Half Yearly Report

RNS Number : 5525R

Utilico Emerging Markets Limited

20 November 2012

 



Date:                20 November 2012

Contact:           Charles Jillings                                              

                        Utilico Emerging Markets Limited                    

                        01372 271 486                                               

Alastair Moreton

Westhouse Securities Limited

0207 601 6100

Utilico Emerging Markets Limited

Unaudited Statement of Results

for the six months to 30 September 2012

Highlights of results 

·    Two quarterly dividends of 1.375p each, representing an annualised yield of 3.5%.

·    Utilico Emerging Markets Limited's ("UEM") net asset value per ordinary share performed well in difficult markets achieving a loss of 0.4% on a total return basis when adding back dividends.

·    Since inception UEM 's average annual compound total return is 11.4%.

CHAIRMAN'S STATEMENT

UEM's net asset value ("NAV") per ordinary share has performed well in difficult markets with a loss of 0.4% on a total return basis, compared to the MSCI Emerging Markets Total Return Index (GBP adjusted) which fell by 2.6%.

Since inception, UEM has achieved an average annual compound total return of 11.4%. This is a creditable performance in the wider markets and underlines the strength of the opportunity for investors in the emerging markets.

Looking at the emerging markets in which UEM invests, Brazilian and Chinese main indices were down 8.3% and 7.8% over the six months. On top of this, Brazil reduced its interest rates significantly and as a result, the Brazilian Real to Sterling weakened substantially, down 12.4%. This presented significant headwinds to investors in these markets.

It is pleasing to see the revenue earnings per share ("EPS") at 3.37p, up 10.5% compared to the six months to 30 September 2011. In part, this is due to reduced expenses compared to last year, which included £0.3m cost of migration to the main market (£0.5m over the full year).

As set out in the annual report to 31 March 2012, the Company is able to declare dividends from capital. Last year's dividends of 5.50p were 74.9% covered by the EPS of 4.12p. Further, the Board decided last year to declare quarterly dividends going forward. To date, the Board has declared and paid a first quarterly dividend of 1.375p in September 2012 and will be paying a second quarterly dividend of 1.375p in December 2012, making a total for the half year of 2.75p. This is covered 1.23x by the interim EPS. On an annualised basis the two quarterly dividends are equal to a 3.5% yield on the 30 September 2012 share price of 159.00p.

During the six months UEM did not buy back any ordinary shares as the discount had narrowed since joining the FTSE 250 Index.

At the end of September 2012 UEM had drawn £16.9m of its £50.0m bank facility. This increased to £25.0m subsequent to the period end, as the Company invested ahead of expected good underlying company results, borne out of the firmer markets seen in October 2012. The Company has been selling into this strength towards the end of October and early November and reducing debt to £4.0m today.

After the year end, the Board conducted a review of audit services and decided to tender them for the upcoming financial year. Following the tender process, KPMG Audit plc was appointed as auditor of UEM.

Outlook

The emerging economies are looking stronger as lower interest rates in Brazil and policy responses in China gain some traction. We expect further progress over the next six months. It is good to see most emerging economies' GDP growth rates remain in positive territory. We are about stock selection and that process is working well for investors.

Alexander Zagoreos

Chairman

20 November 2012

INVESTMENT MANAGER'S REPORT

The six months to 30 September 2012 have been testing, with conflicting economic news. The overarching backdrop has been a consistent deterioration in economic outlook as measured by GDP. The world's governments have responded to this in a number of ways including quantitative easing in the West. The emerging economies have been stronger than those of the developed world and policy responses have been focused on reducing interest rates; reducing banking capital requirements; privatisations; and intervention. Against this background most emerging markets have been weak, currencies have deteriorated and certain sectors have been unsettled. Overall the MSCI Emerging Markets Total Return Index (GBP adjusted) is down 2.6%.

UEM's portfolio has reflected all the above stresses. In particular, UEM was impacted by the Chinese intervention into the toll road sector and by the Brazilian government's recent intervention in the power sector. In this demanding environment UEM's total return NAV held up well, registering a small loss of 0.4% over the six months. Over the last 18 months UEM's total return NAV is up 2.7%, outperforming the MSCI Emerging Markets Total Return Index (GBP adjusted) which is down 10.6%.

PORTFOLIO

UEM's gross assets increased by 1.1% from £382.9m to £387.0m reflecting, in the main, increased net debt from £6.2m to £14.2m.

The composition of the top ten holdings has again seen some movement. Infrastructure India plc which was 10th at the year end is now out of the top ten and China Gas Holdings Ltd is a new entrant at 9th, pushing Tractebel Energia S.A. into 10th. 

Eastern Water Resources PCL ("Eastern Water")

Eastern Water's share price is up 78.5%, an impressive performance, reflecting both recovery from the recent devastating floods in Thailand and also real progress in both pricing and operational performance. In the half year to June 2012, Eastern Water reported revenues up 12.3%, net profit up 40.6% and overall effective tariff increases of 9.5%. As a result of this significant share price increase UEM has been selling down.

International Container Terminal Services Inc. ("ICT")

ICT continues to deliver strong results. The privatisation process being followed by the Philippine government has energised the Philippine economy and together with tariff increases in Manila and new port acquisitions across its international portfolio, ICT has delivered good results. In the first half year to June 2012, gross revenues were up 8.1% on the back of an 8.6% increase in container throughput. Net income was up 17.1% due to the growth in volumes and reduced financing charges. ICT's shares were up 8.3% in the six months. UEM has sold into this strength reducing its holding by nearly 20%.

Malaysia Airport Holdings Berhad ("MAHB")

MAHB has made progress over the last six months operationally. However, the main focus of both the management and the markets has been on the delivery of the new airport terminal, runway and office buildings. Not unexpectedly the shares have been weak and ended the six months down 7.1%. While we were sellers last year at higher levels, we remain firm holders. As MAHB delivers the new terminal and is able to extract the operational performance from this considerable investment, UEM will look for a stronger share price performance. In the nine months to 30 September 2012, MAHB has reported revenues up 14.3% and EBITDA up 6.5%.

Ocean Wilsons Holdings Limited ("Ocean Wilsons")

Ocean Wilsons has been disappointing, with the share price down 17.1% to £9.70 in the six months ending 30 September 2012. The decision to sell 32.4% of our holding in the first six months of last year at an average of £14.30 has worked well. Ocean Wilsons is well placed to participate both in the Brazilian offshore oil and gas industry and in the recovery in the world's economies. We would prefer to see better performance from their investment portfolio. At current valuations Ocean Wilsons is attractive. Reversing out the 58.3% it holds in Wilson & Sons, a Brazilian listed port operator, the investment portfolio is, in effect, valued at zero. We have recently added to our position on weakness.

Companhia de Saneamento de Minas Gerais ("Copasa")

Copasa has reported revenues up 8.0% on stronger sewage sales but a decline of 14.0% of net profits, due to higher interest costs, reflecting the increased leverage. Its share price has weakened by 3.3%, reflecting wider weakness in the Brazilian markets. UEM has held its position through the six months.

Asia Satellite Telecommunications (Holdings) Limited ("AsiaSat")

AsiaSat has performed well in the six months, both in terms of its operations and its share price. The shares ended the six months at HK$22.00, up 15.8%. An offer of HK$23.50 from AsiaSat's two main shareholders lapsed in the six months under review, as it was rejected by the majority of the minority shareholders. For the six months to June 2012, underlying revenues and EBITDA were little changed compared to a year earlier but net profit was up 7.6% and the interim dividend was raised by 50%. We remain positive about AsiaSat's potential and its significant undervaluation. UEM has held its position through the six months.

Companhia de Concessoes Rodoviarias S.A. ("CCR")

CCR has performed well and its share price is up 23.5% over the six months. Revenues for the six months to June 2012 increased by 12.7% with EBITDA up 15.7% and net income up 51.7%. UEM added to its holding in CCR during the period.

Santos Brasil Participacoes S.A. ("Santos")

Santos has performed very well at an operational level and has stood out against the wider economy. It is a well-placed, well-managed Brazilian port operator in the Port of Santos and is the gateway for Sao Paulo, Brazil's commercial capital. For the nine months to 30 September 2012, gross revenues were up 16.6%, driven by a 12.8% increase in units handled within the ports.  Notwithstanding this strong performance, the shares were down 9.8% over the six months as a result of wider concerns and market weakness in Brazil. Again UEM added modestly to its position over the six months.

China Gas Holdings Ltd ("China Gas")

China Gas has been a good performer over the six months. China Gas is a major distribution company, with over 160 city gas projects, connecting 7.2m households to its network. In the year to March 2012 its revenues grew by 19.4% and EBITDA by 30.6%, driven by piped gas volume growth of 25.0%. Its share price has, in part, reflected this progress and is up 13.4%. UEM added to its holding on weakness over the six months.

Tractebel Energia S.A. ("Tractebel")

Tractebel has been disappointing. The shares ended down 12.7% at US$15.60 (UEM holds American Depository Receipts). This weakness reflects the Brazilian government's intervention in the wider power generation market. In overview the markets' expectation was that concessions would be extended on commercial terms including an adequate terminal value. However, the Brazilian government enacted MP579 which significantly impairs the value of the concession holders. Operators can either choose to allow their concessions to expire and revert to the state for a token amount or licenses can be renewed but with much lower tariffs which only compensate operational costs (ie no equity return). This resulted in significant mark downs in share prices. Tractebel was caught up in this. The Brazilian government's motivation in this was to reduce energy prices by 80% and it is likely to achieve this in the short term. But the impact on investors will no doubt push up the risk free rate of return and as such the cost of capital. This will in our view undo much of the respect for Anel (the Brazilian regulator) who was well regarded. UEM reduced its holding by 7% and reinvested into other opportunities with less exposure to the ruling.

Infrastructure India plc ("IIP")

IIP has been a poor performer, with its share price down 61.3% to 26.75p over the six months. Having participated in the repositioning of IIP and supported the change in management to Guggenheim, shareholders have been rewarded with poor management. IIP effectively ran out of cash twice and needed emergency funding. Guggenheim facilitated this both times, at a significant cost to other shareholders. In the process our investment has been significantly impacted. The shares today trade at 25.0p versus a rescue rights price of 33.0p. At 25.0p the shares stand at a 60.0% discount to their NAV. IIP has fallen from 10th to 23rd in the portfolio.

Portfolio General

Over the six months we invested £47.4m and realised £42.8m from sales. In the top ten we realised a net £9.6m or 4.9%.

Over the six months Brazil has reduced from 32.0% to 26.8% due to realisations and weakness in the power generation positions and China increased from 19.9% to 23.8% due to performance and further investment. Thailand nearly doubled to 11.8% from 6.8%, driven by Eastern Water.

Water and Waste increased to 25.0% from 22.2% helped by Eastern Water. Electricity reduced due to the impact of Brazil power generation.

Currency

Currency has continued to be a headwind. The Brazilian Real was down 12.4% adding to last year's reduction of 11.8%. The Indian Rupee was down 4.9% against Sterling, from its high in March 2012.

Market Hedging

There has been little change in the market hedging position over the six months to 30 September 2012. While we are concerned that the underlying fundamental challenges faced by the developed world economies are unresolved, it has been difficult to hedge these risks. Given we have invested in this position and the uncertainties are in sharper focus, UEM will maintain its hedge in the short term.

Bank Debt

Net debt increased from £6.2m at 31 March 2012 to £14.2m as at 30 September 2012. This was drawn £3.5m in Sterling, £3.7m in US Dollars and £7.0m in Euros, with £2.7m of cash and cash equivalents. Since the end of the half year the bank debt peaked at £25.0m as a result of investments and has now reduced to £4.0m as a number of positions were sold into the firming markets. UEM has a £50.0m facility with Scotiabank Europe plc.

Revenue returns

Revenue income was in line with the previous half year at £8.8m. This represents an average portfolio yield of some 4.7% on an annualised basis. However, "Other expenses" are down significantly, as the one off migration costs associated with moving to the main market of the London Stock Exchange are not repeated. Further, the finance costs are significantly lower due to lower borrowings through the period. Taxation remains unchanged.

The net effect of the maintained earnings versus lower costs, saw the revenue return profit increase by £0.7m or 10.3% to £7.3m. In turn the EPS increased by 10.5% to 3.37p. This is pleasing in difficult times.

The ongoing charges figure reduced to 0.9%. UEM has consistently focused on this aspect, as high costs undermine long term returns.

Capital Returns

The portfolio losses of £6.1m and losses on derivatives of £2.2m reflect in part weakness in the emerging markets and strength in the US markets.

Management fees in the period to 30 September 2011 were reduced by a gain arising on the settlement of the performance fee for the year to 31 March 2011, which was settled in part by buying shares in the market at a discount, giving rise to a gain of £270,000. Adding this back the management fees at the interim stage are largely unchanged. The finance costs were down and taxation was also marginally down. The net effect of all the above is capital return losses of £8.9m. This translated into a loss per share of 4.13p.

Buybacks

The Company did not buy back any shares in the six months under review.

ICM Limited

20 November 2012

GROUP PERFORMANCE SUMMARY

	Half-year	Half-year	Annual	Half-year
	30 Sep 12	30 Sep 11	31 Mar 12	change %
Total return(1)	(0.4%)	(11.9%)	3.1%	n/a
Annual compound total return (since inception)	11.4%	10.6%	12.3%	n/a
Net asset value per ordinary share	171.72p	152.83p	175.60p	(2.2)
Ordinary share price	159.00p	137.00p	164.00p	(3.0)
Discount	(7.4%)	(10.4%)	(6.6%)	n/a
Earnings per ordinary share (basic)
- Capital	(4.13p)	(24.21p)	1.19p	n/a
- Revenue	3.37p	3.05p	4.12p	10.5(2)
- Total	(0.76p)	(21.16p)	5.31p	n/a
Dividend per ordinary share		-
- 1st Quarter	1.375p	-	-	n/a
- 2nd Quarter	1.375p(3)	3.75p	3.75p	n/a
- 3rd Quarter	-	-	-	n/a
- 4th Quarter	-	-	1.75p	n/a
- Total	-	-	5.50p	n/a
Equity holders' funds (£m)	370.1	329.4	378.5	(2.2)
Gross assets (£m)(4)	387.0	341.6	382.9	1.1
Cash/(overdraft) (£m)	2.7	2.6	(1.8)	n/a
Bank debt (£m)	(16.9)	(12.2)	(4.4)	284.1
Net cash/(debt) (£m)	(14.2)	(9.6)	(6.2)	129.0
Net debt gearing on gross assets	3.7%	2.8%	1.6%	n/a
Management and administration fees (£m)(5)	1.6	2.0	3.9	20.0(2)
Ongoing charges figure (6)	0.9%	1.0%	0.9%	n/a

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

(2)   Percentage change based on comparable six month period to 30 September 2011

(3)   The dividend declared has not been included as a liability in these accounts

(4)   Gross assets less liabilities excluding loans

(5)   Excluding performance fee, including other expenses

(6)   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

INTERIM MANAGEMENT REPORT AND RESPONSIBILITY STATEMENT

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

Principal risks and uncertainties

The principal risks faced by the Company include:

• Inappropriate long-term investment strategy

• Inappropriate asset allocation

• Excessive gearing

• Loss of management personnel

The Board reported on the principal risks and uncertainties faced by the Company and the way they are mitigated are described in more detail under the heading "Internal Controls and Management of Risk" in the Corporate Governance

section of the Annual Report and Accounts for the year ended 31 March 2012. In the view of the Board, there have not been any changes to the fundamental nature of these risks since the previous report and these principal risks and uncertainties are equally applicable to the remaining six months of the financial year as they were to the six months under review.

The Annual Report and Accounts is published on the Company's website, www.uem.bm

Related Party Transactions

There has been no change in related party relationships and no significant changes to related party transactions post 31 March 2012. Details of the fees paid to the Investment Manager are set out in note 2 to the Notes to the Accounts.

There has been no change in the Directors in the period under review; the current Directors of the Company are listed on page 24 of the Report and Accounts to 30 September 2012. The Directors continue to receive their remuneration in the form of shares in the Company.

The Disclosure and Transparency Rules ("DTR") of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.

The Directors confirm to the best of their knowledge that:

i) the condensed set of financial statements contained within the report for the six months to 30 September 2012 has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" and gives a true and fair view of the assets, liabilities, financial position and return of the Group;

ii) the Interim Management Report, together with the Chairman's Statement and Investment Manager's Report, include a fair review of the information required by 4.2.7R and 4.2.8R of the FSA's Disclosure and Transparency Rules. The half yearly financial report was approved by the Board on 20 November 2012 and the above responsibility statement was signed on its behalf by the Chairman,

Alexander Zagoreos

For and on behalf of the Board

UNAUDITED CONDENSED GROUP STATEMENT OF COMPREHENSIVE INCOME

Six months to  30 September 2012					Six months to  30 September 2011
		Revenue	Capital	Total	Revenue	Capital	Total
		return	return	Return	return	return	return
		£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
(Losses)/gains on investments		-	(6,050)	(6,050)	-	(51,855)	(51,855)
(Losses)/gains on derivative instruments		-	(2,209)	(2,209)	-	617	617
Exchange losses		(53)	(9)	(62)	-	(215)	(215)
Investment and other income		8,844	-	8,844	8,805	-	8,805
Total income		8,791	(8,268)	523	8,805	(51,453)	(42,648)
Management and administration fees		(420)	(683)	(1,103)	(401)	(420)	(821)
Other expenses		(511)	(13)	(524)	(930)	(12)	(942)
Profit/(loss) before finance costs and taxation		7,860	(8,964)	(1,104)	7,474	(51,885)	(44,411)
Finance costs		(62)	(145)	(207)	(304)	(710)	(1,014)
Profit/(loss) before taxation		7,798	(9,109)	(1,311)	7,170	(52,595)	(45,425)
Taxation		(528)	202	(326)	(580)	312	(268)
Profit/(loss) for the period		7,270	(8,907)	(1,637)	6,590	(52,283)	(45,693)
Earnings per ordinary share - pence		3.37	(4.13)	(0.76)	3.05	(24.21)	(21.16)

The total column of this statement represents the Group's Condensed Income Statement and the Group's Condensed 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 period and therefore the 'profit for the period' is also the 'total comprehensive income for the period', 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 non-controlling interests.

UNAUDITED CONDENSED GROUP STATEMENT OF CHANGES IN EQUITY

for the six months to 30 September 2012
	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
(Loss)/profit for the period	-	-	-	-	(8,907)	7,270	(1,637)
Ordinary dividends paid	-	-	-	-	(1,352)	(5,383)	(6,735)
Balance at 30 September 2012	21,553	7,510	204,587	11,093	121,214	4,141	370,098

for the six months to 30 September 2011
	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 2011	21,860	12,136	204,587	11,093	128,906	4,569	383,151
(Loss)/profit for the period	-	-	-	-	(52,283)	6,590	(45,693)
Ordinary dividend paid	-	-	-	-	-	(3,125)	(3,125)
Shares and warrants purchased by the Company	(307)	(4,626)	-	-	-	-	(4,933)
Balance at 30 September 2011	21,553	7,510	204,587	11,093	76,623	8,034	329,400

for the year to 31 March 2012
	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 2011	21,860	12,136	204,587	11,093	128,906	4,569	383,151
Profit for the year	-	-	-	-	2,567	8,892	11,459
Ordinary dividends paid	-	-	-	-	-	(11,207)	(11,207)
Shares and warrants purchased by the Company	(307)	(4,626)	-	-	-	-	(4,933)
Balance at 31 March 2012	21,553	7,510	204,587	11,093	131,473	2,254	378,470

UNAUDITED CONDENSED GROUP BALANCE SHEET

	30 September 2012	30 September 2011	31 March 2012
	£'000s	£'000s	£'000s
Non-current assets
Investments	373,208	337,705	374,169
Current assets
Other receivables	6,683	6,155	9,641
Derivative financial instruments	7,386	-	6,836
Cash and cash equivalents	2,701	4,189	387
	16,770	10,344	16,864
Current liabilities
Bank loans	-	(12,197)	-
Other payables	(834)	(4,142)	(3,849)
Derivative financial instruments	-	(746)	(1,925)
	(834)	(17,085)	(5,774)
Net current assets/(liabilities)	15,936	(6,741)	11,090
Total assets less current liabilities	389,144	330,964	385,259
Non-current liabilities
Bank loans	(16,863)	-	(4,381)
Deferred tax	(2,183)	(1,564)	(2,408)
Net assets	370,098	329,400	378,470
Equity attributable to equity holders
Ordinary share capital	21,553	21,553	21,553
Share premium account	7,510	7,510	7,510
Special reserve	204,587	204,587	204,587
Other non-distributable reserve	11,093	11,093	11,093
Capital reserves	121,214	76,623	131,473
Revenue reserve	4,141	8,034	2,254
Total attributable to equity holders	370,098	329,400	378,470
Net asset value per ordinary share
Basic - pence	171.72	152.83	175.60

 UNAUDITED CONDENSED GROUP STATEMENT OF CASH FLOWS

	Six months to 30 September 2012	Six months to 30 September 2011	Year to 31 March 2012
	£'000s	£'000s	£'000s
Cash flows from operating activities	(1,214)	9,609	21,435
Cash flows from investing activities	-	-	-
Cash flows before financing activities	(1,214)	9,609	21,435
Financing activities
Ordinary dividends paid	(6,735)	(3,125)	(11,207)
Movements from loans	12,499	1,452	(6,058)
Cost of ordinary shares purchased	-	(4,933)	(4,933)
Cash flows from financing activities	5,764	(6,606)	(22,198)
Net movement in cash and cash equivalents	4,550	3,003	(763)
Cash and cash equivalents at the beginning of the period	(1,773)	(742)	(742)
Effect of movement in foreign exchange	(76)	297	(268)
Cash and cash equivalents at the end of the period	2,701	2,558	(1,773)

Comprised of:
Cash	2,701	4,189	387
Bank overdraft	-	(1,631)	(2,160)
Total	2,701	2,558	(1,773)

NOTES

The Directors have declared a second quarterly interim dividend in respect of the year to 31 March 2013 of 1.375p per ordinary share payable on 14 December 2012 to shareholders on the register at close of business on 30 November 2012. The total cost of the dividend which has not been accrued in the results for the six months to 30 September 2012, is £2,963,000 based on 215,528,793 ordinary shares in issue at the date of this report.

The half-yearly report will be posted to shareholders in early December 2012 and made available on the website www.uem.bm shortly. Copies may be obtained during normal business hours from Exchange House, Primrose Street, London EC2A 2NY.

 

END

 

 

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