Half-year Report

RNS Number : 3885G

Utilico Emerging Markets Trust PLC

25 November 2020

 

Date:     25 November 2020

Contact:   Charles Jillings 

    Utilico Emerging Markets Trust plc 

    01372 271 486 

Gay Collins/Pippa Bailey

Montfort Communications

0203 770 7913

[e-mail]

UTILICO EMERGING MARKETS TRUST PLC

UNAUDITED HALF-YEARLY FINANCIAL REPORT

FOR THE SIX MONTHS TO 30 SEPTEMBER 2020

Utilico Emerging Markets Trust plc ("UEM" or the "Company") today announced its unaudited financial results for the six months to 30 September 2020.

Highlights of results for the six months to 30 September 2020:

· Net asset value ("NAV") total return per share of 12.3%*

· NAV per share of 200.56p, up 10.3%*

· Gross assets of £481.0m, up from £461.4m

· Annual compound NAV total return of 8.7%*

· Dividends per share of 3.850p. Dividends were fully covered by earnings

· Revenue earnings per share ("EPS") decreased 12.5% to 5.59p

· Revenue income decreased to £14.7m, an 18.7% decline

*See Alternate Performance Measures on pages 41 to 43 of the Half-Yearly Financial Report for the six months to 30 September 2020

John Rennocks, Chairman of UEM said: "The half-year to 30 September 2020 has been challenging. Despite difficult markets it is pleasing to see UEM's NAV recover 10.3% to close at 200.56p (31 March 2020: 181.84p), and to report a NAV total return of 12.3% (31 March 2020: (24.9%)). This has lagged behind the MSCI Emerging Markets total return index ("MSCI") which was up 24.2%, as investors globally have driven digital investments higher, while generally ignoring infrastructure and utility investments, and the Brazilian Real weakening by 11.7% which in itself reduced UEM's GBP Nav by an estimated 3.5%. Despite UEM's portfolio being largely value-based utilities and infrastructure assets, UEM's outperformance of the MSCI Emerging Markets Utilities total return Index ("MSCI Utilities") which was up 1.5%, is a significant positive.

"ESG continues to be a focus for UEM. We have a robust policy on ESG against which investee companies are measured and UEM's Investment managers have a good track record on governance, given their active approach to investment companies.

"Notwithstanding the shift of 11.6% of the portfolio to Data Services and Infrastructure which are high growth, low earnings yielding opportunities, it is encouraging to see the revenue account earnings per share ("EPS") only reduce by 12.5%. Implicitly, the utilities portfolio is delivering returns in line with last year. Given the global headwinds to cashflows and reduction in dividends in most markets, this result is very pleasing.

"In August 2020, the Board declared the first quarterly dividend of 1.925p per share in respect of the year ending 31 March 2021 and has recently announced a second quarterly dividend of 1.925p per share. The Board expects to maintain the third and fourth quarter dividends at this level, which would result in dividends for the full year to 31 March 2021 of 7.70p, an uplift of 1.7% over the year to 31 March 2020. Dividends remain fully covered by income at the half-year and if needed the Board will use its revenue reserves or substantial capital reserves to maintain the dividend payments.

"The global economies face unprecedented challenges; however, it is pleasing to see most of UEM's portfolio companies performing well in the circumstances. UEM's performance continues to be driven by bottom-up stock selection, and the portfolio is predominantly investing in relatively liquid, cash-generative companies with long-duration assets that the Investment Managers believe are structurally undervalued and offer excellent total returns. Since inception over 15 years ago, UEM's track record of performance has been reassuring and the Board has every confidence that the Investment Managers will continue to identify investments offering attractive, long-term returns for UEM."

Charles Jillings, Investment Manager of UEM added: "COVID-19 has caused unprecedented challenges for investors. We are strongly of the view that the shift of workers and businesses online has accelerated the digitalisation of governments, business and individuals markedly, which in turn should offer investment opportunities. UEM's gross assets (less liabilities, excluding loans) increased from £461.4m to £481.0m in the half-year to 30 September 2020, reflecting gains on both the revenue and capital accounts, as well as increased gearing.

"UEM remained active during the half-year to 30 September 2020, investing £108.6m (realisations were £89.1m), and adding seven new entries into the top twenty holdings of the portfolio over the half-year. We also exited certain holdings which had held up in the market crash. UEM has been investing in Data Services and Infrastructure assets over the recent years in recognition of the growth in technology and their natural infrastructure characteristics, and we have increased exposure to this asset class from 4.4% to 11.6% as a result of both investment and asset appreciation.

"As investors seek opportunities in technology and healthcare it is frustrating to see the underperformance of UEM's asset class share prices especially given the strong performance by most of UEM's holdings; however, the third quarter investee earnings which are now being reported have even surprised us in their earnings strength.

"UEM's portfolio consists of a diverse range of companies that are often under-represented in the MSCI. The strength of our sector and country knowledge built up over decades has given us an ability to continue to identify these investments, despite COVID-19 and global lockdowns. Despite unprecedented challenges due to COVID-19, UEM's investment objective to provide positive long-term absolute returns has not changed, and we remain optimistic to uncover compelling investments that offer excellent returns."

PERFORMANCE SUMMARY

				% Change
	Half-year	Half-year	Annual	Mar -
	30 Sep 2020	30 Sep 2019	31 Mar 2020	Sep 2020
NAV total return per share (1)   (%)	12.3	9.0	(24.9)	n/a
Share price total return per share (1)   (%)	10.0	10.4	(23.2)	n/a
Annual compound NAV total return (1)  (since inception) (%)	8.7	11.3	8.1	n/a
NAV per share (pence)	200.56	268.75	181.84	10.3
Share price (pence)	174.00	237.00	161.50	7.7
Discount (%)	(13.2)	(11.8)	(11.2)	n/a
Earnings per share
- Capital (pence)	16.77	16.01	(68.29)	4.7 (4)
- Revenue (pence)	5.59	6.39	7.88	(12.5) (4)
Total (pence)	22.36	22.40	(60.41)	(0.2) (4)
Dividends per share (pence)	3.850 (2)	3.725	7.575	3.4 (4)
Gross assets (3)  (£m)	481.0	653.5	461.4	4.2
Equity holders' funds (£m)	448.9	612.9	414.3	8.4
Shares bought back (£m)	7.2	4.3	4.8	67.4 (4)
Net (overdraft)/cash (£m)	(1.6)	5.9	39.5	(104.1)
Bank loans (£m)	(32.1)	(40.6)	(47.1)	(31.8)
Net debt (£m)	(33.7)	(34.7)	(7.6)	343.4
Net gearing on net assets (%)	(7.5)	(5.7)	(1.8)	n/a
Management and administration fees and other expenses
- excluding performance fee (£m)	2.5	3.2	6.4	(21.9) (4)
- including performance fee (£m)	2.5	4.2	6.4	(40.5) (4)
Ongoing charges figure (1)
- excluding performance fee (%)	1.1 (5)	1.1 (5)	1.1	n/a
- including performance fee (%)	1.1 (5)	1.3 (5)	1.1	n/a

(1)  See Alternative Performance Measures on pages 41 to 43 of the Half-Yearly Financial Report for the six months to 30 September 2020.

(2)  The second quarterly dividend declared has not been included as a liability in the accounts

(3)  Gross assets less liabilities excluding loans

(4)  Percentage change based on comparable six month period to 30 September 2019

(5)  For comparative purposes the figures have been annualised

CHAIRMAN'S STATEMENT

The half-year to 30 September 2020 has been truly challenging for all stakeholders. The coronavirus ("Covid-19") pandemic has seen both a demand and supply shock and impacted most stakeholders in all economies. UEM has seen its NAV total return recover 12.3% in difficult markets over the half-year to 30 September 2020. This has lagged behind the MSCI Emerging Markets Index as investors globally have driven digital investments higher, while generally ignoring infrastructure and utility investments. The MSCI Emerging Markets Utilities total return Index ("MSCI Utilities") for the half-year was up 1.5% while the MSCI Emerging Markets total return Index ("MSCI") was up 24.2%. Despite UEM's portfolio being largely value-based utilities and infrastructure assets, UEM's outperformance of the MSCI Utilities is a significant positive.

Globally investors have essentially sought out technology growth over value. The other key headwind for UEM has been the weakness of the Brazilian Real. At the start of the half-year UEM's exposure to the Brazilian markets was 29.1%. Over the half-year the Brazilian Real weakened 11.7% which in itself reduced UEM's GBP NAV by an estimated 3.5%.

On top of Covid-19, we continue to experience two broad opposing forces at work in global markets at the moment; social and political tensions, and central bank intervention. Central banks are focused on reflationary policies, providing liquidity, lowering interest rates and now decreasing average inflation targets. The prolonged effect of negative interest rates is a concern. We see negative interest rates as eroding value for savers and pension funds, while increasing the long-term risk to global security. As EM investors, we are reassured by the lower interest rates in nearly all economies from Brazil, to India and China. This will see improved earnings for investee companies as the cost of finance falls and should see asset values rise as discount rates fall.

The world has become more divided and polarised in its views. This has manifested itself in protests from Hong Kong, Minsk, Moscow, Beirut, London, Portland, Paris through to Santiago, although each has had different drivers. For example, independence for Hong Kong, the wealth gap in Santiago, climate change in London and Black Lives Matter in Portland. The focus is on a rebalance of social and political priorities and resources. Questions are being asked and headwinds rising. Some of this anger has developed into riots, caused significant disruption and is generating sharp policy changes. Most countries are seeing a rise in nationalism. The US election is itself a strong expression of these social and political divides - often overridden by fake news and social agendas.

There is also an accelerating expectation that businesses address questions around their approach to Environmental, Social and Governance ("ESG") outcomes. ESG continues to be a focus for us. UEM's Investment Managers have a good record on governance, given their active approach to investee companies and they have taken steps to strengthen the ESG approach to investing. For example, decarbonisation offers UEM more opportunities than challenges. Our investment in China Everbright Greentech Limited, China's leading biomass and hazardous waste treatment business, and other investments offer significant opportunities for UEM over the long-term. UEM has a robust policy on ESG against which investee companies are measured.

In the UK, Brexit and Covid-19 has crowded out discussions on most topics in the first half of the financial year and its outcome remains uncertain. Over the half-year to 30 September 2020, Sterling weakened 4.1% against the US Dollar, partially reflecting this uncertainty.

Covid-19 has become a global pandemic that severely challenges us all, and the impact worldwide cannot be emphasised enough. It has inflicted huge damage to underlying economies and has disrupted health services, education, business and social activities. Governments have struggled to keep up with a rapidly changing situation and the optimal medical, economic and social solutions to tackling the pandemic. Covid-19 has impacted every continent and every community. More than this, it has exposed the stresses and weaknesses in our economies, politics, and social fabric. The vulnerable have borne and continue to bear the greatest burden directly and indirectly from Covid-19.

The shift overnight from working in offices to working at home has been experienced by many first-hand. This has disrupted and challenged professional, social and personal lives. Our Investment Managers have rightly focused on three issues. First, people; their employees, investee boards and stakeholders, ensuring the right processes and decisions were adopted and made. Second, ensuring that UEM and its investee companies focused on short term cashflow needs and that they had adequate funding. Third, ensuring that UEM and its investees could thrive where opportunities arise. While Covid-19 has challenged business vulnerability, it has also accelerated change. The shift to working from home has no doubt augmented the adoption of digital platforms. We believe that UEM's management team has risen to the challenges and emerged stronger. No doubt there are further challenges to come and UEM will address those in a similar manner.

The pandemic has exposed social and political fault lines and we have witnessed unprecedented responses from governments and central banks to support their economies. Interest rates have been lowered to near nil and negative in some instances. Borrowings have soared beyond what was considered already an over- leveraged position. We have seen social tensions rise as communities hit hardest by Covid-19 are often among the poorest and most vulnerable. Where these issues have combined with historic unresolved racial tensions, significant demonstrations in the USA and Europe have occurred.

A sense of urgency to address economic weakness created by Covid-19 has been a big positive. The growth of digital consumption has accelerated under Covid-19 as more people are working from home and more businesses are operating online. As a result, technology-orientated businesses have significantly jumped in value, a trend we noticed before and one that we continue to see accelerating.

The social issues, from nationalism to the pandemic, remain unresolved. However, communities have pulled together and the human spirit has risen above this upheaval. Let us hope our leaders can deliver on these challenges.

In the EM world, Jair Bolsonaro's government is leading Brazil in the right direction on tackling excessive government costs. Pension reforms have been passed and his government continues to pursue policies to open up the economy and privatise state-owned enterprises. In India, Narendra Modi has been re-elected with a stronger mandate and China's President Xi is committed to growth, especially in technology. It is noteworthy that at a time when the US is turning away from an open economy, China is opening up its economy. These three EM economies account for 51.4% of UEM's portfolio and should respond positively to these policies.

Volatility has reduced over the half-year. Most currencies have followed a narrower band. The exception in UEM's portfolio is the Brazilian Real which was down by 11.7% against Sterling over the half-year. Commodities have moved significantly higher. Oil was caught up in the pandemic demand shock and a power struggle between oil suppliers. Oil famously traded on the Houston exchange at negative values as oversupply, shortage of storage and limited demand resulted in surplus oil. Oil ended the half-year to 30 September 2020 up 80.1%.

China remains a key driver of the EM economies and there is no doubt that Trump's relentless focus on China trade has had a negative impact on China to date. Biden is likely to be less abrasive and there is hope the two nations can build a high level of trust and support on climate change, world trade and open economies.

It is noteworthy that China's economy from Covid-19 has seen a strong recovery in the third quarter and that China's external trade continues to expand. Their trade with Europe now exceeds the US.

China's desire to pivot away from a capital investment-driven and export led economy towards an economy focused on leadership in technology, health and green base, will result in China being a more balanced economy. For now we see China's gross domestic product ("GDP") expanding and currency strengthening.

EARNINGS AND DIVIDEND
The profile of UEM's existing investments remains largely the same. These businesses are predominantly profitable, cash generative and dividend paying. They offer attractive long-term total returns. Notwithstanding the shift of some 11.6% of the portfolio to Data Services and Infrastructure which are high growth, low earnings yielding opportunities, it is pleasing to see the revenue account earnings per share ("EPS") only reduce by 12.5%. Implicitly the utilities portfolio is delivering returns in line with last year. Given the global headwinds to cashflows and reduction in dividends in most markets, this result is very pleasing.

In August 2020, the Board declared the first quarterly dividend of 1.925p per share in respect of the year ending 31 March 2021 and has recently announced a second quarterly dividend of 1.925p per share. The Board expects to maintain the third and fourth quarter dividends at this level, which would result in dividends for the full year to 31 March 2021 of 7.70p, an uplift of 1.7% over the year to 31 March 2020.

Dividends remain fully covered by income at the half-year and if needed the Board will use its revenue reserves or substantial capital reserves to maintain the dividend payments. As at 30 September 2020, UEM has revenue reserves of £9.8m, some 4.38p per share.

SHARE BUYBACKS
UEM's share price discount widened from 11.2% as at 31 March 2020 to 13.2% as at 30 September 2020 and remains above discount levels the Board would wish to see. The Investment Managers have continued buying back UEM's shares for cancellation with 4.0m shares bought back in the six months to 30 September 2020, at an average price of 177.80p. While the Board would prefer to see the discount narrow even more, any share buyback remains an investment decision. Traditionally the Investment Managers have bought back shares if the discount widens to over 10.0%. Since inception, the Company has bought back 53.5m ordinary shares totalling £92.9m.

COVID-19
The Covid-19 impact on UEM's portfolio is set out in the Investment Managers' Report. In response to the pandemic, the Board has suspended all travel and physical meetings, and has moved to holding regular video conference meetings to receive portfolio updates and performance reviews from the Investment Managers. All interactions with UEM's service providers have been by video conference, where needed.

OUTLOOK
By any "normal" metric the global economies face unprecedented challenges today. The war on Covid-19 has taken its toll and is ongoing. Few countries have re-opened their borders to travel and most have ongoing local shutdown responses to Covid-19 flareups, thereby limiting full recovery. Many nations have seen borrowings balloon to over 100% of GDP, interest rates trending to zero and unemployment jump. Given this outlook the Board remains cautious.

It is pleasing to see most of UEM's portfolio companies performing well in the circumstances. It is worth re-emphasising that UEM's performance continues to be driven by bottom-up stock selection. The portfolio is predominantly invested in relatively liquid, cash-generative companies with long-duration assets that the Investment Managers believe are structurally undervalued and offer excellent total returns. Since inception over 15 years ago, UEM's track record of performance has been reassuring and the Board has every confidence that the Investment Managers will continue to identify investments offering attractive, long-term returns for UEM.

John Rennocks

Chairman

25 N ovember 2020

INVESTMENT MANAGERS' REPORT

The Covid-19 pandemic impact on UEM's NAV has been all encompassing. UEM's NAV fell to a low of 177.29p on 23 March 2020 following the global lockdowns. It is pleasing to see for the half-year to 30 September 2020, UEM's NAV recovered to close at 200.56p and record a NAV total return of 12.3% for the half-year. However, during the six month period, the market was focused on technology company growth opportunities and UEM's portfolio of mainly utility infrastructure shares remained largely out of favour and unsupported by the wider market.

Covid-19 has caused unprecedented challenges for investors. Add this pandemic to a growing list of significant concerns, including central bank intervention, populism, US/China frictions, Brexit, Black Lives Matter, climate change and it is obvious to see that investors have been besieged by a dynamic and difficult environment. When the world's largest corporates struggle to project their next quarter's revenues, it is hard to be confident about the direction of the global economy. ICM has continued to be focused on its investments and the delivery of their individual opportunities, making sure they have both the right approach to risk while seeking opportunities that will thrive in this current and post Covid-19 environment.

ICM is strongly of the view that the shift of workers and businesses online, under the pandemic lockdowns globally, has accelerated the digitalisation of governments, businesses and individuals markedly. This shift ranges from doctors' surgeries going online, restaurants setting up internet delivery options and farmers offering produce direct to consumers online; This should offer new investment opportunities. Businesses without internet reach or capability will face a challenging outlook, while many businesses have been agile and shifted online, and therefore have both an opportunity and a positive outlook. We emphasise to our investee companies that disruption is coming to everybody and they need to be taking advantage of it by adapting their business models and embracing these challenges.

PORTFOLIO
UEM's gross assets (less liabilities, excluding loans) increased from £461.4m to £481.0m in the half-year to 30 September 2020, reflecting gains on both the revenue and capital accounts as well as increased gearing.

UEM, during the half-year to 30 September 2020, invested £108.6m and realised £89.1m. UEM invested further in Data Services and Infrastructure and exited certain holdings which had held up during the recent turbulent times.

There have been seven new entries into the top twenty holdings of the portfolio over the half-year; Korea Internet Neutral Exchange Inc. ("KINX"), a South Korean data centre operator; Corporacion Financiera Colombiana S.A. ("Corficolombiana"), a Colombian Infrastructure company; Bolsa de Valores de Colombia ("BVC"), the Colombian stock exchange; My E.G. Services Bhd ("MYEG"), a Malaysian e-government operator; Ecorodovias Infraestrutura e Logistica S.A. ("Ecorodovias"), a Brazilian toll road operator; China Gas Holdings Limited ("China Gas"), a Chinese gas distribution company; and CESC Limited ("CESC") an Indian electricity generation and distribution company.

UEM exited Companhia de Saneamento do Parana, the Brazilian water and waste management company; Energisa S.A., a Brazilian distribution business; and Omega Geracao S.A., a Brazilian wind and solar farm operator. The following investments were scaled back and are no longer top twenty holdings: Transgaz S.A., the Romanian gas transmission business; Torrent Power Limited, the Indian electricity distribution and generation company; and APT Satellite Holdings Limited, the Hong Kong based Asian Satellite company.

The market performance analysis bar chart on page 8 of the Half-Yearly Financial Report for the six months to 30 September 2020 shows over the half-year that utility investments have stood still, rising only 1.5%, while investors have perceived the immediate beneficiaries of Covid-19 and the lockdowns, as being technology and healthcare companies. Most of UEM's portfolio falls into utilities and infrastructure.

It is frustrating to see the underperformance of share prices in UEM's asset class, especially given the strong performance by most of our holdings. The third quarter investee earnings which are now being reported have even surprised us in their earnings strength.

For example, International Container Terminal Services, Inc. ("ICT"), our top holding has reported the following metrics for the third quarter to 30 September 2020 versus the third quarter last year. Volumes up 3.0%; revenues up 7.0%; For EBITDA up 13.0%; and net income up 23.0%. These are impressive even in normal markets and a reward for ICT's relentless focus on growth, cost and efficiencies. The share price has risen strongly from its lows of just under PHP 70.00 in March to end September at PHP 109.00, but this still represents a decline over twelve months of 12.0%. Pleasingly, since the third quarter results announcement in November, the shares moved rapidly higher to trade at PHP 125.00. However, for a business which has just delivered strong growth the shares should be well above current levels. This market underperformance is evident elsewhere throughout the portfolio.

We have been investing in Data Services and Infrastructure assets over recent years in recognition of the growth in technology and their natural infrastructure characteristics. We have now broken this asset class out as it accounts for 11.6% of UEM's total portfolio. Details on this sector have been included on page 25 of the Half-Yearly Financial Report for the six months to 30 September 2020 so shareholders can better understand these investments.

Included in the Data Services and Infrastructure sector is KINX. KINX is a Korean-listed data centre operator which has exhibited strong growth in recent years. KINX is well located to meet the high demands of its customers, having a number of buildings which are highly secure with redundant power and cooling systems, and connections to major domestic and global networks. UEM first invested in KINX in January 2019 when the share price was KRW 22,541. In the twelve months to 30 September 2020, KINX's share price has risen 175.2% to 87,800 and this has propelled KINX to be UEM's sixth largest investment. Trading at 12.9x H1 2020 EBITDA based on the closing price on 30 September 2020, half the value of many peers, we believe this remains a relatively cheap investment in a sector that has outstanding prospects.

The ICM investment team used to travel extensively to seek out compelling investments that offer excellent returns. The strength of our sector and country knowledge built up over decades has given us an ability to adopt and to continue to identify these investments remotely. Most investee companies have embraced video conferencing as a means of holding analyst meetings and, if anything, our interaction with management teams have improved. A significant positive.

Geographic exposure changed as Brazil reduced from 29.1% to 19.7% mainly due to the currency impact of the Brazilian Real; South Korea increased from 1.7% to 7.3% as a result of both investment but also asset appreciation over the half-year; Romania reduced from 5.8% to 3.9% as a result of reductions in holdings.

Sector moves included Data Services and Infrastructure increasing from 4.4% to 11.6% as a result both of investment and asset appreciation.

It is notable that UEM's portfolio consists of a diverse range of companies that are often under-represented in the MSCI. Our focus remains on delivering positive long-term absolute returns.

We know many fund managers disclose the Beta statistics as well as the Active Share (the degree of divergence from the index). For the record, UEM's Beta was approximately 0.7 and the Active Share was consistently above 99.0%. We would stress these are outcomes and we have provided this for information purposes only.

BANK DEBT
UEM's bank loans decreased from £47.1m to £32.1m in the half-year to 30 September 2020. UEM has moved from a net debt position of £7.6m to a net debt position of £33.7m over the half-year as UEM utilised the built up cash position of £39.5m as at 31 March 2020 and partly repaid the bank loan, increased investments and bought back shares. The bank loans are drawn in US Dollars. The bank facility is a three-year unsecured £50.0m multicurrency revolving facility maturing in April 2021.  

REVENUE RETURN
Revenue income decreased to £14.7m in the six months to 30 September 2020 from £18.1m in the six months to 30 September 2019, an 18.7% decline. This reflects increased dividends on most investments and offset by reduced earnings on the Data Services and Infrastructure investments which are high growth, low yield and reduced by the weaker Brazilian Real which lowered the Sterling value of Brazilian dividends received. During the six months to 30 September 2020, 57.0% of UEM's holdings declared or paid a dividend.

Management fees and other expenses reduced 19.7% compared to the prior period from £1.7m to £1.4m in the half-year to 30 September 2020. Finance costs remained constant at £0.1m. Taxation withholding tax on dividends was lower at £0.6m from £1.6m, due to the decrease in income.

As a result of these movements, the profit for the half-year to 30 September 2020 decreased 14.0% to £12.6m from £14.6m in the prior period, and EPS was lower at 5.59p from 6.39p, a decrease of 12.5%. Dividends per share of 3.850p were fully covered by earnings.

The carried forward revenue reserves as at 30 September 2020 were £9.8m against £5.9m as at 31 March 2020.

CAPITAL RETURN
The portfolio gained £43.7m on the capital account during the half-year to 30 September 2020 while losses on derivative instruments were £4.5m. The total income on the capital account was £39.3m (30 September 2019: £40.2m).

Management and administration fees were lower at £1.2m (30 September 2019: £2.5m), a decrease of £1.3m, almost entirely due to no accrual of a performance fee. Finance costs increased marginally to £0.3m during the twelve months to 30 September 2020. Taxation reduced from £0.9m to £0.1m. The net effect of the above was a gain on the capital account of £37.8m (30 September 2019: £36.7m).

Charles Jillings

ICM Investment Management Limited and ICM Limited

25   November 2020

HALF-YEARLY FINANCIAL REPORT AND RESPONSIBILITY STATEMENT

The Chairman's Statement and the Investment Managers' Report give details of the important events which have occurred during the period and their impact on the financial statements.

PRINCIPAL RISKS AND UNCERTAINTIES

Most of UEM's principal risks and uncertainties are market related and are similar to those of other investment companies investing mainly in listed equities in emerging markets.

The principal risks and uncertainties were described in more detail under the heading "Principal Risks and Risk Mitigation" within the Strategic Report section of the Annual Report and Accounts for the year ended 31 March 2020 and have not changed materially since the date of that document.

The principal risks faced by UEM include not achieving long-term total returns for its shareholders, adverse market conditions leading to a fall in NAV, loss of key management, its shares trading at a discount to NAV, losses due to inadequate controls of third party service providers, gearing risk and regulatory risk. In addition, the emergence and spread of Covid-19 continues to be an ongoing risk facing the Company and its portfolio.

The Annual Report and Accounts is available on the Company's website,   www.uemtrust.co.uk  

RELATED PARTY TRANSACTIONS

Details of related party transactions in the six months to 30 September 2020 are set out in Note 8 to the accounts and details of the fees paid to the Investment Managers are set out in Note 2 to the accounts. Directors' fees were not increased with effect from 1 April 2020 and remain at: Chairman £46,000 per annum; Chair of Audit & Risk Committee £43,000 per annum; and other Directors £34,000 per annum.

The net fee entitlement of each Director is satisfied in shares of the Company, purchased in the market by each Director as soon as possible after each quarter end.

DIRECTORS' RESPONSIBILITY STATEMENT

In accordance with Chapter 4 of the Disclosure Guidance and Transparency Rules, the Directors confirm that to the best of their knowledge:

•   The condensed set of financial statements contained within the report for the six months to 30 September 2020 has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" on a going concern basis and gives a true and fair view of the assets, liabilities, financial position and return of the Company;

•   The half-yearly report, together with the Chairman's Statement and Investment Managers' Report, includes a fair review of the important events that have occurred during the first six months of the financial year and their impact on the financial statements as required by DTR 4.2.7R;

•   The Directors' statement of principal risks and uncertainties above is a fair review of the principal risks and uncertainties for the remainder of the year as required by DTR 4.2.7R; and

•   The half-yearly report includes a fair review of the related party transactions that have taken place in the first six months of the financial year as required by DTR 4.2.8R.

On behalf of the Board

John Rennocks

Chairman

25 November 2020

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

	Six months to  30 September 2020			Six months to  30 September 2019
	Revenue	Capital	Total	Revenue	Capital	Total
	return	return	return	return	return	return
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	43,681	43,681	-	42,587	42,587
Losses on derivative instruments	-	(4,475)	(4,475)	-	(2,264)	(2,264)
Foreign exchange gains/(losses)	-	128	128	-	(76)	(76)
Investment and other income	14,682	-	14,682	18,069	-	18,069
Total income	14,682	39,334	54,016	18,069	40,247	58,316
Management and administration fees	(633)	(1,166)	(1,799)	(847)	(2,453)	(3,300)
Other expenses	(742)	-	(742)	(866)	-	(866)
Profit before finance costs and taxation	13,307	38,168	51,475	16,356	37,794	54,150
Finance costs	(120)	(279)	(399)	(105)	(246)	(351)
Profit before taxation	13,187	37,889	51,076	16,251	37,548	53,799
Taxation	(590)	(61)	(651)	(1,607)	(889)	(2,496)
Profit for the period	12,597	37,828	50,425	14,644	36,659	51,303
Earnings per share (basic) - pence	5.59	16.77	22.36	6.39	16.01	22.40

All items in the above statement derive from continuing operations.

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies.

The net return on ordinary activities after taxation represents the profit for the period and also the total comprehensive Income.

CONDENSED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

for the six months to 30 September 2020
		Ordinary		Capital		Retained earnings
		share	Merger	redemption	Special	Capital	Revenue
		capital	reserve	reserve	reserve	reserves	reserve	Total
		£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance as at 31 March 2020		2,278	76,706	67	485,746	(156,311)	5,857	414,343
Shares purchased by the Company and cancelled		(40)	-	40	(7,218)	-	-	(7,218)
Profit for the period		-	-	-	-	37,828	12,597	50,425
Dividends paid in the period		-	-	-	-	-	(8,656)	(8,656)
Balance as at 30 September 2020		2,238	76,706	107	478,528	(118,483)	9,798	448,894

for the six months to 30 September 2019
		Ordinary		Capital		Retained earnings
		share	Merger	redemption	Special	Capital	Revenue
		capital	reserve	reserve	reserve	reserves	reserve	Total
		£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance as at 31 March 2019		2,298	76,706	47	490,504	(265)	4,865	574,155
Shares purchased by the Company and cancelled		(18)	-	18	(4,326)	-	-	(4,326)
Profit for the period		-	-	-	-	36,659	14,644	51,303
Dividends paid in the period		-	-	-	-	-	(8,237)	(8,237)
Balance as at 30 September 2019		2,280	76,706	65	486,178	36,394	11,272	612,895

for the year ended 31 March 2020
		Ordinary		Capital		Retained earnings
		share	Merger	redemption	Special	Capital	Revenue
		capital	reserve	reserve	reserve	reserves	reserve	Total
		£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance as at 31 March 2019		2,298	76,706	47	490,504	(265)	4,865	574,155
Shares purchased by the Company and cancelled		(20)	-	20	(4,758)	-	-	(4,758)
(Loss)/profit for the year		-	-	-	-	(156,046)	18,006	(138,040)
Dividends paid in the year		-	-	-	-	-	(17,014)	(17,014)
Balance as at 31 March 2020		2,278	76,706	67	485,746	(156,311)	5,857	414,343

CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED)

as at	30 Sep 2020	30 Sep 2019	31 Mar 2020
	£'000s	£'000s	£'000s
Non-current assets
Investments	481,957	644,803	418,743
Current assets
Other receivables	1,921	6,980	4,739
Derivative financial instruments	15	-	1,344
Cash and cash equivalents	2,375	5,893	40,620
	4,311	12,873	46,703
Current liabilities
Bank loans	(32,101)	-	-
Other payables	(5,273)	(3,209)	(3,746)
Derivative financial instruments	-	(255)	(278)
	(37,374)	(3,464)	(4,024)
Net current (liabilities)/assets	(33,063)	9,409	42,679
Total assets less current liabilities	448,894	654,212	461,422
Non-current liabilities
Bank loans	-	(40,574)	(47,079)
Deferred tax	-	(743)	-
Net assets	448,894	612,895	414,343
Equity attributable to equity holders
Ordinary share capital	2,238	2,280	2,278
Merger reserve	76,706	76,706	76,706
Capital redemption reserve	107	65	67
Special reserve	478,528	486,178	485,746
Capital reserves	(118,483)	36,394	(156,311)
Revenue reserve	9,798	11,272	5,857
Total attributable to equity holders	448,894	612,895	414,343
Net asset value per share
Basic - pence	200.56	268.75	181.84

CONDENSED STATEMENT OF CASH FLOWS ( UNAUDITED)

	Six months to 30 Sep 2020	Six months to  30 Sep 2019	Year to 31 Mar 2020
	£'000s	£'000s	£'000s
Operating activities
Profit/(loss) before taxation	51,076	53,799	(133,727)
Deduct investment income - dividends	(14,258)	(17,592)	(23,079)
Deduct investment income - interest	(424)	(456)	(887)
Deduct bank interest received	-	(21)	(25)
Add back interest charged	399	351	1,210
Add back (gains)/losses on investments	(43,681)	(42,587)	149,719
Add back losses/(gains) on derivative instruments	4,475	2,264	(1,521)
Add back foreign currency (gains)/losses	(128)	76	1,908
Decrease in other receivables	12	87	85
(Decrease)/increase in other payables	(113)	1,278	(176)
Net cash outflow from operating activities before dividends and interest	(2,642)	(2,801)	(6,493)
Interest paid	(409)	(309)	(1,196)
Dividends received	13,363	16,377	21,848
Investment income - interest received	-	1,442	25
Bank interest received	1,617	21	1,572
Taxation paid	(671)	(3,798)	(4,325)
Net cash inflow from operating activities	11,258	10,932	11,431
Investing activities
Purchases of investments	(108,835)	(160,933)	(272,580)
Sales of investments	90,659	126,102	272,928
Purchases of derivatives	(4,153)	(2,058)	(2,449)
Sales of derivative instruments	733	-	2,858
Net cash (outflow)/inflow from investing activities	(21,596)	(36,889)	757
Financing activities
Repurchase of shares for cancellation	(7,218)	(4,326)	(4,758)
Dividends paid	(8,656)	(8,237)	(17,014)
Drawdown of bank loans	10,898	40,550	64,676
Repayment of bank loans	(24,670)	(8,023)	(26,033)
Net cash (outflow)/inflow from financing activities	(29,646)	19,964	16,871
(Decrease)/increase in cash and cash equivalents	(39,984)	(5,993)	29,059
Cash and cash equivalents at the start of the period	39,500	11,668	11,668
Effect of movement in foreign exchange	(1,077)	218	(1,227)
Cash and cash equivalents at the end of the period	(1,561)	5,893	39,500

Comprised of:
Cash	2,375	5,893	40,620
Bank overdraft	(3,936)	-	(1,120)
Total	(1,561)	5,893	39,500

NOTES TO THE ACCOUNTS (UNAUDITED)

1. ACCOUNTING POLICIES

The Company is an investment company incorporated in the United Kingdom with a premium listing on the London Stock Exchange.

The unaudited condensed Accounts have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ("IFRS"), IAS 34 "Interim Financial Reporting" and the accounting policies set out in the audited statutory accounts for the year ended 31 March 2020.

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. The significant judgements made by the Directors in applying the accounting policies and key sources of uncertainty were the same as those applied to the financial statements as at and for the year ended 31 March 2020.

The condensed Accounts do not include all of the information required for full annual accounts and should be read in conjunction with the accounts of the Company for the year ended 31 March 2020, which were prepared under full IFRS requirements.

2. MANAGEMENT AND ADMINISTRATION FEES

The Company has appointed ICMIM as its Alternative Investment Fund Manager and joint portfolio manager with ICM, for which they are entitled to a management fee and a performance fee. The aggregate fees payable by the Company are apportioned between the Investment Managers as agreed by them.

The relationship between ICMIM and ICM is compliant with the requirements of the EU Alternative Investment Fund Managers Directive and also such other requirements applicable to ICMIM by virtue of its regulation by the Financial Conduct Authority.

The annual management fee is 0.65% per annum of net assets, payable quarterly in arrears. The management fee is allocated 70% to capital return and 30% to revenue return. The investment management agreement may be terminated upon six months' notice.

In addition, the Investment Managers are entitled to a performance fee payable in respect of each financial period, equal to 15% of the amount of any outperformance in that period by equity funds attributable to shareholders of the higher of (i) the post-tax yield on the FTSE Actuaries Government Securities UK Gilt 5 to 10 years Index, plus inflation (on the RPIX basis), plus 2%; and (ii) 8%. The maximum amount of a performance fee payable in respect of any financial year is 1.85% of the average net assets of the Company and any performance fee in excess of this cap is written off. The NAV must also exceed the high watermark established when the performance fee was last paid, adjusted for capital events and dividends paid since that date. The high watermark was 222.13p per share as at 31 March 2020. For the six months to 30 September 2020 the attributable shareholders' funds were below the high watermark and therefore no performance fee has been accrued. The final amount payable is dependent upon the performance of the Company in the year to 31 March 2021.

Half of the performance fee is payable in cash and half in shares of the Company ("Performance Shares"), based on the NAV per share as at the year end. The Investment Managers will purchase the Performance Shares in the market at a price equal to or below the NAV per share at the time of purchase. If the Investment Managers are unable to purchase some or all of the Performance Shares in the market at or below the NAV per share, the Company will issue to the Investment Managers shares at NAV equivalent to any shortfall. The full performance fee is payable to the Investment Managers as soon as practicable following the year end date in order to reduce the risk to the Company of material movements in the price of shares between the year end date and the date of payment. Any subsequent adjustment to the fee arising out of the audit process is paid to or recouped from the Investment Managers in cash within seven days of the publication of the annual report and accounts.

ICMIM also provides company secretarial services to the Company, with the Company paying 45% of the costs associated with this office and recharges research fees to the Company based on a budget of £0.3m per annum, paid quarterly in arrears. These charges are allocated 70% to capital return and 30% to revenue return.

JPMorgan Chase Bank N.A. - London Branch has been appointed Administrator and ICMIM has appointed Waverton to provide certain support services (including middle office, market dealing and information technology support services).

3. TAXATION

The revenue return taxation charge of £590,000 (30 September 2019: £1,607,000 and 31 March 2020: £2,179,000) relates to irrecoverable overseas taxation suffered on dividend and interest income.

The capital return taxation expense of £61,000 (30 September 2019: £889,000 and 31 March 2020: £2,134,000) relates to capital gains on realised gains on sale of overseas investments and deferred tax in respect of capital gains tax on overseas unrealised investment gains that may be subject to taxation in future years

4. EARNINGS PER SHARE

Earnings per share is the profit attributable to shareholders and based on the following data:

	Six months to 30 Sep 2020	Six months to  30 Sep 2019	Year to 31 Mar 2020
	£'000s	£'000s	£'000s
Revenue return	12,597	14,644	18,006
Capital return	37,828	36,659	(156,046)
Total return	50,425	51,303	(138,040)
	Number	Number	Number
Weighted average number of ordinary shares in issue during the period for basic earnings per share calculations	225,545,233	229,005,722	228,510,092
	Pence	Pence	Pence
Revenue return per share	5.59	6.39	7.88
Capital return per share	16.77	16.01	(68.29)
Total return per share	22.36	22.40	(60.41)

5. DIVIDENDS PAID

	Record date	Payment date	30 Sep 2020 £'000s	30 Sep 2019 £'000s	31 Mar 2020 £'000s
2019 Fourth quarterly dividend of 1.80p per share	07-Jun-19	28-Jun-19	-	4,132	4,132
2020 First quarterly dividend of 1.80p per share	06-Sep-19	27-Sep-19	-	4,105	4,105
2020 Second quarterly dividend of 1.925p per share	29-Nov-19	20-Dec-19	-	-	4,390
2020 Third quarterly dividend of 1.925p per share	06-Mar-20	27-Mar-20	-	-	4,387
2020 Fourth quarterly dividend of 1.925p per share	05-Jun-20	19-Jun-20	4,348	-	-
2021 First quarterly dividend of 1.925p per share	04-Sep-20	18-Sep-20	4,308	-	-
			8,656	8,237	17,014

The Directors have declared a second quarterly dividend in respect of the year ending 31 March 2021 of 1.925p per share payable on 18 December 2020 to shareholders on the register at close of business on 4 December 2020. The total cost of the dividend, which has not been accrued in the results for the six months to 30 September 2020, is £4,288,000 based on 222,778,288  shares in issue as at 23 November 2020.

6. ORDINARY SHARE CAPITAL

Issued, called up and fully paid
Ordinary shares of 1p each		Number	£'000s
Balance as at 31 March 2020		227,862,470	2,278
Purchased for cancellation by the Company		(4,040,088)	(40)
Balance as at 30 September 2020		223,822,382	2,238

A further 1,044,094 ordinary shares have been purchased for cancellation at a total cost of £1,881,000 during the period from 1 October 2020 to 23 November 2020.

7. NET ASSET VALUE PER SHARE

The NAV per share is based on the net assets attributable to the equity shareholders of £448,894,000 (30 September 2019: £612,895,000 and 31 March 2020: £414,343,000) and on 223,822,382 ordinary shares, being the number of shares in issue at the period end (30 September 2019: 228,057,408 and 31 March 2020: 227,862,470).

8. RELATED PARTY TRANSACTIONS

The following are considered related parties of the Company: the subsidiary undertakings (Global Equity Risk Protection Limited ("GERP"), UEM (HK) Limited and UEM Mauritius Holdings Limited) and the associates of the Company (East Balkan Properties plc and Pitch Hero Holdings Limited), the Board of UEM, ICM and ICMIM (the Company's joint portfolio managers), ICM Investment Research Limited and ICM Corporate Services (Pty) Ltd.

During the period the Company did not receive or make payments to its subsidiaries. On 6 May 2020, UEM's segregated account in GERP was closed for nil consideration. As at 31 March 2020 the fair value of the loan held with UEM (HK) Limited was £6,420,000 and loan interest accrued was £1,249,000. In the period, loan interest of £1,492,000 was capitalised and added to the balance of the loan. As at 30 September 2020 the fair value of the loan held with UEM (HK) Limited was £7,493,000 and loan interest accrued was £68,000.

There were no transactions between the above associates and the Company.

The Board received aggregate remuneration of £96,000 included within "Other expenses" for services as Directors. As at the period end, £48,000 remained outstanding to the Directors. In addition to their fees, the Directors received dividends totalling £49,000 during the period under review in respect of their shareholdings in the Company. There were no further transactions with the Board during the period. There were no transactions with ICM, ICMIM, ICM Investment Research Limited or ICM Corporate Services (Pty) Ltd, subsidiaries of ICM, other than investment management, secretarial costs, research fees and performance fees as set out in note 2 of £1,666,000 and reimbursed expenses included within Other Expenses of £25,000. As at the period end no payment remained outstanding to ICM and ICMIM in respect of performance fees and £858,000 remained outstanding in respect of management, company secretarial and research fees.

9. GOING CONCERN

Notwithstanding that the Company has reported net current liabilities of £33,063,000 as at 30 September 2020 (31 March 2020: net current assets £42,679,000), the financial statements have been prepared on a going concern basis which the Directors consider to be appropriate for the following reasons. The Board's going concern assessment has focussed on the forecast liquidity of the Company for twelve months from the date of approval of the financial statements. This analysis assumes that the Company would, if necessary, be able to meet some of its short term obligations through the sale of listed securities, which represented 97% of the Company's total portfolio as at 30 September 2020. As part of this assessment the Board has considered a severe but plausible downside that reflects the impact of Covid-19 and an assessment of the Company's ability to meet its liabilities as they fall due assuming a significant reduction in asset values and accompanying currency volatility.

The Board also considered reverse stress testing to identify the reduction in the valuation of liquid investments that would cause the Company to be unable to meet its net current liabilities, being primarily the bank loan of £32,101,000. The Board is confident that the reduction in asset values implied by the reverse stress test is not plausible even in the current volatile environment. Consequently, the Directors are confident that the Company will have sufficient funds to continue to meet its liabilities as they fall due for at least twelve months from the date of approval of the financial statements. Accordingly, the Board considers it appropriate to continue to adopt the going concern basis in preparing the accounts.

As at the period end, the Company had a £50m unsecured multicurrency loan facility with Scotiabank Europe PLC, expiring on 3 April 2021. The Company will either extend or replace the facility or repay the outstanding debt when due from portfolio realisations.

10. FAIR VALUE HIERARCHY

IFRS 13 'Financial Instruments: Disclosures' require an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:

Level 1 reflects financial instruments quoted in an active market.

Level 2 reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets.

Level 3 reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data.

The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy as follows:

	Level 1 £'000s	Level 2 £'000s	Level 3 £'000s	30 Sep 2020 Total £'000s
Investments	461,578	6,013	14,366	481,957
Options - assets	15	-	-	15
Total	461,593	6,013	14,366	481,972

	Level 1 £'000s	Level 2 £'000s	Level 3 £'000s	30 Sep 2019 Total £'000s
Investments	622,717	5,467	16,619	644,803
Forward foreign currency contracts - liabilities	-	(255)	-	(255)
Total	622,717	5,212	16,619	644,548

	Level 1 £'000s	Level 2 £'000s	Level 3 £'000s	31 Mar 2020 Total £'000s
Investments	394,623	10,242	13,878	418,743
Options - assets	1,344	-	-	1,344
Options - liabilities	(278)	-	-	(278)
Total	395,689	10,242	13,878	419,809

During the period one stock was transferred from Level 2 to Level 1 due to investee company shares resuming regular trading in the period. The book cost and fair values were transferred using the 31 March 2020 balances, and all subsequent trades are therefore disclosed in the Level 1 column.

A reconciliation of fair value measurements in level 3 is set out in the following table:

	Six months to 30 Sep 2020 £'000s
Investments brought forward
Cost	15,187
Losses	(1,309)
Valuation	13,878
Purchases	2,719
Sales	(29)
Losses on sale of investments	(5)
Losses on investments held at end of period	(2,197)
Valuation at 30 September 2020	14,366
Analysed as at 30 September 2020
Cost	17,872
Losses	(3,506)
Valuation	14,366

11. RESULTS

The financial information contained in this Half-Yearly Financial Report does not constitute statutory accounts as defined in Sections 434 - 436 of the Companies Act 2006. The financial information for the six months ended 30 September 2020 and 30 September 2019 have neither been audited nor reviewed by the Company's auditors. The information for the year ended 31 March 2020 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditor on those accounts contained no qualification or statement under Section 498(2) or (3) of the Companies Act 2006.

The half-yearly report   for the six months to 30 September 2020 will be posted to shareholders in early December 2020. A copy will shortly be available to view and download from the Company's website at   www.uemtrust.co.uk and the National Storage Mechanism at https://data.fca.org.uk/#/nsm/nationalstoragemechanism .

Legal Entity Identifier: 2138005TJMCWR2394O39

 

END

 

 

IR BRBDBIUDDGGS