RNS Number:3264S
Royal London UK Eqty&Income SecsPLC
20 November 2003
ROYAL LONDON UK EQUITY & INCOME SECURITIES PLC
Preliminary results for the year ended 31 August 2003
The following Chairman's Statement and Investment Manager's Report relates to
both Royal London UK Equity & Income Securities plc and it's parent company,
Royal London UK Equity & Income Trust plc.
Chairman's Statement
Your Company's second year of operation up to 31 August 2003 was a year of two
distinct halves. The first six months saw a continuing deterioration in the
economic environment throughout the world, disappointing company results, and an
increase in political uncertainty as the Iraq war loomed on the horizon.
Unsurprisingly, against this background world markets were weak and interest
rates continued to fall.
The second half of the year under review saw a marked change of fortune and was
altogether more encouraging for investors. The low point of the UK equity market
was reached in March 2003 and since then there has been a sharp rebound from an
oversold position. This has taken place on the back of a short and militarily
successful operation in Iraq, as well as an apparent improvement in the global
economic outlook being no worse than expected.
Your Manager reports in detail on the different sectors of the portfolio in the
Manager's Report. Once again the problem here for your Company has been the
income portfolio. In my Interim Statement, I mentioned that overall exposure to
illiquid, highly geared investment companies had fallen to under 5% of the
assets of the Company and it was not envisaged that there would be a quick
recovery in values. In fact, due to the gearing inherent in the structure of
some of these holdings, the recovery in the equity market has led to some
spectacular gains in this sector - admittedly from an exceptionally depressed
level.
The structure of your Company changed during the year due to the repayment of
#20 million of your Company's loan facility to comply with banking covenants,
incurring breakage costs of #1,059,000. During the year, your Company has
operated within its covenant agreements and now has total borrowings of #50
million and a loan to value ratio of 55.3%.
During the year, the buy-back of Zero Dividend Preference ('ZDP') shares issued
by the Company's subsidiary, Royal London UK Equity & Income Securities plc, was
instigated and a total of 6,575,900 ZDP shares were purchased in the market by
the Company at prices between 55p and 65p (compared to the middle market price
of 95p as at 12 November 2003). These shares were subsequently gifted back to
the subsidiary and cancelled, enhancing the net asset value of the Group by #3.4
million. As at the date of this report, there remain 13,424,100 ZDP shares in
issue.
Your Company is still not in a position to declare or pay a dividend due to its
inability to meet the requirements of section 265 of the Companies Act 1985 as
its assts have fallen to less than 1.5 times its liabilities.
Against this background, the Group's total assets less current liabilities fell
23.4% (including repayment of bank debt) during the year under review. Your
Manager comments in detail on the performance of the various components of the
portfolio against their benchmarks in their Report.
At 31 August 2003 the breakdown of the Group's assets was as follows:
Market-value %
#000
UK Equity Portfolio 56,150 58.9
Income Portfolio 4,493 4.7
UK Bond Portfolio 26,206 27.5
Cash (Net Liquidity) 8,464 8.9
----------------- ----------------
95,313 100.0
Looking to the future I am happy to report that the outlook for the UK equity
market appears more positive: having staged a marked recovery from the depressed
levels of the Spring of 2003, the market has been through a period of
consolidation and current signs look encouraging. The outlook for bond markets
is less clear with the possibility of further interest rate rises on the
horizon. Your Manager's asset allocation reflects these factors and your Board
looks forward to a more rewarding year. The Board's decision to retain a
substantial level of gearing has been a positive factor recently and I am
hopeful that this will continue to be the case.
Finally I would like to thank Chris Phillips, who resigned as a Director of the
Company and its subsidiary on 19 September 2003, for his valuable contribution
and to wish him every success in his new role.
Jonathan Carr
Chairman
19 November 2003
ROYAL LONDON UK EQUITY & INCOME SECURITIES PLC
Investment Manager's Report
for the year ended 31 August 2003
Summary
During the year to 31 August 2003 there was a gradual improvement in global
economic prospects. This reflected the considerable loosening of fiscal and
monetary policy in the USA and Europe (including the UK) and an improvement in
business & consumer confidence following the Iraq war.
Securities markets proved to be volatile over the year. UK equity prices fell in
early 2003 in the run up to hostilities in the Middle East, a trend made worse
by selling from life and pension funds. A low point was reached in March 2003,
but there was a strong recovery from this level, with the main UK equity index
rising by over 25%. Bond prices tended to move in opposite directions to equity
prices over the year. In the latter part of the year, US treasury yields rose
sharply in anticipation of higher growth in 2004. This had an impact upon UK
yields where ten year yields rose from below 4% in June to 4.6% by the end of
August 2003.
The fall in asset prices in the first half of the financial year proved to be
extremely detrimental to split capital securities. During the latter part of
2002, bank debt has been reduced from #70m to #50m to comply with banking
covenants. This was financed through the sale of equity and bond securities,
incurring breakage costs of #1,059,000.
Economic and market background
During the year, UK base rates were lowered to 3.5% as the Monetary Policy
Committee responded to weak economic growth recorded in the first half of 2003.
This represented the lowest level of base rates since the mid 1950s and should
be seen in a global context in which the major monetary authorities were
concerned about the threat of deflation.
In the US the Federal Reserve took the lead in warning about deflation and over
the year official US rates were reduced from 1.75% to 1%. European rates were
also reduced, ending the year at 2%, although the European Central Bank appeared
more reluctant to stimulate activity despite the poor economic performance of
the major European economies. Post the Iraq war, business and consumer
confidence improved and, in consequence, investors began to expect rises in
interest rates. This improvement in sentiment was also reflected in higher
consensus growth forecasts for the leading economies.
In the UK it is likely that growth in 2003 will be around 2% with the prospect
of over 2.5% for 2004. Our forecasts are modestly below official expectations as
we feel that the government's forecasts on productivity growth may be too high.
Official inflation forecasts, on the other hand, look reasonable and it is
expected that the UK will experience stable inflation for at least the next two
years.
Growth portfolio
During the year the broader stockmarket indices made little progress - a rise in
the FTSE All Share Index of only 0.9%. However, this simple statistic does no
justice to the very volatile market movements between the Company's first and
second halves - a decline of 22% followed by an increase of 30%. It also hides
the very strong performance by mid-cap and smaller companies in the run up to
the Company's year end.
There was little to encourage stockmarkets during the early months of the year
under review. Company results continued to disappoint with regular profits
warnings from both sides of the Atlantic. Economic news was downbeat with the
Chancellor reducing his growth forecasts in his autumn statement. The Bank of
England lowered interest rates early in 2003 to counter weakening consumer
demand and the poor manufacturing outlook. There was increasing concern over the
potential outbreak of war in the Middle East which adversely affected market
sentiment. Early in 2003 the UK market fell on 11 consecutive days, an
unprecedented event in recent decades.
Once it was clear that the conflict in Iraq was to be short lived, the market
was well placed to rally from very oversold levels. The uncertainty of a long
drawn-out war was no longer overhanging the market, company results were not
getting any worse, M & A activity started to return and the Global macroeconomic
background appeared to be responding to various stimulatory measures.
Against this background, the leadership in market changed dramatically during
the year. This favoured those stocks and sectors well placed to benefit from a
pick up in any cyclical activity at the expense of the more defensive ones. For
example, beverages, food manufacturing, drugs, utilities and tobaccos all
significantly under-performed the market and were well represented in the
portfolio.
Investments that served the portfolio well include Whitbread, GUS, BHP Billiton,
Wolseley, Rio Tinto, Standard Chartered and Vodafone, all were overweight and
outperformed the market by at least 10%. The shift into higher yielding
equities, that was mentioned in last year's report, has resulted in a portfolio
yield higher than the market average. During the year additions were made to a
range of stocks including BP, GUS, BAA, Scottish & Newcastle and Royal Bank of
Scotland. New investments were made in Headlam Group and BHP Billiton.
Bond portfolio
Corporate bonds outperformed government bonds over the year. This reflected the
steady on-going demand for bonds by institutions, seeking a yield advantage over
government securities, and an improvement in the financial health of the
corporate sector.
The main characteristics of the Bond portfolio were retained during the year. A
high exposure to non-rated bonds, a bias towards higher-yielding investment
grade debt and a substantial investment in bank preference shares were evident
throughout the year.
Overall, the portfolio was broadened and the unit size of holdings reduced. At
the end of the year the Bond portfolio consisted of 53 holdings; by value 64.9%
were rated investment grade by at least one major rating agency and the balance
was secured against some form of specific asset - usually property or financial
security.
During the year the portfolio was adversely impacted by several corporate
developments. First Hydro, Mutual Securitisation and Fixed Link Finance recorded
falls in value and all currently trade at 80% of nominal value. First Hydro was
affected by concerns about the fall in the price of UK electricity; Mutual
Securitisation was impacted by the problems of the UK life assurance sector; and
Fixed Link Finance is the senior debt of Eurotunnel plc.
Income portfolio
During the year the value of the Income portfolio fell. This reflected a fall in
the price of securities and the sale of certain shares.
Over the course of the year the weakness of the equity market and the geared
nature of the portfolio investments led to a number of holdings being suspended
and subsequently liquidated. The prospects for the recovery of any value from
these investments is low, reflecting the subordinated nature of geared ordinary
and income shares.
The exposure to property-related investment companies provided support to the
Income portfolio. Real Estates Opportunities appreciated considerably over the
year as investors focused upon the underlying asset strength of the company.
During the year the exposure to the geared ordinary shares of this company was
reduced as opportunities were taken in the latter part of the year to sell stock
above asset value. In August 2003 a holding was taken in Real Estates
Opportunities 7.5% convertible loan stock 2011.
Over the year the Income portfolio's heavy weighting in companies investing in
financial sectors was maintained. This reflected the view that the prospects for
financial companies in the UK were relatively good.
Performance
Excluding the effects of gearing, the Company's investments produced a total
return of +1.2%. At the asset class level, the UK equity return of +2.2%
compared to +4.6% for the FTSE All-Share, while the bond component return of
+8.4% out-performed that of its benchmark, the Barclays Non-Gilt Over Ten Year
Index, which returned +6.1%. The income portfolio had a return of -29.9%
compared to the AITC SCI Composite Index (comprising a fixed weighting of 25%
income shares and 75% ordinary shares), of +9.4%.
Investment outlook
The investment outlook appears to be more encouraging than at the end of August
2002. The relaxation in monetary and fiscal policies, the signs of improving
business and consumer confidence and the reduced prospect of deflation can be
taken as positive developments. Against such a background, the UK equity market
should continue to make progress. However, equity valuations in the US remain
high and this remains the greatest threat to a sustained recovery in UK equity
prices.
The UK economy has become more unbalanced over the last year, with government
expenditure and rising house prices acting as powerful factors stimulating the
economy. Business investment has not recovered and this may reflect the
relatively slow improvement in UK corporate profitability. Interest rates may
rise further during 2004, but market expectations of the speed and the ultimate
level of UK base rates seem too pessimistic. The Managers believe that UK base
rates will end 2004 at 4% and that bond returns will lag equity returns over the
next twelve months.
This background should give some stability to the Income portfolio. However, the
weakness and volatility of markets over the last two years and the actions taken
by Boards to comply with banking covenants has meant that the income generation
of the portfolio has been severely impacted.
Royal London Asset Management Limited
Investment Manager
19 November 2003
ROYAL LONDON UK EQUITY & INCOME SECURITIES PLC
PROFIT AND LOSS ACCOUNT
For the year ended 31 August 2003
(Unaudited) (Audited)
Year ended 31 August 31 August 2001 to 31
2003 August 2002
#'000 #'000
Profit on ordinary activities before and after taxation - -
Non-equity appropriations (1,396) (1,679)
------------ ------------
Retained loss for the year (1,396) (1,679)
======= =======
No operations were acquired or discontinued during the year.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
For the year ended 31 August 2003
There are no recognised gains or losses other than the loss in the year (2002:
same).
BALANCE SHEET
at 31 August 2003
(Unaudited) (Audited)
2003 2002
#'000 #'000
Current assets
Debtors 20,042 21,720
Cash at bank 8 9
--------------- ----------------
Total net assets 20,050 21,729
--------------- ----------------
Capital and reserves
Called-up share capital 50 50
Share premium 20,000 20,000
Profit and loss account (2,399) (1,679)
ZDP redemption reserve 2,399 1,679
Capital contribution - 1,679
-------------- -------------
20,050 21,729
--------------- ---------------
Shareholders' funds
Attributable to equity shareholders 4,227 50
Attributable to non-equity shareholders 15,823 21,679
---------------- ---------------
20,050 21,729
---------------- ---------------
Pence Pence
Net asset value per:
Ordinary share (Note 2) 8,454.00 100.11
ZDP share (Note 2) 117.87 108.40
The accounts were approved by the Directors on 19 November 2003.
Jonathan Carr
Chairman
NOTES TO THE ACCOUNTS
for the year ended 31 August 2003
1. Accounting policies
Basis of accounting
The accounts are prepared on the historical cost basis of accounting.
The Statement of total return prepared in the prior year has been replaced with
a profit and loss account and a statement of total recognised gains and losses.
This has resulted in a further two reserves, Profit and Loss account and capital
contribution. The annual incremental entitlement of the Zero Dividend Preference
Shares has been appropriated from the profit and loss account rather than the
capital reserve.
All of the Company's operations are of a continuing nature.
The Company is a wholly owned subsidiary of Royal London UK Equity & Income
Trust plc, a company registered in the United Kingdom.
2. Net asset value per share
Net asset value per ordinary share is based on net assets attributable to the
ordinary shares of #4,227,000 (2002: #50,000) and 50,000 (2002: 50,000) ordinary
shares in issue at 31 August 2003.
Net asset value per ZDP share is based on net assets attributable to the ZDP
shares of #15,823,000 (2002: #21,679,000) and 13,424,100 (2002: 20,000,000) ZDP
shares in issue at 31 August 2003.
3. Parent undertaking
The company is a wholly owned subsidiary undertaking of Royal London UK Equity &
Income Trust plc, an investment trust company registered in England and Wales
and operating in the United Kingdom.
4. Cash flow statement
The company has taken advantage of the exemptions allowed by FRS 1 (revised) not
to prepare a cash flow statement as it is a wholly owned subsidiary of Royal
London UK Equity & Income Trust plc.
5. Accounts
The above financial information for the year ended 31 August 2003 does not
constitute statutory accounts as defined in Section 240 of the Companies Act
1985. The comparative financial information is based on statutory accounts for
the period end 31 August 2002. These accounts, upon which the Auditors issued an
unqualified opinion, have been delivered to the Registrar of Companies.
Statutory accounts for the year ended 31 August 2003 will be delivered to the
Registrar of Companies in due course.
6. Annual General Meeting
The Annual General Meeting of Royal London UK Equity & Income Securities plc
will be held on 16 December 2003 directly following the Annual General Meeting
of Royal London UK Equity & Income Trust plc, to be held at 12 noon.
20 NOVEMBER 2003
This information is provided by RNS
The company news service from the London Stock Exchange
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