Half Yearly Report

RNS Number : 0595O

City Natural Res High Yield Tst PLC

27 February 2009

 



To:             RNS

From:        City Natural Resources High Yield Trust plc

Date:         27 February 2009

Unaudited results for the six months ended 31 December 2008

• Net asset value total return of -45.7 per cent in 2008

• Net asset value total return of -48.3 per cent since 1 July 2008 compared to a total return of -32.3 per cent from the benchmark index

• Ordinary share price total return since 1 July 2008 of -58.0 per cent

• Net asset value total return of 144.3 per cent since 1 August 2003 compared to a total return of 80.2 per cent from the benchmark index

• Ordinary Share price total return since 1 August 2003 of 67.0 per cent

• Discount of 31.1 per cent to fully diluted net asset value

• Revenue reserve increased to 3.7 pence per share

The Chairman, Geoff Burns, said:

Introduction

The six months under review saw momentous events and changes with far reaching consequences for global financial markets and economies. As a specialist investor in natural resources, the prices of which are mostly highly sensitive to economic realities, your Company has been profoundly affected by these developments.

Investment and Share Price Performance 

The six months to 31 December 2008 saw total returns in your Company's net asset value and share price of -48.3 per cent and -58.0 per cent respectively.  

The total return on the composite benchmark index during the six months to 31 December 2008 was -32.3 per cent. This brought its total return since 1 August 2003 to 80.2 per cent, while the Company's net asset value total return over the same period was 144.3 per cent and its share price total return 67.0 per cent.

The discount at which the Company's shares trade widened from 14.9 per cent at 30 June 2008 to 31.1 per cent at 31 December 2008. Investment funds were savagely de-rated during the period as the market re-priced illiquidity and investors grew fearful of the impact of gearing.

Your Board and Manager have worked, and continue to work, hard to minimise this figure, but, as is evident, we have had only limited success. There are some grounds for optimism, however, and I return to these in the Outlook section below.

The warrant price fell by more than 90 per cent to 8 pence over the six month period. It has since risen to 13 pence.

Investment Strategy

The dramatic correction that we have seen in markets and economies had its origin in the mid 2000's, when the global economy enjoyed a period of strong growth accompanied by relatively low volatility, cheap credit and asset inflation. This growth and low volatility led investors, financial institutions and consumers to become increasingly comfortable with greater leverage at just the time that there was an unparalleled explosion in the availability of debt. The current issue facing the world economy is a direct consequence of that leverage reaching unsustainable proportions, a situation most acute within the US housing market.

The Manager responded to increased volatility and the changing global economy and commodity markets by reducing gearing from around 25 per cent to 15 per cent. Illiquid markets notwithstanding, a number of the more risky positions were reduced, with the proceeds being used to repay debt or deployed to generate income. Given the market's persistent volatility and the reduction in global liquidity the Company continues to review its gearing strategy and short term borrowing arrangements.

A particular focus has been placed by the Manager on precious metals, above all gold, which has been at the heart of your Company since its inception. Gold's safe-haven appeal has continued to support it as the risk of holding other investments has risen, and as investors adjust to a weaker dollar, lower interest rates and the spectre of inflationary concerns. It seems set to test the US $1,000 level again.

Income and Dividends

The increasing emphasis on income of which I have spoken in recent Statements allows me to report one credit amidst the sea of debits.

Earnings per share increased significantly to 2.43 pence during the half year, allowing 0.9 pence to be added to the Company's revenue reserves at the same time as the dividend was maintained. The Revenue Reserve now stands at 3.7 pence per share, representing significantly more than a full year's dividend, and the underlying income generation from the portfolio continues to demonstrate resilience.

The yield on the Company's shares is 3.0 per cent as I write and the Board intends, circumstances permitting, to maintain the Company's record of dividend increases over recent years.

Outlook

A combination of deleveraging and asset value reductions has led to the failure of many financial institutions and the resulting global liquidity reduction has had a devastating impact on the more indebted nations, most spectacularly in the case of Iceland. As such nations include a number of the major consumers, no nation is going to be immune from the contagion, and we could even face a world economy in recession, with negative growth the sum of its parts during 2009.

Yet, the night is darkest just before the dawn. US $147 per barrel was clearly, in retrospect, the wrong price for oil; but so is US $40. The higher cost oil supplies that the world needs are not being developed, and the next stage of the commodity cycle is being set. As with oil, so with many other commodities; the Manager is particularly encouraged by the prospects for uranium and palm oil.

The next year will, I believe, see some of the greatest opportunities that are likely to be available to investors in a generation. Patience and steady nerves are required, but we are positioning the Company to take full advantages of the opportunities that will be afforded.

The Manager, Richard Lockwood, said:

Six months ago in my last annual review, I referred to the traumatic conditions that had taken place. Little did I imagine that the second six months of the year would be materially worse. Scarcely a country avoided the financial holocaust with America and Great Britain amongst the worst affected. Not surprisingly, natural resource markets were part of the carnage, with oil earmarked for the sharpest fall.

However, towards the end of the year interest centred on the gold market to such an extent that, early in the current year, it once again breached the US $1,000 per ounce level. We believe that given the low level of interest rates around the world, the argument that gold will fail to perform because of opportunity costs, no longer applies. Further, when one looks at the elevated level of the Japanese yen and the effect that that has had on its economy, the alternatives for huge capital movements are progressively diminishing. The internal problems and tensions within the EEC means there is not much left apart from the US dollar. These might yet be early days for gold. We have certainly taken that view and gold shares account for over a third of our portfolio, with our biggest holdings, Goldcorp, Randgold, Kinross, Lihir and Avoca.

In the energy sector, our oil and gas shares have been disappointing but we have had huge success on the uranium front with the related holdings of Extract and Kalahari. We believe that the Extract project at Rossing South in Namibia, might well contain as much as two hundred and fifty million pounds of uranium and, given its proximity to Rio's Rossing mine, it is hardly surprising that Rio has already bought 15 per cent stakes in the two companies. We believe that it would take a huge premium to get control of them.

We have become increasingly aware that given parlous state of the world's economies and the low levels of interest rates, investors will become more yield conscious. To that end we increased our final dividend by 17% last year and it is very much our ambition to produce a significant increase for the current year. We have increased our exposure to high yielding bonds and convertibles and while this is becoming more difficult, it is by no means impossible. With the world's financial systems largely in disarray it is hard to envisage a plethora of easy money making opportunities. Nevertheless, the first part of 2009 has seen the portfolio move ahead satisfactorily and we will continue to protect shareholders' interests in every way possible.

Enquiries:

Richard Lockwood

Investment Manager

New City Investment Managers Limited        Tel: [phone]

Martin Cassels

Company Secretary

F&C Asset Management plc                Tel: [phone]

  Unaudited Income Statement for the six months ended 31 December 2008

	2008	2008	2008
	Revenue	Capital	Total
	£'000	£'000	£'000
Losses on investments	-	(72,468)	(72,468)
Exchange losses	-	(192)	(192)
Income	2,555	-	2,555
Investment management fee	(140)	(420)	(560)
VAT on management fees refund	41	124	165
Other expenses	(158)	(6)	(164)
Net return before finance costs and taxation	2,298	(72,962)	(70,664)
Interest payable and similar charges	(188)	(562)	(750)
Net return on ordinary activities before taxation	2,110	(73,524)	(71,414)
Tax on ordinary activities	(582)	391	(191)
Net return on ordinary activities after taxation	1,528	(73,133)	(71,605)
Earnings per share - basic	2.43p	(116.28)p	(113.85)p
- fully diluted	2.29p	(109.54)p	(107.25)p

Amounts recognised as dividends in the period

	Six months	Six months
	ended	ended
	31 December	31 December
	2008	2007
	(unaudited)	(unaudited)
	£'000	£'000
Fourth interim dividend for the year ended
30 June 2007 of 0.85p per share	-	534
First interim dividend for the year ended
30 June 2008 of 0.52p per share	-	346
Fourth interim dividend for the year ended
30 June 2008 of 1.00p per share	629	-
First interim dividend for the year ended
30 June 2009 of 0.55p per share	346	-
	975	880

  Unaudited Income Statement for the six months ended 31 December 2007

	2007	2007	2007
	Revenue	Capital	Total
	£'000	£'000	£'000
Gains on investments	-	13,746	13,746
Exchange losses	-	(213)	(213)
Income	1,998	-	1,998
Investment management fee	(202)	(606)	(808)
Other expenses	(229)	-	(229)
Net return before finance costs and taxation	1,567	12,927	14,494
Interest payable and similar charges	(216)	(649)	(865)
Net return on ordinary activities before taxation	1,351	12,278	13,629
Tax on ordinary activities	(377)	368	(9)
Net return on ordinary activities after taxation	974	12,646	13,620
Earnings per share - basic	1.55p	20.11p	21.66p
- fully diluted	1.53p	19.88p	21.41p

  Audited Income Statement for the year ended 30 June 2008

	2008	2008	2008
	Revenue	Capital	Total
	£'000	£'000	£'000
Gains on investments	-	20,999	20,999
Exchange losses	-	(261)	(261)
Income	3,864	-	3,864
Investment management fee	(412)	(1,235)	(1,647)
Other expenses	(394)	(8)	(402)
Net return before finance costs and taxation	3,058	19,495	22,553
Interest payable and similar charges	(510)	(1,353)	(1,863)
Net return on ordinary activities before taxation	2,548	18,142	20,690
Tax on ordinary activities	(600)	676	76
Net return on ordinary activities after taxation	1,948	18,818	20,766
Earnings per share - basic	3.10p	29.93p	33.03p
- fully diluted	2.92p	28.16p	31.08p

Balance Sheet
	31 December	31 December	30 June
	2008	2007	2008
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Fixed assets
Investments	83,406	163,430	170,166
Current assets
Debtors	2,201	2,484	1,461
Cash at bank and on deposit	2,957	220	3,284
	5,158	2,704	4,745
Creditors: amounts falling due within one year	(15,980)	(27,467)	(29,780)
Net current liabilities	(10,822)	(24,763)	(25,035)
Net Assets	72,584	138,667	145,131
Capital and reserves
Called-up share capital	15,731	15,721	15,721
Special distribution reserve	30,386	30,386	30,386
Share premium	80	34	34
Warrant reserve	2,313	2,336	2,336
Capital reserve	21,734	88,685	94,867
Revenue reserve	2,340	1,505	1,787
Equity shareholders' funds	72,584	138,667	145,131
Net asset value per share - basic	115.35p	220.51p	230.79p
Net asset value per share - fully diluted	113.57p	212.44p	222.11p

Reconciliation of Movements in Shareholders' Funds

	Six months	Six months	Year
	ended	ended	Ended
	31 December	31 December	30 June
	2008	2007	2008
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Opening equity shareholders' funds	145,131	125,928	125,928
Exercise of warrants	33	9	9
Return on ordinary activities after taxation	(71,605)	13,620	20,766
Dividends paid	(975)	(880)	(1,572)
Capitalised expenses	-	(10)	-
Closing equity shareholders' funds	72,584	138,667	145,131

Summarised Statement of Cash Flows
	Six months ended 31 December 2008 (unaudited)	Six months ended 31 December 2007 (unaudited)	Year ended 30 June  2008 (audited)
	£'000	£'000	£'000
Net cash inflow from operating activities	1,696	1,007	2,286
Net cash outflow from servicing of finance	(1,139)	(1,007)	(1,680)
Taxation paid	(61)	(96)	(170)
Net cash inflow / (outflow) from financial investment	12,311	(1,027)	2,245
Equity dividends paid	(975)	(880)	(1,572)
Net cash inflow / (outflow) before financing	11,832	(2,003)	1,109
Net cash (outflow) / inflow from financing	(11,967)	2,009	2,009
(Decrease) / increase in cash	(135)	6	3,118
Reconciliation of net cash flow to movement in net debt
(Decrease) / Increase in cash	(135)	6	3,118
Repayment / (drawdown) of loans	12,000	(2,000)	(2,000)
Exchange losses	(192)	(213)	(261)
Movement in net debt in the period	11,673	(2,207)	857
Opening net debt at 1 July	(23,716)	(24,573)	(24,573)
Closing net debt at 31 December/ 30 June	(12,043)	(26,780)	(23,716)
Represented by:
Cash at bank	2,957	220	3,284
Debt falling due within one year	(15,000)	(27,000)	(27,000)
	(12,043)	(26,780)	(23,716)
Reconciliation of operating revenue to net cash flow from operating activities
Net revenue before interest payable and taxation	(70,664)	14,494	22,553
Losses / (gains) on investments	72,468	(13,746)	(20,999)
(Increase) / decrease in accrued income	(40)	(245)	140
(Increase) / decrease in other debtors	(149)	281	307
(Decrease) / increase in other creditors	(81)	19	24
Exchange losses	192	213	261
Overseas withholding tax suffered	(30)	(9)	-
Net cash inflow from operating activities	1,696	1,007	2,286

  Notes

1.  The unaudited interim results which cover the six months to 31 December 2008 have been prepared in accordance with applicable accounting standards and adopting the accounting policies set out in the statutory accounts of the Company for the year ended 30 June 2008.

2.  A first interim dividend of 0.55p per share was paid on 24 November 2008. A second interim dividend of 0.55p per share was paid on 27 February 2009.

3.  The breakdown of income for the six months to 31 December 2008, 31 December 2007 and the year to 30 June 2008 was as follows:

	31 December  2008 £'000	31 December  2007 £'000	30 June  2008 £'000
Income from investments
UK dividend income	194	31	240
Overseas dividends	199	280	484
Interest on fixed interest securities	2,082	1,657	3,071
	2,475	1,968	3,795
Other income
Deposit interest	73	26	68
Other income	7	4	1
Total income	2,555	1,998	3,864

       4.  The basic revenue return per Ordinary Share is based on a net revenue on ordinary 
            activities after taxation of £1,528,000 (31 December 2007 - £974,000 and 30 June     

            2008 -     £1,948,000) and on a weighted average of 62,895,080 (31 December 
            2007 -62,885,645 and 30 June 2008 - 62,881,845) Ordinary Shares in issue 
            throughout the period. 

The basic capital return per Ordinary Share is based on a net capital loss of £73,133,000 (31 December 2007 - a gain of £12,646,000 and 30 June 2008 - a gain of £18,818,000) and on a weighted average of 62,895,080 (31 December 2007 - 62,885,645 and 30 June 2008 - 62,881,845) Ordinary Shares in issue throughout the period. 

5.    The basic net asset value per Ordinary Share is based on net assets at the end of the period of £72,584,000 (31 December 2007 - £138,667,000, 30 June 2008 - £145,131,000) and on 62,924,229 Ordinary Shares (31 December 2007 - 62,885,643, 30 June 2008 - 62,885,643), being the total number of Ordinary Shares in issue at the end of the period. The basic net asset value per Ordinary Share at 31 December 2008 was 115.35p.

The fully diluted net asset value per Ordinary share for 31 December 2008 was 113.57p. As at 31 December 2008 there were 3,932,914 (31 December 2007 and 30 June 2008 - 3,971,500) Warrants in issue. Each Warrant confers the right to subscribe for one new Ordinary share at 85 pence on 31 October 2009 (or, if later, the date being 30 days after the date in which copies of the Company accounts are dispatched to shareholders). The warrant price as at 31 December 2008 was 8.0 pence.

6.    On 17 November 2008 the Company issued 38,586 ordinary shares of 25 pence, following the exercise of 38,586 warrants. 

7.    As a result of the European Court of Justice decision that investment management fees payable by investment trusts are not, and should never have been, liable to value added tax ('VAT'), the Company is due to recover a total of £165,000.  This amount is recognised in the Income Statement and allocated between revenue and capital in the same ratio as the VAT originally suffered. 

  8.     The financial information for the six months ended 31 December 2008 and 31 December 2007 comprises non-statutory accounts within the meaning of Section 240 of the Companies Act 1985. The financial information for the year ended 30 June 2008 has been extracted from published accounts that have been delivered to the Registrar of Companies and on which the report of the auditors was unqualified.

Directors' Statement of Principal Risks and Uncertainties

The Company's assets consist principally of listed equities and fixed interest securities and its principal risks are therefore market related.  The Company is also exposed to currency risk in respect of the markets in which it invests. Other key risks faced by the Company relate to investment and strategic, regulatory, operational matters and financial controls.  These risks, and the way in which they are managed, are described in more detail under the heading 'Principal risks and risk management' within the Directors' Report and Business Review contained within the Company's annual report and accounts for the year ended 30 June 2008.  The Company's principal risks and uncertainties have not changed materially since the date of the report.

Responsibility statement of the directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with the Statement Half-yearly financial reports issued by the UK Accounting Standards Board; 

• the interim management report includes a fair review of the information required by: 

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

G Burns

Chairman

27 February 2009

 

END

 

 

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