Preliminary Announcement of Results
For immediate release
27 September 2010
To: City Editors
Pacific Assets Trust plc
Announces Interim Results for the six months to 31 July 2010
As at As at %
31 July 2010 31 January Change
2010
Share price 107.75p 104.25p +3.4
Net asset value per share 120.51p 114.28p +5.5
Discount of share price to net 10.6% 8.8% n/a
asset value
per share
Shareholders' funds £140.8m £135.3m +4.1
Market capitalisation £125.9m £123.4m +2.0
Six months to One year to
31 July 2010 31 January
2010
Share price (total return) +4.6% +55.0%
Net asset value per share (total +6.6% +56.8%
return)
MSCI All Country Asia ex Japan +11.1% +54.2%
Index (total return)
Dividends Year ended Year ended
31 January 2010 31 January
2009
Final dividend per share 1.29p 1.29p
Half Year's Highs/Lows High Low
Net asset value per share 133.59p 111.98p
Share price 127.50p 106.00p
Discount+ 2.7% 11.3%
Notes
+ Discount high - Narrowest discount in period
Discount low - Widest discount in period
Source - Morningstar
For and on behalf of
Frostrow Capital LLP, Secretary
27 September 2010
The following are attached:
* Chairman's Statement
* Investment Manager's Report
* Unaudited Income Statement
* Unaudited Balance Sheet
* Unaudited Reconciliation of Movements in Shareholders' Funds
* Summarised Unaudited Statement of Cash Flows
* Notes to the Interim Accounts
For further information please contact:
Alastair Smith/Mark Pope, Frostrow Capital LLP 020 3008 4911/4913
David Gait, First State Investment Management (UK) Limited 0131 473 2200
Chairman's Statement
The past six months has been a period of transition. As discussed in my
statement in the Annual Report, First State Investment Management (UK) Limited
assumed responsibility for managing your Company's portfolio on 1 July. At the
same time, Frostrow Capital LLP became responsible for administration and
marketing.
First State has lost no time in restructuring the portfolio and this process is
now largely complete. A full report from your new Investment Manager is
contained in this document.
The Company will incur approximately £400,000 of costs in connection with the
change to its investment management arrangements, representing 0.3% of the
Company's net assets. Slightly more than half of these costs have been
reflected in the first half of the Company's financial year and the remainder
will be reflected in the second half.
Based on new advice from the Company's tax advisers, the Company recently
submitted a claim to the Taipei National Tax Administration in Taiwan for the
recovery of tax withheld on income arising from the Company's investments in
Taiwan. The claim covers the years 2005 to 2009 and, if successful, the Company
expects to cover approximately £500,000 net of costs. However, as the
likelihood, timing and the quantum of the recovery remain uncertain, no amount
receivable has been recorded in the Company's accounts.
Performance
During the six month period, the Company's net asset value total return was
6.6%, compared to a total return from the MSCI All Country Asia ex Japan Index
of 11.1%. The share price total return for the period was 4.6%. During the
period, the share price discount to net asset value per share widened slightly
from 8.8% to 10.6% as at 31 July 2010.
Share Ownership and Discount Policy
As anticipated, some shareholders who held their shares through the previous
Manager's savings plans have now disposed of their interest in the Company.
This has enabled a number of new shareholders who share your Board's enthusiasm
for the new management arrangements to join the register. On behalf of the
Board, I would like to thank these new shareholders for their support whilst
also thanking existing shareholders for their continuing vote of confidence in
the future.
The Company renewed its authority to repurchase its own shares at the Annual
General Meeting in June. Through this authority it is intended to manage the
discount between the Company's share price and the net asset value per share.
During the past six months there was only one repurchase of 1.5 million shares
on 13 July 2010 at a discount of 10.3% to the Company's ex income net asset
value per share. Since the end of July there have been no further repurchases
of shares as at the date of this report.
Gearing
The Company has a US$20 million facility which provides it with the ability to
introduce gearing when it is considered appropriate to do so. This facility was
not utilised during the period and up to the date of this report.
Outlook
With the new Investment Manager in place and the restructuring of the portfolio
virtually complete, we look forward to a new and more prosperous chapter in
your Company's future. Whilst there are a number of concerns about the
short-term economic outlook, I am confident that patient investors in the Asian
Pacific region will be well rewarded over time.
David Nichol
Chairman
27 September 2010
Investment Manager's Report
Portfolio transition
Having assumed responsibility for management of the Company's portfolio on 1
July, we spent the first part of the month transitioning the portfolio towards
our own Asia Sustainability strategy. We inherited 52 companies and have
retained seven. We have now purchased shares in a further 39 of our favourite
companies. As such the portfolio transition is now 95% complete. By
Sustainability, we are not referring to "green", "clean tech" or "ethical"
investing. Rather, we are simply setting out to invest in those companies we
believe are particularly well positioned to deliver long-term returns in the
face of the huge development challenges Asia faces today. Land and water
scarcity, resource constraints, population pressure and extreme levels of
poverty are just some of the challenges Asian companies are increasingly coming
up against. For some, these challenges represent key risks to their business.
For others, they represent opportunities to build good quality business
franchises that will stand the test of time. It is the latter group in which we
hope to invest. This for example, does not mean buying every solar or wind
company which lists in Asia - currently we have no exposure to either sector.
Our focus is on finding attractively valued companies with good quality
management teams and strong franchises capable of performing in both good and
bad times. Currently none of the listed wind, solar or biofuel companies in
Asia meet our investment criteria.
As with all First State Asian strategies, the portfolio is constructed from
the bottom up, paying no regard to company, sector or country benchmark
weightings. The top ten companies collectively represent over 40% of your
Company's net assets and less than 4% of the MSCI All Country Asia ex Japan
Index, the Company's benchmark. At first glance, it may seem a risky strategy
to stray so far from the benchmark. We hold the opposite view. The object of
investing should surely be to deliver attractive, long-term absolute returns,
not beat any particular index. Admittedly relative performance is a key
commercial reality. As the Company's new Investment Manager we believe this
approach will ensure that the Company outperforms the benchmark by at least
1.75% per annum on a rolling three year period as well as ranking in the top
third of its peer group on a rolling three year basis.
We believe that the best way to achieve this relative outperformance is by
viewing risk simply as the risk of losing money, rather than deviation from an
arbitrary index. For example, six of the top ten stocks in the benchmark index
presently are government-owned and controlled. We doubt that any of them are
run in the long-term interests of minority shareholders. Many of them also come
with significant corporate governance, environmental or social risks. In short,
the risk of losing clients' money by investing in them is simply too great,
regardless of their position in the benchmark index.
As a result there will be times when our performance will differ considerably
from the benchmark. For example, during very strong markets we would usually
expect to lag the benchmark and our peers as it tends to be conceptual, lower
quality, highly priced stocks that rise the fastest. On the flipside, our focus
on buying attractively priced, good quality companies results in a stronger
focus on capital preservation. When markets correct, we hope to fall
significantly less than the benchmark. Or put another way, our strongest
relative performance comes during down markets. This may sound like a strange
investment proposition and our approach is certainly not suitable for
short-term investors with a trading focus who are hoping to `time' Asian
markets. However, for Asian investors with a longer time horizon, we believe
this focus on capital preservation as well as capital growth is the best way to
ensure long-term absolute returns in the asset class.
Outlook
We are amazed by just how little the global financial system has changed since
its fall from grace in 2008. For many global banks the majority of their
profits continue to come from short-term trading gains. Remuneration policies
still encourage short-term risk taking with little, if any, regard for the
longer-term consequences. Lending practices remain far from prudent, while
debt-fuelled over-consumption remains de rigueur. All this makes us extremely
cautious about the global backdrop in which many of our Asian companies
operate. A second crisis in the West would hit our companies hard. Even without
a second crisis, Asia is in danger of succumbing under the weight of monetary
largesse currently being doled out in the West in response to the current
financial situation. Asset price inflation remains a problem, particularly in
China, where the property bubble has yet to be pricked despite recent
Government intervention. Goods and services inflation has returned to almost
every Asian country. Despite this, markets remain remarkably sanguine, for now
at least. Although no company is immune from inflation, some are more
vulnerable than others. We have very little direct exposure to companies which
would be hurt by rising interest rates. Very few of our companies sell goods or
services which are bought with credit cards for example. We do, however, own
shares in a number of `utility' companies ranging from bus and subway companies
in China, Hong Kong and Singapore to our favourite water company in the
Philippines. In most cases, the regulatory regime in theory allows rising input
prices to be passed on fairly quickly. However, in practice, if inflation does
get out of control, Governments are usually quick to clamp down on such pass
through mechanisms. As a result, we have reduced our exposure to these
companies and continue to favour companies with at least some degree of pricing
power.
Meanwhile, an Asian consumer bubble is inflating in a very similar way to the
Asian resources bubble of 2007. Three years ago it became very fashionable to
forecast out Asian per capita demand for natural resources and commodities to
infinity and beyond. Commodity prices soared on the back of simple straight
line forecasts - if China reaches the US average coal consumption of two tons
per person, total Chinese demand will be greater than current world production
of 2.5bn tons. If the per capita grain consumption in China rises from 300kg to
reach the US average of 900 kg, China will consume two thirds of all the grain
currently harvested globally. Today the straight line forecasting is aimed very
much at consumer companies. Most good quality consumer companies in China and
India are now trading on price to earnings multiples of over thirty times.
Almost every week we are invited to a new investor conference showcasing
consumer companies. Asian consumer funds are now commonplace while the variety
of Asian consumer ETFs available is frightening. 60 page consumer research
reports are landing on our desks, heralding bizarre strap-lines such as "The
Great Leap Forward - China, trade-up and the consumer staples opportunity" -
although perhaps this is a more prescient title than we are giving the authors
credit for!
We are continually told just how little laundry powder, toothpaste and hair
products the Asian consumer uses relative to their Western counterpart. For
investors this logic is seductive. It is also dangerously misleading, for three
reasons.
First, in India and China, at least 700 million people still live on extremely
low incomes of one or two US dollars a day. As a result, `effective demand'
from Asian consumers tends to lag `potential demand' significantly.
Millionaires in Shanghai do not consume 2,739 times as much toothpaste as rural
farmers living on one dollar a day.
Second, for many markets, supply has the potential to keep pace with demand.
There is no shortage of toothpaste in the world or toothpaste-making machines.
Neither is there a shortage of companies ready to sell toothpaste, particularly
when returns are so high. Colgate-Palmolive India makes a return on the capital
it employs in India of over 150%. Which budding entrepreneur is not going to
try his hand at toothpaste in Asia with this kind of return? Market growth
counts for nothing if companies cannot defend the supernormal returns many of
them are currently enjoying. While Colgate may well be able to fight them off,
it seems unlikely that this will be achieved without some contraction of
margins and profitability.
Third, there is simply not enough ecological room left globally for China or
India to pursue the same consumption intensive development model followed by
every `developed' country to date. This is by now a well-worn argument put
forward by environmental think tanks and alternative national accounting
bodies. Recently, however, we have started to hear the same argument made by
mainstream policymakers in both China and India. For example, we met a Chinese
government official who talked convincingly about how China will be consumption
constrained and needs to pursue a strategy of "spiritual consumption" - by
which he meant a shift towards spending on leisure and recreational activities
rather than "stuff". With considerable reluctance we are steadily reducing our
stakes in our favourite consumer companies. They are increasingly priced for
perfection, and we have yet to meet the perfect company.
Instead, the majority of our investment ideas continue to come from outside
China and India in markets which seem to have avoided most of the hubris to
date. In particular, we have increased our holdings in what we consider to be
the best quality banks in Korea, the Philippines, Taiwan and Thailand.
Typically these are old fashioned banks, working hard to gather deposits and
doing their best to make careful prudent loans with the proceeds. They tend to
trade at somewhere between one and two times their book value and are typically
at attractive stages of their respective credit cycles. Loan growth is
recovering and credit quality is improving. As a result, the risk/return
profile seems attractive to us.
Within the portfolio there are two companies whose business activities are
within the Asia Pacific region but the shares of which are traded on stock
markets elsewhere. This international approach to the management of a company's
affairs is likely to become an increasing trend in future but does not alter
the spirit of your Company's objective to invest in the Asia Pacific region.
David Gait
Senior Investment Manager
First State Investment Management (UK) Limited
27 September 2010
Unaudited Income Statement
For the six months ended 31 July 2010
Six months ended Six months ended Year ended
31 July 2010 31 July 2009 30 January 2010
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains on - 7,883 7,883 - 35,912 35,912 - 48,665 48,665
investments
held at fair
value through
profit or loss
(Losses)/gains - (28) (28) - - - - 39 39
on derivative
arrangements
Exchange - 586 586 - (238) (238) - (204) (204)
differences
1,942 - 1,942 1,293 - 1,293 2,545 - 2,545
Income
(186) (560) (746) (121) (363) (484) (281) (842) (1,123)
Investment
management fee
Other expenses (720) - (720) (425) - (425) (728) - (728)
Net return 1,036 7,881 8,917 747 35,311 36,058 1,536 47,658 49,194
before finance
costs and
taxation
Interest (2) - (2) - - - - - -
payable
Return on 1,034 7,881 8,915 747 35,311 36,058 1,536 47,658 49,194
ordinary
activities
before tax
Tax on (178) - (178) (219) 140 (79) (173) - (173)
ordinary
activities
Return 856 7,881 8,737 528 35,451 35,979 1,363 47,658 49,021
attributable
to equity
shareholders
Return per 0.72p 6.67p 7.39p 0.45p 29.95p 30.40p 1.15p 40.27p 41.42p
Ordinary share
(note 2)
The "Total" column of this statement represents the Income Statement of the
Company. The "Revenue" and "Capital" columns are supplementary to this and are
prepared under guidance published by the Association of Investment Companies.
All items in the above statement derive from continuing operations. The Company
had no recognised gains or losses other than those declared in the Income
Statement.
No operations were acquired or discontinued during the period.
Unaudited Balance Sheet
As at 31 July 2010
As at As at As at
31 July 2010 31 July 2009 31 January 2010
£'000 £'000 £'000
Fixedassets
Investments 133,321 121,169 134,419
Current assets
Debtors 1,160 1,331 236
Cash at bank and on 7,470 969 819
deposit
8,630 2,300 1,055
Creditors(amounts (1,137) (1,257) (220)
falling due within one
year)
Net current assets 7,493 1,043 835
Net assets 140,814 122,212 135,254
Capital and reserves
Share capital 14,606 14,794 14,794
Share premium account 4 4 4
Capital redemption 1,648 1,460 1,460
reserve
Special reserve 14,572 16,222 16,222
Capital reserve 106,491 86,403 98,610
Revenue reserve 3,493 3,329 4,164
Equity shareholders' 140,814 122,212 135,254
funds
Net asset value per 120.51p 103.26p 114.28p
Ordinary share (note 3)
Unaudited Reconciliation of Movements in Shareholders' Funds
Six months Six months Year ended
ended ended 31 January
31 July 2010 31 July 2009 2010
£'000 £'000 £'000
Opening shareholders' funds 135,254 87,760 87,760
Repurchase of own shares for (1,650) - -
cancellation
Return for the period 8,737 35,979 49,021
Dividend paid (1,527) (1,527) (1,527)
Closing shareholders' funds 140,814 122,212 135,254
Summarised Unaudited Statement of Cash Flows
For the six months ended 31July 2010
Six months Six months Year ended
ended ended 31 January
31 July2010 31 July 2009 2009
£'000 £'000 £'000
Net cash inflow from operating 301 581 952
activities
Servicing of finance (2) - -
Financial investment
Purchase of investments and (123,732) (29,136) (47,524)
derivatives
Sales of investments and derivatives 132,675 27,410 45,243
Net cash inflow/(outflow) from 8,943 (1,726) (2,281)
financial investment
Equity dividends paid (1,527) (1,527) (1,527)
Net cash inflow/(outflow)before 7,715 (2,672) (2,856)
financing
Financing
Repurchase of own shares for (1,650) - -
cancellation
Increase/(decrease)in cash 6,065 (2,672) (2,856)
Reconciliation of net cash flow to
movement in net funds
Increase/(decrease) in cash 6,065 (2,672) (2,856)
resulting from cashflows
Exchange differences 586 (238) (204)
Movement in net funds 6,651 (2,910) (3,060)
Net funds at 1 February 819 3,879 3,879
Net funds at 31 July/31 January 7,470 969 819
Reconciliation of net return before
finance costs and taxation to net cash
flow from operating activities
Net return before finance costs and 8,917 36,058 49,194
taxation
(7,883) (35,912) (48,665)
Gains on investments
28 - (39)
Losses/(gains) on derivative
arrangements (586) 238 204
Exchange differences (121) (89) (173)
Irrecoverable withholding tax on
investment income
Changes in working capital and other (54) 286 431
non-cash items
Net cash inflow from operating 301 581 952
activities
Notes to the interim accounts
1. Basis of Preparation
The financial statements have been prepared under the historical cost
convention, except for the measurement of investments which are valued at
fair value, and in accordance with applicable accounting standards, the
Statement of Recommended Practice `Financial Statements of Investment Trust
Companies and Venture Capital Trusts' dated January 2009 and the UK
Accounting Standards Board's Statement `Half Yearly Financial Reports'.
The same accounting policies that were used for the year ended 31 January
2010 have been applied in these financial statements.
2. Return per share
The total return per share is based on the total return attributable to
equity shareholders of £8,737,000 (six months ended 31 July 2009: return of
£35,979,000; year ended 31 January 2010: return of £49,021,000) and on
118,190,927 shares (six months ended 31 July 2009: 118,348,386; year ended
31 January 2010: 118,348,386), being the weighted average number of shares
in issue.
The revenue return per share is calculated by dividing the net revenue
return attributable to shareholders of £856,000 (six months ended 31 July
2009: return of £528,000; year ended 31 January 2010: return of £1,363,000)
by the weighted average number of shares in issue as above.
The capital return per share is calculated by dividing the net capital
return attributable to shareholders of £7,881,000 (six months ended 31 July
2009: return of £35,451,000; year ended 31 January 2010: return of £
47,658,000) by the weighted average number of shares in issue as above.
3. Net asset value per share
The net asset value per share is based on net assets attributable to shares
of £140,814,000 (31 July 2009: £122,212,000; 31 January 2010: £135,254,000)
and on 116,848,386 shares in issue (31 July 2009: 118,348,386; 31 January
2010: 118,348,386).
4. Withholding tax reclaim
During the period the Company submitted a claim to the Taipei National Tax
Administration in Taiwan for the recovery of tax withheld on income arising
from the Company's investments in Taiwan. The claim covers the years 2005
to 2009 and, if successful, the Company expects to cover approximately £
500,000 net of costs. However, the likelihood, timing and the quantum of
the recovery remain uncertain and as at 31 July 2010 no amount receivable
has been recorded in the Company's accounts.
5. 2010 Accounts
These are not statutory accounts in terms of Section 434 of the Companies
Act 2006 and are unaudited. Statutory accounts for the year to 31 January
2010, which received an unqualified audit report, have been delivered to
the Registrar of Companies. No statutory accounts in respect of any period
after 31 January 2010 have been reported on by the Company's auditors or
delivered to the Registrar of Companies.
Earnings for the first six months should not be taken as a guide to the
results for the full year.
Frostrow Capital LLP
Company Secretary
27 September 2010
- ENDS -
Pacific Assets Trust plc
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