Final Results

RNS Number : 7756S

City Natural Res High Yield Tst PLC

29 September 2014

 



To:                    RNS

From:                City Natural Resources High Yield Trust plc

Date:                 29 September 2014

Audited results for the year ended 30 June 2014

·      Net asset value total return of 1.4 per cent.

·      Ordinary share price total return of 2.2 per cent.

·      Eighth consecutive increase in the annual dividend, with an increase of 280 per cent since 1 August 2003.

·      Net asset value total return of 281.0 per cent since 1 August 2003 compared to a total return of 200.8 per cent from the benchmark index.

·      Ordinary share price total return since 1 August 2003 of 219.7 per cent.

The Chairman, Geoff Burns stated,

"Introduction

Following two consecutive years when it was my duty to report net asset value falls of over 30 per cent (the year before it had increased by more than 50 per cent), I can this year report that the rout in commodity prices has halted.  I can not yet report on a material recovery.

Investment and Share Price Performance

At 30 June 2014 your Company's net asset value stood at 159.9 pence, giving a net asset value total return for the year of 1.4 per cent.  The benchmark index returned 6.1 per cent.

The Company's ordinary share price total return for the year was a little better than this, the 2.2 per cent return reflecting a slight narrowing in the discount at which the Company's shares trade from 17.2 per cent to 16.8 per cent during the year.  The average discount over the year to 30 June 2014 was 15.9 per cent, and over three years 15.4 per cent.  At the time of writing the discount is 11.9 per cent

Your Company continues to provide a unique exposure to the less accessible areas of smaller mining and resource stocks, and a degree of volatility is inevitable.  Your Board and Manager look to manage this volatility, with our income emphasis and the diversification of stocks, sectors and geography being an important part of that process, but it cannot be eliminated.

Over the long term, since the redirection of the Company in 2003 net asset value total return is 281.0 per cent, ordinary share price total return 219.7 per cent, and benchmark total return 200.8 per cent.

Income and Dividends

Income and dividends have been a focus of the Company since 2004, with dividends increasing by 280 per cent since then, and we believe they contribute an important element of stability in our volatile asset class. 

This year's fourth interim dividend of 3.02 pence brought the total dividend for the year to 5.60 pence, making for growth of 1.8 per cent in the full year dividend over last year's equivalent, and bringing to eight the number of consecutive years of dividend growth. 

Shareholders will be aware, however, that the vast majority of the Company's income is derived from overseas securities and, therefore, can be radically influenced by currency movements. Due to the strength of sterling during the period, good underlying income generation has been greatly reduced once converted into sterling.  This has been the largest factor in a fall in earnings per share to 5.45 pence for the current year.  Although your Board expects a solid income performance in the year to 30 June 2015, and the current dividend level to be covered by earnings in that period, it deemed it prudent to declare a moderate increase this year, recognizing that currency could still have an impact.  The Board has no qualms about utilizing revenue reserves to maintain current dividend levels as it has done this year, so long as longer term income generation is deemed safe. These reserves have been built up for the very purpose of smoothing lumpiness in underlying income generation.

The yield on the Company's shares is 4.3 per cent as I write.

Gearing and 3.5% Cumulative Unsecured Loan Stock 2018 ("CULS")

The Company has £39.9 million nominal of CULS in issue.  Gearing was generally maintained in the range of 20 per cent to 25 per cent of shareholders' funds during the year, 25 per cent being the upper limit allowed under the Company's investment policy.  It was 20.5 per cent at the year end.

The Company's 3.5% Cumulative Unsecured Loan Stock 2018 ("CULS") price fell from 93.5 pence to 90.8 pence during the year, a decline of 2.9 per cent.  Since the year end the price has risen to 97.0 pence.

Board Changes

As part of the Board's annual evaluation of its competence, performance, balance and range of skills, it concluded that a fresh contribution from a new Director would be desirable.  Discussion suggested that the Board's resource and investment trust industry experience was already strong, but that a Director who intimately understood our majority shareholder base (private shareholders and their wealth managers) was desirable. A search was undertaken which included recommendations sought from all of our advisers, and, following interview, one of the candidates was selected. I am pleased to report that Alun Evans, formerly Managing Director of Carr Sheppards Financial Services Division and currently responsible for the development of intermediary business at Quilter Cheviot agreed to join the Board. His appointment was effective on 26 September 2014 and he is standing for election by shareholders at this year's Annual General Meeting.

Annual General Meeting

After two years in London, the Company's Annual General Meeting returns to the regions this year and will take place at The Royal Crescent Hotel, Bath at 12.30pm on Thursday 27 November 2014.  I do hope that as many shareholders as possible will join us and take the opportunity to meet the Directors and the Investment Manager over a buffet lunch after the meeting.  The Board finds these meetings in various parts of the country a very useful way to keep in touch with our widely spread shareholder base.

Outlook

Very little has changed with regard to the investment environment over the last year. Global economic recovery is happening slowly, more slowly in the Eurozone than in the United States and the UK, while the usual caveats apply to the Chinese, Indian and Brazilian growth stories.  The end of ultra-low interest rates seems little closer, while quantative easing continues on a huge scale, with the Eurozone apparently primed to pick up any slack in supply from the United States.  We continue to believe that the threat of serious inflation will, sooner or later, mean the return of financial rectitude, but, as St Augustine might have it, not yet…

While for the most part stock markets have continued to gorge themselves at the trough of easy money, commodity prices have had only the crumbs to feed on.  Prices have firmed, with old and new international crises, until recently, providing a measure of support for the oil price, but only at a level that has allowed the shale oil revolution in the United States to prosper without choking off economic growth.  Gold has flickered, but with bullion having fallen 30 per cent from its highs, and miners more than twice that, it had every right to do so.  27 per cent of your Company's portfolio is represented by oil and gas equities, with 13 per cent of it in gold equities.  Palm oil is the core of our soft commodity exposure, and copper, nickel and uranium are all material interests.

The resources sector has stabilised, helped by the cancellation of a number of capital projects, the consequences of which have still to work their way through the system,  and a renewed focus on shareholder value, the benefits of which should be seen over the next year-or-so in the shape of increased returns.  The medium term case for your Company remains as compelling as ever, world population growth and increasing urbanisation underpinning an expanding demand for resources.  It is not possible to predict when a sustained recovery in the sector will arrive, but it is possible to say with certainty that it is closer, and the equity proportion of the portfolio has been tweaked upwards in anticipation of it. Your Company continues to provide the diversification into less accessible areas of resource companies that its shareholders seek, positioning your Company to outperform, as it has done in the past, when the recovery does come.

Geoff Burns

Chairman

26 September 2014

Investment Manager's Review

Will Smith, New City Investment Managers:                     0207 201 6900

Ian Francis, New City Investment Managers:                    0207 201 6900

Martin Cassels, R&H Fund Services Limited:                    0131 524 6138

Audited Income Statement

for the year ended 30 June 2014

			2014	2014	2014
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Gains on investments		-		202	202
Exchange gains		-		71	71
Income		5,399		-	5,399
Investment management fee		(318)		(955)	(1,273)
Other expenses		(485)		-	(485)
Net return before finance costs and taxation		4,596		(682)	3,914
Interest payable and similar charges		(393)		(1,872)	(2,265)
Net return on ordinary activities before taxation		4,203		(2,554)	1,649
Tax on ordinary activities		(560)		420	(140)
Net return attributable to equity shareholders		3,643		(2,134)	1,509
Return per ordinary share	1	5.45p		(3.19)p	2.26p

Reconciliation of Movements in Shareholders' Funds

	Year ended 30 June 2014 Audited  £'000	Year ended 30 June 2013 Audited  £'000
Opening equity shareholders' funds	109,094	163,946
Gains/ (losses) on investments	202	(53,075)
Net return attributable to ordinary shareholders	3,643	4,240
Costs charged to capital	(2,407)	(2,519)
Exchange losses	71	(95)
Dividends paid	(3,678)	(3,410)
Issue of ordinary shares	4	7
Closing equity shareholders' funds	106,929	109,094

Audited Income Statement

for the year ended 30 June 2013

			2013	2013	2013
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Losses on investments		-		(53,075)	(53,075)
Exchange losses		-		(95)	(95)
Income		6,415		-	6,415
Investment management fee		(459)		(1,377)	(1,836)
Other expenses		(509)		-	(509)
Net return before finance costs and taxation		5,447		(54,547)	(49,100)
Interest payable and similar charges		(363)		(1,865)	(2,228)
Net return on ordinary activities before taxation		5,084		(56,412)	(51,328)
Tax on ordinary activities		(844)		723	(121)
Net return attributable to equity shareholders		4,240		(55,689)	(51,449)
Return per ordinary share	1	6.34p		(83.28)p	(76.94)p

 

Audited Balance Sheet

as at 30 June 2014

	As at 30 June 2014	As at 30 June 2013
	£'000	£'000
Fixed assets
Investments	129,186	131,736
Current assets
Debtors	1,217	3,119
Cash at bank and on deposit	14,539	10,895
	15,756	14,014
Creditors: amounts falling due within one year	(1,554)	(1,013)
Net current assets	14,202	13,001
3.5% Convertible Unsecured Loan Stock 2018                    4	(36,459)	(35,643)
Net assets	106,929	109,094
Capital and reserves
Called-up share capital                                                            5	16,718	16,718
Special distributable reserve                                                   5	30,386	30,386
Share premium                                                                         5	4,796	4,791
Equity component of 3.5% Convertible Unsecured Loan Stock 2018                                                                                           5	2,973	3,698
Capital reserve                                                                         5	45,757	47,167
Revenue reserve                                                                      5	6,299	6,334
Equity shareholders' funds	106,929	109,094
Net asset value per share                                                       2	159.90p	163.14p

Audited Cash Flow Statement

for the year to 30 June 2014

	Year ended 30 June 2014	Year ended 30 June 2013
	£'000	£'000
Operating activities
Investment income received	5,474	6,423
Deposit interest received	4	2
Other income received	35	17
Investment management fees paid	(1,274)	(1,889)
Other cash payments	(463)	(499)
Net cash inflow from operating activities	3,776	4,054
Servicing of finance
Interest on bank facility / overdraft	(42)	(14)
Interest on 3.5% Convertible Unsecured Loan Stock 2018	(1,398)	(1,399)
Net cash outflow from servicing of finance	(1,440)	(1,413)
Taxation
Tax refund	30	-
Capital expenditure and financial investment
Purchases of investments	(64,077)	(76,943)
Disposals of investments	68,962	74,432
Net cash outflow from capital expenditure and financial investment	4,885	(2,511)
Dividends
Equity dividends paid	(3,678)	(3,410)
Net cash outflow before financing	3,573	(3,280)
Financing
Issue expenses on ordinary shares	-	(7)
Net cash (outflow) / inflow from financing	-	(7)
(Decrease) / increase in net cash	3,573	(3,287)
Reconciliation of net cash flow to movement in net cash / (debt) (Decrease) / increase in cash in the year	3,573	(3,287)
Exchange losses	71	(95)
Movement in net cash / (debt) in the year	3,644	(3,382)
Opening net cash / (debt) at 1 July	10,895	14,277
Closing net cash at 30 June	14,539	10,895

Notes

1.         The revenue return per ordinary share is based on a net profit after taxation of £3,643,000 (2013: £4,240,000) and on a weighted average of 66,872,434 ordinary shares in issue during the year (2013: 66,869,778).

The capital return per ordinary share is based on a net capital loss of £2,143,000 (2013: a net capital loss of £55,689,000) and on a weighted average of 66,872,434 ordinary shares in issue during the year (2013: 66,869,778).

2.         The net asset value per ordinary share is based on net assets of £106.9 million (2013: £109.1 million) and on 66,872,822 (2013: 66,871,406) ordinary shares, being the number of ordinary shares in issue at the year end.

3.         The Board declared a fourth interim dividend of 3.02p per share which was paid on 30 August 2014 to shareholders on the register on 9 August 2014, having an ex-dividend date of 7 August 2014. 

4.         3.5% Convertible Unsecured Loan Stock 2018   

	Nominal value of CULS £'000	Liability component £'000	Equity component £'000
Balance at the beginning of the year	39,946	35,643	3,698
Amortisation of discount on issue and issue expenses	-	96	-
Transfer of CULS liability discount amortisation	-	724	(724)
Conversion during the year	(5)	(4)	(1)
Balance at the end of the year	39,941	36,459	2,973

On 26 September 2011, the Company issued a total of £40,000,000 nominal of 3.5% Convertible Unsecured Loan Stock 2018. The CULS can be converted at the election of holders into ordinary shares during the months of March and September in each year throughout their life, commencing March 2012 to September 2018 at a rate of 1 ordinary share for every 377.1848p nominal of CULS.  On 8 October 2013, the Company issued 1,416 ordinary shares in connection with the exercise of £5,351 nominal of the Company's CULS.

Once 80% of the nominal amount of the CULS issued have been converted, the Company is allowed to request that holders redeem or convert the remainder. Interest is paid on the CULS on 31 March and 30 September in each year, commencing 31 March 2012. 25% of the interest is charged to revenue in line with the Board's expected long-term split of returns from the investment portfolio of the Company.

As at 30 June 2014, there was £39,940,775 nominal of CULS in issue.

5.         Reserves

	Special reserve £'000	Share premium £'000	Equity element of CULS £'000	Capital reserve £'000	Revenue reserve £'000
At 30 June 2013	30,386	4,791	3,698	47,167	6,334
Exchange gains	-	-	-	71	-
Gains on investments	-	-	-	202	-
Management fees charged to capital	-	-	-	(955)	-
Finance costs charged to capital	-	-	-	(1,872)	-
Taxation credited to capital	-	-	-	420	-
Dividends paid	-	-	-	-	(3,678)
Retained net revenue for the year	-	-	-	-	3,643
Transfer of CULS liability discount amortisation	-	-	(724)	724	-
Issue of ordinary shares	-	5	(1)	-	-
At 30 June 2014	30,386	4,796	2,973	45,757	6,299

6.         The following are considered related parties: the Board of Directors ("the Board") and           CQS/New City Investment Managers (the "Investment Manager").

As at 30 June 2014, the Company held shares in New City Energy and Golden Prospect Precious Metals, these two investment companies are also managed by the Investment Manager.

7.         The financial information set out above does not constitute the Company's statutory accounts for the year ended 30 June 2014. The financial information for 2014 is derived from the statutory accounts for 2013 which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2013 accounts, their report was unqualified and did not contain a statement under section 498 of the Companies Act 2006.  The statutory accounts for 2014 are audited and the Auditors have issued an unqualified opinion. The statutory accounts for 2014 will be finalised on the basis of the financial information presented in this announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

Principal Risks

The principal risks faced by the Company are: investment and strategy risk; market risk; sector risk; financial risk; earnings and dividend risk; operational risk and regulatory risk. These risks, which have not changed materially since the annual report for the year ended 30 June 2013, and the way in which they are managed, are described in more detail in the annual report for the year ended 30 June 2014.  The report will be made available on the manager's website www.ncim.co.uk during September 2014.

The Company's financial instruments comprise its investment portfolio, cash balances, bank facilities, debtors and creditors that arise directly from its operations.  As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective.  The Company can make use of flexible borrowings for short term purposes, as detailed in the Chairman's Statement, to achieve improved performance in rising markets and to seek to enhance the returns to shareholders, when considered appropriate by the Investment Manager. The downside risk of borrowings may be reduced by raising the level of cash balances held.

Listed fixed asset investments held are valued at fair value.  For listed securities this is either bid price or the last traded price depending on the convention of the exchange on which the investment is listed.  Unlisted investments are valued by the Directors on the basis of all information available to them at the time of valuation.  The fair value of all other financial assets and liabilities is represented by their carrying value in the Balance Sheet. The fair value of the bank facility and the fair value of the 3.5% Convertible Unsecured Loan Stock 2018 are not materially different from their carrying value in the Balance Sheet.

The main risks that the Company faces arising from its financial instruments are:

(i)         market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

(ii)         interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii)        foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales and income will fluctuate because of movements in currency rates;

(iv)        credit risk, being the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company; and

(v)         liquidity risk, being the risk that the bank may demand re-payment of the loan or that the Company many not be able to liquidate quickly its investments.

Market price risk

Market price risk arises mainly from uncertainty about future prices of financial instruments held.  It represents the potential loss the Company might suffer through holding market positions in the face of price movements.  To mitigate the risk the Board's investment strategy is to select investments for their fundamental value.  Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long term investments.  An appropriate spread of investments is held in the portfolio in order to reduce both the statistical risk and the risk arising from factors specific to a country or sector.  The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy. 

Interest rate risk

Financial assets

Bond and preference share yields, and their prices, are determined by market perception as to the appropriate level of yields given the economic background. Key determinants include economic growth prospects, inflation, the Government's fiscal position, short term interest rates and international market comparisons.  The Investment Manager takes all these factors into account when making any investment decisions as well as considering the financial standing of the potential investee company.

Returns from bonds and preference shares are fixed at the time of purchase, as the fixed coupon payments are known, as are the final redemption proceeds.  Consequentially, if a bond is held until its redemption date, the total return achieved is unaltered from its purchase date.  However, over the life of a bond the market price at any given time will depend on the market environment at that time.  Therefore, a bond sold before its redemption date is likely to have a different price to its purchase level and a profit or loss may be incurred.

Interest rate risk on fixed rate interest instruments is considered to be part of market price risk as disclosed above.

Floating rate

When the Company retains cash balances they are held in floating rate deposit accounts.  The benchmark rate which determines the interest payments received on cash balances is the bank base rate for the relevant currency for each deposit.

Financial liabilities

The Company may utilise the bank facility to meet any liabilities due.  The Company has borrowed in sterling at a variable rate based on the UK bank base rate. The Board sets borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis.

Foreign Currency Risk

The Company invests in overseas securities and may hold foreign currency cash balances which give rise to currency risks. The Company does not hedge its currency exposure and as a result the movement of exchange rates between pounds sterling and the other currencies in which the Company's investments are denominated may have a material effect, unfavourable or favourable, on the returns otherwise experienced on the investments made by the Company. Although the Manager may seek to manage all or part of the Company's foreign exchange exposure, there is no assurance that this can be performed effectively.

The Manager does not intend to hedge the Company's foreign currency exposure at the present time.

Credit Risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company.  The Investment Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis.  The carrying amounts of financial assets best represent the maximum credit risk exposure at the balance sheet date.

Credit risk on fixed interest investments is considered to be part of market price risk.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement.  Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the high credit quality of the brokers used. The Board monitors the quality of service provided by the brokers used to further mitigate this risk.

The cash held by the Company and all the assets of the Company which are traded on a recognised exchange are held by HSBC Bank, the Company's custodian.  Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited.  The Board monitors the Company's risk by reviewing the custodian's internal control reports.

Should the credit quality or the financial position of HSBC Bank deteriorate significantly the Investment Manager will move the cash holdings to another bank.

There were no significant concentrations of credit risk to counterparties as at 30 June 2014 and as at 30 June 2013.

Liquidity risk

The Company's financial instruments include investments in unlisted investments which are not traded in an organised public market and which generally may be illiquid.  As a result, the Company may not be able to liquidate these investments at an amount close to their fair value.

The Company's liquidity risk is managed on an ongoing basis by the Investment Manager.  The Company's overall liquidity risks are monitored on a quarterly basis by the Board.

The Company maintains sufficient cash, has a short term bank facility and readily realisable securities to pay accounts payable and accrued expenses.  The Company also maintains sufficient cash and readily realisable securities to meet any demand repayment on its overdraft facility.

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).

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 or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgments and estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

• prepare the financial statements on the 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. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

On behalf of the Board

Geoff Burns, Chairman

26 September 2014

 

END

 

 

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