New City High Yield Fund Ltd : Annual Financial...
To: THOMSON REUTERS
Date: 10 October 2014
From: New City High Yield Fund Limited
Results for the year ended 30 June 2014
- Net asset value total return of +10.3 per cent.
- Ordinary share price total return of +13.7 per cent.
- Dividend yield of 6.5 per cent, based on dividends at an annual rate of 4.21 pence and a share price of 65.25 pence at 30 June 2014.
- Ordinary share price at a premium of 4.6 per cent to net asset value at 30 June 2014.
Chairman's Statement
Investment and Share Price Performance
During another good year your Company's net asset value rose by 3.1% to 62.4 pence during the year ended 30 June 2014; when this capital measure is adjusted for the payment of dividends totalling 4.21 pence per share for the year, the net asset value total return was 10.3%.
The share price total return for the same period was even stronger at 13.7%, as the premium to net asset value at which your Company's shares trade increased from 1.2% to 4.6%. The Company's shares have traded at a premium throughout the year.
Earnings and Dividends
Three interim dividends of 0.92 pence per share were paid during the year, each representing a 2.2% increase on last year's corresponding dividends. The fourth interim dividend was increased by 3.6% from 1.40 pence to 1.45 pence per share; this was paid after the year end on 29 August 2014. Based on an annualised rate of 4.21 pence and a share price of 66.00 pence at the time of writing, this represents a yield of 6.4 per cent.
Earnings per share declined from 5.42 pence last year to 4.76 pence this year. This was a consequence of a number of factors, of which the interaction between a slight decline in portfolio yield and the pattern of share issues was the most important. The Company's earnings have been, and are expected to continue to be, sufficient to more than cover the dividend.
The level of dividends paid by the Company has increased every year.
Rating and Fund Raising
The market continues to attach a premium rating to the shares of your Company. At an Extraordinary General Meeting in December 2013 shareholders approved a resolution granting authority to issue shares equivalent to 25% of the Company's issued share capital, and a prospectus was published in January this year. £30.0m was raised from new and existing shareholders under the subsequent placing programme, representing the issue of 47.1m shares of the total authority of 61.1m shares granted under the prospectus.
The Directors anticipate issuing further shares as necessary as part of the process of managing the premium to net asset value at which your Company's shares trade, and a resolution will be proposed at the Annual General Meeting to renew the Directors' authority to issue shares equivalent to 10% of the Company's share capital. As well as a modest increase in net asset value, existing shareholders can look to benefit from a lower ongoing charges ratio and greater liquidity in the Company's shares.
Outlook
Global economic recovery appears to be solidly entrenched, except perhaps in the Eurozone, with the United States and the United Kingdom amongst those showing good progress. Quantitative easing may be giving way to the prospect of interest rate rises in the latter, but it seems that the Eurozone can be relied upon to keep monetary policy slack. This is a backdrop that, your Company, and its shareholders, are well positioned to benefit from.
James G West
Chairman
9 October 2014
Investment Manager's Review
For most of the twelve months to 30 June 2014, the financial world was wondering when would the "Tapering" (i.e. the decreasing of quantitative easing ["QE"]) commence? Mark Carney, the new Governor of the Bank of England and Mario Draghi, the Head of the European Central Bank ("ECB"), in the middle of 2013, gave definitive forward guidance that rates were not going to rise any time soon.
In August 2013 the figures from the Markit/CIPS UK services Purchasing Managers Index implied that the UK was growing at its fastest rate for over six years, this coincided with markets in the US and the UK implying that Tapering in the US was closer than expected, the short term result of this was that both of the ten year government benchmark bonds in the US and UK fell to a level that gave a yield of 3%.
This became even clearer when more figures were showing the US in recovery, this time the US third quarter GDP coming in at plus 2.8% against forecasts of 2% quickly backed up by the much improved non-farm payroll coming in at +204,000 at which point markets and pundits correctly predicted that tapering would come into effect in January 2014 at the rate of $10bn/month.
But in Europe the economics were somewhat different. In November 2013 the ECB cut rates to 0.25% to encourage Banks to lend and Companies to borrow or invest in new plant or staff. We commented at the time that this alone would be unlikely to be enough, which would be confirmed at the end of the Company's financial year.
In January we had the early effects of tapering with cheap money exiting emerging markets and higher risk investments in very short order. To add to this the cooling of the Chinese economy, albeit inline with the expectation of the markets, meant the net result was a very weak start to 2014 with all major equity markets substantially down, the Dow Jones Industrial down 5.5%, the Nikkei225 down 8.5% and our own FTSE 100 down 3.5%.
In February we had the all important speech from the new Governor of the US Federal Reserve Bank, Janet Yellen. The core theme of this was one of a steady and consistent course forward. The tone was optimistic following the tapering of QE, with the prospect that interest rates were going to remain low for some time to come emphasised by Mrs Yellen's comment on the current employment figure of 6.6%, "well above levels that the Fed finds consistent with maximum sustainable employment".
The last four months of the Company's financial year saw the ugly head of Geo-Politics come to the fore. In Ukraine, following the overthrow of the pro Russian regime in Kiev, the ethnic Russian majority of Crimea aided by masked gunmen occupied government buildings and Ukrainian military bases on the peninsula, during which time a referendum on the succession to Russia was hastily put to the region, with a resounding 96% in favour (85% of the region is ethnic Russian). The result being the Crimean parliament declaring independence of Ukraine and a request to join the Russian Federation, which was duly granted. Various other eastern states in Ukraine with a high ethnic Russian population continue to struggle for independence, this along with the political chess between Russia and the western governments looks to rumble on for some time.
In June at the end of the Company's financial year the ongoing Syrian problems took a worrying turn, spilling over into north western Iraq where the Jihadist militant group Isis has declared a Caliphate or Islamic state in the lands it occupies in Iraq and Syria. We believe that this will have a longer term effect on an already volatile political landscape of the middle-east.
Meanwhile back in Europe in June another battle was raging, this time economic, with the ECB and its ongoing task to encourage economic growth in the Euro zone, the salvo used was far greater than back in November, this time becoming the first of the world's major currency zones to move deposit rates to below zero moving to -0.1%, the targeted outcome a weakening of the Euro currency and to create a reflationary environment. As an addition the Banks will have access to 400Bn euro for four years at a rate very close to zero at the September and December Long Term Refinancing Operation auctions. This is seen as a much needed shot in the arm to the Euro zone economy, hopefully more effective than the November 2013 rate cut which had very little effect.
For the Company over the year we added to core holdings of Phoenix 7.25% 2021, British Airways 6.75% preferred, General Accident 8.875% preferred, Domestic and General 7.875% 2021, and Odeon 9.5% 2019. We participated in tap issues from Antares Energy 10% 2023 and Tizir 9% 2017, the majority of the funds invested coming from the on-going tap issue along with money received from the call by Skipton building society of its 10% bonds 2018 in early December 2013, and Ocean Rig of its 9.5% bond 2016. In March 2014, we were fortunate enough to exit our position in Coop Bank equity at a price of 530p/share which was the high for the shares which were issued as part of the restructuring in quarter four of 2013 at 375p/share enabling the company to exit its position flat from its original purchase in April 2013. The diversity of the portfolio continues to be focussed on with several smaller holdings taken during the year, examples of which would be Thames Water 7.75% 2019 and Southern Water 8.5% 2019 and Matalan 8.875% 2020.
The growth in the USA economy will be key going forward. We still expect the first rate rise to come at the end of quarter one 2015, if anything can be drawn from history then the fact that more companies go into default when the economy is in early/mid recovery phase, then this is a flag worth looking for in the coming months.
In China GDP growth is now officially forecast below the "Magic" 7% level although this is still a large number, we would expect this to have a negative effect on both global growth and commodity prices.
Europe is still trying hard to get some growth into the economy, but this continues to be an uphill struggle.
The UK, post the 'No' vote in the independence vote for Scotland, will still be in political stress with the forthcoming general election in May 2015, and "what about England?" calls from various factions. Away from this uncertainty the underlying economy is still recovering well and given the forward guidance from the Bank of England we would expect a rate rise around about the same time as the USA at the end of Quarter one.
With this backdrop we are still comfortable with the prospects for the company going forward.
Ian Francis
New City Investment Managers
9 October 2014
Audited Income Statement
For the year ended 30 June 2014
| £ '000 | £'000 | £'000 | ||
| Notes | Revenue | Capital | Total | |
| Capital gains on investments | ||||
| Gains on investments | - | 2,948 | 2,948 | |
| Exchange gains | - | 57 | 57 | |
| Revenue | ||||
| Income | 14,269 | - | 14,269 | |
| 14,269 | 3,005 | 17,274 | ||
| Expenses | ||||
| Investment management fee | (1,037) | (346) | (1,383) | |
| Other expenses | (567) | (90) | (657) | |
| Total expenses | (1,604) | (436) | (2,040) | |
| Profit before finance costs and taxation | 12,665 | 2,569 | 15,234 | |
| Finance costs | ||||
| Interest payable and similar charges | (211) | (70) | (281) | |
| Profit before taxation | 12,454 | 2,499 | 14,953 | |
| Irrecoverable withholding tax | (182) | - | (182) | |
| Profit after taxation | 12,272 | 2,499 | 14,771 | |
| Earnings per ordinary share (pence) | 2 | 4.76 | 0.97 | 5.73 |
The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.
All revenue and capital items in the above statement are derived from continuing operations.
No operations were acquired or discontinued in the year.
Audited Income Statement
For the year ended 30 June 2013
| £ '000 | £'000 | £'000 | ||
| Notes | Revenue | Capital | Total | |
| Capital gains on investments | ||||
| Gains on investments | - | 5,600 | 5,600 | |
| Exchange gains | - | 54 | 54 | |
| Revenue | ||||
| Income | 14,176 | - | 14,176 | |
| 14,176 | 5,654 | 19,830 | ||
| Expenses | ||||
| Investment management fee | (916) | (305) | (1,221) | |
| Other expenses | (518) | - | (518) | |
| Total expenses | (1,434) | (305) | (1,739) | |
| Profit before finance costs and taxation | 12,742 | 5,349 | 18,091 | |
| Finance costs | ||||
| Interest payable and similar charges | (196) | (65) | (261) | |
| Profit before taxation | 12,546 | 5,284 | 17,830 | |
| Irrecoverable withholding tax | (160) | - | (160) | |
| Profit after taxation | 12,386 | 5,284 | 17,670 | |
| Earnings per ordinary share (pence) | 2 | 5.42 | 2.31 | 7.73 |
Audited Balance Sheet
| As at | As at | ||
| 30 June 2014 | 30 June 2013 | ||
| Notes | £'000 | £'000 | |
| Non-current assets | |||
| Investments held at fair value | 194,441 | 157,714 | |
| Current assets | |||
| Other receivables | 5,027 | 3,918 | |
| Cash and cash equivalents | - | 777 | |
| 5,027 | 4,695 | ||
| Total assets | 199,468 | 162,409 | |
| Current liabilities | |||
| Bank loan facility | (15,360) | (12,214) | |
| Other payables | (2,247) | (2,346) | |
| Total liabilities | (17,607) | (14,560) | |
| Net assets | 181,861 | 147,849 | |
| Stated capital and reserves | |||
| Stated capital account | 111,638 | 81,890 | |
| Special distributable reserve | 50,385 | 50,385 | |
| Capital reserve | 5,570 | 3,071 | |
| Revenue reserve | 14,268 | 12,503 | |
| Equity shareholders' funds | 181,861 | 147,849 | |
| Net asset value per ordinary share (pence) | 3 | 62.41 | 60.53 |
Audited Statement of Changes in Equity
For the year ended 30 June 2014
| Stated | Special | |||||
| capital | distributable | Capital | Revenue | |||
| account* | reserve+ | reserve* | reserve# | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | ||
| At 1 July 2013 | 81,890 | 50,385 | 3,071 | 12,503 | 147,849 | |
| Total comprehensive income for the year: | ||||||
| Profit for the year | - | - | 2,499 | 12,272 | 14,771 | |
| Transactions with owners recognised directly in equity: | ||||||
| Dividends paid | - | - | - | (10,507) | (10,507) | |
| Issue of shares | 29,748 | - | - | - | 29,748 | |
| At 30 June 2014 | 111,638 | 50,385 | 5,570 | 14,268 | 181,861 | |
Audited Statement of Changes in Equity
For the year ended 30 June 2013
| Stated | Special | |||||
| capital | distributable | Capital | Revenue | |||
| account* | reserve+ | reserve* | reserve# | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | ||
| At 1 July 2012 | 66,680 | 50,385 | (2,213) | 9,297 | 124,149 | |
| Total comprehensive income for the year: | ||||||
| Profit for the year | - | - | 5,284 | 12,386 | 17,670 | |
| Transactions with owners recognised directly in equity: | ||||||
| Dividends paid | - | - | - | (9,180) | (9,180) | |
| Issue of shares | 15,210 | - | - | - | 15,210 | |
| At 30 June 2013 | 81,890 | 50,385 | 3,071 | 12,503 | 147,849 | |
* Following a change in Jersey Company Law effective 27 June 2008 dividends can be paid out of any capital account of the Company subject to certain solvency restrictions. It is the Company's policy however to account for revenue items and pay dividends through a separate revenue reserve.
+ The balance on the special distributable reserve of £50,385,000 (2012: £50,385,000) is treated as distributable profits available to be used for all purposes permitted by Jersey Company Law including the buying back of ordinary shares, the payment of dividends and the payment of preliminary expenses.
# The balance on the revenue reserve of £14,268,000 (2013: £12,503,000) is available for paying dividends.
Audited Cash Flow Statement
| Year | Year | |
| Ended | Ended | |
| 30 June 2014 | 30 June 2013 | |
| £'000 | £'000 | |
| Operating activities | ||
| Profit before finance costs and taxation | 15,234 | 18,091 |
| Gains on investments | (2,948) | (5,600) |
| Exchange gains | (57) | (54) |
| Decrease/(increase) in other receivables | 297 | (144) |
| Increase in other payables | 18 | 20 |
| Net cash inflow from operating activities before interest and taxation | 12,544 | 12,313 |
| Interest paid | (274) | (252) |
| Irrecoverable withholding tax paid | (182) | (160) |
| Net cash inflow from operating activities | 12,088 | 11,901 |
| Investing activities | ||
| Purchases of investments | (102,911) | (77,918) |
| Sales of investments | 67,390 | 55,904 |
| Net cash outflow from investing activities | (35,521) | (22,014) |
| Financing | ||
| Equity dividends paid | (10,507) | (9,180) |
| Drawdown of bank loan facility | 3,146 | 4,751 |
| Issue of ordinary shares | 29,748 | 15,210 |
| Net cash inflow from financing | 22,387 | 10,781 |
| (Decrease)/increase in cash and cash equivalents | (1,046) | 668 |
| Net debt at the start of the year | (11,437) | (7,408) |
| Drawdown of bank loan facility | (3,146) | (4,751) |
| Exchange gains | 57 | 54 |
| Net debt at the end of the year+ | (15,572) | (11,437) |
+ Net debt includes cash held at bank and bank loan facility.
Principal Risks and Uncertainties
The principal risks faced by the Company are: investment and strategy risk; market risk; financial risk; earnings and dividend risk; operational risk and regulatory risk. These risks, which have not changed materially since the annual report for the year ended 30 June 2013, and the way in which they are managed, are described in more detail in the annual report for the year ended 30 June 2014. The report will be made available on the manager's website www.ncim.co.uk during October 2014.
Statement of Directors' Responsibilities in respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable Jersey law and International Financial Reporting Standards ("IFRS") as adopted by the International Accounting Standards Board ("IASB").
Jersey law requires the Directors to prepare in accordance with generally accepted accounting principles, financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the profit and loss of the Company for that year. Under Jersey law they have elected to prepare the financial statements in accordance with IFRS as adopted by the IASB.
In preparing these financial statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable International Financial Reporting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Jersey) Law 1991. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. The financial statements are published on the www.ncim.co.uk website, which is a website maintained by the Company's Investment Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors confirm that to the best of their knowledge:
· the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;
· that in the opinion of the Directors, the annual Report and Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's performance, business model and strategy; and
· the Strategic Report 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 the Company faces.
On behalf of the Board
J G West
Chairman
9 October 2014
Notes (audited)
1. Earnings per ordinary share
The revenue earnings per ordinary share is based on the net profit after taxation of £12,272,000 (2013: £12,386,000) and on 257,812,038 (2013: 228,639,498) ordinary shares, being the weighted average number of ordinary shares in issue during the year.
The capital earnings per ordinary share is based on a net capital gain of £2,468,000 (2013: net capital gain of £5,284,000) and on 257,812,038 (2013: 228,639,498) ordinary shares, being the weighted average number of ordinary shares in issue during the year.
2. Net asset value per ordinary share
The net asset value per ordinary share is based on net assets of £181,861,000 (2013: £147,849,000) and on 291,405,541 (2013: 244,239,339) ordinary shares, being the number of ordinary shares in issue at the year end.
3. Dividends
A fourth interim dividend in respect of the year ended 30 June 2014 of 1.45p per ordinary share was paid on 29 August 2014 to shareholders on the register on 25 July 2014. In accordance with IFRS this dividend has not been included as a liability in these accounts and will be recognised in the period in which it is paid.
- Related parties
The following are considered related parties: the Board of Directors ("the Board") and CQS/New City Investment Managers ("the Investment Manager")
Mr G Ross is a director of the Company Secretary and Administrators, R&H Fund Services (Jersey) Limited and also the UK Administrator, R&H Fund Services Limited, which receive fees from the Company.
All transactions with related parties are carried out at an arms length basis.
There are no other transactions with the Board other than aggregated remuneration for services as Directors and there are no outstanding balances to the Board at the year end.
- Bank loan facility
The Company has a short term loan facility with HSBC Bank Plc. This facility allows up to 20 per cent of the value of shareholders' funds to be borrowed with the drawn down amount repayable on demand. As at the year end the unsecured loan facility had a limit of £20.0 million of which £15.4 million was drawn down at the year end.
- Financial information
These are not full statutory accounts for the year ended 30 June 2014. The full audited annual report and accounts for the year ended 30 June 2014 will be sent to shareholders in October 2014 and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The full audited accounts for the period ended 30 June 2013, which were unqualified, have been lodged with the Registrar of Companies.
The report and accounts for the year ended 30 June 2014 will be made available on the website www.ncim.co.uk. Copies may also be obtained from the Company's registered office, Ordnance House, 31 Pier Road, St. Helier, Jersey, JE4 8PW, Channel Islands
Enquiries:
Ian Francis, New City Investment Managers: 020 7201 5366
Martin Cassels, UK Administrator 0131 524 6140
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: New City High Yield Fund Ltd via Globenewswire
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