Interim Management Statement

RNS Number : 7913W

Hansa Trust PLC

31 January 2013

 



HANSA TRUST PLC

INTERIM MANAGEMENT STATEMENT (UNAUDITED)

This Interim Management Statement covers the period from 1 April 2012 to 31 December 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 31 December 2012 and the date of publication of this statement, which have had a material impact on the financial position of the Company.

CORPORATE RESULTS

	Nine months to 31-12-2012		Year Ended 31-03-2012
STATISTICS
Shareholders' Funds	£238.9m		£268.2m
Share Price
Ordinary share	725.7p		920.0p
'A' Ordinary share	740.0p		873.0p
Discount #
Ordinary shares	27.1%		17.7%
'A' Ordinary shares	25.7%		21.9%
Net Asset Value  per share
Opening Net Asset Value	1,117.5p		1,100.5p
Dividends	(14.0p)		(3.5p)
Revenue and capital return	(108.2p)		20.5p
Closing Net Asset Value	995.3p		1,117.5p
PERFORMANCE
Net Asset Value Return - (Inc. Div & Exps)	(10.9%)		1.8%
Performance Benchmark	2.9%		4.4%
Ordinary Share	(21.1%)		(3.3%)
'A' Ordinary Share	(15.2%)		(6.1%)
FTSE All-Share Index	3.0%		(2.1%)
Total Return (Dividends Reinvested)
Ordinary Shares	(19.6%)		(2.8%)
'A' non-voting Ordinary shares	(13.6%)		(5.7%)
FTSE All-Share Index Total Return	6.3%		1.9%

 

 

KEY PERFORMANCE STATISTICS

PORTFOLIO PERFORMANCE STATISTICS

	Nine months to 31-12-2012		Year Ended 31-03-2012
	%		%
Portfolio Time Weighted Return #	(9.0)		2.7
ex Ocean Wilsons Holdings	(3.4)		0.6
Benchmark	2.9		4.4
FTSE All Share - Total Return	6.3		1.9

Weighting	Sector	Time Weighted Returns
13.0	Natural Resources	(8.0)		(13.5)
37.6	Strategic	(17.1)		5.5
5.6	Mid Cap	21.5		21.5
17.7	Smaller Cap / AIM	(21.7)		4.4
2.3	Utilities	10.7		1.9
7.9	Property	17.2		(1.3)
13.9	Large Cap	10.7		7.1
3.0	Investment Trusts	(1.3)		0.4
(1.0)	Loans	(1.3)		(2.3)
100.0	Total	(9.0)		2.7

# Time weighted returns are the sum of the daily performances over the reporting period and may vary from a point to point valuation return, if the portfolio is subject to extreme volatility during the reporting period

Top Ten Contributors - pence per share

	9 Months 31-12-2012		Year Ended 31-03-12
Ocean Wilson Holdings	(77.8)	Ocean Wilson Holdings	25.7
Hargreaves Services	(23.1)	NCC Group	18.7
BG Group	(14.7)	Hargreaves Services	12.6
Cape	(13.8)	Experian Group	9.0
Andor Technology Ltd	(8.9)	Andor Technology	8.1
CAP-XX	(1.6)	Galliford Try	7.9
Cairn Energy	(1.3)	GlaxoSmithKline	4.6
Kofax	(1.3)	United Business Media	2.2
Immupharma	(1.0)	Wolseley	2.0
Straight	(0.9)	Qinetiq Group	1.7
Other investments	67.5	Other investments	(62.1)
Pre. expenses and dividends	(100.7)	Pre. expenses and dividends	30.4

PORTFOLIO ANALYSIS                                                                  

		Mkt.Cap		%		Mkt.Value		% of
		£000,000		Held		£000		NAV
Strategic and Unquoted
Ocean Wilsons Holdings Limited		337.7		26.45		89,319		37.4
DV4 Limited		0.0		0.00		6,278		2.6
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		0.0		0.00		460		0.2
DV3 Commitment expiring 31 March 2014		0.0		0.00		327		0.1
						100,542		42.10
Remaining Portfolio
NCC Group Plc		315.4		3.61		11,400		4.8
Experian Group		9,893.2		0.09		8,816		3.7
BG Group PLC		34,408.4		0.02		8,517		3.6
Weir Group Plc (The)		3,982.6		0.21		8,246		3.5
Herald Investment Trust PLC		406.9		1.76		7,170		3.0
BHP Billiton Plc		44,959.6		0.02		7,134		3.0
Great Portland Estates PLC		1,680.8		0.40		6,753		2.8
Andor Technology Ltd		138.3		4.76		6,582		2.8
United Business Media		1,760.0		0.37		6,453		2.7
Hargreaves Services Plc		173.5		3.64		6,310		2.6
Top Ten Investments						77,380		32.4
Hansteen Holdings Plc		511.1		1.20		6,109		2.6
Centrica PLC		17,343.0		0.03		5,734		2.4
HSBC Holdings PLC		119,501.6		0.01		5,727		2.4
Galliford Try Plc		608.2		0.89		5,446		2.3
GlaxoSmithKline PLC		65,418.9		0.01		5,336		2.2
Kofax PLC		258.7		2.01		5,202		2.2
Eni S.p.A.		54,055.9		0.01		4,462		1.9
BP PLC		81,279.1		0.01		4,248		1.8
Wolseley		7,937.8		0.05		3,990		1.7
Cape PLC		254.2		1.45		3,675		1.5
Top Twenty Investments						127,309		53.3
Royal Dutch Shell PLC		56,896.0		0.01		3,123		1.3
Goals Soccer Centres Plc		62.8		4.11		2,583		1.1
Brooks Macdonald Group PLC		165.3		1.51		2,495		1.0
Lloyds Banking Group		33,704.8		0.01		2,236		0.9
Qinetiq Group Plc		1,212.0		0.15		1,835		0.8
Cairn Energy Plc		1,597.4		0.09		1,408		0.6
Petroceltic International Plc		307.2		0.42		1,280		0.5
Immupharma PLC		42.4		1.53		650		0.3
All Leisure		14.2		3.59		510		0.2
Altitude Group PLC		7.2		6.43		461		0.2
Top Thirty Investments						143,889		60.2
18 Other Investments						1,716		0.7
Net Liabilities						(7,272)		(3.1)
Total Net Asset Value						238,874		100.0
Banking Facility £30m-utilisation 31 December £3.0m

INVESTMENT REPORT

BACKGROUND

We entered 2012 against a backdrop of uncertainty and instability in world economies, and we largely leave 2012 as we entered it. There needs to be a resolution to the US fiscal cliff. A lasting solution to the Eurozone crisis still lies ahead although the statement that the European Central Bank is prepared to use Outright Monetary Transactions to stabilise the region has calmed Spanish and Italian government bond yields. The Middle East remains unpredictable and there are big question marks over China's sustainable growth rate, while Japan faces the most severe long-term fiscal challenge of the major regions as it would need to tighten fiscal policy by 9% of GDP to stabilise government debt to GDP, and economic momentum has slipped sharply.  In 2012 Central bank actions, particularly those of the Federal Reserve and the European Central Bank, reduced financial/global banking tail-risk across the globe by shielding politically powerful banks from reality by indebting themselves and therefore us even more, and then compounded our problems by propping-up sovereign debt markets with even more printed money. However policy makers did not find the solution to the twin problems of weak or negative growth and joblessness, with developed economies remaining sluggish, leading to deficit estimates being revised up. Growth is needed to deal with deficits, and the threat of deflation will persist until the major Western economies are on  a sustained growth path. In 2011 the Western developed economies grew by just 1.6% and according to the International Monetary Fund that figure will fall to 1.3% this year, with both the UK and the Eurozone contracting by 0.4%. Meanwhile the emerging markets surged ahead, growing 6.2% last year and are on course for a buoyant 5.3% expansion in 2012. The broader reality is that power continues to shift from West to East and the world becomes an increasingly competitive place for Western nations.

OVERALL PERFORMANCE

During the nine months under review, the Ordinary and "A" Ordinary share prices declined by 21.1% and 15.2% respectively against a rise in the FTSE All-Share Index of 3.0% as both classes of shares traded at wider discount to their net asset value. The time weighted return of the portfolio was -9.0%, compared with a rise of 2.9% in the Company's benchmark and a rise of 6.3% in the FTSE All-Share Index - Total Return.

The nine month period under review has been difficult. Brazil's economic future does not look nearly as bright as its recent past. Since 2010, when the country registered GDP growth of 7.5%, its economy has slowed dramatically. Last year the country's GDP growth reached only 2.7%, and while GDP growth forecasts for 2012 began the year at 3.5%, Brazil's central bank now expects growth to reach only 1.9%, while Credit Suisse projects only 1.5% growth for the year. Against this background the central bank has cut the selic interest rate to a record low 7.25%, from a peak of 12.5% in August 2011. The most obvious cause of Brazil's poor economic outlook is the collapse of the commodities boom, with the country's exports to China decreasing by more than half during the first six months of 2012. Growing Brazilian protectionism is also making Brazilian products increasingly less competitive, and these protectionist policies need to be reversed by implementing  long-delayed labour, tax and education reforms in order to reduce the cost of doing business in Brazil and address some of the country's supply-side weaknesses while increasing the country's international competitiveness. A decade of economic growth has seen the emergence of a new lower-middle class that increasingly expects better standards of education, security and infrastructure. The labour market remains tight, with unemployment nearing only 5%, and inflation expectations are only loosely anchored. While concerns in Brazil focus on the slowing demand for the country's exports, others worry that domestic labour costs are now outstripping productivity gains and feel that a more substantial rebalancing of the economy is in order. Investor appetite has waned which has taken its toll on the short term price performance of Ocean Wilsons Holdings Limited.

In addition we suffered a number of setbacks in some of our other top ten holdings, including Hargreaves Services, Cape, Kofax,  Andor and BG Group which are covered under the individual company commentaries. Finally, and 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" Ordinary non-voting shares in thin markets, causing a huge pricing disparity with the Hansa Ordinary voting shares which have the same economic interest and will remain in the index.

SECTOR WEIGHTING AND PERFORMANCE

	Sector Weighting at	Sector Weighting  at	9 Months Performance
Sector	31 December 2012	31 March 2012	to 31 December 2012
	%	%	%
Strategic	37.4	41.0	(17.1)
Smaller Cap/AIM	17.7	20.4	(21.7)
Natural Resources	12.6	12.6	(8.0)
Property	8.2	6.2	17.2
Large Cap	14.4	11.9	10.7
Utilities	2.4	2.0	10.7
Mid Cap	5.7	4.4	21.5
Investment Trusts	3.0	2.7	(1.3)
Loans	(1.4)	(1.2)	(1.3)

NEWS UPDATES FROM TOP HOLDINGS

(the twenty four holdings listed below represent 95.7% of Net Asset Value, and individually represent more than 1% of NAV. Details are provided in respect to each company's Market Capitalisation, the proportion of NAV that the holding represents, and the company's share price performance over the nine months to 31 December 2012).

Ocean Wilsons Holdings - (Market Cap. £337.7m   : 37.4% of NAV: Performance -17.1%) is a Bermuda based investment company and through its subsidiary operates as a maritime services company in Brazil. The company is listed on both the Bermuda Stock Exchange and the London Stock Exchange and has two principal subsidiaries. Wilson Sons Limited (58.25% owned), is an autonomous Bermuda company listed on the Sao Paulo Stock Exchange and Luxembourg Stock Exchange. Wilson Sons is one of the largest providers of maritime services in Brazil, 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.

Over the next six years Wilson Sons Limited expects to invest over US$1.8bn, not including acquisitions, US$0.84bn in Offshore Support Services, the balance in Towage and Shipyards, as both will also benefit from offshore E&P activities. Brasco (wholly owned) has signed a contract for the acquisition of Briclog for R$125m. Briclog is located in the city of Rio de Janeiro and has been providing port services to the oil and gas industry since 2004. On the operational front, the legal action that temporarily halted the construction of the extension of the Guaraja shipyard has been satisfactorily resolved and the company has recently been granted an environmental licence to proceed with the construction of a much larger shipyard at Rio Grande, which will focus on building offshore support vessels to service oil and gas platforms. The expansion of the Company's naval construction capacity will facilitate the strategy of building vessels to meet the demand driven by the growth in the offshore oil and gas industry in Brazil. On the economic front, any strengthening of the US$ against the R$ will ease some of the cost pressures on Wilson Sons which has revenues in US$ and costs in R$, while any strengthening of the US$ against Sterling increases the translational value of the underlying assets.

Ocean Wilsons Holdings Ltd first half income was negatively affected by a combination of the depreciation of the Real against the US dollar, constrained cabotage and transhipment volumes, the end of the Petrobas public port operation in Rio de Janeiro, increased depreciation (which is dollar denominated) and increased employee expenses from headcount for pre-operational hiring and share based payment expenses. The outcome in terms of profit for the full year may fall significantly short of earlier market forecasts, but the company maintains a positive view on future market prospects as it continues to focus on delivering its long term US$1.8bn investment plan.

Wilson Sons Limited announced a contract for the acquisition of a new offshore support vessel, so the Company's joint venture fleets will now comprise 5 offshore vessels under construction and 17 in operation with 14 owned and 3 AHTS ship management contracts. Wilson Sons estimates that by the end of 2015 its offshore supply vessel fleet will have grown to around 24 vessels and then 34 vessels by 2017, placing it in the top four Brazilian OSV operators. Meanwhile the company is aiming to complete the civil works of the Guaruja II shipyard during the last quarter of 2012, more than doubling the shipbuilding capacity of Wilson Sons and allowing for increased third party vessel construction and maintenance services.

Wilson Sons is now waiting for a final licence to start building a new US$155m shipyard in Rio Grande next to its Tecon Rio Grande container terminal. This would allow the company to concentrate most of its shipbuilding activity down south in the Rio Grande yard while focussing more on ship repair and servicing the offshore industry in Guaruja, because of its proximity to the Santos and Campos basins.

Wilson Sons reported Q3 revenues 10.1% lower against the comparative period of 2011 mainly as a result of the average BRL currency devaluation of 24% in the quarter when compared to the previous year. Approximately 65% of Wilson Sons' revenues are BRL denominated and currently 90% of the company's operating costs (excluding depreciation) are denominated in BRL. 91.9% of total debt is long-term and 73.9% is provided through BNDES and Banco do Brasil, agents for the Fundo da Marinha Mercante (FMM), while 93.5% of debt is denominated in USD. Wilson Sons announced that it has received U$135m funding (FMM) to build 12 new tugboats during the next three years, a mixture of replacements and additional capacity to meet the demand driven by growth in the oil and gas industry and international trade flow, and all of them will be built in the Guaruja shipyards. The expansion of the container terminals in Salvador and of the Guaruja II shipyard are in final stages and planned to be completed by the end of this year.

NCC Group - (Market Cap. £315.4m : 4.8% of NAV: Performance +2.3%) 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. 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 had no impact on trading but resulted in a one-off, mostly non-cash charge, of £6.9m in the financial year to 31st May 2012". More recently it has acquired two US-based companies, Matasano Security and Intrepidus, establishing NCC Group as a major force on the East of the United States, with the largest testing team in the key New York area. The group has enjoyed significant success in the US since it acquired California-based iSec Partners in October 2010. NCC Group's latest IMS stated "with our Escrow business showing solid growth and the continued strong demand for all aspects of information security, we remain well positioned to maintain our long term, sustained growth". The company has just conducted a five-for-one share bonus issue in order to create two new share incentive schemes for US employees as well as to improve share liquidity. There are more than 120 staff in the US and the business there is growing strongly. The rise and severity of cyber- attacks is concerning and could lead to some form of cyber-security legislation requiring companies to reveal material security breaches which in turn would drive higher spending in cyber- security consulting and solutions. Close to 20m items of personal information have been illegally traded online in 1H12, more than in the whole of 2011 and four times the number in 2010 according to Experian.

Experian Group - (Market Cap. £9,893.2m : 3.7% of NAV: Performance +2.0%) 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, notably the group's high growth Brazilian subsidiary Serasa, and verticals, with a culture of innovation to develop new products and move in to new customer segments. Acquisitive growth funded by free cash flow continues to play an important role, with the deals tending to be bolt-on which accelerate organic growth or allow the group to expand the reach of its core competencies of data or analytics. The full year core financial targets remain, namely mid to high single- digit organic revenue growth, improving margins and cash flow conversion of over 100%. Experian recently bought in a 29.9% stake in Serasa from its minority shareholders for a consideration of U$1.5bn, paving the way for the return of surplus capital to shareholders starting in FY14. Serasa is one of the largest credit bureaux in the world and is the market leader in Brazil, with approximately 60% market share. Experian's latest results were in line with expectations and the Chief Executive wrote "we are now in the fourth year of our global growth programme and it is gaining momentum. We continue to see significant opportunities and in order to maximise our growth potential we are today launching a new efficiency programme to drive operational improvements and to sustain premium growth into the future", all of which should be seen as an extension of the self-help agenda.

BG Group - (Market Cap. £34,408.4m : 3.6% of NAV: Performance -29.2%) continues to offer some of the best growth prospects amongst the big-cap oils even though BG's E&P volumes have been broadly flat for the last three years. BG Group's Q3 results were largely in line with expectations, but the production downgrades for both 2012 and 2013 came as a surprise, although the company insists that production guidance for 2014 and beyond is unchanged. The company attributed the slide in the production outlook to a series of deferrals or delays on projects in the North Sea, USA, Egypt and Brazil. BG still has the resource potential to deliver a significant uplift in earnings in 2015 and beyond. Most recently BG announced the appointment of Chris Finlayson as CEO, effective 1 January. He has 35 years' industry experience, and prior to BG his career was spent at Shell. LNG markets could see a doubling in demand by 2025, and with 40% of its value and nearly 30% of its production LNG related,  BG is the outstanding play on the positive trends with trading upside should the current wave of projects face delay.  The company took another step towards achieving its US$5bn asset disposal programme, to focus on exploration activities, by announcing an agreed sale of its Comgas business in Brazil to Cosan for US$1.7bn.

Weir Group - (Market Cap. £3,982.6m : 3.5% of NAV: Performance +8.6%) 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 strong operating margins. Interestingly General Electric has announced the creation of GE mining, based in Australia, demonstrating GE's attraction to the mining industry despite some immediate concerns about the original equipment outlook. With many of the mining majors delaying new projects the Weir debate is focussed on the deliverability of the June 2012 target to double the EBIT number by 2016. About 50% of group revenues come from spares and service, one of the highest aftermarket exposures in the sector. The mainstay products are slurry pumps for mining and pressure pumps for hydraulic fracturing of shale gas and shale oil, both with high wear rates and in the case of mining the beneficiary of higher mine production levels as ore grades decline. WEIR recently released an in-line IMS and is set to achieve double-digit profits growth this year despite the challenges in the Oil & Gas division and softer conditions in Minerals, benefitting from good opex budgets for energy related equipment as well as enjoying the aftermarket revenues of its growing installed base. Weir has agreed to acquire Mathena Inc, a leading provider of pressure control rental equipment and services for onshore oil and gas drilling applications, supported through 12 service facilities located in the key US unconventional oil and gas basins, increasing the aftermarket focus of Weir Oil & Gas. Keith Cochrane, Weir's CEO, sees the UK's experience in the oil and gas sector making it "the obvious choice as a hub for Europe's nascent shale gas industry".

Herald Investment Trust - (Market Cap. £406.9m : 3.0% of NAV: Performance -1.3%) was launched in 1994 to invest in smaller quoted Technology, Media & Telecom stocks. Two thirds of assets are invested in the UK market and the portfolio is very diversified with some 240 holdings, so individual stock risk is relatively low, while there is very little net gearing at the present time. Little interest is being shown by institutional investors in this area of the market  as reflected in very little IPO activity, leading to low valuations, thereby leaving the door open to takeover activity, particularly by US companies.

BHP Billiton - (Market Cap. £125,215.4m: 3.0% of NAV: Performance +13.7%) is the largest mining company in the world with tier 1, high volume, low production cost, long-life and expandable upstream assets, diversified by commodity, geography and market. The company expects industrialisation and urbanisation of China and other emerging economies to continue to support strong demand for many commodities in the long term, but takes the view that the commodity Supercycle is decelerating in the short term, rather than coming to an end. BHP Billiton is more of a resources company than a miner, with the Petroleum division contributing 23% of EBIT, which it is prepared to see rising to 40% of EBIT if that is how opportunities and projects develop and, in due course exposure to phosphates, in one sense a proxy for food production. Oil is more defensive than metals, and phosphates are likely to be so too. Now that Chinese investment growth is slowing, BHP is scaling back its previously announced capex plans, or as CEO Marius Kloppers recently stated "adjusting our rate of forward capital deployment in order to live within our means". For FT13, 20 major projects are currently in execution with a budget of US$22.8bn, and the company has stated that no major project approvals are expected in the next 12 months. BHP has provided an update for Olympic Dam ( a mine with a life of at least 100 years ), delaying the project to investigate an alternative, less capital-intensive design. "We are absolutely determined to bend the cost trend". This new prudence is going down well with investors who see the move as protecting cash for dividends or share buy backs and for new investment opportunities in the current downturn. Meanwhile improving Chinese lead indicators and a supportive iron ore price have instilled a sense that China's demand impact in H1 13 might be more material than many thought as recently as three months ago.

Great Portland Estates - (Market Cap. £1,680.8m: 2.8% of NAV: Performance +37.6) 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, and we expect Great Portland's West End portfolio to continue to outperform the wider market as robust tenant demand (led by the TMT sector) for its product coupled with restricted supply drives further rental growth. The company's pre-letting successes have de-risked its committed development pipeline as well as allowing it to switch on further schemes. There are 16 uncommitted schemes totalling 2.6msqft, including two "jewels", namely the two major land holdings and Crossrail beneficiaries at Hanover Square and Rathbone Place, both London W1. Great Portland Estates announced good interims and a £140m placing to take advantage of market opportunities. Since raising £166m in the May 2009 rights issue the company has made £644m of acquisitions delivering an ungeared IRR of about 18%pa. "Our portfolio, 100% in central London, is rich with asset management and development opportunity and is well positioned for further growth". Meanwhile the amount of safe haven capital flowing into the central London property market shows no signs of diminishing.

Andor Technology- (Market Cap. £138.3m: 2.8% of NAV: Performance -24.5%) is a global leader in the development and manufacture of high performance scientific digital cameras for academic, industrial and  government applications. The company is continuing to see strong growth in Asia Pacific, offset by weaker sales in Europe and the US. Trading last year was affected by an earlier absence of orders from two of the company's US customers, one of which has now returned to more normal ordering patterns, but still leaving a gap in 2012 order flow. Andor's revenues and profits for the full year were still modestly ahead of the prior year, while earnings rose 14% with the tax charge reducing to 15% due to R&D tax credits and one off items. Net cash ended the year at £17.1m. 2013 is expected to see a slower sales growth rate than is normal because of some pressure on government research. Innovation and new product delivery is key to Andor's continued growth and the new mid-range Zyla camera has been well received, with good traction with OEM's, and should see growth ramping up in the current year. Andor is now the market leader in a number of key segments. The company is well placed to broaden its activities further by acquisition, targeting adjacent markets such as machine vision and security. The company has been building up sizeable cash reserves over the last few years and the Board now considers it appropriate to pay a maiden dividend of 2p and intends to adopt a progressive dividend policy which reflects the long-term earnings and cash flow potential of the company.

United Business Media - (Market Cap. £1,760.0m: 2.7% of NAV: Performance +19.8%) focuses on two principal activities : worldwide information distribution, targeting and monitoring,  and the development and monetisation of B to B communities and markets, with 6000 staff in more than 30 countries. UBM's business mix has been moving towards more attractive divisions and geographies, namely Events and US/emerging markets including China, through a combination of organic growth and acquisitions. Events, the valuable part of UBM and a secular growth story, now make up nearly two thirds of EBITA currently, and most recently grew revenues by 15% underlying, with margins of up to 32.5%, and a weighting towards large scale, market-leading shows in the US and emerging markets. At the time of the H1 results this year UBM announced a strategic review/non- core disposal of the Data Services division within UBM, which is expected to be completed by the end of Q1 2013. This should be the catalyst for a re-rating of the shares, because the Events business would then represent more than three quarters of EBITA post-sale, while also allowing the re-focussed company to choose from returning cash, reducing debt and/or making more earnings accretive Events acquisitions. UBM's Events business comes out very well against its peers both on an organic revenue growth basis and also on margins, and events/exhibitions are often the only occasion when industry players can get together.

Hargreaves Services - (Market Cap. £173.5m  : 2.6% of NAV: Performance -46.3%) is the UK's leading

supplier of solid fuels and bulk material logistics. The company announced record profits for the year ended 31 May 2012, which were overshadowed by on-going geological gas ingress problems in the Maltby deep coal mine. Hargreaves provided an update on Maltby Colliery in November, stating the T125 panel is not viable on health & safety, geological, and financial grounds, so the mine will be mothballed. Maltby is not a core asset in terms of growth strategy, and the group is well placed to continue taking its services-led offering into new geographies, leveraging its experience in mining services, steel and power generation. In December Hargreaves announced that a serious overstatement of stock values and credit notes had been identified within the Group's Belgian subsidiary with a potential balance sheet write off of up to £15m. A further announcement confirmed that the proposed mothballing of Maltby colliery will proceed and is planned to be completed by the end of March 2013. The post- tax forecast loss from discontinued operations is £57.3m, including a non cash balance sheet write down of £45m relating to goodwill, mineral rights and development assets. "The rest of the Group is trading strongly and is again well positioned for a strong second half performance. Hargreaves is a diversified, strong Group focussed on a broad range of value added activities associated with the supply of solid fuel and the Board remains confident about the prospects for the Group".

DV4 Limited - (£1bn committed, Unquoted, 2.6% NAV: Performance +4.7% ) has now drawn down 64.7% of monies committed and Hansa Trust has a £10m commitment to this fund. In addition there is significantly more capital committed to existing assets in DV4, which will increase that committed percentage materially. The focus of acquisitions for the DV4 portfolio in the recent past and going forwards has been towards London and the South East, in the two principal markets where momentum exists, namely prime offices and residential. DV4 has now acquired 22 investments and has released profits from the sale of 40 Holborn Viaduct. The Olympic Village (50:50 joint venture with Qatari Diar) is likely to require substantial equity at completion and Minerva (50:50 joint venture with AREA Property Partners) will require further equity as well. DV4's subsidiary Alpha Plus Holdings successfully issued a 7-year 5.75% Sterling Secured retail bond with an aggregate nominal amount of £48.5m.  The proceeds will be used by Alpha Plus to repay existing shareholder loans owed by it to DV4 and will in turn be used by DV4 to repay an existing £40m term loan and a working capital facility from RBS, due for repayment in April 2013. The assembled portfolio very much reflects the original thinking behind the fund, namely it is opportunistic in nature, has considerable potential for value enhancement through asset management initiatives and has a theme of underlying quality.

Hansteen Holdings - (Market Cap. £511.1m : 2.6% of NAV: Performance +16.9%) with a heavy portfolio weighting in Germany and a strategy of buying high yielding industrial properties at less than replacement cost with opportunities to add value and manage them intensively via locally based management teams for income and capital growth. The key is purchase price, financing structure and management approach. "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".

Centrica - (Market Cap. £17,343.0m : 2.4% of NAV: Performance +10.7%) is the UK's largest energy supplier with 41% of the gas market, 25% of the electricity market and 7% of the UK power generation market. 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's strategy of increased vertical integration and improving operational efficiency has enabled it to continue to grow despite the challenging economic environment and volatile commodity prices. Strong cash generation and a good balance sheet underpin significant spend on organic capex and acquisitions as well as future dividend growth. British Gas Services is targeting double-digit profit growth through operational efficiencies. Centrica's Q3 trading update confirmed that the company remains on track to deliver full year earnings growth in line with market expectations with support from the cost savings programme.

HSBC Holdings - (Market Cap. £119,501.6m : 2.4% of NAV: Performance +21.8%) has significant exposure to emerging markets, particularly Asia (some 75% of the bank's total profits), and is entirely retail funded, with a loan to deposit ratio of 75%, making it a net lender into wholesale markets. HSBC has reiterated that it is confident it will achieve cost savings at the top end of its US$2.5 - 3.5bn target range by the end of 2013, demonstrating that costs are under control, and at the same time Stuart Gulliver thinks the bank can hit its target ROE range of 12-15%. More than 14000 staff have been let go since the end of last year, and plans have been announced to cut loose 19 business areas that are sub-scale/non-core. HSBC's Q3 results were helped by a bigger than expected drop in the bad debt charge, particularly in the US unit and strong revenue growth in the Global Banking and Markets business. The bank is well into its three year restructuring plan to simplify the business and it announced eight transactions to dispose of or close businesses in Q3 2012, making a total of 41 since the start of 2011. Most recently HSBC reached a US$1.9bn settlement with US authorities in relation to the investigation into inadequate compliance with anti-money laundering and sanctions laws.

Galliford Try - (Market Cap. £608.2m : 2.3% of NAV: Performance +25.6%) set out a strategy in September 2009 to transform its house building business by carrying out a rights issue to raise £125.6m, and setting the ambitious objective of doubling the size of the house building division by the end of the third year and targeting a significant increase in profits and return on capital. The plan was to create a business that could deliver around 3000 units a year with a deliberate focus on the south of England where the market is more robust. These objectives have been exceeded, and in addition, the group has maintained a high quality and profitable construction order book. The current strategy is to enhance the quality of earnings and improve cash flow, enabling the group to pursue a progressive and sustainable dividend distribution policy. A strong balance sheet and a disciplined growth strategy with a clear focus on improving margins by improving building practices and benefitting from a positive undertow in the work out of legacy land. Galliford Try's Q1 IMS showed continued positive trading in both housing and construction, with a strong sales rate through the autumn selling season.  The group is well positioned to deliver further profitable growth in 2013 and beyond.

GlaxoSmithKline - (Market Cap. £65,418.9m : 2.2% of NAV: Performance -0.4%) has benefitted from it "defensive" attractions of cash generation and a decent yield. A compelling long-term buy amidst a backdrop of zero interest rates and negative real yields. Meanwhile the proportion of world GDP spent on healthcare is expected to rise as technology advances in pharmaceuticals and medical equipment and devices continue to improve health and life expectancy. This might suggest that GlaxoSmithkline is like a supercharged inflation-linked bond offering the win/win of superior growth and a higher starting yield. While it is the first large-cap pharma to exit the patent cliff and has minimal hard patent risk until 2015/16, it does face risk with its No 1 selling drug, Advair, which accounts for about 30% of EBIT. The company is struggling to return to sales and margin growth mode promised by CEO Andrew Witty, increasing the pressure on the company to execute on its pipeline, where regulatory and execution hurdles are high. The company has cleaned up the majority of its liabilities and management has been disciplined in its M&A efforts and has had the confidence to invest in its pipeline at a time when the market was expecting a focus on margins, and expectations are very low when it comes to possible blockbusters. Darapladib and MAGE-A3 are of greatest interest, each one capable of being transformational to earnings in its own right. Darapladip is attempting to become a significant disruptive technology to the multi-billion dollar statin market. GSK has been testing "cancer therapeutic vaccine" MAGE-A3 in trials for metastatic melanoma and non-small cell lung cancer. Given GSK's vaccine expertise the company has as good a chance as any of making the breakthrough. So, the Group remains highly cash generative and there appears to be a good pipeline of new products, with the potential to launch 8 major new drugs and vaccines in the next two years.

Kofax - (Market Cap. £258.7m : 2.2% of NAV: Performance -5.6%) strategy has evolved into a single corporate vision statement, namely, to be the 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 directly through its own sales organisations and a global network of more than 800 authorised partners throughout the Americas, EMEA and Asia Pacific. The US$48.1m acquisition of Singularity has made for a more compelling joined-up software proposition, enabling Kofax to upsell to a more mature capture customer base. Kofax realized "lower than expected software license revenues during the third quarter in its core capture software business as the result of an unusual number of delayed orders at quarter end", but at the time the management did not lower their guidance for the full year. Kofax produced an impressive set of final figures with Q4 software license sales +20.3%, as moves to backfill the product portfolio saw success in re-igniting sales, while also strengthening management in the sales organisation. Kofax has reaffirmed its guidance for all of fiscal year 2013, which is for mid to high single digit total revenue growth on a constant currency basis, while mobile capture is considered a "game changer" for customer focused initiatives.

ENI - (Market Cap. €65,418.9m: 1.9% of NAV: Performance +9.6%) is selling 30% of its 52.5% holding in Italian gas distributor Snam to Italian State holding company CDP as the first srep 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 48%. As a result of its improved gearing ENI will authorise the restart of a share buyback programme, with the Italian government maintaining its holding in ENI at 30%. ENI has recently reiterated its production volume growth targets of a little more than 3%pa from 2011-15 and about 3%pa from 2015-22, although the company did emphasise  current difficulties on project delivery. ENI's Q3 results were ahead of consensus due to reduced financing charges and improved income from associates. Production volumes rose by 16% y/y, largely due to the recovery in Libyan output.

BP's - (Market Cap.£81,279.1m : 1.8% of NAV: Performance -4.7%) share price was about 630p before the Deepwater Horizon tragedy in the Gulf of Mexico some two years ago, a disaster that at one point threatened BP's very survival. BP initially said it would sell U$38bn of assets by the end of 2013, and it has almost  reached that target already. BP agreed to sell its TNK-BP stake to Rosneft for U$26.3bn, eventually leaving it with a 19.75% stake in Rosneft, which in turn becomes the world's largest listed energy company. Including the sale of its half of TNK-BP to Rosneft, the total sales proceeds amount to U$65bn. BP's Q3 results were well received while the company says it is on track to deliver its 10 point plan for 2014, which includes plans to grow free cash flow, while focussing and increasing investment in its upstream activities, while reducing downstream operations. Since 2010 BP has accessed about 400,000 sq km of new acreage, more than double the area secured in the previous  nine years, as well as cutting the number of upstream installations it operates by fifty per cent and the number of operated wells by about a third, to reduce complexity and risk. BP has not yet been able to draw a line under the Gulf disaster. In December a US court approved a U$7.8bn settlement between the group and private sector plaintiffs affected by the spill, and last November BP agreed to a U$4.5bn settlement to resolve criminal charges relating to the disaster. However it still faces claims for civil penalties and damages from federal, state and local authorities, and a trial is due to start in February. There are hopes that these civil claims will be settled out of court, clarifying the size of the damages, thereby drawing a line under Deepwater Horizon.

Wolseley - (Market Cap. £7,937.8m : 1.7% of NAV: Performance +20.7%) is 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. Although these markets remain very competitive, Wolseley continues with its  policy of self- help. The group is being very tightly run, with an underlying trading margin of 5.2% and scope for further improvement, while the group is highly cash generative. The latest full year figures saw net debt fall from £568m to £45m, partly the result of a number of disposals, although the group also made nine bolt on acquisitions during the year. The surprise was a £350m special dividend, a measure of the speed with which the Group has recovered from the dark days of 2008-2009 when shareholders supported a £1bn rescue rights issue in 2009, as debt was running at £3bn. That rights issue cash and another £2bn in operating cashflows has wiped out the debt.  The USA accounts for 48% of on- going group revenue and with a margin of 6.3% it accounts for an even higher share of group profit. Ferguson, the US subsidiary, has outperformed its market strongly as its distribution centre model is unique in the industry and has given it economies of scale (being twice the size of its next biggest competitor) and the ability to offer a range of 50000 stock-keeping units compared to around 6000 at single branch competitors. Ferguson may be about to benefit from the recent strengthening in new US housing starts. There is no sector of America's economy that is more cyclical than housing and some commentators think that the latest upturn could turn in to a boom by 2015, driven by a combination of improving house prices, rising rates of household formation and population growth, a lower inventory of homes for sale, and last but by no means least improving access to mortgage credit.

Cape - (Market Cap. £254.2m: 1.5% of NAV: Performance -46.4%) is an international provider of essential, non-mechanical support services to the energy and mineral resources sectors. Cape is fundamentally well placed to benefit from the rise in global energy demand over the next few years, but poor execution threw a spanner in the works. In March Cape announced that work releases on an Algerian contract had been slower than expected, with revenues in 2011 less than one-third of planned levels, and CEO Martin May left the company, being replaced on an acting basis by Brendan Connolly. A further project review was held in mid-April during which no material concerns were highlighted by the project team, and a trading statement on 1st May confirmed "that overall trading has been in line with the Board's expectations. The bombshell came on 25th May when Cape announced its intention to recognise a one-off charge of £14m in respect of current and estimated future losses on the contract, followed by the announcement on 30th May of the appointment of Joe Oatley, former CEO of Hamworthy, as CEO, who had run Strachan & Henshaw, a contracting business within Weir. In August Cape announced its third profit warning, saying Full Year results for 2012 and 2013 will be materially lower than expected, this time caused by a slowdown of onshore work in Australia. At the end of August management showed their confidence in the outlook for the business by maintaining the interim dividend. In November Cape flagged that full year operating profit would be significantly below previous expectations as trading conditions onshore Australia had deteriorated further, with Cape unable to replenish its project pipeline as awards slowed, while the high-margin Pluto LNG contract was drawing to a close, and the company would take a charge against the carrying value of the Australian assets in the full year results. The trading performance of the Group's businesses in the UK, CIS/Mediterranean & North Africa and Gulf/Middle East regions and Asia was in line with expectations and "the Group's financial position remains robust". With new management in place (Joe Oatley, CEO, ex-Hamworthy ; Michael Speakman, CFO, ex-Expro) we could see a clean slate for Cape in 2013. The company has excellent growth opportunities in global markets, particularly in the Far East, where both Offshore and LNG markets are growing rapidly. Cape faces limited competition and has a strong safety track record which continues to distinguish it amongst peers. Meanwhile the UK business benefits from a rather defensive maintenance business (91% of H1 2012 revenue). The consistent performance of the UK business, which accounted for 41% of group revenue in H1 2012 and 60% of Cape's order book has been overshadowed by difficulties in other geographies.

Royal Dutch Shell's - (Market Cap. £56,896.0m : 1.3% of NAV: Performance +2.5%) figures have continued to be volatile over recent quarters, with a significant miss in the second quarter due to temporary factors. However Q3 earnings were ahead of market expectations. Its key targets are to improve cash flow by 50% to U$200bn over the 2012-15 period, and by 2017-18 oil & gas production is expected to be 4 million barrels oil equivalent. Gearing is low and Shell's cash flow projections give it the opportunity to fund its heavy capital investment programme and at the same time grow the dividend.

Goals Soccer Centres - (Market Cap. £62.8m : 1.1% of NAV: Performance +16.6%) is the leading player in the fast-growing 5-a-side soccer market, operating 43 centres in the UK, one in Los Angeles, and has established a pipeline in excess of 40 sites. The latest interim figures were overshadowed by the recent failed 144p per share bid from Ontario Teachers' Pension Scheme, blocked by just over 25% of shareholders on the grounds that it undervalued the business. The barriers to entry are high in this market, and the cost of the centres is mostly in the build, and once the capital is sunk the on-going running costs are relatively marginal. Debt reduction and improving returns at sites opened since 2008 is the main story going forwards. Meanwhile a new innovative modular build concept has been successfully developed at Chester on time and on budget, reducing capital expenditure to £1.5m per centre from £2.3m, reducing the build time to 14 weeks from 22 weeks, significantly improving return on capital.

OUTLOOK

The Republicans would commit political suicide if they force the US into recession through allowing the fiscal cliff to run its natural course. Markets expect a last minute compromise to defer much of the fiscal cliff and avert recession, as politicians always take the least difficult decision. As the largest economy in the world, as goes the US economy so will go the global economy and US cyclical growth could surprise on the upside in 2013. The US private sector is in good shape with consumer leverage back to trend, and the US banking system is working with loan growth now clearly positive. The US housing market has improved significantly after a deep slump following the financial crisis, with starts, permits, sales and prices starting to rapidly make up lost ground, with housing inventories also showing signs of improvement, all helping to start dragging households out of negative equity. Residential investment could see annual growth of 15-20% during the next five years, which alone may contribute 1-2 percentage points to annual GDP and up to 4m jobs over that period. The corporate sector fundamentals look strong with low leverage and high levels of profitability and cash flow, while old capital stocks require an increase in corporate investment which would boost GDP. The US will overtake Saudi Arabia and Russia to become the world's largest global oil producer by the second half of this decade, and the US could almost be self-sufficient in energy by 2035 according to the International Energy Agency. The resurgence in US shale oil and gas production has led to cheaper energy, giving US industry a competitive edge and spurring economic activity at home and encouraging a reduction in off-shoring. Interestingly the US Federal Reserve's Open Markets Committee took further steps at its 11-12 December meeting to provide support to promote jobs and growth, with interest rates being kept at close to zero until unemployment falls below 6.5%. This is a historic change to monetary policy because it's the first time a large central bank has ever tied its interest rate policy directly to the state of the economy. The Fed also expanded its third round of quantitative easing to US85bn a month, adding U$45bn of Treasury purchases to its commitment to buy U$40bn of mortgage-backed securities each month, and said it will keep buying until there is a substantial improvement in the labour market. Shortly afterwards George Osborne told MP's that he is open to the possibility of the Bank of England scrapping its two per cent inflation target in favour of a growth-based remit, while Mr Carney becomes the new governor of the Bank of England in the middle of next year.

There has been a strong and clear commitment from members of the Eurozone to keep Greece in the common-currency bloc, a reminder that it is easy to underestimate the sheer political will that exists on the Continent for keeping the euro show on the road. The Eurozone is showing glimmers of economic hope, and it is noticeable that the euro has got stronger on the foreign exchanges in recent months as the economic indicators are now starting to point in the right direction.  The key confidence-boosting factor in deciding whether foreign investors will buy government debt is the state of the balance of payments, an indicator of a country's competitiveness and whether it can pay its way in the world by exporting more than it imports. A return to a current account surplus is the point at which a country is generating the income to pay down its foreign debts. The balance of payments picture has been transformed over the last year in Greece, Spain and Ireland, and is moving in the right direction in Italy and Portugal, as the competitiveness of these countries has been restored by the austerity measures and the ensuing drop in living standards. Unit labour costs in Greece, Spain and Portugal have fallen seven per cent, while in Ireland they are down  eighteen per cent from their peak. As a result the peripheral Eurozone countries as a whole are now showing a trade surplus of nine per cent of their GDP. Meanwhile it has been agreed that the European Central Bank is to monitor the largest 200 Eurozone banks, with non-Eurozone member states allowed to join if they wish. Although this is just a single supervisory mechanism it represents a major step towards  a new banking union for the Eurozone, with a communal deposit protection scheme and a common resolution regime for failed banks. Once agreed, the bailout funds will be able to centrally recapitalise troubled banks rather than going through governments as they do now, another leap in the headlong rush to full fiscal and political union on the Continent. A run of Chinese data in recent months has showed growth rebounding in the world's second largest economy. The incoming new leadership is making the right noises about change, including fighting rampant official corruption and land reform, with an emphasis on the quality of growth rather than just the quantity. Xi Jinping has outlined the party's "requirements and tasks", which include the acceleration of urbanisation, boosting public infrastructure investment and increasing domestic consumption. Japan's new prime minister will want to reinvigorate the struggling economy after two decades of deflation and five years of a strong yen that has hurt Japanese exports. Mr Abe says the LDP will push policies to reflate the economy such as pressing the central  bank to ease monetary policy more aggressively, more infrastructure spending and a "dramatic cut in corporate taxes".

The pace of economic recovery could gather momentum as 2013 progresses. Animal spirits are currently subdued, with corporate boardrooms keen to return capital to shareholders by way of higher dividend pay outs and share buybacks, rather than focusing on capital investment programmes, M&A, or taking on more employees. We could see more confidence return to corporate boardrooms in 2013, more capital investment, M&A and hiring, and a shift out of first gear in to second gear as the year progresses. Ultimately it is the growth in corporate earnings, not central bank policy, which dictates share price performance over the medium term.

 

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