TIDMBTEM
RNS Number : 2418W
British Empire Trust PLC
13 November 2017
BRITISH EMPIRE TRUST PLC
('British Empire' or the 'Company')
LEI: 213800QUODCLWWRVI968
Annual Financial Report for the year ended 30 September 2017
A copy of the Company's Annual Report for the year ended 30
September 2017 will shortly be available to view and download from
the Company's website, http://www.british-empire.co.uk. Neither the
contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other
website) is incorporated into, or forms part of, this
announcement.
Printed copies of the Annual Report will be sent to shareholders
shortly. Additional copies may be obtained from the Corporate
Secretary, Link Company Matters Limited, on 01392 477500.
The Annual General Meeting ('AGM') of the Company will be held
on 20 December 2017 at 11.00am at 11 Cavendish Square, London, W1G
0AN
The Directors have proposed the payment of a final dividend of
10.0p per Ordinary Share which, if approved by shareholders at the
forthcoming AGM, will be payable on 5 January 2018 to shareholders
whose names appear on the register at the close of business on 8
December 2017 (ex-dividend 7 December 2017).
The following text is copied from the Annual Report and Accounts
(page references refer to pages in the Annual Report and
Accounts):
STRATEGIC REPORT
COMPANY PERFORMANCE
Financial Highlights
- Net asset value ('NAV') per share on a total return basis
increased by 18.8%
- Benchmark(1) index increased by 16.3%
- Final dividend increased by 3.1% to 10.0p
- Share price total return of 18.7%
Performance Summary
Net asset value per share (total return) for the year
to 30 September 2017(2) 18.8%
Share price total return for the year to 30 September
2017 18.7%
30 September 30 September
2017 2016 % change
Indices
MSCI All Country World ex-US Index
(GBP adjusted total return)(1) 450.81 387.51 16.33%
MSCI All Country ex-US Value Index
(GBP adjusted total return) 268.74 227.08 18.35%
Discount
(difference between share price
and net asset value)(3) -9.92% -9.64%
Year to Year to
30 September 30 September
2017 2016
Earnings and Dividends
Investment income GBP17.39m GBP20.69m
Revenue earnings per share 10.44p 14.32p
Capital earnings per share 106.99p 141.72p
Total earnings per share 117.43p 156.04p
Ordinary dividends per share 12.00p 11.70p
Special dividends per share - 2.80p
Ongoing Charges Ratio
Management, marketing and other
expenses (as percentage of average
shareholders' funds) 0.87% 0.89%
2017 Year's Highs/Lows High Low
Net asset value per share 799.17p 673.85p
Net asset value per share (debt
at fair value) 794.06p 661.83p
Share price (mid market) 711.00p 600.00p
(1) The lead benchmark is the MSCI All Country World ex-US
Index.
(2) As per guidelines issued by the AIC, performance is
calculated using net asset values per share inclusive of accrued
income and debt marked to fair value.
(3) As per guidelines issued by the AIC, the discount is
calculated using the net asset value per share inclusive of accrued
income and with the debt at fair value.
Buy-backs
During the year, the Company purchased 9,715,122 Ordinary
Shares, all of which have been placed into treasury, at a cost of
GBP64.6m.
Alternative Performance Measures
For all Alternative Performance Measures included in this
Strategic Report, please see definitions in the glossary in the
Annual Report and Accounts.
CHAIRMAN'S STATEMENT
This report covers the period from 1 October 2016 to 30
September 2017.
Investment Performance
Your Company delivered strong performance over the year, with a
net asset value total return of 18.8%, which was 2.5 percentage
points higher than the benchmark, the MSCI All Country World ex-US
Index.
Over the past two years, your Company's investment portfolio has
been more concentrated and reflects greater conviction on the part
of the Investment Manager about opportunities for return. Following
this statement, his report sets out the factors affecting
investment returns during the year (including changes in underlying
asset value, discount levels, shareholder activism and corporate
events). The report also assesses in detail the positioning of the
key constituents of the portfolio and their outlook. It also sets
out the major contributors and detractors to performance over the
year.
Income and Dividend
Your Board has elected to increase the final dividend to 10.0p
per share, which will result in a total dividend for the year of
12.0p per share. The investment approach of your Investment Manager
is to look to realise the value of the often heavily discounted
underlying assets in the investee companies. This is typically
achieved through corporate action where the timing of resulting
revenues in any given year is uncertain. However, the Company has
substantial revenue reserves and, as part of the final dividend,
some 1.2p per share will be distributed from reserves. The Board
would expect in future years at least to maintain the level of
ordinary dividend paid to shareholders.
Amendments to the Articles of Association
As part of the business to be proposed at the Annual General
Meeting, the Board is seeking shareholder approval for the adoption
of new articles of association. Recent amendments to the
regulations governing investment trusts removed the requirement for
the articles of association of an investment company to prohibit
the distribution of capital profits. Accordingly, the Board is
seeking authority at the Annual General Meeting to amend the
articles of association to allow the Company to distribute capital
profits. The Board believes that the removal of this restriction
will give the Company greater flexibility in the long term as it
will enable the Company to make distributions from any surplus
arising from the realisation of any investment. However, the Board
has no intention of exercising this authority at the current
time.
The Board is also taking the opportunity to propose some
additional amendments to the articles of association to reflect
other recent regulatory changes. These changes are further detailed
on page 40.
Gearing
While we are mindful of the extended rally in many markets since
the global financial crisis, long-term debt remains available at
interest rates which appear very attractive by historical
standards. The Investment Manager also believes that there continue
to be significant investment opportunities available at attractive
valuations. The Board has therefore approved a further modest
increase in debt, of EUR20m unsecured private placement loan notes
which were issued after the year end on 1 November 2017. If all of
this debt is deployed, gearing will be 7.9% of net assets, based on
the value of your assets as at the date of issue.
Discount
The discount at which the Company's shares trade has generally
been in the range of 10% to 12% over the year and at the year end
was 9.9%.
Your Board continues to believe that it is in the best interests
of shareholders to use share buybacks with the aim of limiting the
volatility in the discount and this year some 9.7 million shares
were bought back. One direct effect of the buybacks was to increase
NAV per share for remaining shareholders by 0.8% over the
accounting year.
While share buybacks seek to address any oversupply of shares,
equally important is stimulating demand. The Investment Manager,
with support from external advisers, has continued its efforts to
explain its unique investment philosophy to relevant investment
audiences and it is encouraging to see a number of new
shareholders.
Corporate Broker
On 3 April 2017, we announced the appointment of Jefferies Hoare
Govett as the Company's corporate broker. As part of its role,
Jefferies executes share buybacks on the Company's behalf.
Board
On 9 October 2017, we announced that, following my retirement
from the Board after this year's Annual General Meeting ('AGM'),
Susan Noble will assume the role of Chairman.
It has been a huge privilege for me to have contributed to
British Empire's continuing success over the last 15 years and
during such an interesting period in the Company's 126 year
history, including the global financial crisis. I am confident that
I leave the Company in good hands, with a strong and capable Board
and an excellent team of portfolio managers at AVI, ably led by Joe
Bauernfreund.
Susan's appointment as Chairman is part of a process of
refreshing the Board. We announced in March the appointment of
Calum Thomson as a non-executive Director of the Company.
Subsequently, Calum succeeded Andrew Robson as Chair of the Audit
Committee when Andrew retired on 31 May 2017. We thank Andrew for
his substantial contribution over several years as a Director and
as Chairman of the Audit Committee.
My colleagues are at an advanced stage in the process of seeking
a new Director with the assistance of professional search
consultants and an appointment will be announced shortly.
Outlook
Equity markets have proved to be remarkably resilient and the US
market in particular has had a long period of strength, despite
uncertainty surrounding the trend of interest rates and political
issues worldwide.
The underlying performance of most of the core portfolio
companies continues to improve and there remains the prospect,
given British Empire's strict investment process, that asset values
may rise and discounts contract further. The increased exposure to
Japan through a basket of well-placed smaller companies with strong
cash and market positions has done well so far.
The policy of continuing to stick to our knitting has proved to
be the right one and there is also clear evidence that AVI's well
thought out active involvement in some portfolio companies has
improved shareholder value significantly over time. AVI's continued
thorough research into the underlying value of the Company's core
investments and other opportunities, together with corporate
activity and shareholder activism, should enhance the prospect of
discounts narrowing further.
Looking further ahead, we are confident that there are
sufficient opportunities for investment to have added modestly to
the Company's long-term gearing levels.
Annual General Meeting
I look forward to seeing shareholders at the AGM, which this
year will be held on Wednesday, 20 December at 11.00am at 11
Cavendish Square, London W1G 0AN.
This Statement forms part of the Strategic Report. The Strategic
Report has been approved and signed on the Board's behalf.
Strone Macpherson
Chairman
10 November 2017
OVERVIEW OF STRATEGY
Total returns to 30 September 2017
Company
1 Year 10 Years
18.8% 85.0%
Benchmark
MSCI All Country World ex-US Index
1 Year 10 Years
16.3% 80.5%
Discount
30 September 30 September 2016
2017
9.9% 9.6%
Estimated Percentage added to Net Asset Value per Share
from Buybacks
2017 2016
0.8% 0.8%
Ongoing Charges Ratio
2017 2016
0.87% 0.89%
Core Positions the Company Typically Holds
25-35
Top Ten Investments Represent
47.0%
of total assets less current liabilities
Company Purpose
The Company is an investment trust. Its investment objective is
to achieve capital growth through a focused portfolio of mainly
listed investments, particularly in companies whose shares stand at
a discount to estimated underlying net asset value.
Strategy
Our strategy is to seek out-of-favour companies whose assets are
misunderstood by the market or under-researched, and which trade
significantly below their intrinsic value or where pressure can be
brought to bear to enact change to release value for
shareholders.
Investment Approach
As an investment trust, the Company's most important
relationship is with the Investment Manager.
The Company's assets are managed by AVI. AVI aims to deliver
superior returns and specialises in investment in securities that
for a number of reasons may be selling on anomalous valuations.
The Investment Manager has the flexibility to invest around the
world and is not constrained by any fixed geographic or sector
weightings, but does seek to maintain a concentrated yet
diversified portfolio. No more than 10% of the Company's
investments may be in unlisted securities. AVI's investment
philosophy is described in more detail in the Annual Report and the
Company's Investment Policy.
Key Performance Indicators ('KPIs')
The Company uses KPIs as an effective measurement of the
development, performance or position of the Company's business, in
order to set and measure performance reliably. These include Net
Asset Value Total Return, Discount to Net Asset Value and Value for
Money.
The Company's Board of Directors meets regularly and at each
meeting reviews performance against a number of key measures.
Net asset value total return
The Directors regard the Company's net asset value total return
as being the overall measure of value delivered to shareholders
over the long term. Total return reflects both the net asset value
growth of the Company and also dividends paid to shareholders. The
Investment Manager's investment style is such that performance is
likely to deviate materially from that of any broadly based equity
index. The Board considers the most important comparator to be the
MSCI All Country World ex-US Index, which was adopted as the
Company's benchmark from 1 October 2013.
A full description of performance and the investment portfolio
is contained in the Investment Review, commencing on page 16 of the
Annual Report.
The discount at which the Company's shares trade compared with
net asset value
The Board believes that an important driver of an investment
trust's discount or premium over the long term is investment
performance. However, there can be volatility in the discount or
premium. Therefore, the Board seeks shareholder approval each year
to buy back and issue shares with a view to limiting the volatility
of the share price discount or premium.
During the year under review, the discount has moved generally
in a range from 10% to 12%, with a high of 13.6% and a low of 8.3%,
based on closing prices and, as at 30 September 2017, stood at
9.9%.
During the year under review, no new shares were issued and 9.7m
shares were bought back and placed into treasury, adding an
estimated 0.8% to net asset value per share to the benefit of
continuing shareholders. The shares were bought back at an average
discount of 11.4%.
Value for money
The Board continues to be conscious of expenses and works hard
to maintain a sensible balance between good service and costs.
For the year ended 30 September 2017, the ongoing charges ratio
was 0.87%, down slightly from the previous year.
Principal Risks
When considering the total return of the investments, the Board
must also take account of the risk which has been taken in order to
achieve that return. There are many ways of measuring investment
risk, and the Board takes the view that understanding and managing
risk is much more important than setting any numerical target. The
Board looks at risk from many different angles, an overview of
which is set out below. It has carried out a robust assessment of
the principal risks facing the Company, including those that would
threaten its business model, future performance, solvency or
liquidity.
The Investment Manager presents reports on portfolio returns and
a set of contribution and risk statistics at each Board meeting.
The objective of using these techniques is not to be prescriptive,
but to understand levels of risk and how they have changed over
time. The purpose of this focus on risk is to ensure that the
returns earned are commensurate with the risks assumed. The
investment approach followed by the Investment Manager aims, over
the long term, to achieve returns in excess of those produced by
the market.
Portfolio diversification
Conventional wisdom holds that the most effective way of
reducing risk is to hold a diversified portfolio of assets. The
Company typically now holds 25-35 core positions. This range could
be considered a relatively concentrated (and therefore risky)
portfolio. It is important to note that, in line with its
investment objective, the Company's holdings are mostly in stocks
which are themselves owners of multiple underlying businesses.
Thus, the portfolio is much more diversified on a look-through
basis than if it were invested in companies with a single line of
business. For the same reason, the top ten portfolio positions,
representing 47.0% of total assets at the year end, are in practice
highly diversified on a look-through basis. This diversification is
evident at country, sector and currency levels.
Investment strategy
The Investment Manager has a clear investment strategy, as set
out on page 16. There will be periods when this strategy
underperforms in comparison to its benchmark and its peer group.
The Board monitors performance at each Board meeting, and reviews
the investment process thoroughly at least annually.
Gearing
The Company is permitted to use gearing, and has had a GBP15m
debenture in place for many years. In January 2016, the Company
also issued two tranches of fixed-rate, long-dated Loan Notes,
denominated in Sterling (GBP30m) and Euros (EUR30m).
Taking account of the GBP15m debenture liability and the Loan
Notes, the Company's debt as a percentage of equity as at 30
September 2017 was 7.9% (2016: 8.4%).
A further EUR20m of Loan Notes were issued on 1 November 2017
for a term of 20 years at a fixed rate of 2.93%.
Subsequent to the issue of the new Loan Notes, the debt as a
percentage of equity was 9.5%.
There is a degree of risk associated with gearing. While gearing
should enhance investment performance over the long term, it is
likely to exacerbate any decline in asset value in the short term.
There are covenants attached to both the Loan Notes and the
Debenture, which could be breached in extreme market conditions and
could require early repayment, which could be expensive. Total
return results, when issued on the basis of debt being marked to
estimated market value, are likely to be more volatile. The value
of the Euro tranche of the Loan Notes will fluctuate with currency
movements, although it should be noted that the portfolio contains
a significant amount of Euro denominated assets. It is possible
that the investment returns will not match the borrowing cost over
time, and therefore the gearing will be dilutive.
The Board manages this risk by setting its fixed gearing at a
prudent level. It obtained the 20-year borrowing in January 2016 at
a blended fixed annualised rate of 3.79%, which the Board and AVI
consider to be attractive over the long term. The covenants are set
at levels with substantial headroom. The two significant covenants
on the Loan Notes are that total indebtedness should not exceed 40%
of net assets and net assets should not fall below GBP300m, whilst
the Debenture specifies that borrowings shall not exceed 100% of
adjusted capital and reserves. The covenants on the further debt
issued on 1 November 2017 are substantially similar to those on the
existing Loan Notes.
Foreign exchange
Foreign exchange risk is an integral part of a portfolio which
is invested across a range of currencies. This risk is managed by
the Investment Manager mainly by way of portfolio diversification
but the Investment Manager may, with Board approval, hedge currency
risk.
Discount
The shares of investment trusts frequently trade at a discount
to their published net asset value. The Board seeks to manage the
risk of any widening of the discount by regularly reviewing the
level of discount at which the Company's shares trade, and it will,
if necessary and appropriate, limit any significant widening
through measured buybacks of shares. The value of the Company's
shares will additionally be subject to the interaction of supply
and demand, prevailing net asset values and the general perceptions
of investors. The share price will accordingly be subject to
unpredictable fluctuations and the Company cannot guarantee that
the share price will appreciate in value.
Other risks
Further risks which can impact on performance are a loss of key
personnel (especially within the investment management team);
regulatory (principally breaches of either UKLA Listing Rules,
Disclosure Guidance and Transparency Rules or Sections 1158/1159 of
the Corporation Tax Act 2010) and failure of systems or controls.
In managing these risks, the Company reviews staffing and
succession planning of the Investment Manager at least annually to
ensure that there are adequate qualified staff/capacity available,
and in particular requires the Investment Manager to notify the
Board promptly of any changes in senior staff. The Company also
reviews the relevant systems and controls, including their cyber
crime controls, at the Investment Manager and at other third-party
suppliers, including the Custodian, Depositary and Administrator.
The Board monitors the risks inherent in the changing of a
supplier, and also considers the risk controls at new
suppliers.
There were no material changes to the Company's risk profile
during the year, other than normal movements in market risk.
The principal financial risks are examined in more detail in
note 14 to the financial statements on pages 65 to 71.
Environmental, Social and Governance Issues
The Company recognises that social, human rights, community,
governance and environmental issues can have an effect on some of
its investee companies. AVI's Stewardship Policy also recognises
that the social and environmental consequences of corporate
activity are important factors in determining the creation and
maximisation of shareholder value over the long term.
The Company is an investment trust and so its own direct
environmental impact is minimal. The Company has no greenhouse gas
emissions to report from its operations, nor does it have
responsibility for any other emissions-producing sources under the
Companies Act 2006 (Strategic Report and Directors' Reports)
Regulations 2013.
The Company has no employees. The Directors are satisfied that,
to the best of their knowledge, the Company's principal suppliers,
which are listed on the inside back cover of this report, comply
with the provisions of the UK Modern Slavery Act 2015.
The Directors do not have service contracts. There are five
Directors, four male and one female. Further information on the
Board's policy on recruitment of new Directors is contained on page
42.
Future Strategy
The Board and the Investment Manager have long believed in their
focus on investment in high-quality undervalued assets and that,
over time, this style of investment has been well rewarded.
The Company's overall future performance will, inter alia, be
affected by: the Investment Manager's decisions; investee
companies' earnings, corporate activity, dividends and asset
values; and by stock market movements globally. Stock markets are
themselves affected by a number of factors, including: economic
conditions; central bank and other policymakers' decisions;
political and regulatory issues; and currency movements.
The Company's performance relative to its peer group and
benchmark will depend on the Investment Manager's ability to
allocate the Company's assets effectively, and manage its liquidity
or gearing appropriately. More specifically, the Company's
performance will be affected by the movements in the share prices
of its investee companies in comparison to their own net asset
values.
The overall strategy remains unchanged.
TEN LARGEST EQUITY INVESTMENTS
The top ten equity investments make up 47.0% of total assets
less current liabilities, with underlying businesses spread across
a diverse range of sectors and regions.
1. PARGESA
Nature of business: Investment Holding Company
Valuation: GBP55.5m
% of total assets less current liabilities: 5.7%
Discount: -32.8%
Through Pargesa's stake in GBL it holds interests in a number of
listed companies. The portfolio is concentrated on a limited number
of major holdings with the aim of creating long-term value through
active ownership.
2. EXOR
Nature of business: Investment Holding Company
Valuation : GBP50.1m
% of total assets less current liabilities: 5.1%
Discount : -29.4%
EXOR is an Italian-listed holding company run by the Agnelli
family, which traces its roots back to the formation of FIAT in
1899. It has exposure to four main assets, three of which are
listed: Fiat Chrysler Automobiles, Ferrari and CNH, and one
unlisted: PartnerRe.
3. RIVERSTONE ENERGY
Nature of business: Investment Company
Valuation: GBP47.4m
% of total assets less current liabilities: 4.9%
Discount: -17.7%
A London-listed closed-end fund investing in oil & gas
companies, mainly in the US and Canada with a focus on
unconventional (shale) assets. Backed by a management team with a
strong track record in the sector, Riverstone Energy was able to
capitalise on the distress in the sector following the oil price
crash to assemble an attractive portfolio concentrated in the
lowest-cost basins in North America. The company trades on a 18%
discount to NAV.
4. SYMPHONY INTERNATIONAL
Nature of business: Investment Company
Valuation: GBP47.1m
% of total assets less current liabilities: 4.8%
Discount: -27.9%
Symphony is a London-listed closed-end fund with a focus on the
Asian consumer. The shares trade at a deep discount to the value of
the investment portfolio, half of which is invested in fast-growing
Minor International, a Thai-listed hotels and restaurants group
with a global footprint. Other exposures include real estate and
healthcare.
5. WEL
Nature of business: Investment Holding Company
Valuation: GBP45.5m
% of total assets less current liabilities: 4.7%
Discount: -27.1%
Wendel is a French-listed holding company with exposure to a
diverse range of sectors. Major business lines include
certification and inspection services, consumer packaging and
mobile telephone infrastructure through their investments in Bureau
Veritas, Constantia Flexibles and IHS.
6. JPEL PRIVATE EQUITY
Nature of business: Investment Company
Valuation: GBP44.4m
% of total assets less current liabilities: 4.6%
Discount: -19.3%
JPEL Private Equity is a London-listed closed-end fund investing
in private equity investments primarily in the US and Europe. The
portfolio is well-balanced between mature legacy funds and more
recent secondary direct investments - the former generate
prodigious cash flows that will now be distributed to shareholders
under the new realisation policy; the latter are largely high
growth companies bought at attractive valuations that have produced
strong NAV growth.
7. JARDINE STRATEGIC
Nature of business: Investment Holding Company
Valuation: GBP43.8m
% of total assets less current liabilities: 4.5%
Discount: -23.5%
An Asian holding company which holds significant interests in
Jardine Matheson, Hongkong Land, Jardine Cycle & Carriage,
Dairy Farm and Mandarin Oriental by way of a cross shareholding
between Jardine Matheson and Jardine Strategic. The group
structure, which is controlled by the Keswick family, provides
broad exposure to Asian businesses at an attractive discount to the
value of their listed underlying holdings, while providing the base
for long-term value creation through the stable stewardship of
their investee companies.
8. TETRAGON FINANCIAL
Nature of business: Investment Company
Valuation: GBP43.4m
% of total assets less current liabilities: 4.5%
Discount: -34.1%
A Euronext and London-listed closed-end fund investing in a
multi-asset portfolio with exposure to CLO equity, hedge funds, and
real estate. Tetragon wholly owns or has substantial stakes in the
asset managers that manage its portfolio, and the ultimate IPO of
this asset management business is likely to release some of the
value found in the company's 34% discount to NAV.
9. ADLER REAL ESTATE
Nature of business: Real Estate Company
Valuation: GBP42.3m
% of total assets less current liabilities: 4.3%
Discount: -13.6%
Adler Real Estate owns a portfolio of c. 50,000 residential
units throughout Germany. The company primarily focuses on
affordable housing while improving operating performance of these
often undermanaged assets. It is trading on a 14% discount to NAV
while peers are trading at or above NAV.
10. PERSHING SQUARE HOLDINGS
Nature of business: Investment Company
Valuation: GBP38.0m
% of total assets less current liabilities: 3.9%
Discount: -24.1%
A Euronext and London-listed closed-end fund investing in a
highly-concentrated, predominantly long portfolio of listed US
equities. The manager's reputation has been damaged by the
catastrophic losses experienced in their out-sized position in
Valeant Pharmaceuticals, but that enabled us to make the investment
at a wide discount to NAV despite the manager's long-term track
record still being outstanding. The shares trade on a 24% discount
to NAV, which we believe is far too wide.
INVESTMENT PORTFOLIO
AT 30 SEPTEMBER 2017
% of
total assets
% of investee Valuation less current
Company Nature of business company GBP'000 liabilities
------------------------------- ---------------------- ------------- --------- -------------
Investment Holding
Pargesa Company 1.2 55,489 5.7
------------------------------- ---------------------- ------------- --------- -------------
Investment Holding
EXOR Company 0.4 50,120 5.1
------------------------------- ---------------------- ------------- --------- -------------
Riverstone Energy Investment Company 4.6 47,427 4.9
------------------------------- ---------------------- ------------- --------- -------------
Symphony International
Holdings Investment Company 14.7 47,068 4.8
------------------------------- ---------------------- ------------- --------- -------------
Investment Holding
Wendel Company 0.8 45,546 4.7
------------------------------- ---------------------- ------------- --------- -------------
JPEL Private Equity Investment Company 15.1 44,392 4.6
------------------------------- ---------------------- ------------- --------- -------------
Investment Holding
Jardine Strategic Company 0.1 43,814 4.5
------------------------------- ---------------------- ------------- --------- -------------
Tetragon Financial Investment Company 4.7 43,398 4.5
------------------------------- ---------------------- ------------- --------- -------------
Adler Real Estate Real Estate Company 6.3 42,335 4.3
------------------------------- ---------------------- ------------- --------- -------------
Pershing Square Holdings Investment Company 1.7 38,048 3.9
------------------------------- ---------------------- ------------- --------- -------------
Top ten investments 457,637 47.0
------------------------------------------------------- ------------- --------- -------------
Investment Holding
Investor AB 'A' Company 0.3 37,399 3.8
------------------------------- ---------------------- ------------- --------- -------------
NB Private Equity Partners Investment Company 3.7 36,132 3.7
------------------------------- ---------------------- ------------- --------- -------------
Tokyo Broadcasting Asset-backed Company 1.4 35,907 3.7
------------------------------- ---------------------- ------------- --------- -------------
Aberdeen Private Equity Investment Company 25.4 35,431 3.6
------------------------------- ---------------------- ------------- --------- -------------
Investment Holding
Aker ASA Company 1.5 33,934 3.5
------------------------------- ---------------------- ------------- --------- -------------
SC Fondul Proprietatea Investment Company 0.1 31,646 3.3
------------------------------- ---------------------- ------------- --------- -------------
Investment Holding
Toyota Industries Company 0.2 29,237 3.0
------------------------------- ---------------------- ------------- --------- -------------
Third Point Offshore Investment Company 2.7 28,219 2.9
------------------------------- ---------------------- ------------- --------- -------------
Investment Holding
Digital Garage Company 3.4 25,424 2.6
------------------------------- ---------------------- ------------- --------- -------------
Vietnam Phoenix Fund 'C' Investment Company 18.5 23,793 2.4
------------------------------- ---------------------- ------------- --------- -------------
Top twenty investments 774,759 79.5
------------------------------------------------------- ------------- --------- -------------
Investment Holding
Kinnevik AB 'B' Company 0.4 23,725 2.4
------------------------------- ---------------------- ------------- --------- -------------
Investment Holding
Swire Pacific 'B' Company 0.6 21,406 2.2
------------------------------- ---------------------- ------------- --------- -------------
Toshiba Plant Systems Asset-backed Company 1.7 21,066 2.2
------------------------------- ---------------------- ------------- --------- -------------
GP Investments Investment Company 14.6 15,000 1.5
------------------------------- ---------------------- ------------- --------- -------------
Investment Holding
Cosan Ltd Company 1.2 12,220 1.3
------------------------------- ---------------------- ------------- --------- -------------
Pasona Group* Asset-backed Company 2.3 7,668 0.8
------------------------------- ---------------------- ------------- --------- -------------
Tachi-S* Asset-backed Company 1.5 7,346 0.8
------------------------------- ---------------------- ------------- --------- -------------
Enplas* Asset-backed Company 1.1 6,727 0.7
------------------------------- ---------------------- ------------- --------- -------------
Hirano Tecseed* Asset-backed Company 3.2 6,406 0.7
------------------------------- ---------------------- ------------- --------- -------------
Nishimatsuya Chain* Asset-backed Company 1.1 6,320 0.6
------------------------------- ---------------------- ------------- --------- -------------
Top thirty investments 902,643 92.7
------------------------------------------------------- ------------- --------- -------------
Dragon Capital Vietnam
Property Investment Company 15.4 5,852 0.6
------------------------------- ---------------------- ------------- --------- -------------
Nippon Road* Asset-backed Company 1.3 5,395 0.6
------------------------------- ---------------------- ------------- --------- -------------
Yamato Kogyo* Asset-backed Company 0.4 5,290 0.5
------------------------------- ---------------------- ------------- --------- -------------
Kato Sangyo* Asset-backed Company 0.6 4,997 0.5
------------------------------- ---------------------- ------------- --------- -------------
Investment Holding
Swire Pacific 'A' Company 0.1 4,294 0.4
------------------------------- ---------------------- ------------- --------- -------------
Better Capital (2009) Investment Company 2.0 3,628 0.4
------------------------------- ---------------------- ------------- --------- -------------
Toa* Asset-backed Company 1.3 3,381 0.3
------------------------------- ---------------------- ------------- --------- -------------
Ashmore Global Opportunities
- GBP Investment Company 12.6 2,975 0.3
------------------------------- ---------------------- ------------- --------- -------------
Takamatsu Construction* Asset-backed Company 0.3 2,344 0.2
------------------------------- ---------------------- ------------- --------- -------------
Denyo* Asset-backed Company 0.8 2,310 0.2
------------------------------- ---------------------- ------------- --------- -------------
Top forty investments 943,109 96.7
------------------------------------------------------- ------------- --------- -------------
Matsui Construction* Asset-backed Company 0.9 1,850 0.2
------------------------------- ---------------------- ------------- --------- -------------
Daiwa Industries* Asset-backed Company 0.4 1,629 0.2
------------------------------- ---------------------- ------------- --------- -------------
Dai-Dan* Asset-backed Company 0.4 1,499 0.2
------------------------------- ---------------------- ------------- --------- -------------
Nakano* Asset-backed Company 1.0 1,418 0.1
------------------------------- ---------------------- ------------- --------- -------------
EF Realisation Investment Company 8.4 1,006 0.1
------------------------------- ---------------------- ------------- --------- -------------
Total equity investments 950,511 97.5
------------------------------------------------------- ------------- --------- -------------
Total investments 950,511 97.5
------------------------------------------------------- ------------- --------- -------------
Net current assets 23,894 2.5
------------------------------------------------------- ------------- --------- -------------
Total assets less current
liabilities 974,405 100.0
------------------------------------------------------- ------------- --------- -------------
* Constituent of Japanese Special Situations basket.
INVESTMENT REVIEW/INVESTMENT MANAGER'S REVIEW
OVERVIEW OF AVI'S INVESTMENT PHILOSOPHY
British Empire is managed by AVI.
The aim of AVI is to deliver superior investment returns. AVI
specialises in investing in securities that for a number of reasons
may be selling on anomalous valuations.
AVI's investment philosophy is to:
1 Invest in companies trading at discounts to net asset value.
Our focus is to find listed companies that own assets such as
listed securities, property, cash and other businesses. We then
estimate the value of all of those assets. After deducting any
liabilities such as debt or pension liabilities, we arrive at
an estimate of net asset value for that company. We will consider
investing in companies where the discount between the current
share price and our estimate of the value of that business is
wide.
2 Identify good quality underlying assets with appreciation potential
at compelling valuations.
There are many companies trading at discounts to net asset value.
Our aim is to identify companies that own high-quality businesses
where there is not only a wide discount, but also where we consider
there to be a reasonable likelihood of those assets appreciating
in value.
3 Look for events to narrow discounts.
Once we find a good quality business on an attractive valuation,
we then consider whether it is likely that the discount will
narrow. Many companies trade at a discount for a reason and if
that reason persists, then the discount may persist. Catalysts
differ for the various types of company in which we invest. For
example, in the case of a closed-end fund, where we are a large
shareholder we can influence a board to pursue a strategy for
discount narrowing. In the case of a family controlled company,
we would rely on the family to be the activist. Our analysis
would involve trying to understand the interests and objectives
of the controlling shareholder, and whether our interests were
aligned with theirs.
4 Focus on balance sheet strength.
Debt works very well when markets are appreciating. However,
debt can also destroy a lot of value when markets are falling
and the business environment for a particular company deteriorates.
We consider very carefully the balance sheet strength of the
companies in which we invest. Factors which we look at include
the actual quantum of debt relative to the assets of the companies,
the maturity profile of the debt and the cashflows that the businesses
generate.
5 Focus on bottom-up stock picking.
We are not asset allocators attempting to invest a pool of money
across various asset classes. We are equity investors focusing
on a particular style of value investing. We do not hug benchmarks
and we will not own a company just because it is in a benchmark.
We seek to invest in companies that meet the criteria described
above.
Our focus on buying high-quality businesses trading at wide
discounts to their net asset value has served us well over the long
term. There are periods of time, however, when our style is out of
favour and the types of companies in which we invest are ignored by
the broader market. This requires us to be patient and to remain
true to our style, so that when other investors begin to appreciate
the value in those companies, we are well placed to benefit. In the
short term, this means that there could be some volatility in our
returns. However, we are confident that we own high-quality
businesses, which are trading on cheap valuations.
Members of the investment team at AVI invest their own money in
funds which they manage. As at 30 September 2017, AVI's investment
team owned 214,364 shares in British Empire Trust plc.
PERFORMANCE REVIEW
Joe Bauernfreund
Joe is Chief Executive Officer and Chief Investment Officer of
AVI. Joe has been British Empire's named portfolio manager since 1
October 2015, continuing the natural progression that has seen only
three portfolio managers at British Empire in the last 30
years.
Performance
Your Company returned 18.8% during the financial year to 30
September 2017, which is 2.5% ahead of its benchmark the MSCI All
Country World ex-US Index.
Key contributors to investment performance were AP Alternative
(+3.3%), Wendel (+2.3%), Investor AB (+1.7%), JPEL Private Equity
(+1.4%) and Aker (+1.3%).
There were two detractors of note over the period: Hudson's Bay
(-1.8%) and Pershing Square (-1.0%).
Portfolio Commentary
It has been a remarkable year in many respects. Equity markets
have now extended the rally following the financial crisis to eight
years, with many markets reaching all-time highs during 2017.
September marked the 11th successive month of gains for the MSCI
All Country World Index (in USD terms), which ranks as the second
longest period of consecutive gains for the index since its
formation in 1969.
What makes these statistics so remarkable is the fact that, over
the course of the past 12 months, we have experienced extreme
political uncertainty; heightened geopolitical tensions; as well as
the prospect of the end of Quantitative Easing and the start of
interest rate normalisation. However, although broad equity market
valuations are generally elevated compared to their historical
levels, bulls will point to low bond yields as support for equity
markets. So are we due a correction?
Like everyone else, we do not know with any certainty the answer
to this question, nor can we predict if or when markets will decide
that risk has been mis-priced and trigger a fall. What we do know,
however, is that our investment philosophy has been tried and
tested with some success over a 30-year period, and that sensibly
sticking to our framework of investing will likely lead to good
long-term investment returns. With this in mind, there are several
observations about your Company's portfolio that are relevant in
formulating a view about the prospects for future returns.
There are three key determinants of returns for an investor in
British Empire. Two of them relate to the specifics of our
investment strategy - our focus on companies trading at discounts
to NAV - whilst the third relates to the currency effects of having
a Sterling-based fund that invests largely in overseas
companies.
In focusing on companies trading at discounts to NAV, the two
most important drivers of returns will be changes in NAV and
changes in the discount. When considering an investment, we focus
on both aspects of return. Changes in NAV will largely, but not
solely, be a function of both earnings and the multiples applied to
them by the market, whilst the change in discount can be impacted
by shareholder activism and the occurrence of corporate events. The
effect of activism on discounts is an independent variable and not
driven by market valuations.
We pointed out last year that we were confident about the
prospective returns from your Company's portfolio given the 32%
weighted average discount, combined with the potential for discount
contraction arising from corporate events. It is, therefore,
pleasing to be able to report this year that a number of key
contributors to performance owe their strong performance to
corporate events. These are discussed in detail in coming pages,
but we would highlight AP Alternative, Better Capital 2009, DWS
Vietnam Fund and Aker ASA as particular beneficiaries of this
theme. Each saw their discounts disappear or narrow substantially
from the levels at which the investments were made. In addition, in
several cases it was our own efforts to engage constructively with
boards that initially led to the narrowing of the discount. This
type of shareholder activism is an important source of return for
us.
Today, the portfolio discount stands at 26%. Whilst that is six
percentage points narrower than one year ago, it is still very much
wider than the 10% level observed in 2006, which provides some
guidance for where discounts could ultimately reach. In addition,
the prospect of continued corporate activity and events at many
portfolio companies could result in us realising these investments
on zero or low single digit discounts, as was the case in three of
the examples cited in the previous paragraph. In our view, there is
a very real prospect therefore of further discount compression
within the existing portfolio. This is an important consideration
when assessing the prospective returns from the current
holdings.
Turning now to the NAV side of the equation, the considerations
are more complex, as "value" will often be determined by reference
to market valuations and, if these are highly rated, then it
follows that the NAV applied to our investments may also be
overpriced. We deal with this by focusing on corporate events that
are likely to realise value over a period of time, and by owning
high-quality businesses that will likely grow in value over the
long run. The portfolio today contains a number of companies that
are planning on selling assets or restructuring businesses in the
coming year, and we expect the effect of this to be reflected in
the NAV and the discount. Examples of this include Wendel selling a
number of its private assets, EXOR working on unlocking value from
Fiat Chrysler, JPEL Private Equity continuing to realise its
portfolio and Symphony selling down part of its listed portfolio.
These last two will most likely return the cash proceeds to
shareholders. The sale of assets by holding companies, particularly
of unlisted assets which are not always accurately valued by many
investors, could unlock "hidden value" and provide an unanticipated
boost to NAVs.
Reflecting on your Company's portfolio using this analytical
framework gives us confidence that the portfolio is in good shape.
There is much value to be unlocked from corporate events and
shareholder activism and, whilst we are not immune from the
vagaries of equity markets, we do believe that this portfolio is
more attractively valued than the broad market.
In addition, our global remit means that we are free to evaluate
opportunities around the world, and we are not forced to buy
companies in a particular sector or region irrespective of their
valuation merits. The portfolio of 30 core positions gives the
Company exposure to hundreds of underlying companies around the
world. These span a variety of countries, sectors and industries.
We constantly aim to balance the upside potential from corporate
events via discount contraction, with a focus on absolute valuation
levels. Mindful of the general rise in multiples, this year has
seen an important shift in the portfolio: the weighting in Japan at
the year end was almost 20%, whereas it was less than 10% one year
ago. The reasons behind the increased exposure to Japan are rooted
in valuations.
Japan has a number of characteristics that make it a compelling
investment opportunity. From a valuation perspective, it is the one
major global stock market where we are able to find many companies
trading on cheap valuations. In addition, Japanese company
managements are coming under increasing pressure to improve
corporate governance and boost shareholder returns. To capitalise
on both of these factors, we have created a basket of companies
that trade on extremely cheap valuations. Our basket makes up 7.3%
of the overall portfolio and contains over a dozen companies that
have a substantial proportion of their market cap in net cash. This
is a play on the theme of improved corporate governance in Japan.
The potential upside to shareholders from improved balance sheet
efficiency amongst these companies is substantial. In the four
months since we established the basket, it has outperformed the
TOPIX by 11.0% and risen by 9.2% in Sterling. Further comment on
this can be found on page 30.
In addition to the basket investment, we are also taking a more
pro-active approach to engagement with management in Japan. Amongst
some of the larger holdings, we have been communicating with boards
and making suggestions for ways to improve governance and balance
sheet management. We are hopeful that this constructive engagement
will yield positive results for all shareholders.
The final piece in the return picture was the effect of
currencies. The weakening Pound in the months following the Brexit
vote in June 2016 contributed to your Company's returns in the 2016
financial year. Over the past 12 months, the Pound has been a
volatile currency reflecting the ongoing uncertainty over Brexit
and its impact on the UK economy, as well as other macroeconomic
events affecting countries around the world. Whilst the Pound
trades at far lower levels than it did before the Brexit
referendum, over the past 12 months it has strengthened against the
major currencies to which this portfolio is exposed, and thus the
overall impact of currencies was to reduce Sterling returns by
almost 4%. It is not our policy to hedge currency risk and thus
changes in the level of the Pound will continue to have an effect
on your Company's returns.
Given the foregoing portfolio characteristics, the investment
team at AVI remain convinced that the opportunities across our
investment universe are compelling. Consequently, your Company has
been fully invested throughout the past 12 months and has been
utilising most of the debt available to it. Today, the portfolio is
105% invested. In addition, the portfolio continues to be managed
in a high conviction, concentrated manner. The top ten holdings
make up 47% of the portfolio, compared to 55% one year ago and 41%
two years ago. A number of positions were fully exited during the
year - often following some form of corporate event. The proceeds
have been reinvested into existing holdings, as well as a number of
new investments. In the pages that follow, we describe the
investment theses behind some of the main contributors to
performance, as well as the two major investments that have not
delivered positive returns over the period.
Portfolio Review
Contributors
AP ALTERNATIVE ASSETS/ATHENE
Description: Investment Company
Weight*: No longer held
Total return on position FY17 (local)**: 29.7%
Total return on position FY17 (GBP): 31.8%
Contribution (GBP)***: 332bps
Discount: -
% of investee company: No longer held
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
The position in AP Alternative Assets was by some distance the
largest positive contributor over the financial year, adding 332bps
to British Empire's NAV as the position climbed in value by
24.5%.
The Company first invested in AP Alternative Assets in mid-2012,
attracted by the 40% discount and management's unambiguous message
that they saw no better investment than buying back their own
shares at such a cheap rating. Launched in 2006 at a time when US
private equity and hedge fund managers were coming to Europe in
search of permanent capital, AP Alternative Assets was established
to co-invest alongside fund manager Apollo's private equity funds
and in its credit and hedge funds. Just under a third of its NAV
was invested in a privately-held life insurance company called
Athene. The financial crisis saw sharp mark-downs in Apollo's
heavily-levered private equity investments exacerbated by further
leverage at the AP Alternative Assets level. Apollo's response was
aggressive, buying up debt issued by their portfolio companies at
deep discounts to par, and the portfolio had been much stabilised
by the time we invested. Late-2012 saw a restructuring under which
AP Alternative Assets injected its investments into Athene in
exchange for additional shares in Athene, which became a single
asset holding company as a result.
We viewed Athene, a pure-play provider of fixed (mainly
equity-indexed) annuities, as an attractive high-growth business
with clear and embedded cost of capital and competitive advantages
over peers. We added materially to the position in AP Alternative
Assets over the years, despite its shares trading at times at
premiums approaching 30% to official reported NAVs. As our analysis
suggested Athene was appreciably undervalued by the official
valuation at which it was held. Athene's successful IPO in the
first half of December saw us reduce the position, and we sold the
remainder of the combined holding over the next six months as
Athene's share price climbed further.
Over the life of this investment, the position recorded a return
on investment in US Dollars of 115% and an internal rate of return
('IRR') of 44% (140% and 52% respectively in GBP).
WEL
Description: Investment Holding Company
Weight*: 4.7%
Total return on position FY17 (local)**: 32.1%
Total return on position FY17 (GBP): 35.6%
Contribution (GBP)***: 227bps
Discount: -27.1%
% of investee company: 0.8%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
Wendel has been a high conviction investment for over three
years now and was your Company's largest position for much of the
past year. The share price total return from Wendel over the year
was 34%, with 21% of that coming from NAV return and the remainder
from the effects of discount contraction.
We have commented in the past about how Wendel's discount stood
out as anomalously wide when compared to other European
family-controlled holding companies and did not appropriately
reflect the high-quality nature of its assets or the prospect of
corporate transactions unlocking a great deal of hidden value from
their unlisted businesses. One year ago, the discount stood at 33%,
whereas today it has narrowed to 25%. Partly, this reflects the
increased awareness for potential M&A amongst the four largest
unlisted businesses in their portfolio and, additionally, it is
also down to action taken by management to reduce gearing at the
holding company - something which we have long encouraged
management to address.
The likely sale of some of Wendel's unlisted companies is an
exciting prospect and was fundamental to our thesis for having such
a large investment in the company. It is this part of the portfolio
where there is greatest uncertainty about the realisable value and
we expect that ultimately the sale of these businesses will occur
at prices in excess of reported NAVs. The prospect of unlocking
some of this hidden value is an important driver of returns. We
believe it will boost the NAV of the Company and also improve
sentiment, so reducing the discount.
As the market has started to appreciate this potential, we have
taken some partial profits and reinvested the proceeds into other
situations where we believe investors have failed to recognise
value. Wendel remains too cheap in our view and we maintain that
there is plenty of upside to come from NAV growth and further
discount contraction.
INVESTOR AB
Description: Investment Holding Company
Weight*: 3.8%
Total return on position FY17 (local)**: 27.9%
Total return on position FY17 (GBP): 28.9%
Contribution (GBP)***: 174bps
Discount: -20.5%
% of investee company: 0.3%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
Investor is one of the greatest illustrations of the advantages
and attractions of investing in family-controlled holding
companies. The Company has now held a position in Investor for 15
years and during this period it has outperformed the MSCI All
Country World ex-US Index by 6.5% on an annualised basis. The fact
that, despite this tremendous record, the company still trades at a
discount to NAV greater than 20% is baffling to us, particularly
when one considers that a number of its peers amongst the Swedish
holding company sector with inferior track records trade at
narrower discounts. It is encouraging that the discount has
narrowed over the past 12 months - from 24% one year ago to 21%
today. Nevertheless, it remains wider than is justified by its
long-term track record and the quality of its portfolio.
Like Wendel, Investor owns both listed and unlisted assets, but
it is in the unlisted portfolio that there is the greatest
potential for unlocking hidden value. Reported NAVs are typically
out of line with realistic realisable values. It is in this area
that we at AVI spend a lot of our research effort trying to
identify assets where the market has failed to appreciate the true
value. It was therefore very pleasing when Investor this year took
steps to publicly disclose their estimated realisable valuations of
the unlisted assets in the portfolio. Investments had previously
been held at book value; masking the true value in the portfolio
and causing an artificially wide discount. The impact from such a
disclosure was greater than we had anticipated which saw a
narrowing of the discount and an increase in the market's
assessment of Investor's NAV, adding 13% of previously hidden value
to the reported NAV.
In addition to the improved transparency on unlisted valuations,
Investor held its first capital markets day in seven years, with
presentations from Investor's largest unlisted assets. These steps
towards greater communication with the market were well received
and we are encouraged to see such a large family holding company
take such interest in minority shareholders.
JPEL PRIVATE EQUITY
Description: Investment Company
Weight*: 4.6%
Total return on position FY17 (local)**: 29.7%
Total return on position FY17 (GBP): 26.8%
Contribution (GBP)***: 144bps
Discount: -19.3%
% of investee company: 15.1%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
JPEL Private Equity has been a strong source of returns,
particularly following its move into run-off in early 2016. The
position returned 26.8% over the year, adding 144bps to British
Empire's NAV. NAV growth of 18% and the discount moving in from 26%
to 19% only tells half the story, as two returns of capital were
also made at NAV (i.e., at zero discounts).
The first distribution under the new policy, paid via a
mandatory redemption of shares at NAV, was announced in November
2016 and was relatively modest at just 4% of NAV. December then saw
the sale of Innovia, the company responsible for the new UK plastic
five pound notes, to Canadian strategic buyer CCL Industries.
Innovia was a co-investment made in 2014 by JPEL Private Equity
alongside lead sponsor Arle, and the impressive returns (3.2x
invested capital/IRR of 50%) help validate the renewed investment
programme begun by JPEL Private Equity at the beginning of 2014.
The sale of Innovia came at a 100% uplift to carrying value,
boosting JPEL Private Equity's NAV by 3.6%. This was followed in
March by the sale of Datamars, the animal tagging business, for a
return on invested capital of 3.5x and an IRR of 51%. These
realisations helped fund a subsequent return of capital of 19% of
NAV.
With the maturity of JPEL Private Equity's Zero Dividend
Preference shares at the end of October, substantially all of the
proceeds from future portfolio exits will be available for
distribution to shareholders, and we expect a further distribution
to be made before the end of 2017 given the recently reported sale
of a key holding.
Sample metrics for JPEL Private Equity's buy-out portfolio show
an average weighted EV/EBITDA carrying value of just 7x, which
compares favourably to the average 9.9x EV/EBITDA level recorded
for US middle market buy-outs in Q1-17, suggesting that its
portfolio is under-valued compared to listed markets. We continue
to see upside and further liquidity in JPEL Private Equity's
portfolio.
AKER ASA
Description: Investment Holding Company
Weight*: 3.5%
Total return on position FY17 (local)**: 19.1%
Total return on position FY17 (GBP): 16.9%
Contribution (GBP)***: 128bps
Discount: -29.4%
% of investee company: 1.5%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
Aker was by far the greatest contributor to performance in 2016,
and was once again a key driver of returns this year. As the market
started to price in the recovery in the oil price from the low
levels seen in 2016 and to recognise the high quality nature of
Aker's portfolio, as well as the proactive approach of management,
the discount narrowed from 43% 18 months ago to 18% at some points
during the current year. We used this substantial re-rating to
reduce the holding in a substantial way for the first time since
the initial investment in 2008.
Over the whole year, Aker's NAV, including dividends,
appreciated by 21% following on from a NAV return of 55% in the
prior year, with AkerBP being the main driver of returns given its
60% weight in Aker's NAV. The focus at AkerBP is the start-up of
Johan Sverdrup, one of the five largest oil fields ever found in
the Norwegian continental shelf. First oil is expected in late
2019, although the field is now 60% complete and ahead of plan so
this may be brought forward, much to the delight of shareholders.
AkerBP is a quality operator, consistently beating production
expectations and lowering production cost guidance. We trust
management to continue in this manner and on a dividend yield of
3.8%, before Johan Sverdrup delivers its first oil, we expect
further upside.
The second largest asset in Aker's portfolio is ship leasing
business Ocean Yield, accounting for 20% of NAV and returning 19%
over the year. It continues to invest in new vessels across a
variety of end industries and pay an attractive yield to Aker. One
large exposure to a gas producing vessel in India is a concern
given its lease maturity at the end of 2018. We believe this
uncertainty is suppressing the market price and once the outcome of
the contract becomes clear we expect the market to value Ocean
Yield on a more favourable yield than the current 8.3%.
Aker has taken full advantage of the oil downturn in some asset
categories, investing counter cyclically in unloved sectors. The
30% discount on which Aker trades seems too wide for a company with
a predominately listed portfolio. While we wait for this to narrow,
we are being paid a 5% yield to invest alongside a family who have
shown great investment acumen and in a group of companies that we
find attractive in their own right. We will continue to hold a
position in Aker while such favourable attributes exist.
EXOR
Description: Investment Holding Company
Weight*: 5.1%
Total return on position FY17 (local)**: 20.3%
Total return on position FY17 (GBP): 22.0%
Contribution (GBP)***: 108bps
Discount: -29.4%
% of investee company: 0.4%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
EXOR is a new investment for your Company and one that we have
been adding to heavily since the first purchase in December. It is
now your Company's second largest holding and much of the profit we
took out of Wendel has been reinvested into EXOR.
EXOR is run by the Agnelli family with a history dating back to
the late 19(th) century. Originally the holding company for FIAT,
through value enhancing transactions and a commitment to
diversifying the group's assets, Fiat Chrysler Automobiles ('FCA')
now accounts for only 31% of EXOR's portfolio. Other assets include
reinsurer PartnerRe (26%), Ferrari (19%) and CNH Industrial (17%).
Our interest in EXOR was piqued when, in early 2016, its discount
widened from the low teens to 35%. The discount subsequently
narrowed rapidly to 17% before widening again to 25%, where we made
the initial investment. A key element of our investment thesis is
the potential upside in FCA. Since Sergio Marchionne became CEO in
2004, it has been transformed from a small loss-making Italian car
company to the fifth largest global auto manufacturer by market
cap.
With Marchionne's retirement planned for early 2019, FCA has
been clear about meeting certain profitability and net debt
targets. Annual targets up to and including 2018 were released in
2014 and, despite FCA meeting the targets so far, the market has
little faith in the 2018 target. This is evident in that FCA trades
on a 2018 guided EV/EBIT multiple of 2.2x. Marchionne has commented
numerous times regarding the market valuation of FCA and it is our
belief that something will be done to unlock this value, most
likely through further spin offs, but potentially through a large
merger. Despite FCA almost doubling since the first purchase, we
believe there is further valuation upside. The combination of a
hated industry, with the accompanying low valuation, and a
rational, value-realising CEO skews the risk-reward in the
Company's favour. We estimate that the potential value of FCA is
substantially higher than the current share price and it is the
prospect of a corporate event occurring in the next 12-18 months
that has driven our conviction in this investment and made it such
a large holding.
Ferrari, accounting for 19% of EXOR's portfolio, has also been
an important driver of returns since the initial investment in
EXOR, with an increase in its share price of 94%. It has increased
in value by 112% since its IPO in 2015.
While we do have our reservations regarding valuation, the
quality of Ferrari's business is undeniable and we believe it will
generate attractive growth and margins for many years to come.
PartnerRe is an interesting investment for EXOR. It is part of the
strategy to diversify away from the historic main holding in Fiat.
Reinsurance rates have fallen as capital seeking idiosyncratic
returns has driven down premiums. It is in such environments that
having investment discipline is paramount. Being privately owned by
EXOR, who have no requirement to demand short-term targets, is
allowing PartnerRe to reduce their level of underwriting and to
avoid irrational deals. When the cycle turns, it will be PartnerRe
which emerges as a winner, much to the benefit of EXOR.
On a 29% discount we do not believe that the market is
accurately reflecting the investment acumen of EXOR or the
potential for value accretive deals at FCA.
PARGESA
Description: Investment Holding Company
Weight*: 5.7%
Total return on position FY17 (local)**: 22.4%
Total return on position FY17 (GBP): 18.6%
Contribution (GBP)***: 106bps
Discount: -32.8%
% of investee company: 1.2%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
Pargesa is a Swiss-listed holding company whose sole asset is a
stake in Belgian-listed holding company Groupe Bruxelles Lambert
('GBL'): on a look-through basis, the two companies' assets are
therefore identical and include stakes in listed companies
LafargeHolcim, Imerys, SGS, Adidas, Pernod-Ricard, Umicore, Engie
and Ontex.
In September 2015, we sold the Company's position in GBL and
invested the proceeds in Pargesa when Pargesa's discount - both
absolute and relative to GBL - reached rarely seen levels. At that
time, Pargesa's discount was 34% (compared with a long-term average
of 25%) and GBL's was 22% (26%), and the 12% spread between the two
discounts was the largest that it had been in over a decade - the
long-term average spread is 1%.
Pargesa gives the Company exposure to a high-quality portfolio
of European listed companies. The active approach of management has
delivered good returns over the long term. On an anomalously wide
discount of 34% we believe this is an excellent way of getting
exposure to European equities, with potential upside coming from a
variety of sources - strong European equity markets; discount
contraction and active ownership. We have been surprised that the
discount has remained at these elevated levels for almost two
years, particularly as investors are buying into the same portfolio
and the same management via GBL on a far narrower discount. We
continue to believe that investors will recognise this at some
point. In the meantime, there is no cheaper way to gain access to a
diversified portfolio of high quality European names and for this
reason, Pargesa is currently your Company's largest position.
NB PRIVATE EQUITY
Description: Investment Company
Weight*: 3.7%
Total return on position FY17 (local)**: 22.9%
Total return on position FY17 (GBP): 20.9%
Contribution (GBP)***: 105bps
Discount: -18.8%
% of investee company: 3.7%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
Your Company's position in NB Private Equity Partners ('NBPE')
registered a 21% total return, contributing 105bps.
The long-awaited announcement in March of NBPE's plans to
enfranchise its shareholders helped drive the company's discount
down. At the time of NBPE's IPO in 2007, the high proportion of US
shareholders on its register would have resulted in the company
losing its Foreign Private Issuer status (with adverse consequences
for its investment flexibility) if shareholders had full voting
rights. The change in the shareholder base since the company's
listing meant this had ceased to be such an impediment and, having
engaged constructively with the board and management of NBPE on the
issue over a sustained period of time, we were pleased with the
proposed introduction of full voting rights for ordinary
shareholders.
The move was accompanied by an upgrade of the company's listing
to the Premium segment of the London Stock Exchange which, in
tandem with a switch of trading currency from USD to GBP, made the
shares eligible to enter the FTSE indices and opened them up to
index-tracker buying for the first time. Having begun this
reporting period on a 23% discount, NBPE's discount tightened in to
a 12%-13% range ahead of the FTSE re-balancing and we took
advantage of the re-rating to reduce what had become an out-sized
position. By the year-end, the discount had drifted out to almost
20% on the back of selling pressure, but we expect the result of
the company's restructuring to be a narrower discount over the long
term than would otherwise have been the case.
In terms of NAV growth, NBPE has had a respectable year with a
13% NAV total return (in US Dollars), but we believe there is more
to come. The legacy funds portfolio, which has been a relative drag
on returns, is now down to just 16% of NAV and its impact should be
more muted going forward. Moreover, NBPE has been a particularly
active investor over the last few years (60% of its direct equity
co-investments were made in 2015 or later), and we expect returns
to accelerate on these investments as they move further through the
investing cycle. Notably, NBPE's 2014 investments are already held
at 1.8x cost.
Another feature of NBPE that we think is under-appreciated by
the market is an advantageous fee structure relative to its listed
private equity peers. There are no management or performance fees
charged on co-investments made by the lead GP sponsor, as compared
to funds of funds which typically have a double layer of fees. In
addition, the level of NBPE's single layer of fees compares
favourably to direct investing peers (7.5% performance fee versus
15-20% for peers). We continue to view NBPE shares as undervalued
given the attractive portfolio composition and fee structure.
JARDINE STRATEGIC
Description: Investment Holding Company
Weight*: 4.5%
Total return on position FY17 (local)**: 24.7%
Total return on position FY17 (GBP): 16.5%
Contribution (GBP)***: 102bps
Discount: -23.5%
% of investee company: 0.1%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
Like Investor AB, the Company has been invested in either
Jardine Matheson or Jardine Strategic for well over a decade. And
like Investor AB, this long-term investment has been justified by
returns well in excess of broad equity markets - once again
highlighting the very real attractions of investing for the long
term in family-controlled holding companies.
Last year, we sold the Company's stake in Jardine Matheson after
its discount narrowed to below 10% and reinvested the proceeds in
October 2016 into Jardine Strategic. The Keswick family exert
control over these two listed companies by way of a complex
cross-shareholding structure, but the two companies essentially
offer exposure to the same group of underlying listed companies,
predominantly in Asia - Dairy Farm, Hongkong Land, Mandarin
Oriental and Astra International (via Jardine Cycle &
Carriage).
The initial investment in Jardine Strategic was made at a
discount of 34% and, over the course of this year, that discount
has narrowed to 24% - the narrowest level we have observed since
2009. At the same time, its NAV has grown by 10% so that the total
return over the year has been achieved from a combination of both
NAV growth and discount contraction. This discount narrowing and
NAV growth provided good returns for your Company, as Jardine
Strategic contributed slightly over 1% to NAV.
The Jardine Group's long-term focus on creating shareholder
value from a concentrated, high-quality portfolio of Asian-focused
assets continues to appeal to us even at these narrower discount
levels. The valuations of the underlying companies look attractive
and we see upside potential in them. This will be an important
driver of returns in coming years, notwithstanding any changes in
the discount. In addition, it has been interesting to observe that
Jardine Matheson has been buying additional shares in Jardine
Strategic in recent months, increasing their stake to 84%. This may
well have been a factor behind the recent discount contraction and,
in addition, we believe it pays to look at what the controlling
shareholders are doing. The fact that they are effectively buying
up more of their own company is possibly a good indicator of the
value they see in their businesses.
BETTER CAPITAL 2009
Description: Investment Holding Company
Weight*: 0.4%
Total return on position FY17 (local)**: 24.2%
Total return on position FY17 (GBP): 24.2%
Contribution (GBP)***: 98bps
Discount: -44.7%
% of investee company: 2.0%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
We added significantly to the Company's position in Better
Capital 2009 ('BCAP') over 2016, and reaped the benefits of doing
so this year when the sale of its key holding, Gardner Aerospace,
came through. The holding in BCAP increased in value by 24%, adding
98 basis points to your Company's NAV; the position is now much
smaller following the return of the proceeds from the Gardner
sale.
We first invested in BCAP in December 2014 after a material and
badly-communicated write-down in one of its previously
strong-performing portfolio companies resulted in the evaporation
of the premium rating then enjoyed by the company. Having traded at
times in excess of a 20% premium, we were able to acquire stock on
discounts exceeding 20%. We viewed the holding in Gardner
Aerospace, which then accounted for 50% of BCAP's NAV, as an
inherently attractive business given four factors: first, its
advantaged position as a Tier 1 supplier to Airbus manufacturing a
large number of essential parts that accounted for a very low
portion of the total cost of an aircraft; second, the visibility on
future revenue and earnings growth from the ramping-up of
production on contracts already won; third, the high regulatory and
technical barriers to entry; and last, strong levels of customer
retention.
In November 2016, BCAP announced it was in exclusive discussions
with a Chinese buyer. However, the protracted sale process, and
scepticism over the credentials of the buyer given other
Chinese/International M&A deals falling through led to the
shares trading at an implied discount of over 80% to the ex-Gardner
rump. The deal completed in June 2017, with BCAP recording a 7x
multiple on cost and 35% IRR on its investment. The sale price for
Gardner was more than double its carrying value at the time of the
initial investment in BCAP.
At the end of June, BCAP returned the proceeds from the sale to
shareholders resulting in 83% of the holding being redeemed at NAV.
This investment, initiated in December 2014, has registered a 27%
IRR to date, driven by the upside we identified in Gardner at the
outset in addition to discount narrowing.
Detractors
PERSHING SQUARE HOLDINGS
Description: Investment Company
Weight*: 3.9%
Total return on position FY17 (local)**: -15.4%
Total return on position FY17 (GBP): -18.7%
Contribution (GBP)***: -104bps
Discount: -24.1%
% of investee company: 1.7%
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
Despite only being acquired late in the financial year, Pershing
Square Holdings ('PSH') was the second largest detractor (-104bps).
This was due mainly to discount widening, but also as a result of
share price weakness in its holdings in Mondelez and Chipotle
Mexican Grill. We welcome a falling share price - particularly when
driven largely by an expanding discount - while we are building a
new position as it allows us to accumulate additional shares at
lower levels. We continued to add to your Company's holding in PSH
at discounts approaching 25%, having made the initial purchases at
the 15% level.
The reputation of Pershing Square Capital Management, the
manager of PSH, has been damaged by the catastrophic losses
experienced in their out-sized position in Valeant Pharmaceuticals,
but the corollary of this is that we were able to make the
investment in PSH at wide discounts to NAV, despite the manager's
long-term track record still being outstanding (13.5% annualised
returns since inception in 2004 vs 8.3% for the S&P500
index).
We see clear scope for upside in several of PSH's largest
holdings, in particular Mondelez. Mondelez has a compelling
collection of brands with enviable emerging market exposures, and
its sub-par margins (notwithstanding improvements over the last few
years) offer a purchaser huge scope for efficiency gains. If
M&A is not forthcoming, the prospect of margin expansion is an
attractive plan B.
We also believe it is untenable for Pershing Square to preside
over a public vehicle trading at a wide discount to NAV given their
high profile and vocal championing of shareholder rights during
various activist battles over the years. We are pleased to see that
steps have been taken to address the rating (improving voting
rights, moving to a main market London listing, introducing a
buyback), but we will expect further discount control measures to
be implemented should the rating not improve materially.
HUDSON'S BAY
Description: Asset-backed Company
Weight*: No longer held
Total return on position FY17 (local)**:-36.0%
Total return on position FY17 (GBP): -35.1%
Contribution (GBP)***: -182bps
Discount: -
% of investee company: No longer held
* % of total assets less current liabilities.
** Weighted returns adjusted for buys and sells over the
year.
*** Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
Hudson's Bay was the largest detractor from performance this
year, costing your Company 182bps of NAV. We initiated this
position in December 2015 because, in addition to owning a number
of retail brands (Hudson's Bay, Saks 5(th) Avenue, Lord &
Taylor and Kaufhof), it also owned the real estate from which these
brands operated. Management had already started the process of
unlocking this real estate value by spinning off a large part of
their portfolio into separate joint venture companies, and we had
high hopes that this process of monetisation would continue and
narrow the very wide gap between the share price and the value of
its real estate assets. We were reassured of this by the presence
of the Chairman and CEO as the largest single shareholder in the
company and were confident his strategy of monetising real estate
assets would deliver strong returns for all shareholders.
The investment did not work out as planned and we decided to
sell the entire investment this year and realise a loss of GBP9.4m.
Like many retailing businesses around the world, Hudson's Bay has
been hit hard by the "Amazonisation" of the retail industry. The
massive growth of e-commerce and the scale of Amazon's ambitions
has changed the industry enormously. This affected Hudson's Bay as,
not only were retail profits under pressure, but at the same time,
the value of its real estate assets, which are inextricably linked
to the success of the retail operations, were hit hard. One only
has to look at the retail REIT sector in the US to see how the
market has reacted to this phenomenon. The sharp declines in the
share price of Hudson's Bay reflect the reality that it will be
very difficult to capture the potential value of those real estate
assets at a time when pricing is so weak.
We do not know whether the value of these assets will recover.
What we do know, however, is that the timing of the monetisation
event will have to be pushed out into the future and that the
financial positon of the company will continue to look stretched
for as long as retail profits are under pressure. Painful as it was
to take the loss, we think there is too much risk in the company
for us to maintain a position.
Additional Holdings of Interest
JAPAN SPECIAL SITUATIONS
Description: Asset-backed Companies
Weight*: 6.6%
Discount: -32.0%
* % of total assets less current liabilities.
The Japanese Special Situations basket consists of 15 stocks
that have inefficient balance sheets and diversified domestic
sector exposure. Really, these should be thought of as one basket -
made up of cash and assets that trade at a discount. Our Investment
thesis is that with a large portion of their value in net cash,
which is being under appreciated by the market, they will
outperform, particularly under the pressure of improving corporate
governance.
We formed the basket at the beginning of June and it now
consists of 15 names with an aggregate 7.3% weight in your Company.
We found the most opportunities in small-capitalisation companies
which often are not accessible to other large market participants
due to lack of liquidity and size. Your Company's fixed base of
capital allows us bear this illiquidity risk and to remain agile so
that such opportunities can be exploited.
In addition to the focus on highly capitalised balance sheets,
we also sought companies with strong cash generation despite a
large portion of capital being used inefficiently. By investing in
this basket, we have effectively placed 53% of invested capital in
cash yet are still receiving a 6.5% Free Cash Flow ('FCF') yield
and a dividend yield of 1.5%. If these companies were to return
their redundant tangible assets to shareholders, these investments
would have a FCF yield of 24%. There are few markets outside Japan
where a portfolio with the above statistics could be created.
While the holding period has been short, the performance has
been strong, with the basket outperforming the TOPIX index by 11%.
We find the changing corporate governance theme in Japan to be an
interesting one and believe we have built a compelling basket of
companies, at attractive valuations, that should be a beneficiary
of such change.
SWIRE PACIFIC A & B
Description: Investment Holding Company
Weight*: 0.4% / 2.2%
Discount: -27.6% / -35.4%
% of investee company: 0.1% / 0.6%
* % of total assets less current liabilities.
Swire Pacific, through both their A and B shares, has had a
small negative impact on British Empire's NAV over the 12 months.
While the large exposure to their listed property subsidiary, Swire
Properties, has provided strong returns, similar to those we saw
with Hongkong Land and the Jardine Group, other holdings in Cathay
Pacific, HAECO and the Marine Services Division, SPO, have been a
drag on performance. In fact, the stub value of the ex-Swire
Properties businesses currently has a negative valuation -
something that has only occurred once since 2012.
However, while we believe these businesses (including their
beverage bottling and distribution business) are worth more than
zero, the company needs to do more to improve returns from their
investments. After meeting with management in Hong Kong recently,
we were pleased to see that they have taken some steps to try to
remedy this as the family are clearly displeased about performance
in recent years. They have made sweeping changes to the Swire
board, removing directors who were representatives of the
underlying holdings, enabling a more transparent and rigorous
review of their performance. In addition, they brought an external
candidate onto the board who has strong experience of corporate
deals in China. We believe this greater oversight of performance
and ability to look at deals will see movements in the portfolio
which we hope will improve performance significantly over the
medium term. However, we do have to judge performance on their
actions so we will be watching closely.
VIETNAM PHOENIX FUND 'C'
Description: Investment Company
Weight*: 2.4%
Discount: -17.6%
% of investee company: 18.5%
* % of total assets less current liabilities.
While we engage with the boards and management of almost all
investee companies, we consider ourselves constructive shareholders
and seek to work with companies to find ways to improve the rating
on which they trade. On some occasions, however, we are forced to
take a more forthright stance. The investment in Vietnam Phoenix
Fund (formerly known as DWS Vietnam Fund), which added 80bps over
the year, has been one such example.
We first invested in Vietnam Phoenix Fund in July 2013. Despite
a successful track record, the company's shares languished on a
near 40% discount due to an egregious fee structure, poor corporate
governance, a conflicted board and the absence of any discount
control measures. An 18% stake was accumulated in the company and
we set to work tackling the various issues that were resulting in
such a wide discount to NAV. We voted against the three management
representatives on the board and had two of our nominees appointed
as directors. The company cancelled the 10% of its shares held in
treasury and began a new buyback programme. Most significantly, we
extracted a public commitment from the board that the manager's
contract would not be extended on the same terms and to put forward
restructuring proposals to open-end the fund.
In late 2016, the restructuring proposals were approved and
Vietnam Phoenix Fund was converted into an open-ended fund
(two-thirds of the position) that realised its investments over the
next three months and returned cash to shareholders at NAV, and a
closed-end fund housing the private equity assets that should do
the same over the next two years. We have since added to your
Company's holding in the spun-off private equity fund at discounts
in excess of 20%. Its major asset is Greenfeed, an animal feed
company that we estimate is carried very inexpensively in the
fund's NAV, particularly given its strategic positioning and its
track record of growing earnings.
Over the life of your Company's investment in Vietnam Phoenix
Fund, including the current position in the private equity
spin-off, we have recorded a 52% total return and 19% IRR in USD
(82% and 29% respectively in GBP).
SYMPHONY INTERNATIONAL HOLDINGS
Description: Investment Company
Weight*: 4.8%
Discount: -27.9%
% of investee company: 14.7%
* % of total assets less current liabilities.
Symphony holds a portfolio of listed and unlisted investments
operating in the hospitality, healthcare, leisure and real estate
sectors, with its most significant holding being its 6% stake in
Thai-listed Minor International, which accounts for approximately
half of Symphony's NAV. With over 150 hotels and resorts, 2,000
restaurants and 300 retail trading outlets across 32 countries
spread across Asia, Africa, Europe, South America, and the Middle
East, Minor is a significant company in terms of scale.
Over the year, Symphony's NAV was essentially flat after
adjusting for dividends. Modest increases in the share prices of
listed holdings Minor and Parkway Life REIT and small foreign
exchange gains were offset by a decline in the share price of IHH
Healthcare and a write-down in Christian Liaigre (the high-end
furniture retailer) on the back of a weak retail environment in
Paris due to the string of terrorist attacks.
However, your Company's position in Symphony benefited from a
material contraction in its discount from 39% to 28%. Since we
first invested in Symphony in 2012, we have engaged constructively
with management to find ways to tackle the excessively wide and
persistent discount at which the shares have traded. In 2014, a
policy of paying an annual dividend was introduced, with large
special dividends being paid for the first three years equivalent
to dividend yields of 5.5%, 5.8%, and 8.8%. This year, the special
dividend was cut due to limited excess cash being available for
distribution and the dividend yield equated to "just" 4.1%.
However, a very large additional dividend of $0.10 (equivalent on
its own to a 12.4% yield) was declared in September following the
full sale of Parkway Life REIT and the partial sale of some of the
holding in Minor. Given that dividends effectively represent a
return of capital at a zero discount, such payments are highly
accretive to shareholders.
Our work with management on ways of reducing the discount also
saw the appointment of a new corporate broker with greater
expertise in closed-end funds than the previous incumbent, and the
initiation of an aggressive buyback that seeks to repurchase at
least 10% of shares annually. This buyback has helped narrow the
discount, and has been significantly accretive to NAV per share
given the wide discount on which shares are being repurchased.
TOP 30 LOOK-THROUGH HOLDINGS
British Empire invests in holding companies and closed-end funds
that in turn invest in listed and unlisted companies. We show below
the top 30 holdings on a "look-through basis", i.e., the underlying
companies to which we have exposure. For example, British Empire
owns a stake in Symphony International Holdings, a London-listed
private equity fund, that accounts for 4.8% of British Empire's
portfolio (5.2% of its NAV). Symphony International's largest
holding is Minor International, which accounts for c. 50% of its
own NAV. This translates to an effective exposure of British Empire
to Minor International of 2.6% of British Empire's NAV. The table
below is an indication of the degree of diversification of the
portfolio.
Underlying
look-through
Look-through holding Parent company weight Look-through holding sector
-------------------------- ----------------------- -------------- -------------------------------
Minor International Symphony International 2.6% Hotels, Resorts & Cruise
Holdings Lines
-------------------------- ----------------------- -------------- -------------------------------
Aker BP Aker ASA 2.3% Oil & Gas Exploration
& Production
-------------------------- ----------------------- -------------- -------------------------------
Swire Properties Swire Pacific Ltd 2.3% Real Estate Operating
'A' and 'B' Companies
-------------------------- ----------------------- -------------- -------------------------------
Bureau Veritas Wendel 2.2% Research & Consulting
Services
-------------------------- ----------------------- -------------- -------------------------------
Fiat Chrysler Automobiles EXOR 2.0% Automobile Manufacturers
-------------------------- ----------------------- -------------- -------------------------------
Toyota Forklifts Toyota Industries 1.8% Auto Parts & Equipment
and Handling Equipment
-------------------------- ----------------------- -------------- -------------------------------
Toshiba Plant Operations Toshiba Plant 1.7% Construction & Engineering
-------------------------- ----------------------- -------------- -------------------------------
PartnerRe EXOR 1.7% Reinsurance
-------------------------- ----------------------- -------------- -------------------------------
Canadian Intl Oil Riverstone Energy 1.6% Oil & Gas Exploration
Corp & Production
-------------------------- ----------------------- -------------- -------------------------------
Automatic Data Processing Pershing Square 1.5% Data Processing & Outsourced
Holdings Services
-------------------------- ----------------------- -------------- -------------------------------
Toyota Motor Corp Toyota Industries 1.4% Automobile Manufacturers
-------------------------- ----------------------- -------------- -------------------------------
Centennial Resource Riverstone Energy 1.3% Oil & Gas Exploration
Development & Production
-------------------------- ----------------------- -------------- -------------------------------
Kakaku.com Digital Garage 1.3% Internet Software & Services
-------------------------- ----------------------- -------------- -------------------------------
Jardine Cycle & Jardine Strategic 1.3% Car & Motorbike Distribution
Carriage - Indonesia
-------------------------- ----------------------- -------------- -------------------------------
Mondelez Pershing Square 1.3% Packaged Foods & Meats
Holdings
-------------------------- ----------------------- -------------- -------------------------------
Hongkong Land Jardine Strategic 1.3% Real Estate Operating
Companies
-------------------------- ----------------------- -------------- -------------------------------
Ferrari EXOR 1.2% Automobile Manufacturers
-------------------------- ----------------------- -------------- -------------------------------
Dairy Farm Jardine Strategic 1.2% Food Retail
-------------------------- ----------------------- -------------- -------------------------------
Imerys Pargesa 1.1% Construction Materials
-------------------------- ----------------------- -------------- -------------------------------
CNH Industrial EXOR 1.1% Agricultural & Farm Machinery
-------------------------- ----------------------- -------------- -------------------------------
Cosan Cosan Ltd 1.1% Oil & Gas Refining & Marketing
-------------------------- ----------------------- -------------- -------------------------------
Hidroelectrica SA Fondul Proprietatea 1.1% Electric Utilities
-------------------------- ----------------------- -------------- -------------------------------
Adidas Pargesa 1.1% Apparel, Accessories &
Luxury Goods
-------------------------- ----------------------- -------------- -------------------------------
LafargeHolcim Pargesa 1.0% Construction Materials
-------------------------- ----------------------- -------------- -------------------------------
Restaurant Brands Pershing Square 0.9% Restaurants
International Holdings
-------------------------- ----------------------- -------------- -------------------------------
Zalando Kinnevik B 0.9% Internet & Direct Marketing
Retail
-------------------------- ----------------------- -------------- -------------------------------
Financial Technology Digital Garage 0.9% Data Processing & Outsourced
(e-payments) Services
-------------------------- ----------------------- -------------- -------------------------------
FibroGen JPEL Private Equity 0.9% Biotechnology
-------------------------- ----------------------- -------------- -------------------------------
SGS Pargesa 0.9% Research & Consulting
Services
-------------------------- ----------------------- -------------- -------------------------------
Tokyo Electron Tokyo Broadcasting 0.8% Semiconductor Equipment
Systems
-------------------------- ----------------------- -------------- -------------------------------
OUTLOOK
The weighted average discount on your Company's portfolio has
narrowed over the year as a result of increased levels of corporate
events. However, at 26% it remains wide. The prospect for continued
corporate activity and shareholder activism suggests that the
portfolio discount is likely to narrow further. This will be an
important driver of returns in the coming year. The high
conviction, concentrated portfolio is well placed to benefit from
these trends.
Joe Bauernfreund
Chief Executive Officer
Asset Value Investors Limited
10 November 2017
DIRECTORS
Strone Macpherson - Chairman
Steven Bates - Senior Independent Director
Susan Noble
Nigel Rich FCA
Calum Thomson FCA - Chairman of the Audit Committee
All Directors are non-executive and independent of the
Investment Manager.
INVESTMENT OBJECTIVE, POLICY AND RESTRICTIONS
The objective of the Company is to achieve capital growth
through a focused portfolio of investments, particularly in
companies whose shares stand at a discount to estimated underlying
net asset value.
Investments are principally in companies listed on recognised
stock exchanges in the UK and/or overseas, which may include
investment holding companies, investment trusts and other
companies, the share prices of which are assessed to be below their
estimated net asset value or intrinsic worth.
Although listed assets make up the bulk of the portfolio, the
Company may also invest in unlisted assets with the prior approval
of the Board.
The Company generally invests on a long-only basis but may hedge
exposures through the use of derivative instruments and may also
hedge its foreign currency exposures.
There are no geographic limits on exposure, as the Company
invests wherever it considers that there are opportunities for
capital growth. Risk is spread by investing in a number of
holdings, many of which themselves are diversified companies.
The Company will not invest in any holding that would represent
more than 15% of the value of its total investments at the time of
investment.
Potential investments falling within the scope of the Company's
investment objective will differ over the course of market cycles.
The number of holdings in the portfolio will vary depending upon
circumstances and opportunities within equity markets at any
particular time.
The Company may gear its assets through borrowings which may
vary substantially over time according to market conditions but
which will not exceed twice the nominal capital and reserves of the
Company.
GEARING LEVELS
The Company's Investment Policy, as disclosed above, permits a
significant level of gearing, as do the Company's Articles of
Association and the limits set under AIFMD (see the Company's
website www.british-empire.co.uk/.
Under normal market conditions, it is expected that the
portfolio will be fully invested, although net gearing levels may
fluctuate depending on the value of the Company's assets and
short-term movements in liquidity.
As set out on page 10, the Company's debt as a percentage of
equity as at 30 September 2017 was 7.9%. Long-term debt comprised
GBP15m of Debenture Stock and two tranches of Loan Notes, one of
GBP30m and the other EUR30m.
Subsequent to the year end, on 1 November 2017, the Company
issued a further EUR20m Loan Notes. See Chairman's Statement on
page 6 and note 17 on page 71 for further information.
RESULTS AND DIVIDS
Company profit for the year was GBP141,699,000, which included a
profit of GBP12,603,000 attributable to revenue (2016: profit of
GBP204,238,000, which included a profit of GBP18,747,000
attributable to revenue). The profit for the year attributable to
revenue has been applied as follows:
GBP'000
-------------------------------------------------------- --------
Current year revenue available for dividends 12,603
-------------------------------------------------------- --------
Interim dividend of 2.0p per Ordinary Share paid on
30 June 2017 2,380
Recommended final dividend payable on 5 January 2018
to shareholders on the Register as at 8 December 2017
(ex dividend 7 December 2017):
- Final dividend of 10.0p per Ordinary Share 11,557*
13,937
-------------------------------------------------------- --------
* Based on shares in circulation on 9 November 2017.
MANAGEMENT ARRANGEMENTS
AVI is the Company's appointed AIFM, and is engaged under the
terms of an Investment Management Agreement ('IMA') dated 17 July
2014. The IMA is terminable by one year's notice from either party,
other than for "cause".
The Investment Manager is entitled to a management fee of 0.70%
of the net assets of the Company, calculated quarterly by reference
to the net assets at the preceding quarter end and paid
monthly.
J.P. Morgan Europe Limited was appointed as Depositary under an
agreement with the Company and AVI dated 2 July 2014, and is paid a
fee on a sliding scale between 0.5 basis points and 4 basis points
based on the assets of the Company. The Depositary Agreement is
terminable on 90 calendar days' notice from either party.
JPMorgan Chase Bank, National Association, London Branch, has
been appointed as the Company's Custodian under an agreement dated
2 July 2014. The agreement will continue for so long as the
Depositary Agreement is in effect and will terminate automatically
upon termination of the Depositary Agreement, unless the parties
agree otherwise.
Link Company Matters Limited (formerly Capita Company
Secretarial Services Limited) was appointed as corporate Company
Secretary on 1 April 2014. The current annual fee is GBP65,000,
which is subject to an annual RPI increase. The Agreement may be
terminated by either party on six months' written notice.
With the Board's consent, AVI has sub-contracted certain fund
administration services to Link Asset Services (formerly Capita
Asset Services). The cost of these sub-contracted services is borne
by AVI from its own resources and not by the Company.
CAPITAL STRUCTURE AS AT 30 SEPTEMBER 2017
The Company's capital structure comprises Ordinary Shares,
Debenture Stock and Loan Notes.
Ordinary Shares
At 30 September 2017, there were 129,526,165 (2016: 160,014,089)
Ordinary Shares of 10p each in issue, of which 13,372,622 (2016:
34,145,424) were held in treasury and therefore the total voting
rights attaching to Ordinary Shares in issue were 116,153,543.
Income entitlement
The profits of the Company (including accumulated revenue
reserves) available for distribution and resolved to be distributed
shall be distributed by way of interim, final and (where
applicable) special dividends among the holders of Ordinary Shares,
subject to the payment of interest to the holders of Debenture
Stock and Loan Notes.
Capital entitlement
After meeting the liabilities of the Company and the amounts due
to Debenture Stock and Loan Note holders on a winding-up, the
surplus assets shall be paid to the holders of Ordinary Shares and
distributed among such holders rateably according to the amounts
paid up or credited as paid up on their shares.
Voting entitlement
Each Ordinary shareholder is entitled to one vote on a show of
hands and, on a poll, to one vote for every Ordinary Share
held.
The Notice of Meeting and Form of Proxy stipulate the deadlines
for the valid exercise of voting rights and, other than with regard
to Directors not being permitted to vote their shares on matters in
which they have an interest, there are no restrictions on the
voting rights of Ordinary Shares.
Transfers
There are no restrictions on the transfer of the Company's
shares other than a) transfers by Directors and Persons Discharging
Managerial Responsibilities and their connected persons during
closed periods under the Market Abuse Regulation or which may
constitute insider dealing, b) transfers to more than four joint
transferees and c) transfers of shares which are not fully paid up
or on which the Company has a lien provided that such would not
prohibit dealings taking place on an open and proper basis.
The Company is not aware of any agreements between shareholders
or any agreements or arrangements with shareholders which would
change in the event of a change of control of the Company.
Debenture Stock
At 30 September 2017, there was in issue GBP15,000,000 (2016:
GBP15,000,000) 81/8% Debenture Stock 2023, repayable on 2 July
2023.
Income entitlement
Holders of the Debenture Stock are entitled to interest paid
half-yearly at the rate of 81/8% per annum.
Capital entitlement
The Debenture Stock holders are entitled to repayment of
principal and outstanding interest on the redemption date or, if
earlier, on the occurrence of an event of default. The Debenture
Stock is secured by a floating charge on all of the assets of the
Company. If the Company is liquidated the Debenture Stock is
redeemable by the Company at a price which is the higher of par and
the price at which the Gross Redemption Yield on the date of
redemption is equivalent to the yield on a reference UK government
bond, together with interest accrued up to and including the date
of redemption. Had the Company been liquidated on 30 September
2017, the redemption premium would have amounted to GBP3.0m over
and above the mid-market price.
The mid-market price of the Debenture Stock as at 30 September
2017 was 130.25p (2016: 129.80p).
Voting entitlement
The holders of Debenture Stock have no right to attend or to
vote at general meetings of the Company.
Loan Notes
At 30 September 2017, there was in issue fixed rate 20 year
unsecured private placement notes (the 'Loan Notes'). The Loan
Notes were issued in two tranches on 15 January 2016, Series A:
GBP30m and Series B: EUR30m.
Income entitlement
Interest is payable half-yearly at 4.184% per annum on the
Sterling Loan Notes and 3.249% per annum on the Euro Loan
Notes.
Capital entitlement
The Loan Note holders are entitled to repayment of principal and
outstanding interest on the redemption date or, if earlier, on the
occurrence of an event of default. The Loan Notes are unsecured. If
the Company is liquidated the Loan Notes are redeemable by the
Company at a price which is the higher of par and, for the Series A
Loan Notes, the price at which the Gross Redemption Yield on the
date of redemption is equivalent to the yield on a reference UK
government bond and, for the Series B Loan Notes, the price at
which the Gross Redemption Yield on the date of redemption is
equivalent to the yield on a reference German government bond, both
together with interest accrued up to and including the date of
redemption. Had the Company been liquidated on 30 September 2017,
the redemption premium would have amounted to GBP17.0m over and
above the market values.
The estimated market values of the Loan Notes as at 30 September
2017 were Series A: GBP33.1m and Series B: GBP27.5m, being GBP3.2m
and GBP1.2m respectively above the amortised values excluding
interest.
Voting entitlement
The holders of the Loan Notes have no right to attend or to vote
at general meetings of the Company.
A further issue of EUR20m Loan Notes was made on 1 November
2017. Interest on these Loan Notes will be payable half-yearly at
an annual rate of 2.93% and the principal is repayable on 1
November 2037.
GOING CONCERN
The Directors have carefully reviewed the current financial
resources and the projected expenses of the Company for the next 12
months. On the basis of that review and as the majority of net
assets are securities which are traded on recognised stock
exchanges, the Directors are satisfied that the Company's resources
are adequate for continuing in business for the foreseeable future
and that it is appropriate to prepare the financial statements on a
going concern basis.
VIABILITY
The Directors consider viability as part of their continuing
programme of monitoring risk. The Directors believe three years to
be a reasonable time horizon to consider the continuing viability
of the Company, reflecting a balance between a longer-term
investment horizon and the inherent shorter-term uncertainties
within equity markets, although they do have due regard to
viability over the longer term and particularly to key points
outside this time frame, such as the due dates for the repayment of
long-term debt. The Company is an investment trust whose portfolio
is invested in readily realisable listed securities and with some
short-term cash deposits. The following facts support the
Directors' view of the viability of the Company:
-- In the year under review, expenses (including finance costs
and taxation) were adequately covered by investment income.
-- The Company has a liquid investment portfolio.
-- The Company has long-term debt of GBP15m which falls due for
repayment in 2023 and GBP30m and EUR30m which both fall due for
repayment in 2036. This debt was covered some 13.7 times as at the
end of September 2017 by the Company's total assets. Following the
issue of further debt on 1 November 2017, the total debt was
covered some 10.5 times by the Company's assets at that date. The
Directors are of the view that, subject to unforeseen
circumstances, the Company will have sufficient resources to meet
the costs of annual interest and eventual repayment of principal on
this debt.
-- The Company has a large margin of safety over the covenants on its debt.
The Company's viability depends on the global economy and
markets continuing to function. The Directors do also consider the
possibility of a wide ranging collapse in corporate earnings and/or
the market value of listed securities. To the latter point, it
should be borne in mind that a significant proportion of the
Company's expenses are in ad valorem investment management fees,
which would reduce if the market value of the Company's assets were
to fall.
In order to maintain viability, the Company has a robust risk
control framework which, following guidelines from the FRC, has the
objectives of reducing the likelihood and impact of: poor judgement
in decision-making; risk-taking that exceeds the levels agreed by
the Board; human error; or control processes being deliberately
circumvented.
Taking the above into account, and the potential impact of the
principal risks as set out on pages 10 and 11, the Directors have a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due for a period of
three years from the date of approval of this Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report
and financial statements in accordance with applicable United
Kingdom law and regulations. Company law requires the Directors to
prepare financial statements for each financial year. Under that
law they are required to prepare financial statements in accordance
with International Financial Reporting Standards as adopted by the
EU ('IFRS').
Under Company law, the Directors must not approve the financial
statements unless they are satisfied that they 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 period.
In preparing the financial statements the Directors are required
to:
-- select suitable accounting policies and apply them
consistently in accordance with International Accounting Standard
('IAS') 8 Accounting Policies, Changes in Accounting Estimates and
Errors;
-- make judgements and estimates which are reasonable and prudent;
-- state whether the financial statements have been prepared in
compliance with IFRS, subject to any material departures disclosed
and explained therein;
-- provide additional disclosures where compliance with the
specific requirements of IFRS are considered to be insufficient to
enable users to understand the impact of particular transactions,
events and conditions on the financial position and performance;
and
-- prepare financial statements on a going concern basis unless
it is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006 and
Article 4 of the IAS Regulation. They are also responsible for
safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
The Directors are also responsible for preparing a Strategic
Report, Directors' Report, Directors' Remuneration Report and
Corporate Governance Statement that comply with relevant laws and
regulations, and for ensuring that the Annual Report includes
information required by the Disclosure Rules of the UK Listing
Authority.
The financial statements of the Company are published on the
Company's website at www.british-empire.co.uk. The Directors are
responsible for ensuring the maintenance and integrity of the
information relating to the Company published on this website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
DECLARATION
The Directors listed above, being the persons responsible,
hereby confirm to the best of their knowledge:
-- that the financial statements have been prepared in
accordance with applicable accounting standards and give a true and
fair view of the assets, liabilities, financial position and profit
or loss of the Company; and
-- the Strategic Report and the Investment Manager's Review
include 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
In the opinion of the Board, 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 position
and performance, business model and strategy.
By Order of the Board
Link Company Matters Limited
Corporate Secretary
10 November 2017
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the
Company's statutory accounts for the year ended 30 September 2017
but is derived from those accounts. Statutory accounts for the year
ended 30 September 2017 will be delivered to the Registrar of
Companies in due course. The Auditors have reported on those
accounts; their report was (i) unqualified, (ii) did not include a
reference to any matters to which the Auditors drew attention by
way of emphasis without qualifying their report and (iii) did not
contain a statement under Section 498 (2) or (3) of the Companies
Act 2006. The text of the Auditors' report can be found in the
Company's full Annual Report and Accounts on the Company's website
at
www.british-empire.co.uk.
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 September 2017
2017 2017 2016 2016
Revenue Capital 2017 Revenue Capital 2016
return return Total return return Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ----- -------- -------- ------- -------- -------- -------
Income
Investment income 2 17,393 - 17,393 20,689 - 20,689
Gains on investments
held at fair value 8 - 137,833 137,833 - 196,289 196,289
Foreign exchange forward
contract loss - - - - (3,557) (3,557)
Exchange losses on currency
balances - (1,579) (1,579) - (371) (371)
------------------------------ ----- -------- -------- ------- -------- -------- -------
17,393 136,254 153,647 20,689 192,361 213,050
Expenses
Investment management
fee 3 (1,856) (4,332) (6,188) (1,511) (3,527) (5,038)
Other expenses (including
irrecoverable VAT) 3 (1,628) - (1,628) (1,524) - (1,524)
------------------------------ ----- -------- -------- ------- -------- -------- -------
Profit before finance
costs and tax 13,909 131,922 145,831 17,654 188,834 206,488
Finance costs 4 (997) (2,346) (3,343) (815) (1,930) (2,745)
Exchange losses on unsecured
loan 4 - (480) (480) - (2,992) (2,992)
------------------------------ ----- -------- -------- ------- -------- -------- -------
Profit before taxation 12,912 129,096 142,008 16,839 183,912 200,751
Taxation (309) - (309) 1,908 1,579 3,487
------------------------------ ----- -------- -------- ------- -------- -------- -------
Profit for the year 12,603 129,096 141,699 18,747 185,491 204,238
------------------------------ ----- -------- -------- ------- -------- -------- -------
Basic and diluted
Earnings per Ordinary
Share 10.44p 106.99p 117.43p 14.32p 141.72p 156.04p
------------------------------ ----- -------- -------- ------- -------- -------- -------
The total column of this statement is the Income Statement of
the Company prepared in accordance with IFRS, as adopted by the
European Union. The supplementary revenue and capital columns are
presented in accordance with the Statement of Recommended Practice
issued by the Association of Investment Companies ('AIC SORP').
All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued
during the year.
There is no other comprehensive income, and therefore the profit
for the year after tax is also the total comprehensive income.
The accompanying notes are an integral part of these financial
statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2017
Ordinary Capital
share redemption Share Capital Merger Revenue
capital reserve premium reserve reserve reserve* Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------- -------- ----------- -------- -------- -------- --------- --------
For the year ended 30
September 2017
Balance as at 30 September
2016 16,001 2,934 28,078 717,051 41,406 38,503 843,973
Ordinary Shares bought
back and held in treasury
(see note 12) - - - (64,592) - - (64,592)
Ordinary Shares held in
treasury cancelled (see
note 12) (3,048) 3,048 - - - - -
Total comprehensive income
for the year - - - 129,096 - 12,603 141,699
Ordinary dividends paid
(see note 6) - - - - - (17,851) (17,851)
Balance as at 30 September
2017 12,953 5,982 28,078 781,555 41,406 33,255 903,229
--------------------------- -------- ----------- -------- -------- -------- --------- --------
For the year ended 30
September 2016
Balance as at 30 September
2015 16,001 2,934 28,078 573,862 41,406 35,261 697,542
Ordinary Shares bought
back and held in treasury
(see note 12) - - - (42,302) - - (42,302)
Total comprehensive income
for the year - - - 185,491 - 18,747 204,238
Ordinary dividends paid
(see note 6) - - - - - (15,505) (15,505)
Balance as at 30 September
2016 16,001 2,934 28,078 717,051 41,406 38,503 843,973
--------------------------- -------- ----------- -------- -------- -------- --------- --------
* Revenue reserve is fully distributable by way of dividend.
The accompanying notes are an integral part of these financial
statements.
BALANCE SHEET
as at 30 September 2017
2017 2016
Notes GBP'000 GBP'000
------------------------------------------- ----- ----------- -----------
Non-current assets
Investments held at fair value through
profit or loss 8 950,511 886,369
------------------------------------------- ----- ----------- -----------
950,511 886,369
Current assets
Other receivables 9 4,850 22,454
Cash and cash equivalents 25,496 13,799
------------------------------------------- ----- ----------- -----------
30,346 36,253
------------------------------------------- ----- ----------- -----------
Total assets 980,857 922,622
------------------------------------------- ----- ----------- -----------
Current liabilities
Other payables 10 (6,452) (7,973)
------------------------------------------- ----- ----------- -----------
(6,452) (7,973)
------------------------------------------- ----- ----------- -----------
Total assets less current liabilities 974,405 914,649
------------------------------------------- ----- ----------- -----------
Non-current liabilities
81/8% Debenture Stock 2023 11 (14,957) (14,950)
4.184% Series A Sterling Unsecured
Loan Notes 2036 11 (29,878) (29,871)
3.249% Series B Euro Unsecured Loan
Notes 2036 11 (26,341) (25,855)
------------------------------------------- ----- ----------- -----------
(71,176) (70,676)
------------------------------------------- ----- ----------- -----------
Net assets 903,229 843,973
------------------------------------------- ----- ----------- -----------
Equity attributable to equity shareholders
Ordinary share capital 12 12,953 16,001
Capital redemption reserve 5,982 2,934
Share premium 28,078 28,078
Capital reserve 781,555 717,051
Merger reserve 41,406 41,406
Revenue reserve 33,255 38,503
------------------------------------------- ----- ----------- -----------
Total equity 903,229 843,973
------------------------------------------- ----- ----------- -----------
Net asset value per Ordinary Share
- basic 13 777.26p 670.52p
------------------------------------------- ----- ----------- -----------
Number of shares in issue excluding
Treasury Shares 116,153,543 125,868,665
------------------------------------------- ----- ----------- -----------
The financial statements were approved by the Board of British
Empire Trust plc on 10 November 2017 and were signed on its behalf
by:
PSS Macpherson
Chairman
The accompanying notes are an integral part of these financial
statements.
Registered in England & Wales No. 28203
STATEMENT OF CASH FLOWS
for the year ended 30 September 2017
2017 2016
Notes GBP'000 GBP'000
---------------------------------------------- ------ --------- ---------
Reconciliation of profit before taxation
to net cash inflow from operating activities
Profit before taxation 142,008 200,751
Realised exchange gains on currency
balances - (3,180)
Gains on investments held at fair value
through profit or loss (137,833) (196,289)
Increase in other receivables (313) (513)
(Decrease)/increase in creditors (458) 558
Taxation paid (314) 4,089
Amortisation of Debenture issue expenses 19 16
Net cash inflow from operating activities 3,109 5,432
---------------------------------------------- ------ --------- ---------
Investing activities
Purchases of investments (502,357) (431,807)
Sales of investments 594,865 433,687
---------------------------------------------- ------ --------- ---------
Net cash inflow from investing activities 92,508 1,880
---------------------------------------------- ------ --------- ---------
Financing activities
Dividends paid 6 (17,851) (15,505)
Issue of loans net of costs - 52,726
Payments for Ordinary Shares bought
back and held in treasury (66,536) (40,383)
Exchange loss on Loan Notes 480 2,992
---------------------------------------------- ------ --------- ---------
Cash outflow from financing activities (83,907) (170)
---------------------------------------------- ------ --------- ---------
Increase in cash and cash equivalents 11,710 7,142
---------------------------------------------- ------ --------- ---------
Reconciliation of net cash flow movement
in funds:
Cash and cash equivalents at beginning
of year 13,799 6,649
Exchange rate movements (13) 8
Increase in cash and cash equivalents 11,710 7,142
Increase in net cash 11,697 7,150
---------------------------------------------- ------ --------- ---------
Cash and cash equivalents at end of
year 25,496 13,799
---------------------------------------------- ------ --------- ---------
The accompanying notes are an integral part of these financial
statements.
NOTES TO THE FINANCIAL STATEMENTS
1. General information and accounting policies
British Empire Trust plc is a company incorporated and
registered in England and Wales. The principal activity of the
Company is that of an investment trust company within the meaning
of Sections 1158/1159 of the Corporation Tax Act 2010 and its
investment approach is detailed in the Strategic Report.
The financial statements of the Company have been prepared in
accordance with IFRS as adopted by the European Union, which
comprise standards and interpretations approved by the
International Accounting Standards Board ('IASB'), and as applied
in accordance with the provisions of the Companies Act 2006. The
annual financial statements have also been prepared in accordance
with the AIC SORP for the financial statements of investment trust
companies and venture capital trusts, except to any extent where it
is not consistent with the requirements of IFRS.
Basis of preparation
The functional currency of the Company is Pounds Sterling
because this is the currency of the primary economic environment in
which the Company operates. The financial statements are also
presented in Pounds Sterling rounded to the nearest thousand,
except where otherwise indicated.
Going concern
The financial statements have been prepared on a going concern
basis and on the basis that approval as an investment trust company
will continue to be met.
The Directors have made an assessment of the Company's ability
to continue as a going concern and are satisfied that the Company
has adequate resources to continue in operational existence for the
foreseeable future (being a period of 12 months from the date these
financial statements were approved). Furthermore, the Directors are
not aware of any material uncertainties that may cast significant
doubt upon the Company's ability to continue as a going concern,
having taken into account the liquidity of the Company's investment
portfolio and the Company's financial position in respect of its
cash flows, debt and investment commitments (of which there are
none of significance). Therefore, the financial statements have
been prepared on the going concern basis.
Segmental reporting
The Directors are of the opinion that the Company is engaged in
a single segment of business, being investment business. The
Company primarily invests in companies listed in the UK and other
recognised international exchanges.
Accounting developments
The accounting policies are consistent with those of the
previous financial year. The following accounting standards and
their amendments were in issue at the period end but will not be in
effect until after this financial year end. The Directors are
considering the impact of the standards upon the financial
statements. The impact of IFRS 9 in future periods will increase
disclosure requirements and change the presentation of investments
and the allocation of income. This will require the consideration
of future expected cash flows in holding financial assets. There
should be no material impact on the overall returns of the Company.
It is not envisaged that the other standards listed below will have
a material effect on the financial statements.
International Financial Reporting Standards Effective date
-------------------------------------------------- ---------------
IFRS 7 Financial Instruments (IFRS 9 Disclosures) 1 January 2018
IFRS 9 Financial Instruments 1 January 2018
IFRS 15 Revenue from Contracts with Customers 1 January 2018
IFRS 16 Leases 1 January 2019
-------------------------------------------------- ---------------
Critical accounting judgements and key sources of estimation
uncertainty
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts in
the Balance Sheet, the Statement of Comprehensive Income and the
disclosure of contingent assets and liabilities at the date of the
financial statements. The estimates and associated assumptions are
based on historical experience and various other factors that are
believed to be reasonable under the circumstances, the results of
which form the basis of making judgements about carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period, or in the period of the revision and future
period if the revision affects both current and future periods.
There were no significant accounting estimates or significant
judgements in the current period.
Investments
The Company's business is investing in financial assets with a
view to capital growth. This portfolio of financial assets is
managed and its performance evaluated on a fair value basis in
accordance with the documented investment strategy and information
is provided internally on that basis to the Company's Board of
Directors.
The investments held by the Company are designated 'at fair
value through profit or loss'. All gains and losses are allocated
to the capital return within the Statement of Comprehensive Income
as 'Gains or losses on investments held at fair value through
profit or loss'. Also included within this heading are transaction
costs in relation to the purchase or sale of investments. When a
purchase or sale is made under a contract, the terms of which
require delivery within the timeframe of the relevant market, the
investments concerned are recognised or derecognised on the trade
date.
All investments are designated upon initial recognition as held
at fair value through profit or loss, and are measured at
subsequent reporting dates at fair value, which is either the bid
price or closing price for Stock Exchange Electronic Trading
Service - quotes and crosses ('SETSqx'). The Company derecognises a
financial asset only when the contractual rights to the cash flows
from the asset expire, or when it transfers the financial asset and
substantially all the risks and rewards of ownership of the asset
to another entity. On derecognition of a financial asset, the
difference between the asset's carrying amount and the sum of the
consideration received and receivable and the cumulative gain or
loss that had been accumulated in equity is recognised in profit or
loss.
Fair values for unquoted investments, or for investments for
which the market is inactive, are established by using various
valuation techniques in accordance with the International Private
Equity and Venture Capital (the 'IPEV') guidelines. These may
include recent arm's length market transactions, the current fair
value of another instrument that is substantially the same,
discounted cash flow analysis, option pricing models and reference
to similar quoted companies. Where there is a valuation technique
commonly used by market participants to price the instrument and
that technique has been demonstrated to provide reliable estimates
of prices obtained in actual market transactions, that technique is
utilised. Where no reliable fair value can be estimated for such
instruments, they are carried at cost, subject to any provision for
impairment. These are constantly monitored for value and
impairment. The values and impairment, if any, are approved by the
Board.
All investments for which a fair value is measured or disclosed
in the financial statements are categorised within the fair value
hierarchy levels in note 14. A transfer between levels may result
from the date of an event or a change in circumstances.
Foreign currency
Transactions denominated in currencies other than Pounds
Sterling are recorded at the rates of exchange prevailing on the
date of the transaction. Items which are denominated in foreign
currencies are translated at the rates prevailing on the Balance
Sheet date. Any gain or loss arising from a change in exchange rate
subsequent to the date of the transaction is included as an
exchange gain or loss in the capital reserve or the revenue account
depending on whether the gain or loss is capital or revenue in
nature.
Cash and cash equivalents
Cash comprises cash in hand and demand deposits. Cash
equivalents are short-term, highly liquid investments and money
market funds, that are readily convertible to known amounts of cash
and which are subject to insignificant risk of changes in
value.
For the purposes of the Statement of Cash Flows, cash and cash
equivalents consist of cash and cash equivalents as defined above,
net of outstanding bank overdrafts when applicable.
Other receivables and payables
Trade receivables, trade payables and short-term borrowings are
measured at amortised cost and balances revalued for exchange rate
movements.
Income
Dividends receivable on quoted equity shares are taken to
revenue on an ex-dividend basis. Dividends receivable on equity
shares where no ex-dividend date is quoted are brought into account
when the Company's right to receive payment is established. Fixed
returns on non-equity shares are recognised on a time-apportioned
basis. Dividends from overseas companies are shown gross of any
withholding taxes which are disclosed separately in the Statement
of Comprehensive Income.
Special dividends are taken to the revenue or capital account
depending on their nature. In deciding whether a dividend should be
regarded as a capital or revenue receipt, the Board reviews all
relevant information as to the reasons for the sources of the
dividend on a case-by-case basis.
When the Company has elected to receive scrip dividends in the
form of additional shares rather than in cash, the amount of the
cash dividend forgone is recognised as income. Any excess in the
value of the cash dividend is recognised in the capital column.
All other income is accounted on a time-apportioned accruals
basis and is recognised in the Statement of Comprehensive
Income.
Expenses and finance costs
All expenses are accounted on an accruals basis. On the basis of
the Board's expected long-term split of total returns in the form
of capital and revenue returns of 70% and 30% respectively, the
Company charges 70% of its management fee and finance costs to
capital.
Expenses incurred directly in relation to arranging debt finance
are amortised over the term of the finance.
Expenses incurred in buybacks of shares to be held in treasury
are charged to the capital reserve through the Statement of Changes
in Equity.
Taxation
The charge for taxation is based on the net revenue for the year
and takes into account taxation deferred or accelerated because of
temporary differences between the treatment of certain items for
accounting and taxation purposes.
Deferred tax is provided using the liability method on temporary
differences between the tax bases of assets and liabilities and
their carrying amount for financial reporting purposes at the
reporting date. Deferred tax assets are only recognised if it is
considered more likely than not that there will be suitable profits
from which the future reversal of timing differences can be
deducted. In line with recommendations of the SORP, the allocation
method used to calculate the tax relief on expenses charged to
capital is the 'marginal' basis. Under this basis, if taxable
income is capable of being offset entirely by expenses charged
through the revenue account, then no tax relief is transferred to
the capital account.
Dividends payable to shareholders
Dividends to shareholders are recognised as a liability in the
period in which they are paid or approved in general meetings and
are taken to the Statement of Changes in Equity. Dividends declared
and approved by the Company after the Balance Sheet date have not
been recognised as a liability of the Company at the Balance Sheet
date.
Non-current liabilities: Debenture and Loan Notes
The non-current liabilities are valued at amortised cost. Costs
in relation to arranging the debt finance have been capitalised and
are amortised over the term of the finance. Hence, amortised cost
is the par value less the amortised costs of issue.
The Euro Loan Note is shown at amortised cost with the exchange
difference on the principal amounts to be repaid reflected. Any
gain or loss arising from changes in the exchange rate between Euro
and Sterling is included in the capital reserves and shown in the
capital column of the Statement of Comprehensive Income.
Further details of the non-current liabilities are set out in
notes 11 and 14.
Capital redemption reserve
The capital redemption reserve represents non-distributable
reserves that arise from the purchase and cancellation of
shares.
Share premium
The share premium account represents the accumulated premium
paid for shares issued in previous periods above their nominal
value less issue expenses. This is a reserve forming part of the
non-distributable reserves. The following items are taken to this
reserve:
-- costs associated with the issue of equity; and
-- premium on the issue of shares.
Capital reserve
The following are taken to the capital reserve through the
capital column in the Statement of Comprehensive Income:
Capital reserve - other:
-- gains and losses on the disposal of investments;
-- amortisation of issue expenses;
-- costs of share buybacks;
-- exchange differences of a capital nature; and
-- expenses, together with the related taxation effect,
allocated to this reserve in accordance with the above
policies.
Capital reserve - investment holding gains:
-- increase and decrease in the valuation of investments held at the year end.
The capital reserve is non-distributable.
Merger reserve
The merger reserve represents the share premium on shares issued
on the acquisition of Selective Assets Trust plc on 13 October 1995
and is not distributable.
Revenue reserves
The revenue reserve represents the surplus of accumulated
profits and is distributable by the way of dividends.
2. Income
2017 2016
GBP'000 GBP'000
----------------------------------------------- -------- --------
Income from investments
UK dividends 293 2,675
UK property income distributions - 216
Overseas dividends 17,194 16,581
Deposit and fixed interest 16 38
Underwriting commission - 77
Interest on recovery of French withholding tax 29 634
Exchange (losses)/gains on receipt of income* (139) 468
----------------------------------------------- -------- --------
Total income 17,393 20,689
----------------------------------------------- -------- --------
* Exchange movements arise from ex-dividend date to payment
date.
3. Investment management fee and other expenses
2017 2017 2016 2016
Revenue Capital 2017 Revenue Capital 2016
return return Total return return Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------- ------- ------- ------- ------- ------- -------
Management fee 1,856 4,332 6,188 1,511 3,527 5,038
------------------------------------- ------- ------- ------- ------- ------- -------
1,856 4,332 6,188 1,511 3,527 5,038
------------------------------------- ------- ------- ------- ------- ------- -------
Other expenses:
Directors' emoluments - fees 144 - 144 133 - 133
Auditor's remuneration - audit
- KPMG LLP 25 - 25 - - -
Auditor's remuneration - audit
- Ernst & Young LLP - - - 29 - 29
Auditor's remuneration - taxation - - - 9 - 9
Auditor's remuneration - withholding
tax, interim review and debenture
review services 8 - 8 29 - 29
Marketing 400 - 400 456 - 456
Savings scheme costs 8 - 8 80 - 80
Printing and postage costs 66 - 66 121 - 121
Registrar fees 86 - 86 77 - 77
Custodian fees 159 - 159 124 - 124
Depositary fees 145 - 145 134 - 134
Advisory and professional fees 318 - 318 187 - 187
Irrecoverable VAT 172 - 172 73 - 73
Regulatory fees 58 - 58 38 - 38
Directors' insurances and other
expenses 39 - 39 34 - 34
------------------------------------- ------- ------- ------- ------- ------- -------
1,628 - 1,628 1,524 - 1,524
------------------------------------- ------- ------- ------- ------- ------- -------
For the year ended 30 September 2017, the fee calculated in
accordance with the IMA amounted to 0.7% (2016: 0.7%) of the net
asset value calculated on a quarterly basis.
Details of the IMA and fees paid to the Investment Manager are
set out in the Report of the Directors.
4. Finance costs
2017 2017 2016 2016
Revenue Capital 2017 Revenue Capital 2016
return return Total return return Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- -------- -------- -------- -------- -------- --------
Bank overdraft interest - - - 1 - 1
Other expenses - - - - 11 11
-------------------------------- -------- -------- -------- -------- -------- --------
- - - 1 11 12
-------------------------------- -------- -------- -------- -------- -------- --------
Loan and debenture interest
81/8% Debenture Stock 2023 366 854 1,220 366 858 1,224
4.184% Series A Sterling
Unsecured Loan Notes 2036 376 879 1,255 268 625 893
3.249% Series B Euro Unsecured
Loan Notes 2036 255 594 849 180 420 600
-------------------------------- -------- -------- -------- -------- -------- --------
997 2,327 3,324 814 1,903 2,717
-------------------------------- -------- -------- -------- -------- -------- --------
Amortisation
81/8% Debenture Stock 2023 - 7 7 - 7 7
4.184% Series A Sterling
Unsecured Loan Notes 2036 - 7 7 - 5 5
3.249% Series B Euro Unsecured
Loan Notes 2036 - 5 5 - 4 4
-------------------------------- -------- -------- -------- -------- -------- --------
- 19 19 - 16 16
-------------------------------- -------- -------- -------- -------- -------- --------
Total 997 2,346 3,343 815 1,930 2,745
-------------------------------- -------- -------- -------- -------- -------- --------
Exchange loss on Loan Notes* - 480 480 - 2,992 2,992
-------------------------------- -------- -------- -------- -------- -------- --------
* Revaluation of Euro Loan Notes.
5. Taxation
Year ended 30 September Year ended 30 September
2017 2016
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- -------- -------- -------- -------- -------- --------
Analysis of charge for the
year
Overseas tax not recoverable* 849 - 849 1,079 - 1,079
Overseas tax - reversal
of prior year tax withheld** - - - - (1,579) (1,579)
Overseas tax recovered previously
expensed*** (540) - (540) (2,987) - (2,987)
----------------------------------- -------- -------- -------- -------- -------- --------
Tax cost/(recovery) for
the year 309 - 309 (1,908) (1,579) (3,487)
----------------------------------- -------- -------- -------- -------- -------- --------
* Tax deducted on payment of overseas dividends by local tax
authorities.
** Tax deducted on receipt of capital on acquisition of
Westgrund by Adler, subsequently returned.
*** Receipts from the recovery of French and Canadian
withholding tax from prior years.
The tax assessed for the year differs from the standard rate of
corporation tax in the United Kingdom of 19%. The differences are
explained below:
Year ended 30 September Year ended 30 September
2017 2016
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------- -------- --------- --------- -------- ---------- ---------
Profit before taxation 12,912 129,096 142,008 16,839 183,912 200,751
--------------------------------------- -------- --------- --------- -------- ---------- ---------
Theoretical tax at UK corporation
tax rate of 19.5% (2016: 20%)* 2,518 25,174 27,692 3,368 36,782 40,150
Effects of the non-taxable
items:
- UK franked investment income (57) - (57) (535) - (535)
- Tax-exempt overseas investment
income (3,353) - (3,353) (3,252) - (3,252)
- Exchange gains/(losses)
on revenue items 27 - 27 (93) - (93)
- (Losses)/gains on investments,
exchange gains on capital items
and movement on fair value
of derivative financial instruments - (26,476) (26,476) - (37,871) (37,871)
- Excess management expenses
carried forward 865 1,302 2,167 505 1,089 1,594
- Overseas tax not recoverable 849 - 849 1,068 (1,579)** (511)
- Overseas tax recovered previously
expensed (540) - (540) (2,987) - (2,987)
- Overseas tax expensed as
double tax relief - - - 11 - 11
- Accrued income taxable on
receipt - - - 7 - 7
Tax credit/(recovery) for the
year 309 - 309 (1,908) (1,579) (3,487)
--------------------------------------- -------- --------- --------- -------- ---------- ---------
* Tax rate 20% to 31 March 2017 and 19% from 1 April 2017.
** Tax deducted on receipt of capital on acquisition of
Westgrund by Adler, subsequently returned.
At 30 September 2017, the Company had unrelieved management
expenses of GBP59,611,000 (30 September 2016: GBP48,565,000) that
are available to offset future taxable revenue. A deferred tax
asset of GBP10,134,000 has not been recognised because the Company
is not expected to generate sufficient taxable income in future
periods in excess of the available deductible expenses and
accordingly, the Company is unlikely to be able to reduce future
tax liabilities through the use of existing surplus losses.
Deferred tax is not provided on capital gains and losses arising
on the revaluation or disposal of investments because the Company
meets (and intends to continue for the foreseeable future to meet)
the conditions for approval as an investment trust company.
6. Dividends
2017 2016
GBP'000 GBP'000
------------------------------------------------------- -------- --------
Amounts recognised as distributions to equity holders
in the year:
Final dividend for the year ended 30 September 2016
of 9.70p (2015: 9.70p) per Ordinary Share 12,006 12,914
Special dividend for the year ended 30 September 2016
of 2.80p (2015: nil) 3,465 -
Interim dividend for the year ended 30 September 2017
of 2.00p (2016: 2.00p) per Ordinary Share 2,380 2,591
------------------------------------------------------- -------- --------
17,851 15,505
------------------------------------------------------- -------- --------
Set out below are the interim, final and special dividends paid
or proposed on Ordinary Shares in respect of the financial year,
which is the basis on which the requirements of Section 1159 of the
Corporation Tax Act 2010 are considered.
2017 2016
GBP'000 GBP'000
----------------------------------------------------------- -------- --------
Interim dividend for the year ended 30 September 2017
of 2.00p (2016: 2.00p) per Ordinary Share 2,380 2,591
Proposed final dividend for the year ended 30 September
2017 of 10.00p (2016: 9.70p) per Ordinary Share 11,557* 12,057
Proposed special dividend for the year ended 30 September
2017 of nil (2016: 2.80p) per Ordinary Share - 3,480
13,937 18,128
----------------------------------------------------------- -------- --------
* Based on shares in circulation on 9 November 2017.
7. Earnings per Ordinary Share
The earnings per Ordinary Share is based on Company net profit
after tax of GBP141,699,000 (2016: (GBP204,238,000)) and on
120,666,358 (2016: 130,884,588) Ordinary Shares, being the weighted
average number of Ordinary Shares in issue (excluding shares in
treasury) during the year.
The earnings per Ordinary Share detailed above can be further
analysed between revenue and capital as follows:
2017 2016
Basic and diluted Revenue Capital Total Revenue Capital Total
------------------------- -------- -------- ------------ -------- -------- ------------
Net profit (GBP'000) 12,603 129,096 141,699 18,747 185,491 204,238
Weighted average number
of Ordinary Shares 120,666,358 130,884,588
------------------------- -------- -------- ------------ -------- -------- ------------
Earnings per Ordinary
Share 10.44p 106.99p 117.43p 14.32p 141.72p 156.04p
------------------------- -------- -------- ------------ -------- -------- ------------
There are no dilutive instruments issued by the Company (2016:
none).
The distributable reserves of the Company are GBP33,255,000
(2016: GBP38,503,000).
8. Investments held at fair value through profit or loss
30 September 30 September
2017 2016
GBP'000 GBP'000
------------------------------------------- ------------- -------------
Securities
Opening book cost 718,435 733,891
Opening investment holding gains/(losses) 167,934 (26,844)
------------------------------------------- ------------- -------------
Opening fair value 886,369 707,047
Movement in the year:
Purchases at cost:
Equities 465,243 435,141
Bonds 37,995 -
Sales - proceeds:
Equities (538,947) (406,171)
Bonds (37,982) (45,937)
- realised gains on sales 130,171 1,512
Increase in investment holding gains 7,662 194,777
Closing fair value 950,511 886,369
------------------------------------------- ------------- -------------
Closing book cost 774,915 718,435
Closing investment holding gains 175,596 167,934
------------------------------------------- ------------- -------------
Closing fair value 950,511 886,369
------------------------------------------- ------------- -------------
Year ended Year ended
30 September 30 September
2017 2016
GBP'000 GBP'000
---------------------- ------------- -------------
Transaction costs
Costs on acquisition 918 960
Costs on disposals 840 790
---------------------- ------------- -------------
1,758 1,750
---------------------- ------------- -------------
Analysis of capital gains
Gains on sales of securities based on historical
cost 130,171 1,512
Movement in investment holding gains for
the year 7,662 194,777
-------------------------------------------------- -------- --------
Net gains on investments 137,833 196,289
-------------------------------------------------- -------- --------
9. Other receivables
2017 2016
GBP'000 GBP'000
-------------------------------- -------- --------
Amounts due from brokers 500 18,422
Overseas tax recoverable 2,801 2,796
Prepayments and accrued income 1,541 1,205
VAT recoverable 8 31
-------------------------------- -------- --------
4,850 22,454
-------------------------------- -------- --------
Overseas tax recoverable relates to withholding tax in a number
of countries, some of which is past due, but is in the process of
being reclaimed by the Custodian through local tax authorities and
which the Company expects to receive in due course.
No other receivables are past due or impaired.
10. Other payables
2017 2016
GBP'000 GBP'000
--------------------------------- -------- --------
Purchases for future settlement 4,215 3,334
Amounts owed for share buybacks 1,116 3,059
Other creditors 1,121 1,580
--------------------------------- -------- --------
6,452 7,973
--------------------------------- -------- --------
11. Non-current liabilities
2017 2016
GBP'000 GBP'000
------------------------------------------------ -------- --------
81/8% Debenture Stock 2023 14,957 14,950
4.184% Series A Sterling Unsecured Loan Notes
2036 29,878 29,871
3.249% Series B Euro Unsecured Loan Notes 2036 26,341 25,855
------------------------------------------------ -------- --------
Total 71,176 70,676
------------------------------------------------ -------- --------
The amortised costs of issue expenses are set out in note 4.
The market values of the Debenture Stock and the Loan Notes are
set out in note 14.
The Debenture Stock is secured by a floating charge over all of
the assets of the Company. Under the terms of the Debenture Stock,
total borrowings are not to exceed 100% of adjusted capital and
reserves.
The Company issued two Loan Notes on 15 January 2016:
GBP30,000,000 4.184% Series A Sterling Unsecured Loan Notes due 15 January 2036
EUR30,000,000 3.249% Series B Euro Unsecured Loan Notes due 15 January 2036
Under the terms of the Loan Notes, the net assets of the Company
shall not be less than GBP300,000,000 and total indebtedness shall
not exceed 40% of net assets.
Further information on the Debenture Stock and Loan Notes is set
out on page 50.
12. Called-up share capital
Ordinary Shares of 10p
each
-------------------------
Nominal
Number of value
shares GBP'000
-------------------------------------------------- -------------- ---------
Allotted, called up and fully paid: 129,526,165 12,953
-------------------------------------------------- -------------- ---------
Treasury Shares:
Balance at beginning of year 34,145,424
Buyback of Ordinary Shares into treasury 9,715,122
Cancellation of Ordinary Shares held in treasury (30,487,924)
-------------------------------------------------- --------------
Balance at end of year 13,372,622
-------------------------------------------------- --------------
Total Ordinary Share capital excluding Treasury
Shares 116,153,543
-------------------------------------------------- --------------
During the year, 9,715,122 (2016: 8,394,546) Ordinary Shares
with a nominal value of GBP972,000 (2016: GBP839,000) and
representing 7.50% of the issued share capital, were bought back
and placed in treasury for an aggregate consideration of
GBP64,592,000 (2016: GBP42,302,000). No Ordinary Shares were bought
back for cancellation (2016: nil). 30,487,924 Ordinary Shares, with
a nominal value of GBP3,049,000, previously held in treasury were
cancelled during the year (2016: nil).
The allotted, called up and fully paid shares at 30 September
2016 consisted of 160,014,089 Ordinary Shares.
13. Net asset value
The net asset value per share and the net asset value
attributable to the Ordinary Shares at the year end are calculated
in accordance with their entitlements in the Articles of
Association and were as follows:
Net asset value per
share attributable
2017 2016
Ordinary Shares (basic) 777.62p 670.52p
------------------------- --------------- --------------
Net asset value attributable
2017 2016
GBP'000 GBP'000
Ordinary Shares (basic) 903,229 843,973
------------------------- --------------- --------------
Basic net asset value per Ordinary Share is based on net assets
and on 116,153,543 Ordinary Shares (2016: 125,868,665), being the
number of Ordinary Shares in issue excluding Treasury Shares at the
year end.
At the year end, the net asset value per Ordinary Share adjusted
to include the Debenture Stock and Loan Notes at fair value was
769.91p (2016: 661.81p).
14. Financial instruments and capital disclosures
Investment objective and policy
The investment objective of the Company is to achieve capital
growth through a focused portfolio of investments, particularly in
companies whose share prices stand at a discount to estimated
underlying net asset value.
The Company's investment objective and policy are detailed on
page 38.
The Company's financial instruments comprise equity and
fixed-interest investments, cash balances, receivables, payables
and borrowings. The Company makes use of borrowings to achieve
improved performance in rising markets. The risk of borrowings may
be reduced by raising the level of cash balances or fixed-interest
investments held.
Risks
The risks identified arising from the financial instruments are
market risk (which comprises market price risk, interest rate risk
and foreign currency risk), liquidity risk and credit and
counterparty risk. The Company may also enter into derivative
transactions to manage risk.
The Board and Investment Manager consider and review the risks
inherent in managing the Company's assets which are detailed
below.
Market risk
Market risk arises mainly from uncertainty about future prices
of financial instruments used in the Company's business. It
represents the potential loss which the Company might suffer
through holding market positions by way of price movements,
interest rate movements and exchange rate movements. The Investment
Manager assesses the exposure to market risk when making each
investment decision and these risks are monitored by the Investment
Manager on a regular basis and the Board at quarterly meetings with
the Investment Manager.
Market price risk
Market price risk (i.e. changes in market prices other than
those arising from currency risk or interest rate risk) may affect
the value of investments.
The portfolio is managed with an awareness of the effects of
adverse price movements through detailed and continuing analysis
with the objective of maximising overall returns to shareholders.
If the fair value of the Company's investments at the year end
increased or decreased by 10%, then it would have had an impact on
the Company's capital return and equity of GBP95,051,000 (2016:
GBP88,637,000).
Foreign currency
The value of the Company's assets and the total return earned by
the Company's shareholders can be significantly affected by foreign
exchange rate movements as most of the Company's assets are
denominated in currencies other than Pounds Sterling, the currency
in which the Company's financial statements are prepared. Income
denominated in foreign currencies is converted to Pounds Sterling
upon receipt.
A 5% rise or decline of Sterling against foreign currency
denominated (i.e. non Pounds Sterling) assets and liabilities held
at the year end would have increased/decreased the net asset value
by GBP39,898,000 (2016: GBP36,813,000).
The currency exposure is as follows:
Currency risk
GBP Euro USD SEK JPY NOK Other Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 30 September 2017
Other receivables 62 580 109 - 1,505 1,903 691 4,850
Cash and cash equivalents 25,496 - - - - - - 25,496
Other payables (2,058) (179) (2,651) - (1,564) - - (6,452)
81/8% Debenture Stock
2023 (14,957) - - - - - - (14,957)
4.184% Series A Sterling
Unsecured Loan Notes
2036 (29,878) - - - - - - (29,878)
3.249% Series B Euro
Unsecured Loan Notes
2036 - (26,341) - - - - - (26,341)
----------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Currency exposure on
net monetary items (21,335) (25,940) (2,542) - (59) 1,903 691 (47,282)
Investments held at
fair value through profit
or loss - equities 126,599 138,001 317,609 61,124 176,214 33,934 97,030 950,511
----------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total net currency exposure 105,264 112,061 315,067 61,124 176,155 35,837 97,721 903,229
----------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
This exposure is representative at the Balance Sheet date and
may not be representative of the year as a whole. The balances are
shown in the reporting currencies of the investee companies and may
not represent the underlying exposures of the investee
companies.
GBP Euro USD SEK JPY NOK Other Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 30 September 2016
Other receivables 17,671 2,114 222 - 431 1,668 348 22,454
Cash and cash equivalents 13,689 - - - 110 - - 13,799
Other payables (5,061) (185) (1,071) - - - (1,656) (7,973)
81/8% Debenture Stock
2023 (14,950) - - - - - - (14,950)
4.184% Series A Sterling
Unsecured Loan Notes
2036 (29,871) - - - - - - (29,871)
3.249% Series B Euro
Unsecured Loan Notes
2036 - (25,855) - - - - - (25,855)
---------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Currency exposure on
net monetary items (18,522) (23,926) (849) - 541 1,668 (1,308) (42,396)
Investments held at
fair value through
profit or loss - equities 121,500 140,143 255,948 91,940 80,946 61,027 134,865 886,369
---------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total net currency
exposure 102,978 116,217 255,099 91,940 81,487 62,695 133,557 843,973
---------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Interest rate risk
Interest rate movements may affect:
-- the fair value of investments in fixed-interest rate
securities;
-- the level of income receivable on cash deposits;
-- the interest payable on variable rate borrowings; and
-- the fair value of the Company's long-term debt.
The possible effects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account when making investment decisions. The Company, generally,
does not hold significant cash balances, with short-term borrowings
being used when required.
The Debenture Stock and Loan Notes issued by the Company pay a
fixed-rate of interest and are carried in the Company's Balance
Sheet at amortised cost rather than at fair value. Hence, movements
in interest rates will not affect net asset values, as reported
under the Company's accounting policies, but may have an impact on
the Company's share price and discount/premium.
The exposure at 30 September of financial assets and financial
liabilities to interest rate risk is shown by reference to floating
interest rates.
At At
30 September 30 September
2017 2016
GBP'000 GBP'000
-------------------------------------- -------------- --------------
Exposure to floating interest rates:
Cash and cash equivalents 25,496 13,799
-------------------------------------- -------------- --------------
If the above level of cash was maintained for a year, a 1%
increase in interest rates would increase the revenue return and
net assets by GBP255,000 (2016: GBP138,000). Management proactively
manages cash balances. If there was a fall by 1% in interest rates
it would potentially impact the Company by turning positive
interest to negative interest. The total effect would be a cost
increase/revenue reduction of GBP255,000.
At 30 September 2017 At 30 September
2016
------------------------------------ ----------------------- -----------------------
Book cost Fair value Book cost Fair value
GBP'000 '000 GBP'000 GBP'000
------------------------------------ ---------- ----------- ---------- -----------
81/8% Debenture Stock 2023 14,957 19,538 14,950 19,470
4.184% Series A Sterling Unsecured
Loan Notes 2036 29,878 33,070 29,871 32,888
3.249% Series B Euro Unsecured
Loan Notes 2036 26,341 27,518 25,855 29,284
------------------------------------ ---------- ----------- ---------- -----------
Total 71,176 80,126 70,676 81,642
------------------------------------ ---------- ----------- ---------- -----------
The impact of holding the Debenture Stock and Loan Notes at fair
value would be to reduce the Company's net assets by
GBP8,950,000.
The fair value of the Company's Debenture Stock and Loan Notes
at the year end was GBP80,126,000 (2016: GBP81,642,000). A 1%
increase in the applicable interest rates would be expected to
increase the fair values of the Debenture Stock and Loan Notes by
approximately GBP8.4m (2016: GBP9.0m), all other factors being
equal. A 1% decrease would decrease the fair values by
approximately GBP9.8m, all other factors being equal. This will
impact the market value of the fixed-interest debt.
Liquidity risk
The Company's assets mainly comprise readily realisable
securities which can be easily sold to meet funding commitments, if
necessary. Unlisted investments, if any, in the portfolio are
subject to liquidity risk. The risk is taken into account by the
Directors when arriving at their valuation of these items.
The remaining contractual payments on the Company's financial
liabilities at 30 September, based on the earliest date at which
payment can be required and current exchange rates at the Balance
Sheet date, were as follows:
In more than In more than In more than
1 2 3
year but years but years but
not not not
In 1 year more than more than more than
or less 2 years 3 years 10 years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------- --------- ------------ ------------ ------------ --------
At 30 September 2017
81/8% Debenture Stock 2023 (1,219) (1,219) (1,219) (18,352)* (22,009)
4.184% Series A Sterling
Unsecured Loan Notes 2036 (1,255) (1,255) (1,255) (8,786) (12,551)
3.249% Series B Euro Unsecured
Loan Notes 2036 (859) (859) (859) (6,013) (8,590)
Other payables (6,452) - - - (6,452)
(9,785) (3,333) (3,333) (33,151) (49,602)
------------------------------- --------- ------------ ------------ ------------ --------
In more than In more than In more than
1 2 3
year but years but years but
not not not
In 1 year more than more than more than
or less 2 years 3 years 10 years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------- --------- ------------ ------------ ------------ --------
At 30 September 2016
81/8% Debenture Stock 2023 (1,219) (1,219) (1,219) (19,571)* (23,228)
4.184% Series A Sterling
Unsecured Loan Notes 2036 (1,255) (1,255) (1,255) (8,786) (12,551)
3.249% Series B Euro Unsecured
Loan Notes 2036 (843) (843) (843) (5,903) (8,432)
Other payables (7,973) - - - (7,973)
(11,290) (3,317) (3,317) (34,260) (52,184)
------------------------------- --------- ------------ ------------ ------------ --------
* Comprises the remaining interest payments to 2023, together
with the principal to be repaid in 2023.
Credit risk
Credit risk is mitigated by diversifying the counterparties
through whom the Investment Manager conducts investment
transactions. The credit standing of all counterparties is reviewed
periodically with limits set on amounts due from any one
counterparty.
The total credit exposure represents the carrying value of
fixed-income investments, cash and receivable balances and totals
GBP30,346,000 (2016: GBP36,253,000).
Fair values of financial assets and financial liabilities
Valuation of financial instruments
The Company measures fair values using the following fair value
hierarchy that reflects the significance of the inputs used in
making the measurements. Categorisation within the hierarchy has
been determined on the basis of the lowest level input that is
significant to the fair value measurement of the relevant assets as
follows:
-- Level 1 - valued using quoted prices unadjusted in active
markets for identical assets or liabilities.
-- Level 2 - valued by reference to valuation techniques using
observable inputs for the asset or liability other than quoted
prices included within Level 1.
-- Level 3 - valued by reference to valuation techniques using
inputs that are not based on observable market data for the asset
or liability.
The tables below set out fair value measurements of financial
instruments as at the year end, by the level in the fair value
hierarchy into which the fair value measurement is categorised.
Financial assets at fair value through profit or loss at 30
September 2017
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
------------------- ------- ------- ------- -------
Equity investments 920,866 29,645 - 950,511
------------------- ------- ------- ------- -------
Financial assets at fair value through profit or loss at 30
September 2016
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
------------------- ------- ------- ------- -------
Equity investments 838,130 48,239 - 886,369
------------------- ------- ------- ------- -------
Level 2 financial assets at fair value through profit or loss at
30 September
2017 2016
GBP'000 GBP'000
------------------------------------ -------- -------
Opening fair value 48,239 4,319
Transfer from Level 1 to Level 2 - 42,195
Transfer from Level 2 to Level 3 (40,636) -
Movement in unrealised appreciation 22,042 1,725
------------------------------------ -------- -------
Total 29,645 48,239
------------------------------------ -------- -------
A Level 2 listed company completed a capital reorganisation,
splitting capital between continuation and realisation funds. This
was transferred to Level 3 at market value and realised during the
year, as set out in the table below.
The valuation of Level 2 financial assets is determined using
the average of independent broker traded prices available in the
market. The valuation techniques used by the Company are explained
in the accounting policies note on page 56.
Level 3 financial assets at fair value through profit or loss at
30 September
2017 2016
GBP'000 GBP'000
----------------------------------------------------- -------- -------
Opening fair value - -
Transfer from Level 2 to Level 3 40,636 -
Sales - proceeds (33,549) -
Total losses included in gains on investments in the
Statement of Comprehensive Income on sold assets (7,087) -
Closing fair value - -
----------------------------------------------------- -------- -------
Financial liabilities
The Company's 81/8% Debenture Stock 2023 and Loan Notes are
carried at amortised cost (see note 1). The other financial assets
and financial liabilities of the Company are carried in the Balance
Sheet at an approximation to their fair value. The fair value is
the amount at which the asset could be sold or the liability
transferred in an orderly transaction between market participants,
at the measurement date, other than a forced or liquidation
sale.
At 30 September At 30 September 2016
2017
----------------------- -----------------------
Amortised Fair value Amortised Fair value
cost cost
GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ ---------- ----------- ---------- -----------
81/8% Debenture Stock 2023 (14,957) (19,538) (14,950) (19,470)
4.184% Series A Sterling Unsecured
Loan Notes 2036 (29,878) (33,070) (29,871) (32,888)
3.249% Series B Euro Unsecured
Loan Notes 2036 (26,341) (27,518) (25,855) (29,284)
------------------------------------ ---------- ----------- ---------- -----------
Total (71,176) (80,126) (70,676) (81,642)
------------------------------------ ---------- ----------- ---------- -----------
Quoted market prices have been used to determine the fair value
of the Company's Debenture Stock and therefore it would be
categorised as Level 1 under the fair value hierarchy. As there is
no publicly available price for the Company's Loan Notes, their
fair market value has been derived by calculating the relative
premium (or discount) of the loan versus the publicly available
market price of the reference market instrument and exchange rates.
As this price is derived by model, using observable inputs, it
would be categorised as Level 2 under the fair value hierarchy.
The financial liabilities in the table below are shown at fair
value, being the amount at which the liability may be transferred
in an orderly transaction between market participants. The costs of
early redemption of the Debenture Stock and Loan Notes are set out
on page 50. The Debenture Stock is valued by reference to the price
prevailing on an active market, so is determined as Level 1. The
market values of the Loan Notes are determined by the calculation
above using observable inputs, and they are considered as Level
2.
Financial liabilities at fair value through profit or loss at 30
September 2017
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
---------------- -------- -------- ------- --------
Debenture Stock (19,538) - - (19,538)
Loan Notes - (60,588) - (60,588)
---------------- -------- -------- ------- --------
(19,538) (60,588) - (80,126)
---------------- -------- -------- ------- --------
Financial liabilities at fair value through profit or loss at 30
September 2016
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
---------------- -------- -------- ------- --------
Debenture Stock (19,470) - - (19,470)
Loan Notes - (62,172) - (62,172)
---------------- -------- -------- ------- --------
(19,470) (62,172) - (81,642)
---------------- -------- -------- ------- --------
Capital management policies and procedures
The structure of the Company's capital is described in note 12
and details of the Company's reserves are shown in the Statement of
Changes in Equity on page 52.
The Company's capital management objectives are:
-- to ensure that it will be able to continue as a going concern;
-- to achieve capital growth through a focused portfolio of
investments, particularly in companies whose share prices stand at
a discount to estimated underlying net asset value, through an
appropriate balance of equity capital and debt; and
-- to maximise the return to shareholders while maintaining a
capital base to allow the Company to operate effectively and meet
obligations as they fall due.
The Board, with the assistance of the Investment Manager,
regularly monitors and reviews the broad structure of the Company's
capital on an ongoing basis. These reviews include:
-- the level of gearing, which takes account of the Company's
position and the Investment Manager's views on the market; and
-- the extent to which revenue in excess of that which is
required to be distributed should be retained.
The Company's objectives, policies and processes for managing
capital are unchanged from last year.
The Company is subject to externally imposed capital
requirements:
a) as a public company, the Company is required to have a minimum share capital of GBP50,000; and
b) in accordance with the provisions of Sections 832 and 833 of
the Companies Act 2006, the Company, as an investment company:
i) is only able to make a dividend distribution to the extent
that the assets of the Company are equal to at least one and a half
times its liabilities after the dividend payment has been made;
and
ii) is required to make a dividend distribution each year such
that it does not retain more than 15% of the income that it derives
from shares and securities.
These requirements are unchanged since last year and the Company
has complied with them at all times.
15. Contingencies, guarantees and financial commitments
At 30 September 2017, the Company had no financial commitments
(2016: GBPnil).
At 30 September 2017, the Company had no contingent liability in
respect of any investments carrying an obligation for future
subscription or underwriting commitments (2016: GBPnil).
16. Related party disclosures
The related party transaction pursuant to the IMA with AVI is
set out in the Report of the Directors on page 39. Management fees
for the year amounted to GBP6,188,000 (2016: GBP5,038,000).
As at the year end, the following amounts were outstanding in
respect of management fees: GBPnil (2016: GBP443,000).
Strone Macpherson was Chairman of Close Brothers Group plc
during the period, the ultimate parent of Winterflood Securities
Limited (Winterflood). Winterflood was the Company's Corporate
Broker until 29 March 2017 and was paid a retainer of GBP25,000 per
annum by the Company. GBPnil was outstanding at the period end.
Commissions earned by Winterflood in managing the Company's buyback
programme are offsettable against this retainer. Commissions of
GBP73,000 were earned in the financial year, fully offsetting the
retainer.
Strone Macpherson is a trustee of The King's Fund which will
provide a venue and facilities for the purpose of holding the
Company's AGM. The Company has paid The King's Fund GBP4,000 during
the period and a further GBP1,000 is committed.
Fees paid to the Company's Directors are disclosed in the Report
on Remuneration Implementation on page 80. At the year end, GBPnil
was outstanding due to Directors (2016: GBPnil).
17. Post balance sheet events
Since the year end, the Company has bought back 583,695 Ordinary
Shares with a nominal value of GBP58,370 at a total cost of
GBP4,205,000 and placed in treasury.
The Company issued fixed-rate 20-year unsecured private
placement Loan Notes on 1 November 2017. The issue was EUR20m
(equivalent to approximately GBP17.9m) at an interest rate of 2.93%
per annum. The funding date was 1 November 2017 and the Loan Notes
are due to be repaid on 1 November 2037. The semi-annual interest
payment dates will be 1 May and 1 November.
NATIONAL STORAGE MECHANISM
A copy of the Annual Report and Accounts will be submitted
shortly to the National Storage Mechanism ('NSM') and will be
available for inspection at the NSM, which is situated at:
www.morningstar.co.uk/uk/nsm
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FFUFASFWSEIF
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November 13, 2017 02:00 ET (07:00 GMT)
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