpherson was Chairman of Close Brothers Group plc during the period, the ultimate parent of Winterflood Securities Limited (Winterflood). Winterflood was the Company's Corporate Broker until 29 March 2017 and was paid a retainer of £25,000 per annum by the Company. £nil was outstanding at the period end. Commissions earned by Winterflood in managing the Company's buyback programme are offsettable against this retainer. Commissions of £73,000 were earned in the financial year, fully offsetting the retainer.
Strone Macpherson is a trustee of The King's Fund which will provide a venue and facilities for the purpose of holding the Company's AGM. The Company has paid The King's Fund £4,000 during the period and a further £1,000 is committed.
Fees paid to the Company's Directors are disclosed in the Report on Remuneration Implementation on page 80. At the year end, £nil was outstanding due to Directors (2016: £nil).
17. Post balance sheet events
Since the year end, the Company has bought back 583,695 Ordinary Shares with a nominal value of £58,370 at a total cost of £4,205,000 and placed in treasury.
The Company issued fixed-rate 20-year unsecured private placement Loan Notes on 1 November 2017. The issue was €20m (equivalent to approximately £17.9m) at an interest rate of 2.93% per annum. The funding date was 1 November 2017 and the Loan Notes are due to be repaid on 1 November 2037. The semi-annual interest payment dates will be 1 May and 1 November.
NATIONAL STORAGE MECHANISM
A copy of the Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ('NSM') and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/nsm
This information is provided by RNS
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