Half Yearly Report

RNS Number : 6776G

British Empire Sec & Gen Tst PLC

16 May 2011

 



BRITISH EMPIRE SECURITIES AND GENERAL TRUST PLC

Announcement of un-audited results for the half year ended 31 March 2011

Objective   

The investment objective of the Company is to achieve capital growth through a focused portfolio of investments, particularly in companies whose shares stand at a discount to estimated underlying net asset value.

Financial Highlights

At		At
31 March 2011		30 September 2010	% change
Capital Return
Net assets	£876.16m	£829.67m	5.6
Net asset value per share	547.33p	518.28p	5.6
Share price (mid market)	496.70p	465.50p	6.7
Discount	9.25%	10.18%	-
	Six months to	Six months to
	31 March 2011	31 March 2010
Revenue Earnings and Dividends
Revenue earnings per share	1.29p	0.75p
Interim dividend per share	2.00p	1.80p

	Six months to		Year to
	31 March 2011		30 September 2010
Performance Comparison
British Empire Securities and General Trust plc (NAV total return)		7.7%	14.7%
Morgan Stanley Capital International World Index  (£ adjusted total return)		11.9%	9.4%
Morningstar Investment Trust Global Growth Index (total return)		9.9%	14.1%

Chairman's Statement

The six month period under review from 1st October 2010 to 31st March 2011 has seen a further improvement in net asset value per share of 7.7%. This represents a modest underperformance against our benchmark index (the Morningstar Investment Trust Global Growth Index) which was up 9.9%. Since the half-year end to 3rd May 2011, the net asset value has increased by 2.4% against an increase in the Index of 1.6%. (All figures are on a total return basis).

The Manager continues to focus on companies with strong balance sheets and which typically are valued in the markets at a discount to net asset value; the overall discount levels in the portfolio stand at 30% and somewhat more than this for our European holdings.

Liquidity has been reduced from 20.2% at the year-end to 13.3% at 31^st March 2011 and significant profits have been taken in a number of Far Eastern investments. New investments have been made in Europe, including, for the first time since 2005, Spain. The holdings in Japan have decreased as a proportion of the whole as it remains unclear where the catalyst for improved corporate performance will come from. In addition, it is difficult to assess the impact the recent earthquakes and the enormous damage stemming from them will have on the Japanese economy given its already significant indebtedness.

The discount to net asset value has oscillated between 5% and 10% and stood at approximately 9.3% at the half-year end.

We are increasing the interim dividend from 1.8p to 2.0p and would expect at least a similar percentage increase in the final dividend based on the strong income flows in the portfolio since the half-year end.

Despite the gradual recovery in the world economy the headwinds are significant for further strong progress in markets. The necessary reduction in Government spending in much of the western world is only in its early stages and the effects of it have not been fully felt. That said, there are now signs of a recovery in corporate activity which is starting to unlock hitherto hidden value in the portfolio.

Strone Macpherson

Chairman

16 May 2011

Investment Manager's Report

For the first six months of the financial year, the Company's net asset  value(NAV) per share rose 7.7% compared with gains of 9.9% for the Morningstar Investment Trust Global Growth Index and 11.9% for the MSCI World Index (£) (all figures are on a total return basis).

The largest positive contributors during the period were Aker (+1.1%), Investor AB 'A' (+1.0%), Deutsche Wohnen (+0.8%), Exor SpA Preference (+0.7%), Groupe Bruxelles Lambert (+0.6%) and Lundbergfőretagen AB 'B' (+0.4%).

The largest detractor from performance was Kinross Gold (- 0.4%).

Over the five year period to 31 March 2011, the Company's NAV per share rose 26.55% compared with gains of 26.11% for the Morningstar Global Growth Investment Trust Index and 23.29 % for the MSCI World Index (£) (all figures are on a total return basis).

As at 31 March 2011, the geographical profile was as follows: Continental Europe 55%, UK 5%, Asia Pacific 15%, Canada 7%, Japan 4%, USA 1% and liquidity 13% (based on country of listing except for London-listed Japanese funds which are classified as Japan).

The discount on the Company's shares was 9.3% as of 31 March 2011.

The equity markets remained buoyant in the first 6 months of the Company's financial year. There has been a cyclical upturn in the global economy, albeit purchased at the cost of increased government deficit spending and highly accommodative monetary policies. The levels of debt to Gross Domestic Product (GDP) in much of the developed world remain elevated but the burden has been shifted from the private to the public sector. As a result, the solvency of sovereign borrowers is now being called into question. The debt deleveraging cycle is still playing out and invites some caution in relation to the duration of the current economic recovery and the staying power of the equity market rally.

The discounts to NAV we are able to find in the markets are attractive. The weighted average discount on our portfolio (excluding cash held) is 30%. We find the European markets particularly good value with discounts on our holdings there of 34%. Investors perceive the European markets to be dysfunctional and are more willing to hunt for growth elsewhere but in our view there are many very good companies listed in Europe on compelling ratings.

We have added to our European exposure during the period and, in particular, initiated several significant positions in Spain. We had not invested in Spain for several years since we sold our last holding in September 2005. We now have 7.5% of the portfolio in Spain in 5 companies: Prisa, Telefonica, Ferrovial, NH Hoteles and Alba. The weak Spanish economy and the ongoing problems in the property and financial sector have masked the progress made by corporate Spain in strengthening its balance sheet. The companies in the portfolio generally have substantial foreign assets and are trading on significant discounts to NAV.

We reduced our exposure to Asian holding companies through partial sales of our holdings in Jardine Matheson, Jardine Strategic and Swire 'B'. We became more cautious on the valuation of the underlying assets following the phenomenal outperformance of Asia in recent years.

Unlike some value investors, we have become less convinced by the case for Japan, and have reduced exposure over the past year. The entire equity market is inexpensive on a price to book ratio of less than one. However, the obstacle in realising this value is that Japanese corporate management does not strive to maximise value for shareholders as a core aim. On the macro-economic side, it is too soon to say if the government's response to the terrible destruction caused by the earthquake and tsunami will be a positive or negative for the equity markets. With a government debt to GDP ratio of over 200%, the last thing Japan needs is more deficit spending. At some point the bond markets may rebel and send yields on government bonds higher, causing a fiscal crisis. Some of the spending may also be funded by higher taxes which are not helpful for an economy struggling with low growth and a deflationary bias.

The high discounts that we have in the stocks in our portfolio are an important store of value but are only of benefit if that value can ultimately be realised for shareholders. This can happen through the narrowing of discounts, and more fundamentally, through corporate activity.

There has been some encouraging news in this regard during the period. There have been bids for portfolio companies Colonia, CNP and Forth Ports generating material uplifts for the fund. Buybacks have also been used to good effect in situations where the discount to NAV was wide. Overall, we are positive on the portfolio at this level of discount to NAV and see more potential for corporate activity to add value.

John Pennink

Asset Value Investors Limited

16 May 2011

Consolidated Income Statement

	For the six months to 31 March 2011 (unaudited)			For the six months to 31 March 2010 (unaudited)			For the year to 30 September 2010 (audited)
	Revenue	Capital		Revenue	Capital		Revenue	Capital
	return	return	Total	return	return	Total	return	return	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Income
Investment income note 2	5,091	-	5,091	4,121	-	4,121	19,535	-	19,535
Gains on investments held at fair value	-	55,647	55,647	-	63,929	63,929	-	97,769	97,769
(Losses)/gains on forward currency contracts held at fair value	-	-	-	-	(1,858)	(1,858)	-	1,952	1,952
Losses on Equities Index Stock 2013 held at fair value	-	(340)	(340)	-	(883)	(883)	-	(1,635)	(1,635)
Exchange losses on currency balances	-	(591)	(591)	-	(1,910)	(1,910)	-	(2,519)	(2,519)
	5,091	54,716	59,807	4,121	59,278	63,399	19,535	95,567	115,102
Expenses
Investment    management fee	(1,235)	(1,235)	(2,470)	(1,094)	(1,094))	(2,188)	(2,187)	(2,187)	(4,374
Performance fee	-	-	-	-	(26)	(26)	-	(170)	(170)
Back VAT on management and performance fees	111	69	180	-	-	-	231	165	396
Other expenses (including irrecoverable VAT)	(531)	-	(531)	(510)	-	(510)	(1,114)	(1)	(1,115)
Profit before finance costs and tax	3,436	53,550	56,986	2,517	58,158	60,675	16,465	93,374	109,839
Finance costs	(1,154)	(4)	(1,158)	(1,169)	(4)	(1,173)	(2,338)	(7)	(2,345)
Profit before taxation	2,282	53,546	55,828	1,348	58,154	59,502	14,127	93,367	107,494
Taxation	(214)	-	(214)	(144)	-	(144)	(1,415)	8	(1,407)
Profit for the period	2,068	53,546	55,614	1,204	58,154	59,358	12,712	93,375	106,087
Earnings per Ordinary Share  - note 3	1.29p	33.45p	34.74p	0.75p	36.33p	37.08p	7.94p	58.33p	66.27p

The Company did not have any income or expense that is not included in profit for the period. Accordingly, the "Profit for the period" is also the "Total Comprehensive Income for the period", as defined in IAS 1 (revised) and no separate Statement of Comprehensive Income has been presented.

The total column of this statement is the profit and loss account of the Group. The revenue return and capital return columns are supplementary to this and are prepared under the guidance published by the Association of Investment Companies.

All items in the above statement derive from continuing operations.

All income is attributable to the equity holders of British Empire Securities and General Trust plc. There are no minority interests.

Consolidated Statement of Changes in Equity

For the six months to 31 March 2010 (unaudited)

	Ordinary	Capital
	share	redemption	Share	Capital	Merger	Revenue
	capital	reserve	premium	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 September 2009	16,008	2,927	28,078	622,927	41,406	23,842	735,188
Total comprehensive income for the period	-	-	-	58,154	-	1,204	59,358
Ordinary dividend paid	-	-	-	-	-	(6,723)	(6,723)
Special dividend paid	-	-	-	-	-	(2,001)	(2,001)
Balance at 31 March 2010	16,008	2,927	28,078	681,081	41,406	16,322	785,822

For the year ended 30 September 2010 (audited)

	Ordinary	Capital
	share	redemption	Share	Capital	Merger	Revenue
	capital	reserve	premium	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 September 2009	16,008	2,927	28,078	622,927	41,406	23,842	735,188
Total comprehensive income for the period	-	-	-	93,375	-	12,712	106,087
Ordinary dividend paid	-	-	-	-	-	(9,604)	(9,604)
Special dividend paid	-	-	-	-	-	(2,001)	(2,001)
Balance at 30 September 2010	16,008	2,927	28,078	716,302	41,406	24,949	829,670

For the six months to 31 March 2011 (unaudited)

	Ordinary	Capital
	share	redemption	Share	Capital	Merger	Revenue
	capital	reserve	premium	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 September 2010	16,008	2,927	28,078	716,302	41,406	24,949	829,670
Total comprehensive income for the period	-	-	-	53,546	-	2,068	55,614
Ordinary dividend paid	-	-	-	-	-	(9,125)	(9,125)
Balance at 31 March 2011	16,008	2,927	28,078	769,848	41,406	17,892	876,159

Consolidated Balance Sheet

	At 31 March 2011 (unaudited) £'000		At 31 March 2010 (unaudited) £'000	At 30 September 2010 (audited) £'000
Non-current assets
Investments held at fair value through profit or loss		893,312	757,768	853,883
Current assets
Forward currency contracts held at fair value through profit or loss		-	75,000	-
Sales for future settlement		872	47,986	-
Other receivables		3,010	3,274	2,687
Cash and cash equivalents		11,010	17,155	6,020
		14,892	143,415	8,707
Total assets		908,204	901,183	862,590
Current liabilities
Forward currency contracts held at fair value through profit or loss		-	(76,857)	-
Purchases for future settlement		(145)	(7,551)	(1,054)
Other payables		(1,178)	(1,118)	(1,284)
103/8 per cent Debenture Stock 2011		(8,484)	-	(8,484)
		(9,807)	(85,526)	(10,822)
Total assets less current liabilities		898,397	815,657	851,768
Non-current liabilities
10 3/8 per cent Debenture Stock 2011		-	(8,484)	-
8 1/8 per cent Debenture Stock 2023		(14,911)	(14,904)	(14,907)
Equities Index Stock 2013 held at fair value through profit or loss		(7,280)	(6,392)	(7,144)
Provision for deferred tax		(47)	(55)	(47)
Net assets		876,159	785,822	829,670

Equity attributable to equity Shareholders
Ordinary Share capital	16,008	16,008	16,008
Capital redemption reserve	2,927	2,927	2,927
Share premium	28,078	28,078	28,078
Capital reserve	769,848	681,081	716,302
Merger reserve	41,406	41,406	41,406
Revenue reserve	17,892	16,322	24,949
Total equity	876,159	785,822	829,670
Net asset value per Ordinary Share - basic note 6	547.33p	490.89p	518.28p
Number of Ordinary Shares in issue	160,080,089	160,080,089	160,080,089

Consolidated Cash Flow Statement

Six months to 31 March 2011 (unaudited) £'000		Six months to  31 March 2010 (unaudited) £'000	Year to 30 September 2010(audited) £'000
Net cash (outflow)/inflow from operating activities
Profit before taxation	55,828	59,502	107,494
Losses on Equities Index Stock 2013 held at fair value	340	883	1,635
Realised exchange losses on currency balances	591	1,910	2,519
Gains on investments held at fair value through profit or loss	(55,647)	(63,929)	(97,769)
Purchases of investments	(384,938)	(443,586)	(855,586)
Sales of investments	399,375	465,716	856,931
(Increase)/decrease in other receivables	(529)	679	1,694
Decrease in creditors	(106)	(445)	(2,136)
Taxation	(8)	(5)	(1,705)
Amortisation of Debenture issue expenses	4	4	7
Net cash inflow from operating activities	14,910	20,729	13,084
Financing activities
Dividends paid	(9,125)	(8,724)	(11,605)
Buyback of Equities Index Stock 2013	(204)	(177)	(177)
Cash outflow from financing activities	(9,329)	(8,901)	(11,782)
Increase in cash and cash equivalents	5,581	11,828	1,302
Exchange movements	(591)	(1,910)	(2,519)
Change in cash and cash equivalents	4,990	9,918	(1,217)
Cash and cash equivalents at beginning of period	6,020	7,237	7,237
Cash and cash equivalents at end of period	11,010	17,155	6,020

Notes to the Financial Statements

1.   Significant accounting policies

The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. The accounting policies and methods of computation followed in these half year financial statements are consistent with the most recent annual financial statements for the year ended 30 September 2010.

The factors which have an impact on Going Concern are set out in the Going Concern section of the Director's Report in the Company's Annual Report and Accounts to 30th September 2010. At 31st March 2011 there have been no significant changes to these factors. Accordingly, the Directors believe that it is appropriate to continue to adopt the Going Concern basis in preparing the interim accounts.

The half year financial statements have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting".

These financial statements are presented in sterling as this is the currency of the primary economic environment in which the Group operates.

2.   Income

	31 March	31 March	30 September
	2011	2010	2010
	£'000	£'000	£'000
Income from investments
Listed investments	4,973	4,113	19,520
Other income
Deposit interest	118	8	15
Total income	5,091	4,121	19,535

3.   Earnings per Ordinary Share

	31 March	31 March	30 September
	2011	2010	2010
Total earnings per Ordinary Share
Total profit	£55,614,000	£59,358,000	£106,087,000
Weighted average number of Ordinary Shares in issue during the period	160,080,089	160,080,089	160,080,089
Total earnings per Ordinary Share	34.74p	37.08p	66.27p

The total earnings per Ordinary Share detailed above can be further analysed between revenue and capital as below:
Revenue earnings per Ordinary Share
Revenue profit	£2,068,000	£1,204,000	£12,712,000
Weighted average number of Ordinary Shares in issue during the period	160,080,089	160,080,089	160,080,089
Revenue earnings per Ordinary share	1.29p	0.75p	7.94p
Capital earnings per Ordinary Share
Capital profit	£53,546,000	£58,154,000	£93,375,000
Weighted average number of Ordinary Shares in issue during the period	160,080,089	160,080,089	160,080,089
Capital earnings per Ordinary Share	33.45p	36.33p	58.33p

4. Comparative information

The financial information contained in this half year report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006.

The financial information for the six months ended 31 March 2011 and 31 March 2010 have not been audited.

The information for the year ended 30 September 2010 has been extracted from the latest published audited financial statements. The audited financial statements for the year ended 30 September 2010 have been filed with the Registrar of Companies. The report of the auditors on those accounts contained no qualification or reference to any matters to which the auditors drew attention by way of emphasis without qualifying the audit report or statement under Section 498(2) or (3) of the Companies Act 2006.

5.   Retained earnings

The table below shows the movement in the retained earnings analysed between revenue and capital items.

	Revenue		Capital	Total
	£'000		£'000	£'000
At 30 September 2010	24,949		716,302	741,251
Movement during the period:
Total comprehensive income for the period		2,068	53,546	55,614
Ordinary dividend paid: Ordinary Shares		(9,125)	-	(9,125)
At 31 March 2011		17,892	769,848	787,740

6.   Net asset value per Ordinary Share

The net asset value per Ordinary Share is based on net assets of £876,159,000 (31 March 2010: £785,822,000; 30 September 2010: £829,670,000) and on 160,080,089 (31 March 2010: 160,080,089, 30 September 2010: 160,080,089) Ordinary Shares, being the number of Ordinary Shares in issue at the period ends.

7.   Equities Index Unsecured Loan Stock 2013

During the period the Company bought back 80,000 units of its Equities Index Unsecured Loan Stock 2013 for cancellation at a cost of £204,000.

8.   Dividends

During the period the Company paid a final dividend of 5.70p per Ordinary Share for the year ended 30 September 2010 on 7 January 2011 to Ordinary Shareholders on the register at 10 December 2010 (ex-dividend 8 December 2010).

The interim dividend of 2.00 per Ordinary Share for the year ending 30 September 2011 will be paid on 10 June 2011 to Ordinary Shareholders on the register at the close of business on 27 May 2011 (ex-dividend 25 May 2011).

9.   Contingent assets

While most of the Back VAT has now been recovered, the Company will continue to pursue recovery of outstanding Back VAT, and interest, as far as is practical. The Directors consider it inappropriate to recognise any Back VAT not yet recovered, in these financial statements.

The Board has recovered and accounted for £3,603,575 up to the date of this report. For the six months to 31 March 2011 £179,975 Back VAT has been recovered and shown within these financial statements. This has been allocated £110,901 as revenue and £69,074 as capital within the Consolidated Statement of comprehensive Income in line with VAT previously written off on investment management and performance fees previously charged. Interest amounting to £115,846 relating to these recoveries has also been received by the Company.

10.  Principal financial risks

The principal financial risks which the Company faces include exposure to:

- Market price risk

- Foreign Currency risk

- Interest rate risk

- Liquidity risk

- Credit risk

Further details of the Company's management of these risks and exposure to them is set out in Note 19 to the Company's Annual Report & Accounts for the year ended 30 September 2010, as issued on 15 November 2010. There have been no changes to the management of or exposure to these risks since that date.

11.  Related party transactions

The Company has related party transactions with Asset Value Investors Limited. Management fees for the period amounted to £2,470,000 (six months to 31 March 2010: £2,188,000; year ended 30 September 2010: £4,374,000) and the performance fees for the period amounted to £nil (six months to 31 March 2010 relating to the prior year: £26,000; year ended 30 September 2010: £170,000 of which £26,000 relates to the prior year).

At the half year end, the following amounts were outstanding in respect of management fees: £412,000 (half year end 31 March 2010: £364,000; year ended 30 September 2010: £365,000) and performance fees: £nil (half year end 31 March 2010: £nil; year ended 30 September 2010: £144,000).

12.  Interim Management Report

There have been no changes to the related party disclosures set out in the Annual Report of the Company for the year ended 30 September 2010, except as above.

The Directors consider that the Chairman's Statement, the Investment Manager's  Report, the above statement on related party disclosures and the Directors' Responsibility Statement together constitute the Interim Management Report of the Company for the half year to 31 March 2011 and satisfy the requirements of the FSA's Disclosure Rules and Transparency Rules (DTR) 4.2.3 to 4.2.11.

13.  Responsibility Statement

The Directors of the Company (Mr Strone Macpherson (Chairman), Mr Steven Bates, Mrs Rosamund Blomfield-Smith, Mr John May and Mr Andrew Robson) being the responsible persons, confirm to the best of their knowledge that:

a) the condensed set of financial statements, which has been prepared in accordance with International Financial Reporting Standards, gives a true and fair view of the assets, liabilities, financial position and profit of the Company;

b) the Interim Management Report includes a fair review, as required by DTR 4.2.7R, of important events that have occurred during the first six months of the financial year, and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

c) the Interim Management Report includes a fair review of the information concerning related parties transactions as required by DTR 4.2.8R.

14.  Copies of the Half Year Report

Printed copies of this Half Year Report will be sent to shareholders shortly.  Additional copies may be obtained from the Company Secretary - Phoenix Administration Services Limited, Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW.  A copy of the Half Year Report can be viewed and downloaded from the Company's website www.british-empire.co.uk .

Phoenix Administration Services Limited

16 May 2011

The content of the Company's web-pages and the content of any website or pages which may be accessed through hyperlinks on the Company's web-pages is neither incorporated into nor forms part of the above announcement.

 

END

 

 

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