Half Yearly Report

RNS Number : 4060V

Aurora Investment Trust PLC

27 October 2014

 



AURORA INVESTMENT TRUST plc

Half Yearly Financial Report

For the six months ended 31 August 2014

Investment Policy

The policy of the Company is to achieve capital appreciation through investments listed mainly on the London Stock Exchange, primarily comprising equities but with some exposure also to fixed interest.  The portfolio comprises a mix of large, mid and smaller capitalised stocks.  A distinctive feature is an emphasis on investments in companies with exposure to economies growing at a faster rate than the UK.

CHAIRMAN'S STATEMENT

 

The half year returns were:

	At 28/02/14	At 31/08/14	Change	At 31/08/13
Net Asset Value per share	191.78p	186.98p	(2.5%)	180.75p
Share price	166.00p	164.25p	(1.1%)	140.00p
Discount	13.4%	12.2%	1.2%	22.5%
Gearing (net)	19.8%	18.8%	1.0%	8.5%

*Borrowings less net current assets (excluding short term borrowings) as a percentage of Net Asset Value

Review of the period

Overall the six months under review, markets have traded in a narrow range.  The FTSE100 has produced a tiny positive performance, but the FTSE All-share index declined by 0.7%, reflecting a return to underperformance by smaller, listed companies.  This has been detrimental to our portfolio of small growth companies. Despite the inevitability of monetary tightening at some stage, as economic growth gathers momentum in both the USA and UK, short dated bond yields have, unexpectedly, continued to fall.

Although consumer confidence in the USA has improved, the Federal Reserve continues to have concerns about the strength of US manufacturing and has confirmed that it is ready to introduce further stimulatory measures should growth falter.  Geopolitical tensions in the Ukraine and Syria/Iraq have increased the probability of decisions over raising interest rates being pushed into the future. The oil price has been unexpectedly weak, given the possible disruption to supplies and confounding many investors.   The service and house building sectors of the UK economy have produced positive surprises but manufacturing (motor cars apart) has been hit by continuing stagnation in Continental Europe.  Business investment is, however, finally starting to recover.

European policy, in particular, remains well behind the curve. M. Draghi gave advance warning of his intentions during the Jackson Hole conference and then acted decisively to announce more accommodative moves in an effort to avert deflation, but it remains to be seen how far the Germans will permit the ECB to go down the QE path.  The Japanese deflationary malaise of recent years is now stalking Continental Europe. 

Asian economies have continued, as forecast, to deliver superior rates of growth.  India and Indonesia, both populous nations, have started to accelerate their economies following recent elections.  Notwithstanding this and the strong balance of payments position of China and most Asian (India excepted) economies their stock-markets have remained out of favour.  The Chinese economy continues to slow and is not moving fast enough to a more sustainable economic balance with increased emphasis on consumption.  Investors continue to be concerned about the level of potential bad debts, particularly in the Chinese local authority sector. 

Looking ahead, the point at which the very significant monetary stimulus of recent years is withdrawn is likely to commence in the UK, followed by the US, but the issue remains when.  In so far as economic recovery is not derailed in the process, stock markets should benefit in what will remain by historical standards a low interest rate environment. 

Investment Policy

The Manager has continued to take the view that the superior growth prospects of Asian, relative to Western economies, argue for a major Asian weighting in the portfolio, largely through smaller Chinese companies listed on the AIM market in London.  This part of the portfolio has performed poorly, notwithstanding the prospects.  The balance of the portfolio comprises large, UK listed, stocks, particularly in the house building sector, and investments in domestic mid and smaller cap stocks with exciting growth prospects.  There is also a section of the portfolio oriented towards Energy and Metals, which should benefit from the recovery of the world economy and continuing growth in developing markets.  This part of the portfolio has also underperformed over the period, largely as a result of weaker than expected oil prices.

Over the period the Manager has added to the Trust's exposure to the UK house building sector (Berkeley Group) on the grounds that the sector is performing well, it is a high income producer and interest rates are unlikely to rise materially for some time. 

The Manager is also less optimistic going forward than in the recent past as regards the prospects for promising growth stocks, in the light of the global political problems which look set to continue for the foreseeable future and are causing a high level of caution among investors.

AIFMD

The Manager has been registered as a small AIFM and has arrangements in place to meet the requirements of this Directive.

Continuation Vote

At the recent AGM shareholders voted in favour of a three year extension to the life of the company but on the understanding that there would not be a further extension beyond this and that, within the coming 3 years, the Manager would shift the balance of the portfolio to more liquid stocks.  In due course, the Board would propose a merger/takeover of the Trust, which would also deliver cash to those wishing to exit.

Lord Flight

Chairman

27 October 2014

INTERIM MANAGEMENT REPORT

MANAGER'S REVIEW

The six month period under review has proved more difficult than anticipated by the Manager at a time when the US and UK economies were seen to be gradually recovering.  The London market enjoyed once again a roller-coaster ride, ending the half year with a small loss of 0.7%. Regrettably the fund fared even less well; the net asset value declined by 2.5%, for which I apologise to investors.

My comments of one year ago that 'investor's appetite for risk has certainly increased' has not proved entirely accurate, with only a few exceptions.  During the period, the FTSE 100, to which the portfolio is only modestly exposed on the grounds of relative lack of growth prospects, managed a minute gain whereas the rest of the market fell away, with the smallest capitalisations faring least well. Their day will come, but investors remain more nervous than I had imagined; I never thought that one could buy a stock trading at below its net cash value.  How wrong I could be.  The portfolio currently has no less than three of them, all with huge potential!

The portfolio strategy has not changed. I remain as cautious as ever about the prospects for the Eurozone. The celebrated commentators who forecast 'normalisation' for the region are talking complete 'bunkum'. Even Mr Draghi realises that he needs to resort to unusual measures to boost the region.  The world waits with bated breath for the asset purchasing programme to begin to stave off both recession and deflation which is slowly taking hold in several countries.  Most recently, Poland has reduced interest rates by a much larger than anticipated 0.5%, down to 2%, on the grounds that the government is so worried by the stagnation in the German economy on one flank and the effect of Russian sanctions on the other.

By contrast, the UK economy is performing remarkably well, indeed more strongly even than the US.  I shed not a tear though for Oliver Blanchard (IMF), who was so rude only last year to our Chancellor and am happy to mock the Europhiles, who in 1998 wanted the UK to join the euro to avoid the economy being left in the slow lane.

During the period I have made few changes to the portfolio, as I have found it a remarkably difficult task to select a company exposed to the UK domestic economy with good long term prospects. Once again in my career I have decided to invest heavily in well managed house-builders. Additions were made to the existing holding Persimmon.  I have also recently added new holdings in Berkeley Group and some Barratt using the proceeds from sales of Man Group and Kazakhmys. Whilst many forecasters are suggesting that interest rates will rise in the near future, I strongly disagree. I am happy to have adopted a contrarian view and increased the exposure to interest rate sensitive stocks. Furthermore, despite all the crowing about more housing being built, the net additions are only sufficient to account for the net increase to the population from immigration. This sector surely has, in a disinflationary era, superior pricing power.

The largest holding in the portfolio, BTG, exposed mainly to the US, has continued to perform well throughout the period. Despite being confident about further price appreciation, I have continued to trim the holding. Ashtead, which is the only other stock heavily exposed to the USA, has also performed superbly well and in view of its confidence about its future prospects has raised a considerable amount of new ten year finance at the lowly rate of 5.62%.

By contrast, two UK stocks, for which I have high hopes, have been notable underperformers. Gresham Computing has successfully been gaining new contracts but it has recently announced that these have taken longer than expected to get started. The company remains excited about its future prospects.  IGas Energy, the UK company with the greatest exposure to prospective shale acreage in the UK, has suffered in share price terms not only from a falling oil price but also from a dearth of news flow, being in the process of completing its deal to purchase Dart Energy. Hopefully, the imminent announcement of drilling results will bring positive change to the share price.

The performance of the exposure to lowly rated Chinese AIM listed shares has been truly awful. In brief, Asian Citrus, whose long term prospects are superb, abolished its dividend for the year, having been badly affected by a first ever hurricane, which destroyed its banana crop, further adding to its misery following two years of severe flooding.  Naibu, a well-managed sports shoe manufacturer, cut its dividend against the advice of the non-executives because it found difficulty in recruiting for its new factory, which it has now let. The company has decided to build another one further inland using much of the net cash balance (which amounts to more than the market capitalisation). Meanwhile West China Cement is suffering from severe price competition in part of its territory while another local company is under predatory attack from a much larger company.

Asian markets, with their far superior rates of growth, are finally showing the first signs of recovering their poise after an extremely difficult prior year. Recent events in Hong Kong have not helped sentiment nor has the prevalence of worries about mounting debt in China. It remains to be seen whether the recent elections of Mr. Modi in India and Joko Widodo in Indonesia will help these markets to regain their mojo! The holding in Aberdeen Asset Management is certainly well placed if they do.

Undoubtedly, my greatest disappointment arose from Emblaze (now renamed BSD Crown). The company proved to the jury in its recent patent case, heard in Cupertino, California, that it had a valid patent for its video streaming product, but it failed to convince the jurors that Apple Inc. had infringed it; a decision as weird, in my opinion, as that of the Florida jury which recently awarded a widow $31 billion in a tobacco case.  I await with bated breath the outcome of the appeal which is set for late October.  This company is also trading at below its net cash value.

Although this time of year often sees the low points in markets before the winter re-rating takes place, it is not difficult to feel that the world is a gloomy place.  The combination of deflation and stagnation in Europe, an apathetic US President who is bored of governing, a slowdown in China, near hostile conditions in the Ukraine and fierce fighting and the resumption of bombing in Iraq do not bode well for strong investor confidence.

Nevertheless, I consider that the portfolio has above average potential.

MJ Barstow                    

Mars Asset Management Ltd

27 October 2014

ANALYSIS OF NET ASSET VALUE RETURNS

		Movement		Attribution of
		in net assets		change to NAV
		£'000		pence per share
Revenue income		536		5.16
Trading losses		(17)		(0.16)
Expenses, costs and tax		(320)		(3.08)
Dividend paid		(395)		(3.80)
Capital losses		(303)		(2.92)
Of which:
Change in market		171		1.64
Net gearing		(437)		(4.20)
Stock selection		(37)		(0.36)
Total movement in NAV		(499)		(4.80)

SECTOR BREAKDOWN

As at 31 August 2014

SECTOR	AURORA
	%
Oil & Gas	18.2
Construction & Materials	15.4
Consumer Services	14.1
Financials	13.4
Information Technology	8.3
Resources (Mining)	7.9
Support Services	6.4
Consumer Goods	5.9
Industrials	2.6
Alternative Energy	1.7
	93.9
Fixed Interest Securities	6.1
	100.0

TOP TEN HOLDINGS

Consolidated portfolio

As at 31 August 2014

All holdings shown are of ordinary shares, unless shown otherwise			£'000	Portfolio
BTG	Health Care		2,306	10.0%
Persimmon	Housebuilding		1,852	8.0%
Royal Dutch Petroleum 'B'	Oil Integrated		1,782	7.7%
Ashtead Group	Support Services		1,469	6.4%
Aberdeen Asset Management	Investment		1,303	5.7%
Gresham Computing	Software		1,287	5.6%
Rio Tinto	Mining		964	4.2%
Berkeley Group	Housebuilding		958	4.1%
Lloyds Bank 11.75% PIBS	Fixed Income		924	4.0%
Pure Circle	Consumer Goods		920	4.0%
Total top ten holdings			13,765	59.7%
Other investments			9,339	40.3%
			23,104	100.0%

FORMAL DECLARATIONS

The Chairman's Statement on pages 1 and 2 and the Manager's Review on pages 4 to 5 provide details on the performance of the Company.  Those reports also include an indication of the important events that have occurred during the first six months of the financial year ending 28 February 2015 and the impact of those events on the condensed set of financial statements included in this Half-yearly financial report.

Details of the largest ten investments held at the period end and the structure of the portfolio at the period end are provided on page 6.

Principal Risks and Uncertainties

The Board considers that the main risks and uncertainties faced by the Company fall into the categories of (i) Market risks and (ii) Corporate governance and internal control risks.  A detailed explanation of these risks and uncertainties can be found in the Company's most recent Annual Report for the year ended 28 February 2014.  The principal risks and uncertainties facing the Company remain unchanged from those disclosed in the Annual Report.

Related Party Transactions

Details of the investment management arrangements were provided in the Annual Report.  There have been no material changes to the related party transactions described in the Annual Report that could have an effect on the financial position or performance of the Company.  Amounts payable to the investment manager in the period are detailed in the Income Statement on page 9.

Board of Directors

27 October 2014

DIRECTORS STATEMENT OF RESPONSIBILITY

FOR THE HALF YEARLY REPORT

The Directors confirm to the best of their knowledge that:

·     The condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting"; and

·     The interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FSA's Disclosure and Transparency Rules.

The half yearly financial report was approved by the Board on 27 October 2014 and the above responsibility statement was signed on its behalf by:

Lord Flight

Chairman

27 October 2014

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

		6 months to 31 August 2014		6 months to 31 August 2013
		(unaudited)		(unaudited)

		Revenue	Capital	Total		Revenue	Capital	Total
	Notes	£'000	£'000	£'000		£'000	£'000	£'000
(Losses)/gains on investments designated at fair value through profit or loss		(17)*	(303)	(320)		720*	(1,111)	(391)
Income
Investment income		536	-	536		515	-	515
		536	-	536		515	-	515
Expenses
Investment management fees		(45)	(45)	(90)		(41)	(41)	(82)
Other expenses		(126)	-	(126)		(114)	-	(114)
		(171)	(45)	(216)		(155)	(41)	(196)
Profit/(loss) before finance costs and tax		348	(348)	-		1,080	(1,152)	(72)
Finance costs		(52)	(52)	(104)		(48)	(48)	(96)
Profit/(loss) before tax		296	(400)	(104)		1,032	(1,200)	(168)
Tax		-	-	-		(2)	-	(2)
Profit/(loss) and total comprehensive income for the period		296	(400)	(104)		1,030	(1,200)	(170)
Earnings per share		2.85p	(3.85p)	(1.00p)		9.91p	(11.54p)	(1.63p)

The total column of this statement represents the Group's Income Statement, prepared in accordance with IFRS.  The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.  All items in the above statement derive from continuing operations.  All income is attributable to the equity holders of the parent company.  There are no minority interests.

*Trading subsidiary (losses) and gains.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

			Six months Ended		Six months Ended		Year ended
			31 August 2014		31 August 2013		28 February 2014
		Notes
			(unaudited)		(unaudited)		(audited)
			£'000		£'000		£'000
Opening balance			19,939		19,352		19,352
Total comprehensive income for the financial period/year			(104)		(170)		977
Dividends paid or legally committed to be paid on ordinary shares			(395)		(390)		(390)
Closing balance			19,440		18,792		19,939

CONSOLIDATED BALANCE SHEET

	At 31 August 2014		At 31 August 2013		At 28 February 2014
	(unaudited)		(unaudited)		(audited)
	£'000		£'000		£'000
Non-current assets Investments - designated at fair value through profit or loss	23,104		20,392		23,892
Current assets
Investments held for trading	143		2,269		170
Sales for future settlement	-		-		180
Other receivables	134		207		84
Cash and cash equivalents	171		10		140
	448		2,486		574
Total assets	23,552		22,878		24,466
Current liabilities
Bank loan/overdraft	(4,047)		(4,010)		(4,453)
Other payables	(65)		(76)		(74)
	(4,112)		(4,086)		(4,527)
Total assets less current liabilities	19,440		18,792		19,939
Equity
Called up share capital	3,598		3,598		3,598
Share premium account	10,997		10,997		10,997
Capital reserves	5,718		5,150		6,118
Revenue reserve	(873)		(953)		(774)
	19,440		18,792		19,939

Net asset value per ordinary share (excluding     shares held in Treasury)	186.98p		180.75p		191.78p
No. of ordinary shares in issue (excluding shares     held in Treasury)	10,397,059		10,397,059		10,397,059
No. of ordinary shares held in Treasury	3,994,330		3,994,330		3,994,330

CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 31 August 2014

	2014		2013
	£'000		£'000
	(unaudited)		(unaudited)
Cash flows from operating activities
Cash inflow from disposal of non-current operating assets	5,488		2,679
Cash outflow from purchase of non-current operating assets	(4,823)		(1,820)
Cash inflow from revenue income	462		471
Cash inflow/(outflow) from trading current asset investments	10		(561)
Cash outflow from expenses	(202)		(261)
Tax paid	-		(2)
Net cash flow from operating activities	935		506
Financing
Equity dividends paid	(395)		(390)
Interest and finance charges paid	(103)		(83)
Decrease in bank borrowings	(406)		(143)
Net cash flow from financing activities	(904)		(616)
Net increase/(decrease) in cash and cash equivalents	31		(110)
Cash and cash equivalents at beginning of period	140		120
Increase/(decrease) in cash	31		(110)
Cash and cash equivalents at end of period	171		10

NOTES

1.   Status of the financial statements

These financial statements are not the Group's statutory accounts as defined in section 434 of the Companies Act 2006. The financial information for the half years ended 31 August 2014 and 31 August 2013 has not been audited. 

The information for the year ended 28 February 2014 has been extracted from the latest published audited financial statements.  The audited financial statements for the year ended 28 February 2014 have been filed with the Registrar of Companies.  The report of the auditors on those accounts contained no qualification or statement under section 498(2) or (3) of the Companies Act 2006.  

The directors approved the half-yearly report on 27 October 2014.  This report is being sent to shareholders and copies will be made available to the public at the registered office of the Group.  The report will be available in electronic format on the Manager's website www.marsassetmanagement.co.uk

2.   Accounting policies

The half-yearly financial information has been prepared in accordance with IAS34 Interim Financial Reporting.  The accounting policies are unchanged from those used in the last annual financial statements except where otherwise stated.

3.   Purchase of own shares

The Company did not purchase any of its own shares during the half year ended 31 August 2014.  A total of 3,994,330 shares are being held in Treasury and are available for re-sale.  

4.   Earnings per share

Returns for the period ended on 31 August 2014 are stated by reference to the weighted average of 10,397,059 shares in issue during the period, excluding shares held in Treasury (2013: 10,397,059) shares in issue, excluding shares held in Treasury). 

5.   Dividends

In accordance with the stated policy of the Group, the directors do not recommend an interim dividend. 

The final dividend of 3.8p per share in respect of the year ended on 28 February 2014 was declared by the Annual General Meeting on 18 July 2014 and was paid on 29 July 2014.  This dividend was not reflected in the financial statements for the year ended 28 February 2014, but is reflected in the financial statements for the half year ended 31 August 2014.

6.   Related party transactions

Fees payable to the Manager are shown in the Consolidated Income Statement.  £36,000 (incl. VAT) was payable to the Administrator in respect of the period.  Fees were accrued of £15,000 to the Manager and £6,000 (incl. VAT) to the Administrator at 31 August 2014; these fees were paid following the period end.

Mr Barstow purchased 20,000 shares in the Company during the period.

DIRECTORS AND ADVISERS

DIRECTORS	INVESTMENT MANAGER
Lord Flight (chairman)	Mars Asset Management Limited
MJ Barstow FCA	10-11 Charterhouse Square
The Honourable James Nelson	London EC1M 6LQ
RM Martin	Tel:  [phone]
BANKERS	SECRETARY & REGISTERED OFFICE
Coutts & Co	Cavendish Administration Limited
440 Strand	145-157 St John Street
London WC2R 0QS	London EC1V 4RU
	Tel: [phone]
CUSTODIAN	ADMINISTRATOR
The Northern Trust Company	Cavendish Administration Limited
50 Bank Street	145-157 St John Street
London E14 5NT	London EC1V 4RU
REGISTRARS	AUDITORS
Capita Registrars	Grant Thornton UK LLP
Northern House	30 Finsbury Square
Woodsome Park	London EC2P 2YU
Fenay Bridge
Huddersfield HD8 0LA

STOCKBROKER                       

Cenkos Securities plc

6.7.8 Tokenhouse Yard

London EC2R 7AS

 

END

 

 

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