Interim Results

British Empire Sec & Gen Tst PLC 09 May 2003 BRITISH EMPIRE SECURITIES AND GENERAL TRUST p.l.c INTERIM ANNOUNCEMENT OF UNAUDITED HALF YEAR RESULTS for the six months ended 31 March 2003 •Net asset value fell by 2.3% compared to a gain for the MSCI World Index of 0.9% and falls of 2.5% and 3.7% for the Datastream Net Assets and FTSE All-Share Indices respectively (Source: Datastream). Low exposure to technology contributed to a small underperformance of the MSCI (NASDAQ was up 14%). •Over three years net asset value per share is 33.6% ahead of the MSCI World Index (Source: Datastream). •British Empire is close to fully invested for the first time in several years. Net cash 2.6% of net assets. •Over-inflated multiples have been blown away. Valuations, especially through wide discount investment holding company structures, are now much more attractive. •Geographical profile on a look through basis: Continental Europe 33.1%, UK 24.4%, Asia Pacific 7.5%, North America 8.3%, Japan 7.3%, EMEA 5.3%, Other 1.4% and Liquidity 12.7%. •The Company won three awards: the Money Observer Award for Best Global Trust for the third year running and the Standard and Poors Award for best Global Growth Trust over three years (out of 29 funds) for the second year running and first (out of 27 funds) over 5 years. The Company retains its S& P five star ranking. •Iain Robertson, Chairman said, 'Our cautious policy and high levels of liquidity in 2000 and 2001 proved to be justified. We now feel valuations are much more realistic, hence our near fully invested stance.' •John Pennink, Investment Manager said, 'Although uncertainties are legion 50% falls in many markets have resulted in some attractive valuations. Where assets are depressed and discounts wide we feel justified in taking opportunities.' Enquiries: John Pennink Asset Value Investors Limited One Bow Churchyard Cheapside, London EC4M 9HH Tel: 020 7463 6429 CHAIRMAN'S STATEMENT The Company has returned to a fairly fully invested position for the first time for some years having acquired new investments at some of the widest discounts to net asset value seen for some time. As a result of the consequent reduction in interest received on our cash balances and as envisaged in last year's Report, the Board will not be recommending a special dividend at the year end (2002: 0.5p) but has decided to maintain the interim dividend at 0.4p, the same level as last year. The Board will make a recommendation on the final dividend for the year in the light of the results for the full year. Your Board is concerned about the draft proposals put forward by the FSA in respect of changes to the listing rules for Investment Trusts contained within its recent consultation paper. We have made detailed representations to the FSA about the possible effects of these proposals on our investment style and philosophy and have explained the potential risk to our future investment flexibility, particularly in respect of investments in European investment holding companies and investment trusts, should the proposals be implemented as set out in the consultation document. We shall be keeping the situation under review as the consultation process progresses. Iain Robertson Chairman 9 May 2003 INVESTMENT MANAGER'S REPORT During the first 6 months of the financial year, British Empire's net asset value per share fell 2.3% compared to rises of 0.9% for the MSCI World Index and falls of 2.5% and 3.7% for the Datastream and FTSE All-Share Indices. Our low exposure to technology contributed to a small under-performance of the MSCI (NASDAQ was up 14%). Over the three year period to 31 March 2003, net asset value per share fell 13.6% compared to falls of 47.2% for the MSCI World and 44.2% for the FTSE All-Share Index respectively. Over five years the Company is top of its peer group of 26 Global Growth Trusts, the net asset value per share rising 26.3% compared to a fall of 17.5%, for the sector average. Over the 18 year period since the major rights issue in 1985, the Company's net asset value per share has risen 478% compared to a rise in the MSCI World Index of 201% (Source: Datastream). British Empire has recently won several awards: Standard & Poors 1st place - Five Years UK Investment Trusts Global Growth Sector out of 27 funds 2003 1st place - Three Years UK Investment Trusts Global Growth Sector out of 29 funds 2003 (for the second year running). The company retains its Standard & Poors 5 star ranking. Money Observer 1st place - Best Global Trust, Investment Awards 2003 (for the third year running). The most significant gains in the portfolio during the reporting period were Lionore Mining +43%, Buderus +26%, Wheelock +19%, AMP Diversified Property Trust +18%, FCC +14%, Wendel Investissement +14%, and Eastern European Trust +11%. Among the more significant losers were Fimalac -51%, Intrawest -33%, AIM Trust -32%, Edinburgh Smaller Companies Trust -25%, Fidelity Japan Values -22%,Baillie Gifford Japan Trust -19%, and Danubius Hotels - 15%. As at 31 March 2003, the geographical profile on a look through basis was as follows: Continental Europe 33.1%, UK 24.4%, Asia Pacific 7.5%, North America 8.3%, Japan 7.3%, EMEA 5.3%, Other 1.4% and Liquidity 12.7%. We find ourselves close to being fully invested for the first time in several years. Liquidity minus debt as a percentage of net assets was 2.6% as at 31 March 2003. Shareholders will know that this is considerably lower than our liquidity position in recent years, which reached a peak of over 50% in April 2001. As value investors, we believe the most important determinant of future returns is the price one pays for assets or earnings streams. We went liquid because we were unwilling to pay an exalted multiple on peak cyclical earnings. Now we find that, through holding company and investment trust structures, we are able to find investments on low multiples to cyclically depressed earnings and wide discounts to net asset value. Liquidity conditions in major economies are supportive and should allow for a mild cyclical recovery in the next few quarters. In addition, equity markets in Europe appear oversold due to forced selling by large institutions such as insurance companies. Forced selling has created a situation in which equities look good value compared with other asset classes such as cash and bonds and present an opportunity for those of a contrarian bent. We do not expect a powerful new bull market, however, for the reason that many of the imbalances left behind by the economic boom and bull market have yet to be worked out. Kenneth Rogoff, chief economist for the IMF, listed the risks to the global economy as follows, 'the continuing unwinding of the equity price bubble, the emerging risk of a housing price bubble in some regions, financial imbalances around the globe, including the present patently unsustainable constellation of current accounts, structural weaknesses in Japan and Europe (especially Germany), continuing security concerns...as well as a variety of sundry further risks, including fragilities in emerging markets and SARS.' A sustained rise in equity prices will require the resolution of many of these issues. In an era in which strong gains in equity markets are harder to come by, investors will have to be more pro-active in trying to release value from under-performing assets. James Tobin hypothesised that the combined market value of all the companies on the stock market should be roughly equal to their replacement costs. This powerful idea suggests that there should be reversion to an equilibrium level after periods of excessive enthusiasm and pessimism. When listed assets are trading at a multiple of replacement costs it is natural to assume that there will be a raft of new supply of shares coming to the market as entrepreneurs rush to take advantage of the huge uplift to be gained on going public. Eventually, this process will have the effect of driving down the price of listed assets. This is precisely what happened, par excellence, during the internet boom. Companies with very little in the way of assets could list and instantly be worth (on paper) billions of pounds. So the process was repeated until the whole edifice collapsed. On the other hand, big discounts in the value of listed equity to replacement value should lead to an increase in takeover bids, management buyouts and liquidations. Indeed, there has been a tentative pickup in takeover activity in the equity markets recently. In the UK, Safeway and Six Continents are the most notable of recent targets. The reason for the increase in activity may be that many companies are now selling below the value of their assets and financing is inexpensive. Within our portfolio, we have seen two holdings become the subject of bid activity. We sold the German industrial conglomerate Buderus after a bid by Bosch and AMP Diversified following an approach by Stockland in Australia. We were able to get out of both at close to NAV after buying in on a substantial discount. Increasing M&A activity, combined with share buybacks may provide the answer to the question of who will buy the market in the absence of institutional and private client demand. We believe that many of our holdings could be attractive to strategic or financial bidders. The discounts are wide and the underlying assets are arguably very good value. Our largest area of exposure is to Continental Europe where we have 33.1% of total assets, mainly in investment holding companies. The European markets have been depressed by forced sellers and, in addition, we can buy through structures on very wide discounts. Rue Imperiale trades on a discount of 43%, Wendel Investissement 35% and Investor 'A' 31%. The portfolio has 24.4% in the UK. The bulk of this is in investment trusts. One positive development, in a sector comprising about 400 funds, is the relative absence of new fund launches. Nevertheless rationalisation is vitally necessary in order to promote differentiation of approach and style and reduce the massive duplication of effort and costs. Further attrition is necessary if the endemic sector discount, a curious anomaly in the financial world, is to be reduced meaningfully. Among emerging markets, Eastern Europe has again provided gains as investors appreciated the merits of attractive ratings and the benefits of economic convergence. Last year we referred to Japan as the eternal enigma. The description remains valid. The overall market has continued its long secular decline, yet many small and medium-sized companies perform dynamically. We aim to access such investments through closed-end funds. Ratings are quite attractive, especially when adjusted for the wide discounts available on the funds. As would be expected, markets have rallied following the conclusion of active operations in Iraq and a fall in the oil price. Attention now turns back to fundamental factors . The profit outlook is clouded by a lack of pricing power and a weak volume trend. In response to revenue uncertainty companies are aggressively cutting costs and paying down debt. Given that investors spirits have been almost as depressed as was the case in the extreme days of 1974, and the current reporting season is emerging without too many shocks, there is a strong possibility of a further rally. This may encourage the view that the next bull market is nicely poised to roll. It seems to us that this is only likely for the minority of companies boasting reliable earnings valued in the market to deliver a double figure pre-tax return on investment. John Pennink Asset Value Investors Limited 9 May 2003 Group Statement of Total Return (Incorporating the Revenue Account) -- ------------------------------------ for the six months to 31 March 2003 (unaudited) ------- -------- ------- Revenue Capital Total £'000 £'000 £'000 Losses on investments - (7,941) (7,941) Realised exchange differences - 72 72 Depreciation of loan stock - 221 221 Income 2,319 617 2,936 Investment management fee (incl. (685) (186) (871) Irrecoverable VAT) Other expenses (incl. Irrecoverable VAT) (515) - (515) ------------------------------------ ------- -------- ------- Net return before finance costs and 1,119 (7,217) (6,098) taxation Finance costs (1,353) (3) (1,356) ------------------------------------ ------- -------- ------- Return on ordinary activities before (234) (7,220) (7,454) taxation Taxation on ordinary activities - - - ------------------------------------ ------- -------- ------- Return attributable to equity (234) (7,220) (7,454) shareholders Dividend in respect of equity shares (640) - (640) ------------------------------------ ------- -------- ------- Transfer to reserves (874) (7,220) (8,094) ------------------------------------ ------- -------- ------- Return per Ordinary share : basic (0.15)p (4.51)p (4.66)p ------------------------------------ ------- -------- ------- ---------------- ----------------- for the six months to for the year to 31 March 2002 30 September 2002 (unaudited) (audited) ---------------- ----------------- Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Gains/(losses) on - 37,382 37,382 - (22,307) (22,307) investments Realised exchange - (4) (4) - (281) (281) differences (Appreciation)/ - (644) (644) - 1,839 1,839 depreciation of loan stock Income 4,724 - 4,724 10,241 - 10,241 Investment management fee (incl. Irrecoverable VAT) (771) (193) (964) (1,649) (1,447) (3,096) Other expenses (incl. (732) - (732) (909) (121) (1,030) irrecoverable VAT) ------ ------- ------ ------- ------- ------- Net return before 3,221 36,541 39,762 7,683 (22,317) (14,634) finance costs and taxation Finance costs (1,284) (4) (1,288) (2,644) (7) (2,651) ----------------------- ------ ------- ------ ------- ------- ------- Return on ordinary activities before taxation 1,937 36,537 38,474 5,039 (22,324) (17,285) Taxation on ordinary (306) - (306) (1,171) 434 (737) activities ------ ------- ------ ------- ------- ------- ----------------------- Return attributable to 1,631 36,537 38,168 3,868 (21,890) (18,022) equity shareholders Dividend in respect of (660) - (660) (3,059) - (3,059) equity shares ------ ------- ------ ------- ------- ------- ----------------------- Transfer to/(from) 971 36,537 37,508 809 (21,890) (21,081) reserves ------ ------- ------ ------- ------- ------- ----------------------- Return per Ordinary 0.95p 21.17p 22.12p 2.29p (12.94)p (10.65)p share : basic ------ ------- ------ ------- ------- ------- ----------------------- Group Balance Sheet ------------------------------ --------- --------- ---------- As at 31 As at 31 As at 30 March March September 2003 2002 2002 (unaudited) (unaudited) (audited) ------------------------------ --------- --------- ---------- £'000 £'000 £'000 ------------------------------ --------- --------- ---------- Investments 297,600 386,960 312,902 Net Current Assets / 4,236 593 (2,503) (Liabilities) --------- --------- ---------- ------------------------------ Total assets less current 301,836 387,553 310,399 liabilities --------- --------- ---------- ------------------------------ Financed by: Equities Index Unsecured Loan 5,774 8,974 6,178 Stock 2013 10 3/8 per cent Debenture 11,883 11,883 11,883 Stock 2011 8 1/8 per cent Debenture Stock 14,854 14,847 14,850 2023 Provision for liabilities and - - 69 charges Ordinary Shareholders' Funds 269,325 351,849 277,419 ------------------------------ --------- --------- ---------- 301,836 387,553 310,399 ------------------------------ --------- --------- ---------- Net Asset Value per Ordinary 168.24p 208.19p 173.30p share --------- --------- ---------- ------------------------------ Number of Ordinary shares in 160,080,089 169,005,089 160,080,089 issue --------- --------- ---------- ------------------------------ Summarised Group Statement of Cash Flows --------- --------- --------- ------------------------------- Six months to Six months to Year to 31 March 31 March 30 September 2003 2002 2002 (unaudited) (unaudited) (audited) £'000 £'000 £'000 ------------------------------- --------- --------- --------- Net cash inflow from operating 47 2,376 5,494 activities Servicing of finance (1,345) (1,334) (2,701) Taxation - 39 (868) Capital expenditure and 4,369 (10,962) (4,450) financial investment Acquisitions and disposals - - 6,432 Equity dividends paid (2,401) (2,610) (3,284) ------------------------------- --------- --------- --------- Net cash inflow/(outflow) 670 (12,491) 623 before financing Financing (2,284) (10,963) (25,594) ------------------------------- --------- --------- --------- Decrease in cash (1,614) (23,454) (24,971) ------------------------------- --------- --------- --------- Reconciliation of net cash flow to movement in net debt ------------------------------- --------- --------- --------- Decrease in cash (1,614) (23,454) (24,971) Buyback of index loan stock 182 123 313 ------------------------------- --------- --------- --------- Changes in net debt resulting (1,432) (23,331) (24,658) from cash flows Currency gains/(losses) 57 (4) (281) Other 218 (771) 1,832 ------------------------------- --------- --------- --------- Movement in net debt (1,157) (24,106) (23,107) Opening net debt (29,756) (6,649) (6,649) ------------------------------- --------- --------- --------- Closing net debt (30,913) (30,755) (29,756) ------------------------------- --------- --------- --------- Reconciliation of operating profit to net cash flow from operating activities Net return before finance cost 1,119 3,221 7,683 and taxation Performance fee charged to (186) (193) (1,447) capital Changes in working capital and (886) (652) (742) other non-cash items ------------------------------- --------- --------- --------- Net cash inflow from operating 47 2,376 5,494 activities --------- --------- --------- ------------------------------- Notes 1. The unaudited results have been prepared on the basis of the accounting policies set out in the statutory accounts of the Group for the year ended 30 September 2002. 2. The results for the first six months should not be taken as a guide to the full year's results. 3. Income from revenue sources comprises: Six months to Year to 31 March 30 September ------ --------- 2003 2002 2002 £'000 £'000 £'000 Dividends 2,271 1,471 9,621 Interest 49 3,015 384 Other income (1) 238 236 ------ ------- --------- Total 2,319 4,724 10,241 ------ ------- --------- 4. During the period the Company bought back 102,800 units of Equities Index Unsecured Loan Stock 2013 for cancellation at a cost of £181,600. 5. At 31 march 2003 the Company had 160,080,089 Ordinary shares and 3,326,197 units of Equities Index Unsecured Loan Stock in issue. 6. The interim dividend will be paid on 13 June 2003 to Ordinary shareholders on the register at 30 May 2003. 7. These are not full statutory accounts in terms of section 240 of the Companies Act 1985. The full audited accounts for year to 30 September 2002, which were unqualified, have been lodged with the Registrar of Companies. Independent Review Report to British Empire Securities and General Trust p.l.c Introduction We have been instructed by the company to review the financial information for the six months ended 31 March 2003 which comprises the Group Statement of Total Return, Group Balance Sheet, Group Cash Flow Statement and the related notes 1 to 7. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the company in accordance with guidance contained in Bulletin 1999/4 'Review of interim financial information' issued by the Auditing Practices Board. To the fullest extent required by the law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 'Review of interim financial information' issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data, and based thereon, assessing whether the accounting policies and presentation have been consistently applied, unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 31 March 2003. Ernst & Young LLP London 9 May 2003 This information is provided by RNS The company news service from the London Stock Exchange

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