Annual Financial Report

RNS Number : 3131K

Utilico Emerging Markets Limited

24 June 2014

 



Date:                23 June 2014

Contact:           Charles Jillings                                              

Utilico Emerging Markets Limited                    

01372 271 486                                               

Alastair Moreton

Westhouse Securities Limited

0207 601 6100

Utilico Emerging Markets Limited

Statement of Results

for the year to 31 March 2014

Highlights of results

·      Revenue earnings per ordinary share of 4.80p

·      Net asset value of 192.38p per ordinary share

·      Dividends per ordinary share of 6.10p

·      Dividends per ordinary share represent a yield of 3.4%

·      Gross assets under management of £433.4m

·      Average annual compound total return since inception of 12.4%

·      Average ongoing charges figure of 0.9%

Chairman's Statement

The year to 31 March 2014 has been challenging for funds invested in emerging markets. Investors in the UK have faced weak emerging equity and currency markets and a strong UK sterling currency. UEM has seen its net asset value ("NAV") decline by 3.4% on a total return basis; this performance is ahead of the MSCI Emerging Markets Total Return Index (GBP adjusted) which experienced a loss of 9.9%.

Since inception UEM has reported an average annual compound total return per ordinary share of 12.4%, including the return on warrants exercised on 2 August 2010.

Over the last three years UEM's NAV growth was 19.6% on a total return basis. This is well ahead of the MSCI Emerging Markets Total Return Index (GBP adjusted) which has returned a loss of 11.0%. Pleasingly, this strong performance has been recognised in a number of awards over the last two years. UEM has won Investment Week Investment Company of the year award in the Emerging Markets category in both 2012 and 2013; Money Observer Best Diversified Emerging Markets Trust for 2013; Moneywise 2014 Investment Trust award for Global Emerging Markets and was included in the Investors Chronicle Top 100 Funds for 2013.

The biggest headwind faced by UEM over the twelve months has been the strength of Sterling. Had exchange rates remained constant over the period, the NAV would have been £61.6m higher. This loss of 14.2% significantly held back UEM's performance. It should be noted this translation loss is largely unrealised.

The revenue earnings per share weakened over the year, mainly as a result of weaker exchange rates but also due to the shift of investments from Brazil to China where dividends are relatively lower. Revenue earnings per share declined 7.7% to 4.80p.

As a Bermuda company, UEM is able to distribute both capital and income returns as dividends. The Board has declared four quarterly dividends of 1.525p in respect of the year ended 31 March 2014, amounting to 6.10p versus 5.80p last year, an increase of 5.2%. The final quarterly dividend of 1.525p was paid from UEM's capital reserves. Over the last three years the dividend has been covered 74.9% (2012), 89.7% (2013) and 78.2% (2014) from revenue earnings per share. Undistributed revenue reserve now amounts to £2.3m or 1.1p per share.

The Board has recently reviewed the fees payable to ICM Limited, UEM's Investment Manager. As a result of this review, the Directors, in conjunction with the Investment Manager, have agreed to make a number of changes to the existing fee arrangements under the Investment Management Agreement with effect from 1 April 2014. The Board believes that it is in the best interests of shareholders to have a competitive base fee and performance fee, subject to an appropriate hurdle, high water mark and cap. The key features of the changes were to move the investment management fee from 0.50% of gross assets to 0.65% of net assets, the introduction of a minimum hurdle of 8.0% on the performance fee benchmark and a cap on performance fees in any financial year of 1.85% of average adjusted equity funds (net assets plus dividends paid in the period). Had this new fee structure applied since inception, total fees paid to the Investment Manager would have been over 10% lower.

During the year the Company applied for a credit rating from Standard & Poor's ("S&P") for a possible debt issuance. S&P has rated UEM as BBB/A2 Outlook Stable. This reflects well on UEM's asset class, ICM's processes and the team led by Charles Jillings.

In April 2014 the Board, in conjunction with the Investment Manager, determined that UEM should seek to increase modestly UEM's gearing and seek to establish longer term facilities to better match UEM's long-term investment cycle. UEM appointed Canaccord Genuity as its advisor and the Investment Manager met with a number of fixed income investors with a view to issue a 10 year retail bond. There was strong support for UEM within the debt markets. However, a number of UEM's equity investors were firmly against leverage, given UEM's emerging market asset class. In light of this, UEM's Board decided not to proceed with the bond offering.

The Investment Manager has over the years focused on its relationship with investors and met with them on a regular basis. It is pleasing to see the discount narrow over the year.

OUTLOOK

Emerging market economies continue to achieve GDP growth and their outlook is positive. Despite this, the world's economic activity remains subdued, as the challenges facing western economies remain largely unresolved. The performance from UEM's stock selection process has been positive for investors and the Investment Manager expects to be able to continue to identify attractive investments.

Alexander Zagoreos
Chairman
23 June 2014

Investment Manager's Report

The year to 31 March 2014 has been challenging for funds invested in emerging markets. There was a strong divergence between developed and developing economies and the performance in UEM's underlying portfolio was undermined.

Over the year, the Brazilian Bovespa was down 10.5%, Chile IPSA was down 14.9% and the Thai SET was down 11.8%. Conversely the S&P Index was up 19.3% and the Eurostoxx was up 20.5%. On currencies the Brazilian Real was down 18.6%, the Chilean Peso down 22.0%, the Indian Rupee down 22.1%, the Thai Baht down 17.8%, the Philippine Peso down 17.1% and the Malaysian Ringgit down 13.6% against Sterling. Together these have contributed to strong headwinds for emerging markets investors.

Against this background UEM has worked hard to end the period with a negative total return of only 3.4%, ahead of the MSCI Emerging Market Total Return (GBP adjusted) loss of 12.5%.

The biggest headwind faced by UEM over the twelve months has been the strength of Sterling. Had exchange rates remained constant the NAV would have been £61.6m higher. This loss of 14.2% on the portfolio significantly held back UEM's performance.

UEM continues to focus mainly on listed companies which for the most part are established and profitable. The majority of these companies are dividend paying. As a result total revenue income of £13.7m (prior year £13.9m) represents a return on the opening investment portfolio of 3.0%. The revenue income was mainly held back by weaker exchange rates. Adjusting for the negative impact of currency movements of £61.6m, the portfolio delivered a positive underlying performance.

PORTFOLIO

UEM's gross assets (less liabilities excluding loans) decreased from £452.1m to £433.4m over the twelve months to 31 March 2014.

There were three new companies in the top ten at the year-end compared with last year: MyEG Services Berhad ("MYEG"), APT Satellite Holdings Limited ("APT") and China Everbright International Limited ("China Everbright") which came in at six, nine and ten respectively. Those leaving the top ten were Companhia de Saneamento de Minas Gerais ("Copasa"), Companhia de Concessoes Rodoviarias S.A. ("CCR") and Santos Brasil Participacoes S.A. ("Santos").

MYEG'sshare price performance was very strong, up 256.0% for the year. MYEG has grown its revenues and profits substantially. Revenues in the year to June 2013 were up 14.3% and net income was up 28.0%. MYEG is a company that has been in UEM's portfolio for a number of years and following the strong share price performance UEM sold down 8.1% of its holding.

MYEG is a concessionaire for the Malaysian E-Government programme, which allows Malaysian citizens and businesses to transact with the government electronically. Initially the service was centred around driving licence and car tax renewals, but its scope has been extended to include the payment of traffic fines, vehicle registration, and more recently the renewal of immigrant workers' permits. MYEG also sells additional services, such as insurance, to customers using the company's website.

MYEG is part of a consortium currently implementing a service tax monitoring system, which will record and report cash register transactions in bars, restaurants and nightclubs, with a wider implementation expected post the introduction of GST in Malaysia in April 2015.

APT's share price rose by a pleasing 68.1% during the year. As with Asiasat, APT is a Hong Kong based satellite operator. It has been part of UEM's portfolio since 2012, entering the top ten this year through a combination of increased investment and share price performance.

Traditionally, APT's revenues have been substantially below Asiasat's despite both companies having similar operational satellite capacity. A new satellite launched in May 2012 has been transformative, with the company increasing both capacity utilisation and unit pricing.

Revenue growth in the financial year ended December 2013 was 26.4% and net income grew by 53.1%. Cash generation during 2013 was particularly strong, with APT moving from net debt of HK$604.7m to a net cash position of HK$307.6m.

China Everbright's share price increased by 88.8% over the period under review, reflecting its underlying operational performance and a re-rating by the market. China Everbright is one of the leading environmental protection and alternative energy companies in China, operating 11 Waste-to-Energy ("WTE") projects, 18 wastewater treatment projects, three industrial and hazardous solid waste treatment plants, as well as several methane-to-energy biomass and solar projects. These concessions are typically Build-Operate-Transfer ("BOT") contracts with a 30-year lifespan.

The Chinese government's support for energy conservation and environmental protection has been bolstered by the 12th Five-Year Plan, which ranked this industry first amongst seven Strategic Emerging Industries in 2013. This resulted in a surge of new project developments by municipal governments, as well as the standardisation of the electricity tariff for WTE projects. China Everbright was a clear beneficiary, securing 12 new projects during the year.

The construction of these new projects, combined with excellent underlying growth whereby total WTE electricity generated by China Everbright increased by 27.5% YoY to over 1m MWh, resulted in an excellent financial performance in 2013. Revenues increased by 56.0%, EBITDA by 41.7%, and normalised net income by 50.0% in the year to December 2013. Dividends per share were raised by 41.7%.

UEM has been invested in China Everbright since 2009 and there was no change to our shareholding in the period under review.

China (including Hong Kong)remained UEM's biggest country investment increasing from 26.7% to 32.1%. This has been driven mainly by continued investment performance offset in part by currency weakness. The Shanghai Composite and Hang Seng indices were down 9.1% and 0.7% respectively. The Chinese Renminbi and Hong Kong dollar were down 9.0% and 8.9% respectively against Sterling. Both factors represent a negative headwind for investors.

China Gas Holdings Ltd's ("China Gas") share price continued to appreciate rapidly, increasing by 57.6% in the year and hitting a record high of HK$13.40 on 22 April 2014. This in part reflects the strong operational and financial progress achieved by China Gas, with piped gas volumes growing by 14.6% in the six months to September 2013 and liquefied petroleum gas ("LPG") volumes up 87.2%, boosted by the acquisition of Panva Gas. This resulted in revenue and normalised net income growth of 46.4% and 74.6% respectively.

China Gas has expanded its total number of gas concessions to 208 cities following the acquisition of Fortune Gas in August 2013. As at 30 September 2013 China Gas had 9.7m customers connected, up 22.9% on the previous year. It is notable that only 44.5% of households within its concession areas are connected to the gas network, emphasising the growth opportunity yet to be realised.

Asia Satellite Telecommunications Holdings Limited's ("Asiasat") share price rose 14.3% during the year and the total return, including dividends paid, was just over 20.0%. Underlying revenues were little changed on 2012, with the company relatively capacity constrained. Two new satellites are due to be launched from Cape Canaveral in June and July 2014 respectively and the company is optimistic that these new satellites, which will provide additional capacity, will drive growth in the second half of 2014 and beyond.

We are again encouraged by Asiasat's decision to improve its balance sheet efficiency by declaring a special dividend of HK$1.50 with its 2013 results, which together with the regular final dividend of HK$0.80, will return HK$900m of cash to shareholders in June 2014.

Malaysiais now UEM's second largest country investment rising from 10.0% to 16.3%. This is due to both increased valuations, as in the case of Malaysia Airport Holdings Berhad("MAHB") and MYEG, and to new investments. The wider FTSE Bursa Malaysia Index was up 10.6%. However, the market gains were offset by currency weakness, with the Malaysian Ringgit down 13.6% versus Sterling.

MAHB's share price was up 35.6% as the company saw passenger numbers increase by an astonishing 18.4% during 2013 driven by the continual expansion of low-cost carrier airlines including AirAsia, by Malaysia Airlines joining the One World Alliance in February 2013 and by the entry of ten new airlines using MAHB's airports. The realisation that the new third runway and airport terminal, KLIA2, the world's first dedicated low-cost carrier hub, would be completed within revised budget estimates helped sentiment towards the company.

Brazilian exposure has reduced further over the year to 31 March 2014 down from 24.5% to 15.7%. This reflects continued realisations combined with market and currency weakness. Longer term we remain optimistic about Brazil given the investment into infrastructure, its proximity to North America and the outlook for its offshore oil assets. However, short-term concerns about the election and political interventions make Brazil a challenging investment environment. The Brazilian Bovespa was down 10.5% and the Brazilian Real was down 18.6%, together representing very significant negatives for investors.

Ocean Wilsons Holdings Limited's ("Ocean Wilsons") share price was up 5.3% during the year, as the operating company, Wilson Sons, is now beginning to benefit from the completion of its US$1bn capex plan which it has undertaken since its IPO in 2007. Its cash flow has significantly improved which has enabled Ocean Wilsons to increase its dividend for 2013 by 43%. Operationally Wilson Sons witnessed a solid year with net revenues up 8.2% and EBITDA up 24.9%, although net income was down 14.0%, as it was affected by exchange rate losses given the depreciation of the Brazilian Real. Ocean Wilsons' investment portfolio was up 4.8% for the period to US$249.0m.

The Philippines has remained UEM's fourth largest country investment at 9.5%, (last year 10.8%). This mainly reflects positive investment performance offset by currency weakness and realisations. The Philippine PSEI was down 6.1% and the Philippine Peso down 17.1% over the twelve months. Once again, providing significant headwinds for investors.

International Container Terminal Services Inc's ("ICT") share price rose by 17.4% over the year. During 2013, the company has continued to acquire a number of new container terminals, with Congo and Honduras being the latest additions to its portfolio in 2013. The company continues to perform well, with new terminals driving long term growth with net revenues up 17.6% in 2013, EBITDA up 22.7% and net income up 20.3%. Volume growth of Twenty Foot Equivalent Units ("TEUs") was 12.1%. Given the share price appreciation we have realised £7.3m of our holding during the year.

Exposure to Thailandhas reduced from 11.2% to 6.9% mainly as a result of realisations and due to significant currency weakness. The Thai SET Index was down 11.8% and the Thai Baht was down 17.8%, together contributing to significant negatives for investors.

Eastern Water Resources Development and Management PCL("Eastwater") shares were down 24.0% in the period under review. The company has endured a turbulent period following the implementation of annual tariff increases in 2012. Its biggest customer, the Provincial Waterworks Authority ("PWA") refused to accept the tariff increase, a situation complicated further by the fact that the PWA is the company's largest shareholder with a 40.2% stake and has board representation. An increasingly political struggle resulted in CEO Praphant Asava-Aree, a strong defender of minority rights, stepping down in May 2013.

Following this there were several changes made to the Eastwater board of directors, including the chairman and the PWA representative. This included the appointment of a new CEO, Wanchai Lawattanatrakul, who in December 2013 announced a 10.5% cut in the PWA's tariff, backdated to 1 November 2013. This regressive step was exceptionally disappointing and we have made, and continue to make, strong representations to the board to protect our rights and improve the level of corporate governance at Eastwater.

In the financial year to 31 December 2013 raw water volumes fell by 2.5%, affected by weaker economic activity and an above-average rainy season, resulting in customers substituting demand with their own raw water resources. This was offset by the tariff increases which were in place for most of the year, allowing revenues to grow by 2.4% and normalised profits by 6.2%. However dividends per share were cut by 4.5%. In the year to March 2014 we reduced our holding in Eastwater by 12.0%.

Chile increased from 3.1% to 4.6% as a result of investment outperformance and further investment. The Chile IPSA index was down 14.9% and the Chilean Peso (CLP) was down 22.0%, again contributing to significant negatives for investors.

Gasco S.A.'s ("Gasco") share price increased by 20.5% in the year to March 2014. Gasco continues to deliver steady operational and financial progress following the change in LNG import costs being indexed to cheaper Henry Hub prices as compared to its previous link to Brent pricing. In the year to 31 December 2013 natural gas volumes sold in Chile declined by 8.5%, mainly due to lower demand from thermoelectric customers. Excluding these wholesale customers, underlying volume growth was steady at 4.4%. LPG volumes in Chile were also stable with 3.4% growth. Group revenues fell 4.0%, but this decline was more than offset by lower input costs with normalised earnings increasing 60.3%.

Gasco remains well positioned for future growth, with the capacity of the GNL Quintero facility being expanded by 50% by mid-2014, which will see a material uplift in available gas supplies to support further expansion in Gasco and its 51.8% owned subsidiary Metrogas' customer bases. In the year to 31 December 2013 Gasco increased its dividends per share by 123%, on top of which it has announced a special dividend of CLP182.00 per share, which will benefit UEM's 2015 income. In the period under review we increased our holding in Gasco by 36.0%.

PORTFOLIO GENERAL

Investment activity continued at similar levels to the last three years, with investments of £101.9m (2013: £90.7m) and realisations of £104.1m (2013: £92.0m). Within the top ten investments, UEM invested £7.6m in APT, £4.7m in Gasco and £2.3m in MAHB. Partial realisations in the top ten included ICT at £7.3m, Eastern Water £4.6m and MYEG £2.5m.

Changes in the geographic split reflect the realisations plus relative market performance. China increased to 32.1% (2013: 26.7%) of the total portfolio and Brazil reduced to 15.7% (2013: 24.5%). Sector changes also reflect realisations and investment performance. Ports remain the largest sector, with gas up strongly to 16.9% (2013: 10.3%) and water and waste down from 22.1% to 13.5%.

BANK DEBT

Bank debt has increased from £9.2m to £23.1m over the twelve months. The Scotiabank facility of £50.0m has been extended to 30 April 2016 on effectively the same terms and conditions. At the year end the debt was drawn as £14.5m in Sterling, £4.1m in Euro and £4.5m in US Dollar.

MARKET HEDGING

There has been little change in the market hedged position over the year. However, the continued performance of the US S&P Index has undermined the carrying value of the hedged position and resulted in a net loss of £5.8m in the twelve months.

REVENUE RETURN

Revenue income has decreased over the year by 1.5% from £13.9m to £13.7m. This reflects a yield on the opening investment portfolio of 3.0%. While we were looking for growth in the year to 31 March 2014 this has been mainly held back by the weaker exchange rates and by the shift in the portfolio from Brazil to China, where dividend yields are lower.

The normal management and administrative fees were largely unchanged. However, other expenses increased mainly as a result of increased travel costs and professional fees.

Finance costs were higher mainly due to increased borrowings. Taxation remained broadly in line with last year.

The net impact of the decreased income and higher costs was a reduced revenue return of £10.3m, down from £11.2m, or 8.0% on last year.

CAPITAL RETURN

The portfolio loss in the year of £19.8m reflects strong stock selection being offset by significantly weaker currencies. The loss on derivative instruments of £5.8m arose from the continuing strong US equity markets which eroded the value of UEM's S&P put option positions.

Total management and administrative fees charged to capital were much lower as there was no performance fee paid in respect of the year under review.

The increased borrowings resulted in finance costs being higher, while the taxation gain arose through the decrease in deferred tax position calculated on lower gains from the Brazilian holdings.

The net effect of the above was a loss for the year on a capital return of £25.9m, down from £66.2m profit last year.

CDO Jillings

ICM Limited

Investment Manager

23 June 2014

GROUP PERFORMANCE SUMMARY

	31 March 2014	31 March 2013	Change %
Total return (1) (annual) (%)	(3.4)	20.5	n/a
Annual compound total return (since inception)(2) (%)	12.4	14.2	n/a
Net asset value per ordinary share (pence)	192.38	205.49	(6.4)
Ordinary share price (pence)	180.00	191.20	(5.9)
Discount (%)	(6.4)	(7.0)	n/a
Earnings per ordinary share
- Capital (pence)	(12.13)	30.71	(139.5)
- Revenue (pence)	4.80	5.20	(7.7)
- Total (pence)	(7.33)	35.91	(120.4)
Dividends per ordinary share
- 1st Quarter (pence)	1.525	1.375	10.9
- 2nd Quarter (pence)	1.525	1.375	10.9
- 3rd Quarter (pence)	1.525	1.525	0.0
- 4th Quarter(3) (pence)	1.525	1.525	0.0
- Total (pence)	6.100	5.800	5.2
Equity holders' funds (£m)	410.2	442.9	(7.4)
Gross assets (£m)(4)	433.4	452.1	(4.1)
Ordinary shares bought back (£m)	3.9	-	n/a
Cash/(overdraft) (£m)	(0.9)	2.6	(134.6)
Bank debt (£m)	(23.1)	(9.2)	151.1
Net Debt (£m)	(24.0)	(6.6)	263.6
Net debt gearing on gross assets (%)	5.5	1.5	n/a
Management and administration fees  and other expenses (£m)
- excluding performance fee	3.7	3.4	8.8
- including performance fee	3.7	12.9	(71.3)
Ongoing charges figure (5)
- excluding performance fee (%)	0.9	0.8	n/a
- including performance fee (%)	0.9	3.2	n/a

(1)   Total return is calculated based on NAV per share return plus dividends reinvested from the payment date

(2)   Annual total return based on NAV per ordinary share return, plus dividends reinvested from the payment date and return on warrants converted on 2 August 2010

(3)   The fourth quarterly dividend (2013, fourth quarter) declared on 23 April 2014 and paid on 6 June 2014 has not been included as a liability in the accounts

(4)   Gross assets less liabilities excluding loans

(5)   Expressed as percentage of average net assets, ongoing charges comprise all operational, recurring costs that are payable by the Company or suffered within underlying investee funds, in the absence of any purchases or sales of investments

Investment OBJECTIVE AND POLICY

Investment Objective

The Company's objective is to provide long-term total return through a flexible investment policy that permits it to make investments predominantly in infrastructure, utility and related sectors, mainly in emerging markets.

Investment Policy and Risk

The Company's investment policy is flexible and its investments include (but are not limited to) water, sewerage, waste, electricity, gas, telecommunications, ports, airports, service companies, rail, roads, any business with essential service or monopolistic characteristics and in any new infrastructure or utilities which may arise, mainly in emerging markets. The Company may also invest in businesses which supply services to, or otherwise support, the infrastructure, utilities and related sectors.

The Company focuses on the under-developed and developing markets of Asia, Latin America, Emerging Europe and Africa but has the flexibility to invest in markets worldwide. The Company generally seeks to invest in emerging market countries which are regarded as having attributes such as political stability, economic development, an acceptable legal framework and an encouraging attitude to foreign investment.

The Board and Investment Manager review the risk profile of the Company every six months. Agreed risk parameters are established and compliance is reviewed at the quarterly board meetings.

There will be no material change to the Company's investment policy without prior shareholder approval.

The Company has the flexibility to invest in shares, bonds, convertibles and other types of securities, including non-investment grade bonds and to invest in unlisted securities. The Company may also use derivative instruments such as American Depository Receipts, promissory notes, contracts for difference, financial futures, call and put options, and warrants for the purpose of efficient portfolio management.

The Company may, from time to time, actively seek to protect the Company's portfolio and balance sheet from major corrections. This would include foreign currency hedges, interest rate hedges, stock market index put and call options, and similar instruments.

UEM seeks to identify and invest in undervalued investments predominantly in the infrastructure and utility sectors mainly in emerging markets. The Company aims to identify securities where underlying values and growth prospects are not reflected in the market price. This is often as a result of strong growth drivers, but can include changes in regulation, technology, market motivation, potential for financial engineering, competition or shareholder indifference.

The Company seeks to minimise risk by investing mainly in companies and sectors displaying the characteristics of essential services or monopolies such as utilities, transportation infrastructure, communications or companies with a unique product or market position. Most investee companies are asset backed, have good cash flows and offer good dividend yields. UEM generally seeks to invest in companies with strong management who have the potential to grow their business and who have an appreciation of, and ability to, manage risk.

UEM believes it is generally appropriate to support investee companies with their capital requirements while at the same time maintaining an active and constructive shareholder approach, including encouraging the optimisation of capital structures and business efficiencies. The investment team seeks to maintain regular contact with investee companies and UEM is often among its investee companies' largest international shareholders.

The Company aims to maximise value for shareholders by holding a relatively concentrated portfolio of securities and invests through instruments appropriate to the particular situation. UEM is prepared to hold investments in unlisted securities when the attractiveness of the investment justifies the risks and lower liquidity associated with unlisted investments. The Investment Manager controls stock-specific and sector and geographic risk by continuously monitoring the exposures in the portfolio. In depth continual analysis of the fundamentals of investee companies allows the Investment Manager to assess the financial risks associated with any particular stock. The portfolio is typically made up of 60 to 90 stocks.

PRINCIPAL RISKS AND RISK MITIGATION

The Board carefully considers the Company's principal risks and seeks to mitigate these risks through continual and regular review, policy setting, compliance with and enforcement of contractual obligations and active communication with the Investment Manager and the Company's Administrator (F&C Management Limited ("F&C" or "the Administrator")).

The Board applies the principles and recommendations of the UK Code on Corporate Governance and the AIC's Code on Corporate Governance. Through these procedures, and in accordance with Internal Control: Revised Guidance for Directors on the Combined Code (the "FRC guidance"), the Board has established an on-going process for identifying, evaluating and managing the significant risks faced by the Company and has regularly reviewed the effectiveness of the internal control systems for the year. This process has been in place throughout the year under review and to the date hereof and will continue to be regularly reviewed by the Board going forward.

The following are considered to be the most significant risks to shareholders in relation to their investment in the Company. Further details of risks and risk management policies as they relate to the financial assets and liabilities of the Company are detailed in note 25 to the financial statements.

Investment objective and strategy - the risk that the investment strategy does not achieve long-term total returns for the Company's shareholders

There is no guarantee that the Company's strategy and business model will be successful in achieving its investment objective.

The Board monitors the performance of the Company and has established guidelines to ensure that the investment policy that has been approved is pursued by the Investment Manager.

The Board regularly reviews strategy in relation to a range of issues including the balance between quoted and unquoted stocks, the allocation of assets between geographic regions and of sectors and gearing. Periodically the Board holds a separate meeting devoted to strategy, the most recent one being held in November 2013.

Investment risk

The investment process employed by the Investment Manager combines assessment of economic and market conditions in the relevant countries with stock selection. Fundamental analysis forms the basis of the Company's stock selection process, with an emphasis on sound balance sheets, good cash flows, the ability to pay and sustain dividends, good asset bases and market conditions. The political risks associated with investing in these countries are also assessed. Overall, the investment process is aiming to achieve absolute returns through an active fund management approach.

Sometimes governments make unexpected changes in the regulatory environment which impact the price of investments held by the Company in that country.

Such factors are out of the control of the Board and the Investment Manager and the impact of any such announcement on the relevant investments is assessed to decide if any changes are required to the portfolio.

Risk management is an integral part of the investment management process. The Investment Manager effectively controls risk by ensuring that the Company's portfolio is always appropriately diversified.

Past performance of the Company is not necessarily indicative of future performance.

A fuller review of economic and market conditions is included in the Investment Manager's Report.

Currency risk

The Company's results are reported in Sterling, whilst the majority of its assets are priced in foreign currencies. It is difficult and expensive to hedge most emerging market currencies. The impact of adverse movements in exchange rates can significantly affect the returns in Sterling of both capital and income. Such factors are out of the control of the Board and the Investment Manager and may give rise to distortions in the reported returns to shareholders.

Gearing

Gearing levels may change from time to time in accordance with the Investment Manager's and the Board's assessment of risk and reward. Whilst the use of borrowings by the Company should enhance total return where the return on the Company's underlying securities is rising and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is falling. As at 31 March 2014, net gearing from borrowings stood at 5.5%.

Banking: a breach of the Company's loan covenants might lead to funding being summarily withdrawn

The Investment Manager monitors compliance with the banking covenants when each drawdown is made and at month end.

The Board reviews compliance with the banking covenants at each Board meeting.

Shares trading at a discount to Net Asset Value

Shareholders are exposed to certain risks in addition to risks applying to the Company itself. The ordinary shares of the Company may trade at a discount to their NAV. The Board monitors the price of the Company's shares in relation to their NAV and the premium/discount at which they trade. The Board generally will buy-back shares for cancellation if they are trading at a discount in excess of 10% and the Investment Manager agrees it is a good investment decision.

The value of an investment in the Company and the income derived from that investment may go down as well as up and an investor may not get back the amount invested.

Key staff: loss by the Investment Manager of key staff could affect investment returns

The quality of the management team is a crucial factor in delivering good performance. There are training and development programs in place for employees and the recruitment and remuneration package has been developed in order to retain key staff.

The position is monitored by the Board at each meeting; the Board discusses succession planning with the Investment Manager.

Regulatory: breach of regulatory rules could lead to suspension of trading in the Company's shares, financial penalties or a qualified audit report

The Company Secretary, working closely with the Administrator, monitors the Company's compliance with the Listing Rules of the Financial Conduct Authority and compliance with the principal rules is reviewed by the Directors at each Board Meeting; any concerns are discussed with the Company's legal advisers.

Reliance on the Investment Manager and other service providers: the Company has no full-time employees and the Directors have all been appointed on a non-executive basis; the Company is reliant upon the performance of third party service providers. In particular, the Investment Manager performs services which are integral to the operation of the Company

Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to successfully pursue its investment policy. The Audit Committee monitors the performance of the service providers at each meeting.

The Board reviews operational issues at each Board Meeting and the Audit Committee receives reports on the operation of internal controls.

Financial: inadequate controls by the Investment Manager or Administrator or third party service providers could lead to misappropriation of assets

The Audit Committee reviews the Administrator's annual internal control report which details the controls around the reconciliation of the Administrator's records to those of the Custodians. The Administrator reviews the control reports published by JP Morgan Chase and draws any issues to the attention of the Board. The records of the assets held at Bermuda Commercial Bank Limited are reconciled to the valuations used by the Administrator.

Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations. The Board reviews financial reports in detail at each Board Meeting.

GROUP INCOME STATEMENT

for the year to 31 March	2014				2013
		Revenue	Capital	Total	Revenue	Capital	Total
		return	return	return	return	return	return
		£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
(Losses)/gains on investments		-	(19,767)	(19,767)	-	82,990	82,990
Losses on derivative instruments		-	(5,821)	(5,821)	-	(5,240)	(5,240)
Exchange (losses)/gains		(59)	(202)	(261)	86	(55)	31
Investment and other income		13,742	-	13,742	13,945	-	13,945
Total income		13,683	(25,790)	(12,107)	14,031	77,695	91,726
Management and administration fees		(925)	(1,328)	(2,253)	(853)	(10,927)	(11,780)
Other expenses		(1,324)	(25)	(1,349)	(1,081)	(25)	(1,106)
Profit/(loss) before finance costs and taxation		11,434	(27,143)	(15,709)	12,097	66,743	78,840
Finance costs		(197)	(461)	(658)	(108)	(253)	(361)
Profit/(loss) before taxation		11,237	(27,604)	(16,367)	11,989	66,490	78,479
Taxation		(982)	1,683	701	(789)	(287)	(1,076)
Profit/(loss) for the year		10,255	(25,921)	(15,666)	11,200	66,203	77,403
Earnings per ordinary share - pence		4.80	(12.13)	(7.33)	5.20	30.71	35.91

The total column of this statement represents the Group's Income Statement and the Group's Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies in the UK.

The Group does not have any income or expense that is not included in the profit for the year, and therefore the 'profit for the year' is also the 'total comprehensive income for the year', as defined in International Accounting Standard 1 (revised).

All items in the above statement derive from continuing operations.

All income is attributable to the equity holders of the Company. There are no minority interests.

COMPANY INCOME STATEMENT

for the year to 31 March	2014				2013
		Revenue	Capital	Total	Revenue	Capital	Total
		return	return	return	return	return	return
		£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
(Losses)/gains on investments		-	(25,597)	(25,597)	-	77,664	77,664
Exchange (losses)/gains		(63)	(211)	(274)	86	(14)	72
Investment and other income		13,667	-	13,667	13,945	-	13,945
Total income		13,604	(25,808)	(12,204)	14,031	77,650	91,681
Management and administration fees		(925)	(1,328)	(2,253)	(853)	(10,927)	(11,780)
Other expenses		(1,227)	(25)	(1,252)	(1,036)	(25)	(1,061)
Profit/(loss) before finance costs and taxation		11,452	(27,161)	(15,709)	12,142	66,698	78,840
Finance costs		(197)	(461)	(658)	(108)	(253)	(361)
Profit/(loss) before taxation		11,255	(27,622)	(16,367)	12,034	66,445	78,479
Taxation		(982)	1,683	701	(789)	(287)	(1,076)
Profit/(loss) for the year		10,273	(25,939)	(15,666)	11,245	66,158	77,403
Earnings per ordinary share - pence		4.80	(12.13)	(7.33)	5.22	30.69	35.91

The total column of this statement represents the Company's Income Statement and the Company's Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue and capital return columns are both prepared under guidance published by the Association of Investment Companies in the UK.

The Company does not have any income or expense that is not included in the profit for the year, and therefore the 'profit for the year' is also the 'total comprehensive income for the year', as defined in International Accounting Standard 1 (revised).

All items in the above statement derive from continuing operations.

All income is attributable to the equity holders of the Company.

GROUP STATEMENT OF CHANGES IN EQUITY

for the year to 31 March 2014
	Ordinary	Share		Other non-	Retained earnings
	share	premium	Special	distributable	Capital	Revenue
	capital	account	reserve	reserve	reserves	reserve	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 31 March 2013	21,553	7,510	204,587	11,093	196,325	1,819	442,887
(Loss)/profit for the year	-	-	-	-	(25,921)	10,255	(15,666)
Ordinary dividends paid	-	-	-	-	(3,287)	(9,756)	(13,043)
Shares purchased by the Company	(229)	(3,714)	-	-	-	-	(3,943)
Balance at 31 March 2014	21,324	3,796	204,587	11,093	167,117	2,318	410,235

for the year to 31 March 2013
	Ordinary	Share		Other non-	Retained earnings
	share	premium	Special	distributable	Capital	Revenue
	capital	account	reserve	reserve	reserves	reserve	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 31 March 2012	21,553	7,510	204,587	11,093	131,473	2,254	378,470
Profit for the year	-	-	-	-	66,203	11,200	77,403
Ordinary dividends paid	-	-	-	-	(1,351)	(11,635)	(12,986)
Balance at 31 March 2013	21,553	7,510	204,587	11,093	196,325	1,819	442,887

COMPANY STATEMENT OF CHANGES IN EQUITY

for the year to 31 March 2014
	Ordinary	Share		Other non-	Retained earnings
	share	premium	Special	distributable	Capital	Revenue
	capital	account	reserve	reserve	reserves	reserve	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 31 March 2013	21,553	7,510	204,587	11,093	196,114	2,030	442,887
(Loss)/profit for the Year	-	-	-	-	(25,939)	10,273	(15,666)
Ordinary dividends paid	-	-	-	-	(3,287)	(9,756)	(13,043)
Shares purchased by the Company	(229)	(3,714)	-	-	-	-	(3,943)
Balance at 31 March 2014	21,324	3,796	204,587	11,093	166,888	2,547	410,235

for the year to 31 March 2013
	Ordinary	Share		Other non-	Retained earnings
	share	premium	Special	distributable	Capital	Revenue
	capital	account	reserve	reserve	reserves	reserve	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 31 March 2012	21,553	7,510	204,587	11,093	131,307	2,420	378,470
Profit for the Year	-	-	-	-	66,158	11,245	77,403
Ordinary dividends paid	-	-	-	-	(1,351)	(11,635)	(12,986)
Balance at 31 March 2013	21,553	7,510	204,587	11,093	196,114	2,030	442,887

BALANCE SHEETS

	GROUP		COMPANY
at 31 March	2014	2013	2014	2013
	£'000s	£'000s	£'000s	£'000s
Non-current assets
Investments	433,955	455,901	436,724	460,948
Current assets
Other receivables	880	2,105	879	2,103
Derivative financial instruments	1,857	4,702	-	-
Cash and cash equivalents	1,574	2,798	489	2,430
	4,311	9,605	1,368	4,533
Current liabilities
Bank loans	(23,132)	(9,228)	(23,132)	(9,228)
Other payables	(3,916)	(10,723)	(3,742)	(10,698)
	(27,048)	(19,951)	(26,874)	(19,926)
Net current (liabilities)/assets	(22,737)	(10,346)	(25,506)	(15,393)
Total assets less current liabilities	411,218	445,555	411,218	445,555
Non-current liabilities
Deferred tax	(983)	(2,668)	(983)	(2,668)
Net assets	410,235	442,887	410,235	442,887
Equity attributable to equity holders
Ordinary share capital	21,324	21,553	21,324	21,553
Share premium account	3,796	7,510	3,796	7,510
Special reserve	204,587	204,587	204,587	204,587
Other non-distributable reserve	11,093	11,093	11,093	11,093
Capital reserves	167,117	196,325	166,888	196,114
Revenue reserve	2,318	1,819	2,547	2,030
Total attributable to equity holders	410,235	442,887	410,235	442,887
Net asset value per ordinary share
Basic - pence	192.38	205.49	192.38	205.49

STATEMENTS OF CASH FLOWS

	GROUP		COMPANY
for the year to 31 March	2014	2013	2014	2013
	£'000s	£'000s	£'000s	£'000s
Cash flows from operating activities	(665)	15,341	(661)	7,968
Investing activities:
Purchases of investments	(101,081)	(95,099)	(104,773)	(95,150)
Sales of investments	104,628	97,240	104,628	99,384
Purchases of derivatives	(8,725)	(32,111)	-	-
Sales of derivatives	5,749	27,080	-	-
Cash flows from investing activities	571	(2,890)	(145)	4,234
Cash flows before financing activities	(94)	12,451	(806)	12,202
Financing activities: Ordinary dividends paid	(13,043)	(12,986)	(13,043)	(12,986)
Movements from loans	14,215	4,634	14,215	4,634
Cost of ordinary shares purchased	(3,942)	-	(3,942)	-
Cash flows from financing activities	(2,770)	(8,352)	(2,770)	(8,352)
Net movement in cash and cash equivalents	(2,864)	4,099	(3,576)	3,850
Cash and cash equivalents at the beginning of the year	2,569	(1,773)	2,201	(1,934)
Effect of movement in foreign exchange	(580)	243	(585)	285
Cash and cash equivalents at the end of the year	(875)	2,569	(1,960)	2,201

Comprised of:
Cash	1,574	2,798	489	2,430
Bank overdraft	(2,449)	(229)	(2,449)	(229)
Total	(875)	2,569	(1,960)	2,201

NOTES

The Directors have paid a fourth quarterly dividend in respect of the year ended 31 March 2014 of 1.525p per ordinary share on 6 June 2014 to shareholders on the register at close of business on 23 May 2014. The total cost of the dividend which has not been accrued in the results for the year to 31 March 2013, was £3,252,000.

This statement was approved by the Board on 23 June 2014. It is not the Group's or Company's statutory accounts. The statutory accounts for the financial year ended 31 March 2014 have been approved and audited, and received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report. The statutory accounts for the financial year ended 31 March 2013 received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

The Report & Accounts for the year ended 31 March 2014 will be posted to shareholders in early July 2014. A copy is available to view and download from the Company's website at www.uem.bm. Copies may also be obtained during normal business hours from Exchange House, Primrose Street, London, EC2A 2NY.

By order of the Board

ICM Limited, Secretary

23 June 2014

 

END

 

 

FR EASKDASFLEFF