RNS Number:4440F
Royal London UK Eqty&Income Tst PLC
19 November 2004
ROYAL LONDON UK EQUITY & INCOME TRUST PLC
Preliminary results for the year ended 31 August 2004
(All references to "Group" include the Company's subsidiary, Royal London UK
Equity & Income Securities plc)
Chairman's Statement
After the sharp recovery in world equity markets seen in the second half of its
last financial year, it was only to be expected that your Group's third year of
operation would be one of consolidation. The recovery in the equity markets was
stalled by a combination of events including rising interest rates on both sides
of the Atlantic, unsettling events in the Middle East and an ever-increasing oil
price.
Against this background your Group's total assets rose by 5.5% during the year
under review. Your Investment Manager comments in detail on the performance of
the individual components of the portfolio in their report.
There has been no change in the structure of your Company this year and it has
continued to operate within its covenant agreements: the current loan to value
ratio is 50.4%, with total borrowings of #50 million.
Following the success of last year's buy-back of Zero Dividend Preference
("ZDP") shares issued by the Company's subsidiary, Royal London UK Equity &
Income Securities plc, your Board agreed to continue the buy-back programme when
suitable opportunities occurred. Unfortunately, liquidity in the shares has been
limited and during the year under review, the Company purchased a total of
385,000 ZDP shares at a cost of #399,000 (excluding associated costs). These ZDP
shares are currently being held as an investment with the intention of
cancelling them at a later date. Nevertheless the buy-back programme as a whole
has enhanced the net asset value of the Group by #3.5 million. At the date of
this report there remain 13,424,100 ZDP shares in issue.
Your Group is still not in a position to declare or pay a dividend due to its
inability to meet the requirements of Section 265 of the Companies Act 1985 as
the Group's assets remain less then 1.5 times its liabilities.
Many of the investments in the income portfolio have suffered significant falls
in value with some having been suspended or put into liquidation. At the
year-end, a review of the income portfolio was undertaken by your Board and
investments with an aggregate book cost of #16,018,000 were identified as having
suffered a permanent diminution in value. Such diminution has been agreed to
amount to #16,012,000. This amount has now been written-off as a realised
capital loss, having previously been recognised as an unrealised capital loss
and included in the published net asset value statements as such.
At 31 August 2004 the breakdown of the Group's assets was as follows:
Market-value %
#000
UK Equity Portfolio 61,508 61.2
Income Portfolio 5,653 5.6
UK Bond Portfolio 27,531 27.4
Cash (net current assets) 5,864 5.8
-------------- ------------
100,556 100.0
========== ==========
Source: BNP Paribas Fund Services UK Limited
As the year progressed your Board became increasingly aware of the fact that
following the catastrophic events in the split-capital sector during the first
two years of your Company's existence, income generation was going to be a
long-term problem. It was gradually becoming apparent that it was unlikely that
your Group would generate sufficient income to satisfy expectations of ordinary
shareholders even when it became legally possible to pay dividends as a result
of the dramatic constriction of the income-producing base of the portfolio. Your
Board considered carefully and at length where future returns for the ordinary
shares were most likely to be generated and came to the conclusion that they
could only realistically come from capital return rather than by income in the
form of dividends. These conclusions have been arrived at in conjunction with
your Group's Investment Manager, which will be making future investment
decisions in light of these conclusions.
At the same time your Board is renegotiating the investment management fee with
Royal London Asset Management Limited. Details of this will be announced to the
market shortly.
Looking to the future, the outlook for markets remains uncertain. Interest rates
are not expected to rise much further however and equity markets, after quite a
long period of relatively little progress, are showing encouraging signs of
moving forward as I write. Your Group, with its high level of gearing, is well
positioned to be a major beneficiary of any upward movement.
Jonathan Carr
Chairman
19 November 2004
ROYAL LONDON UK EQUITY & INCOME TRUST PLC
for the year ended 31 August 2004
Investment Manager's Report
Summary
The focus of markets over the past year has been on whether demand in the US is
strong enough to support a sustainable recovery. While US GDP growth has been
running at a faster pace than at any time in the past 20 years, recent data has
turned weaker. Rising oil prices have acted as a tax on household incomes
leading to a slow-down in consumer expenditure.
Over the past year, equity markets have out-performed bond markets. Robust
corporate earnings and strong economic data have propelled equities higher,
while rising interest rates have acted as a dampener on bond markets.
Economic and market background
UK growth continued its upward trend during the period under review. Latest
available data shows that strong consumption and government spending, as well as
a pick-up in business investment, helped underpin robust growth.
Having lowered interest rates to 3.5%, their lowest level in almost half a
century, in November, the Bank of England decided to increase the base rate by
0.25%, the first rise in almost four years. With growth in the UK picking up,
and credit growth strong, the Bank believed that a modest increase in interest
rates was necessary in order to keep prospective inflation in line with the
target of 2.0%. As above-trend growth persisted in the UK, the Bank became
increasingly worried about the build-up of consumer debt and house price
inflation, and rates were increased in February, May, June and August, ending
the period at 4.75%.
Towards the end of the period, it became apparent that the 1.25% rise in
interest rates was beginning to have an effect. Retail sales slowed as higher
interest rates began to deter high street spending, and data released by the
Royal Institution of Chartered Surveyors showed that the property market was
also responding to higher interest rates as house price inflation slowed.
During the year to 31 August 2004, UK corporate bonds marginally out-performed
government bonds. Collateralised debt was the strongest performing sector, while
more economically sensitive names performed well on the back of growing economic
confidence and the ongoing search for yield. While demand for corporate bonds
remained strong for most of the period, the first two months of 2004 saw credit
spreads widen as investors began to look to invest funds in alternative assets.
This, however, proved to be a passing phenomenon, and spreads began to tighten
as investors chased limited stock.
Growth portfolio
The FTSE All-Share Index advanced by 7.2% during the year. The market was strong
during the Company's first half but fell away in the run up to the year-end.
These moves very much reflect the changing outlook for global economic growth.
During the final months of 2003 the fundamental background for stockmarkets had
started to look a lot better then earlier in the year. There was growing
optimism over the strength of the global economic recovery after two
disappointing years thanks to expansionary policies in both the USA and China.
OECD lead indicators had picked up, while company results and accompanying
outlook statements, both here and in the USA, were supportive of further market
strength.
However, as 2004 unfolded, the market's advance started to stall as evidence of
the recovery, especially in the USA, became increasingly patchy. The market was
also unsettled by events in the Middle East, the spiralling oil price, the
prospect of rising interest rates earlier than had been anticipated and the lack
of any further upgrades to company profits.
The portfolio performed well over the year. The key sectors were Mining, Oil &
Gas, Tobacco, Utilities, Leisure and Property, by no means a homogenous list but
indicative of much of the uncertainty that surrounded the market. Mining and Oil
stocks reflected the high price of commodities, while the defensive qualities of
Utilities and Tobacco were increasingly recognised by investors. In addition,
Utilities enjoyed a favourable regulatory review. The Property sector came back
into favour, mainly on the back of a strong London office market. The portfolio
was well represented in all these sectors. The portfolio has continued to have
an above average income yield.
In addition to favourable sector exposure, certain individual investments made
significant contributions to performance during the year. Among the larger
FTSE100 companies Xstrata, BHP Billiton, Reckitt Benckiser, Tesco, Severn Trent,
HSBC, Barclays, Scottish & Southern and British American Tobacco all
outperformed the market by over 10%. There were also excellent contributions
from investments in the mid-cap area, for example: William Hill, Carpetright,
Headlam and Hammerson.
Trading activity during the year increased exposure to the Mining, Building,
Engineering and Media sectors. Sources of funds were Food Producers, Beverages
and Utilities. New investments include Trinity Mirror, Stanley Leisure, BPB,
Carnival and a range of house building companies: Crest Nicholson, Redrow and
Persimmon.
Bond portfolio
The main characteristics of the bond portfolio were retained during the year. A
high exposure to unrated bonds, a bias towards higher yielding investment grade
debt, and a substantial investment in financials, property, collateralised debt
and consumer cyclical stocks continued to be the prime characteristics of the
portfolio.
Earlier in the year the portfolio was broadened and the unit size of holdings
was reduced in order to limit credit risk within the fund. During the period,
the fund maintained a long duration position, a reflection of the high weighting
in 15+ year bonds. Exposure to these securities provided positive momentum to
the portfolio's performance, as did the high exposure to BBB-rated bonds, which
performed well during the year. The Company also benefited from a high exposure
to unrated debt. The secured characteristics of many of these securities proved
beneficial to performance, especially during periods of credit spread widening.
Income portfolio
During the year, there was an improvement in the valuation of a number of the
securities in the income portfolio. This primarily reflected the recovery in the
UK equity market. However, the sharp decline in equity markets since the launch
of the Company, and the subsequent de-leveraging of many of the holdings, has
permanently reduced the value of the portfolio.
During the year, trading activity within the income portfolio was relatively
low. Several trusts held within the portfolio were liquidated, while one of the
largest holdings was subject to an unsuccessful bid. It is likely that in the
medium-term the exposure of the overall fund to investment companies will remain
relatively low.
Performance
Excluding the effects of gearing, the Company's investments produced a total
return of +10.8%, outperforming the composite benchmark return of +9.7%. When
gearing was included the return appreciated to +18.4%. At the asset class level,
the UK equity portfolio return of +12.3% outperformed the FTSE All-Share return
of +10.8%. The bond portfolio return of +6.5% also outperformed its benchmark,
the Barclays Non-Gilt over Ten Year Index's return of +4.3%. The income
portfolio appreciated in value over the financial year, showing a return of
+15.8%, which lagged its benchmark return of +18.3%.
Investment outlook
Within the UK, continued economic expansion points to a marginal increase in
interest rates over the next 12 months. This should lead to a slight increase in
yields as economic growth diminishes expectations for bond markets.
We continue to be more optimistic on the outlook for UK equities relative to
bonds. Although a tight labour market and rising cost pressures from increasing
commodity prices and rising interest rates will put pressure on corporate
profitability, valuations remain supportive for UK equities.
Royal London Asset Management Limited
Investment Manager
19 November 2004
GROUP STATEMENT OF TOTAL RETURN
(incorporating the revenue account)
for the year ended 31 August 2004
For year ended 31 August 2004
Revenue Capital Total
#'000 #'000 #'000
Total capital gains from investments - 5,366 5,366
Income from fixed asset investments 4,941 - 4,941
Other interest receivable and similar income 180 - 180
------------ ------------ ------------
Gross revenue and capital gains 5,121 5,366 10,487
Investment management fee (457) (685) (1,142)
Other administrative expenses (434) - (434)
------------ ------------ ------------
Net return on ordinary activities before interest 4,230 4,681 8,911
payable and taxation
Interest payable (1,307) (1,961) (3,268)
------------ ------------ ------------
Net return on ordinary activities before taxation 2,923 2,720 5,643
Taxation on net loss on ordinary activities (1) - (1)
------------ ------------ ------------
Net return on ordinary activities after taxation 2,922 2,720 5,642
Provision for redemption of ZDP shares in subsidiary - (1,363) (1,363)
Gain on repurchase and cancellation of ZDP shares - - -
Gain on repurchase of ZDP shares - 70 70
------------ ------------ ------------
2,922 1,427 4,349
------------ ------------ ------------
Dividends and appropriations attributable to annuity
shareholders
Dividends on annuity shares:
Appropriation of dividend attributable to annuity (2,550) - (2,550)
shareholders of 8.50p
------------ ------------ ------------
Net return attributable to ordinary shareholders 372 1,427 1,799
Dividends on Ordinary shares - - -
------------ ------------ ------------
Transfer to reserves 372 1,427 1,799
======= ======= =======
Pence Pence Pence
Return per ordinary share (Note 2) 0.53 2.04 2.57
Return per annuity share (Note 2) 8.50 - 8.50
Return per ZDP share in the subsidiary (Note 2) - 10.34 10.34
The revenue column of this statement represents the revenue account of the
Group. No operations were acquired or discontinued during the year.
All revenue and capital items in the above statement derive from continuing
operations.
GROUP STATEMENT OF TOTAL RETURN
(incorporating the revenue account)
for the year ended 31 August 2004 (CONTINUED)
For year ended 31 August 2003
Revenue Capital Total
#'000 #'000 #'000
Total capital losses from investments - (4,585) (4,585)
Income from fixed asset investments 5,133 - 5,133
Other interest receivable and similar income 100 - 100
------------ ------------ ------------
Gross revenue and capital gains/(losses) 5,233 (4,585) 648
Investment management fee (422) (633) (1,055)
Other administrative expenses (369) - (369)
------------ ------------ ------------
Net return/(loss) on ordinary activities before 4,442 (5,218) (776)
interest payable and taxation
Interest payable (1,775) (2,663) (4,438)
------------ ------------ ------------
Net return/(loss) on ordinary activities before 2,667 (7,881) (5,214)
taxation
Taxation on net return/(loss) on ordinary activities - - -
------------ ------------ ------------
Net return/(loss) on ordinary activities after 2,667 (7,881) (5,214)
taxation
Provision for redemption of ZDP shares in subsidiary - (1,396) (1,396)
Gain on repurchase and cancellation of ZDP shares - 3,426 3,426
Gain on repurchase of ZDP shares - - -
------------ ------------ ------------
2,667 (5,851) (3,184)
------------ ------------ ------------
Dividends and appropriations attributable to annuity
shareholders
Dividends on annuity shares:
Appropriation of dividend attributable to annuity (2,550) - (2,550)
shareholders of 8.50p
------------ ------------ ------------
Net return/(loss) attributable to ordinary 117 (5,851) (5,734)
shareholders
Dividends on Ordinary shares - - -
------------ ------------ ------------
Transfer to/(from) reserves 117 (5,851) (5,734)
======= ======= =======
Pence Pence Pence
Return/(loss) per ordinary share (Note 2) 0.17 (8.36) (8.19)
Return per annuity share (Note 2) 8.50 - 8.50
Return per ZDP share in the subsidiary (Note 2) - 9.47 9.47
The revenue column of this statement represents the revenue account of the
Group.
No operations were acquired or discontinued during the year.
All revenue and capital items in the above statement derive from continuing
operations.
BALANCE SHEETS
at 31 August 2004
Group Company Group Company
2004 2004 2003 2003
#'000 #'000 #'000 #'000
Fixed asset investments
Listed investments 94,692 94,692 86,849 86,849
Subsidiary undertaking - 3,333 - 4,227
-------------- -------------- -------------- --------------
94,692 98,025 86,849 91,076
-------------- -------------- -------------- --------------
Current assets
Debtors and prepayments 1,189 1,189 1,563 1,563
Cash at bank 5,721 5,713 8,987 8,979
-------------- -------------- -------------- --------------
6,910 6,902 10,550 10,542
Creditors: amounts falling due within one (1,046) (1,046) (2,086) (2,086)
year
-------------- -------------- -------------- --------------
Net current assets 5,864 5,856 8,464 8,456
-------------- -------------- -------------- --------------
Total assets less current liabilities 100,556 103,881 95,313 99,532
Creditors: amounts falling due after more (50,000) (70,042) (50,000) (70,042)
than one year
-------------- -------------- -------------- --------------
Total net assets 50,556 33,839 45,313 29,490
========= ======== ======== ========
Capital and reserves
Called-up share capital 1,000 1,000 1,000 1,000
Share premium 94,500 94,500 94,500 94,500
Capital reserve - realised (38,091) (40,975) (12,027) (16,204)
Capital reserve - unrealised (32,196) (29,312) (59,687) (55,510)
Revenue reserve 8,626 8,626 5,704 5,704
-------------- -------------- -------------- --------------
Shareholders' funds 33,839 33,839 29,490 29,490
Minority interest - ZDP shares 16,717 - 15,823 -
-------------- -------------- -------------- --------------
50,556 33,839 45,313 29,490
======== ======== ======== ========
Attributable to annuity shareholders 28,975 28,975 26,425 26,425
(non-equity)
Attributable to ordinary shareholders 4,864 4,864 3,065 3,065
(equity)
-------------- -------------- -------------- --------------
33,839 33,839 29,490 29,490
======== ======== ======== ========
Net asset value per: Pence Pence Pence Pence
Annuity share (Note 3) 96.58 96.58 88.08 88.08
Ordinary share (Note 3) 6.95 6.95 4.38 4.38
ZDP share in subsidiary (Note 3) 128.21 - 117.87 -
Approved by the Board of Directors on 19 November 2004.
Jonathan Carr
Chairman
GROUP CASH FLOW STATEMENT
for the year ended 31 August 2004
For the year For the year
ended 31 August 2004 ended 31 August 2003
#'000 #'000 #'000 #'000
Net cash inflow from operating activities 3,459 4,021
Servicing Finance
Interest paid (3,277) (4,759)
Financial Investment
Acquisition of investments (19,733) (14,556)
Sale of investments 16,684 36,445
---------------- ---------------
Net cash (outflow)/inflow from financial (3,049) 21,889
investment
Equity dividends paid - -
-------------- --------------
Net cash (outflow)/inflow before financing (2,867) 21,151
Financing
Purchase of ZDP shares issued by subsidiary (399) (3,826)
Issue expenses paid - (443)
Loan drawn down - -
Loan repayment - (20,000)
-------------------- ------------------
Net cash outflow from financing (399) (24,269)
-------------- --------------
Decrease in cash (3,266) (3,118)
======== ========
Reconciliation of net cash flow to movement in
net debt
Decrease in cash as above (3,266) (3,118)
Net cash outflow from loans repaid - 20,000
--------------- ---------------
(3,266) 16,882
Net debt at start of year (41,013) (57,895)
--------------- ---------------
Net debt at end of year (44,279) (41,013)
========= =========
NOTES TO THE ACCOUNTS
for the year ended 31 August 2004
1. Accounting policies
a. Basis of accounting
The accounts are prepared on the historical cost basis of accounting,
modified to include the revaluation of fixed asset investments and in
accordance with applicable accounting standards and with the Statement of
Recommended Practice - Financial Statements of Investment Trust Companies
(the "SORP") dated January 2003. All of the Company's operations are of a
continuing nature.
b. Group accounts
The Group accounts consolidate the accounts of the Company and its wholly
owned subsidiary Royal London UK Equity & Income Securities Plc. The revenue
account is only presented in consolidated form as provided by Section 230 of
the Companies Act 1985. Net revenue after taxation of the Company for the
year amounted to #2,922,000 (2003: #2,667,000).
c. Dividends on annuity shares
In accordance with FRS4, all dividends relating to non-equity shares are
charged to the Statement of Total Return as they accrue, irrespective of
whether the Company has sufficient distributable reserves and passes the
requirements of Section 265 of the Companies Act 1985 at the time that
the dividend falls due. An amount equal to dividends due but not paid is
included within the amount of shareholders' funds attributable to
non-equity shares. As soon as the Company has sufficient distributable
reserves, the accrued dividends will be transferred out of reserves to
creditors and the dividend will then be paid.
2. Return/(loss) per share
Return/(loss) per ordinary share
Revenue return per ordinary share is calculated by dividing the net revenue
return on ordinary activities after taxation for the year of #372,000 (2003:
#117,000) by the number of ordinary shares in issue throughout the year of
70,000,000 (2003: 70,000,000).
Capital gain per ordinary share is calculated by dividing the net capital gain
on ordinary activities after taxation for the year of #1,427,000 (2003: loss
#5,851,000) by the number of ordinary shares in issue throughout the year of
70,000,000 (2003: 70,000,000).
Return per annuity share
Revenue return per annuity share is calculated by dividing the total amount
attributable to the annuity shareholders of #2,550,000 (2003: #2,550,000) by the
number of annuity shares in issue throughout the year of 30,000,000 (2003:
30,000,000).
Return per ZDP share in the subsidiary
Capital return per ZDP share is calculated by dividing the predetermined growth
in capital entitlement per the Articles of Association of #1,363,000 (2003:
#1,396,000) by the weighted average number of ZDP shares in issue for the year
ended 31 August 2004 of 13,197,366 (2003: 14,741,705).
3. Net asset value per share
Net asset value per ordinary share
Net asset value per ordinary share is calculated in accordance with the Articles
of Association, which is consistent with FRS 4, and is based on net assets
attributable to ordinary shares of #4,864,000 (2003: #3,065,000) and 70,000,000
(2003: 70,000,000) ordinary shares in issue at 31 August 2004.
The movement during the period of the assets attributable to the ordinary shares
was as follows:
2004 2003
#'000 #'000
Net assets attributable to ordinary shareholders at start of period 3,065 8,799
Total net gain/(loss) on ordinary activities after taxation for the year 1,799 (5,734)
Dividends - -
--------------- ---------------
Net assets attributable to ordinary shareholders at end of period 4,864 3,065
========= =========
Net asset value per annuity share
Net asset value per annuity share is calculated in accordance with the Articles
of Association and is based on net assets attributable to annuity shares of
#28,975,000 (including arrears of annuity dividends) (2003: #26,425,000) and
30,000,000 (2003: 30,000,000) annuity shares in issue at 31 August 2004.
The movement during the period of the assets attributable to the annuity shares
was as follows:
2004 2003
#'000 #'000
At start of period 26,425 23,875
Dividend attributable to annuity shareholders* 2,550 2,550
--------------- ---------------
Net assets attributable to annuity shareholders at end of period 28,975 26,425
========= =========
Net asset value per ZDP share in the subsidiary
Net asset value per ZDP share is calculated in accordance with the Articles of
Association and is based on net assets attributable to ZDP shares of #16,717,000
(2003: #15,823,000) and 13,039,100 (2003:13,424,100) ZDP shares in issue outside
the Group at 31 August 2004.
The movement during the period of the assets attributable to the ZDP shares
was as follows:
2004 2003
#'000 #'000
Net assets attributable to ZDP shareholders at start of period 15,823 21,679
ZDP shares cancelled - (7,252)
ZDP shares purchased at attributable net asset value* (469) -
--------------- ---------------
Net asset value remaining after buy-backs 15,354 14,427
Capital return for the period 1,363 1,396
--------------- ---------------
Net assets attributable to ZDP shareholders at end of period 16,717 15,823
========= =========
*Represents the net asset value of the shares purchased at the transaction date.
4. Annual General Meeting
The Annual General Meeting of Royal London UK Equity & Income Trust plc will be
held on Wednesday, 15 December 2004 at 12 noon.
5. Accounts
The above financial information for the year ended 31 August 2004 does not
constitute statutory accounts as defined in Section 240 of the Companies Act
1985. The comparative financial information is based on statutory accounts for
the year ended 31 August 2003. The preliminary results are prepared on the same
basis as set out in the previous year's annual accounts. These accounts, upon
which the auditors issued an unqualified opinion, have been delivered to the
Registrar of Companies. The audit report for the statutory accounts for the
year ended 31 August 2004 has yet to be signed and delivered to the Registrar of
Companies.
BNP Paribas Secretarial Services Limited
19 November 2004
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FFAFDUSLSEDF
Royal London Uk Equity Trust (LSE:RLU)
Historical Stock Chart
From Jun 2024 to Jul 2024
Royal London Uk Equity Trust (LSE:RLU)
Historical Stock Chart
From Jul 2023 to Jul 2024
