Final Results
Ocean Wilsons Holdings Ld
06 March 2007
Ocean Wilsons Holdings Limited
Preliminary Announcement
Chairman's Statement
Introduction
I am pleased to report that your Company produced another excellent result in
2006. The Group's core businesses performed well with significant growth in the
port operations and logistic businesses. For the first time, the port operations
division exceeded towage as the Group's largest division. There was a welcome
recovery in the Group's margins following several years of decline. The Group
continues to invest in its existing businesses as well as to explore new
opportunities.
Results
Turnover for the year increased by 17% to US$334.1 million (2005: US$285.2
million). Operating profit for the year increased by 83% to US$61.4 million
(2005: US$33.5 million) reflecting the higher turnover, improved operating
margins, a profit on the disposal of our interest in the joint venture WR
Operacoes Portuarias Ltda. and the release of surplus on the acquisition of our
subsidiary Brasco Logistica Offshore Ltda.
Improved returns on the investment portfolio US$11.4 million (2005: US$7.8
million) compensated for a decrease in investment income US$11.2 million (2005:
US$14.2 million). Profit before tax was US$28.1 million higher at US$77.6
million (2005: US$49.5 million). Earnings per share were 158.6 cents (2005: 93.6
cents).
Brazil
Although the Brazilian economic growth was slightly higher in 2006 (2.9%) than
in 2005 (2.3%), the Brazilian Government, with a conservative economic policy,
has maintained a favourable environment for business activities. The
macroeconomic figures show stability in the economy, and an expectation of less
volatility in the future.
The trade surplus reached US$ 46.1 billion in 2006, as a result of an increase
of 19% in the total foreign trade movement, from US$ 192 billion in 2005 to US$
229 billion in 2006. The higher growth in imports (24%) when compared to exports
(16%) is an indication of investments in industry, showing positive expectations
from the business community and a stronger exchange rate.
For the third year in a row, the Real has appreciated against the USD. The
increase in net foreign exchange reserves (from US$ 53 billion in 2005 to US$
86 billion in 2006), the continuation of a low inflation rate (the consumer
price index fell from 5.7% in 2005 to 3.1% in 2006), combined with a high real
interest rate resulted again in a stronger currency. Although the Central Bank
basic rate dropped from 19.2% in December 2005 to 12.5% in December 2006, it is
still one of the highest real interest rates in the world.
The Government's objective to pursue a low inflation rate, together with its
intent to keep reducing the real interest rate, means that the exchange rate
will continue to reflect the fundamental strength of the Real. Along the same
lines, the Brazilian sovereign risk
premium (as measured by the JP Morgan Emerging Markets Board Index - EMBI) fell
during the year, from more than 400 basis points at the end of 2005 to less than
200 basis points in 2006, its lowest level ever.
The Government has recently announced an infrastructure investment plan, called
'PAC', to be funded by the public and private sectors, to support future
logistic growth and reduce the Brazilian infrastructure bottleneck. However, the
implementation of the plan will depend on important pending structural reforms,
in areas such as social security, labour legislation and taxation.
Exchange rates
In 2006, the Brazilian Real (Real) appreciated 8.6% against the US Dollar, from
R$2.34 at 1 January 2006 to R$2.14 at year end. The appreciation of the
Brazilian Real against the US Dollar generated a net exchange gain of US$4.4
million (2005: US$5.4 million) in the Group's Real denominated cash balances.
Dividends
The Board is recommending the payment of a final dividend of 20 cents per share
(2005:18 cents per share), to be paid on 4 May 2007, to shareholders on the
register at the close of business on 10 April 2007, making a total dividend for
the year of 22 cents per share (2005: 20 cents per share). The increase reflects
the excellent performance of the Group during the year and the Board's
confidence in the future prospects of your Company.
The Group's dividends are set in US Dollars. Shareholders, receive dividends in
Sterling by reference to the exchange rate applicable to the US Dollar on the
dividend record date, except for those shareholders that elect to receive
dividends in US Dollars. Shareholders electing to receive a dividend in US
Dollars should write to the Company's UK transfer agent, Capita Registrars at
the address set out at the end of this announcement, before the next dividend
record date, 4 April 2007.
The Board's dividend policy takes into consideration all aspects of the Group's
financial performance and prospects, but especially profitability and free cash
flow. Shareholders should also be aware that the future value of dividend
payments in Sterling terms will depend on the prevailing Sterling/US Dollar
exchange rate at the relevant dividend record date.
Corporate social responsibility
The Board has adopted the fundamental principles of corporate social
responsibility. We are committed to understanding the needs and interests of
all stakeholders with whom we are involved and are concerned for the community
and environment. We are always working to improve our social and environmental
performance, with the objective of ensuring that our activities contribute to
the sustainable development of the communities in which we operate.
Taxes
In 2006 the Group paid in excess of US$70.0 million (2005: US$60.0 million) in
Brazilian income, payroll and sales taxes.
Local employment
At the end of 2006, the Group directly employed more than 3,600 people in Brazil
and created numerous employment opportunities through its suppliers and
sub-contractors.
We continue to have an active and constructive relationship with the local and
national trade unions in Brazil that represent our employees, and negotiate wage
agreements on their behalf.
Best employment practice
As part of our commitment to best employment practice, all employees and their
dependents receive private medical cover at a cost of US$5.2 million (2005:
US$4.1 million) to the Group. In addition, the Group provided US$3.1 million
(2005: US$2.2 million) of food assistance, and spent a further US$568,000 (2005:
US$400,000) on education and professional development for employees. The Group
will continue to invest in its management and employees.
Charitable donations
In line with our policy to support local charities the Group made charitable
donations of US$130,000 (2005: US$163,000) during the year. The primary focus
of the Group's charitable efforts continues to be projects helping homeless
children and adolescents. The Group continued its support of Escola de Gente,
Casa Jimmy and Pastoral do Menor in Rio, Fundo da Infancia e Adolescencia in
Rio Grande and Casa da Crianca in Salvador. In addition to financial support,
the Group encourages employees to participate in social initiatives of this
nature.
Strategy
On 12 February 2007 the Board of Ocean Wilsons Holdings Limited made the
following announcement:
' The board of Ocean Wilsons Holdings Limited notes the recent rumors in the
market, and confirms that the Board is actively considering a partial IPO of
its Brazilian operations. If a decision is taken to proceed, further information
will be made available in due course.'
In the event that the Board does decide to proceed with the IPO, the Group's
shareholders will receive a document with full details of the proposal and the
reasons and background to it.
Long term incentive plan
The Board is currently finalising a new long term incentive plan to reward
senior management with compensation linked to the performance of the Ocean
Wilsons Holdings Limited share price.
Outlook
The Group remains in a very good position to take advantage of the positive
Brazilian economic environment. We expect to continue to grow and invest in our
core businesses, primarily in Port Terminals and Offshore (Platform Supply
Vessels - PSVs).
Our investments in 2007 will be concentrated in Tecon Rio Grande and PSV's. We
expect to conclude the expansion of Tecon Rio Grande by the end of 2007 and
deliver a new PSV in April 2007. We have already started to build two other
PSV's, out of the four new vessels that we will build to satisfy the terms of
the Petrobras public tender that we were awarded.
The strong Brazilian currency is still a challenge facing management, given the
very high percentage of our costs that are in Real. However, we believe that
the strong results delivered in 2006 are evidence of the ability of your Company
to deal effectively with this environment. Management is totally committed to
the profitability of the Group, and to increase shareholder value.
Management and staff
On behalf of your Board, I would like to thank our management and staff for
their hard work and loyalty during the year. The Group's performance in a
competitive market is a credit to our people, who have delivered outstanding
results. We will continue to invest in their future.
J. F. Gouvea Vieira
Chairman
5th March 2007
OPERATING REVIEW
2006 Annual Operating Review
Towage
Revenues rose to US$ 118.8 million in 2006 (2005: US$ 106.5 million), an
increase of 11.5%, which reflects the continuous effort to increase the income
level of the business. Operating margins were slightly lower due to the
appreciation of the Real, with segment operating profit of US$ 31.4 million in
2006 (US$ 32.6 million in 2005).
The towage business performed well in 2006, with the number of vessels attended
in line with 2005 and a 6% increase in the average dead-weight tonnage of ships
serviced. Although the total number of vessels calling on Brazilian ports
increased by 5%, our market share was slightly lower due to greater competition
among the harbour towage operators. The appreciation of the Real against the US
Dollar caused operating margins to fall.
Continuing the fleet renewal program, our shipyard in Guaruja delivered the 73
tons bollard pull tugs Aquarius and Volans, in March and June respectively. Both
have 'Unrestricted Service' and 'FiFi I' Lloyd's Register class notation
(fire-fighting capacity of 2.400 m3/hr), and are the largest harbour tugs
operating in Brazil. The strategy is to replace the fleet's older tugs with high
bollard pull and state of art units, enabling some of the tugs to attend the
specific demands of the offshore oil industry.
Our joint venture with CVRD Consorcio Baia de Sao Marcos, also had a good
result for the year, maintaining revenue and operating profit levels. The joint
venture fleet rose from eight to nine tugs during the course of the year.
Port Terminals
Revenues in this segment increased by 29.2%, rising from US$ 98.6 million in
2005 to US$ 127.4 million in 2006, while operating margins rose from US$ 12.2
million in 2005 to US$ 39.4 million in 2006, reflecting the significant
improvement in the performance of the container terminals.
Tecon Rio Grande
Tecon Rio Grande operated 614,700 TEU's (Twenty Feet Equivalent Units), against
670,000 TEU's in 2005, which represents a decrease of 8%. The reduction came
about mainly due to the impact of (i) chicken influenza, which reduced exports
of frozen chicken, (ii) appreciation of the Real, which affected the
competitiveness of some export products, and (iii) the operation of some vessels
in the public port, due to a combination of our terminal's expansion work and
berthing window rules.
In order to support growing demand expected over the next years, two Post
Panamax Gantry Cranes and four Rubber Tyred Gantries have been purchased and are
expected to be in operation by the end of the first semester of 2007. The third
berth is expected to be completed by the end of 2007, allowing the operation of
three vessels simultaneously.
Despite of the volume decrease, strong commercial efforts were made to recover
prices to an adequate market level, which improved significantly our revenues
and results.Tobacco, frozen chicken, resin, furniture and footwear represented
over 55% of the cargoes exported through Tecon Rio Grande.
Tecon Salvador
The terminal moved 252,790 TEU's, an increase of 14.4% over 2005. Tecon Salvador
achieved its record movement of 16,323 boxes per month in October and throughout
2006 accounted for nearly 100% of the containers moved through the port of
Salvador. Productivity also improved, from 34.8 moves per hour in 2005 to 36.6
in 2006.
Results were positively affected by the increase of full container volume and
the commercial efforts to raise prices to an adequate level.
Tecon Salvador is the main terminal for agricultural and petrochemicals products
exports of the region, and the yard size is a real limitation for future growth
Therefore, we plan to invest in new investments in Rubber Tyred Gantries, to
allow a more economic usage of the current available area, and thus to increase
productivity.
Port Terminal for Oil&Gas Support (Brasco)
We provide services for the petroleum offshore industry through our onshore port
base. Despite the shortage of rigs that affected some clients drilling
operations, the new contract with Devon partially compensated this impact in
2006. Our long-term forecast is positive as oil companies are moving to the
development phase of their offshore fields. The company is developing an inland
site to increase its available storage area, to support its current base, as
well as its future operations on the new base in Niteroi (at the former Group
shipyard), and for the development of new sites in Rio de Janeiro State.
Logistics
Logistics revenues increased by 32.7%, rising from US$ 37.1 million in 2005 to
US$ 49.3 million in 2006. Our operating results improved 112%, from US$ 2.0
million in 2005 to US$ 4.2 million in 2006.
The Logistic division develops and operates customized solutions for storage,
distribution and transportation for several different industrial segments, such
as cosmetic and pharmaceutical products, agro industry, frozen chicken,
petrochemicals, and pulp and paper. The division is an important logistic
provider for both Brazilian and multinational companies, namely: Votorantim
Celulose e Papel, Votorantim Metais, Doux Frangosul, Merck, Monsanto, Xerox and
Petroflex. The division currently manages 135,000m2 of warehouses (including
bonded areas) and over 100 pieces of lifting equipment, (forklifts, reach
stackers and top loaders).
In road transportation services, it performs national distribution operations
and managed more than 62,500 trips in 2006, moving both import and export
cargoes in containers from and to the main ports in Brazil. As part of the
strategy to develop this fast growing business, during 2006 we made continuous
efforts to increase revenue, reduce road use costs so as to improve our margin.
The logistics division is the fastest growing business within our Group and has
been recognized as one of the main logistic service providers in Brazil, winning
various awards in 2006.
Ship Agency
Ship agency revenues decreased by 16.3% to US$ 17.8 million from US$ 20.7
million, although the operating result increased by 89%, rising from US$ 4.6
million to US$ 8.7 million. The agency had a good year in line with our
expectations, attending 6,613 ship calls, a growth of 13% compared to the
previous year.
The partnership with CMA-CGM ended, as our partner wished to be independent in
their Brazilian operations. The volume of sales coming from foreign
representatives and Gulf Agency Company hub agents network has doubled.
We continued to implement service quality improvements and internal process
reviews. The centralisation of agency back office activities generated a
productivity improvement of 13%. The division is ranked second in its market,
with a share of 10%.
Offshore (Platform Supply Vessels)
Revenues in this segment increased by 16.7%, rising from US$ 7.2 million in 2005
to US$ 8.4 million in 2006, while operating margins decreased from US$ 1.6
million in 2005 to US$ 1.1 million in 2006.
The two offshore vessels, under time charter to Petrobras, continued to perform
very well during 2006, achieving operational records, though the results were
impacted by a few cost items. Both vessels were dry-docked for regular
maintenance and ran class surveys during the year. The fleet's third vessel
Saveiros Fragata is expected to be delivered in April 2007 and immediately start
operating for Petrobras. Following the Group's strategy to increase our presence
in the market, we participated in the latest Petrobras tenders for the
new-building and time charter of PSVs. The Group won contracts for four new
vessels, to be delivered between 2008 and 2010.
Non-segmented activities
Revenues from non-segmented activities increased from US$ 29.4 million to US$
31.0 million, and operating losses increased from US$ 18.3 million to US$21.2
million. The main cost item in this segment is Group administration.
Shipyard
Besides the Towage fleet maintenance activities, the shipyard was very busy with
the new-building program for tugs and the construction of the PSV, Saveiros
Fragata. Third party work delivered a good result with the building of a new
ferryboat for the Sao Paulo State Company, Dersa.
Dragaport
Our associated dredging company Dragaport had an excellent performance in 2006,
performing work at the Brasfels shipyard site (Angra dos Reis - Rio de Janeiro
State) and in the ports of Rio Grande, Santos and Rio de Janeiro.
Cezar Baiao
Chief Executive Brazilian Operations
FINANCIAL REVIEW
Revenue
Group revenue, as reported for the year, was US$334.1 million, up by 17% on 2005
(US$285.2 million) principally due to increases in the port operations and
logistics businesses.
Operating margins and profit
Operating profit for the year increased by 83% to US$61.4 million (2005: US$
33.6 million) reflecting the higher turnover and improved margins. Margins for
the year improved to 18.4%, (2005: 11.8%). This improvement was driven mainly by
a recovery in port terminal tariffs, changes in the treatment of the PIS and
COFINS taxes and cost reduction. Operating profit for the year further
benefitted from the profit on disposal of our interest in the joint venture WR
Operacoes Portuarias Ltda. of US$3.0 million and release of surplus on the
acquisition of our additional interest in Brasco of US$1.4 million.
Investment revenues
Investment revenue for the Group for the year was down US$3.0 million to US$11.2
million, (2005: US$14.2 million) principally due to reduced exchange gains on
cash and cash equivalents, US$4.4 million (2005: US$5.4 million) and the absence
of investment revenues from insurance underwriting activities, US$ nil (2005:
US$2.2 million).
Other gains and losses
Other gains of US$11.4 million (2005: US$7.8 million) arise from the Group's
portfolio of trading investments and reflect the increase in unrealised gains in
trading investments of US$4.5 million (2005: US$10.7 million), profits on the
disposal of trading investments of US$3.1 million (2005: US$1.3 million) and
exchange movements on trading investments of US$3.9 million gain (2005: US$4.2
million loss).
Finance costs
Finance costs for the year ended 31 December 2006 increased by US$0.4 million to
US$6.4 million compared with US$6.0 million in 2005. The increase was
attributable to losses on derivatives of US$1.2 million (2005: US$nil) and a
decrease in exchange gains on foreign currency borrowings, of US$0.8 million
(2005: US$1.2 million). These negative movements were partially offset by a
reduction in lease interest payments as several large lease contracts
terminated in 2006.
Profit before tax
Group profit before tax for the year increased 57% to US$77.7 million from
US$49.5 million in 2005 principally due to the increase in operating profit.
Taxation
The US$ 20.8 million tax charge (2005: US$14.9 million) for the year represents
an effective tax rate for the period of 27% (2005: 30%). The corporate tax rate
prevailing in Brazil is 34%. The lower effective tax rate primarily reflects
the benefit of income arising in subsidiaries operating in jurisdictions with
lower tax rates.
Earnings per share
Basic earnings per share for the year were 158.6 cents, compared with 93.6 cents
in 2005.
Cash flow
The improvement in operating profit in 2006 was reflected in improved operating
cashflow. Net cash inflow from operating activities was US$ 37.2 million,
US$12.3 million higher than prior year (2005: US$ 24.9 million).
Investing activities for 2006 absorbed US$24.9 million, which was US$ 21.9
million lower than the corresponding outflow last year (2005: US$46.8 million).
In 2005 US$23.2 million was used to acquire the minority interest in Tecon Rio
Grande. The Groups spending on property plant and equipment increased to US$
42.2 million from US$36.2 million in 2005.
At 31 December 2006, the Group had US$ 62.6 million in cash and cash
equivalents, (31 December 2005 : US$50.9 million).
Balance sheet
At the year end the Group's net assets amounted to US$225.6 million (2005:
US$171.4 million). The strong growth in net assets reflects the strong profit
performance over the year as well as the appreciation of the Real. This
translates into net assets per share of 638 cents per share (31 December 2005:
485 cents). Net assets located in Brazil amounted to 407 cents per share (31
December 2005: 303 cents) and net assets outside Brazil to 231 cents per share
(31 December 2005: 182 cents).
Debt
The Group has net debt (defined as bank loans, overdrafts, obligations under
finance leases and derivative financial instruments less cash and cash
equivalents) of US$50.0 million (2005: US$ 58.5 million). During 2006 the Group
made capital repayments on existing loans in accordance with debt repayment
schedules of US$16.1 million (2005: US$11.4 million) and raised new loans of
US$21.0 million (2005: US$18.3million) to finance vessel construction and the
expansion of Tecon Rio Grande.
Risk management
Treasury
The Group has a centralised treasury operation in Brazil, which manages the
investment of surplus funds and borrowings. Clear guidelines have been
established relating to cash management authority levels and investment limits.
The guidelines prohibit taking speculative financial instrument positions, and
regular financial management reports are supplied to senior management.
The main financial risks facing the Group relate to funding, interest rates,
currency fluctuations and movements in the market price of securities.
Funding risk
The Group conducts business principally in Brazil and holds a portfolio of
international investments outside Brazil. The Group borrows to fund capital
projects and looks to cash flow from these projects to meet repayments. Working
capital is funded through cash generated by operating revenues.
There is limited long term commercial funding available in Brazil except from
the Banco Nacional de Desenvolvimento Economico e Social (BNDES). All long term
funding is obtained by our Brazilian subsidiaries from the BNDES or the
International Finance Corporation (IFC, part of the World Bank) except for
specific equipment supplier financing when available at favourable terms.
At the year end, the Group had US$110.2 million in borrowings repayable over
periods of up to 16 years.
The Group also held approximately US$53.6 million in Real denominated cash
deposits in Brazil and the equivalent of US$9.0 million in Sterling, US Dollar
and Euro denominated deposits outside Brazil. The Group maintains large cash
balances to fund investment opportunities and to manage short term fluctuations
in cash flow.
Interest rate risk
The Group has three main types of borrowings, Real denominated, Real denominated
linked to the US Dollar and US Dollar borrowings. Real denominated borrowings
linked to the US Dollar have fixed interest rates and expose the Group to fair
value risk. US Dollar borrowings have variable interest rates and expose the
Group to cash flow risk.
Currency risk
The Group operates principally in Brazil with a substantial proportion of the
Group's revenue, expenses and assets denominated in the Real. Due to the cost of
hedging the Real, the Group does not normally hedge its net exposure to the Real
as the Board does not consider it economically viable.
However during 2006 the Group used immaterial currency swaps to manage its
exposure on the short term portion of its US Dollar and US Dollar linked debt.
Such swaps are only undertaken with Board approval.
Additionally the Group hedges US Dollar and US Dollar linked loan repayments for
periods of up to one year by investing surplus funds in US Dollar linked
Brazilian Government bonds or by purchasing foreign exchange options.
The Group has significant long-term borrowings in US Dollars and in Real
denominated loans linked to the US Dollar. These are used to finance Real
denominated capital projects. This exposes the Group to a potential currency
mismatch of costs and revenues. The Group accepts this risk, as there are few
sources of long term Real denominated financing available.
Market price risk
The Group invests in internationally listed securities or funds principally for
the long-term. The Group's exposure to market price risk arises mainly from
potential loss the Group may suffer through holding market positions due to
price movements or currency fluctuations.
INVESTMENT PORTFOLIO
Hanseatic Asset Management LBG that manages the Group's investment portfolio
reports as follows:
General
'2006 was a positive year for global equities with the MSCI World Index
advancing by 20.1 % exceeding the returns available from cash or bonds for the
fourth consecutive year. Amongst the developed markets, Europe outperformed and
gains were augmented for US Dollar denominated investors by appreciation of the
Euro by 11.5% and Sterling by 13.7%. The US and Japan both underperformed. Japan
was particularly disappointing with the Topix essentially unchanged on the year.
It was another good year in the Emerging Markets especially in Asia. China in
the 'Year of the Dog' was the standout theme for investors. Oil prices
surrendered their strength of the first half of the year to end 2006 where they
started it. Copper fell sharply in December but still finished 35% higher. The
price of an ounce of gold rose by 23%. Ten year bond yields were 30 basis
points higher in the US and 70 basis points higher in Europe but both were well
below their mid year peaks. Twelve month interest rates rose from 4.8% too 5.3%
in the US and from 2.8% to 4% in Europe.
With the exception of a bout of pessimism in the second quarter investors
remained sanguine for much of the year. A number of factors lay behind the
sell-off such as how far the decline in US housing would drag down the world
economy, the threat to inflation posed by commodity prices and the implications
of a change at the helm of the US Federal Reserve. This sell-off was compounded
by the scale of investor leverage which had been exploiting what amounted to
free finance via the Yen 'carry trade'.
However such concerns proved short lived as they were offset by record levels
of corporate profitability, robust margins and the process of shrinking equity.
The high levels of capital available for merger and acquisition and leveraged
buyout activity has meant that the available pool of equity has been declining
at a rate which exceeds supply. In particular these factors underpinned the
strength of European equities where low levels of volatility and tight credit
spreads sustained a benign financing environment for retiring equity.
Japan proved to be the most frustrating market of 2006. Despite double digit
gains in operating earnings, and profit margins at their highest levels for 30
years the market never recovered from its setback in the second quarter.
Concerns about the impact of a slowing US economy and an ongoing lack of
confidence amongst domestic investors dominated instead.
Emerging markets were again a rewarding home for investors in 2006, particularly
anything China related. High levels of investment ahead of the 2008 Olympics in
Beijing have unleashed a boom in the economy. Profitability is rising sharply
in Chinese companies. Inflation has not so far been a significant worry for
policy makers as the country's huge supply of labour together with productivity
gains have kept a lid on goods and services inflation. US retail investors in
particular have been attracted to China and together with demand from savings
rich local investors resulted in a gain in local Chinese shares in excess of
100%.
Performance
The portfolio benefited from this generally positive market background and
increased by 18.4% over the year, marginally less than the gains of 20% in the
MSCI World Index but significantly ahead of its performance benchmark which
increased by 6.8%. Over the six years that Hanseatic Asset Management has had
the assignment of managing the portfolio it has increased in value by 59.6%.
Over the same period the MSCI World Index increased by only 2.9% and the
performance benchmark by 25.6%.
In 2006, the best performing area of the portfolio was the UK where returns were
augmented by the strength of Sterling. In particular, there were significant
positive contributions from Lansdowne UK Equity Fund, Cathedral Capital PLC and
Finsbury Growth and Income Trust PLC. The Far East and the Emerging Markets also
performed very well in particular the Close Finsbury Far East Fund, which
emphasised China and related plays, and the SR - Emerging Markets Portfolio.
The one negative area was in Japan where an overweight exposure together with
poor performing funds undermined returns on both a relative and absolute basis.
Japan was frustrating last year. The improving profitability of the corporate
sector that the case for investing in Japan was predicated on is definitely
occurring, but domestic investors seem to have very little confidence in their
own market. Without the same level of foreign participation which characterised
2005 the market lagged other parts of the world. It was particularly weak in the
smaller and medium sized domestic companies which the portfolio is exposed to.
The best performing individual investments in 2006 were
%
Cathedral Capital PLC 92.5
Merrill Lynch World Mining Trust PLC 48.0
Close Finsbury Far East Equity Fund 38.9
Jupiter European Opportunities Trust PLC 38.5
Lansdowne UK Equity Fund 38.3
Ivanhoe Mines Limited 36.7
Finsbury Growth and Income Trust PLC 35.1
Aberdeen Global - Asia Pacific Fund 27.4
SR Global Fund - Emerging Markets Portfolio 26.5
Lansdowne European Equity Fund 26.2
Portfolio activity
During the year, there were purchases worth approximately US$14.5m and sales to
the value of US$17.3m. The most significant new investments were BlueBay
European Credit Opportunities Fund, the Melchior Japan Investment Trust PLC,
Finsbury Emerging Biotechnology Trust PLC and UFG Russia Select Fund Limited.
The BlueBay fund offers leveraged exposure to a diversified portfolio of
primarily European senior secured leveraged loans and high yield bonds.
Crucially the managers have the flexibility to short securities which is an
attractive factor given the performance of the high yield market and the
compression in spreads.
The Melchior Fund concentrates on smaller and mid cap growth stocks in Japan. It
was a new listing whose management team had a strong track record. The timing
was unfortunate as this sector of the market in particular suffered during the
second half of the year.
Finsbury Emerging Biotechnology Trust was a placing following a change of
management term and geographical focus. Valuations have become very attractive
as this sector has been out of favour. The managers anticipate a more benign
environment for biotechnology companies going forward following the appointment
of a new Commissioner of the FDA. The UFG Russia Fund is a long/short equity
fund operating in Russia. The manager distinguished himself from other Russian
Funds in the market setback in the second quarter by using shorting to
successfully protect value.
The largest sale in the period was the holding in Cathedral Capital a private
Lloyds based insurance company operating primarily in the aviation and the real
estate markets of the US following a bid from its management. The other major
sales included the Putnam New Flag High Yield Fund, which funded the purchase of
Blue Bay. The holding in Endeavour Corporation was sold to take profits after
the run up in oil prices in early 2006 and partial profits were taken in the
Ashmore Emerging Markets Liquid Investment Portfolio holding following
tightening Sovereign spreads. The holding in Odey European Inc was sold and
proceeds from the Russian Century Fund were used to invest in UFG Russia.
Outlook
Since the current bull market in global equities began in March 2003 there have
been two principal drivers behind higher share prices - the corporate profits
cycle and in the developed world a shrinking supply of equity through merger and
acquisition activity, leveraged buyouts and share repurchases. There has been
little in the way of multiple expansion. The only metric by which shares have
become significantly more expensive is
price to book. A robustly profitable corporate sector continues to support the
outlook for shares and the abundance of liquidity globally underpins the
prospects for high levels of equity withdrawal. Levels of capital spending
remain subdued in part due to the platform company model whereby manufacturing
operations are relocated to the developing world. This suggests companies will
continue to focus on merging either with competitors or geographically
contiguous operations. High levels of cash - the average level of cash on the
balance sheet of an S&P 500 company is over 8%, which is the highest for 20
years - suggests that buying back stock or special dividends will remain another
supportive feature for equities. Relative to bonds, shares remain attractively
priced. When these structural factors are added to a relatively benign outlook
for a mid cycle slowdown sufficient to hold monetary policy in check but not
enough to derail the world economy then equities would appear to be the
financial asset class of choice for 2007.
There are however a number of issues for concern that should be taken into
account. For one thing the consensus amongst investment commentators is
positive and many of the industry 'permabears' have capitulated recently.
Secondly the bull market is relatively 'long in the tooth' which statistically
increases the chances of a serious setback.
New technology and the emergence of the developing world has led to a large
increase in global manufacturing capacity. This increased level of supply has
put downward pressure on the price of traded goods which in turn has boosted the
purchasing power of consumers and businesses alike. Productivity and corporate
profitability have increased accordingly. The other feature of the impact of
globalization has been the huge surge in global savings given the Asian
propensity to save. These excesses are recycled into the global financial
system creating the liquidity which underpins asset prices. Any change to this
current balance would have a massively dislocating effect on capital markets.
Although that does not appear imminent it is likely to occur when savings rates
come down in Asia to finance rising levels of consumption. The impact of
consumers in the developing world going head to head with those in the developed
world would result in cost pressures throughout the entire economic chain with
very negative implications for monetary policy. If equity markets start to
sense this is happening they will become very nervous places.
Perhaps a more immediate threat is posed by the prospect of a financial accident
emanating from a disruption to the 'carry trade'. Deflation in the domestic
economy of Japan has resulted in near zero interest rates. Although it is
difficult to quantify it is believed that the world financial markets are very
vulnerable to any change in this source of free Yen financing. Any change to
Japanese policy in response to say, the weakness in the Yen could have very
negative knock on consequences.
Finally in terms of potential risks to the equity outlook it is impossible to
ignore geopolitical issues. There are any number of potentially negative
scenarios involving the Middle East, terrorism and disruption to oil supplies.
Also the prospect of brinkmanship between Taiwan and China is likely to increase
as the Olympics draws near. Later in 2007 investors are likely to focus on
important elections in 2008 involving the US and Russia and the implications of
the political climate in those two countries.
On balance the Managers of the Portfolio think that equities should be able to
deliver better returns than cash and bonds in 2007. They believe however that
the margin of out performance will decline from previous years and that there
are many reasons to expect the levels of market volatility to rise.'
Insurance
In October 2005 Ascension Underwriting disposed of all its investments in Lloyds
underwriting syndicates through the annual Lloyds auctions and is not currently
underwriting insurance. Results for the 2004 and 2005 underwriting years reflect
best estimates and consequently may be subject to change in the future although
the Board does not anticipate any significant changes.
Keith Middleton
Group Finance Director
Ocean Wilsons Holdings Limited
Consolidated income statement
At a board meeting held on 5 March 2007 the following announcement of the audited results of the
Company and its subsidiary companies for the year ended 31 December 2006 were approved by the
Directors.
Year to 31 Year to 31
December December 2005
2006
US$'000 US$'000
Note
Revenue 334,109 285,227
Raw materials and consumables used (53,886) (50,398)
Employee benefits expense (83,225) (71,719)
Depreciation and amortisation expense (15,100) (13,959)
Other operating expenses (125,247) (116,207)
Profit on disposal of property, plant and equipment 435 565
Profit on disposal of joint venture and associate 2,965 -
Release of surplus on acquisition of interest in subsidiary 1,433 -
Share of (loss)/profit of associate (51) 39
Operating profit 61,433 35,548
Investment revenues 11,196 14,212
Other gains and losses 11,433 7,764
Finance costs (6,414) (6,002)
Profit before tax 77,648 49,522
Income tax expense 3 (20,765) (14,865)
Profit for the year 56,833 34,657
Attributable to:
Equity holders of parent 56,077 33,086
Minority interests 806 1,571
56,883 34,657
Earnings per share
Basic and diluted 158,6c 93,6c
Ocean Wilsons Holdings Limited
Consolidated balance sheet
as at 31 December 2006
31 December 2006 31 December 2005
Non current assets US$'000 US$'000
Goodwill 13,132 13,132
Other intangible assets 2,053 2,288
Property, plant and equipment 175,785 147,651
Deferred tax assets 8,289 7,462
Interest in associate - 365
Available for sale investments 5,346 4,821
Other non-current assets 7,809 5,657
212,414 181,376
Current assets
Inventories 7,061 6,669
Trading investments 73,192 64,563
Trade and other receivables 54,413 45,295
Cash and cash equivalents 62,599 50,881
197,265 167,408
Total assets 409,679 348,784
Current liabilities
Trade and other payables (54,223) (54,266)
Current tax liabilities (1,944) (971)
Obligations under finance leases (581) (3,893)
Bank overdrafts and loans (14,945) (16,431)
Derivative financial instrumets (782) -
(72,475) (75,561)
Net current assets 124,790 91,847
Non-current liabilities
Bank loans (95,216) (88,515)
Deferred tax liabilities (9,336) (8,455)
Provisions (5,913) (4,317)
Obligations under finance leases (1,098) (566)
(111,563) (101,853)
Total liabilities (184,038) (177,414)
Net assets 225,641 171,370
Capital and reserves
Share capital 11,390 11,390
Retained earnings 173,305 126,331
Capital reserves 25,973 23,942
Investment revaluation reserve 2,381 1,856
Translation reserve 8,762 6,538
Equity attributable to equity holders of the parent 221,811 170,057
Minority interests 3,830 1,313
Total equity 225,641 171,370
OCEAN WILSONS HOLDINGS LIMITED
Consolidated statement of changes in equity
As at 31 December 2006
Attributable
Investment to equity
Share Retained Capital revaluation Translation Holders of Minority
Capital earnings reserves reserve reserve the parent interests
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Balance at 1 January 2005 11,390 101,137 23,122 1,353 1,406 138,408 9,019 147,427
Gains on available for sale - - - 503 - 503 - 503
investment
Currency translation - - - - 5,132 5,132 - 5,132
adjustment
Profit for the year - 33,086 - - - 33,086 1,571 34,657
Total recognised income for - 33,086 - 503 6,358 38,721 1,571 40,292
the period
Dividends - (7,072) - - - (7,072) - (7,072)
Acquisition of minority - - - - - - (9,277) (9,277)
interest
Transfer to capital reserves - (820) 820 - - - - -
Balance at 1 January 2006 11,390 126,331 23,942 1,856 6,538 170,057 1,313 171,370
Gains on available for sale - - - 525 - 525 - 525
investment
Currency translation - - - - 2,224 2,224 187 2,411
adjustment
Profit for the year - 56,077 - - - 56,077 806 56,883
Total recognised income for - 56,077 - 525 2,224 58,826 993 59,819
the period
Dividends - (7,072) - - - (7,072) - (7,072)
Sale of minority interest - - - - - - 1,524 1,524
Transfer to capital reserves - (2,031) 2,031 - - - - -
Balance at 31 December 2006 11,390 173,305 25,973 2,381 8,762 221,811 3,830 225,641
Ocean Wilsons Holdings Limited
Consolidated cash flow statement
for the year ended 31 December 2006
Year to Year to
31 December 31 December
2006 2005
US$'000 US$'000
Net cash inflow from operating activities 37,239 24,871
Investing activities
Interest received 5,922 5,997
Dividends received from associate 327 323
Dividends received from trading investments 915 642
Proceeds on disposal of trading investments 17,280 12,843
Income from underwriting activities - 1,530
Proceeds on disposal of property, plant and equipment 2,144 3,077
Purchase of property, plant and equipment (42,231) (36,245)
Proceeds from disposal of investment in an associate 49 -
Net cash inflow/(outflow) arising from acquisition of subsidiary 1,723 (23,222)
Purchase of trading investments (14,476) (11,704)
Net cash inflow arising on disposal of joint venture 3,464 -
Net cash used in investing activities (24,833) (46,759)
Financing activities
Dividends paid (7,072) (7,072)
Repayments of borrowings (16,099) (11,389)
Repayments of obligations under finance leases (3,421) (2,932)
New bank loans raised 20,955 18,295
Increase/(decrease) in bank overdrafts 640 (409)
Net cash used in from financing activities (4,997) (3,507)
Net (decrease)/increase in cash and cash equivalents 7,359 (25,395)
Cash and cash equivalents at beginning of year 50,881 70,915
Effect of foreign exchange rate changes 4,359 5,361
Cash and cash equivalents at end of year 62,599 50,881
Ocean Wilsons Holdings Limited
Preliminary Announcement
Notes to the Preliminary Accounts
1. Basis of Accounting
The financial statements have been prepared on the historical cost basis, except
for the revaluation of financial instruments. The accounting policies applied
are consistent with those set out in the Group's 2006 Annual Report.
2. Basis of Preparation
The financial information set out in this announcement does not constitute the
Group's statutory financial statements for the years ended 31 December 2006 or
2005, but is derived from those accounts. The auditors have reported on those
accounts and their reports were unqualified.
Whilst the financial information included in this preliminary announcement has
been prepared in accordance with International Financial Reporting Standards
(IFRSs), this announcement does not itself contain sufficient information to
comply with IFRSs.
3. Taxation
Year to 31 Year to 31 December
December 2006
2005
US$ '000 US$ '000
UK tax - -
Brazilian tax 20,765 14,865
20,765 14,865
4. Dividends
The proposed final dividend of 20.0 cents per share will be paid on the 4 May
2007, to shareholders on the register at close of business on 19 April 2007 if
approved by shareholders at the annual general meeting to be held on 10 April
2007.
5. Other information
Additional copies of this announcement can be obtained from the Company's
registered office, Clarendon House, Church Street, Hamilton, Bermuda or from the
Company's UK transfer agent, Capita Registrars Group Plc, The Registry 34
Beckenham Road, Beckenham, Kent BR3 4TU.
Address for dividend currency election
Ocean Wilsons Dividend election
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent, BR3 4TU
This information is provided by RNS
The company news service from the London Stock Exchange
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