Annual Financial Report

RNS Number : 2137W

British Assets Trust PLC

16 November 2010

 



BRITISH ASSETS TRUST PLC

Date:  16 November 2010

Results for the year ended 30 September 2010

·      Share price total return of 21.2 per cent

·      Net asset value total return of 12.2 per cent compared with a total return of 11.7 per cent from the benchmark index

·      Maintained dividend of 6.112p per share, producing a dividend yield of 4.9 per cent at the year end

Chairman's Statement:

I have pleasure in presenting my first annual statement as Chairman of British Assets Trust.

The Company's net asset value total return for the year was 12.2 per cent. This is ahead of the total return of 11.7 per cent from the composite benchmark of 75% FTSE All-Share Index and 25% FTSE World (ex UK) Index. The share price total return was 21.2 per cent, reflecting a significant narrowing of the debt-adjusted discount, which at the end of the year was 1.1 per cent compared to 6.9 per cent at the end of the previous year.

Although stockmarkets made progress during the year as a whole, there was a certain degree of volatility due principally to the uncertainty of the global economic recovery and the implications of the sovereign debt crisis in the Eurozone. In the UK, the measures taken by the new coalition government to reduce the significant fiscal deficit have been generally well received and, with a gradual return to economic growth, company results have by and large been positive. Throughout the year, the Managers maintained an overweight position in emerging markets, where they believe continued strong expansion in countries such as Brazil, India and China will be the principal drivers of world growth.

Gearing was a significant contributor to performance in rising markets. The contribution from asset allocation was also positive, reflecting in the main the Company's overweight exposure to emerging markets which continued to outperform global developed markets during the year.

The negative contribution from stock selection reflects the defensive positioning of the portfolio. As investors gained confidence that economies were recovering and not going to fall into depression, companies with the greatest sensitivity to economic recovery benefited the most from the ensuing rise in stockmarkets. Often these were companies with high levels of debt and low levels of cash which the Managers had tended to avoid in favour of higher quality cash generative companies able to sustain dividend payments. In the UK, income stocks were also affected by the underperformance of the oil sector, with BP suspending its dividend.

The corporate bond portfolio had another good year, delivering returns ahead of both equities and government bonds.

Earnings and Dividends

The Company's revenue earnings for the year were 5.0p per share (2009: 5.8p). Three interim dividends of 1.442p per share were paid during the year and the Board recommends payment of a final dividend of 1.786p per share, payable on 7 January 2011 to those shareholders on the register on 10 December 2010. This brings the total dividend for the year to 6.112p per share, unchanged from the previous year and in accordance with the Board's previously stated expectations.

Within the UK, where the Company earns most of its income, dividend payments generally improved during the year. However, this improvement was offset by the suspension by BP of its dividend following the significant oil spill in the Gulf of Mexico. BP, which had been one of the Company's largest investments was, prior to the suspension, the biggest dividend payer in the UK and this event had a significant effect on many income-reliant investors.

Last year the Company's revenue benefited from the repayment of past VAT on management fees. This year, dividend income is still below the levels seen prior to the economic downturn and this, combined with the effect of the BP dividend suspension, means that the Company's net income for the year was below what was needed to cover the cost of the dividend. However, the Company has significant accumulated revenue reserves from which it is able to cover dividends.

Looking forward, the Board recognises the importance of the dividend level to shareholders and the attractions of its yield premium relative to cash deposits and equity markets in general. The Board expects the Company to benefit from continued dividend growth in the UK and overseas. However, dividends remain below the level they were prior to the credit crisis and, having reviewed revenue projections for the year ahead, the Board considers it likely that the level of dividend will be maintained again in respect of the current financial year.

Gearing

As at 30 September 2010, the Company's level of gearing, net of cash, was 21.0 per cent. This was represented by equity gearing of 6.2 per cent and 14.8 per cent in corporate bonds.

The Company's borrowings are represented by £60 million 6.25 per cent Bonds which are due for redemption in 2031, and a £60 million bank revolving credit facility which matures in March 2013, £27.4 million of which was drawn down at the year end.

Annual General Meeting

The Company's Annual General Meeting will be held at 12 noon on Thursday 16 December 2010 at the offices of F&C Asset Management plc, 80 George Street, Edinburgh.

Outlook

In managing the portfolio, the Board has to strike a balance between generating income and capital returns. In the current environment, the Managers' expectation is for only modest economic growth in developed markets. However, companies are generally in a strong position to grow their dividends. Emerging markets retain good long term growth prospects and remain attractive.

Notwithstanding the uncertain economic times the Board believes the Company, with its high dividend yield and prospects for capital growth, will continue to be attractive to investors.

Lynn Ruddick

Chairman

Income Statement for the Year ended 30 September 2010

	Notes	2010	2010	2010
		Revenue	Capital	Total
		£'000	£'000	£'000
Gains on investments		-	30,471	30,471
Exchange differences		-	323	323
Income		17,156	-	17,156
Management expenses		(334)	(1,452)	(1,786)
Other expenses		(845)	-	(845)
		______	______	______
Net return before finance costs & taxation		15,977	29,342	45,319
Finance costs		(1,030)	(3,090)	(4,120)
		______	______	______
Return on ordinary activities before tax		14,947	26,252	41,199
Tax on ordinary activities		(353)	-	(353)
		______	______	______
Return attributable to shareholders		14,594	20,252	40,846
		______	______	______
Return per share	3	5.0p	9.0p	14.0p

The total column of this statement is the Profit and Loss Account of the Company.  The supplementary revenue and capital columns are both prepared under guidance published by The Association of Investment Companies.

All revenue and capital items in the above Income Statement derive from continuing operations.

No operations were acquired or discontinued in the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above Income Statement.

Income Statement for the Year ended 30 September 2009

		2009	2009	2009
	Notes	Revenue	Capital	Total
		£'000	£'000	£'000
Gains on investments		-	29,773	29,773
Exchange differences		-	(1,344)	(1,344)
Income		18,369	-	18,369
Management expenses		1,086	(1,702)	(616)
Other expenses		(879)	-	(879)
		______	______	______
Net return before finance costs & taxation		18,576	26,727	45,303
Finance Costs		(1,136)	(3,410)	(4,546)
		______	______	______
Return on ordinary activities before tax		17,440	23,317	40,757
Tax on ordinary activities		(293)	-	(293)
		______	______	______
Return attributable to shareholders		17,147	23,317	40,464
Return per share	3	5.8p	8.0p	13.8p

Reconciliation of Movements in Shareholders' Funds

For the year ended 30 September 2010

	Called up Share Capital	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Shareholders' Funds
	£'000	£'000	£'000	£'000	£'000
Opening shareholders' funds	72,778	15,563	230,992	35,409	354,742
Dividends paid	-	-	-	(17,795)	(17,795)
Return attributable to ordinary shareholders	-	-	26,252	14,594	40,846
Closing shareholders' funds	72,778	15,563	257,244	32,208	377,793

Reconciliation of Movements in Shareholders' Funds

For the year ended 30 September 2009

	Called up Share Capital	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Shareholders' Funds
	£'000	£'000	£'000	£'000	£'000
Opening shareholders' funds	73,153	15,188	209,320	35,855	333,516
Ordinary Shares purchased for cancellation	(375)	375	(1,645)	-	(1,645)
Dividends paid	-	-	-	(17,593)	(17,593)
Return attributable to ordinary shareholders	-	-	23,317	17,147	40,464
Closing shareholders' funds	72,778	15,563	230,992	35,409	354,742

Balance Sheet as at 30 September	2010	2009
	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	457,280	429,158
	_______	________
Current assets
Debtors	4,364	3,053
Cash at bank and on deposit	7,002	13,663
	_____	________
	11,366	16,716
Creditors: amounts falling due within one year	(31,405)	(31,711)
	_______	________
Net current liabilities	(20,039)	(14,995)
	_______	________
Total assets less current liabilities	437,241	414,163
Creditors: amounts falling due after more than one year	(59,448)	(59,421)
	_______	________
Net assets	377,793	354,742
	_______	________
Capital and reserves
Called-up share capital	72,778	72,778
Capital redemption reserve	15,563	15,563
Capital reserve	257,244	230,992
Revenue reserve	32,208	35,409
	_______	________
Equity shareholders' funds	377,793	354,742
	_______	________
Net asset value per share	129.8p	121.9p

Cash Flow Statement for the Year Ended 30 September 2010	2010	2009
	£'000	£'000
Operating activities
Investment income received	16,423	16,564
Deposit interest received	26	214
Interest on VAT recovered	-	923
Underwriting commission received	121	238
Management expenses paid	(2,091)	1,624
Other cash payments	(851)	(896)
	______	______
Net cash inflow from operating activities	13,628	18,667
	______	______
Servicing of finance
Interest on 6.25 per cent Bonds 2031	(3,750)	(3,750)
Interest on revolving advance facility	(346)	(839)
	______	______
Net cash outflow from servicing of finance	(4,096)	(4,589)
	______	______
Capital expenditure and financial investment
Purchases of investments	(185,907)	(308,902)
Sales of investments	187,576	313,226
	________	______
Net cash inflow from capital expenditure and financial investment	1,669	4,324
	________	______
Equity dividends paid	(17,795)	(17,593)
	________	_______
Net cash (outflow)/inflow before financing	(6,594)	809
	________	_______
Financing
Revolving advance facility repaid	(304)	(3,781)
Ordinary Shares purchased for cancellation	-	(1,637)
	________	_______
Net cash outflow from financing	(304)	(5,418)
	-________	_______
Decrease in cash	(6,898)	(4,609)
	________	_______
Reconciliation of net cash flow to movement in net debt
Decrease in cash in the year	(6,898)	(4,609)
Revolving advance facility repaid	304	3,781
	_______	_______
Change in net debt resulting from cash flows	(6,594)	(828)
Currency gains/(losses)	209	(1,106)
Increase in 6.25 per cent Bonds 2031 liability	(27)	(26)
	_______	_______
Movement in net debt in the period	(6,412)	(1,960)
Opening net debt	(73,459)	(71,499)
	_______	_______
Closing net debt	(79,871)	(73,459)
	_______	________

Principal Risks and Risk Management

The Company's assets consist mainly of listed securities and its principal risks are therefore market-related. The Company is also exposed to currency risk in respect of overseas markets in which it invests. More detailed explanations of these risks and the way which they are managed are contained in note 2.

Other risks faced by the Company include the following:

·    External - events such as terrorism, protectionism, inflation or deflation, economic recessions and movements in interest rates and exchange rates could affect share prices in particular markets.

·    Investment and strategic - incorrect strategy, asset allocation, stock selection and the use of gearing could all lead to poor returns for shareholders.

·    Regulatory - breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties, or a qualified audit report.  Loss of investment trust status could lead to the Company being subject to tax on capital gains.

·    Operational - failure of the Managers' accounting systems or disruption to the Managers' business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.

·    Financial - inadequate controls by the Managers or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations. Breaching bond and loan covenants or being unable to replace maturing borrowing facilities could lead to a loss of shareholders' confidence and financial loss for shareholders.

The Board seeks to mitigate and manage these risks through continual review, policy setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company's investment portfolio. Investment risk is spread through holding a wide range of securities in different countries and industrial sectors. The Managers make use of third party risk systems to monitor investment risk and the Board receives quarterly risk reports. The Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge, in respect of the Annual Report for the year ended 30 September 2010, of which this statement of results is an extract:

·      The financial statements have been prepared in accordance with applicable UK Accounting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Annual Report includes a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      The Annual Report includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

Lynn Ruddick

Director

Notes

1.         The financial statements have been prepared under UK Generally Accepted Accounting Practice ('UK GAAP') and in accordance with guidelines set out in the Statement of Recommended Practice ('SORP') for investment trust companies and venture capital trusts, issued in January 2009 by The Association of Investment Companies, except as disclosed in the following paragraph.

            Expenses which are allocated to capital are available to reduce the Company's liability to corporation tax.  The SORP recommends that the benefit of that tax relief should be allocated to capital and a corresponding charge made to revenue.  This is known as the 'marginal method' of allocating tax relief between capital and revenue.  The Company does not adopt the marginal method for two reasons.  Firstly, the Company has only one class of share and any allocation of tax relief between capital and revenue would have no impact on shareholders' funds.  Secondly, the significant unutilised management expenses and interest carried forward make it unlikely that the Company will be liable to corporation tax in the foreseeable future.  Had this allocation been made, the charge to revenue and corresponding credit to capital for the year ended 30 September 2010 would have been £348,000 (2009: £1,862,000).

2.         Financial instruments

The Company's financial instruments comprise equity and fixed interest investments, foreign currency exchange contracts, cash balances, bonds, a bank loan, overdrafts and debtors and creditors that arise directly from its operations. As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company makes use of borrowings to achieve improved performance in rising markets. The risk of borrowings may be reduced by raising the level of cash balances held.

Listed fixed asset investments held are valued at fair value. For listed securities this is either bid price or the last traded price depending on the convention of the exchange on which the investment is listed.  Unquoted investments are valued by the Directors on the basis of all information available to them at the time of valuation.  The fair value of the Company's financial assets and liabilities is represented by their carrying value in the Balance Sheet.

The main risks that the Company faces arising from its financial instruments are:

(i)         market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

            (ii)         interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii)        credit risk, being the risk that a counterparty to a financial instrument will fail to       discharge an obligation or commitment that it has entered into with the Company;

(iv)        liquidity risk, being the risk that the Company may not be able to liquidate its investments quickly enough to meet its ongoing financial commitments; and

(v)         foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales and income will fluctuate because of movements in currency rates.

Market price risk

The management of market price risk is part of the fund management process and is typical of equity - investment. The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with an objective of maximising overall returns to shareholders. Derivatives may be used from time to time to hedge - specific market risk or gain exposure to a specific market.

Interest rate risk

(a)  Floating rate

Interest payments are received on cash balances by reference to the bank base rate for the relevant currency for each deposit.

(b)  Fixed rate

The Company holds fixed interest investments and has fixed interest liabilities.

The bonds are denominated in sterling. In the event that the Company decides to repay the bonds before their maturity date the terms of issue may result in a penalty for early repayment.

Credit risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The carrying amounts of financial assets best represents the maximum credit risk exposure at the balance sheet date.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the diversity of counterparties used.

All the assets of the Company which are traded on a recognised exchange are held by JPMorgan Chase Bank, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited. The Board monitors the Company's risk by reviewing the custodian's internal control reports.  The Managers have in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis.

The credit risk on liquid funds and derivative financial instruments is controlled because the counterparties are banks with high credit ratings, rated AA or higher, assigned by international credit rating agencies.  Bankruptcy or insolvency of such financial institutions may cause the Company's ability to access cash placed on deposit to be delayed, limited or lost. 

Liquidity risk

The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and expenses as they fall due. Short term flexibility is achieved, where necessary, through the use of overdraft facilities.  The Company's liquidity risk is managed on an ongoing basis by the Managers.

Foreign currency risk

The Company invests in overseas securities and holds foreign currency cash balances which give rise to currency risks. In the year to 30 September 2010, the Company entered into US Dollar and Euro foreign currency contracts with a view to partially hedging these currency risks

3.         Return per Ordinary Share is based on a weighted average of 291,112,282 (2009: 292,587,264) Ordinary Shares in issue. 

4.         The proposed final dividend of 1.786p per Ordinary Share, will be paid on 7 January 2011 to ordinary shareholders on the register at close of business on 10 December 2010.

            The last date for receipt of mandate instructions for those shareholders who wish to join the Dividend Reinvestment Plan is 17 December 2010.

5.         The Company had 291,112,282 (2009: same) Ordinary Shares in issue as at 30 September 2010.

6.         The Company's geographic exposure as a percentage of ordinary shareholders' funds at 30 September 2010 was as follows (comparative figures are for 30 September 2009).

	2010	2009
UK	76.2	70.8
Global Developed (ex UK)	17.3	19.6
Emerging Markets	12.7	15.1
Corporate Bonds	14.8	15.5
Gearing	(21.0)	(21.0)
	____	_____
Total	100.0	100.0
	____	_____

7.         The following table provides a breakdown of the estimated contributions to the net asset value total return for the year:

	%
Market/benchmark return	11.7
Stock selection
UK equities	-0.7
Overseas equities	-0.9
Asset allocation	0.8
Corporate bonds	0.2
Gearing	2.0
Expenses	-0.9
	-----
British Assets Trust net asset value total return	12.2
	----

8.         This announcement is not the Company's statutory accounts.  The statutory accounts for the year ended 30 September 2009 have been delivered to the Registrar of Companies and have received an audit report which was unqualified and did not contain any emphasis of matter.

The Annual Report for the year ended 30 September 2010 will be posted to shareholders and is available for inspection at 80 George Street, Edinburgh EH2 3BU, the registered office of the Company, and on the Company's website, www.british-assets.co.uk.

Enquiries:         

Julie Dent

Investment Manager

            F & C Asset Management plc - 0207 628 8000

 

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