Final Results

RNS Number : 7088Z

City Natural Res High Yield Tst PLC

28 September 2009

 



To:             RNS

From:        City Natural Resources High Yield Trust plc

Date:         28 September 2009

Audited results for the year ended 30 June 2009

• Net asset value total return of -24.1 per cent since 1 July 2008 compared to a total return of -30.7 per cent from the benchmark index.

• Ordinary share price total return since 1 July 2008 of -28.4 per cent.

• Net asset value total return of 258.9 per cent since 1 August 2003 compared to a total return of 120.2 per cent from the benchmark index.

• Ordinary share price total return since 1 August 2003 of 184.9 per cent.

• Dividend of 3.07 pence per share for the year, an increase of 15.8 per cent.

The Chairman, Geoff Burns said,

Investment Performance and Strategy

At 30 June 2009 the Company's fully diluted net asset value stood at 165.5 pence, giving a net asset value total return for the year of -24.1 per cent.

I commented last year on the volatility that the net asset value had demonstrated in the previous twelve months, and this year proved to be no different. During the period the global financial system neared meltdown, commodity prices fluctuated wildly, and recession took hold of the Western world. The Company's net asset value registered a low of 102.9 pence in October 2008, before recovering strongly in the post March return of risk appetite, to the year end level of 165.5 pence. It has since continued to push on and stands at 204.8 pence as I write.

This recovery put the Company back into the top ten investment trust performers in both net asset value and share price performers in the six months to 30 June 2009. Commodity price recovery, and its effect on the portfolio drove this, with oil, copper, nickel and uranium all contributing, while gold suffered from the strengthening dollar and investors' return to riskier assets. 

Benchmark 

The total return on the Company's composite benchmark index during the year to 30 June 2009 was -30.7 per cent. This brought its total return since 1 August 2003 to 120.3 per cent, while the Company's net asset value total return over the same period was 258.9 per cent and its share price total return 184.9 per cent.

Share Price Performance

The share price total return for the year was -28.4 per cent. A feature of the year has been the discount which, despite the recovery in returns, has remained stubbornly above the levels of previous years. The Board and Manager continue to work to minimise this figure, but in all probability it will require a period of stability and reduced volatility to mitigate it.

The warrant price echoed in an exaggerated fashion the volatility of the share price during the year, but as we move to the final warrant exercise date of 31 October 2009 it can be expected to track the share price closely. As things stand, the Board expects all 3.9 million warrants in issue to be exercised, adding £3.3 million to the Company's assets. 

Income

It has been a conscious policy, while the assets have experienced such turbulence, to focus on income enhancement and increasing the dividend. The fourth interim dividend of 1.42 pence per share paid at the end of August took dividends for the year to 3.07 pence per share. This represents a 15.8 per cent increase over last year's level, itself a 12.8 per cent increase on the dividends paid in 2007.

Earnings per share rose from 3.1 pence to 4.1 pence, allowing 1.0 pence per share to be added to the Company's revenue reserve. The revenue reserve now stands at more than 4.3 pence per share. The yield on the Company's shares is 1.9 per cent as I write.

Outlook

With such a strong recovery in commodity prices, one wonders whether a pause for breath might not be healthy. The great uncertainty is whether there is a fundamental revival in demand, or is it the result of restocking and a return to an acceptance of risk?

While most commodities recovered, gold remained rangebound until this month saw a renewed breach of the USD 1,000 level as risk appetite turned to other assets, but there is a fascinating potential here for the tables to be turned. Never before has so much money been printed in such quantities over such a short time. Economists cannot agree on the impact of quantitative easing on inflation and the real economy, nor the timescale. There is a risk that an overshoot in monetary expansion may occur, with inflation resurging. This, and the possible weakening of the dollar that would result, would be positive for gold, and we believe it appropriate to remain seriously committed to it.

The concern over the pace of recovery in underlying demand for commodities applies to most of them, given uncertainty over global growth. However, in the case of uranium the longer term energy urgency is not diminished by the current downturn. Current oil and gas supply projections remain inadequate in the light of forecast energy demand, countries such as the UK have no non nuclear solution at this moment, and China has recently signalled its intention to increase its nuclear targets. 

Although there is at the time of writing optimism over the prospects for an early and rapid recovery, there remains in our view a risk that disappointment will arrive. This is unlikely to mean a return to October 2008, but could mean a more drawn out recovery process than many would like to believe. There is no doubt, though, that the Asian economies have by and large shown relative resilience, and the commodity story remains solid over the medium term. We are confident that our strategy of providing a carefully selected exposure to these assets, combined with holding more defensive resources, and strong income growth, will provide positive shareholder returns. 

Manager's Review

The traumatic conditions of last year seem but a distant memory. Swift action by the Central Banks prevented the banking crisis turning into a depression and, while any recovery is bound to be slow, there has been enough confidence in the system to encourage a sharp recovery in almost all financial instruments.

Commodities, in particular, have been huge beneficiaries in this turnaround with oil proving particularly resilient. From a high of US$147 per barrel, the price collapsed to US$33 only to more than double its current level of US$66. Not surprisingly the relevant shares were equally volatile, although our three principal holdings of Nido, Horizon and Kairiki showed a fair degree of stability. Showing much less volatility was the gold price. It might have been anticipated that given the demise of the US dollar, bullion would have performed strongly, but in the event it would have to be described as disappointing. In fact, as measured

against the stronger currencies, the price actually went down. Nevertheless, we remain convinced that a bull market is a distinct possibility and are happy to retain our holdings in Goldcorp, Randgold and Lihir.

Once again, our pride of place went to our two related uranium stocks, Extract Resources and Kalahari Minerals. In our last half yearly report we mentioned that their Rossing South deposit might well contain two hundred and fifty million pounds of U3O8. In the event the resource is already up to two hundred and sixty seven million pounds and it is not inconceivable that this could double within the next year. Expedience suggested that we take some profits but we remain firm holders of the remaining shares. The drive for uranium, whilst worldwide, is very much influenced by China and other Eastern nations and, as I write this report, China's southern Guangdong province is planning a six-fold increase in its nuclear power generating capacity. Interestingly this target is approximately 2.6 times China's total nuclear generating capacity. Even more interesting is the lack of any direction as to where the necessary uranium might come from. We remain committed to the view that within the next two years there could well be a severe shortage of physical delivery.

As long as China's economic growth patterns remain, the commodity markets should at least hold current levels. Both the Trust's asset value and share price moved ahead sharply in the first six months of the current year, a trend which has continued subsequently. As is so often the case, commodities frequently seem to take turns in showing strong performance and it would not surprise us to see some of the more pedestrian performers, such as palm oil, pick up in the second half of the year. 

Finally, we constantly refer to the importance of income and we were pleased to be able to increase our dividend for the financial year by 15.8 per cent. We have added to our holdings of the bonds in Fortescue and REA and remain on the lookout for new investments in this sector.

Enquiries:

Richard Lockwood, New City Investment Managers:                 0207 557 4370
Martin Cassels, F&C Investment Business Ltd:                         0207 628 8000

  Audited Income Statement

for the year ended 30 June 2009

	Notes		2009	2009	2009
		Revenue		Capital	Total
		£'000		£'000	£'000
Realised losses on investments		-		(15,254)	(15,254)
Investment holding losses		-		(22,113)	(22,113)
Exchange losses		-		(440)	(440)
Income		4,539		-	4,539
Investment management fee		(279)		(838)	(1,117)
Vat refund on management fees		41		124	165
Other expenses		(528)		(6)	(534)
Net return before finance costs and taxation		3,773		(38,527)	(34,754)
Interest payable and similar charges		(258)		(776)	(1,034)
Net return on ordinary activities before taxation		3,515		(39,303)	(35,788)
Tax on ordinary activities		(914)		521	(393)
Net return attributable to equity shareholders		2,601		(38,782)	(36,181)
Return per ordinary share	1
Basic		4.13p		(61.65)p	(57.52)p
Fully diluted		4.07p		(60.70)p	(56.63)p

Reconciliation of Movements in Shareholders' Funds

	Year ended 30 June 2009 Audited  £'000	Year ended 30 June 2008 Audited  £'000
Opening equity shareholders' funds	145,131	125,928
(Losses) / gains on investments	(37,367)	20,999
Return on ordinary activities after taxation	2,601	1,948
Costs charged to capital	(1,099)	(1,920)
VAT refund on management fees	124	-
Exchange losses	(440)	(261)
Exercise of warrants	33	9
Dividends paid	(1,667)	(1,572)
Closing equity shareholders' funds	107,316	145,131

  Audited Income Statement

for the year ended 30 June 2008 

	Notes		2008	2008	2008
		Revenue		Capital	Total
		£'000		£'000	£'000
Realised gains on investments		-		11,233	11,233
Investment holdings gains		-		9,766	9,766
Exchange losses		-		(261)	(261)
Income		3,864		-	3,864
Investment management fee		(412)		(1,235)	(1,647)
Other expenses		(394)		(8)	(402)
Net return before finance costs and taxation		3,058		19,495	22,553
Interest payable and similar charges		(510)		(1,353)	(1,863)
Net return on ordinary activities before taxation		2,548		18,142	20,690
Tax on ordinary activities		(600)		676	76
Net return attributable to equity shareholders		1,948		18,818	20,766
Return per ordinary share	1
Basic		3.10p		29.93p	33.03p
Fully diluted		2.99p		28.93p	31.92p

   Balance Sheet as at 30 June

	2009 Audited		2008 Audited
	£'000		£'000
Fixed assets
Investments	114,447		170,166
Current assets
Debtors	1,046		1,461
Cash at bank and on deposit	5,270		3,284
	6,316		4,745
Creditors: amounts falling due within one year	(13,447)		(29,780)
Net current liabilities	(7,131)		(25,035)
Net assets	107,316		145,131
Capital and reserves
Called-up share capital	15,731		15,721
Special distributable reserve	30,386		30,386
Share premium	80		34
Warrant reserve	2,313		2,336
Capital reserves	56,085		94,867
Revenue reserve	2,721		1,787
Equity shareholders' funds	107,316		145,131
Net asset value per ordinary share  2
Basic		170.55p		230.79p
Fully diluted		165.52p		222.11p

Cash Flow Statement for the year to 30 June

	2009 Audited	2008 Audited
	£'000	£'000
Operating activities
Investment income received	5,049	3,930
Deposit interest received	82	68
Investment management fees paid	(1,152)	(1,626)
Other cash payments	(448)	(86)
Net cash inflow from operating activities	3,531	2,286
Servicing of finance
Interest on loan	(1,386)	(1,621)
Bank overdraft interest	-	(59)
Net cash outflow from servicing of finance	(1,386)	(1,680)
Taxation
Tax paid	(86)	(170)
Capital expenditure and financial investment
Purchases of investments	(36,535)	(57,679)
Disposals of investments	53,536	59,924
Net cash inflow from capital expenditure and financial investment	17,001	2,245
Dividends
Equity dividends paid	(1,667)	(1,572)
Net cash inflow before financing	17,393	1,109
Financing
Bank loan (repaid) / drawndown	(15,000)	2,000
Issue of ordinary shares following warrant exercise	33	9
Net cash (outflow) / inflow from financing	(14,967)	2,009
Increase in cash	2,426	3,118
Reconciliation of net cash flow to movement in net debt Increase in cash in the year	2,426	3,118
Cash outflow / (inflow) from repayment / (drawdown) of loans	15,000	(2,000)
Exchange losses	(440)	(261)
Movement in net debt in the year	16,986	857
Opening net debt at 1 July	(23,716)	(24,573)
Closing net debt at 30 June	(6,730)	(23,716)

Notes

1.                  The basic revenue return per ordinary share is based on the net profit after taxation of £2,601,000 (2008: £1,948,000) and on 62,909,535 (2008: 62,881,845) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

 

The basic capital return per ordinary share is based on a net capital loss of £38,782,000 (2008: a gain of £18,818,000) and on 62,909,535 (2008: 62,881,845) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

 

The fully diluted revenue return per ordinary share is based on net profit after tax of £2,601,000 (2008: £1,948,000) and on 63,896,056 (2008: 65,059,724) shares, being the weighted average number of ordinary shares and warrants in issue during the year.

 

The fully diluted capital return per ordinary share is based on a net capital loss of £38,782,000 (2008: a gain of £18,818,000) and on 63,896,056 (2008: 65,059,724) shares, being the weighted average number of ordinary shares and warrants in issue during the year.

 

2.         The basic net asset value per ordinary share of 170.55p (2008: 230.79p) is based on 62,924,229 shares (2008: 62,885,643), being the total number of ordinary shares in issue at the end of the year. The fully diluted net asset value per ordinary share is 165.52p (2008: 222.11p).

 

          On 17 November 2008 the Company issued 38,586 ordinary shares of 25p each following the exercise of 38,586 warrants. As at 30 June 2009 there were 3,932,914 (2008: 3,971,500) warrants in issue. Each warrant confers the right to subscribe for one new ordinary share at 85 pence on 31 October 2009 (or, if later, the date being 30 days after the date in which copies of the Company accounts are dispatched to shareholders). The warrant price as at 30 June 2009 was 46.3 pence per warrant (2008: 109.5 pence).  

         

3.         The Board declared a fourth interim dividend of 1.42p per share which was paid on 28 August 2009 to shareholders on the register on 7 August 2009, having an ex-dividend date of 5 August 2009. 

 

4.         The following are considered related parties: the Board of Directors (“the Board”) and CQS/New City Investment Managers Limited (“the Manager”). Mr Prickett is also a Director of Patagonia Gold. At the year end the company held 2,150,000 shares in Patagonia Gold valued at £290,000. Mr Collins is also a Director of Midas Capital plc. Midas Capital is the parent company of Intelli Corporate Finance Limited. Intelli provide brokerage services to the Company. There are no other transactions with the Board other than aggregated remuneration for services as Directors

5.        The financial information set out above does not constitute the Company’s statutory accounts for the year ended 30 June 2009.  The financial information for 2008 is derived from the statutory accounts for 2008 which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2008 accounts, their report was unqualified and did not contain a statement under section 498 of the Companies Act 2006.  The statutory accounts for 2009 are audited and the Auditors have issued an unqualified opinion. The statutory accounts for 2009 will be finalised on the basis of the financial information presented in this announcement and will be delivered to the Registrar of Companies following the Company’s Annual General Meeting.

 

Principal Risks

The Company's assets consist principally of listed equities and fixed interest securities and its principal risks are therefore market related. The Company is also exposed to currency risk in respect of the markets in which it invests. These risks, which have not changed materially since the annual report for the year ended 30 June 2008, and the way in which they are managed, are described in more detail in the annual report for the year ended 30 June 2009. The report will be made available on the manager's website www.ncim.co.uk during September 2009.

The Company's financial instruments comprise its investment portfolio, cash balances, bank loans, 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 flexible borrowings for short term purposes, as detailed in the Chairman's Statement, to achieve improved performance in rising markets and to seek to enhance the returns to shareholders, when considered appropriate by the Investment Manager. 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 of the last traded price depending on the convention of the exchange on which the investment is listed. Unlisted investments are valued by the Directors on the basis of all information available to them at the time of valuation. The fair value of all other financial assets and liabilities is represented by their carrying value in the Balance Sheet. The fair value of the loan is not materially different from its 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 the 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 many not be able to liquidate quickly its investments.

Market price risk

Market price risk arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. To mitigate the risk the Board's investment strategy is to select investments for their fundamental value. Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long term investments. An appropriate spread of investments is held in the portfolio in order to reduce both the statistical risk and the risk arising from factors specific to a country or sector. The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy.  

Interest rate risk

Financial assets

Bond and preference share yields, and their prices, are determined by market perception as to the appropriate level of yields given the economic background. Key determinants include economic growth prospects, inflation, the Government's fiscal position, short term interest rates and international market comparisons. The Investment Manager takes all these factors into account when making any investment decisions as well as considering the financial standing of the potential investee company. 

Returns from bonds and preference shares are fixed at the time of purchase, as the fixed coupon payments are known, as are the final redemption proceeds. Consequentially, if a bond is held until its redemption date, the total return achieved is unaltered from its purchase date. However, over the life of a bond the market price at any given time will depend on the market environment at that time. Therefore, a bond sold before its redemption date is likely to have a different price to its purchase level and a profit or loss may be incurred.

Floating rate

When the Company retains cash balances they are held in floating rate 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. 

Financial liabilities

The Company finances its operations through its bank loan. The Company has borrowed in Sterling at a floating rate of interest. The Board sets borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. 

Foreign Currency Risk

The Company invests in overseas securities and may hold foreign currency cash balances which give rise to currency risks. The Company does not hedge its currency exposure and as a result the movement of exchange rates between pounds sterling and the other currencies in which the Company's investments are denominated may have a material effect, unfavourable or favourable, on the returns otherwise experienced on the investments made by the Company. Although the Investment Manager may seek to manage all or part of the Company's foreign exchange exposure, there is no assurance that this can be performed effectively. 

The Manager does not intend to hedge the Company's foreign currency exposure at the present time.

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 Investment Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. The carrying amounts of financial assets best represent the maximum credit risk exposure at the balance sheet date. 

Credit risk on fixed interest investments is considered to be part of market price risk.

Credit risk on unlisted investments is considered to be part of market price risk.

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 high credit quality of the brokers used. The Board monitors the quality of service provided by the brokers used to further mitigate this risk. 

The cash held by the Company and all the assets of the Company which are traded on a recognised exchange are held by HSBC 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.

Should the credit quality or the financial position of HSBC Bank deteriorate significantly the Investment Manager will move the cash holdings to another bank. 

Liquidity risk

The Company's financial instruments include investments in unlisted investments which are not traded in an organised public market and which generally may be illiquid. As a result, the Company may not be able to liquidate there investments at an amount close to their fair value. 

The Company's liquidity risk is managed on an ongoing basis by the Investment Manager. The Company's overall liquidity risks are monitored on a quarterly basis by the Board. 

The Company maintains sufficient cash and readily realisable securities to pay accounts payable and accrued expenses. 

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 June 2009, of which this statement of results is an extract:

• The financial statements have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

• The Report of the Directors includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

Geoff Burns, Chairman

28 September 2009

 

END

 

 

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