Half Yearly Report

RNS Number : 3113Z

Merchants Trust PLC

18 September 2009

 



    18 September 2009

THE MERCHANTS TRUST PLC

Half-yearly financial report

For the six months ended 31 July 2009

Highlights

• Net dividends declared in the first six months of 2009/10 are 11.2p per share, an increase of 1.0%.

• Ordinary shares yield 6.6% at 337p (excluding the special dividend paid in May 2009), compared with 3.5% on the FTSE 100 Index at the close of business on 17 September 2009.

• The Net Asset Value per share rose by 6.9% compared with a rise of 6.6% in the FTSE 350 Higher Yield Index and 11.0% in the FTSE 100 Index. High yielding and defensive shares lagged the market overall.

Interim management report

Interim dividends

The Board has declared a second quarterly dividend of 5.6p per share, payable on 12 November 2009 to shareholders on the register at close of business on 9 October 2009. The total distribution declared for the first half of 2009/10 is 11.2p net, an increase of 1.0% when compared with the same period last year. The Board is mindful of the importance shareholders attach to dividends and believes that the revenue reserve should be used to support distributions in periods when a shortfall in revenue occurs. As at 31 July 2009, the Trust's revenue reserve, after deducting the first and second interim dividends, represented 18.0p per share (2008:17.6p).

Net Revenue

In the first six months of the current year, net revenue fell by 24.5% to 11.68p per share. Dividend cuts, especially in the financial sector, and portfolio changes were significant factors behind the reduction in revenue over the period. A refund of past VAT from HMRC and underwriting income were positive contributors to revenue over the period.

Net asset value

The net asset value per ordinary share was 327.3p at 31 July 2009. This represents an increase of 6.9% when compared with the equivalent figure at 31 January 2009 - the end of the last financial year. Over the same period the FTSE 100 Index rose by 11.0%, whilst the FTSE 350 Higher Yield Index rose by 6.6% (Capital Return).  High yielding and defensive shares lagged the market overall.

Material events and transactions

In the six month period ended 31 July 2009 the following material events and transactions have taken place.

At the Annual General Meeting of the Company held on 12 May 2009, all the resolutions put to shareholders were passed. At the conclusion of the AGM, Joe Scott Plummer retired from the Board.

The third quarterly dividend of 5.6p per share was paid on 20 February 2009 to shareholders on the register on 23 January 2009.

On 29 April 2009 400,000 ordinary shares were issued from a general block listing of shares, bringing the number of ordinary shares of 25p in issue to 103,213,464.

A final dividend of 5.6p per share was paid on 15 May 2009 to shareholders on the register on 17 April 2009.   In addition shareholders received a special dividend of 0.5p per ordinary share in respect of the recovery of VAT for the period 1990 to 1996.  The total payment for the year ended 31 January 2009 was 22.8p.

There were no buy backs of shares and no related party transactions in the period.

Since the period end, Simon Fraser was appointed as a non-executive director on 1 August 2009. Simon is a non-executive director of Barclays PLC, Barclays Bank PLC, Fidelity European Values PLC and Fidelity Japanese Values PLC. Simon spent his career at Fidelity International Limited, where he held a number of positions, including Chief Investment Officer (CIO) from 1999-2005, President of Fidelity International's European and UK Institutional business and latterly President of the Investment Solutions Group. He stepped down from executive responsibilities at the end of 2008.

The first quarterly dividend for the year ending 31 January 2010 of 5.6p per share was paid on 19 August 2009 to shareholders on the register on 17 July 2009.

Principal Risks and Uncertainties 

The principal risks and uncertainties facing the Company over the next six months are broadly unchanged from those described in the Annual Financial Report for the year ended 31 January 2009. These are set out in the Business Review beginning on page 17 of that Report, together with commentary on the Board's approach to mitigating the risks and uncertainties, under the following headings: Investment Activity and Strategy; Accounting, Legal and Regulatory; Corporate Governance and Shareholder Relations; Operational; and Financial.

Recent economic data have shown a degree of stabilisation in economic conditions. However, the world's financial system remains fragile and the scale of government debt required to stabilise the financial sector will generate additional uncertainty in markets.

Derivatives Strategy

As mentioned in the last annual report, the directors reviewed the possibility of using exchange traded stock and index options to reduce the volatility of the Trust's net assets. Following this review we initiated a strategy of writing covered call options on a limited number of stocks within the equity portfolio and using the proceeds to buy out of the money put options on the FTSE 100 Index. The call options allow the purchaser the option of buying stock from the Trust at certain pre-agreed prices for a limited period. The put options are essentially an 'insurance' policy to provide some downside protection if the market were to fall very significantly.  

Prospects

It now seems very likely that a crisis of the financial system has been avoided by the intervention of the authorities to stabilise the banking system and by monetary easing. The key debate has moved on to the profile of economic recovery.  It is expected that most western economies will soon emerge from recession, aided by government stimuli and an improvement in the inventory cycle.  However, despite the recent reduction in consumer and corporate debt, there remains a very significant debt overhang, especially at the government level. This poses a challenge to the prospects for sustained growth.

In the UK, the Bank of England is likely at some point to raise interest rates from virtually zero. This will pose a challenge to the cashflow of consumers and corporates, giving them a further incentive to reduce spending.  An even bigger challenge is at the government level. The UK budget projects a deficit for this fiscal year of 12% of GDP or £175bn. Reducing this deficit in the medium term will require a reduction in government spending and higher taxation. Both of these factors will constrain economic growth which is itself critical to rebuilding tax revenues. Overall therefore UK economic growth in the medium term is likely to be below long term trend levels even if there is a stronger short term recovery in activity. The US and other OECD countries face similar challenges. Whilst the outlook for China and certain emerging markets looks brighter, global growth is likely to be muted for the next few years.

These macroeconomic headwinds are likely to constrain company profits growth. In the short term, however, profits in many cyclical businesses will benefit from their own cost reduction exercises and some bounce back in demand from the very difficult conditions at the turn of the year.  

The stock market has recovered strongly from its trough earlier in the year as the financial system has been rescued. Valuations in aggregate still seem reasonable from a longer term viewpoint. However the polarisation of the market, with a sharp recovery in cyclical valuations, has reduced the available pool of attractive companies on high yields in these sectors. Conversely, the underperformance of many defensive shares, when coupled with our cautious medium term economic view, makes us even more positive on the relative attractions of businesses that are not overly dependent upon robust economic growth to deliver increasing profits and cashflow. These businesses, in industries such as pharmaceuticals, utilities, oil & gas, telecommunications, defence and food and beverages make up a large part of the portfolio. The polarisation of the market has also allowed new investments in what might be classified as high quality growth stocks trading on unusually low valuations with solid and growing dividend yields.

Although the first half of the year saw significant cuts in UK company dividends, particularly in the financial sector, and further dividend cuts cannot be ruled out, in recent months the prospects for UK corporate dividends appear to have stabilised with a number of the Trust's largest holdings announcing maintained or improved dividends. A fall in sterling has increased receipts from companies declaring dividends in dollars.

Responsibility statement

The Directors confirm to the best of their knowledge that:

• The condensed set of financial statements contained within the half-yearly financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half-Yearly Financial Reports'; and

• The interim management report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7 R of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

• The interim management report includes a fair review of the information concerning related parties transactions as required by the Disclosure and Transparency Rule 4.2.8 R.

The half-yearly financial report was approved by the Board on 18 September 2009 and the above responsibility statement was signed on its behalf by the Chairman.

Hugh Stevenson

Chairman

155 Bishopsgate

London EC2M 3AD

THE MERCHANTS TRUST PLC

Twenty Largest Equity Holdings as at 31 July 2009

		Valuation		% of
				Total
		£'000s		Assets*		Sector
Royal Dutch Shell 'B' Shares		40,144		8.90		Oil & Gas Producers
Vodafone		36,605		8.11		Mobile Telecommunications
GlaxoSmithKline		36,051		7.99		Pharmaceuticals & Biotechnology
HSBC		30,769		6.82		Banking
BP		29,645		6.57		Oil & Gas Producers
Scottish & Southern Energy		16,882		3.74		Electricity
BAE Systems		16,762		3.71		Aerospace & Defence
BT		16,186		3.59		Fixed Line Telecommunications
BHP Billiton		15,078		3.34		Mining
AstraZeneca		14,904		3.30		Pharmaceuticals & Biotechnology
British American Tobacco		14,851		3.29		Tobacco
Unilever		13,272		2.94		Food Producers
Centrica		12,431		2.76		Gas, Water & Multiutilities
Aviva		10,733		2.38		Life Insurance
Reed Elsevier		10,152		2.25		Media
National Grid		10,109		2.24		Gas, Water & Multiutilities
Inchcape		7,192		1.59		General Retailers
Barclays		6,710		1.49		Banking
Britvic		6,058		1.34		Beverages
Hammerson		6,016		1.33		Real Estate Investment Trusts
		350,550		77.68
* Total Assets include current liabilities

Portfolio Analysis as at 31 July 2009

		%
Listed equities		95.80
Unlisted equities		0.01
UK call options*		(0.05)
UK put options		0.02
Other net current assets		4.22
Total Assets		100.00

*As at 31 July 2009 call options had been written over 3.2% of the portfolio, generating premium receipts of £165,089. The proceeds were used to fund the purchase of FTSE 100 put options with a strike price of 2600, maturing in December 2009 and March 2010, at a cost of £168,458.

  THE MERCHANTS TRUST PLC

Summary of Unaudited Results

INCOME STATEMENT

For the six months ended 31 July 2009

	2009
	Revenue	Capital	Total Return
	£'000s	£'000s	£'000s
			(Note 2)
Net gains on investments at fair value	-	24,711	24,711
Income from investments	13,501	-	13,501
Other income	447	-	447
Investment management fee	(256)	(476)	(732)
Investment management fee VAT Refund	416	773	1,189
Administration expenses	(393)	(1)	(394)
Net return before finance costs and taxation	13,715	25,007	38,722
Finance costs: interest payable and similar charges	(1,684)	(3,086)	(4,770)
Net return on ordinary activities before taxation	12,031	21,921	33,952
Taxation	-	-	-
Net return attributable to Ordinary Shareholders	12,031	21,921	33,952
			-
Net return per Ordinary Share (Note 1)
(basic and diluted)	11.68p	21.28p	32.96p
				2009
BALANCE SHEET				£'000s
As at 31 July 2009
Investments held at fair value through profit or loss				432,410
Net current assets				18,866
Total Assets Less Current Liabilities				451,276
Creditors - amounts falling due after one year				(113,452)
Total Net Assets				337,824
Called up Share Capital				25,803
Share Premium Account				8,523
Capital Redemption Reserve				293
Capital Reserves				273,040
Revenue Reserve				30,165
Equity Shareholders' Funds				337,824
Net Asset Value per Ordinary Share				327.3p

The net asset value is based on 103,213,464 Ordinary Shares in issue at 31 July 2009.

  THE MERCHANTS TRUST PLC

Summary of Unaudited Results

INCOME STATEMENT

For the six months ended 31 July 2008

	2008
	Revenue	Capital	Total Return
	£'000s	£'000s	£'000s
			(Note 2)
Net losses on investments at fair value	-	(68,062)	(68,062)
Income from investments	18,209	-	18,209
Other income	148	-	148
Investment management fee	(376)	(698)	(1,074)
Investment management fee VAT Refund	-	-	-
Administration expenses	(394)	(1)	(395)
Net return before finance costs and taxation	17,587	(68,761)	(51,174)
Finance costs: interest payable and similar charges	(1,682)	(3,083)	(4,765)
Net return on ordinary activities before taxation	15,905	(71,844)	(55,939)
Taxation	-	-	-
Net return attributable to Ordinary Shareholders	15,905	(71,844)	(55,939)
Net return per Ordinary Share (Note 1)
(basic and diluted)	15.47p	(69.88)p	(54.41)p
				2008
BALANCE SHEET				£'000s
As at 31 July 2008
Investments held at fair value through profit or loss				546,500
Net current assets				6,015
Total Assets Less Current Liabilities				552,515
Creditors - amounts falling due after one year				(113,371)
Total Net Assets				439,144
Called up Share Capital				25,703
Share Premium Account				7,527
Capital Redemption Reserve				293
Capital Reserves				376,159
Revenue Reserve				29,462
Equity Shareholders' Funds				439,144
Net Asset Value per Ordinary Share				427.1p

The net asset value is based on 102,813,464 Ordinary Shares in issue at 31 July 2008.

THE MERCHANTS TRUST PLC

INCOME STATEMENT

for the year ended 31 January 2009

	2009
	Revenue	Capital	Total Return
	£'000s	£'000s	£'000s
			(Note 2)
Net losses on investments at fair value	-	(189,593)	(189,593)
Income from investments	30,319	-	30,319
Other income	1,410	-	1,410
Investment management fee	(659)	(1,222)	(1,881)
Investment management fee VAT Refund	967	206	1,173
Administration expenses	(600)	(3)	(603)
Net return before finance costs and taxation	31,437	(190,612)	(159,175)
Finance costs: interest payable and similar charges	(3,420)	(6,272)	(9,692)
Net return on ordinary activities before taxation	28,017	(196,884)	(168,867)
Taxation	-	-	-
Net return attributable to Ordinary Shareholders	28,017	(196,884)	(168,867)
Net return per Ordinary Share (Note 1)
(basic and diluted)	27.25p	(191.50p)	(164.25p)
				2009
BALANCE SHEET				£'000s
As at 31 January 2009
Investments held at fair value through profit or loss				411,795
Net current assets				16,482
Total Assets Less Current Liabilities				428,277
Creditors - amounts falling due after one year				(113,473)
Total Net Assets				314,804
Called up Share Capital				25,703
Share Premium Account				7,527
Capital Redemption Reserve				293
Capital Reserves				251,119
Revenue Reserve				30,162
Equity Shareholders' Funds				314,804
Net Asset Value per Ordinary Share				306.2p

The net asset value is based on 102,813,464 Ordinary Shares in issue at 31 January 2009.

THE MERCHANTS TRUST PLC

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

	Called Up Share Capital £'000s	Share Premium  Account   £'000s	Capital Redemption Reserve £'000s	Capital Reserves £'000s	Revenue Reserve £'000s	Total £'000s
Six months ended 31 July 2009
Net Assets at 31 January 2009	25,703	7,527	293	251,119	30,162	314,804
Revenue Return	-	-	-	-	12,031	12,031
Dividends on Ordinary Shares	-	-	-	-	(12,028)	(12,028)
Capital Return	-	-	-	21,921	-	21,921
Shares issued during the period	100	996	-	-	-	1,096
Net Assets at 31 July 2009	25,803	8,523	293	273,040	30,165	337,824
Six months ended 31 July 2008
Net Assets at 31 January 2008	25,703	7,527	293	448,003	24,661	506,187
Revenue Return	-	-	-	-	15,905	15,905
Dividends on Ordinary Shares	-	-	-	-	(11,104)	(11,104)
Capital Return	-	-	-	(71,844)	-	(71,844)
Net Assets at 31 July 2008	25,703	7,527	293	376,159	29,462	439,144
Year ended 31 January 2009
Net Assets at 31 January 2008	25,703	7,527	293	448,003	24,661	506,187
Revenue Return	-	-	-	-	28,017	28,017
Dividends on Ordinary Shares	-	-	-	-	(22,516)	(22,516)
Capital Return	-	-	-	(196,884)	-	(196,884)
Net Assets at 31 January 2009	25,703	7,527	293	251,119	30,162	314,804

THE MERCHANTS TRUST PLC

CASH FLOW STATEMENT

for the six months ended 31 July 2009 and comparative periods

	Six Months to 31 July 2009			Six Months to 31 July 2008			Year to 31 January 2009
	£’000s			£’000s			£’000s
Net cash inflow from operating activities	14,268			15,496			27,864
Return on investment and servicing of finance
Interest paid	(4,812)			(4,797)			(9,586)
Dividends paid on Preference Stock	(21)			(21)			(43)
Net cash outflow from servicing of finance	(4,833)			(4,818)			(9,629)
Capital expenditure and financial investment
Purchase of fixed asset investments	(56,874)			(89,801)			(152,891)
Sale of fixed asset investments	60,652			91,090			165,738
Net cash inflow from capital expenditure and financial investment	3,778			1,289			12,847
Equity dividends paid	(12,028)			(11,104)			(22,516)
Net cash inflow before financing	1,185			863			8,566
Issue of Ordinary Shares	1,096			-			-
Net cash inflow from financing	1,096			-			-
Increase in cash	2,281			863			8,566
Reconciliation of Return on Ordinary Activities before Taxation to Net Cash Flow from Operating Activities
Total return before finance costs and taxation*	38,722			(51,174)			(159,175)
Net (gains) losses on investments at fair value	(24,711)			68,062			189,593
	14,011			16,888			30,418
Increase in debtors	(136)			(1,369)			(2,328)
Decrease (Increase) in creditors	393			(23)			(226)
Net cash inflow from operating activities	14,268			15,496			27,864
Reconciliation of net cash flow to movement in net debt
Net cash inflow	2,281			863			8,566
Decrease (Increase) in long term loans	20			42			(60)
Movement in net funds	2,301			905			8,506
Net debt brought forward	(98,962)			(107,468)			(107,468)
Net debt carried forward	(96,661)			(106,563)			(98,962)

*Inclusive of the VAT refund on investment fees (refer to Income Statement).

THE MERCHANTS TRUST PLC

NOTES

Note 1

The returns per Ordinary Share have been calculated using a weighted average number of shares in issue during the period of 103,018,989 shares (31 July 2008 - 102,813,464 shares; 31 January 2009 - 102,813,464 shares).

Note 2

The total return column of this statement is the profit and loss account of the Company.

All revenue and capital items derive from continuing operations. No operations were acquired or discontinued in the period.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the Income Statement.

Included in the cost of investments are transaction costs on purchases which amounted to £267,000 (31 July 2008 - £521,000; 31 January 2009 - £878,000) and transaction costs on sales which amounted to £80,000 (31 July 2008 - £125,000; 31 January 2009 - £222,000).

Note 3

Investments are designated as held at fair value through profit or loss in accordance with FRS 26 'Financial Instruments : Recognition and Measurement'. Listed investments are valued at bid market prices.

Note 4

In accordance with FRS 21 'Events after the Balance Sheet Date', the final dividend payable on Ordinary Shares is recognised as a liability when approved by shareholders. Interim dividends are recognised only when paid.

Dividends paid on Ordinary Shares in respect of earnings for each period are as follows:

	Six months to		Six months to		Year to
	31 July		31 July		31 January
	2009		2008		2009
	£'000s		£'000s		£'000s
First Interim dividend 5.50p paid 19 August 2008	-		-		5,654
Second Interim dividend 5.60p paid 13 November 2008	-		-		5,758
Third Interim dividend 5.60p paid 20 February 2009 (2008 - 5.40p)	5,757		5,552		5,552
Special dividend 0.5p paid 15 May 2009 (2008 - Nil)	514		-		-
Final dividend 5.60p paid 15 May 2009 (2008 - 5.40p)	5,757		5,552		5,552
	12,028		11,104		22,516

Dividends payable at the period end are not recognised as a liability under FRS 21 'Events after the Balance Sheet Date'. Details of these dividends are set out below.

	Six months to		Six months to		Year to
	31 July		31 July		31 January
	2009		2008		2009
	£'000s		£'000s		£'000s
Third Interim dividend 5.60p paid 20 February 2009	-		-		5,757
Special dividend 0.5p paid 15 May 2009	-		-		514
Final dividend 5.60p paid 15 May 2009	-		-		5,757
First Interim dividend 5.60p paid 19 August 2009 (2008 - 5.50p)	5,780		5,654		-
Second Interim dividend 5.60p payable 12 November 2009 (2008 - 5.60p)	5,780		5,758		-
	11,560		11,412		12,028

The second interim dividend noted above is based on the number of shares at the period end. However, the dividend subsequently paid will be based on the number of shares in issue on the record date and will reflect any purchase or cancellation of shares by the Company settled subsequent to the period end.

Note 5

The half-yearly financial report has been neither audited nor reviewed by the Company's auditors. The financial information for the year ended 31 January 2009 has been extracted from the statutory financial statements for that year which have been delivered to the Registrar of Companies. The accounting policies and presentation are consistent with those applied in the latest published financial statements. The auditors' report on those financial statements was unqualified and did not contain a statement under either Section 237(2) or Section 237(3) of the Companies Act 1985.

The Company also makes limited additional and updated disclosures, mainly relating to the first and third quarters of the financial year. These Interim Management Statements are released via the Regulatory News Service and posted on the Company's website www.merchantstrust.co.uk on or shortly before 19 June and 19 December each year.

This half-yearly financial report, which will include a Fund Managers' Report, will be sent to Shareholders shortly and made available to the public at the Registered Office of the Company, 155 Bishopsgate, London, EC2M 3AD.

For further information, please contact:

RCM (UK) Limited

Simon White, Head of Investment Trusts

Tel: [phone]

or

RCM (UK) Limited

Simon Gergel, Fund Manager

Tel: [phone]

 

END

 

 

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