RNS Number:4441F
Royal London UK Eqty&Income SecsPLC
19 November 2004
ROYAL LONDON UK EQUITY & INCOME SECURITIES PLC
Preliminary results for the year ended 31 August 2004
Chairman's Statement
(All references to "Group" include the Company's parent, Royal London UK Equity
& Income Trust plc)
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 the Company's Zero Dividend
Preference ("ZDP") shares by its parent, Royal London UK Equity & Income Trust
plc ("Royal London Trust"), 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 Royal London Trust 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 Group's 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 Group'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
income 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 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 SECURITIES 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 portfolio 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 Group 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
ROYAL LONDON UK EQUITY & INCOME SECURITIES PLC
PROFIT AND LOSS ACCOUNT
For the year ended 31 August 2004
Year ended Year ended
31 August 31 August 2003
2004
#'000 #'000
Profit on ordinary activities before and after taxation - -
Non-equity appropriations (1,387) (1,396)
------------ ------------
Retained loss for the year (1,387) (1,396)
======= =======
No operations were acquired or discontinued during the year.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
For the year ended 31 August 2004
There are no recognised gains or losses other than the loss for the year (2003:
same).
BALANCE SHEET
at 31 August 2004
2004 2003
#'000 #'000
Current assets
Debtors 20,042 20,042
Cash at bank 8 8
--------------- ----------------
Total net assets 20,050 20,050
--------------- ----------------
Capital and reserves
Called-up share capital 50 50
Share premium 20,000 20,000
Profit and loss account (3,786) (2,399)
ZDP redemption reserve 3,786 2,399
-------------- -------------
20,050 20,050
--------------- ---------------
Shareholders' funds
Attributable to equity shareholders 2,840 4,227
Attributable to non-equity shareholders 17,210 15,823
---------------- ---------------
20,050 20,050
---------------- ---------------
Pence Pence
Net asset value per:
Ordinary share (Note 2) 5,680.00 8,454.00
ZDP share (Note 2) 128.21 117.87
Approved by the Board of Directors on 19 November 2004.
Jonathan Carr
Chairman
NOTES TO THE ACCOUNTS
for the year ended 31 August 2004
1. Accounting policies
Basis of accounting
The accounts are prepared on the historical cost basis of accounting.
All of the Company's operations are of a continuing nature.
2. Net asset value per share
Net asset value per ordinary share is based on net assets attributable to the
ordinary shares of 2,840,000 (2003: #4,227,000) and 50,000 (2003: 50,000)
ordinary shares in issue at 31 August 2004.
2004 2003
#'000 #'000
Net assets attributable to ordinary shareholders at start of year 4,227 50
Transfer from ZDP shareholders arising from share buy-backs (1,387) 4,177
----------- -----------
Net assets attributable to ordinary shareholders at end of year 2,840 4,227
======= =======
Net asset value per ZDP share is based on net assets attributable to the ZDP
shares of #17,210,000 (2003: #15,823,000) and 13,424,100 (2003: 13,424,100) ZDP
shares in issue at 31 August 2004.
2004 2003
#'000 #'000
Net assets attributable to ZDP shareholders at start of year 15,823 21,679
Capital return for the year 1,387 1,396
Transfer to ordinary shareholders arising from share buy-backs - (7,252)
----------- -----------
Net assets attributable to ZDP shareholders at end of year 17,210 15,823
======= =======
3. Parent undertaking
The Company is a wholly owned subsidiary undertaking of Royal London UK Equity &
Income Trust plc, an investment trust company registered in England and Wales
and operating in the United Kingdom.
4. Cash flow statement
The Company has taken advantage of the exemptions allowed by FRS 1 (revised) not
to prepare a cash flow statement as it is a wholly owned subsidiary of Royal
London UK Equity & Income Trust plc.
5. Annual General Meeting
The Annual General Meeting of Royal London UK Equity & Income Securities plc
will be held on Wednesday, 15 December 2004 directly following the Annual
General Meeting of Royal London UK Equity & Income Trust plc, to be held at 12
noon.
6. 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
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