Annual Financial Report

RNS Number : 3709I
Utilico Emerging Markets Limited
19 June 2017
 

Date:                      19 June 2017

Contact:                 Charles Jillings

                                ICM Investment Management Limited

                                01372 271 486   

 

                                Robert Finlay

                                Stockdale Securities

                                0207 601 6100

 

 

Utilico Emerging Markets Limited

 

Statement of Results

for the year to 31 March 2017

 

 

HIGHLIGHTS OF RESULTS

 

 

·      Net asset value ("NAV") total return of 26.2%

·      Diluted NAV of 241.29p per ordinary share, up 19.1%

·      Revenue earnings per ordinary share (diluted) of 7.70p

·      Dividends per ordinary share increased to 6.65p

GROUP PERFORMANCE SUMMARY

 





31 March

2017

31 March

2016

Change %

2017/16

Total return(1) (annual) (%)

26.2

n/a

Annual compound total return(2)

(since inception) (%)

 

12.1

 

10.9

 

n/a





Diluted NAV per ordinary share (pence)

241.29

202.52

19.1

Ordinary share price (pence)

214.50

178.50

20.2

Discount (%)

(11.1)

(11.9)

n/a

Subscription share price (pence)

27.25

17.25

58.0





Earnings per ordinary share (diluted)(pence)




- Capital

43.90

(5.50)

n/a

- Revenue

7.70

8.23

(6.4)

Total (pence)

51.60

2.73

n/a





Dividends per ordinary share (pence)




- 1st Quarter

1.625

1.525

6.6

- 2nd Quarter

1.625

1.625

0.0

- 3rd Quarter

1.700

1.625

4.6

- 4th Quarter(3)

1.700

1.625

4.6

Total (pence)

6.650

6.400

3.9





Equity holders' funds (£m)

532.2

436.6

21.9

Gross assets(4)(£m)

579.0

455.2

27.2

Ordinary shares bought back (£m)

10.0

3.0

233.3





Cash (£m)

15.3

12.6

21.4

Bank debt (£m)

(46.8)

(18.7)

150.3

Net debt (£m)

(31.5)

(6.1)

416.4

Net debt gearing on gross assets (%)

5.4

1.3

n/a





Management and administration fees

and other expenses (£m)




- excluding performance fee

5.2

4.5

15.6

- including performance fee

14.3

4.5

217.8





Ongoing charges figure(5)(%)




- excluding performance fee

1.1

1.1

n/a

- including performance fee

2.9

1.1

n/a

 

(1)        Total return is calculated based on NAV per ordinary share plus dividends reinvested from the payment date and adjusted for the exercise of subscription shares

(2)        Annual compound total return is calculated based on NAV per ordinary share plus dividends reinvested from the payment date and adjusted for the exercise of warrants and subscription shares

(3)         The fourth quarterly dividend has not been included as a liability in the accounts

(4)         Gross assets less liabilities excluding loans

(5)        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

 

CHAIRMAN'S STATEMENT

The combination of robust underlying share prices and relative strengthening of emerging market currencies continued in the second half of the year and has resulted in a strong performance in UEM's investments. The impact of the Brexit vote and consequent negative effect on Sterling in the first half year has been positive for UK domestic emerging market investors, including UK based UEM shareholders.

It should be noted that the profile of the portfolio's investee companies remains largely unchanged. UEM continues to focus on listed companies that are predominantly offering long-term growth, are profitable and are paying dividends. Notwithstanding the strong recent performance, valuations of these companies remain attractive as growth and profitability has often outpaced share price appreciation. With encouraging prospects for these underlying investee companies, the long term opportunity in the emerging markets utility and infrastructure sectors remains undimmed.

 

John Rennocks
Chairman
16 June 2017

 

INVESTMENT MANAGER'S REPORT

Rumo S.A. ("Rumo"), a Brazilian rail transport operator and a new investment for UEM, is now the ninth largest individual position in the portfolio. Transportadora de Gas del Sur S.A. ("TGS")Power Grid Corporation of India Limited ("Powergrid"), India's biggest grid operator, an existing investment, is now the nineteenth largest position and Grupo Aeroportuario del Centro Norte, S.A.B de C.V ("OMA"), a Mexican regional airport operator, an existing investment, climbed to twentieth position in the portfolio.

Gasco S.A., which was the eighth largest position in the portfolio last year, was subject to a tender offer during the year at a premium and the Investment Managers took the decision to exit the holding. The Egyptian Satellite Company's share price decreased by 41.2% over the year; as a result, the investment fell from seventeenth to thirty-fifth position in the portfolio. Metro Pacific Investments Corporation's share price rose by 2.9%, but not enough to remain in the top twenty, falling from eighteenth to twenty-second position in the portfolio. Asiasat's share price fell by 9.0% and, as a result, the investment fell from nineteenth to twenty-seventh position in the portfolio.

Brazil is now UEM's largest country exposure, increasing from 9.8% to 19.6% of the portfolio.

Ocean Wilsons Holdings Limited ("Ocean Wilsons")

Alupar Investimento S.A.'s ("Alupar") share price increased by 48.0% in the year to 31 March 2017. The past twelve months have been a particularly active period for Alupar as the regulator improved the rates of return on offer for new transmission line concessions. Alupar won five new 30-year concessions at auction, with a total investment requirement of BRL2.5bn at estimated real returns of over 12%, as well as one additional new concession in Colombia. To help fund these new projects, Alupar undertook a BRL350m capital increase at BRL12.30 per unit and disposed of its 51% stake in Transchile for USD58.9m. The lagged effect of inflation adjustments applied to its operating transmission asset revenues, combined with a 30.1% growth in energy volumes following the commissioning of the Energia dos Ventos wind farm and the Risaralda hydro plant, resulted in group revenues increasing by 4.0% in its financial year ended 31 December 2016. EBITDA growth was steady, posting a 9.6% increase, while normalised earnings grew by 15.8%. Dividends per share fell by 34.8%, reflecting both the circa 20% increase in the number of shares outstanding, as well as the company's desire to retain cash to fund investment in the new concessions. In the year to 31 March 2017 UEM increased its position in the company by 27.1%.

Rumo is a new investment for UEM and is Brazil's largest independent rail-based logistics operator. Rumo's share price increased by 155.4% in the year to 31 March 2017, partly driven by the positive equity market sentiment in Brazil during 2016, but mainly due to a successful BRL2.6bn equity raise in April 2016 which has refinanced its balance sheet and enabled new management to start executing its BRL8.5bn capex plan. With the new funding, the company has been able to improve the operational efficiency of the railway network to ensure that it is able to expand capacity. On the back of the capital raise, the new management team set out clear financial targets, indicating that EBITDA by 2020 will be BRL4.5bn. To date, management has delivered on its plans, which is helping the stock price rerate. Financial performance for the year to 31 December 2016 saw revenues increase by 4.4% despite a 10.3% decline in rail volumes and a 20.2% decline in container volumes, due to lower than expected corn volumes. EBITDA was up by 5.8%, with normalised net income still negative given higher depreciation and financial costs due to the implementation of its capex plan. UEM also has a £4.6m investment in Cosan Logistics, which owns 26.6% of Rumo. As at 31 March 2017, Cosan Logistics traded at a 25.7% discount to Rumo.

China (including Hong Kong) is UEM's second largest country exposure at 18.5%, decreasing during the year from 26.3% of the portfolio.

China Gas Holdings Limited's ("China Gas") share price increased by 9.6% in the year to 31 March 2017. Chinese gas distribution companies have continued to suffer from an uncertain regulatory backdrop as the market stutters towards liberalisation. A key issue has been the setting of the input gas price by the oil majors at levels which, for much of the year, were uncompetitive against fuel oil. This was surprising as it runs contrary to the Chinese government's commitment to increase the proportion of natural gas in the energy matrix in order to reduce pollution. Nevertheless, China Gas has proven resilient, growing its customer base by 18.1% to 16.2m connections in the six months to 30 September 2016. This helped to deliver piped gas volume growth of 13.3%, while LPG volumes also grew by 25.7%. The financial impact of these strong operational figures was dampened by the lower tariffs reflecting the drop in commodity prices, resulting in group revenues falling by 6.9%. Lower cost of goods sold helped mitigate this decline with EBITDA increasing by 2.9%, though normalised net income still fell by 3.8%. Interim dividends were unchanged on the previous year. In the year ended 31 March 2017 UEM decreased its position in China Gas by 42.0%.

APT Satellite Holdings Limited's ("APT")

Yuexiu Transport Infrastructure Limited ("Yuexiu")

China Resources Gas Group Ltd ("CR Gas")

Shanghai International Airport Co Ltd ("Shanghai Airport") saw a marginal decrease in its share price of 0.4% over the year to 31 March 2017 despite solid 2016 financial and operational results. Over its financial year to 31 December 2016, Shanghai Airport saw passenger numbers increase by 9.8%, which continues to be driven by the increase in average Chinese incomes, additional flights being offered by low cost carriers, as well as the growing appetite for travel from the Chinese population. However, the current flight restrictions at Shanghai Airport on ad hoc flights, chartered flights and additional routes issued by The Civil Aviation Administration of China in May 2016 due to an on-time departure rate of below 70% has hindered the airport from fully capturing its total passenger growth potential. For the financial year to 31 December 2016, revenues increased in line with passenger growth at 10.6%, adjusted EBITDA increased by 12.1% and net income was up by 13.3%.

Romania climbed from the fourth to third largest country exposure in the portfolio, increasing from 8.8% to 9.9%.

Transelectrica S.A.'s ("Transelectrica") shares increased by 13.4% in the year to 31 March 2017. In its financial year to 31 December 2016, domestic demand for electricity remained steady with growth at 1.2%, but with net exports falling by 25%, domestic production fell by 1.7%. With grid losses slightly improved at 2.3%, total volume billed by Transelectrica increased by 2.0%. As the company had over-recovered profits allowed by the regulatory regime in the previous year, tariffs were cut again in mid-2016 by an average of 9.0% and as a result effective tariffs fell by 9.4%. As such, group revenues fell by 7.4%, excluding balancing market services which are profit-neutral to the company. Wage pressures and operating leverage resulted in EBITDA falling by 10.9% and, with a higher effective tax rate, normalised earnings fell by 23.7%.

Transgaz S.A.'s ("Transgaz") share price increased by 41.9% in the year to 31 March 2017. During the year Transgaz secured a financing agreement with the EU for a new 480km pipeline connecting Bulgaria and Hungary, which is scheduled to be commissioned in 2019. This is an important step towards increasing the regulated asset base and boosting longer-term returns for the company, which could be further enhanced if the Black Sea gas field discoveries are developed into producing assets. In its financial year to 31 December 2016 domestic gas volumes transmitted fell by 1.8%, while losses remained steady at just 0.7%. With the regulator increasing the fixed component of the tariff to 60%, reducing the volumetric (i.e. seasonality) component to 40%, effective tariffs for Transgaz increased by 10.0%. As a result, domestic transport revenues grew by 8.0% which, combined with gas transit revenues which were up by 3.1%, delivered group revenue growth of 8.6%. With high operating leverage, EBITDA increased by 16.4% and normalised earnings by 21.9%. Dividends per share increased by 67.8% as the company's main shareholder sought to increase the dividend payout to 90% of earnings. In the year to 31 March 2017 UEM increased its position in Transgaz by 11.4%.

Conpet S.A.'s ("Conpet") share price increased by 28.5% in the year to 31 March 2017. As a consequence of the lower oil price, Romania's main producer, OMV Petrom, has significantly reduced investments in new wells causing a decline in oil production over the past year. As a result, in its financial year to 31 December 2016, Conpet reported a 5.6% decline in domestic oil transport volume growth, which was more than offset by a 10.0% increase in imports, bringing total volume growth to 1.3%. Following the implementation of relatively small adjustments to domestic tariffs and more significant hikes in the lower import tariffs, overall effective tariffs only fell by 1.3%, resulting in group revenues being broadly unchanged on last year. Lower transport costs enabled EBITDA to grow by 3.4%, which was accentuated at the bottom line by reduced depreciation, with normalised earnings growth of 18.5%. With no debt and cash amounting to over 40% of the market capitalisation accruing on the balance sheet, the company finally looks set to return some of this excess cash to shareholders. It announced a 10.5% increase in its ordinary dividend, as well as a special dividend, taking the total dividend increase to 127%. In the year to 31 March 2017 UEM increased its holding in Conpet by 8.3%.

The Philippines increased from 6.3% to 6.7% of the portfolio and is now the fifth largest country exposure.

International Container Terminal Services, Inc's ("ICT") share price increased by 34.5% in the year to 31 March 2017. For its financial year to 31 December 2016, ICT had a solid performance with consolidated volumes up by 11.7%. This was driven by an 11.2% increase in Asian volumes due to the ramp-up of its Pakistan terminals and improved trading activity in Manila; a 20.0% increase in volumes from EMEA due to the contribution from a newly acquired terminal in Iraq; and a 9.7% increase in volumes from the Americas boosted by new terminals in Mexico and Honduras. Total revenue growth for the period was up by 7.1%, not fully reflecting the growth in container volumes as yield per container box was down by USD5 to USD130. Of this, USD3 was due to foreign exchange weakness and USD2 due to less favourable volume mix. Adjusted EBITDA was up by 16.3% due to stringent cost control by management and lower start-up costs as new terminals came online. As a result, operational leverage is beginning to flow through. Normalised net income was up by 16.7%. ICT's management has indicated that it is slowly changing its investment philosophy from 'growth' to 'growth with dividends' as it looks to fully utilise its existing operations and to invest only in brownfield projects.

Other Latin America exposure (which includes Mexico) increased from 3.9% to 6.6% of the portfolio and is now the portfolio's sixth largest geographic exposure.

OMA's share price over the period only increased by 1.6% despite the Mexican airport operator reporting solid 2016 financial results. In line with the wider Mexican markets, OMA's share price was unfortunately affected by the election in the US of Donald Trump whose threats of 'ripping up' NAFTA negatively impacted investors' sentiment. Operationally, its financial year ended 31 December 2016 was robust, with total revenues for OMA up 23.1%, with aeronautical revenues increasing by 27.7%, driven by a 10.9% increase in passengers in addition to a tariff increase in 2Q16. Non-aeronautical revenues over the period increased by 19.7%, benefiting from the growth in passenger numbers as well as from commercial diversification by the company. Adjusted EBITDA was up by 35.7%, with EBITDA margin expanding by 470bps to 63.8%. Normalised net income was up by 48.1%. Given the increase in average wages in Mexico, along with the increased airline capacity provided by the low-cost carriers, flight penetration is expected to continue to rise from its low base over the short term, providing a positive outlook for the sector.

India's country exposure increased from 4.6% to 6.1% of the portfolio over the year to 31 March 2017.

SJVN Limited's ("SJVN") share price increased by 17.5% in the year to 31 March 2017. Following a period of growth subsequent to the commissioning of the Rampur hydro project, the past year has been one of more stable performance for SJVN. In the six months to 30 September 2016, SJVN reported that energy generation from its hydro facilities declined by 2.6%, as hydrology normalised downwards following the very strong prior year. Indeed, it is notable that with a load factor of 83.9%, production efficiency remains at excellent levels. By comparison the wind farm assets performed poorly, with output falling by 27.5% due to outages caused by turbine issues. That said, the wind assets are insignificant when compared to the scale of SJVN's hydro assets and overall output fell by just 2.7%. With minimal change in effective tariffs, this resulted in revenue and EBITDA falling by 2.5% and 3.5% respectively, while normalised earnings increased by 4.7%. SJVN has retained a very strong net cash balance sheet for many years, whilst maintaining a modest dividend payout policy of c.30% of earnings. However, this year the government has sought to address this situation in part by announcing an increase in the interim dividend of 257% (equivalent to an almost 100% payout of earnings). In the year to 31 March 2017, UEM increased its position in SJVN by 26.3%.

Powergrid is a new company in UEM's top twenty holdings and is the portfolio's second largest investment in India. This position was initiated towards the end of 2013. Powergrid is a "Navaratna" Central Public Sector Enterprise which has been listed since 2007 and is the dominant electricity transmission utility in India. The company operates a grid totalling c.140,000km of transmission lines and 219 substations, accounting for approximately 90% of the country's inter-state and inter-regional network. The company is 57.9% controlled by the Government of India and its assets are fully regulated by the Central Electricity Regulatory Commission under a regime which allows a 15.5% return on equity, though the company can often exceed this via performance incentives and efficiency gains. In addition to the transmission operations, Powergrid also offers some telecoms and consultancy services, although these are much less significant to overall financials, accounting for less than 5% of group revenues.

Malaysian investments decreased from 13.7% to 5.3% of the portfolio and fell from second to the eighth largest country exposure.

Malaysia Airports Holdings Berhad's ("Malaysia Airports") share price increased by 2.8% in the year to 31 March 2017. Performance at the Malaysia-based airports improved during its financial year to 31 December 2016 with passenger growth for the year at 5.5%, up from the muted 0.6% passenger growth seen in 2015. Management has indicated that passenger growth for 2017 is expected to be up by 6.5% as traveller sentiment has improved since the tragic events of 2014. In addition, capacity has been added to the market through low-cost carriers, as well as by Malaysia Airlines following its restructuring in 2014/2015. The drag on Malaysia Airports' share price has come from its 100% investment in Sabiha Gokcen International Airport ("ISG") in Istanbul. ISG only saw 4.6% growth in passengers in 2016, compared to the highs of 19.7% growth that was seen in 2015. Passenger growth was deflated due to the political events that rocked Turkey throughout 2016. Management is hoping for traffic growth to improve in 2017 to around 7.2%. Financial performance for its financial year ended 31 December 2016 saw group revenues up by 7.8% and adjusted EBITDA up by 7.7%. Normalised net income was down for the period by 41.0%. Post full year results, Malaysia Airports reported that it has finally received government approval for the extension of its concession for its Malaysian airports until 2069.

MyEG Services Berhad ("MyEG") continued to see strong upward momentum in its business during the period, with its share price advancing by 30.3% during the year to 31 March 2017, adjusted for a 1-for-2 bonus issue in December 2016.

Argentina's exposure increased significantly from 0.3% to 4.8% of the portfolio in the year to 31 March 2017.

TGS is one of the portfolio's most recent investments, having only been initiated in spring 2016 and is a new entry in the top twenty. TGS is the largest natural gas transmission company in Argentina. It transports almost two-thirds of the country's gas, predominantly to Buenos Aires from gas fields in the south of the country. It owns a pipeline network totalling over 9,000km in length and has an operating license through to 2027, with a ten-year extension beyond this. TGS also owns a hydrocarbon liquids processing plant which produces propane, butane and ethane. This is sold on commercial terms to its major client, Dow Chemical. Under the Kirchner administration, tariff increases for the gas transmission network significantly lagged inflation, failing to provide agreed regulatory returns. However, under the new government, regulation is being reapplied in steps. As a result, TGS saw effective tariffs hiked by over 100% in the year to 31 December 2016, with further hikes of 30% and 40% being implemented in April and December 2017.

Thailand exposure has decreased from 6.8% to 4.8% of the portfolio.

Eastern Water Resources Development and Management PCL's ("Eastwater") shares performed poorly in the year to 31 March 2017, falling by 10.1% over the period. Eastwater continues to suffer from the lack of a proper regulatory framework. This has led to a failure by management to sustain returns through the implementation of tariff increases. This was reflected in operational figures, with raw water volumes falling by 7.4% in its financial year ended 31 December 2016. It is notable that while demand from industrial estates was relatively robust, up by 7.9%, demand from its largest customer (state-owned Provincial Waterworks Authority) fell by 17.7%. With no tariff increases, resulting raw water revenues fell by 7.0%. Meanwhile tap water demand has remained strong, boosted by recent corporate activity, with volumes up by 11.0% and effective tariffs up by 8.2%. As a result, group revenues were flat on last year; EBITDA growth was just 0.4% and normalised earnings fell by 4.6%. Dividends per share were unchanged on last year. In the period under review UEM decreased its holding in Eastwater by 19.3%.

Chilean exposure reduced from 6.2% to 3.8% of the portfolio in the year to 31 March 2017.

Engie Energia Chile S.A.'s ("E.CL") shares increased by 9.7% in the year to 31 March 2017. Over the past year, E.CL has continued construction of its USD1.1bn 375MW coal-fired facility, as well as its USD780m transmission line project ("TEN") to connect the central and northern grids, which are due to be connected in 2017 and 2018 respectively. In its financial year to 31 December 2016 E.CL reported electricity sales volumes down by 2.3%, as some smaller contracts from the unregulated sector (predominantly mining companies) rolled off and were not replaced. By comparison demand from regulated customers was stable at 0.9%, though revenues from these customers were impacted by the lagged effect of bi-annual indexation to Henry Hub prices and US CPI. As a result, revenues from energy sales fell by 7.2%. After a strong year for gas distribution sales in 2015, revenues from this business line fell by 90%, reflecting the volatile nature of these sales, which are dependent on E.CL's contracting of LNG cargos and third-party demand. As a result, overall group revenues fell by 15.3% and EBITDA declined by 8.8%. Reported net profits were boosted by the sale of a 50% stake in the TEN project, however, after adjusting for the gain on disposal, normalised earnings fell by 11.4%. E.CL increased its dividends per share by 227%, demonstrating good capital discipline following the disposal. UEM increased its shareholding in E.CL by 32.9% in the period under review.

 48.2%. This reflects a combination of dividend increases by investee companies due to growth in profitability, the increased portfolio weighting in higher dividend paying investments such as in Romania and Brazil, as well as Sterling's weakness.

Charles Jillings
ICM Investment Management Limited and ICM Limited
16 June 2017

 

INVESTMENT OBJECTIVE AND POLICY

 

INVESTMENT OBJECTIVE

The Company's objective is to provide long-term total return through a flexible investment policy that permits it to make investments predominantly in infrastructure, utility and related sectors, mainly in emerging markets.

 

INVESTMENT POLICY AND RISK

PRINCIPAL RISKS AND RISK MITIGATION

Investment risk: the risk that the investment strategy does not achieve long-term positive total returns for the Company's shareholders

The Board monitors the performance of the Company and has established guidelines to ensure that the investment policy that has been approved is pursued by the Investment Managers. These guidelines include sector and market exposure limits.

 

The investment process employed by the Investment Managers combines assessment of economic and market conditions in the relevant countries with stock selection. Fundamental analysis forms the basis of the Company's stock selection process, with an emphasis on sound balance sheets, good cash flows, the ability to pay and sustain dividends, good asset bases and market conditions. The political risks associated with investing in these countries are also assessed. The Investment Managers try to reduce risk by ensuring that the Company's portfolio is always appropriately diversified. Overall, the investment process is aiming to achieve absolute returns through an active fund management approach.

 

The Company's results are reported in Sterling, whilst the majority of its assets are priced in foreign currencies. The impact of adverse movements in exchange rates can significantly affect the returns in Sterling of both capital and income. Such factors are out of the control of the Board and the Investment Managers and may give rise to distortions in the reported returns to shareholders. It is difficult and expensive to hedge emerging markets' currencies.

 

In addition, the ordinary shares of the Company may trade at a discount to their NAV. The Board monitors the price of the Company's shares in relation to their NAV and the premium/discount at which they trade. The Board generally buys back shares for cancellation if they are trading at a discount in excess of 10% and the Investment Managers agree that it is a good investment decision.

 

The Board regularly reviews strategy in relation to a range of issues including the balance between quoted and unquoted stocks, the allocation of assets between geographic regions and sectors and gearing. Periodically the Board holds a separate meeting devoted to strategy, the most recent one having been held in November 2016.

 

A more detailed review of economic and market conditions is included in the Investment Managers' Report section of the Strategic Report in the Report and Accounts.

 

There is no guarantee that the Company's strategy and business model will be successful in achieving its investment objective. The value of an investment in the Company and the income derived from that investment may go down as well as up and an investor may not get back the amount invested. Past performance of the Company is not necessarily indicative of future performance.

 

No material change in overall risk in year.

 

Gearing: the risk that the use of gearing may adversely impact on the Company's performance

Gearing levels may change from time to time in accordance with the Board and Investment Managers' assessment of risk and reward. Whilst the use of borrowings should enhance total return where the return on the Company's underlying securities is rising and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is falling. As at 31 March 2017, net debt gearing on gross assets was 5.4%.

 

No material change in overall risk in year.

 

Banking: a breach of the Company's loan covenants might lead to funding being summarily withdrawn

ICMIM monitors compliance with the banking covenants when each drawdown is made and at the end of each month. The Board reviews compliance with the banking covenants at each Board meeting.

 

No material change in overall risk in year.

 

Key staff: loss by the Investment Managers of key staff could affect investment returns

The quality of the management team is a crucial factor in delivering good performance. There are training and development programs in place for employees and the recruitment and remuneration packages have been developed in order to retain key staff.

 

Any material changes to the management team are considered by the Board at its next meeting; the Board discusses succession planning with the Investment Managers at regular intervals.

 

No material change in overall risk in year.

 

Reliance on the Investment Managers and other service providers: inadequate controls by the Investment Managers or Administrator or third party service providers could lead to misappropriation of assets

Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to successfully pursue its investment policy. The Company's main service providers are listed on page 106 of the Report and Accounts. The Audit Committee monitors the performance of the service providers.

 

All listed investments are held in custody for the Company by JPMorgan Chase Bank NA, Jersey; the unlisted investments are held in custody by Bermuda Commercial Bank Limited (together, the "Custodians").

 

J.P.Morgan Europe Limited ("JPMEL"), the Company's depositary services provider, also monitors the movement of cash and assets across the Company's accounts.

 

The Audit Committee reviews the Administrator's annual internal control report which details the controls around the reconciliation of the Administrator's records to those of the Custodians. The Administrator reviews the control reports published by JPMorgan Chase and draws any issues to the attention of the Board.

 

The Board reviews operational issues at each Board meeting and the Audit Committee receives reports on the operation of internal controls and the risk of cybercrime, as explained in more detail within Internal Controls on page 50. The risk of cybercrime is high, as it is with most organisations, but the Board regularly seeks assurances from the Investment Managers and other service providers on the preventative steps that they are taking to reduce this risk.

 

Although there has been no change in overall risk in the year, the possibility of cybercrime continues to be a concern. The Company's assets are considered to be relatively secure, so the risks are the inability to transact investment decisions for a period of time and reputational risk.

 

 

VIABILITY STATEMENT

 

In accordance with the provisions of the UK Corporate Governance Code, published by the Financial Reporting Council in April 2016 (the "Code"), the Directors have assessed the prospects of the Company over the next three years. The Board has determined that a three year period is a reasonable time horizon to consider the continuing viability of the Company, given the current regulatory environment, as they do not expect there to be any significant change to the current principal risks and to the mitigating controls in place over this period.

 

In its assessment of the viability of the Company, the Board has considered each of the Company's principal risks and uncertainties detailed above, as well as the impact of a significant fall in the emerging market equity markets on the value of the Company's investment portfolio. All of the key operations required by the Company are outsourced to third party providers and alternative providers could be engaged at relatively short notice if necessary. The Directors have also considered the Company's income and expenditure projections and the fact that the majority of the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary.

 

Based on the Company's processes for monitoring operating costs, share price discount, the Investment Managers' compliance with the investment objective and policy, asset allocation, the portfolio risk profile, gearing, counterparty exposure, liquidity risk and financial controls, the Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next three years.

 

 

DIRECTORS' STATEMENT OF RESPONSIBILITIES

in respect of the Annual Report and the Financial Statements

The Directors are responsible for preparing the annual report and the Group and Company financial statements in accordance with applicable law and regulations. The Group financial statements are required to be prepared in accordance with IFRSs as adopted by the EU and applicable law and the Directors have elected to prepare the Company financial statements on the same basis. In preparing each of the Group and Company financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether they have been prepared in accordance with IFRSs as adopted by the EU; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Bermuda Companies Act (1981). They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

 

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report and Corporate Governance Statement that complies with that law and those regulations. The Directors have additionally elected to prepare a Directors' Remuneration Report as if the Company were required to comply with the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) made under the UK Companies Act 2006.

 

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL FINANCIAL REPORT

We confirm that to the best of our knowledge:

• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

• the annual report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

 

We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

 

Approved by the Board on 16 June 2017 and signed on its behalf by:

 

 

 

John Rennocks

Chairman

 

GROUP INCOME STATEMENT

 

 

 

for the year to 31 March

2017

2016



Revenue

Capital

Total

Revenue

Capital

Total



return

return

Return

return

return

return



£'000s

£'000s

£'000s

£'000s

£'000s

£'000s









Gains/(losses) investments


-

114,638

114,638

-

(8,213)

(8,213)

Losses on derivative instruments


-

(6,411)

(6,411)

-

(896)

(896)

Foreign exchange gains/(losses)


449

1,058

1,507

(136)

(404)

(540)

Investment and other income


20,153

-

20,153

21,418

-

21,418

Total income


20,602

109,285

129,887

21,282

(9,513)

11,769

Management and administration fees


(1,234)

(11,374)

(12,608)

(1,102)

(1,870)

(2,972)

Other expenses


(1,701)

(22)

(1,723)

(1,496)

(19)

(1,515)

Profit/(loss) before finance costs and

taxation


 

17,667

 

97,889

 

115,556

 

18,684

 

(11,402)

 

7,282

Finance costs


(195)

(454)

(649)

(118)

(274)

(392)

Profit/(loss) before taxation


17,472

97,435

114,907

18,566

(11,676)

6,890

Taxation


(935)

(3,188)

(4,123)

(1,056)

(24)

(1,080)

Profit/(loss) for the year


16,537

94,247

110,784

17,510

(11,700)

5,810








Earnings per ordinary share (basic)

 - pence


 

7.80

 

44.46

 

52.26

 

8.23

 

(5.50)

 

2.73









Earnings per ordinary share (diluted)

 - pence


 

7.70

 

43.90

 

51.60

 

8.23

 

(5.50)

 

2.73

 

The total column of this statement represents the Group's Income Statement and the Group's Statement of Comprehensive Income, prepared in accordance with International Financial Reporting Standards ("IFRS"). The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies ("AIC") in the UK.

 

The Group does not have any income or expense that is not included in the profit for the year and therefore the profit for the year is also the total comprehensive income for the year, 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 minority interests.

 

 

 

COMPANY INCOME STATEMENT

 

 

 

for the year to 31 March

2017

2016



Revenue

Capital

Total

Revenue

Capital

Total



return

return

return

return

return

return



£'000s

£'000s

£'000s

£'000s

£'000s

£'000s









Gains/(losses) on investments


-

107,848

107,848

-

(8,776)

(8,776)

Gains on derivative instruments


-

239

239

-

-

-

Foreign exchange gains/(losses)


320

737

1,057

(156)

(369)

(525)

Investment and other income


20,619

-

20,619

20,944

-

20,944

Total income


20,939

108,824

129,763

20,788

(9,145)

11,643

Management and administration fees


(1,201)

(11,374)

(12,575)

(1,071)

(1,870)

(2,941)

Other expenses


(1,610)

(22)

(1,632)

(1,413)

(19)

(1,432)

Profit/(loss) before finance costs and

taxation


 

18,128

 

97,428

 

115,556

 

18,304

 

(11,034)

 

7,270

Finance costs


(195)

(454)

(649)

(118)

(274)

(392)

Profit/(loss) before taxation


17,933

96,974

114,907

18,186

(11,308)

6,878

Taxation


(935)

(3,188)

(4,123)

(1,044)

(24)

(1,068)

Profit/(loss) for the year


16,998

93,786

110,784

17,142

(11,332)

5,810









Earnings per ordinary share (basic)

 - pence


 

8.02

 

44.24

 

52.26

 

8.05

 

(5.32)

 

2.73









Earnings per ordinary share (diluted)

 - pence


 

7.92

 

43.68

 

51.60

 

8.05

 

(5.32)

 

2.73

 

The total column of this statement represents the Company's Income Statement and the Company's 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 AIC in the UK.

 

The Company does not have any income or expense that is not included in the profit for the year and therefore the profit for the year is also the total comprehensive income for the year, 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.

GROUP STATEMENT OF CHANGES IN EQUITY

 

 

 

for the year to 31 March 2017












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 2016

 

21,146

 

771

 

204,587

 

11,093

 

188,428

 

10,537

 

436,562

Profit for the year

-

-

-

-

94,247

16,537

110,784

Ordinary

dividends paid

 

-

 

-

 

-

 

-

 

-

 

(13,906)

 

(13,906)

Shares issued on

exercise of

subscription share

rights

 

 

 

478

 

 

 

8,265

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,743

Shares purchased by the

Company

 

(483)

 

(8,121)

 

(1,418)

 

-

 

-

 

-

 

(10,022)

Balance at

31 March 2017

 

21,141

 

915

 

203,169

 

11,093

 

282,675

 

13,168

 

532,161

 

 

for the year to 31 March 2016












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 2015

 

21,324

 

3,796

 

204,587

 

11,093

 

203,380

 

3,181

 

447,361

(Loss)/profit for the year

-

-

-

-

(11,700)

17,510

5,810

Ordinary

dividends paid

 

-

 

-

 

-

 

-

 

(3,252)

 

(10,154)

 

(13,406)

Shares issued on

exercise of

subscription share

rights

 

 

 

4

 

 

 

74

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

78

Shares purchased by the

Company

 

(182)

 

(2,800)

 

-

 

-

 

-

 

-

 

(2,982)

Issue cost of subscription

shares

 

-

 

(299)

 

-

 

-

 

-

 

-

 

(299)

Balance at

31 March 2016

 

21,146

 

771

 

204,587

 

11,093

 

188,428

 

10,537

 

436,562

 

 

 

COMPANY STATEMENT OF CHANGES IN EQUITY

 

 

for the year to 31 March 2017












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 2016

 

21,146

 

771

 

204,587

 

11,093

 

188,701

 

10,264

 

436,562

Profit for the year

-

-

-

-

93,786

16,998

110,784

Ordinary

dividends paid

 

-

 

-

 

-

 

-

 

-

 

(13,906)

 

(13,906)

Shares issued on

exercise of

subscription share

rights

 

 

 

478

 

 

 

8,265

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,743

Shares purchased by the

Company

 

(483)

 

(8,121)

 

(1,418)

 

-

 

-

 

-

 

(10,022)

Balance at

31 March 2017

 

21,141

 

915

 

203,169

 

11,093

 

282,487

 

13,356

 

532,161

 

 

for the year to 31 March 2016












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 2015

 

21,324

 

3,796

 

204,587

 

11,093

 

203,285

 

3,276

 

447,361

(Loss)/profit for the year

-

-

-

-

(11,332)

17,142

5,810

Ordinary

dividends paid

 

-

 

-

 

-

 

-

 

(3,252)

 

(10,154)

 

(13,406)

Shares issued on

exercise of

subscription share

rights

 

 

 

4

 

 

 

74

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

78

Shares purchased by the

Company

 

(182)

 

(2,800)

 

-

 

-

 

-

 

-

 

(2,982)

Issue cost of subscription

shares

 

-

 

(299)

 

-

 

-

 

-

 

-

 

(299)

Balance at

31 March 2016

 

21,146

 

771

 

204,587

 

11,093

 

188,701

 

10,264

 

436,562

 

 

 

 

 

BALANCE SHEETS

 

GROUP

COMPANY

at 31 March

2017

2016

2017

2016


£'000s

£'000s

£'000s

£'000s

Non-current assets





Investments

572,264

438,639

579,471

442,941

Current assets





Other receivables

1,966

2,686

1,715

2,676

Derivative financial instruments

3,170

3,636

633

-

Cash and cash equivalents

15,336

12,609

10,785

11,629


20,472

18,931

13,133

14,305

Current liabilities





Bank loans

-

(18,657)

-

(18,657)

Other payables

(10,504)

(1,787)

(10,482)

(1,763)

Derivative financial instruments

(110)

(300)

-

-


(10,614)

(20,744)

(10,482)

(20,420)

Net current assets/(liabilities)

9,858

(1,813)

2,651

(6,115)

Total assets less current liabilities

582,122

436,826

582,122

436,826

Non-current liabilities





Bank loans

(46,816)

-

(46,816)

-

Deferred tax

(3,145)

(264)

(3,145)

(264)

Net assets

532,161

436,562

532,161

436,562






Equity attributable to equity holders





Share capital

21,141

21,146

21,141

21,146

Share premium account

915

771

915

771

Special reserve

203,169

204,587

203,169

204,587

Other non-distributable reserve

11,093

11,093

11,093

11,093

Capital reserves

282,675

188,428

282,487

188,701

Revenue reserve

13,168

10,537

13,356

10,264

Total attributable to equity holders

532,161

436,562

532,161

436,562






Net asset value per ordinary share





Basic - pence

251.72

206.45

251.72

206.45

Diluted - pence

241.29

202.52

241.29

202.52

 

 

 

 

STATEMENTS OF CASH FLOWS

 

GROUP

COMPANY

for the year to 31 March

2017

2016

2017

2016


£'000s

£'000s

£'000s

£'000s

Cash flows from operating activities

12,487

12,048

13,321

11,703

Investing activities:





Purchases of investments

(159,338)

(97,303)

(165,550)

(99,017)

Sales of investments

141,232

130,611

137,748

129,087

Purchases of derivatives

(9,014)

(14,912)

(394)

-

Sales of derivatives

2,879

11,995

-

-

Cash flows from investing activities

(24,241)

30,391

(28,196)

30,070

Cash flows before financing activities

(11,754)

42,439

(14,875)

41,773

Financing activities:

Ordinary dividends paid

 

(13,906)

 

(13,406)

 

(13,906)

 

(13,406)

Movements from loans

26,858

(14,133)

26,858

(14,133)

Proceeds from issue of shares

8,743

78

8,743

78

Cost of ordinary shares purchased

(10,022)

(2,982)

(10,022)

(2,982)

Issue cost of subscription shares

-

(299)

-

(299)

Cash flows from financing activities

11,673

(30,742)

11,673

(30,742)

Net movement in cash and cash

 

(81)

 

11,697

 

(3,202)

 

11,031

Cash and cash equivalents at the

 

12,609

 

526

 

11,629

 

195

Effect of movement in foreign exchange

2,808

386

2,358

403

Cash and cash equivalents at the

 

15,336

 

12,609

 

10,785

 

11,629

 

 

Comprised of:





Cash

15,336

12,609

10,785

11,629

 

NOTES

 

The Directors paid a fourth quarterly interim dividend in respect of the year ended 31 March 2017 of 1.700p per ordinary share on 16 June 2017 to shareholders on the register at close of business on 2 June 2017. The total cost of the dividend, which has not been accrued in the results for the year to 31 March 2017, was £3,594,000 and will be paid from the Revenue Reserve.

 

This statement was approved by the Board on 16 June 2016. It is not the Group's or Company's statutory accounts. The statutory accounts for the financial year ended 31 March 2017 have been approved and audited, and received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report. The statutory accounts for the financial year ended 31 March 2016 received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

 

The Report & Accounts for the year ended 31 March 2017 will be posted to shareholders in early July 2017. A copy is available to view and download from the Company's website at www.uem.bm. Copies may also be obtained during normal business hours from Exchange House, Primrose Street, London, EC2A 2NY.

 

By order of the Board

ICM Investment Management Limited, Secretary

16 June 2017


This information is provided by RNS
The company news service from the London Stock Exchange
 
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