Interim Results

RNS Number : 5509J

Utilico Emerging Markets Limited

04 December 2008

 



Date:                  4 December 2008

Contact:           Charles Jillings    

                            Utilico Emerging Markets Limited    

                            01372 271 486    

    Alastair Moreton

    Arbuthnot Securities Limited

    020 7012 2000

Utilico Emerging Markets Limited

Unaudited Statement of Results

for the six months to 30 September 2008

Highlights of results 

• EPS remained strong at 4.19p an increase of 17.0% on the prior period 

• Total expense ratio remains a positive feature at 0.8% 

• UEM's cum income diluted NAV per share ended down 18.6% at 127.98p per share 

Chairman's Statement

The first six months have been extremely testing, and have seen sustained selling of equities, a reduction in valuations, an increase in premia attached to emerging markets and a flight to quality and away from risk. While UEM's investments have continued to record good operational progress, their share prices have inevitably fallen with the equity markets. The MSCI Emerging Markets (Sterling adjusted) Index ended the six months down 20.6% and UEM's cum income diluted NAV per share ended down 18.6% at 127.98p per share.

The markets have displayed two key features: rising volatility with corrections happening in days rather than months with imbalances driven to the extreme quickly and aggressively, together with the emergence of a concerted drive by investors to deleverage which on some days resembled panic. UEM's portfolio has been impacted by this process as has UEM's own share price at times.

During the six months to September 2008 UEM remained fully invested. The bank facility of £80.0m was fully drawn, all in US Dollars. Cash on hand was modest and reflected working capital balances together with cash held against contracts for difference ('CFD') positions.

Gross assets declined by 16.2%, a frustration for the managers as the majority of investments have once again delivered positive earnings growth and declared rising dividends. This has enabled UEM to increase its revenue earnings per share by 17.0% to 4.19p.

Instinctively this is a good time to invest in our sector, however the instability will mean the manager's focus will need to balance the instinct to invest against the imperative to preserve capital.

As outlined in the full year results, the net index put option positions were moved to a market neutral position. The long dated put contracts being offset by short dated put contracts. In hindsight this reduced the inherent protection against sharp market falls and thus the benefit to the Company of holding the long dated contracts.

Exchange losses arose as a result of a strengthening of the borrowing currency, the US Dollar. This reflects a flight to the US Dollar as the deleveraging process accelerated.

The total expense ratio ('TER') at 0.8% remains a positive feature of UEM's profile and is consistent with previous years. Low costs enable the Company to substantially pass through the income stream generated by the portfolio. Of the £11.1m gross income stream arising from the portfolio the Board proposes to pay out, after expenses and deductions, 77.1% as an interim dividend.

Finance costs have remained the same as the first half of last year at £2.6m or some 6.9% on an annualised basis of the average debt. 

Given the volatility in worldwide equity markets the Company is seeking shareholder approval to convert its share premium account of £219.5m to a new special distributable reserve. The Board is proposing this as Bermuda law does not permit the payment of a dividend unless assets are greater than the combination of liabilities, issued share capital and share premium. A notice of Special General Meeting to be held on 5 January 2009 accompanies this interim report.

Subject to this resolution being passed it is the Board's intention to declare an interim dividend of 4.00p per share, on or around 6 January 2009 (3.50p in 2007 and 2.00p in 2006). This represents an increase of 14.3%.

It is intended that any dividends declared on the ordinary shares will be paid only out of the net income received from the investment portfolio and any accumulated revenue reserves. The new distributable special reserve created by the reduction of the share premium account will not be used to pay dividends except with the prior sanction of an extraordinary resolution of both the Warrant holders and the S Shareholders in accordance with the rights attaching to the Warrants and the S Shares.

UEM's share price has reflected the stresses of the wider market and ended the period at a discount of 8.4%. As fellow shareholders with some 2.2m shares held by the members of the Board, we are disappointed in this event. However, we continue to see new long term shareholders on the register and believe this is the right way to ensure a balanced committed shareholder base. 

Trading since the half year

The deleveraging process has gained momentum in the second half and was reflected in aggressive redemptions in open ended investment and hedge funds in October as markets plunged. This resulted in two outcomes for UEM in October. First, the matched put option positions were stranded by the retreating markets. They had embedded value but offered little ongoing protection. Second, the debt as a percentage of assets increased mainly as a result of declining asset values but also as a result of a rising US Dollar, the debt was denominated in US Dollars at the half-year. 

In response to the above, the Investment Manager sold the matched put positions. This, together with portfolio realisations, reduced the debt from £82.8m to £40.8m. Currently UEM has put positions which offer downside protection and the flexibility to reduce debt further if needed.

Outlook

The outlook for equity markets is difficult to determine given the events during September and October 2008. In the real economy, inflation is receding (for now), to be replaced by deepening concerns over the credit markets and the impacts of a sharp downturn on the wider economy. The dearth of credit in the developed markets has stalled those markets and will result in a deepening recession until those credit markets are reopened. The outcome and depth of the recession will depend on the ability of the world's governmental institutions to intervene effectively and restore confidence. 

The equity markets are focused on the impact of the wider economy but also on concerns over a rising and persistent deleveraging.

Alexander Zagoreos
Chairman
December 2008  

 Investment Report

As noted in the Chairman's statement, UEM's interim period to 30 September 2008 has been a difficult one. During the first half we maintained a fully drawn and fully invested position on the basis that we continued to see progress being made by UEM's investments combined with the fact that UEM benefitted from a significant index put position and gearing was modest. Following market deterioration in September and faced with turmoil in October we took the decision to reduce the absolute put position and halve UEM's debt by the end of October 2008. This has been completed. 

In the first half, UEM's cum income diluted NAV per share fell in line with markets in general to 127.98p, down 18.6%. The MSCI Emerging Markets (Sterling adjusted) index lost 20.6% over this period.

Portfolio

Over the six months investments made (not including investments in GERP, a segregated account company where all the S&P500 index options are held) were £26.6m and realisations were £36.2m. The portfolio retreated from £441.4m on 31 March to £367.3m at 30 September recording a loss of £71.4m. While in line with the markets this has been disappointing. Much of the decline has been a result of deleveraging and most listed investments have been marked lower. 

Amongst the top ten we have seen some movement in the composition. AES Tiete ('AES') (8th at the year end), Datang International Power (9th at the year end) and Eastern Water Resources (10th at the year end) all dropped out of the top ten. AES and Datang both fell as a result of disposals and also as a result of a decline in their share prices. Eastern Water remains in the portfolio, but its share price decline of 15.6% reduced it to 11th in value. 

The replacements in the top ten were Comanche Clean Energy, POS Malaysia and Companhia de Concessoes de Rodoviarias ('CCR'). Both POS Malaysia and CCR have been in the top ten before, and their relative share price resilience has seen them once again emerge as top ten holdings. POS Malaysia dropped out of the top ten last half year as a result of a special 1.5 Ringgit per share dividend. To see them re-emerge as a top ten holding without further investment is pleasing. 

Comanche Clean Energy is a producer of ethanol and biodiesel in Brazil. It produces ethanol from sugar cane, which is then used as fuel for vehicles, either on its own or blended with petrol. All new cars sold in Brazil can run on ethanol, and sugar cane remains the lowest cost method of producing it. Comanche is a young company and we are encouraged by its development.

Amongst the top ten holdings we have seen continuation in good performance in line with our expectations. We have again looked at EBITDA as reported for each of the top ten as a yardstick. Seven out of the top ten have reported increased EBITDA for the first half of 2008. These include Companhia de Gas de Sao Paulo ('Comgas'), Malaysia Airport Holdings, Ocean Wilsons Holdings Limited, International Container Terminal Services and CCR, with increases of 13.5%, 15.2%, 30.5%, 49.2%, and 16.3% respectively. Comanche is a very young company in its first years of operations with no appropriate EBITDA comparisons and POS Malaysia Berhad reported reduced EBITDA due to higher costs despite reporting increased revenues.

Equest Balkan Properties ('EBP') is excluded as it is an expanding property company to which EBITDA is not an appropriate measure. Following a strategic review of EBP, Charles Jillings has been appointed Chairman and the company is firmly focused on asset realisations and return of capital to its shareholders.

The portfolio concentration remained broadly consistent with the year end. The top ten accounted for 43.9% (43.8% at the year end) and the top twenty accounted for 66.4% (66.0% at the year end).

The geographic split has remained largely unchanged. Brazil is still the largest exposure at 33.3%, marginally up from 31.5% at the full year. Again on a sectoral basis, there has been little change with water remaining the largest at 16.7%, down from 17.0% at the full year.

Bank Debt

The bank debt remained constant over the six months to 30 September 2008. All the debt was drawn in US Dollars. As a result of Sterling falling in value against the US Dollar the Sterling liability increased over the period. However, as noted above, bank debt has been halved since the period end. Further, the bank debt profile has now been split between the US Dollar and Sterling. On the US Dollar element, UEM currently benefits from Sterling calls/US Dollar puts at 1.50 and 1.60.

Cash reduced from £11.2m to £3.6m both as a result of portfolio investment reducing cash on hand from £5.8m to £0.4m and of further reductions in the CFD positions reducing the need for cash collateral from £5.4m to £3.2m.

Gearing increased as a result of the portfolio retreat such that it stood at 22.5% at the half year, up from 18.2% at 31 March 2008. As at 31 October 2008 after the debt reduction, the gearing stood at 17.3%.

Market Index Put Options

As noted in the full year results, the S&P 500 index option hedge was moved closer to a market neutral position. As a result there was both embedded value in the spread between the long positions bought and the short positions sold and there was an ability to roll the short positions to extract value while the markets moved sideways. This strategy neutralised the hedge against sharp corrections. GERP's value at 31 March 2008 was £27.4m. In the six months to 30 September 2008 GERP invested £6.8m, reporting an investment loss of £4.0m. At 30 September 2008 GERP's value was £30.2m. This loss is included in investment gains and losses.

Since the period end the matched index put positions have been realised and used to reduce bank debt. Currently UEM has 1,175 S&P 500 Index put options at an average strike price of 885 which offer downside protection and the flexibility to reduce debt further if needed.

Other Hedging

UEM has maintained its interest rate fix on the US Dollar. As at 30 September 2008, this interest rate swap was valued at a negative £1.9m.

Revenue Return

The revenue return has once again been strong. Total income of £11.1m is substantially ahead of the prior period income of £7.9m, in part due to increased capital following the £85.0m C share issue in December 2007 but also due to rising earnings and dividends paid from the investment portfolio. This performance underlines the strength of the investment portfolio.

The fees and expenses are in line with the prior half year at £0.8m. Finance costs are again in line with the prior half year at £0.8m. Taxation has risen as a result of rising income.

Earnings per share was 4.19p, up 17.0% over the prior period and underlines the strength of the portfolio.

Looking forward it is difficult to be certain about the underlying investment portfolio's level of performance or dividend payment. However, results to date are encouraging. 

It is worth noting that UEM's investments are predominantly listed, have operational assets, are profitable and are paying dividends. These companies are trading at relatively low valuations in relation to their profit.

Capital Return

The total capital income loss was £79.1m for the six months. This includes exchange rate losses of £8.5m, mostly made up of losses on our US Dollar loans between June and September 2008. Fees, expenses and finance costs (not including the accrued performance fee) were in line with the six months to 30 September 2007. Taxation is a positive of £0.9m as a result of the reversal of accrued taxation on capital gains which have now been eroded by the portfolio losses. The loss per share as a result was 37.80p.

Outlook

The outlook for equity markets is difficult to determine given the events during September and October 2008. We continue to believe our portfolio of utility and infrastructure assets remains attractive. We also continue to believe the nature of our investments being predominately operational, profitable and paying dividends will be rewarding over the long term. We believe the reduced debt and market hedge will give us the flexibility to withstand further market volatility. We believe the emerging markets we are invested in offer a balance of risk and reward which is attractive. We remain optimistic over the long term.

SUMMARY OF UNAUDITED RESULTS

	Half year	Half year	Annual	Half year
	30 Sep 08	30 Sep 07	31 Mar 08	Change %
Undiluted net asset value per ordinary share	133.37p	187.80p	168.39p	(20.8)
Diluted net asset value per ordinary share	127.98p	173.43p	157.20p	(18.6)
Ordinary share price	117.25p	173.50p	153.75p	(23.7)
(Discount)/Premium - (based on diluted NAV)	(8.4%)	-%	(2.2%)	n/a
Earnings per share (basic)
- Capital	(37.80p)	38.55p	17.89p	n/a
- Revenue	4.19p	3.58p	5.24p	17.0%
- Total	(33.61p)	42.13p	23.13p	n/a
Dividend per share
- Interim	4.00p(1)	3.50p	3.50p	14.3%
- Final	n/a	n/a	1.30p	n/a
- Total	n/a	n/a	4.80p	n/a
Equity holders' funds (£m)	285.5	312.4	359.5	(20.6)
Gross assets (£m)(2)	368.3	379.7	439.4	(16.2)
Bank debt (£m)	82.8	64.2	79.9	3.6
Gearing on gross assets(2)	22.5%	16.9%	18.2%	n/a
Management and administration fees (3)	1.5	1.3	3.1	n/a
Total expense ratio (4)	0.8%	0.8%	0.8%	n/a

• Dividend proposed subject to approval to convert share premium account to a new distributable reserve.

• Gross assets less liabilities excluding loans.

• Excluding performance fee, including other expenses.

• Annualised management and administration fees over monthly average gross assets.

DIRECTORS' STATEMENT OF PRINCIPAL RISKS AND UNCERTAINTIES

The principal risk faced by the Company is that it fails to produce the capital appreciation stated as its objective, and the NAV does not rise over the longer-term. The risks which might give rise to this can be categorised as investment and strategy, manager, gearing, operational and financial. One of the main risks specific to the Company is the loss of its offshore tax status.

These risks and the way they are mitigated are described in more detail under the heading Internal Controls and Management of Risk in the Corporate Governance section of the Company's Annual Report for the year ended 31 March 2008. The Company's principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Company's financial year.

DIRECTORS' STATEMENT OF RESPONSIBILITIES

The Directors confirm that to the best of our knowledge:

i) the condensed set of financial statements has been prepared in accordance with the International Accounting Standard 34 'Interim Financial Reporting' and gives a true and fair view of the assets, liabilities, financial position and return of the Company;

ii) the Chairman's Statement (constituting the interim management report) includes a fair review of the important events that have occurred in the six months to 30 September 2008 and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

iii) the Interim Report includes a fair review of the material related parties transactions that have taken place in the six months to 30 September 2008 and that have materially affected the financial position or performance of the Company during the period, and any changes in the related party transactions described in the last Annual Report that could do so. 

UNAUDITED INCOME STATEMENT

6 months to  30 September 2008					6 months to  30 September 2007
		Revenue	Capital	Total	Revenue	Capital	Total
		return	return	return	return	return	return
		£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains and losses on investments		-	(71,368)	(71,368)	-	70,025	70,025
Gains and losses on derivative instruments		-	711	711	-	5,721	5,721
Exchange gains and losses		-	(8,484)	(8,484)	-	1,836	1,836
Investment and other income		11,145	-	11,145	7,859	-	7,859
Total income		11,145	(79,141)	(67,996)	7,859	77,582	85,441
Management and administration fees		(421)	(712)	(1,133)	(351)	(10,360)	(10,711)
Other expenses		(366)	(3)	(369)	(437)	(26)	(463)
Profit/(loss) before finance costs and taxation		10,358	(79,856)	(69,498)	7,071	67,196	74,267
Finance costs		(771)	(1,800)	(2,571)	(776)	(1,811)	(2,587)
Profit/(loss) before taxation		9,587	(81,656)	(72,069)	6,295	65,385	71,680
Taxation		(630)	884	254	(375)	(1,621)	(1,996)
Profit/(loss) for the period		8,957	(80,772)	(71,815)	5,920	63,764	69,684
Earnings per share (basic) - pence		4.19	(37.80)	(33.61)	3.58	38.55	42.13
Earnings per share (diluted) - pence		3.94	n/a	n/a	3.35	36.04	39.39

The total column of this statement represents the Company's Income Statement, prepared in accordance with IFRS.

The supplementary revenue and capital return columns are both prepared under guidance published by the Association of Investment Companies in the UK. All items in the above statement derive from continuing operations.

All income is attributable to the equity holders of the Company.

  UNAUDITED STATEMENT OF CHANGES IN EQUITY

						6 months to 30 September 2008
	Ordinary	Share		S	Non-	Retained earnings
	share	premium	Warrant	share	distributable	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserves	reserve	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 31 March 2008	21,351	219,008	9,048	9,350	103	97,468	3,202	359,530
(Loss)/profit for the period	-	-	-	-	-	(80,772)	8,957	(71,815)
Ordinary dividend paid	-	-	-	-	-	-	(2,776)	(2,776)
Conversion of S shares and warrants	55	498	(151)	(10)	161	-	-	553
Balance at  30 September 2008	21,406	219,506	8,897	9,340	264	16,696	9,383	285,492

						6 months to 30 September 2007
	Ordinary	Share		S	Non-	Retained earnings
	share	premium	Warrant	share	distributable	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserves	reserve	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 31 March 2007	16,498	147,194	9,050	-	101	67,408	1,365	241,616
Profit for the period	-	-	-	-	-	63,764	5,920	69,684
Ordinary dividend paid	-	-	-	-	-	-	(1,155)	(1,155)
Issue of ordinary shares and warrants	135	2,074	-	-	-	-	-	2,209
Balance at  30 September 2007	16,633	149,268	9,050	-	101	131,172	6,130	312,354

						Year to 31 March 2008
	Ordinary	Share		S	Non-	Retained earnings
	share	premium	Warrant	share	distributable	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserves	reserve	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 31 March 2007	16,498	147,194	9,050	-	101	67,408	1,365	241,616
Profit for the year	-	-	-	-	-	30,060	8,814	38,874
Ordinary dividends paid	-	-	-	-	-	-	(6,977)	(6,977)
Issue of ordinary shares, S shares and warrants	4,853	73,074	(2)	9,350	2	-	-	87,277
Cost of issuing ordinary shares	-	(1,260)	-	-	-	-	-	(1,260)
Balance at  31 March 2008	21,351	219,008	9,048	9,350	103	97,468	3,202	359,530

UNAUDITED BALANCE SHEET

	30 September 2008	30 September 2007	31 March 2008
	£'000s	£'000s	£'000s
Non current assets
Investments	367,312	358,598	441,360
Current assets
Other receivables	4,182	1,934	3,171
Derivative financial instruments	-	12,787	458
Cash and cash equivalents	3,564	18,979	11,236
	7,746	33,700	14,865
Current liabilities
Bank loans	(31,044)	(19,751)	(29,962)
Other payables	(3,778)	(11,859)	(11,732)
Derivative financial instruments	(2,026)	(709)	(3,163)
	(36,848)	(32,319)	(44,857)
Net current (liabilities)/assets	(29,102)	1,381	(29,992)
Total assets less current liabilities	338,210	359,979	411,368
Non current liabilities
Bank loans	(51,741)	(44,440)	(49,937)
Deferred tax	(977)	(3,185)	(1,901)
Net assets	285,492	312,354	359,530
Equity attributable to equity holders
Ordinary share capital	21,406	16,633	21,351
Share premium account	219,506	149,268	219,008
Warrant reserve	8,897	9,050	9,048
S share reserve	9,340	-	9,350
Non-distributable reserve	264	101	103
Capital reserves	16,696	131,172	97,468
Revenue reserve	9,383	6,130	3,202
Total attributable to equity holders	285,492	312,354	359,530
Net asset value per ordinary share
Basic - pence	133.37	187.80	168.39
Diluted - pence	127.98	173.43	157.20

   UNAUDITED CASH FLOW STATEMENT

	6 months to 30 September 2008	6 months to 30 September 2007	Year to 31 March 2008
	£'000s	£'000s	£'000s
Cash flows from operating activities	164	(20,784)	(121,146)
Cash flows from investing activities	-	-	-
Cash flows before financing activities	164	(20,784)	(121,146)
Financing activities Ordinary dividends paid	(2,776)	(1,155)	(6,977)
Movements from borrowings	(5,506)	20,654	35,626
Proceeds from warrants exercised Proceeds from S shares exercised Movements from issue of ordinary share capital	544 10 (15)	1 - -	6 - 83,756
Cash flows from financing activities	(7,743)	19,500	112,411
Net decrease in cash and cash  equivalents	(7,579)	(1,284)	(8,735)
Cash and cash equivalents at the beginning of the period	11,236	19,904	19,904
Effect of movement in foreign exchange	(93)	359	67
Cash and cash equivalents at the end of the period	3,564	18,979	11,236

NOTES

Subject to the resolution being past by shareholders, to convert the share premium account of the Company to a new special distributable reserve, at a special General Meeting to be held on 5 January 2009, the Board intends to declare an interim dividend in respect of the period ended 30 September 2008 of 4.00p per ordinary share on or around 6 January 2009. The total cost of the dividend which has not been accrued in the results for the period ended 30 September 2008, is £8,562,000 based on 214,061,736 shares in issue at the date of this report.

The half-yearly report will be posted to shareholders around the middle of December 2008. Copies may be obtained during normal business hours from Exchange House, Primrose Street, London EC2A 2NY.

By order of the Board

F&C Management Limited, Secretary

4 December 2008

 

END

 

 

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