Final Results

RNS Number : 2219I

British Assets Trust PLC

14 November 2008

 



BRITISH ASSETS TRUST PLC

Date:  14 November 2008

Audited results for the year ended 30 September 2008

• Dividend increase of 4.0 per cent 

• Share price total return of -24.8 per cent

• Net asset value total return of -26.8 per cent 

Chairman's Statement:

Against a backdrop of significant financial market turbulence, the Company's net asset value total return for the year ended 30 September 2008 was -26.8 per cent. This compares with a total return of -20.3 per cent from the composite benchmark of 75 per cent FTSE All-Share Index and 25 per cent FTSE World (ex UK) Index. The share price total return for the year was -24.8 per cent, in part due to the narrowing of the debt-adjusted discount to 8.0 per cent at the end of the year, compared to 10.3 per cent as at 30 September 2007 (source: Fundamental Data).

Following a year of continued good dividend growth, the Board is pleased to be able to continue with its progressive dividend policy and to recommend an increase of 4.0 per cent in the rate of dividend for the year.

Throughout the year, there were growing concerns about the effects of a slow down in growth of the world's major economies, as rising oil and commodity prices led to higher inflation, and concerns intensified over the implications of the continuing global credit crisis. The concerns escalated towards the end of the financial year and it became clear that a global banking crisis was developing as a number of major financial institutions, initially in the US, and then in the UK and Europe, faced collapse. Government intervention has been required to recapitalise the banking sector and avoid further collapses, and significant amounts of additional liquidity have been provided by central banks in an attempt to restore confidence to the sector. Notwithstanding these actions there are significant concerns over the wider economic implications and it now seems clear that the world's major economies are entering a period of slower growth or, more probably, recession. 

Unsurprisingly, these events have had a profound impact on stockmarkets around the world, with shares of banks being among the most affected. The FTSE All-Share Index fell by more than 13 per cent in September and, since the end of the financial year, has fallen by a further 16 per cent.  

The table in note 8 provides a breakdown of the estimated contributions to the Company's underperformance against its benchmark for the year, most of which is attributable to the effect of the level of gearing during the period. As explained later in my statement, the majority of the Company's borrowings are represented by long term Bonds, although a new borrowing facility was taken out during the year to provide the Company with greater flexibility than it has had in the past. The Company's Bonds are less flexible and, by their nature, are intended to enhance returns over the longer term. In times of falling markets, therefore, gearing will have an adverse effect on the Company's performance. The Board and Managers review the level of gearing very carefully at each Board Meeting, and between meetings where necessary. The Board has taken the view that, at current market levels, it would not be in the interests of shareholders to materially reduce the level of gearing. 

Stock selection in all areas also had an adverse effect on the Company's performance relative to the benchmark. The UK portfolio, which outperformed in the first half of the year, underperformed the FTSE All-Share Index for the year as a whole, principally as a result of its exposure to certain financial stocks which have in the past been an important contributor to the Revenue Account. 

Encouragingly the North American portfolio which, as previously reported, changed to being managed using quantitative stock selection techniques during the year, outperformed the regional benchmark for the period from 1 April 2008 when the change was made. Since the year end, the Board has agreed with the Managers that the overseas portfolios will be consolidated into two portfolios; a global developed markets portfolio which will be managed using quantitative stock selection techniques, and an actively managed global emerging markets portfolio. This change will mean moving away from regional portfolios based on geographic domicile. The reason for the change is to provide greater focus on the best individual investment opportunities overseas.

  During the year, the corporate bond portfolio outperformed its composite benchmark, as well as continuing to be an important contributor to the Revenue Account.

Earnings and Dividends

The Company's revenue earnings per share for the year were 6.2p (2007: 5.7p). First, second and third interim dividends, each of 1.4p per Ordinary Share, were paid on 11 April, 11 July and 10 October 2008 respectively.

During the year, the Company benefited from good levels of dividend growth from its investee companies, particularly in the UK where most of its investment income is generated. The investment income arising from the corporate bond portfolio is also an important contributor to the Revenue Account. The Board is therefore pleased to recommend a final dividend of 1.734p per Ordinary Share in respect of the year, payable on 9 January 2009 to shareholders on the register at close of business on 12 December 2008. This brings the total dividend in respect of the year to 5.934p per Ordinary Share, an increase of 4.0 per cent from the previous year. 

The Board considers the Company's dividend yield, which was 5.9 per cent as at 30 September 2008, to be one of its key attractions. Whilst the outlook for dividend receipts next year is clearly challenging, the Board has considered carefully the revenue forecast for the forthcoming year and the size of the Company's revenue reserve, and expects to continue with the stated aim of maintaining a progressive dividend policy. 

Gearing

At the end of the year the Company's gearing, net of cash, was 20.5 per cent, represented by equity gearing of 11.6 per cent and 8.9 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 five year £60 million multi-currency revolving advance facility with The Royal Bank of Scotland plc ('the Revolving Advance Facility'). As stated at the interim stage, this facility was put in place on 31 March 2008 to coincide with the date on which the Company's £60 million 6.625 per cent Bonds ('the 2008 Bonds') were redeemed.

Amounts borrowed under the Revolving Advance Facility may be drawn down in varying amounts and currencies, thus providing the Company with a degree of flexibility which was not available with the 2008 Bonds. As at 30 September 2008 the amount drawn down under the facility was £30 million, in a variety of currencies relating to the geographical spread of the portfolio.

Share Buy Backs

During the year the Company purchased 8,400,000 shares for cancellation, equivalent to 2.8 per cent of the shares in issue as at 30 September 2007, for an aggregate consideration of £10.6 million. These buy backs enhanced the net asset value by 0.5p per share.

The Company will seek to renew its share buy back authority at the Annual General Meeting.

VAT on Management Fees

Following the European Court of Justice ruling in June 2007 that investment trusts should be regarded as special investment funds, management fees paid by the Company are no longer subject to VAT. 

During the year, the Managers have been liaising closely with HM Revenue and Customs ('HMRC') to recover on the Company's behalf VAT paid in the past on investment management fees. The accounts for the year include a provision for the recovery of VAT of £1.49 million in respect of the period from 1 January 2001. This has been allocated between revenue and capital and provides an enhancement of 0.5p per share to the net asset value and 0.1p to the revenue earnings per share. The Company expects to be able to make further provisions for recoveries for earlier years once the amounts involved can be estimated with sufficient accuracy. 

The Company is also expecting to receive interest on amounts of VAT recovered. However, at this stage, the amounts involved and timings of the payments are uncertain and no provision has therefore been made in the accounts.

Board Composition

As stated at the interim stage, Mr Ian Russell was appointed as a non-executive Director of the Company on 1 June 2008. Mr Russell is a former chief executive and finance director of Scottish Power plc. He is currently a non-executive director of Johnston Press plc and The Mercantile Investment Trust plc, Chairman of Remploy Limited and an adviser to the 3i Group.

The current composition of the Board is in line with the Combined Code of Corporate Governance, which encourages boards to have at least half of their number, excluding the chairman, with service of less than nine years.

As previously announced, I will retire at the Annual General Meeting in 2009. Plans are in hand as regards my succession. 

Outlook

The effect on the global economy of recent events in financial markets will be long lasting, and as further signs of an economic slowdown emerge in the months ahead there are likely to be further interest rate cuts by central banks in an attempt to limit the downturn. 

At current levels, stockmarkets are assuming a global recession in developed countries and a slow down in developing countries. In due course, fiscal stimulus and interest rate cuts should help confidence to return to markets, but until this happens there is unlikely to be a meaningful recovery in share prices. During this difficult time the Managers continue to focus on companies with good dividend prospects which they believe will provide a strong basis for both long term capital performance and dividend growth. 

W R E Thomson

Chairman

Enquiries:    Julie Dent

                   F & C Asset Management plc - 0207 628 8000

Income Statement for the Year ended 30 September 2008

	Notes	2008	2008	2008
		Revenue	Capital	Total
		£'000	£'000	£'000
Losses on investments		-	(137,257)	(137,257)
Exchange differences		-	(1,460)	(1,460)
Income	3	21,414	873	22,287
Investment management fee		(85)	(39)	(124)
Other expenses		(869)	-	(869)
		______	______	______
Net return before finance costs & taxation		20,460	(137,883)	(117,423)
Finance costs		(1,680)	(4,961)	(6,641)
		______	______	______
Return on ordinary activities before tax		18,780	(142,844)	(124,064)
Tax on ordinary activities		(295)	-	(295)
		______	______	______
Return attributable to shareholders		18,485	(142,844)	(124,359)
		______	______	______
Return per share	4	6.2p	(48.0)p	(41.8)p

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 2007

		2007	2007	2007
	Notes	Revenue	Capital	Total
		£'000	£'000	£'000
Gains on investments		-	31,923	31,923
Exchange differences		-	(122)	(122)
Income	3	21,234	1,839	23,073
Investment management fee		(527)	(1,581)	(2,108)
Other expenses		(894)	-	(894)
		______	______	______
Net return before finance costs & taxation		19,813	32,059	51,872
Finance Costs		(1,954)	(5,860)	(7,814)
		______	______	______
Return on ordinary activities before tax		17,859	26,199	44,058
Tax on ordinary activities		(337)	-	(337)
		______	______	______
Return attributable to shareholders		17,522	26,199	43,721
		______	______	______
Return per share	4	5.7p	8.6p	14.3p

  Reconciliation of Movements in Shareholders' Funds

For the year ended 30 September 2008

	Called up Share Capital	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Total Shareholders' Funds
	£'000	£'000	£'000	£'000	£'000
Opening shareholders' funds	75,253	13,088	362,771	34,660	485,772
Ordinary shares purchased for cancellation	(2,100)	2,100	(10,607)	-	(10,607)
Dividends paid	-	-	-	(17,290)	(17,290)
Return attributable to ordinary shareholders	-	-	(142,844)	18,485	(124,359)
Closing shareholders' funds	73,153	15,188	209,320	35,855	333,516

Reconciliation of Movements in Shareholders' Funds

For the year ended 30 September 2007 

	Called up Share Capital	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Total Shareholders' Funds
	£'000	£'000	£'000	£'000	£'000
Opening shareholders' funds	77,128	11,213	347,782	34,267	470,390
Ordinary shares purchased for cancellation	(1,875)	1,875	(11,210)	-	(11,210)
Dividends paid	-	-	-	(17,129)	(17,129)
Return attributable to ordinary shareholders	-	-	26,199	17,522	43,721
Closing shareholders' funds	75,253	13,088	362,771	34,660	485,772

Balance Sheet as at 30 September	2008	2007
	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	401,838	558,724
	_______	________
Current assets
Debtors	4,263	5,937
Cash at bank and on deposit	17,962	47,349
	______	________
	22,225	53,286
Creditors: amounts falling due within one year	(31,152)	(66,870)
	_______	________
Net current liabilities	(8,927)	(13,584)
	_______	________
Total assets less current liabilities	392,911	545,140
Creditors: amounts falling due after more than one year	(59,395)	(59,368)
	_______	________
Net assets	333,516	485,772
	_______	________
Capital and reserves
Called-up share capital	73,153	75,253
Capital redemption reserve	15,188	13,088
Capital reserve	209,320	362,771
Revenue reserve	35,855	34,660
	_______	________
Equity shareholders' funds	333,516	485,772
	_______	________
Net asset value per share	114.0p	161.4p

Cash Flow Statement for the Year Ended  30 September	2008	2007
	£'000	£'000
Operating activities
Investment income received	20,267	20,953
Deposit interest received	1,575	1,808
Option premium received	136	-
Underwriting commission received	88	-
Investment management fees paid	(1,609)	(2,108)
Other cash payments	(880)	(906)
	______	______
Net cash inflow from operating activities	19,577	19,747
	______	______
Servicing of finance
Interest on 6.625 per cent Bonds 2008	(1,987)	(5,963)
Interest on 6.25 per cent Bonds 2031	(3,750)	(3,750)
Interest on revolving advance facility	(711)	-
Interest on bank overdraft	(26)	-
	______	______
Net cash outflow from servicing of finance	(6,474)	(9,713)
	______	______
Capital expenditure and financial investment
Purchases of investments	(366,192)	(470,340)
Disposals of investments	383,032	511,722
	_______	______
Net cash inflow from capital expenditure and financial investment	16,840	41,382
	_______	______
Equity dividends paid	(17,290)	(17,129)
	_______	_______
Net cash inflow before financing	12,653	34,287
	_______	_______
Financing
6.625 per cent Bonds 2008 redeemed	(60,000)	-
Revolving advance facility drawn down	30,000	-
Ordinary Shares purchased for cancellation	(10,607)	(11,210)
	_______	_______
Net cash outflow from financing	(40,607)	(11,210)
	_______	_______
(Decrease)/increase in cash	(27,954)	23,077
	_______	_______
Reconciliation of net cash flow to movement in net debt
(Decrease)/increase in cash in the year	(27,954)	23,077
6.625 per cent Bonds 2008 redeemed	60,000	-
Revolving advance facility drawn down	(30,000)	-
Currency (losses)/gains	(1,499)	132
Increase in 6.625 per cent Bonds 2008 liability	(32)	(63)
Increase in 6.25 per cent Bonds 2031 liability	(27)	(26)
Opening net debt	(71,987)	(95,107)
	_______	_______
Closing net debt	(71,499)	(71,987)
	______	_______

  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. Breach of Section 842 of the Income and Corporation Taxes Act 1988 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 covenants 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, and 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 2008, 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

W R E Thomson

Director

14 November 2008 

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 for investment trust companies, issued by the Association of Investment Companies in December 2005, 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 would have been £1,260,000 (2007: £1,012,000).

2.        Financial instruments

The Company's financial instruments comprise equity and fixed interest investments, cash balances, bank loans, overdrafts, 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 downside 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. The fair value of the Company's financial assets and liabilities is represented by their carrying value in the Balance Sheet. The fair value of the loans is not materially different from the 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)    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;

    (iv)    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; and

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

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

When the Company retains cash balances the majority of the cash is held in deposit accounts. The benchmark rate which determines the interest payments received on cash balances is 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. As they are fixed rate bonds, the Company is exposed to changes in market value in the event that the bonds are repaid before maturity.   This exposure may be reduced by investing in fixed interest securities.

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 ('JPM'), 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 limited 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.  

As at 30 September 2008 the Company had an overnight deposit of £13.5 million with a single counterparty.  There were no other material concentrations of credit risk to counterparties at 30 September 2008 or 30 September 2007 because other deposits were spread over a number of counterparties. 

Liquidity risk

The Company's listed securities are considered to be readily realisable in normal market conditions.

The Company's liquidity risk is managed on an ongoing basis by the Managers.

The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and expenses. Short term flexibility is achieved, where necessary, through the use of overdraft facilities.

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 2008, the Company entered into US Dollar and Euro foreign currency contracts with a view to partially hedging these currency risks

3.    Total income of £22,287,000 (2007: £23,073,000) includes special dividends of £873,000 (2007: £3,152,000) of which £nil (2007: £1,313,000) is recognised through revenue and £873,000 (2007: £1,839,000) is recognised through capital.

4.    Return per Ordinary Share is based on a weighted average of 297,162,555 (2007: 306,387,624) Ordinary Shares in issue.  

5.    The proposed final dividend of 1.734p per Ordinary Share, will be paid on 9 January 2009 to ordinary shareholders on the register at close of business on 12 December 2008.

    The last date for receipt of mandate instructions for those shareholders who wish to join the Dividend Reinvestment Plan is 16 December 2008.

6.    The Company had 292,612,282 (2007: 301,012,282) Ordinary Shares in issue as at 30 September 2008.

7.    During the year, the Company purchased for cancellation 8,400,000 (2007: 7,500,000) Ordinary Shares with an aggregate nominal value of £2.1 million for a total consideration of £10.6 million (2007: £11.2 million) representing 2.8% of the Ordinary Shares in issue at the previous year end.

    The Company's geographic exposure as a percentage of ordinary shareholders' funds at 30 September 2008 was as follows (comparative figures are for 30 September 2007).

	2008	2007
UK	74.8	77.2
North America	17.0	12.9
Europe (ex UK)	7.6	8.1
Pacific (ex Japan)	7.3	6.1
Japan	4.9	4.1
Corporate Bonds	8.9	6.6
Gearing	(20.5)	(15.0)
	_____	_____
Total	100.0	100.0
	_____	_____

8.       The following table provides a breakdown of the estimated contributions to the total return for the year:

Attribution of Return                    

	%
Market/benchmark return	-20.3
Stock selection
UK equities	-1.3
Overseas equities	-1.1
Regional asset allocation	-0.3
Corporate bonds	0.9
Gearing	-5.0
Cash/other	0.7
Share buy backs	0.3
Expenses	-0.7
	-----
British Assets Trust net asset value total return	-26.8
	----

9.    This announcement is not the Company's statutory accounts. The statutory accounts for the year ended 30 September 2007 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 nor statements concerning the Companies Act 1985.

The Annual Report for the year ended 30 September 2008 will be sent to shareholders during November 2008 and will be available for inspection at 80 George Street, Edinburgh EH2 3BU, the registered office of the Company.  The full Annual Report and Accounts will be available on the Company's website, www.british-assets.co.uk.

 

END

 

 

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