Interim Results

RNS Number : 2493E

Pacific Assets Trust PLC

25 September 2008

 



To:             RNS

From:        Pacific Assets Trust plc

Date:         25 September 2008

HALF YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED 31 JULY
2008 (unaudited)

• Net asset value per share decreased by 14.1 per cent

• Share price decreased by 14.1 per cent

Chairman's Statement

During the six month period to 31 July 2008, the Company's net asset value per share fell by 14.1 per cent. The net asset value total return was -13.6 per cent placing the Company seventh in its peer group of eight companies. As a comparison, the total return from the MSCI All Country Far East ex Japan Index was -6.3 per cent.

The Company's share price fell by 14.1 per cent during the period, to 99.25 pence, representing a discount of 10.1 per cent to the net asset value per share, unchanged from 31 January 2008.

The period was characterised by continuing concerns over the global credit crisis and the increasing prospect of recessions in many of the more developed economies. Whilst there was relatively little exposure to American sub-prime debt within Asian financial institutions, the indirect impact was significant. Demand for Asian goods from the United States, and more particularly Europe, has fallen. Companies with leveraged balance sheets have had funding difficulties. There has also been a reduction in the risk appetite of investors with a consequent reduction in demand for Asian equities.

In addition to the credit crisis, rising oil and commodity prices triggered fears of higher inflation. This led to the spectre of monetary tightening just at a time when it was least appropriate due to the decline in economic growth. Fortunately, some of these fears have abated with commodity prices falling back from their peaks in tune with declining demand.

Against this background, your Company's underperformance derived largely from its core exposure to medium and smaller sized companies which fared less well than larger companies. Whilst the valuations of these core holdings appear reasonable, your Managers are constantly scrutinising the growth prospects for each holding.

Those Asian countries with relative foreign exchange stability, such as China, Singapore and Taiwan, outperformed as monetary policy remained accommodative and imported inflation benign. In contrast, the largest net oil importing nations, such as India, Korea, Thailand and the Philippines, suffered as their currencies came under pressure, inflation increased, and interest rates rose. Food price inflation, although temporary, induced increased political tension leading to heightened country risk premiums, specifically for Malaysia, Thailand and Korea.

Fiscal support is becoming increasingly prevalent across Asia in an attempt to soften the impact from a slow down in export growth. This consists of a range of policy measures including infrastructure development, raising income tax thresholds and reducing corporate taxes. These measures are expected to ensure that GDP growth remains solid, albeit lower than current levels.

Gearing

Gearing as at 31 July 2008 was 7.4 per cent which compares with 5.9 per cent as at 31 January 2008. The Company's borrowings comprise two flexible US dollar denominated facilities. At this time of significant market volatility your Managers are keeping the level of gearing under constant review.  

Outlook

Following the recent sell-off in Asian stock markets, equity valuations are now at levels which appear attractive by historical standards. However, there remains a high level of uncertainty about the implications of a slowdown in global growth for the economies of the Asia Pacific region and, in particular, China.

Looking beyond the current difficulties, your Board continues to believe in the long term growth prospects for the Asia Pacific region.

David Nichol

Chairman

Manager's Report

The Company's net asset value total return for the six month period ended 31 July 2008 was -13.6 per cent. This compares to a total return from the MSCI All Country Far East Free ex Japan Index of -6.3 per cent.  

The fragility of equity markets seen in January persisted throughout the first quarter. Despite having limited direct exposure to the unwinding global credit crisis, Asian equity markets suffered as global liquidity tightened, sentiment plummeted, risk aversion increased and slowing western growth raised concerns over the sustainability of corporate earnings.  

This concern over growth towards the end of March then gave way to worries over inflation as rising commodity, energy and food prices led to what we believed would be a temporary spike in CPI across the globe. Large oil importing countries such as Thailand, the Philippines, India and Korea saw a marked acceleration in inflation forcing their central banks to raise interest rates in the hope of preventing secondary effects from entering the system through higher wage settlements. Consequently, weightings were reduced in Thailand and India where the inflationary threat was expected to be the most disruptive.

Nonetheless, as Asian central banks retained their bias of supportive negative real interest rates, corporate balance sheets remained strong having deleveraged since the 1997/98 Asian crisis, and valuations appearing undemanding, we maintained a cautiously optimistic position. Yet in recognition of the rise in global risk aversion, gearing was pulled back into line with the peer group average, and mid to small cap exposure reduced. However, a reluctance to invest in last year's large cap laggards proved to be damaging to performance. Although the growth prospects and valuations for these companies had not improved, they were perceived to be relative safe havens having survived previous crises. But, given our preference for purer Asian domestic demand and infrastructure plays, these global growth proxies were avoided. 

The slowdown in Chinese and Indian GDP growth from the heady levels of 2007 came as little surprise to investors. What was less well anticipated was the pressure on corporate margins as rising input costs ate into profitability. The Company's weighting in industrials was reduced through selling Hong Kong bulk shipper Pacific Basin and cutting back the position in Bharat Heavy Electrical of India. Proceeds were rotated into more defensive plays including Korean tobacco company KT&G and Taiwanese telecom provider Chunghwa Telecom. Their earnings visibility at a time of such heightened uncertainty and low beta status warranted an overweight position and performed well for the Company.

In anticipation of the slowdown in Chinese GDP growth and the premium rating commanded by Chinese financials, the Company held an underweight stance to this sector. This detracted from performance as local, regional and global investors saw Chinese banks as relatively defensive. However, in light of further softening in Chinese GDP growth towards 8.0 per cent to 9.0 per cent for 2009, weaker loan growth, deteriorating asset quality and diminishing margins are to be expected, justifying a cautious stance being taken. 

In the second quarter, Malaysia and Thailand succumbed to multiple pressures having proven to be relatively resilient in the first quarter. Inflation moved ahead of targeted bands, soft commodity prices declined, and political uncertainty reached a crescendo. Exposure was reduced to both markets by selling Thai telecom provider Total Access Communications, and locking in some profits in Malaysian palm oil producer IOI Corporation. However, country exposure was maintained given reasonable valuations and in anticipation of political concerns blowing over and inflation reversing as international oil prices subside. 

The best performing market over the period was Singapore, rising 4.6 per cent in sterling terms. The Monetary Authority of Singapore pursued a policy of currency appreciation in an attempt to constrain inflation. While this strategy helped to soften the correction in the property market it did place additional pressure on exporters in the pharmaceutical and electronics sectors which led to increased volatility in quarterly GDP growth.

In light of the exceptional tightening in credit markets, increased flexibility in investment strategy appears warranted. The Company's focus on identifying Asia's fastest growing companies whose valuations have yet to reflect this, remains in place. However, following the increase in cost of capital for corporations, plus a likely prolonged period of risk aversion until macroeconomic data stabilises, a further re-evaluation of the Company's mid to small cap holdings appears appropriate.  

Recent panic selling in the markets has forced the authorities into coordinated action which, when coupled with consolidation, has offered some respite to the wave of negative news flow. This represents an opportunity to realign the Company's current holdings and market weightings as well as address the level of gearing in the portfolio. Whilst markets have sold off and valuations do appear cheap, the risk of additional casualties cannot be ruled out. Consequently, although a floor does appear to be emerging in the financial sector, the secondary repercussions in the real economy may act as a further source of destabilisation to the global economy and therefore to equity markets.

Peter Dalgliesh

Fund Manager

F&C Investment Business Limited

PACIFIC ASSETS TRUST PLC
Unaudited Income Statement
		Six months to 31 July 2008
		Revenue	Capital	Total
		£'000	£'000	£'000
Losses on investments		-	(20,872)	(20,872)
Exchange differences		-	(69)	(69)
Income		2,250	-	2,250
Investment management fee		(198)	(594)	(792)
Other expenses		(358)	-	(358)
Net return before finance		1,694	(21,535)	(19,841)
costs and taxation
Interest payable		(48)	(145)	(193)
Return on ordinary activities
before tax		1,646	(21,680)	(20,034)
Tax on ordinary activities		(475)	327	(148)
Return attributable to
equity shareholders		1,171	(21,353)	(20,182)
Return per Ordinary Share		0.99p	(18.04)p	(17.05)p

PACIFIC ASSETS TRUST PLC
Unaudited Income Statement
		Six months to 31 July 2007
		Revenue	Capital	Total
		£'000	£'000	£'000
Gains on investments		-	46,120	46,120
Exchange differences		-	696	696
Income		1,809	-	1,809
Investment management fee		(169)	(508)	(677)
Other expenses		(256)	-	(256)
Net return before finance		1,384	46,308	47,692
costs and taxation
Interest payable		(106)	(318)	(424)
Return on ordinary activities
before tax		1,278	45,990	47,268
Tax on ordinary activities		(378)	299	(79)
Return attributable to
equity shareholders		900	46,289	47,189
Return per Ordinary Share		0.76p	39.06p	39.82p

PACIFIC ASSETS TRUST PLC

Audited Income Statement

		Year to 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		2,348		29,012	31,360
costs and taxation
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		1.24p	24.35p		25.59p

PACIFIC ASSETS TRUST PLC
Balance Sheet (unaudited)
	As at	As at	As at
	31 July	31 July	31 January
	2008	2007	2008
			(audited)
	£'000	£'000	£'000
Fixed assets
Investments	140,325	187,975	161,098
Current assets
Debtors	933	333	3,627
Cash at bank and on deposit	-	786	-
	933	1,119	3,627
Creditors: amounts falling due within one year	(10,661)	(20,103)	(12,620)
Net current liabilities	(9,728)	(18,984)	(8,993)
Net assets	130,597	168,991	152,105
Capital and reserves
Called-up share capital	14,794	14,794	14,794
Share premium account	4	4	4
Capital redemption reserve	1,460	1,460	1,460
Special reserve	16,222	16,222	16,222
Capital reserve - realised	95,136	70,914	116,550
Capital reserve - unrealised	(415)	62,609	(476)
Revenue reserve	3,396	2,988	3,551
Equity shareholders' funds	130,597	168,991	152,105
Net asset value per Ordinary Share	110.35p	142.79p	128.52p

  PACIFIC ASSETS TRUST PLC

Unaudited Reconciliation of Movements in Shareholders' Funds

	Six months to	Six months to	Year ended
	31 July	31 July	31 January
	2008	2007	2008
			(audited)
	£'000	£'000	£'000
Opening shareholders' funds	152,105	123,616	123,616
Return for the period	(20,182)	47,189	30,304
Dividends paid	(1,326)	(1,326)	(1,326)
Share buy backs	-	(488)	(489)
Closing shareholders' funds	130,597	168,991	152,105

  PACIFIC ASSETS TRUST PLC

Summarised Unaudited Statement of Cash Flows

						Six months to	Six months to	Year ended
						31 July	31 July	31 January
						2008	2007	2008
								(audited)
						£'000	£'000	£'000
Net cash inflow from operating activities						977	1,109	1,066
Servicing of finance						(175)	(411)	(994)
Capital expenditure and financial investment						188	(8,802)	1,201
Equity dividends paid						(1,326)	(1,326)	(1,326)
Net cash outflow before financing						(336)	(9,430)	(53)
Financing						(9)	9,550	(618)
(Decrease)/increase in cash						(345)	120	(671)

Reconciliation of net cash flow to movement in net debt

(Decrease)/increase in cash				(345)	120	(671)
Loans drawn down				(2,515)	(10,033)	(10,033)
Loans repaid				2,524	-	10,162
Changes in net debt resulting from cash flows				(336)	(9,913)	(542)
Currency (losses)/gains				(69)	696	153
Movement in net debt				(405)	(9,217)	(389)
Net debt at 1 February				(10,071)	(9,682)	(9,682)
Net debt at 31 July/31 January				(10,476)	(18,899)	(10,071)

Reconciliation of net return before finance costs and taxation to net 

cash inflow from operating activities

Net return before finance costs and taxation					(19,841)	47,692	31,360
Losses/(gains) on investments					20,872	(46,120)	(30,025)
Exchange differences					69	(696)	(153)
Tax on investment income					(148)	(79)	(83)
Changes in working capital and other non-cash items					25	312	(33)
Net cash inflow from operating activities					977	1,109	1,066

Notes to the Accounts

 

1.         The unaudited interim results have been prepared on the basis of the accounting policies set out in the statutory accounts of the Company for the year ended 31 January 2008.

 

2.         Earnings for the first six months should not be taken as a guide to the results for the full year.

 

3.         There were 118,348,386 Ordinary Shares in issue at 31 July 2008 (31 January 2008 – 118,348,386, 31 July 2007 – 118,348,386). The weighted average number of Ordinary Shares in issue during the period, used in calculating the return per share, was 118,348,386 (year ended 31 January 2008 – 118,423,728, six months ended 31 July 2007 – 118,500,320).

 

4.         During the six months ended 31 July 2008 the Company bought no Ordinary Shares for cancellation (year ended 31 January 2008 - 500,000 shares, six months ended 31 July 2007 - 500,000 shares).

 

5.         These accounts have not been audited or reviewed by the Company’s auditors pursuant to the Auditing Practices Board guidance on the review of interim financial information.

           

6.         These are not statutory accounts in terms of Section 240 of the Companies Act 1985 and are unaudited. Statutory accounts for the year to 31 January 2008, which received an unqualified audit report, have been lodged with the Registrar of Companies. No statutory accounts in respect of any period after 31 January 2008 have been reported on by the Company’s auditors or delivered to the Registrar of Companies. The Half Yearly Financial Report will be available on the Company’s website: www.pacific-assets.co.uk.

Statement of Principal Risks and Uncertainties

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. Other risks faced by the Company include external, investment and strategic, regulatory, operational, and financial risks. These risks, and the way in which they are managed, are described in more detail under the heading Principal Risks and Risk Management within the Business Review in the Company's Annual Report for the year ended 31 January 2008. The Company's principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Company's financial year.

Statement of Directors' Responsibilities in Respect of the Half Yearly Financial Report

We confirm that to the best of our knowledge:

• the financial statements have been prepared in accordance with the Statement 'Half-yearly Financial Reports' issued by the UK Accounting Standards Board and give a true and fair view of the assets, liabilities, financial position and return of the Company;

• the Chairman's Statement and Manager's Report (together constituting the Interim Management Report) include a fair review of the information required by the Disclosure and Transparency Rules ('DTR') 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the financial statements;

• the Statement of Principal Risks and Uncertainties shown above is a fair review of the information required by DTR 4.2.7R; and

• the financial statements include a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position or performance of the Company during the period, and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board,

D B Nichol

Director 

For further information contact:

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

Gordon Hay Smith  )

 

END

 

 

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