Annual Report and Accounts

RNS Number : 5720P

Pacific Assets Trust PLC

27 March 2009

 



PACIFIC ASSETS TRUST PLC

AUDITED RESULTS FOR YEAR ENDED 31 JANUARY 2009

DATE: 27 March 2009

Financial Highlights

• Net asset value per share decreased by 42.3 per cent

• Share price decreased by 40.9 per cent

• Final dividend increased by 15.2 per cent to 1.29 pence per share

Chairman's Statement

In a few short months, the world has changed from optimism and prosperity to a period of uncertainty backed by a financial crisis unprecedented for a generation.

Your Company has not escaped this turmoil and, following what had been a relatively good period of performance, the year ended 31 January 2009 was a difficult year. The net asset value per share fell by 42.3 per cent to 74.15p and the net asset value total return for the year was -41.3 per cent, ranking the Company last in its peer group of eight companies. By comparison, the total return from the MSCI All Country Far East ex Japan Index was -25.2 per cent. This underperformance caused the Company to fall from third to last in the peer group over the longer three year comparative period.

The disappointing performance of the Company over the year was a function of being geared in a falling market, higher than desirable exposure to small and medium sized companies, and a belief that the Chinese growth story would hold up. The marked contraction in Chinese growth in the third quarter of 2008 led to a reappraisal of the Company's strategy and a more defensive stance was adopted which has stabilised recent performance and improved relative returns in comparison to the peer group.

For much of the year China remained a source of relative optimism. Sustained growth encouraged the authorities to maintain, with the benefit of hindsight, an excessively restrictive monetary policy. Then, in recognition of sharply deteriorating economic conditions in the third quarter, following the collapse in world trade, the Chinese government aggressively adopted an ambitious pro-growth set of policies. Interest rates were slashed, export constraints relaxed and a huge fiscal stimulus package of Rmb4 trillion (US$585 billion) was announced. The tentative signals are that these measures are gaining some traction. However, it remains too early to know if they can reignite sufficient economic activity to support the region. 

With the western world mired in recession, Asia's sensitivity to exports has been revealed once more. All Asian countries, apart from China, India and Indonesia, are expected to fall into recession in 2009. Following the deleveraging that the region underwent after the 1997/98 Asian financial crisis, governments, companies and individuals are significantly better positioned than their western counterparts to weather the unfolding downturn, and to take advantage of any recovery whenever it emerges. 

Should western governments succeed in their attempts to restore growth, Asia appears well positioned to benefit, but in the near term limited corporate earnings visibility and persistent economic uncertainty point towards extended market volatility and investor caution. A sustained market recovery is only likely once the global financial system has stabilised. At that point credit markets would be expected to recover, risk aversion narrow, and the Asian growth story regain investor interest.

Shareholder Value

In line with the fall in the net asset value per share, the Company's share price fell by 40.9 per cent during the year, to 68.25p per share. The share price discount to net asset value per share was 8.0 per cent as at 31 January 2009 compared with 10.1 per cent as at 31 January 2008.

The Company did not buy back any shares during the year. However, the Board believes that it is important to have a buy back facility in place and will therefore seek to renew the share buy back authority at the forthcoming Annual General Meeting.

Gearing

As a consequence of an increasingly cautious view adopted belatedly towards the end of the year, the Manager reduced the level of gearing such that the Company had no borrowings at the year end. The net cash position of 4.9 per cent as at 31 January 2009 compares with net gearing of 5.9 per cent as at 31 January 2008. 

The Company's borrowing arrangements comprise flexible US dollar denominated facilities which provide the Company with the ability to increase its gearing to the stated limit of 20 per cent of shareholders' funds, when the Manager considers it appropriate to do so.

Earnings and Dividends

The Company's revenue earnings per share for the year were 1.78p, which compares to 1.24p for the previous year. The increase is attributable principally to increased dividends from companies within the portfolio, although there was also a small benefit from the recovery of VAT as explained in more detail below.

The Board recommends a final dividend of 1.29p per share, representing an increase of 15.2 per cent on the previous year, which will be paid on 19 June 2009 to those shareholders on the register on 22 May 2009.

VAT on Management Fees

As the Company invests outside the EU it is able to reclaim VAT incurred on expenses paid. The Board did not therefore expect the Company to benefit significantly from the recent rulings in favour of investment trusts exempting investment management fees from VAT. The Board did, however, take the necessary steps to ensure that the Company's position was protected and was pleased to receive a VAT repayment of £105,000. In the accounts this has been allocated between revenue and capital in the same proportion as the original VAT was paid. In addition to this receipt, the Company received interest of £65,000 which has been allocated to revenue. 

Annual General Meeting

This year's Annual General Meeting will be held at 11.45 am on Thursday 11 June 2009 at the offices of F&C Asset Management plc, Exchange House, Primrose Street, London EC2A 2NY. I would encourage shareholders to attend the Meeting as it is a good opportunity to meet the Directors and Manager. The formal business of the Meeting will be followed by a presentation from the Company's Manager, Peter Dalgliesh.

Invitations to the Meeting are included with the Annual Report and shareholders are requested to reply to the Company Secretary if they are able to attend. I would encourage shareholders who are unable to attend to complete their form of proxy, which is included with the Annual Report. This will ensure that their votes are represented at the Meeting.

Outlook

It is likely that conditions in the world's major economies will remain difficult for some time. Although stock market valuations in the Asia Pacific region appear to offer good value, the region is dependent on an economic recovery in the rest of the world. When evidence of this emerges, Asia Pacific stockmarkets will prosper once again.

David Nichol

Chairman

Manager's Review

Market Review

Despite the unfolding credit crisis in the western world, at the start of 2008 Asia appeared reasonably well positioned to withstand the impacts of a slowing external sector as corporate debt levels were low, the regional financial system was solid, currencies were stable and domestic economic activity was buoyant. Furthermore, the momentum in Chinese growth, although off its peak, suggested that regional growth could be sustained. This belief led the MSCI All Country Far East ex Japan Index to hold up well through to the end of May 2008, outperforming the S&P 500 and tracking in line with the MSCI All Country World Index (in sterling terms). A cautiously optimistic stance towards the Chinese growth story at this time meant that the Company's gearing averaged 6-7 per cent.

However, following the announcement of US financial bankruptcies and forced government intervention, risk aversion swiftly set in. Global asset allocators sought safety in bonds at the expense of the faster growth, higher beta Asian markets. Liquidity flowed out of the region and Asia underperformed, yet currencies and macroeconomic data remained resilient. Asian corporate earnings continued to hold up, maintaining valuations, and with the Chinese authorities appearing to be 'in control' of their economy the Company retained a positive stance towards the region with a bias towards internally driven growth, represented through overweight positions in industrials and materials and an underweight stance in exporters. 

The lead indicator of Chinese power generation materially contracted in the third quarter which, when combined with the sharp slowdown of international trade in October/November 2008, acted as a signal for the Company to adopt a defensive strategy. Cyclical exposure to industrials was cut back, the materials weighting was taken to zero, overweight positions in healthcare, telecoms and consumer staples were put in place, small cap positions were reduced and gearing was reversed to a net cash position of nearly 5 per cent. Disappointingly, the damage to performance had already been inflicted with the Company's net asset value per share ending the year down 41.3 per cent versus the MSCI All Country Far East ex Japan Index's decline of 25.2 per cent (total returns in sterling terms), placing it last in its peer group of eight companies. As a source of modest consolation, the defensive strategy generated improved relative performance versus both the index and the peer group over the final few months of the reporting period.

Within the region, the least poor markets were Malaysia (-20.0 per cent), China (-20.7 per cent) and Singapore (-21.6 per cent). Disappointing stock selection mitigated the relative benefit to the Company of the positive bias towards China and Malaysia. The underweight stance in Chinese financials due to rich valuations, slowing loan growth, narrowing net interest margins and a concern over deteriorating asset quality weighed heavily on performance as the sector performed better than expected. Similarly, despite the Chinese government announcing a Rmb4 trillion (US$585 billion) stimulus package with a focus on infrastructure, railway, education and healthcare, the Company's medical equipment holdings of Mindray Medical and China Medical Technology performed poorly. In contrast, the railway related play of China South Locomotive Rolling Stock performed well.

Malaysia and Thailand experienced troublesome periods of political instability, yet both appear to have potentially muddled through, offering room for optimism that the economic outlook should improve once the world economy finds a floor. Having grown at a benign pace over the last 3-4 years, the financial systems of Malaysia and Thailand rank relatively well. Although the Company remains heavily underweight financials as a whole, Malaysian and Thai banks look interesting though richer Malaysian valuations lead us to prefer investments in Thailand.

Given the downdraft in global economic activity, the Company maintained a negative bias to the export dependent Korean and Taiwanese markets as well as the small, open and therefore vulnerable markets of Hong Kong ('HK') and Singapore. Korea was one of the worst performing markets, falling over 31 per cent, but Singapore and HK held up better than expected. Being underweight property developers and banks in HK assisted performance, but the unwillingness to pay up for richly rated HK utilities weighed heavily on performance. Similarly, the sale of United Overseas Bank in Singapore, because of concern over deteriorating asset quality and weakening loan growth, was detrimental to performance. However, in their latest quarterly earnings report, asset quality has indeed collapsed with a 26 per cent increase in non-performing loans, compared with the previous quarter.

India and Indonesia were the two worst performing markets, falling 44.2 per cent and 43.3 per cent respectively. Heightened uncertainty over their fiscal positions led to weakness in their currencies with a subsequent expansion in government bond yields. The weakness in commodity prices reduced Indonesia's net exports impairing the market's earnings, whilst the slow down in domestic economic activity in India led to a de-rating of the market multiple back towards the regional average.

Outlook

A crisis of confidence has emerged in the global real economy as well as in the equity markets, which is likely to limit any theories of a sharp rebound. GDP growth forecasts have been slashed across the region with only China, India and Indonesia remaining in positive territory. Financial deleveraging and the re-balancing of the US consumer after years of excess spending will keep the underlying global growth dynamic weak for much of 2009. Fiscal policy may provide some temporary excitement, but until inventories are depleted, employment stabilises and the global financial sector is back on its feet it appears hard to confidently predict a resumption of sustainable economic activity, implying that any near term equity market bounces are to be treated with caution rather than excitement.

Peter Dalgliesh

Investment manager

F&C Investment Business Limited

PACIFIC ASSETS TRUST PLC

Audited Income Statement

For the year ended 31 January 2009

	Revenue	Capital	Total
	£'000	£'000	£'000
Losses on investments	-	(61,943)	(61,943)
Exchange differences	-	(2,498)	(2,498)
Income	4,026	-	4,026
Investment management fee	(314)	(942)	(1,256)
Other expenses	(673)	-	(673)
Net return before finance
costs and taxation	3,039	(65,383)	(62,344)
Interest payable	(90)	(271)	(361)
Return on ordinary activities
before tax	2,949	(65,654)	(62,705)
Tax on ordinary activities	(846)	532	(314)
Return attributable to
equity shareholders	2,103	(65,122)	(63,019)
Return per Ordinary Share (p):	1.78	(55.03)	(53.25)

The total column of this statement represents the profit and loss account of the Company. A statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement.

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

No operations were acquired or discontinued in the year. 

PACIFIC ASSETS TRUST PLC

Audited Income Statement

For the year ended 31 January 2008

	Revenue	Capital	Total
	£'000	£'000	£'000
Gains on investments	-	30,025	30,025
Exchange differences	-	153	153
Income	3,306	-	3,306
Investment management fee	(389)	(1,166)	(1,555)
Other expenses	(569)	-	(569)
Net return before finance
costs and taxation	2,348	29,012	31,360
Interest payable	(243)	(730)	(973)
Return on ordinary activities
before tax	2,105	28,282	30,387
Tax on ordinary activities	(642)	559	(83)
Return attributable to
equity shareholders	1,463	28,841	30,304
Return per Ordinary Share (p):	1.24	24.35	25.59

PACIFIC ASSETS TRUST PLC

Audited Reconciliation of Movements in Shareholders' Funds

For the year ended 31 January

	2009	2008
	£'000	£'000
Opening shareholders' funds	152,105	123,616
Return for the year	(63,019)	30,304
Dividends paid	(1,326)	(1,326)
Share buy backs	-	(489)
Closing shareholders' funds	87,760	152,105

PACIFIC ASSETS TRUST PLC
Audited Balance sheet
As at 31 January

		2009	2008
		£'000	£'000
Fixed assets
Investments		83,487	161,098
Current assets
Debtors		1,299	3,627
Cash at bank and on deposit		3,879	-
		5,178	3,627
Creditors: amounts falling due within one year		(905)	(12,620)
Net current assets/(liabilities)		4,273	(8,993)
Net assets		87,760	152,105
Capital and reserves
Called-up share capital		14,794	14,794
Share premium account		4	4
Capital redemption reserve		1,460	1,460
Special reserve		16,222	16,222
Capital reserve		50,952	116,074
Revenue reserve		4,328	3,551
Equity shareholders' funds		87,760	152,105
Net asset value per Ordinary Share (p):		74.15	128.52

  PACIFIC ASSETS TRUST PLC

Audited Cash Flow Statement 

For the year ended 31 January 

	2009 £'000	2008 £'000
Operating activities
Investment income received	3,675	3,234
Deposit interest received	100	24
Investment management fee paid	(1,228)	(1,668)
Other cash payments	(768)	(524)
Net cash inflow from operating activities	1,779	1,066
Servicing of finance
Interest paid on bank loans and overdrafts	(381)	(994)
Net cash outflow from servicing of finance	(381)	(994)
Capital expenditure and financial investment
Purchase of investments	(101,286)	(88,739)
Disposal of investments	117,662	89,940
Net cash inflow from investing activities	16,376	1,201
Equity dividends paid	(1,326)	(1,326)
Net cash inflow/(outflow) before financing	16,448	(53)
Financing
Loans drawn down	10,508	10,033
Loans repaid	(23,716)	(10,162)
Own shares acquired	-	(489)
Net cash outflow from financing	(13,208)	(618)
Increase/(decrease) in cash	3,240	(671)
Reconciliation of net cash flow to movement in net (debt)/funds
Increase/(decrease) in cash in the year	3,240	(671)
Loans drawn down	(10,508)	(10,033)
Loans repaid	23,716	10,162
Change in net funds resulting from cash flows	16,448	(542)
Currency (losses)/gains	(2,498)	153
Movement in net debt	13,950	(389)
Net debt at 1 February	(10,071)	(9,682)
Net funds/(debt) at 31 January	3,879	(10,071)

Principal Risks and Risk Management

The Company's assets consist principally of listed securities and its main risks are therefore market related. The Company is also exposed to currency risk in respect of the 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 beyond the control of the Board and the Manager such as political change, natural disasters, terrorism, protectionism, inflation or deflation, economic recessions and movements in interest rates could affect share prices in particular markets.

• Investment and strategic - incorrect strategy, country and sector 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 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 Manager's accounting systems or disruption to the Manager's 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 Manager 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 loan 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. 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 31 January 2009, 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

D B Nichol

Director

Notes:

• The results, which were approved by the Board on 26 March 2009, have been prepared in accordance with applicable accounting standards and the AIC's Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in January 2009.

The accounting policies adopted in the preparation of the annual report and financial statements are consistent with those followed in the previous year. 

     2.    Financial instruments

The Company's financial instruments comprise its investment portfolio, 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, as detailed in the Chairman's Statement, 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. Unlisted investments are valued by the Directors on the basis of all the 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 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.

             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.

The Company has floating rate liabilities that are denominated in US dollars. The benchmark rate which determines the interest payments made on the revolving credit facility is based on the rate set by the US Federal Reserve.

            (b) Fixed rate

            The Company does not hold any fixed interest investments. 

            Foreign currency risk

The Company invests in overseas securities and holds foreign currency cash balances which give rise to currency risks. It is not the Company's policy to hedge this risk on a continuing basis but it may do so from time to 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 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 high credit quality of the brokers used. The Manager monitors the quality of service provided by the brokers used to further mitigate this risk.

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 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's financial instruments include an investment in an unlisted equity investment which is not traded in an organised public market and which generally may be illiquid. As a result, the Company may not be able to liquidate this investment at an amount close to its fair value.

            The Company's listed securities are considered to be readily realisable.

The Company's liquidity risk is managed on an ongoing basis by the investment manager in accordance with policies and procedures in place. The Company's overall liquidity risks are monitored on a quarterly basis by the Board.

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

3.    Return per share is stated on a weighted average number of Ordinary Shares in issue during the year of 118,348,386 (2008 - 118,423,728).

4.    The Board has proposed a final dividend of 1.29p (2008 - 1.12p) per Ordinary Share payable on 19 June 2009 to shareholders on the Register on 22 May 2009.

5.    There were 118,348,386 Ordinary Shares in issue at 31 January 2009 (2008 - 118,348,386).

6.    These are not statutory accounts in terms of Section 240 of the Companies Act 1985. Statutory accounts for the year to 31 January 2008, which were unqualified, have been lodged with the Registrar of Companies. The statutory accounts for the year to 31 January 2009 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held at the offices of F&C Asset Management plc, Exchange House, Primrose Street, London EC2A 2NY, on Thursday 11 June 2009 at 11.45 am.

           7.    The report and accounts for the year will be sent to shareholders and will be available for inspection at
           the Company's registered office, 80 George Street, Edinburgh EH2 3BU and the Company's
           website www.pacific-assets.co.uk.

            For further information contact:

Peter Dalgliesh             ) F&C Investment Business Limited:  0207 628 8000

Gordon Hay Smith        )

 

END

 

 

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