Half Yearly Report

RNS Number : 4845D

Utilico Emerging Markets Limited

02 December 2009

 



Date:            2 December 2009

 

Contact:      Charles Jillings    

                     Utilico Emerging Markets Limited    

                     01372 271 486
                     Alastair Moreton
                     Arbuthnot Securities Limited
                     020 7012 2000

 

 

Utilico Emerging Markets Limited

Unaudited Statement of Results

for the six months to 30 September 2009

 

Highlights of results 

 

·       UEM'S undiluted NAV per ordinary share has risen from 107.76p to 140.35p, a gain of 30.2%

·         Annual compound return since UEM's launch at August 2005 of 11.8%

·         Bank Debt reduced to nil

·         Total income of £9.2m in the six months to September 2009

 

CHAIRMAN'S STATEMENT

 

The six months to 30 September 2009 have seen one of the strongest recoveries in world equity markets since the Second World War. Whilst a recovery was expected, its strength and breadth has been surprising. Utilico Emerging Market Limited's ("UEM") portfolio has benefited from this and the undiluted net asset value ("NAV") per ordinary share has risen from 107.76p to 140.35p, a gain of 30.2%.

 

Throughout the six months, the Investment Manager has remained market neutral and as a result fully invested. While the drivers of the improvement in asset values are well understood and expected, concern remains over the downside risk. In order to better control risk, the Investment Manager has continued to maintain only a modest exposure to the higher risk economies of Eastern Europe. In addition debt has been reduced over the six months to nil from £41.8m at the start of the half year.

 

This has been a challenging environment for investors. All markets have moved substantially. The Bovespa (Brazilian Stock Exchange main index) improved by 50.3%, the Hang Seng Index by 54.4% and the Kuala Lumpur Composite Index by 37.8%. Currencies have remained volatile. The Brazilian Real to Sterling exchange rate improved by 17.6% but the Sterling to US Dollar exchange rate fell by 10.4%. Commodities have moved as well with oil rising by 42.2% to $70.61 over the six months.

 

These markets have been driven by a swing away from the US Dollar and its perceived safe haven nature and into higher risk and reward assets. In particular, investors have driven up values in commodities, mining companies and financials. UEM's asset focus on utilities and infrastructure assets have lagged behind the markets as investors have focused on higher risk and reward investments.

 

As anticipated, UEM's earnings have fallen primarily as a result of the decreased leverage. The cost of gearing (interest) is 70% capitalised to the capital account allowing the increased income on a geared basis to fall through to the earnings per ordinary share ("EPS"). The interim EPS of 3.26p represents 78.0% of the comparable period's EPS. The Board recognises that a number of shareholders attach significant value to the dividends paid by UEM and has therefore utilised the revenue reserves brought forward and declared an interim dividend of 3.75p (prior year 4.00p).

 

The Investment Manager has continued to monitor the share price discount and bought back 1,150,000 ordinary shares during the six months at an average price of 112.28p, with discounts ranging from 10.4% to 10.5% at the time of purchase. UEM's ordinary share price ended the half year at 124.50p a discount of 7.0% to the diluted NAV per share.

 

OUTLOOK

The sense that the worst is over still remains. Recovery has returned to a number of markets and we continue to be cautiously optimistic over the long term, whilst over the short term we believe set backs are likely to occur. The end of supportive measures will in itself re-introduce stresses and the markets' reaction to this is difficult to determine. Overall we remain confident about the outlook for emerging markets.

 

 

 

Alexander Zagoreos
Chairman
December 2009 

 

 

 

INVESTMENT MANAGER'S REPORT

 

The six months to 30 September 2009 have seen a continued recovery in asset values. A key feature of this recovery has been the appreciation of most asset classes, commodities, equities and more recently property. This has been driven by an exit from the US Dollar (resulting in its weakness) into higher risk assets. The flow of capital has moved both exchange rates and asset values, and as a consequence emerging markets have benefited strongly.

 

The impact on UEM has been positive. The undiluted cum income NAV per share rose from 107.76p to 140.35p. Adding back the final dividend of 0.80p, the total return was 31.0%. Taking into account dividends paid, the average compound annual return since UEM's launch in August 2005 has been 11.8%.

 

UEM's performance over the six months has lagged behind the wider emerging markets. The key driver of this is the underperformance of the infrastructure and utility markets in both emerging and developed markets as investors focus on more cyclical sectors in order to take advantage of the economic recovery. This has left the utility sector at discounts to the wider markets. Investors in mining, commodities and financials have achieved much better returns than investors in the healthcare, infrastructure and utilities sectors. 

 

PORTFOLIO

UEM's gross assets increased to £299.0m from £272.5m arising from a gain on investments of £69.1m offset in the main by debt reduction. The top ten investments have seen further changes over the six months. POS Malaysia ("POSM") and Comanche are no longer in the top ten. POSM reduced as a result of a substantial realisation, whereas the value of Comanche was written down. They were replaced by Companhia Saneamento de Basico do Estado de Sao Paulo ("SABESP") and Xinao Gas Holdings Limited ("Xinao Gas").

 

The majority of UEM's investee companies performed well in very challenging operating conditions in the six months to 30 September 2009. All companies within UEM's ten largest holdings have December year ends and have reported results to June 2009. Within the top ten, Malaysia Airport Holdings Berhad's ("Malaysia Airports") share price rose by 38.6% to MYR3.45 over the six months. Malaysia Airports reported encouraging results for its half year given the weak operating environment with revenues flat, earnings before interest, tax, depreciation and amortisation ("EBITDA") up 8.7% and dividends per share ("DPS") up 5.4%. Passenger numbers increased by 8.6% in the first half of 2009.

 

Ocean Wilsons Holdings Limited's share price rose 52.4% in the six months. While its revenues for the first half were down 11.9%, reflecting the weak US Dollar. EBITDA was up 18.8% and the interim dividend declared remained the same as the previous year. 

 

Companhia Saneamento de Minas Gerais's ("COPASA") share price was up over the six months by 57.6%. Its reported net revenue and EBITDA for the first half of 2009 were up 9.9% and 15.8% respectively. However results would have been even better had there not been a delay in the tariff increase whilst a new regulatory body was being set up. Copasa has declared dividends of 0.67c in the first half up 6.0% on the previous year.

 

Puncak Niaga Holdings Berhad's ("Puncak") share price increased by 9.5% in the six months. Its reported revenue rose 32.7% and EBITDA 90.0%. Dividends were maintained at 10sen per share. We continue to expect a bid for Puncak's assets from the Federal Government given their stated public position of seeking to nationalise Malaysia's water assets, with private companies being reduced to operators only.

 

International Container Terminal Services Incorporated's ("ICT") share price recovered strongly, up by 83.3% over the six months to June 2009. While revenues for the first half were down 16.9% and EBITDA was down 12.6%, the business is now recovering from the low point earlier this year. ICT declared a dividend up 14.3% on the prior year.

 

AES Tiete SA ("AES") continues to perform well. The share price rose by 17.0% over the six months. Revenue in the first half was up 7.8% and EBITDA improved by 10.6%. AES continues to declare all its earnings as dividends, which rose 22.0%.

 

SABESP's share price rose 32.2% in the six months to June 2009. While revenue for the first half rose by 7.3%, normalised EBITDA increased by 6.3% when exceptional non recurring employee redundancy costs are added back. The dividend was reduced by 1.5%. SABESP has been a long term investment for UEM and was ranked 11th at the 31 March 2009 year end.

 

Eastern Water Resources PCL's share price rose 42.1%. Reported interim revenues to June 2009 rose 11.8% and EBITDA rose 19.6%. The company's volumes have seen a sharp recovery during 2009.

 

Companhia de Gas de Sao Paulo's ("COMGAS") share price rose 9.3%. Reported interim revenues to June 2009 rose 9.0% due to increased gas prices, however the decline in gas sales volumes resulted in their EBITDA falling 14.6%. DPS reduced 33.3% given the fall in earnings.

 

Xinao Gas is a new entrant into the top ten. The company deals in gas sales and distribution in the Republic of China. It serves a connectable population of 41.5 million people with 13.5m possible customer connections. Connected customers increased to 4.2m at 30 June 2009, up 27.0% on the previous year. Xinao Gas has seen a very strong share price performance, up 97.4% over the six months. At the interim stage to June 2009 reported revenues were up 13.5%, earnings were up 30.4% and DPS increased by 32.0%.

 

UEM invested £24.1m in the half year with nearly all of this outside the top ten. Disposals amounted to £53.9m and include £10.7m from POSM, £2.9m from Malaysia Airport, £3.2m from Puncak, £1.0m from SABESP and £2.1m from Xinao Gas.

 

The decision to reduce the investment in POSM was strategic. While the opportunities for POSM are significant we are concerned about the political will to support the necessary restructuring, which at its heart requires an increase in the postal rates. We reduced our holding by 70.1% to £4.0m.

 

The above activity resulted in movements both geographically and by sector. As a result of the POSM disposal, UEM's exposure to Malaysia reduced from 27.0% to 20.7% and UEM's exposure to the postal sector reduced from 6.2% to 1.4%

 

Ports increased mainly as a result of a recovery by the investments held at the start of the half year. Renewable energy reduced from 8.4% to 5.2% as a result of the revaluation of Comanche.

The portfolio concentration remained broadly consistent over the six months. The top ten accounted for 57.7% (56.9% at year end) and the top twenty accounted for 79.9% (78.6% at year end).

 

MARKET HEDGING

The strength of the markets' recovery has resulted in the market hedging strategy being reduced. We have maintained, throughout this recovery, some protection against the downside risk of a sharp correction. This has resulted in losses of £2.9m on the position. While we remain confident over the longer term we remain concerned about a sharp correction at some point. Our intention is to maintain as best we can a degree of market protection.

 

BANK DEBT

UEM reduced the usage of the HBOS facility from £41.8m to nil over the six months. UEM has a £50.0m bank facility with HBOS. Utilisation will depend on market conditions at the time.

At 30 September 2009, there was net cash of £18.9m. The main contributor to this cash was £10.7m from POSM and £2.9m from the Malaysia Airport disposals which both completed in late September 2009. Since the period end this cash has been reinvested and £5.0m has been drawn down from the facility.

 

REVENUE RETURN

As anticipated, revenue returns were lower mainly as a result of reduced gearing. Total income was £9.2m down £2.0m on the prior period. Management and administration fees reduced to £0.3m for the six months versus prior half year £0.4m, as a result of reduced gross assets. Other expenses were in line with the prior period. The TER at 0.8% is slightly above last year's 0.7%.

 

Finance costs have reduced as a result of debt reducing over the six months to 30 September 2009. 

 

Taxation has risen as a result of taxable income received in Brazil.

 

The profit for the six months on the revenue account reduced by £2.0m, reflecting the fall in total income of £2.0m. As a result EPS fell 22.0% to 3.26p.

 

CAPITAL RETURN

The portfolio gains on investment of £69.1m reversed the losses incurred in the first half of last year. As explained above, the losses on derivatives continued as a result of a continuing erosion of the hedge positions resulting in a loss of £2.9m (£3.1m loss for 2008). There were exchange gains of £1.6m in the six months reversing some of the losses of £8.6m incurred last year.

 

Management and administration fees reduced due to the fall in gross assets and finance costs fell as a result of debt reductions over the six months.

 

Taxation increased as a result of accrued capital gains on the Brazilian investment portfolio.

 

The profit for the six months on the Capital account is £64.2m reflected in the main the total income of £67.7m.

 

CURRENT TRADING

We are encouraged by the recent operational performance within our investments. Results to date reflect a continuing recovery in activity. Markets are continuing to recover.

  

SUMMARY OF UNAUDITED RESULTS

 

	Half-year	Half-year	Annual	Half-year
	30 Sep 09	30 Sep 08	31 Mar 09	change %
Undiluted net asset value per ordinary share	140.35p	133.37p	107.76p	30.2
Diluted net asset value per ordinary share	133.82p	127.98p	106.51p	25.6
Ordinary share price	124.50p	117.25p	95.50p	30.4
(Discount)/premium - (based on diluted NAV)	(7.0%)	(8.4%)	(10.3%)	n/a
Earnings per ordinary share (basic)
- Capital	30.04p	(37.79p)	(60.28p)	n/a
- Revenue	3.26p	4.18p	5.08p	(22.0)
- Total	33.30p	(33.61p)	(55.20p)	n/a
Dividend per share
- Interim	3.75p(1)	4.00p	4.00p	(6.3)
- Final	n/a	n/a	0.80p	n/a
- Total	n/a	n/a	4.80p	n/a
Equity holders' funds (£m)	299.0	285.5	230.7	29.6
Gross assets (£m)(2)	299.0	368.3	272.5	9.7
Cash (£m)	18.9	4.5	24.1	(21.6)
Bank debt (£m)	-	82.8	41.8	(100.0)
Net (debt)/cash (£m)	(18.9)	78.3	17.7	n/a
Net debt gearing on gross assets	n/a	21.3%	6.5%	n/a
Management and administration fees (£m)(3)	1.2	1.5	2.7	n/a
Total expense ratio (4)	0.8%	0.8%	0.7%	n/a

(1)   The dividend declared has not been included as a liability in these accounts.
(2)   Gross assets less liabilities excluding loans.
(3)   Including other expenses.
(4)   Annualised management and administration fees over monthly average gross assets.

 

 

 

  

DIRECTORS' STATEMENT OF PRINCIPAL RISKS AND UNCERTAINTIES

 

The principal risk faced by the Group is the failure to maintain its objective of capital appreciation and that the NAV does not rise over the longer term. The risks which might give rise to this can be categorised as investment and strategy, manager, gearing, operational and financial. 

 

These risks and the way they are mitigated are described in more detail under the heading Internal Controls and Management of Risk in the Corporate Governance section of the Group's Annual Report for the year ended 31 March 2009. The Group'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 Group's financial year. The Annual Report and Accounts is published on the Company's website, www.uem.bm. 

 

DIRECTORS' STATEMENT OF RESPONSIBILITIES

 

The Directors confirm that to the best of our knowledge:

 

i) the condensed set of financial statements has been prepared in accordance with the International Accounting Standard 34 "Interim Financial Reporting" and gives a true and fair view of the assets, liabilities, financial position and return of the Group;

 

ii) the Chairman's Statement (constituting the interim management report) includes a fair review of the important events that have occurred in the six months to 30 September 2009 and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

 

iii) the Interim Report includes a fair review of the material related party transactions that have taken place in the six months to 30 September 2009 and that have materially affected the financial position or performance of the Group during the period, and any changes in the related party transactions described in the last Annual Report that could do so. 

 

Approved by the Board on 2 December 2009

and signed on its behalf by

Alexander Zagoreos

Chairman

 

 

  UNAUDITED CONDENSED GROUP STATEMENT OF COMPREHENSIVE INCOME

 

        

 

6 months to  30 September 2009					6 months to  30 September 2008
		Revenue	Capital	Total	Revenue	Capital	Total
		return	return	Return	return	return	return
		£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains and losses on investments		-	69,078	69,078	-	(67,360)	(67,360)
Gains and losses on derivative instruments		-	(2,946)	(2,946)	-	(3,103)	(3,103)
Exchange gains and losses		-	1,562	1,562	-	(8,646)	(8,646)
Investment and other income		9,157	-	9,157	11,150	-	11,150
Total income		9,157	67,694	76,851	11,150	(79,109)	(67,959)
Interest not receivable		(261)	-	(261)	-	-	-
Management and administration fees		(315)	(490)	(805)	(421)	(712)	(1,133)
Other expenses		(393)	(6)	(399)	(397)	(3)	(400)
Profit/(loss) before finance costs and taxation		8,188	67,198	75,386	10,332	(79,824)	(69,492)
Finance costs		(498)	(1,163)	(1,661)	(773)	(1,804)	(2,577)
Profit/(loss) before taxation		7,690	66,035	73,725	9,559	(81,628)	(72,069)
Taxation		(724)	(1,808)	(2,532)	(630)	884	254
Profit/(loss) and total comprehensive income for the period		6,966	64,227	71,193	8,929	(80,744)	(71,815)
Earnings per share (basic) - pence		3.26	30.04	33.30	4.18	(37.79)	(33.61)
Earnings per share (diluted) - pence		3.19	29.44	32.63	3.93	n/a	n/a

 

The total column of this statement represents the Group's Condensed Income Statement and the Group's Condensed Statement of Comprehensive Income, prepared in accordance with IFRS.

The supplementary revenue and capital return columns are both prepared under guidance published by the Association of Investment Companies in the UK.

The Group does not have any income or expense that is not included in the profit for the period, and therefore the 'profit for the period' is also the 'total comprehensive income for the period', as defined in International Accounting Standard 1 (revised).

All items in the above statement derive from continuing operations.

All income is attributable to the equity holders of the Company. There are no minority interests.



UNAUDITED CONDENSED GROUP STATEMENT OF CHANGES IN EQUITY

 

for the 6 months to 30 September 2009
	Ordinary	Share			S	Other non-	Retained earnings
	share	premium	Special	Warrant	share	distributable	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	reserves	reserve	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at  31 March 2009	21,412	56	219,500	8,897	9,285	319	(31,451)	2,715	230,733
Profit for the period	-	-	-	-	-	-	64,227	6,966	71,193
Ordinary dividend paid	-	-	-	-	-	-	-	(1,711)	(1,711)
Conversion of  warrants and S shares	6	55	-	(5)	(44)	49	-	-	61
Ordinary shares repurchased by the Company	(115)	(111)	(1,069)	-	-	-	-	-	(1,295)
Balance at  30 Sep 2009	21,303	-	218,431	8,892	9,241	368	32,776	7,970	298,981

 

for the 6 months to 30 September 2008
	Ordinary	Share			S	Other non-	Retained earnings
	share	premium	Special	Warrant	share	distributable	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	reserves	reserve	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at  31 March 2008	21,351	219,008	-	9,048	9,350	103	97,470	3,200	359,530
(Loss)/profit for the period	-	-	-	-	-	-	(80,744)	8,929	(71,815)
Ordinary dividend paid	-	-	-	-	-	-	-	(2,776)	(2,776)
Conversion of  warrants and S shares	55	498	-	(151)	(10)	161	-	-	553
Balance at  30 Sep 2008	21,406	219,506	-	8,897	9,340	264	16,726	9,353	285,492

 

for the year to 31 March 2009
	Ordinary	Share			S	Other non-	Retained earnings
	share	premium	Special	Warrant	share	distributable	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	reserves	reserve	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at  31 March 2008	21,351	219,008	-	9,048	9,350	103	97,470	3,200	359,530
(Loss)/profit for the year	-	-	-	-	-	-	(128,921)	10,853	(118,068)
Ordinary dividends paid	-	-	-	-	-	-	-	(11,338)	(11,338)
Conversion of  warrants and S shares	61	548	-	(151)	(65)	216	-	-	609
Transfer to special reserve	-	(219,500)	219,500	-	-	-	-	-	-
Balance at  31 March 2009	21,412	56	219,500	8,897	9,285	319	(31,451)	2,715	230,733

 

UNAUDITED CONDENSED GROUP BALANCE SHEET

 

	30 September 2009	30 September 2008	31 March 2009
	£'000s	£'000s	£'000s
Non-current assets
Investments	284,789	337,133	245,511
Current assets
Other receivables	2,049	4,182	3,084
Derivative financial instruments	1,691	65,419	12,090
Cash and cash equivalents	18,869	4,495	24,058
	22,609	74,096	39,232
Current liabilities
Bank loans	-	(31,044)	-
Other payables	(3,301)	(4,514)	(2,270)
Derivative financial instruments	(3,368)	(37,461)	(9,930)
	(6,669)	(73,019)	(12,200)
Net current assets	15,940	1,077	27,032
Total assets less current liabilities	300,729	338,210	272,543
Non-current liabilities
Bank loans	-	(51,741)	(41,810)
Deferred tax	(1,748)	(977)	-
Net assets	298,981	285,492	230,733
Equity attributable to equity holders
Ordinary share capital	21,303	21,406	21,412
Share premium account	-	219,506	56
Special reserve	218,431	-	219,500
Warrant reserve	8,892	8,897	8,897
S share reserve	9,241	9,340	9,285
Other non-distributable reserve	368	264	319
Capital reserves	32,776	16,726	(31,451)
Revenue reserve	7,970	9,353	2,715
Total attributable to equity holders	298,981	285,492	230,733
Net asset value per ordinary share
Basic - pence	140.35	133.37	107.76
Diluted - pence	133.82	127.98	106.51

 

 

   UNAUDITED CONDENSED GROUP STATEMENT OF CASH FLOWS

 

	6 months to 30 September 2009	6 months to 30 September 2008	Year to 31 March 2009
	£'000s	£'000s	£'000s
Cash flows from operating activities	38,004	616	81,058
Cash flows from investing activities	-	-	-
Cash flows before financing activities	38,004	616	81,058
Financing activities Ordinary dividends paid	(1,711)	(2,776)	(11,338)
Movements from borrowings	(40,474)	(5,506)	(58,271)
Proceeds from warrants exercised Proceeds from S shares exercised Cost of share buy back Movements from issue of ordinary share capital	17 44 (1,295)   -	544 10 -   (15)	545 64 -   -
Cash flows from financing activities	(43,419)	(7,743)	(69,000)
Net (decrease)/increase in cash and cash equivalents	(5,415)	(7,127)	12,058
Cash and cash equivalents at the beginning of the period	24,058	11,876	11,876
Effect of movement in foreign exchange	226	(254)	124
Cash and cash equivalents at  the end of the period	18,869	4,495	24,058

 

 

NOTES

 

An interim dividend in respect of the six months to 30 September 2009 of 3.75p per ordinary share will be paid on 31 December 2009 to shareholders on the register at close of business on 11 December 2009. This interim dividend has not been accrued in the results for the six months to 30 September 2009.

 

The half-yearly report will be posted to shareholders in mid December 2009. Copies may be obtained during normal business hours from Exchange House, Primrose Street, London EC2A 2NY.

 

 

 

By order of the Board

F&C Management Limited, Secretary

2 December 2009

 

 

 

 

END

 

 

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