Annual Report and Audited Financial Statements

RNS Number : 3580C
Reconstruction Capital II Ltd
14 June 2019
 

14 June 2019

Reconstruction Capital II Limited (the "Company")

Annual Report and Audited Financial Statements

for the year ended 31 December 2018

 

Reconstruction Capital II Limited ("RC2", the "Company" or the "Group"), a closed-end investment company incorporated in the Cayman Islands admitted to trading on the AIM market of the London Stock Exchange, today announces its results for the year ended 31 December 2018.

 

Copies of the Company's annual report will today be posted to shareholders. The annual report is also available to view on the Company's website http://www.reconstructioncapital2.com.

 

Financial highlights

 

•    The audited net asset value as at 31 December 2018 was €0.2238 per share (€0.2504 per share as at 31 December 2017), a 10.62% decrease over the year;

•    The Directors do not recommend the payment of a dividend.

 

Operational highlights

 

Private Equity Programme

 

During the year, the Company acquired shares in two Romanian-focused investment companies, Reconstruction Capital Plc ("RC") and The Romanian Investment Fund Ltd (RIF) for consideration of €1.73m and €1.84m, respectively. RC's only investment is a 69.2% shareholding in RIF, whose main underlying asset is a 60% shareholding in Policolor S.A. ("Policolor"), in which the Company already owns the balance of 40%. The main objective of the acquisitions was to provide the Company with greater control over the exit process from Policolor.

 

At the end of December 2018, the investments held under the Private Equity Programme had a total fair value of €27.8m, which was slightly higher than the 2017 valuation of €27.7m.

 

The fall in the valuation of Policolor reflects a weakening of its operating performance. On a more positive note, the company managed to bring forward the completion of the sale of part of its land, generating proceeds of €6.2m in 2018 which, under the original sales contract, were due to be received in the summer of 2019. In August, Policolor started the construction of its new factory where it is due to relocate its Bucharest production in 2019, and in December it closed down operations at its existing Bucharest site, in order to prepare the remaining land for delivery to the buyers of the site in the summer of 2019, which should generate further proceeds of €4.2m. Over the year, the Policolor group's indebtedness fell from €15.5m to €13.1m, and the company also paid €0.97m of dividends to its shareholders. In April 2018 the Policolor Board appointed a new CEO with a view to improving the operating performance of the Group.

 

The Mamaia hotel continues to face increased competition from "Airbnb"-style lets, and new hotel developments, coupled with operating costs inflation, and this is reflected in its lower valuation. The hotel has undertaken an investment plan of €1m to upgrade its accommodation and facilities which is being funded by a bank loan.

 

The prospects for the consumer loans market were adversely impacted by new prudential regulations capping the indebtedness of individuals which were announced by the National Bank of Romania in the second half of 2018 and came into effect on 1 January 2019. This is reflected in Telecredit's revised valuation of €0.84m. A revised business model for Telecredit has been developed aimed at supplementing its consumer loan business with financial products targeting small and medium-sized businesses, such as factoring facilities and micro loans.

 

Trading Programme

 

RC2 (Cyprus) Limited sold its residual listed equities portfolio held under the Trading Programme in the first quarter of 2018, generating cash proceeds of €0.187m.

 

For further information, please contact:

 

Reconstruction Capital II Limited

Cornelia Oancea / Anca Moraru

Tel: +40 21 3167680

 

Grant Thornton UK LLP (Nominated Adviser)

Philip Secrett

Tel: +44 (0) 20 7383 5100

 

finnCap Limited (Broker)

William Marle / Giles Rolls

Tel: +44 20 7220 0500

 

ADVISER'S REPORT

For the year ended 31 December 2018

 

On 31 December 2018, Reconstruction Capital II Limited ("RC2" or the "Company") had a total audited net asset value ("NAV") of €31.405m, or €0.2238 per share. During the course of 2018, RC2 bought back for cancellation 4,613,641 of its own Ordinary shares, bringing the total number of Ordinary shares in issue at year end to 140,332,376. The NAV per share fell by 10.62% over the course of the year.

 

Private Equity Programme

 

During the year, the Company acquired shares in two Romanian-focused investment companies, Reconstruction Capital Plc ("RC") and The Romanian Investment Fund Ltd (RIF) for consideration of €1.73m and €1.84m, respectively. RC's only investment is a 69.2% shareholding in RIF, whose main underlying asset is a 60% shareholding in Policolor S.A. ("Policolor"), in which the Company already owns the balance of 40%. The main objective of the acquisitions was to provide the Company with greater control over the exit process from Policolor.

 

At the end of December 2018, the investments held under the Private Equity Programme had a total fair value of €27.8m, which was slightly higher than the 2017 valuation of €27.7m. The valuations of Policolor and Mamaia were performed by independent valuers, whilst the valuation of Telecredit IFN SA was based on its audited net asset value. The valuations of RC and RIF were also based on their audited net asset values, but these were in turn based on the same valuation of their main underlying asset, Policolor SA, as adopted by the Company.

 

Valuations

 

 

2018

 

 

2017

 

Reconstruction Capital Plc

2,242,600

 

 

-

The Romanian Investment Fund Limited

2,147,229

 

 

-

Policolor S.A.

18,320,000

 

 

20,600,000

Mamaia Hotel Resorts SRL ("Mamaia")

4,228,219

 

 

4,404,658

Telecredit IFN S.A. ("Telecredit")

849,514

 

 

2,664,000

 

27,787,562

 

 

27,668,658

 

The fall in the valuation of Policolor reflects a weakening of its operating performance. On a more positive note, the company managed to bring forward the completion of the sale of part of its land, generating proceeds of €6.2m in 2018 which, under the original sales contract, were due to be received in the summer of 2019. In August, Policolor started the construction of its new factory where it is due to relocate its Bucharest production in 2019, and in December it closed down operations at its existing Bucharest site, in order to prepare the remaining land for delivery to the buyers of the site in the summer of 2019, which should generate further proceeds of €4.2m. Over the year, the Policolor group's indebtedness fell from €15.5m to €13.1m, and the company also paid €0.97m of dividends to its shareholders. In April 2018 the Policolor Board appointed a new CEO with a view to improving the operating performance of the Group.

 

The Mamaia hotel continues to face increased competition from "Airbnb"-style lets, and new hotel developments, coupled with operating costs inflation, and this is reflected in its lower valuation. The hotel has undertaken an investment plan of €1m to upgrade its accommodation and facilities which is being funded by a bank loan.

 

The prospects for the consumer loans market were adversely impacted by new prudential regulations capping the indebtedness of individuals which were announced by the National Bank of Romania in the second half of 2018 and came into effect on 1 January 2019. This is reflected in Telecredit's revised valuation of €0.84m. A revised business model for Telecredit has been developed aimed at supplementing its consumer loan business with financial products targeting small and medium-sized businesses, such as factoring facilities and micro loans.

 

Apart from the shareholdings in RC and RIF, the other private equity investments are held through two Cyprus-based wholly-owned subsidiaries, RC2 (Cyprus) Limited and Glasro Holdings Limited, which are not consolidated in the present financial statements, in accordance with IFRS. The Assets at Fair Value shown in the present financial statements, which amount to €30.6m, reflect the valuations of the underlying private equity holdings outlined in the above table, plus cash balances of €2.7m, and €0.1m of sundry financial assets and liabilities of these intermediary holding companies.

 

Trading Programme

 

RC2 (Cyprus) Limited sold its residual listed equities portfolio held under the Trading Programme in the first quarter of 2018, generating cash proceeds of €0.187m.

 

Economic Overview

 

Both the Romanian and Bulgarian economies continued to report increases in GDP during 2018 of 4.1% (2017: +7.0%) and 3.1% (2017: +3.6%), respectively, and are expected to continue to grow during 2019. Romania's 2018 GDP growth, which was the highest in the EU for the second year running, continued to be mainly driven by increased private consumption. The IMF is forecasting a slowdown in GDP growth to 3.4% in 2019 due to the effect of inflation on disposable incomes.

 

Events after the Reporting Period

 

On 23 January 2019 the Company announced that it had purchased for cancellation 1,710,611 Ordinary shares for €0.16 each, and in a separate transaction a further 2,364,852 Ordinary shares for €0.16 each. After these cancellations the Company has 136,256,913 Ordinary shares in issue.

INVESTMENT POLICY

 

Change of Investment Objective and Policy of the Company

 

At a general shareholder meeting on 21 February 2018, the investment objective of the Company was changed so that it now aims to achieve capital appreciation and/or to generate investment income returns through the acquisition of real estate assets in Romania, including the development of such assets, and/or the acquisition of significant or controlling stakes in companies established in, or operating predominantly in Romania, primarily in the real estate sector. Any new private equity investment in companies operating in sectors other than real estate is limited to 25% of the Company's total assets at the time of effecting the investment. However, the Company may continue to make follow-on investments in existing portfolio companies without any such limitation.

 

Gearing

 

The Company may borrow up to a maximum level of 30% of its gross assets (as defined in its articles).

 

Distribution Policy

 

The Company's investment objective is focused principally on the provision of capital growth. For further details of the Company's distribution policy, please refer to the Admission Document on the Company's website.

 

 

 

STATEMENT OF COMPREHENSIVE INCOME

 

For the year ended 31 December 2018

 

 

2018

2017

 

 

EUR

 

EUR

 

Investment income

 

 

 

 

Fair value loss on financial assets at fair value through

 

 

 

 

profit or loss

(7,436,971)

(10,981,533)

 

Recovery of previously written off receivable

9,000

189,000

 

Interest income

4,341,794

4,334,820

 

Dividend income

-

7,619,610

 

Other income

10

-

 

 

 

 

 

 

Net investment (loss)/gain

(3,086,167)

1,161,897

 

Expenses

 

 

 

 

 

 

 

 

Operating expenses

(1,031,186)

(1,619,749)

 

Financial expenses

(886)

(188)

 

 

 

 

 

 

Total expenses

(1,032,072)

(1,619,937)

 

 

 

 

 

 

Loss for the year

(4,118,239)

(458,040)

 

 

 

 

 

 

Other comprehensive income

-

-

 

Total comprehensive income for the year attributable

 

 

 

 

 

 

 

 

to owners

(4,118,239)

(458,040)

 

Loss Per Share

 

 

 

 

 

 

 

 

Basic and diluted loss per share

(0.0285)

(0.0031)

 

 

STATEMENT OF FINANCIAL POSITION

 

As at 31 December 2018

 

 

2018

 

 

      2017

 

 

 

EUR

      EUR

 

ASSETS

 

 

 

 

 

Non-current assets

 

 

 

 

 

Financial assets at fair value through profit or loss

30,614,632

 

 

30,143,162

 

 

 

 

 

 

 

Total non-current assets

30,614,632

 

 

30,143,162

 

Current assets

 

 

 

 

 

 

 

 

 

 

Trade and other receivables

21,011

 

 

136,439

 

Cash and cash equivalents

1,480,305

 

 

6,439,763

 

 

 

 

 

 

 

Total current assets

1,501,316

 

 

6,576,202

 

 

 

 

 

 

 

TOTAL ASSETS

32,115,948

 

 

36,719,364

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Trade and other payables

710,726

 

 

430,510

 

 

 

 

 

 

 

Total current liabilities

710,726

 

 

430,510

 

 

 

 

 

 

 

TOTAL LIABILITIES

710,726

 

 

430,510

 

 

 

 

 

 

 

NET ASSETS

31,405,222

 

 

36,288,854

 

EQUITY AND RESERVES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share capital

1,403,324

 

 

1,449,460

 

Share premium

109,862,098

 

 

110,581,355

 

Accumulated deficit

(79,860,200)

 

 

(75,741,961)

 

TOTAL EQUITY

 

 

 

 

 

31,405,222

 

 

36,288,854

 

Net Asset Value per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net asset value per share

0.2238

 

 

0.2504

 

 

 

 

 

 

 

STATEMENT OF CHANGES IN EQUITY

 

For the year ended 31 December 2018

 

 

 

 

 

Share

 

Accumulated

 

 

 

 

Share capital

 

premium

 

deficit

 

Total

 

 

EUR

 

EUR

 

EUR

 

EUR

 

Balance at 1 January 2017

1,476,223

127,991,989

(75,283,921)

54,184,291

 

Loss for the year

-

-

(458,040)

(458,040)

 

Other comprehensive income

-

-

-

-

 

Total comprehensive income for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the year

-

-

(458,040)

(458,040)

 

 

 

 

 

 

 

 

 

 

Issue and redemption of B shares

-

(16,997,375)

-

(16,997,375)

 

Repurchase and cancellation of

 

 

 

 

 

 

 

 

own shares

(26,763)

(413,259)

-

(440,022)

 

 

 

 

 

 

 

 

 

 

Transactions with owners

(26,763)

(17,410,634)

-

(17,437,397)

 

 

 

 

 

 

 

 

 

 

Balance at 31 December 2017

1,449,460

110,581,355

(75,741,961)

36,288,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss for the year

-

-

(4,118,239)

(4,118,239)

 

Other comprehensive income

-

-

-

-

 

Total comprehensive income for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the year

-

-

(4,118,239)

(4,118,239)

 

Repurchase and cancellation of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

own shares

(46,136)

(719,257)

-

(765,393)

 

 

 

 

 

 

 

 

 

 

Transactions with owners

(46,136)

(719,257)

-

(765,393)

 

 

 

 

 

 

 

 

 

 

Balance at 31 December 2018

1,403,324

109,862,098

(79,860,200)

31,405,222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW STATEMENT

 

For the year ended 31 December 2018

 

 

2018

2017

 

EUR

EUR

Cash flows from operating activities

 

 

Loss for the year

(4,118,239)

(458,040)

Adjustments for:

 

 

Fair value loss on financial assets at fair value through

 

 

profit or loss

7,436,971

10,981,533

Reversal of loan impairment

(9,000)

(189,000)

Interest income

(4,341,794)

(4,334,820)

Dividend income

-

(7,619,610)

Net loss on foreign exchange

886

188

 

 

Net cash outflow before changes in working capital

(1,031,176)

(1,619,749)

Decrease in trade and other receivables

115,427

7,352

(Decrease)/increase in trade and other payables

(180,513)

138,108

Purchase of financial assets

(3,433,045)

(370,000)

Disposals and repayments of financial assets

9,000

63,000

Dividends received

-

7,500,000

 

 

Net cash (used in)/ generated by operating activities

(4,520,307)

5,718,711

Cash flows from financing activities

 

 

Payments to purchase own shares

(416,810)

(440,022)

Redemptions of B shares

(21,455)

(16,842,979)

 

 

Net cash flow used in financing activities

 

(438,265)

(17,283,001)

 

Net decrease in cash and cash equivalents before

 

 

 

 

 

 

 

 

 

 

currency adjustment

 

(4,958,572)

(11,564,290)

 

Effects of exchange rate differences on cash and cash

 

 

 

 

 

equivalents

 

(886)

(188)

 

Net decrease in cash and cash equivalents after

 

 

 

 

 

 

 

 

 

 

currency adjustment

 

(4,959,458)

(11,564,478)

 

Cash and cash equivalents at the beginning of the year

 

6,439,763

18,004,241

 

 

 

 

 

 

 

Cash and cash equivalents at the end of the year

 

1,480,305

6,439,763

 

 

 

 

 

 

 

 


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