Interim Management Statement

RNS Number : 9484I

Hansa Trust PLC

31 July 2012

 



HANSA TRUST PLC

INTERIM MANAGEMENT STATEMENT (UNAUDITED)

This Interim Management Statement covers the period from 1 April 2012 to 30 June 2012. It has been produced for the sole purpose of providing information to the Company's shareholders in accordance with the requirements of the UK Listing Authority's Disclosure and Transparency Rules.

The Directors are not aware of any significant events or transactions, which have occurred between 30 June 2012 and the date of publication of this statement, which have had a material impact on the financial position of the Company.

CORPORATE RESULTS

			Quarter to 30 June 2012		Year Ended 31 March 2012
STATISTICS
Shareholders' Funds			£239.3		£268.2m
Share Price
Ordinary share			763.0p		920.0p
'A' Ordinary share			720.0p		873.0p
Discount #
Ordinary shares			23.5%		17.7%
'A' Ordinary shares			27.8%		21.9%
Net Asset Value  per share
Opening Net Asset Value			1,117.5p		1,100.5p
Dividends			(10.5p)		(3.5p)
Revenue and capital return			(109.9p)		20.5p
Closing Net Asset Value			997.1p		1,117.5p
PERFORMANCE
Net Asset Value Return			(10.8%)		1.8%
Performance Benchmark			1.0%		4.4%
Ordinary Share			(17.1%)		(3.3%)
'A' Ordinary Share			(17.5%)		(6.1%)
FTSE All-Share Index			(3.7%)		(2.1%)
Total Return (Dividends Reinvested)
Ordinary Shares			(15.9%)		(2.8%)
'A' non-voting Ordinary shares			(16.3%)		(5.7%)
FTSE All-Share Index Total Return Index			(2.4%)		1.9%

PORTFOLIO PERFORMANCE STATISTICS

		Quarter to 30-06-12		Year to 31-03-12
		%		%
Portfolio Time Weighted Return		(9.8)		2.7
-     ex Ocean Wilsons Holdings Ltd		(10.0)		0.6
Benchmark		1.0		4.4
FTSE All Share - Total Return		(2.4)		1.9

Weighting	Sector	Time Weighted Returns
13.0	Natural Resources	(6.8)		(13.5)
40.8	Strategic	(9.6)		5.5
4.8	Mid Cap	(0.2)		21.5
17.8	Smaller Cap / AIM	(21.9)		4.4
2.3	Utilities	3.9		1.9
7.3	Property	0.5		(1.3)
12.7	Large Cap	(3.9)		7.1
2.8	Investment Trusts	(7.9)		0.4
(1.5)	Loans	(0.4)		(2.3)
100.0	Total	(9.8)		2.7

Top Ten Contributors - pence per share
		Quarter to 30-06-12				Year to 31-03-12
Ocean Wilson Holdings Ltd		(43.7)		Ocean Wilson Holdings Ltd		25.7
Hargreaves Services Plc		(18.0)		NCC Group Plc		18.7
Cape Plc		(10.5)		Hargreaves Services Plc		12.6
Andor Technology Plc		(9.5)		Experian Group Plc		9.0
NCC Group Plc		(5.3)		Andor Technology Ltd		8.1
Kofax Plc		(4.1)		Galliford Try Plc		7.9
Weir Group Plc		(3.8)		GlaxoSmithKline Plc		4.6
Experian Group Plc		(2.8)		United Business Media Plc		2.2
Herald Investment Trust Plc		(2.4)		Wolseley Plc		2.0
BP Plc		(1.5)		Qinetiq Group Plc		1.7
Other investments		(6.5)		Other investments		(62.1)
Before expenses and dividends		(108.1)		Before expenses and dividends		30.4

PORTFOLIO ANALYSIS                                                                  

	Mkt.Cap		%		Mkt.Value		% of
	£000,000		Held		£000		NAV
Strategic and Unquoted
Ocean Wilsons Holdings Limited	369.5		26.45		97,736		40.8
DV4 Limited A2 Ordinary Shares	0.0		0.00		6,027		2.5
DV4 Commitment expiring 8 March 2013	0.0		0.00		3,525		1.5
Consolidated Investment Funds Ltd	0.6		100.00		632		0.3
DV3 Limited Preference Shares NPV	0.0		0.00		460		0.2
DV3 Commitment expiring 31 March 2014	0.0		0.00		327		0.1
					108,708		45.4
Remaining Portfolio
BG Group Plc	44,159.0		0.02		10,946		4.6
NCC Group Plc	274.0		3.64		9,975		4.2
Experian Group Plc	9,086.1		0.09		8,105		3.4
Hargreaves Services Plc	208.7		3.67		7,660		3.2
Weir Group Plc	3,251.3		0.21		6,732		2.8
Herald Investment Trust Plc	379.9		1.76		6,694		2.8
Andor Technology Ltd	115.4		5.57		6,429		2.7
BHP Billiton Plc	38,144.0		0.02		6,050		2.5
GlaxoSmithKline Plc	72,249.9		0.01		5,788		2.4
Hansteen Holdings Plc	459.3		1.20		5,491		2.3
Top 10 Investments					73,868		30.9
Centrica Plc	16,470.0		0.03		5,460		2.3
Great Portland Estates Plc	1,230.1		0.44		5,436		2.3
United Business Media Plc	1,430.9		0.37		5,261		2.2
HSBC Holdings Plc	101,914.3		0.00		4,968		2.1
Galliford Try Plc	517.3		0.90		4,633		1.9
Cape Plc	318.0		1.45		4,608		1.9
Kofax Plc	235.8		1.92		4,518		1.9
BP Plc	80,323.9		0.01		4,219		1.8
Eni S.p.A.	54,279.7		0.01		4,066		1.7
Wolseley Plc	6,792.4		0.05		3,417		1.4
Top 20 Investments					120,453		50.3
Royal Dutch Shell Plc	58,586.9		0.01		3,197		1.3
Goals Soccer Centres Plc	61.3		4.32		2,646		1.1
QinetiQ Group Plc	1,037.6		0.15		1,571		0.7
Brooks Macdonald Group Plc	120.8		1.21		1,456		0.6
Lloyds Banking Group Plc	21,876.6		0.01		1,451		0.6
Cairn Energy Plc	1,595.7		0.09		1,409		0.6
Melrose Resources Plc	139.9		0.91		1,267		0.5
Morson Group Plc	21.3		3.86		823		0.3
ImmuPharma Plc	41.2		1.53		631		0.3
All Leisure	16.7		3.59		599		0.3
Top 30 Investments					135,502		56.6
19 Other Investments					2,608		1.1
Net Liabilities					(3,653)		(1.5)
Total Net Asset Value					239,313		100.0

REVIEW OF THE FIRST QUARTER

The first quarter of the Trust's financial year has been somewhat frustrating. The macro environment in Brazil has deteriorated significantly, with GDP growth forecasts for 2012 almost halving from 3.5% at the beginning of the year to the latest forecast of 1.9%, even though the authorities have announced a series of measures to stimulate private consumption and ease credit conditions, against a backdrop of successive cuts in the Selic rate. The authorities are considering a number of additional measures to boost growth, including further credit extensions to the private sector from BNDES, the national development bank, as well as tax breaks for specific sectors. Policymakers' ability to lift GDP growth significantly is limited by domestic and external factors, with investment spending and exports both being hit by the global slowdown.  In the first quarter of the calendar year the Ibovespa reached its peak, since when the index is down 22%, which has taken its toll on the short term price performance of Ocean Wilsons Holdings Limited.  In addition, we suffered a number of one off hits in some of our other top ten holdings, including Hargreaves Services, Cape, Kofax And Andor, all documented in previous monthly updates. Finally, on a technical note, the Hansa "A" Ordinary non-voting shares exited the FTSE ALL Share index in July, which saw some index selling of the "A" Non-voting ordinary shares in thin markets, causing a huge disparity with the Hansa Ordinary shares which have the same portfolio and will remain in the index.

OVERALL PERFORMANCE

During the quarter under review, the Ordinary and "A" Ordinary share prices fell by 17.1% and 17.5% respectively compared with a fall 3.7% in the FTSE All-Share Index, as both classes of shares traded at a wider discount to their net asset value. The time weighted return of the portfolio was -9.8%%, compared with a rise of 1.0% in the Company's benchmark and a fall of 2.4% in the FTSE All-Share Index- Total Return. The largest contributors to the overall 120.4 pence per share loss in the Net Asset Value (excluding the 10.5 pence per share proposed final dividend) were Ocean Wilson Holdings Ltd 43.7 pence, Hargreaves Services Ltd 18.0 pence and Andor Technology Ltd 9.5 pence.

SECTOR WEIGHTING AND PERFORMANCE

	Sector Weighting	Sector Weighting	Quarters' Performance
Sector	at 30 June 2012	at 30 June 2011	to 30 June 2012
	%	%	%
Strategic	40.8	43.2	(9.6)
Smaller Cap/AIM	17.8	19.1	(21.9)
Natural Resources	13.0	13.5	(6.8)
Property	7.3	5.8	0.5
Large Cap	12.7	11.0	(3.9)
Utilities	2.3	1.9	3.9
Mid Cap	4.8	3.7	(0.2)
Investment Trusts	2.8	2.5	(7.9)
Loans	(1.5)	(0.7)	(0.4)

PORTFOLIO ACTIVITY

During the quarter DV4 Limited called down £468,295 of its commitment.

NEWS UPDATES FROM TOP HOLDINGS 

(The 22 holdings listed below each represent 1.4% or more of Net Asset Value and represent 95.1% of Net Asset Value combined. Details are provided in respect to each company's market capitalisation, the proportion of NAV that the holding represents and the stock's performance over the three months ended 30 June 2012.

OCEAN WILSONS HOLDINGS LIMITED (Mkt Cap £369.5m: 40.8% NAV: Performance -9.6%)

A Bermuda based investment company listed on both the Bermuda Stock Exchange and the London Stock Exchange, with two principal subsidiaries. Wilson Sons Limited (58.25% owned) is an autonomous Bermuda company listed on the Sao Paulo Stock Exchange (BOVESPA) and Luxembourg Stock Exchange. Wilson Sons is one of the largest providers of maritime services in Brazil, employing over 6000 employees, with activities including harbour and ocean towage, container terminal operations, offshore support services, logistics, small vessel construction and ship agency. Ocean Wilsons Investments Limited (wholly owned) is a Bermuda investment company, holding a portfolio of international investments managed by Hanseatic Asset Management LBG, a Guernsey registered and regulated investment manager.

In 2011, Brazil overtook the United Kingdom to become the world's sixth largest economy. Following growth of 7.5% in 2010, GDP growth slowed to 2.7% as the economy suffered the effects from government-implemented measures to control inflation and the impact of the global economic crisis. During the year, the government raised interest rates and implemented lending restrictions and budget cuts in an attempt to control inflationary pressures. Following the slowing of the economy in the second half of 2011, the government began easing monetary policy to stimulate economic growth and reduce upward pressure on the Brazilian Real, with interest rates falling for the fifth consecutive time in March 2012 to 9.75%, from 12.5% in July 2011. It is reported that the government is considering reducing fiscal spending to allow further cuts in Brazil's interest rates which remain amongst the world's highest. The currency remains strong, as a result of high commodity prices and direct foreign investment and foreign capital inflows attracted by the high real interest rates. An overvalued currency is adversely impacting the competitiveness of Brazilian industry and the government increased taxes on short-term foreign borrowings to discourage inflows.

2011 was a mixed year for Ocean Wilsons Holdings limited. Wilson Sons produced strong operating results with robust revenue growth across all business lines, with particularly strong growth at Port Terminals, Logistics and Shipyard businesses. Container terminal revenue benefitted from improved pricing, better sales mix and strong import warehousing revenue. Robust revenue growth at the oil and gas terminal business, Brasco, was driven by increases in the number of vessel turnarounds and strong demand for auxiliary services. Shipyard revenue growth was driven by third party sales to the Wilson,Sons Ultratug Offshore joint venture. However, the more recent depreciation of the Brazilian Real against the US Dollar at year end resulted in a decline in financial revenues and an increase in the deferred tax charge which adversely impacted bottom line earnings.

The fall in global equity markets impacted the investment portfolio which declined by 9.6% on a time weighted basis. The MSCI World Equity Index declined by 7.4% but the USA, where equities were marginally positive over the year, makes up nearly half this index. Losses elsewhere in the world were much more severe. In particular, the "BRIC" markets of Brazil, Russia, India and China which fell by 27%, 22%, 36%, and 22% respectively. The MSCI Japan Index lost 15% in US dollars and the MSCI Europe ex UK Index declined by 15.3%, also in US dollar terms. After the intensity of bearishness in 2011 and the severity of market falls, equities offer good value in most markets, with recovery potential remaining greatest in many of the Emerging Markets.

The reasons underpinning the case for Emerging Markets remain intact, namely a growing share of global GDP, strong balance sheets across the government + corporate + household sectors supporting future credit cycles, a multi-year urbanisation trend, favourable demographics with a rapidly growing middle class, competitive labour costs and a backlog of infrastructure spending. In light of the value of the investment portfolio and the dividend to be received from Wilson Sons Limited, the Board declared a final dividend of 29 cents per share (2010: 38 cents per share), making a total dividend for the year of 33 cents per share (2010: 42 cents per share).

Wilson Sons continues to invest heavily in developing and expanding the business, and in the five years to 31 December 2011 the Group invested U$740m in capital addition, of which U$461m was financed through new loans raised during the same period. In March 2012, Ocean Wilsons announced that the joint venture Wilson, Sons Ultratug Offshore signed a contract with Petrobras for the construction and operation of four large platform supply vessels. The vessels will be financed through the Marine Merchant Fund (FMM), and will be built at the Wilson, Sons Shipyard facilities in Guaruja, Sao Paulo, and are expected to be delivered by 2015. Wilson, Sons Ultratug Offshore intends to operate more than 30 Offshore Support Vessels by 2017, and the strategy is to build an adequate mix of vessels to attend the demand from national and international oil companies operating in Brazil. According to Petrobras' strategic plan, it will require nearly 300 new-chartered Offshore Supply Vessels by 2020 to fulfil their exploration and production of pre-salt and post-salt reserves.  The expansion of the Tecon Salvador container terminal and the completion of the additional capacity at the Guaruja shipyard facility are both forecast to be completed in the beginning of the second half of 2012.

Wilson Sons reported a lacklustre first quarter, attributable to largely non-recurring events. Therefore good improvements in the towage and offshore businesses were overshadowed by a poor performance in port terminals and logistics. Port terminal revenues fell 7.6% mainly due to the end of Brasco operations in the public port of Rio de Janeiro in 4Q11, as well as civil works at the Tecon Salvador terminal constraining storage activities and the secondary quay. The offshore division brought a strong EBITDA margin of 27.7%, with revenues growing 36%, showing the benefits of a larger fleet and higher average daily rates. The operating margin suffered from higher personnel expenses, mainly due to greater provisioning for the stock option plan in 1Q12, reflecting the higher stock price at the end of 1Q12.

In 2012 Wilson Sons will celebrate 175 years of operation in Brazil, and the company is among the ten oldest in the country.

BG GROUP (Mkt Cap £44,159m: 4.6% of NAV: Performance -9.6%) Q4 and full year earnings were well ahead of the consensus estimate helped mainly by a better than expected contribution from the LNG activities and here profit guidance for 2012 has been increased by 30% along with the statement that its "LNG business is set fair with the prospect of excellent profit momentum for many years". Similarly, the Group expects growth in E&P as the Brazilian and Australian activities begin to contribute, with production rising to more than 1 million boepd by 2015 and about 1.4 million boepd by 2020, compared with some 750,000 boepd by the end of 2012. In May BG announced strong Q1 results and took another step towards achieving its U$5bn asset disposal programme, to focus on exploration activities, by announcing an agreed sale of its Comgas business in Brazil to Cosan for U$1.7bn.

NCC GROUP (Mkt Cap £274.0m: 4.2% of NAV: Performance -11.3%) the international, independent provider of Escrow and Assurance announced a strong set of final figures, with overall group operating margins of 27%, 131% cash conversion and a 24% increase in the dividend. "A clear focus on our international growth strategy, which includes exploiting a number of growing market opportunities. The cyber arms race continues to speed up, and with the technology revolution outpacing the ability of IT departments to cope with the plethora of security issues, we are well placed to maintain our growth momentum". In May NCC announced that it "has reverted to its former Group-wide IT solution with immediate effect due to operational problems with its new system which was being installed. This has not had any impact on trading. However, it will result in a one-off, mostly non-cash charge, of £6.9m in the financial year to 31^st May 2012".

DV4 (Unquoted, 4.0% of NAV: Performance -6.4%)

As at 31^st March the Fund had drawn down £641.3m, representing 60.1% of Total Commitments of £1bn, and since the year end there was one further capital draw down for £50m, bringing the total drawn down to £691.3m, which represents 64.7% of Total Commitments. Hansa Trust has a £10m commitment to this property fund. "Transactions are highly polarised between the prime and secondary centres in both pricing and volume", while "the UK occupier market remains polarised between central London and the rest of the UK with central London seeing rising rental values". The focus of acquisitions for the DV4 portfolio for the past year and going forward has largely been towards London and the South East, in the two principal markets where momentum exists, namely prime offices and residential. This is set against the back drop of a number of key objectives. First, a drive towards more income. Second, recognising that bank finance is in short supply, a search for leveraged investment opportunities such as land purchases. Third, the search for potential partners on projects from which the fund can benefit from enhanced promotes and fees. The key points to note are the low aggregate loan to value ratio across the portfolio of 40.8% and the all-in average interest cost of 5.8%. The fund has seen a significant reduction in UK property lending capacity, and development finance for anything other than prime residential schemes is almost non-existent. DV4 managed to make two large acquisitions during the year, East Village and Minerva. QDD Limited (a 50:50 joint venture with Qatari Diar) exchanged contracts with the Olympic Delivery Authority to acquire the Athletes' Village at the Queen Elizabeth Olympic Park at Stratford for £557.5m. The freehold ownership of the 75 acre site comprises 1439 completed private apartments, 38000sqft of retail accommodation, 1435 car parking spaces and 1379 affordable homes. In addition there are a further six development sites with outline planning consent for 2075 residential units. The strategy is to let the majority of the units rather than sell them. The Minerva portfolio is unusual in that the vast majority of the value is contained within a small number of large prime assets, namely the Walbrook Building, the St Botolph Building, The Lancasters, The Ram Brewery in Wandsworth and the Odeon cinema in Kensington. The Alpha Plus Group is the premier private education platform in the UK, but with a London focus, operating 20 schools, colleges and nurseries. The business is performing satisfactorily with earnings now projected for its August year end to be on budget, while school fees for the year averaged a 5.5% increase.

EXPERIAN (Mkt Cap £9,086.1m: 3.4% of NAV: Performance -7.6%) the global credit information and marketing services group remains a long-term growth story, as it continues on a journey of expansion into new geographic markets and verticals, with a culture of innovation to develop new products and move into new customer segments. Experian's IMS confirmed the full year core financial targets remain, namely mid to high single-digit organic revenue growth, improving margins and cash flow conversion of over 90%, affording the ability to make further acquisitions (eg remaining 30% of Serasa in Brazil) or capital returns.

HARGREAVES SERVICES (Mkt Cap £208.7m: 3.2% of NAV: Performance -36.1%) is a leading supplier of solid fuels and bulk material logistics. "Our investment this year in developing our industrial, surface mining and energy and commodities businesses will reap significant benefits during 2012/13 and beyond. Next year, these new profit streams combined with the existing operations will allow us to generate significant profits and cash. This will give us an even stronger platform to drive the medium and long term growth that we are targeting in Europe and Asia".

In April Hargreaves concluded the refinancing of its core UK banking facilities, which increased from £115m to £175m, while its joint venture Tower Regeneration Ltd successfully agreed banking terms in line with its business plan, and coal shipments from the Tower site to Aberthaw Power station commenced ahead of schedule. In May Hargreaves encountered unusual geological conditions in its Maltby deep coal mine, which resulted in an increasing ingress of water, oil, gas and other hydrocarbons. This incident will result in a delay in the Commencement of production on the T125 face, with a likely adverse impact on the Group's profit in the year ending 31 May 2013 of between £12m and £16m. "The face gap should not reflect on the longer term viability or profitability of the mine, and we do not see this event having any material adverse impact on the medium or long term prospects for the Group. Current trading is unaffected". Hargreaves provided no changes to expectations in its July update. "Energy & Commodity progress remains on going despite some volume pressure, and overall we believe Hargreaves remains well set up for material medium term progress",

WEIR GROUP (Mkt Cap £3,251.3m: 2.8% of NAV: Performance -11.7%) is a global engineering solutions provider to the mining, oil & gas and power markets. This focus, together with a growing emerging market presence, continued commitment to operational excellence, strong aftermarket revenues and value enhancing acquisitions has resulted in record operating margins. Weir SPM's leading position in the upstream Oil & Gas unconventional equipment market has been enhanced with the acquisitions of Novatech and Seaboard Holdings, leaving the Group's profit exposure to the Shale Oil & Gas space at around 43% of the group total. Weir Group "achieved in 2011 its stated ambition of doubling 2009 profits by 2014" and management  outlined a generally positive outlook for 2012 based upon the continuation of strong capex programmes by miners and oil & gas operators, while the life-cycle of products is such that the replacement cycle of the enlarged installed base will start to offset original equipment sales longer term. In May Weir pointed to "a year of further good progress in line with previous guidance for the Group overall. Over the year the impact on the Oil & Gas division of the rapidly changing pressure pumping market will be offset by strong trading in the Minerals and Power & Industrial divisions". In June Weir confirmed full year guidance and its ambition to double the Minerals division's ebit number by 2016, largely as a result of high margin aftermarket revenue streams.

HERALD INVESTMENT TRUST (Mkt Cap £379.9m: 2.8% of NAV: Performance -7.9%) objective is to achieve capital appreciation through investments in smaller quoted companies in the areas of telecommunications, multimedia and technology (TMT). Investments may be made across the world, with a recent geographical break down of gross assets showing weightings of some 60% in the UK, 23% in the US and 7% in Japan & Asia Pacific. The Trust has over 240 holdings, and it's notable that many of the large technology players are presently cash rich, and the opportunity to acquire tomorrow's technology today for cash rather than develop it themselves may prove to be irresistible. The Trust was launched in 1994 and has an excellent long-term performance record.

ANDOR TECHNOLOGY (Mkt Cap £115.4m: 2.7% of NAV: Performance -26.3%) is a global leader in the development and manufacture of high performance scientific digital cameras for academic, industrial and government applications, with a CAGR in sales of 30% p.a. for the past 14 years. Andor reported "in the first four months of the financial year trading has been in line with the Board's expectations. Asia Pacific continues to deliver strong revenue growth and Europe is performing well. Innovation and new product delivery is key to Andor's continued growth". In April Andor's trading update for the first six months of the financial year was encouraging. "Asia Pacific continues to deliver strong growth in both order intake and sales. Europe is performing well". Order intake from the Americas was weaker than expected as a result of more prudent stock management on behalf of OEM customers.

"We continue to focus on expanding the operating margin of the business". Andor announced a strong set of interim figures in June, but a £3m shortfall in orders for H2 means full year results are now expected to be below earlier expectations. Over 50% of the addressable market for Andor's cameras is in Industrial and Defence, and the company has appointed an M&A boutique to source acquisitions in these sectors.

BHP BILLITON (Mkt Cap £38,144.0m: 2.5% of NAV: Performance -5.3%) the largest mining company in the world, expects industrialisation and urbanisation of China and other emerging economies to continue to support strong demand for many commodities in the long-term, and are planning to invest U$20bn in capex in 2012, in the face of increased labour and contractor costs. On the supply side mining projects are now at risk of delay due to economic uncertainty and potential delays to funding. BHP Billiton has tier one, high volume, low production cost, long-life and expandable assets. In May BHP Billiton revised down their U$80bn spending programme over the next 5 years as costs rise and prices fall in a weaker global economy, stating that the mining industry has more projects than cash flows and companies will need to prioritise spending. June production volumes saw iron ore and copper achieving the largest volume beats, while no projects have seen budgets or timelines increase.

GLAXOSMITHKLINE (Mkt Cap £72,249.9m: 2.4% of NAV: Performance 5.6%) FY 2012 guidance indicates that sales growth is possible next year, together with core operating margin improvement and further dividend growth, while management is looking for cost savings more than sufficient to address any further pricing pressure. Increasing contributions from vaccines and brand loyal Consumer and Specialist Pharmaceuticals will drive more sustainable cash flow generation. GSK has now absorbed the majority of its patent expiries and doesn't need to materially expand its infrastructure. Excluding the 2010 legal charges GSK has delivered solid EPS growth over the last 5 years, and could still only be at the start of a decade of sustainable sales and EPS growth. GSK has acquired Human Genome Sciences in a friendly £1.9bn cash offer in order to achieve the full potential of Benlysta.

HANSTEEN HOLDINGS (Mkt Cap £459.3m: 2.3% of NAV: Performance 2.7%) is a European industrial Real Estate Investment Trust ("REIT") with a heavy portfolio weighting in Germany, set up by the founders of Ashtenne after that business was sold. Hansteen's latest NAV of 82p was below forecast because of the tough investment market in Benelux. The company has firepower of £300m to make some additional earnings accretive acquisitions. "The likelihood is that the next five or six years will be a period for acquiring and intensively managing. Whilst there will be selective sales there are unlikely to be large-scale realisations. Most likely, the bulk of the returns to our shareholders will be from growing income and dividends. Later in the cycle capital returns will become more significant". May's IMS showed that the management team is growing earnings, selectively achieving profitable sales and pursuing a number of potentially exciting acquisition opportunities from a position of financial strength.

CENTRICA (Mkt Cap £16,470.0m: 2.3% of NAV: Performance 3.9%) delivered solid FY11 results in difficult market conditions, an 8% increase in the dividend and an increased payout ratio. Some 70% of Centrica's operating profit arises from two divisions, Centrica Energy the upstream business, and Centrica Residential the downstream business, with a continuing trend towards vertical integration between the two. Centrica signed a £14bn deal with Statoil to develop oil and gas assets in the North Sea and supply gas to the UK for a decade, making Centrica an operator of Norwegian production assets for the first time. Strong cash generation and a good balance sheet underpin significant spend on organic capex and acquisitions in the coming year, while British Gas Services is targeting double-digit profit growth through operational efficiencies. Centrica's Q1 update confirmed that trading remains in line with expectations, with the Upstream division driving the growth while beginning to see the benefit of cost reduction initiatives elsewhere.

GREAT PORTLAND ESTATES (Mkt Cap £1,230.1m: 2.3% of NAV: Performance 9.4%) is a fully exposed London offices and retail REIT, with an 80% weighting in the West End and the balance in the City and Southwark. There are two commercial property markets in the UK, Central London and the rest of the country. Great Portland's recent pre-letting successes have de-risked its committed development pipeline as well as allowing it to switch on further schemes, against a background of relatively robust tenant demand and a restricted supply of stock in its central London locations. Great Portland's longer-term pipeline is dominated by its two major land holdings and Crossrail beneficiaries at Hanover Square W1 and Rathbone Place W1. The depreciation of the pound together with a lack of new office space in the West End continues to fuel demand from international investors. The company's full year figures were outstanding, with the NAV gaining 12%over the year, a record year on lettings and voids low at 3.3%, "with some pockets of strong interest from the likes of the TMT sector".

UNITED BUSINESS MEDIA (Mkt Cap £1,430.9m: 2.2% of NAV: Performance -3.0%) focusses on two principal activities: worldwide information distribution, targeting and monitoring; and the development and monetisation of B2B communities and markets. UBM's businesses inform markets and serve professional communities, with integrated events, online, print and business information products, with 6000 staff in more than 30 countries. UBM's business mix is moving towards more attractive divisions, Events, and geographies, US/emerging markets, through a combination of organic growth and acquisitions. Events, now 63% of EBITA, most recently grew revenues by 15% underlying, with a weighting towards large scale, market-leading shows in the US and emerging markets. UBM reported a strong Q1 IMS, with Events remaining the key growth engine, as all its leading events generated "strong double digit growth". Growth in the US Newswire business was subdued, while Data and Marketing Services were both weak as expected.

HSBC HOLDINGS (Mkt Cap £101,914.3m: 2.1% of NAV: Performance 2.7%) is gradually selling or closing non-core and underperforming businesses under the stewardship of Stuart Gulliver, although the group remains some way from convincing the market that it can deliver its twin strategic targets of a cost income ratio of 48-52% and an ROE of 12-15% by 2013. We like HSBC structurally for its significant exposure to emerging markets, particularly Asia, and its lack of  dependence on wholesale markets. With a loan to deposit ratio of 75% it is a net lender into wholesale markets. HSBC's latest IMS was more positive than expected, with an improved performance on costs, a return to growth in the loan book and good Global Banking & Markets performance.

GALLIFORD TRY (Mkt Cap £517.3m: 1.9% of NAV: Performance 3.6%) "set out a strategy in September 2009 to transform its housebuilding business through an expansion plan that had the objectives of a significant increase in profits and return on capital employed during the third year. We are now half way through the third year and are confident of delivering everything that we set out to achieve, with our southern biased business performing strongly". Galliford reported a 110% rise in earnings and a 100% rise in the dividend at the interim stage. The focus will be on returns and risk management rather than "growth for growth's sake". Management aim to consolidate the business and become highly cash generative, and going forward the company aims to make "progressive" dividend increases. The latest trading statement demonstrated strong growth year on year, "since our last update the housing market has been stable and we have maintained a high quality construction order book. The group is cash positive at financial year end. 81% of the 10500 plot land bank is secured at current market values".

CAPE (Mkt Cap £318.0m: 1.9% of NAV: Performance -33.9%) the international provider of essential, non-mechanical support services to the energy and mineral resources sectors, recently stated "momentum is building in a number of key regions and projects indicating that Cape is entering a sustained period of demand growth for its services", supporting "our vision of becoming the leading specialist provider of our range of essential non-mechanical services". Cape is fundamentally well placed to benefit from the rise in global energy demand over the next few years, and activity is moving East, with contract award momentum in core growth markets such as the Far East / Pacific Rim. At the beginning of May Cape issued an IMS which stated "that overall trading has been in line with the Board's expectations" and "the Board is confident the Group is well positioned for the remainder of the year", followed by some director buying of shares. Towards the end of May Cape provided an update on the GL3Z-LNG project in Arzew in Algeria following an operational audit, resulting in "a one-off charge of £14m in respect of current and estimated future losses on the contract". At the end of May Cape announced the appointment of Joe Oatley, former CEO of Hamworthy, as CEO, followed by more director buying of shares.

KOFAX (Mkt Cap £235.8m: 1.9% of NAV: Performance -18.0%) is a leading provider of capture enabled business process management (BPM) solutions. These solutions provide a rapid return on investment to thousands of customers in banking, insurance, government, business process outsourcing and other markets. Kofax delivers these solutions through its own sales organisations, and a global network of more than 800 authorised partners in more than 70 countries throughout the Americas, EMEA and Asia Pacific. Kofax paid U$48.1m for Singularity, a leading BPM software vendor. Kofax can now offer a single platform that both manages information into the enterprise as well as the business process dealing with that information, making it the first company to offer a capture enabled BPM platform. In May Kofax announced "lower than expected software license revenues during the quarter in its core capture software business as the result of an unusual number of delayed orders at quarter end", but the management did not lower guidance for the full year and directors purchased more shares. In July Kofax announced that it ended the fiscal year June with record total revenues in line with expectations, with fourth quarter software license revenues in the very high teens, strong cash generation and U$81m on the balance sheet. The Singularity acquisition makes for a compelling joined-up software proposition, supporting Kofax's vision statement "to be the leading provider of Capture-enabled BPM solutions".

BP (Mkt Cap 80,323.9m: 1.8% of NAV: Performance -7.6%) continues to put the Macondo well disaster in the Gulf of Mexico behind it and has more than achieved its divestment programme, giving the company more than sufficient cash to pay for the US escrow account, as well as announcing a U$7.8bn settlement for economic and medical claims relating to the Deepwater Horizon disaster with the Plaintiffs Steering Committee. The key new financial target is that BP expects cash flow from operations to grow by around 50% by 2014, with around half the additional cash flow to be used for increased investment and half for distributions to shareholders and debt repayments. A total of U$45bn will now be divested, and a wave of new projects are expected to result in higher margins across the upstream operation. Exploration spend will increase materially, with 15-25 exploration wells planned in 2013. BP announced that it has received indications of interest for its 50% share in TNK-BP, which could be worth U$30bn, while negotiations between BP and the US Department of Justice over the Deepwater Horizon disaster may be accelerating, pointing to a possible settlement by September.

ENI SPA (Mkt Cap €54.3m: 1.7% of NAV: Performance -4.0%) now sees volume growth of 3% p.a. from 2011-15, after adjusting for the Libyan outage. The longer term forecast from 2015-21 has been raised from 2% p.a. to 3% p.a. volume growth due to the addition of major new projects such as those in Mozambique and Norway. The 4-year capex plan is equivalent to spend of EU 14.9bn p.a., up 12% from guidance a year ago.

In May ENI announced that it will sell 30%  of its 52.5% holding in Italian gas distributor Snam to Italian State holding company CDP as the first step in a complete disposal. This will see a large reduction in ENI's balance sheet gearing and a sharp increase in E&P exposure to 58% of pro forma 2011 capital employed vs the current 48%. As a result of its improved gearing ENI will authorise the restart of a share buyback programme. The Italian government will maintain its holding in ENI at 30%.

WOLSELEY (Mkt Cap £6,792.4m: 1.4% of NAV: Performance 0.4%) the world's largest specialist trade distributor of plumbing and heating products to professional contractors and a leading supplier of building materials in North America, the UK and Continental Europe, announced interim figures which showed strong results from the USA, more than offsetting weakness in Europe. The group is being run very tightly, with an underlying trading margin of 5%, and scope for further improvement. There was good cash generation with net debt reduced to £529m, £176m lower than at the July 2011 year-end. Borrowings will be further reduced by the disposal of the French business Brossette. Six bolt-on acquisitions have been completed in the first half, and the Group is planning to drive further efficiencies and stay focused on improving customer service, gaining market share and holding its gross margin, while the dividend was increased by 33%. Wolseley's strategy is to focus on businesses where it can establish leading market positions in attractive markets and consistently generate good returns for shareholders, and hence its recent decision to explore strategic options for the future of its remaining French operations.

OUTLOOK

The profound macroeconomic issues associated with debt, deleverage and deflation will not go away. The European Central Bank relieved an incipient credit crunch at the end of last year by providing a massive liquidity injection through its long-term refinancing operations, thereby buying time, "kicking the can further down the road", but not dealing with the issue of solvency, as the gap between creditor and debtor countries continues to widen. The world is still staggering under a mountain of debt and deleveraging is proving an impossible task to execute, with the ratio of total (that is public and private) debt to gross domestic product now higher than it was in 2007 in many leading developed economies. The need to get debt levels down is more necessary than ever in the Eurozone, but also in the US, Japan, and the UK. In an era of low or zero interest rates with most countries competing to devalue their currencies, there is little scope to cut interest rates or allow exchange rates to fall to promote an export-led recovery, while a good bout of inflation would send bond yields soaring, only compounding the costs of debt service and choking off any recovery.

The developed economies have suffered the mother of all debt busts, and they are buried in debt. The crisis is about debt as well as economic growth, because without growth it becomes politically harder to push through the necessary structural reforms as the fiscal arithmetic does not work. Growth depends on promoting competition not more government spending. You simply cannot borrow and spend your way out of a debt crisis. Austerity and growth are sequential stages in a rebalancing process, and they reinforce one another.  Debt busts are deflationary and economic recoveries that follow financial recessions tend to be much weaker, slower and more erratic than those that follow non-financial recessions, as the necessary process of deleveraging takes a long time and evolves in waves. Ironically, the  bank recapitalisations that we have witnessed do not prevent deflation, they actually cause it, as the banks tend to use whatever new capital they are given to fund loan contraction rather than delivering credit growth in the real economy. Sovereign debt and banking problems are a typical aftershock of any international financial crisis, just as anaemic growth with sustained high unemployment is par for the course in the earlier years of protracted post financial recoveries.

Sentiment continues to be driven by the Eurozone crisis and lower global growth expectations, as increasing evidence of another soft patch in US economic activity and a slowing rate of growth in China have acted as a further source of unease, with few investors having a strong conviction over the near term outlook, with most investors sitting on their hands resulting in very low trading volumes. We should not get too gloomy because we are still looking at positive global growth expectations because of faster growth in developing markets, despite the headwinds back here in the developed world. Attention is starting to turn to the US November Presidential elections, the looming fiscal cliff and what will happen if Congress is unable to find a solution to the current impasse, underpinning fears that the debt gridlock could slow the world's largest economy. On a brighter note private sector deleveraging is well advanced in the US, and with deleveraging in the US banking sector having largely run its course, banks are once more looking to expand their balance sheets, so the monetary transmission mechanism is working again, while it looks as though the US homebuilding sector has turned the corner and is now once again contributing to economic growth. A decisive decline in Spanish and Italian bond yields would signal that policy reflation is starting to work, but right now that feels a distant prospect. Although corporate earnings expectations are being adjusted downwards, there are signs of a pick-up in corporate M&A activity as companies put their cash to work while investor confidence remains fragile.

 

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