Half-year Report

RNS Number : 9548Y

F&C UK High Income Trust PLC

11 December 2017

 

To:                   RNS

From:              F&C UK High Income Trust plc

Date:               11 December 2017

LEI:                  213800B7D5D7RVZZPV45

 

Interim Results

The Board of F&C UK High Income Trust plc announces the unaudited interim results of the Company for the six month period to 30 September 2017.

 

Highlights

·     Expected distribution yield of 4.7 per cent on Ordinary shares and B shares at 30 September 2017, based on expected dividends for the year ended 31 March 2018. This compares with the yield on the FTSE All-Share Capped 5% Index of 3.6 per cent.

·     Distributions paid quarterly. Interim distributions in respect of the period increased by 3.4 per cent compared to the prior year.

·     Net asset value total return per share for the six months was 2.3 per cent, compared to the FTSE All-Share Capped 5% Index total return of 3.3 per cent.

Chairman's Statement

Investment background

Twelve months ago we were addressing the repercussions of the shock decision to exit the European Union and the sharp fall in UK equity markets. Whilst at the time this might have felt like the nadir, we have witnessed an extraordinary set of events in UK Politics with David Cameron stepping down and a general election being called by Theresa May. What was supposed to be a landslide win, with Labour in turmoil and repeated threats to the leadership, could not have been further from the truth. On the night, Labour gained a significant share and left the Conservative Government with no majority. This has not helped the Prime Minister in her dealings with Brussels on Brexit. While the recent agreement that talks can now progress towards a trade deal is encouraging there is clearly a long way to go before markets will have certainty on the UK's future relationship with the EU.

The impact on 'UK PLC' is difficult to gauge as uncertainty is not helpful when companies are looking at medium-term investment decisions. At the coal-face, the Manager is seeing a broad range of views; from companies ceasing all UK investment to others who see this as an opportunity to invest and grow their global sales reach. Our Manager believes that you very much have to deal with this at a company level and it is not a case of broad-brush negativity, which makes this a perfect stock-picking environment.

Initial investor sentiment around Brexit was to pick-up quality domestic plays that looked oversold. This was followed by a rotation into overseas earners as investors sought growth and the security of mainly dollar earnings whilst also benefitting from any further weakening in Sterling. This remains broadly the stance today although there are clearly some potentially cheap if structurally challenged domestic sectors which are dividing investor opinion.

Investment portfolio

At the Company's Annual General Meeting in June 2017, shareholders approved the proposed changes to the Company's investment policy, which included the removal of the Higher Yield Portfolio ('corporate bonds'). There had been a continued reduction in assets allocated to this portfolio and the remaining holdings have now either been sold or will mature imminently. As at 30 September 2017, 96.5 per cent. of total assets were invested of which 96.1% were held in equities. The remaining 3.5 per cent. of total assets was held as cash and cash equivalents.

Whilst the Higher Yield Portfolio has been sold there has been scope for the Manager to refocus the equity portfolio which has now been reduced from around fifty to forty names. In making this shift we have also moved down the market cap spectrum which was more a function of the opportunities the Manager found in the market than a direct drive to smaller companies. These changes have also been made in tandem with tilting the portfolio more towards growth versus income as the Manager felt the balance had become too skewed. I would, however, like to point out that this is only at the margin. The Board remains firmly focused on the dividend with a view to growing this over the coming years.

Investment Performance

The net asset value total return for the Ordinary shares and B shares was 2.3 per cent. over the six months to 30 September 2017 compared to the 3.3 per cent. total return for the benchmark FTSE All-Share Capped 5% Index.

Since the Company's launch in March 2007, the net asset value total return for the Ordinary shares and B shares has been 98.3 per cent. which exceeds the 90.3 per cent. total return from the benchmark index.

Earnings, Dividends and Capital Distributions

Movements in the Sterling exchange rate, most notably against the US dollar, have an important influence on the Company's revenue as over a fifth of the Company's equity income comes from UK-listed companies that declare dividends in US dollars. While growth in underlying dividends has continued, income at the half year has also been buoyed by the continued weakness of Sterling against the US dollar and the receipt of a number of special dividends. Special dividends added £258,000 to the revenue account during the period compared with £76,000 during the same period in the prior year.

The Company's dividend for the year ending 31 March 2018 is estimated, barring unforeseen circumstances, to be 4.88p per share which represents an increase of 3.4 per cent compared to the prior year (2017: 4.72p per share). The first three quarterly dividends will be paid in equal instalments of 1.21p per share and a fourth quarterly dividend of approximately 1.25p is expected to be paid to Ordinary shareholders. B Shareholders will receive capital repayments of the same amount per share at the same time as dividends are received by Ordinary shareholders.

The expected annual distribution level represents a yield for Ordinary shareholders, B shareholders and unit holders of 4.7 per cent. based on share prices as at 30 September 2017. This yield compares favourably with the yield on the FTSE All-Share Capped 5% Index of 3.6 per cent. at that date.

Dividends to Ordinary shareholders and capital repayments to B shareholders are paid quarterly in August, November, February and May each year.

After providing for the second quarter dividend, the Company had revenue reserves of £5.6m (approximately 6.41p per Ordinary share) at 30 September 2017.

Discount and buy backs

The Company's Ordinary share price and B share price stood at a discount of 6.9 per cent. and 6.0 per cent respectively at 30 September 2017. Over the six month period, the price of the Company's Ordinary shares and B shares traded at an average discount to net asset value per share of 6.2 per cent. and 5.8 per cent respectively.

During the six month period, the Company bought back 500,000 Ordinary shares at a discount of 7.6 per cent to be held in treasury.

Borrowing

The Company refinanced its borrowings at the end of September and reduced the fixed level of debt from £18 million at 3.15 per cent per annum to £7.5 million at a lower rate of annual interest of 2.58 per cent, fixed for five years. In addition the Company also entered into a five year unsecured multicurrency revolving credit facility for £7.5 million.

The Directors currently intend that the maximum aggregate borrowings of the Company will be limited to approximately 20 per cent of the Company's gross assets immediately following drawdown. At the time of writing, borrowings total 5.4 per cent.

Board Changes

As explained in my Annual Report, Mr Kenneth Shand retired as a Director of the Company following the conclusion of the Annual General Meeting on 29 June 2017. Following his retirement, James Williams has become Senior Independent Director and chairman of the Remuneration Committee.

Following the AGM, the Board was pleased to announce the appointment of Mr Andrew Watkins as a non-executive Director of the Company, which took immediate effect. Andrew has worked in the financial services industry for over 40 years and was Head of Client Relations for Investment Trusts at Invesco Perpetual from 2004 until his recent retirement. We believe that his experience of investment trusts and his extensive knowledge of the industry will contribute significantly to the Board.

Outlook

A year ago post the Brexit Referendum, it would have been difficult to see what would drive markets higher, leading many to have a bearish stance on the UK market. Twelve months on and the UK market is, for now, ignoring the backdrop and has yet again delivered a double digit total return which is at odds with the rhetoric about the state of the economy.

Whilst the market has probably performed better than most would have expected, the Manager has been very clear that there are risks being ignored in the pursuit of returns including a disregard for leverage. We have therefore placed an increased focus on balance sheets and cash flows bringing additional defensive qualities to the portfolio should we enter a downturn.

Whilst we are not in the business of making forecasts, in a fragile market which is in no mood for even minor disappointments we feel our focused equity strategy should leave us well placed to deliver whatever the market conditions.

Iain McLaren

Chairman

8 December 2017

Condensed Unaudited Consolidated Statement of Comprehensive Income

For the six month period to 30 September 2017

	Six months to 30 September 2017
Notes	Revenue	Capital	Total
	£'000	£'000	£'000
Gains on investments held at fair value	-	482	482
Exchange differences	-	(16)	(16)
Investment income                                           2	3,364	-	3,364
Investment management fee                            3	(148)	(345)	(493)
Other expenses	(172)	-	(172)
Profit before finance costs and taxation	3,044	121	3,165
Net finance costs
Interest on bank loan	(88)	(206)	(294)
Total finance costs	(88)	(206)	(294)
Profit/(loss) before tax	2,956	(85)	2,871
Tax on ordinary activities	-	-	-
Profit/(loss) for the period	2,956	(85)	2,871
Total comprehensive income for the period	2,956	(85)	2,871
Earnings per share                                           4	2.50p	(0.07)p	2.43p

All of the profit and comprehensive income for the period is attributable to the owners of the Company.

All items in the above statement derive from continuing operations.

Condensed Unaudited Consolidated Statement of Comprehensive Income

For the six month period to 30 September 2016

	Six months to 30 September 2016
Notes	Revenue	Capital	Total
	£'000	£'000	£'000
Gains on investments held at fair value	-	13,674	13,674
Exchange differences	-	(377)	(377)
Investment income                                           2	2,911	-	2,911
Investment management fee                            3	(140)	(328)	(468)
Other expenses	(170)	-	(170)
Profit before finance costs and taxation	2,601	12,969	15,570
Net finance costs
Interest on bank loan	(89)	(208)	(297)
Total finance costs	(89)	(208)	(297)
Profit before tax	2,512	12,761	15,273
Tax on ordinary activities	-	-	-
Profit  for the period	2,512	12,761	15,273
Total comprehensive income for the period	2,512	12,761	15,273
Earnings per share                                           4	2.09p	10.59p	12.68p

Condensed Consolidated Statement of Comprehensive Income

For the year to 31 March 2017

	Year to 31 March 2017*
Notes	Revenue	Capital	Total
	£'000	£'000	£'000
Gains on investments held at fair value	-	20,184	20,184
Exchange differences	-	(545)	(545)
Investment income                                           2	5,447	-	5,447
Investment management fee                            3	(287)	(670)	(957)
Other expenses	(397)	-	(397)
Profit before finance costs and taxation	4,763	18,969	23,732
Net finance costs
Interest on bank loan	(178)	(415)	(593)
Total finance costs	(178)	(415)	(593)
Profit before tax	4,585	18,554	23,139
Tax on ordinary activities	-	-	-
Profit for the period	4,585	18,554	23,139
Total comprehensive income for the period	4,585	18,554	23,139
Earnings per share                                           4	3.82p	15.48p	19.30p

*These figures are audited

Condensed Unaudited Consolidated Balance Sheet

	As at 30 Sept 2017	As at 30 Sept 2016	As at 31 March 2017*
Notes	£'000	£'000	£'000
Non-current assets
Investments held at fair value through profit or loss   8	133,751	136,460	136,041
	133,751	136,460	136,041
Current assets
Receivables	649	640	979
Cash and cash equivalents	4,556	9,289	12,982
	5,205	9,929	13,961
Total assets	138,956	146,389	150,002
Current liabilities
Bank loan	-	(18,000)	(18,000)
Payables	(323)	(310)	(353)
	(323)	(18,310)	(18,353)
Non-current liabilities
Bank loan	(7,500)	-	-
	(7,500)	-	-
Total liabilities	(7,823)	(18,310)	(18,353)
Net assets	131,133	128,079	131,649
Capital and reserves
Share capital                                                            10	134	134	134
Share premium	153	153	153
Capital redemption reserve	5	5	5
Buy back reserve	82,190	84,204	82,711
Special capital reserve	18,839	20,319	19,589
Capital reserves	23,188	17,480	23,273
Revenue reserve	6,624	5,784	5,784
Shareholders' funds	131,133	128,079	131,649
Net asset value per Ordinary/A share                  11	111.22p	106.82p	111.19p
Net asset value per B share                                  11	111.22p	106.82p	111.19p

*These figures are audited 

Condensed Unaudited Consolidated Statement of Changes in Equity

	Notes	Six months to 30 Sept 2017	Six months to 30 Sept 2016	Year to 31 March 2017*
		£'000	£'000	£'000
Opening equity shareholders' funds		131,649	116,528	116,528
Net profit for the period		2,871	15,273	23,139
Shares bought back for treasury	10	(521)	(888)	(2,381)
Dividends paid on Ordinary/A shares	7	(2,116)	(2,095)	(4,168)
Capital repayments paid on B shares	7	(750)	(739)	(1,469)
Closing equity shareholders' funds		131,133	128,079	131,649

*These figures are audited

Condensed Unaudited Consolidated Cash Flow Statement

	Six months to 30 Sept 2017	Six months to 30 Sept 2016	Year to 31 March 2017*
	£'000	£'000	£'000
Net cash flow from operating activities	5,767	7,107	15,576
Net cash flow from financing activities	(14,181)	(4,694)	(9,286)
Net (decrease)/increase in cash and cash equivalents	(8,414)	2,413	6,290
Currency losses	(10)	(388)	(572)
Net cash and cash equivalents at beginning of period	12,982	7,264	7,264
Net cash and cash equivalents at end of period	4,558	9,289	12,982

*These figures are audited

 Notes to the Condensed Accounts (unaudited)

1.    The condensed unaudited consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting and the accounting policies set out in the statutory accounts of the Group for the year ended 31 March 2017. The condensed consolidated financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 March 2017, which were prepared under full IFRS requirements to the extent that they have been adopted by the European Union.

2.    Income for the period is derived from:

	30 Sept 2017	30 Sept 2016	31 March 2017
	£'000	£'000	£'000
Equity investments	3,296	2,581	5,000
Fixed interest investments	60	319	426
Deposit interest	8	10	21
Underwriting commission and other income	-	1	-
	3,364	2,911	5,447

3.    The Company's investment manager is F&C Investment Business Limited. F&C Investment Business Limited receives an investment management fee of 0.75 per cent per annum of the net asset value of the Company payable quarterly in arrears. 

4.    The earnings per share are based on the net profit for the period and on 118,325,177 shares (period to 30 September 2016 - 120,454,847; year to 31 March 2017 - 119,906,901), being the weighted average number of shares in issue during the period.

5.    Earnings for the six months to 30 September 2017 should not be taken as a guide to the results of the full year.

6.    The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Group is engaged in a single segment of business, of investing in equity and higher yielding securities, and that therefore the Group has only a single operating segment. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Group. The key measure of performance used by the Board to assess the Group's performance is the total return on the Group's net asset value measuring debt at fair value. The reconciliation between the measure of profit or loss used by the Board and that contained in the financial statements is as follows:

	30 September 2017		30 September 2016		31 March 2017
	£'000	Pence per share	£'000	Pence per share	£'000	Pence per share
Shareholders' funds per financial statements	131,133	111.22	128,079	106.82	131,649	111.19
Closing fair value adjustment on fixed-rate term loan	-	-	(171)	(0.14)	(78)	(0.07)
Shareholders' funds with debt at fair value	131,133	111.22	127,908	106.68	131,571	111.12
Profit for the period per financial statements	2,871	2.43	15,273	12.68	23,139	19.30
Movement in fair value on fixed-rate term loan	78	0.07	(15)	(0.01)	78	0.07
Profit/(loss) for the period with debt at fair value	2,949	2.50	15,258	(12.67)	23,217	19.37

7.    Dividends and Capital Repayments

	Six months to 30 Sept 2017	Six months to 30 Sept 2016	Year to 31 March 2017
	£'000	£'000	£'000
In respect of the previous period:
Fourth interim dividend paid at 1.21p (2016: 1.18p) per A share	1,058	1,055	1,055
Fourth capital repayment paid at 1.21p (2016: 1.18p) per B share	375	371	371
In respect of the period under review:
First interim dividend paid at 1.21p (2016: 1.17p per A share) per Ordinary share	1,058	1,040	1,040
First capital repayment paid at 1.21p (2016: 1.17p) per B share	375	368	368
Second interim dividend paid at 1.17p per A share	-	-	1,038
Second capital repayment paid at 1.17p per B share	-	-	365
Third interim dividend paid at 1.21p per A share	-	-	1,035
Third capital repayment paid at 1.21p per B share	-	-	365
	2,866	2,834	5,637

A second interim dividend for the year to 31 March 2018, of 1.21p per Ordinary share, was paid on 3 November 2017 to Ordinary shareholders on the register on 6 October 2017. A second quarter capital repayment of 1.21p per B share was paid on 3 November 2017 to B shareholders on the register on 6 October 2017. Although these payments relate to the period ended 30 September 2017, under IFRS they will be accounted for in the six months to 31 March 2018, being the period during which they are paid.

At the Annual General Meeting held on 29 June 2017 Shareholders approved the proposal to change the name of the Company's A shares to Ordinary shares.

8.    Investments held at fair value through profit or loss

	Group (Level 1) £'000
Opening book cost	103,009
Opening fair value adjustment	33,032
Opening valuation	136,041
Movement in the period:
Purchases at cost	37,506
Sales - proceeds	(40,278)
- gains on sales	4,220
Decrease in fair value adjustment	(3,738)
Closing valuation at 30 September 2017	133,751
Closing book cost at 30 September 2017	104,457
Closing fair value adjustment at 30 September 2017	29,294
Closing valuation at 30 September 2017	133,751

Accounting standards recognise a hierarchy of fair value measurements for financial instruments which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The classification of financial instruments depends on the lowest significant applicable input, as follows:

·     Level 1 - quoted (unadjusted) prices in active markets for identical assets or liabilities.

·     Level 2 - other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly. The Group held no such instruments during the period under review.

·     Level 3 - techniques that use inputs that have a significant effect on the recorded fair value that are not based on observable market data. The Group held no such instruments during the period under review.

There were no transfers between levels of the fair value hierarchy during the six months ended 30 September 2017.

9.    On 28 September 2017 the Company repaid its existing £18 million secured term loan with JPMorgan Chase Bank. On the same date the Company drew down a £7.5 million unsecured term loan from Scotiabank Europe plc. The new facility has a five year term to 28 September 2022 and has a fixed interest rate of 2.58 per cent per annum. The Company also entered into a five year unsecured multicurrency revolving credit facility with Scotiabank (Ireland) Designated Activity Company, for £7.5 million. £nil was drawn down at 30 September 2017.

The fair value of the £7.5 million term loan is not materially different from the value reflected in the Balance Sheet. The fair value of the £18 million term loan, on a marked-to-market basis, was £18,171,000 at 30 September 2016 (31 March 2017 - £18,078,000).

10.  The Company bought back 500,000 Ordinary shares to hold in treasury during the period (period to 30 September 2016 - 750,000 A shares; year to 31 March 2017 - 2,000,000 A shares) and nil B shares during the period (period to 30 September 2016 - 200,000 B shares; year to 31 March 2017 - 450,000 B shares). The Company did not resell any Ordinary shares or B shares from treasury (period to 30 September 2016 - nil A or B shares; year to 31 March 2017 - nil A or B shares).

At 30 September 2017 the Company held 15,139,000 Ordinary shares and 1,100,000 B shares in treasury (30 September 2016 - 13,389,000 A shares and 850,000 B shares; 31 March 2017 - 14,639,000 A shares and 1,100,000 B shares).

The Company did not issue any new shares during the period (period to 30 September 2016 - nil; year to 31 March 2017 - nil).

11.  The net asset value per share is based on shareholders' funds at the period end and on 86,928,144 Ordinary shares and 30,976,703 B shares, being the number of shares in issue at the period end (30 September 2016 - 88,678,144 A shares and 31,226,703 B shares; 31 March 2017 - 87,428,144 A shares and 30,976,703 B shares).

12.  Other than the £18 million bank term loan, as disclosed in note 9, the fair values of the Group's financial assets and liabilities are not materially different from their carrying values in the financial statements.

The Group's financial risk management objectives and policies are consistent with those disclosed in the Group's consolidated financial statements for the year ended 31 March 2017.

13.  In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council and have undertaken a rigorous review of the Company's ability to continue as a going concern.

The Company's objective and policy, which is subject to regular Board monitoring processes, is designed to ensure that the Company is invested mainly in liquid, listed securities. The Company retains title to all assets held by its custodian and has agreements relating to its borrowing facilities with which it has complied. Cash is held only with banks approved and regularly reviewed by the Manager.

As part of the going concern review, the Directors noted that borrowing facilities of a £7.5 million fixed term loan and a £7.5 million revolving credit facility are committed to the Company until 28 September 2022.

The Directors believe, in the light of the controls and review processes noted above and bearing in mind the nature of the Company's business and assets, that the Company has adequate resources to continue in operational existence for a period of at least twelve months from the date of approval of the accounts. Accordingly, they continue to adopt the going concern basis in preparing the accounts.

14.  The Group results consolidate those of Investors Securities Company Limited, a wholly owned subsidiary which deals in securities. This company is dormant.

15.  The Company's auditor, Deloitte LLP, has not audited or reviewed the Interim Report to 30 September 2017 pursuant to the Auditing Practices Board guidance on 'Review of Interim Financial Information'. These are not full statutory accounts in terms of Section 434 of the Companies Act 2006 and are unaudited. Statutory accounts for the year ended 31 March 2017, which received an unqualified audit report and which did not contain a statement under Section 498 of the Companies Act 2006, have been lodged with the Registrar of Companies. No full statutory accounts in respect of any period after 31 March 2017 have been reported on by the Company's auditor or delivered to the Registrar of Companies.

The Interim Report will be posted to shareholders during December and will be available on the website: www.fandcukhit.co.uk

Statement of Principal Risks and Uncertainties

Most of the Company's principal risks are market related and comparable to those of other investment trusts investing primarily in listed securities. These risks, and the way in which they are managed, are described under the heading 'Principal Risks and Viability Statement' within the Strategic Report in the Group's Annual Report for the year ended 31 March 2017. The Company's principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the remainder of the Group's financial year. The most important types of risk associated with financial instruments are credit risk, market price risk, liquidity risk, interest rate risk and foreign currency risk. Other risks faced by the Company include investment and strategic, regulatory, operational and custody risks.

Statement of Directors' Responsibilities in Respect of the Interim Report

We confirm that to the best of our knowledge:

·     the condensed set of consolidated financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

·     the Chairman's Statement (constituting the Interim Management Report) together with the Statement of Principal Risks and Uncertainties include a fair review of the information required by the Disclosure and Transparency Rules ('DTR') 4.2.7R, 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 consolidated financial statements; and

·     the Chairman's Statement together with the condensed set of consolidated financial statements include a fair review of the information required by DTR 4.2.8R, 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 Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board

Iain McLaren

Director

8 December 2017

For further information, please contact:

Phil Webster, Fund Manager                                      0207 628 8000

Ian Ridge, Company Secretary                                  0207 628 8000

 

END

 

 

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