RNS Number : 5451Q
Utilico Emerging Markets Trust PLC
19 June 2020
 

Date:            19 June 2020

Contact:       Charles Jillings       

                       Utilico Emerging Markets Trust plc      

                       01372 271 486     

 

Gay Collins/Pippa Bailey

Montfort Communications

0203 770 7913

Utilico@montfort.london

 

 

UTILICO EMERGING MARKETS TRUST PLC

 

ANNUAL FINANCIAL REPORT

FOR THE YEAR TO 31 MARCH 2020

 

Utilico Emerging Markets Trust plc ("UEM" or the "Company") today announced its audited financial results for the year to 31 March 2020.

 

Highlights of results

 

·      Total revenue income of £24.0m, an increase of 12% from the prior year

·      Dividends per share totalled 7.575p for the year, an increase of 5.2%. Dividends were fully covered by earnings

·      Revenue earnings per share ("EPS") of 7.88p, an increase of 5.5% from the prior year

·      Net asset value ("NAV") total return per share of (24.9%)*

·      NAV per share of 181.84p per share, down 27.2%*

·      Gross assets of £461.4m, a decrease of 20.7%

*See Alternate Performance Measures on pages 99 to 100 of the Report and Accounts

 

 

John Rennocks, Chairman of UEM said: "The first three months of 2020 have been unprecedented and truly disruptive. Whilst it is disappointing to see the UEM annual compound NAV total return now below 10.0% at 8.1% (2019:11.0%), it continues to be above the MSCI Emerging Markets Total Return Index (GBP adjusted) of 7.4% over the same period. This significant reduction is in part due to market corrections, but also in part to a very significant downdraft in the Brazilian markets. Given UEM's 29.1% weighting in Brazil, this has impacted UEM's portfolio significantly and contributed to UEM's NAV total return being negative 24.9%, and NAV per share declining to 181.84p, over the year to 31 March 2020.

 

"It is pleasing to report, however, that UEM's revenue income has increased by 12.0% and revenue earnings per share is up 5.5% at 7.88p during the year to 31 March 2020. In addition, the Board have now declared four quarterly dividends totalling 7.575p for the full year, an uplift of 5.2% over the previous year, with dividends remaining fully covered by income.

 

"Despite market valuations having deteriorated sharply due to the impact of COVID-19, no UEM investee company has needed or is expected to require restructuring or refinancing. UEM's portfolio remains predominantly invested in relatively liquid, cash-generative companies with long-duration assets that the Company's Investment Managers believe are structurally undervalued and offer excellent total returns. Although the outlook for the world is challenging and there is more uncertainty around business strategies, our Investment Managers look with optimism at the compelling opportunities that will undoubtably occur to add more resilient investments to the portfolio."

 

 

Charles Jillings, Investment Manager of UEM added: "Emerging Markets saw an unprecedented and tumultuous final three months in the year to 31 March 2020, with virtually all asset classes in decline. UEM has had above average investment activity over the year to 31 March 2020, with much of this being in February and March 2020. Investments in the portfolio increased to £270.1m (31 March 2019: £108.7m), investing in companies with a bias towards lower gearing, better cashflow and dividend profile. There have been six new entries into the top twenty holdings of the portfolio, and investment has increased in the electricity and infrastructure sectors, from 20.0% to 23.3%, and 3.1% to 7.5% respectively.

"UEM has invested in a number of "technology infrastructure" businesses which over time are expected to offer strong growth as the world increases its digital activities. Realisations increased to £270.8m (31 March 2019: £123.6m) with a significant reduction in airports from 7.0% to 1.8%, as UEM exited nearly all of its Chinese and Latin American airports, and a significant reduction in the gas sector from 15.8% to 8.7%.

"Changes to the portfolio's geographic allocation during the year to 31 March 2020 reflect new investments and disinvestments plus relative outperformance. UEM has exited Argentina in full (having significantly reduced its exposure in 2019 down from 10.2% to 3.4%) costing UEM some 1.0% of its NAV. UEM has also significantly reduced its exposure to Mexico, down from 3.8% to 0.7%. There were also increases to the allocation to India, up from 5.8% to 13.1%.

"Despite COVID-19's impact on UEM's portfolio and concern there will be potential aftershocks and consequent challenges, the COVID-19 pandemic has resulted in significant acceleration of social and technological change with business seeing rapid rates of digitalisation.  This will result in both threats to existing business models and opportunities for online services and the team at ICM are looking for and adding businesses they expect to benefit from this enhanced trend".

 

 

 

On 3 April 2018, as a result of the proposals to redomicile Utilico Emerging Markets Limited ("UEM Bermuda") to the United Kingdom, the shareholders of UEM Bermuda exchanged all their shares in UEM Bermuda for shares in UEM on a one for one basis and UEM Bermuda became a wholly owned subsidiary of UEM. All performance data relating to periods prior to 3 April 2018 are in respect of UEM Bermuda.

 



 

CHAIRMAN'S STATEMENT

The first three months of 2020 have been unprecedented and truly disruptive. The coronavirus ("COVID-19") pandemic first shut down China in late January and saw much of the rest of the world shut down by the end of March 2020. This brought the global economy to a halt resulting in both a supply and a demand shock. This huge economic disruption saw markets plummet rapidly and by mid-March the S&P 500 had fallen from a peak of 3,386 in February to 2,237 on 23 March 2020, a fall of 33.9%. As at 31 March 2020 the S&P had recovered to 2,585, reducing the decline to 23.7%. The recovery has been driven by unparalleled action by both governments and central banks to stabilise the economies. The collapse of the oil price contributed further to both market uncertainties and losses.

UEM has delivered an annual compound NAV total return since inception of 8.1% (2019: 11.0%), which is above the MSCI Emerging Markets Total Return Index (GBP adjusted) ("MSCI") of 7.4% over the same period.

While it is disappointing to see the UEM annual compound NAV total return now below 10.0%, EM have been harder hit as they always are at such times of extreme uncertainty. UEM's NAV was down significantly, in part due to market corrections, but also in part to a very significant downdraft in the Brazilian markets. In the year to 31 March 2020 the Bovespa Index was down 23.5% and the Brazilian Real vs Sterling was down 20.9%, resulting in the Brazilian market in Sterling terms being down 39.8% for the year. Given UEM's 29.1% weighting in Brazil this has impacted UEM's portfolio significantly and contributed to UEM's total return for the year being negative 24.9%.

 A key driver for the movements in exchange rates has been the reset of interest rates. The Brazilian benchmark interest rate (Selic) reduced over the twelve months from 6.50% to 3.75%. This, together with weaker oil prices and weakening global GDP, saw the currency decline by 24.7% against the US Dollar and 20.9% against Sterling. Alone this would account for NAV losses of 5.8%. The Brazilian Real's weakness over the last three months is clearly illustrated in the currency graph on page 6 of the Report and Accounts.

The outlook is challenging for investors given the rate of developments and responses from governments and central banks. There is well over USD 10.0 trillion of capital now committed to supporting economies globally and while the packages differ in detail, their objective is to protect the respective economies. At the same time, interest rates continue to fall, including in the EM, and this lowering of finance costs should feed through to earnings and relative valuations. The amount of committed capital combined with lower interest rates has the potential to deliver higher inflation and equity market valuations.

Respective major governments' responses have led to unprecedented measures to protect their healthcare systems, effectively shutting their economies, and launching huge rescue packages. Furthermore, traditional supply chains have been disrupted overnight. Rarely has both the word unprecedented and disruptive been more relevant.

The global community has had to learn, implement, and understand social distancing, lockdown, the R factor and flattening the curve. Overnight the business community moved to either shutdown (such as factories, stores, travel, sport) or to working from home (such as banking, insurance, education). This seismic shift will lead a digital transformation step change. It is going to have a lasting impact on the way the world works and consumes products and will likely lead to social change too.

income AND DIVIDENDs

It is pleasing to report UEM's revenue income has increased 12.0% during the year to 31 March 2020. Although this was partly offset by taxation which rose 173.1% to £2.2m, primarily due to the income received in UEM Bermuda in the prior year being distributed up to UEM net of tax, the resultant revenue earnings per share is up 5.5% at 7.88p, a good outcome.

The Board has now declared four quarterly dividends totalling 7.575p, an uplift of 5.2% over the previous year. Dividends remain fully covered by income. Ongoing charges were 1.1%, in line with last year and no performance fee was paid. The Board would like to re-emphasise that UEM's portfolio is predominantly invested in relatively liquid, cash-generative companies with long-duration assets that the Company's Investment Managers believe are structurally undervalued and offer excellent total returns.

In light of the uncertainties created by world events, it is unclear how future earnings and dividends of UEM's portfolio companies will be affected. As an investment trust, the Company will distribute at least 85% of its revenue income earned each financial year by way of dividends. UEM also has the flexibility to pay dividends from capital reserves.

The Board previously reassured shareholders that, in the event of any short term weakness in portfolio income, the Board intends to maintain its quarterly dividend at the rate of 1.925p per share for the fourth quarter of the current financial year and for the remainder of 2020 calendar year, utilising its revenue reserves and, if necessary, its capital reserves. The Board has already declared the next quarterly dividend of 1.925p payable on 19 June 2020. This will result in dividends for the 2020 calendar year amounting to 7.70p per share per annum, which represents an uplift of 5.1% over the 2019 calendar year and is equivalent to a yield of 4.3% based on a current share price of 178.00p.

I referred in last year's statement to the £14.3m revenue reserves of UEM Bermuda which could not be recognised as revenue reserves following the re-domicile to the UK. Since, from an accounting perspective, the amount is now effectively part of UEM's capital reserves, this provides further support for the Board's decision to maintain the Company's dividend from capital reserves, if it is required.

SHARE BUYBACKS

UEM's share price discount narrowed from 12.8% as at 31 March 2019 to 11.2% as at 31 March 2020. However, it remains above levels the Board would wish to see over the medium term. The Company has continued buying back UEM's shares for cancellation with 2.0m shares bought back in the year to 31 March 2020, at an average price of 242.69p. While the Board would like to see the discount narrow even more, any share buyback remains an investment decision. Traditionally the Company has bought back shares if the discount widens in normal market conditions to over 10.0%. Since inception, the Company has bought back 49.4m ordinary shares totalling £85.7m. The buybacks now represent more than the initial capitalisation of UEM Bermuda when it came to market in July 2005.

COVID-19 IMPACT ON UEM

The COVID-19 impact on UEM's portfolio is detailed in the Investment Managers' Report on page 14 of the Report and Accounts. However, it is worth noting that no UEM investee company has needed or is expected to require restructuring or refinancing. The strategic nature and business model strength of UEM's portfolio has been good. Although market valuations deteriorated sharply, most of the businesses have proved resilient. Coupled with strong government and central bank support the Board does not today see a risk from COVID-19 outside of market volatility in valuations.

Today the outlook is improving. China and Asia led the way into the virus and are now leading the way out. Recovery is picking up week by week. Europe has passed the peak and is recovering as is North America. This progress is feeding through into market valuations.

UEM, as a company, has adjusted to the global lockdowns and currently cancelled all travel by the Board. UEM moved to using video conferencing to meet the requirements by governments on social distancing and travel restrictions, whilst ensuring the Board receives regular updates on the Company's portfolio and performance from the Investment Managers. All interactions with UEM's service providers have been by video conference where needed, including the audit process.

At the forthcoming annual general meeting ("AGM") we are proposing a resolution to make amendments to UEM's Articles to permit "hybrid" general meetings. This will provide UEM with flexibility to hold general meetings by means of an electronic facility as well as at a physical location if, in the future, there are again difficulties with attendance at physical meetings.

IMPACT OF TRADING RELATIONSHIPS

At the time of writing, the US continues to escalate its war of words with China over the virus's outbreak. Clearly this is a concern. We expect the noise to rise in this election year in the US. There remain concerns that Brexit could, under a hard Brexit scenario, negatively impact European trade and therefore UEM's East European investments.

OUTLOOK

The outlook for the world is challenging and UEM expects significant shifts politically, socially and for business. Clearly that impacts on investments and valuations. There is more uncertainty around business strategies and therefore plans and valuations. However, the Investment Managers look with optimism at the compelling opportunities that will undoubtedly occur to add more resilient investments to the portfolio.

 

 

 

John Rennocks

Chairman

19 June 2020

 



 

PERFORMANCE SUMMARY

 






31 March

2020

31 March

2019

% change

2020/19

NAV total return per share (1) (annual) (%)

(24.9)

3.5

n/a

Share price total return per share (1) (annual) (%)

(23.2)

5.4

n/a

Annual compound NAV total return (1)

(since inception - 20 July 2005) (%)

 

8.1

 

11.0

 

n/a





NAV per share (1) (pence)

181.84

249.84

(27.2)

Share price (pence)

161.50

217.90

(25.9)

Discount (1) (%)

(11.2)

(12.8)

n/a





Earnings per share (basic)




- Capital (pence)

(68.29)

(0.12)

n/r*

- Revenue (pence)

7.88

7.47

5.5

Total (pence)

(60.41)

7.35

(921.9)





Dividends per share




- 1st quarter (pence)

1.800

1.800

0.0

- 2nd quarter (pence)

1.925

1.800

6.9

- 3rd quarter (pence)

1.925

1.800

6.9

- 4th quarter (pence)

1.925

1.800

6.9

Total (pence)

7.575

7.200

5.2





Gross assets(2)(£m)

461.4

581.9

(20.7)

Equity holders' funds (£m)

414.3

574.2

(27.8)

Shares bought back (£m)

4.8

9.5

(49.5)





Net cash (£m)

39.5

11.7

237.6

Bank loans (£m)

(47.1)

(7.8)

503.8

Net (debt)/cash (£m)

(7.6)

3.9

(294.9)

Net (debt)/cash on net assets (%)

(1.8)

0.7

n/a





Management and administration fees

and other expenses




- excluding and including performance fee (£m)

6.4

5.9

8.5





Ongoing charges figure




- excluding and including performance fee (%)

1.1

1.0

n/a

 

(1)  See Alternative Performance Measures on pages 99 to 100 of the Report and Accounts

(2)  Gross assets less liabilities excluding loans

* not relevant

 



 

INVESTMENT MANAGERS' REPORT

Emerging Markets saw an unprecedented and tumultuous final three months in the year to 31 March 2020. With countries representing nearly 90% of global GDP under lockdown, markets were stressed and virtually all asset classes, whether it be equities, commodities, currencies or debt, were in decline. The impact of COVID-19 has been very disruptive to normal life and the markets reflected this concern. Equity markets retreated from highs in February to lows in March at a rate that has been rarely seen.

The US led the way lower, however EM markets then retreated faster and further reflecting a risk off bias, with most EM indices in negative territory. A notable exception was China where markets remained stable following significant government intervention.

UEM was significantly impacted by these events seeing its NAV decline to 181.84p, and the NAV total return fall by 24.9% over the year to 31 March 2020. UEM underperformed the wider markets in large part due to its exposure to Brazil, as noted in the Chairman's statement.

COVID-19's impact on UEM's portfolio has been evident and at this stage a few high-level observations can be made. Airports have seen passenger numbers plunge, whilst ports have reported declines in volumes. However, data centres have experienced usage step change upwards. UEM has significantly reduced its airport exposure and it has invested in companies with a bias towards lower gearing, better cashflow and dividend profile. UEM has also seen the Chinese utility and infrastructure sector successfully trade through the shutdowns. UEM has not been required to participate in any rescue rights issues as of today in the portfolio investments. Valuations are cheaper, but the big concern is will there be aftershocks and consequent challenges. We should expect the unexpected.

PORTFOLIO

UEM's gross assets (less liabilities excluding loans) decreased sharply to £461.4m as at 31 March 2020 from £581.9m as at 31 March 2019.

There have been six new entries into the top twenty holdings of the portfolio over the year: India Grid Trust ("Indigrid"), an infrastructure investment trust which owns power transmission assets in India; Gujarat State Petronet Limited ("GSPL"), an Indian gas transmission company; Centrais Elétricas Brasileiras S.A. ("Eletrobras"), a Brazilian utility company; Torrent Power Limited ("Torrent Power"), an Indian electricity distribution and generation company; Societe Nationale des Telecommunications du Senegal ("Sonatel"), a West African telecommunications operator; and Omega Geracao S.A. (Omega"), a Brazilian renewable energy power generator.

The following investments were exited: Companhia de Gas de Sao Paulo ("Comgas"), which was acquired for cash under a takeover offer; China Resources Gas Group Limited; Shanghai International Airport Co Ltd; Metro Pacific Investments Corporation: and Enel Americas S.A. In addition, UEM's investment in Yuexiu Transport Infrastructure Limited ("YTL") was reduced.

Investments in the portfolio increased to £270.1m in the year ended 31 March 2020 (31 March 2019: £108.7m) and realisations increased to £270.8m (31 March 2019: £123.6m). This reflects above average investment activity. Much of this increased activity was in February and March 2020 as UEM reduced its holdings in companies in the airport sector and investments in Mexico.

One outcome from this additional trading activity has been a significant reduction in airports from 7.0% to 1.8% as UEM exited nearly all of its Chinese and Latin American airports. The significant reduction in the gas sector from 15.8% to 8.7% was mainly as a result of exiting Comgas. Electricity increased from 20.0% to 23.2% as a result of investment and relative performance. Infrastructure increased from 3.1% to 7.5% as a result of the investment in Indigrid.

Changes to the portfolio's geographic allocation reflect new investments and disinvestments plus the relative market performance as outlined above. It is worth noting UEM exited Argentina in full and has significantly reduced its exposure to Mexico, down from 3.8% to 0.7% during the year to 31 March 2020. Having significantly reduced the Argentina exposure last year, down from 10.2% to 3.4%, UEM then exited this year, in full, once it became clear that Macri's government would fall. This hard exit cost UEM some 1.0% of its NAV. There were increases to the allocation to India, up from 5.8% to 13.1%, mainly as a result of adding Indigrid and Torrent Power.

UEM ended the year with level 3 investments of £13.9m (2019: £22.7m), representing 3.3% of total investments. UEM's unlisted investments reduced by 38.8%, mainly as a result of realisations. In the twelve months to 31 March 2020, realisations were £11.1m, purchases were £1.9m and net gains on the holdings £0.4m. Over three quarters of the unlisted investments saw realisations in the year, which is pleasing to see. As at the year-end, 46.0% is represented by an investment in an operational wind farm developer in mainland China, which is at an advanced stage of a controlled auction exit. While the due diligence process is likely to be slowed down by COVID-19 we remain optimistic on both valuation and timing.

 

BANK DEBT

UEM's bank loans increased from £7.8m to £47.1m in the year to 31 March 2020. Cash increased from £11.7m to £39.5m. Much of this was in the final two months of the period under review, as UEM sold down positions which we believed had held up too well and UEM exited investments in airports and in Mexico. UEM's net debt position as at 31 March 2020 was £7.6m (31 March 2019: net cash £3.9m). The Scotiabank Europe PLC facility is a three-year unsecured £50.0m multicurrency revolving facility maturing in April 2021.

REVENUE RETURN 

Revenue income increased to £24.0m as at 31 March 2020, from £21.4m as at 31 March 2019, an increase of 12.0%. The increase reflects the rise in dividend income (£3.5m) particularly income from the Indian holdings.

Management fees and other expenses increased by 9.4% to £3.4m in the year to 31 March 2020. This reflected that for most of the year the NAV was higher. Finance costs remained modest at £0.4m given the low interest rate environment. Taxation rose sharply to £2.2m during the year ended 31 March 2020 (2019: £0.8m) and is expected to remain at this level going forward. In the main this resulted from income that was received in UEM Bermuda in the prior year and distributed to UEM net of tax. All holdings were transferred to UEM in the period to 31 March 2019 and in the current year all income is recognised directly in UEM with tax deducted.

Arising from the above, the profit for the year increased by 3.7% to £18.0m from £17.4m for the period to
31 March 2019. The earnings per share was higher, a rise of 5.5% to 7.88p compared to the prior year of 7.47p due to the increase in profit and reduced number of average shares in issue following buybacks in both years. Dividends per share of 7.575p were fully covered by earnings.

Retained revenue reserves rose to £5.9m as at 31 March 2020.

CAPITAL RETURN

The portfolio lost £149.7m on the capital account during the year to 31 March 2020. There were net gains on derivatives of £1.5m and losses on foreign exchange of £1.9m. The total income loss on the capital account was £150.1m against prior year gains of £2.7m.

Management and administration fees were higher at £3.0m (31 March 2019: £2.7m), an increase of 8.3% mainly as a result of higher average net assets during the year. Finance costs increased to £0.8m from £0.2m as a result of increased bank borrowings. There was a charge for taxation of £2.1m (31 March 2019: nil) which arose mainly from Brazilian capital gains tax. The net effect of the above was a loss on capital return of £156.0m (31 March 2019: a loss of £0.3m).

ACCELERATION OF TECHNOLOGical CHANGE

The COVID-19 pandemic has resulted in significant acceleration of social and technological change. This is very evident in the shift overnight to working from home. Businesses from education, health, finance and media are seeing rapid rates of digitalisation. This will result in both threats to existing business models, be they universities or retail, and opportunities for online services. The team at ICM are looking for and adding businesses they expect to benefit from this enhanced trend.

It is worth noting that UEM has invested in a number of "technology infrastructure" businesses. These include MyEG Services in Malaysia, a government e-commerce enabler, through to data centres in Korea and Hong Kong. Over time these investments are expected to offer strong growth as the world increases its digital activities.

 

 

Charles Jillings
ICM Investment Management Limited and ICM Limited

19 June 2020

 



 

PRINCIPAL RISKS AND RISK MITIGATION

During the year ended 31 March 2020, ICMIM was the Company's AIFM and had sole responsibility for risk management subject to the overall policies, supervision, review and control of the Board.

 

The Board considers carefully the Company's principal and emerging risks and uncertainties. It seeks to mitigate these risks through regular review by the Audit & Risk Committee of the Company's risk register which identifies the risks facing the Company and the likelihood and potential impact of each risk, together with the controls established for mitigation. Emerging risks are considered at each Audit & Risk Committee meeting. As required by the Association of Investment Companies ("AIC") Code of Corporate Governance, the Board has undertaken a robust assessment of the principal risks facing the Company. There have been no significant changes to the principal risks during the year.

 

The principal risks and uncertainties currently faced by the Company and the controls and actions to mitigate those risks, are described below.

 

INVESTMENT RISK: The risk that the investment strategy does not achieve long-term positive total returns for the Company's shareholders

The Board monitors the performance of the Company and has established guidelines to ensure that the approved investment policy approved is pursued by the Investment Managers. These guidelines include sector and market exposure limits.

 

The investment process employed by the Investment Managers combines assessment of economic and market conditions in the relevant countries with stock selection. Fundamental analysis forms the basis of the Company's stock selection process, with an emphasis on sound statements of financial position, good cash flows, the ability to pay and sustain dividends, good asset bases and market conditions. The political risks associated with investing in these countries are also assessed. The Investment Managers try to reduce risk by ensuring that the Company's portfolio is always appropriately diversified. Overall, the investment process aims to achieve absolute returns through an active fund management approach and the Board monitors the implementation and results of the investment process with the Investment Managers.

 

MARKET RISK: The Company's assets consist mainly of listed securities and its principal risks are therefore market related and adverse market conditions could lead to a fall in NAV.

The Company's portfolio is exposed to equity market risk and foreign currency risk. Adverse market conditions may result from factors such as economic conditions, political change, natural disasters and health epidemics. At each Board meeting the Board reviews the diversification of the portfolio, asset allocation, stock selection, unquoted investments and levels of gearing and has set investment restrictions and guidelines which are monitored and reported on by the Investment Managers.

 

The Company's results are reported in Sterling, although the majority of its assets are priced in foreign currencies and therefore any rise or fall in Sterling will lead, respectively, to a fall or rise in the Company's reported NAV. Such factors are out of the control of the Board and the Investment Managers and may give rise to distortions in the reported returns to shareholders. It is difficult and expensive to hedge EM currencies.

 

KEY STAFF RISK: Loss by the Investment Managers of key staff could affect investment returns.

The quality of the investment management team is a crucial factor in delivering good performance. There are training and development programs in place for employees and the remuneration packages have been developed in order to retain key staff. Any material changes to the management team are considered by the Board at its next meeting; the Board discusses succession planning with the Investment Managers at regular intervals

 

DISCOUNT RISK: The Company's shares may trade at a discount to their NAV and a widening discount may undermine investor confidence in the Company.

The Board monitors the price of the Company's shares in relation to their NAV and the premium/discount at which they trade. The Board generally buys back shares for cancellation in normal market conditions if they are trading at a discount in excess of 10% and the Investment Managers agree that it is a good investment decision.

 

OPERATIONAL RISK: Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to successfully pursue its investment policy

The Company's main service providers are listed on page 98 of the Report and Accounts. The Audit & Risk Committee monitors the performance and controls (including business continuity procedures) of the service providers at regular intervals.

 

All listed and most unlisted investments are held in custody for the Company by JPMorgan Chase Bank N.A. - London Branch with a small number of unlisted investments held in custody by Waverton Investment Management Limited ("Waverton"). JPMEL, the Company's depositary services provider, also monitors the movement of cash and assets across the Company's accounts.

 

The Audit & Risk Committee reviews the JP Morgan SOC1 reports, which are reported on by Independent Service Auditors, in relation to its administration, custodial and information technology services.

 

The Board reviews the overall performance of the Investment Managers and all the other service providers on a regular basis. The risk of cybercrime is high, as it is with most organisations, but the Board regularly seeks assurances from the Investment Managers and other service providers on the preventative steps that they are taking to reduce this risk.

 

GEARING: Whilst the use of borrowings should enhance total return where the return on the Company's underlying securities is rising and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is falling

Gearing levels may change from time to time in accordance with the Board and Investment Managers' assessment of risk and reward. As at 31 March 2020, UEM had net debt gearing on net assets of 1.8%. ICMIM monitors compliance with the banking covenants when each drawdown is made and at the end of each month. The Board reviews compliance with the banking covenants at each Board meeting.

 

REGULATORY RISK:

Failure to comply with applicable legal and regulatory requirements such as the tax rules for investment companies, the FCA's Listing Rules and the Companies Act 2006 could lead to suspension of the Company's Stock Exchange listing, financial penalties, a qualified audit report or the Company being subject to tax on capital gains.

The Investment Managers and the Company's professional advisers monitor developments in relevant laws and regulations and provide regular reports to the Board in respect of the Company's compliance.

 

CORONAVIRUS

The Board has identified the emergence and spread of COVID-19 as a risk facing the Company and its investee companies. The Board has reviewed the business continuity plans of each of the Company's principal service providers in relation to the steps being taken to combat the spread of the virus and will continue to monitor developments as they occur. The Chairman's Statement and the Investment Managers' Report provide further discussion in relation to COVID-19 and its effects on markets and the Company's portfolio.

 

BREXIT

The Board has considered whether Brexit poses a discrete risk to the Company. As the Company reports in Sterling and almost all the Company's portfolio companies are priced in foreign currencies, sharp movements in exchange rates can affect the NAV (see "market risk" above). Within UEM's portfolio there are very few UK businesses which could see an impact from Brexit both in operations and assets. Accordingly, the Board believes that the impact of Brexit on UEM is unlikely to be material, however, it will continue to keep Brexit under regular review and consideration.

 



 

DIRECTORS' STATEMENT OF RESPONSIBILITIES

in respect of the Annual Report and the Financial Statements

 

 

The Directors are responsible for preparing the Annual Report and Financial Statements, the Directors' Remuneration Report and the 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 the financial statements in accordance with IFRS as adopted by the European Union.

 

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 its profit or loss for that period. In preparing these financial statements, the Directors are required to:

 

•      select suitable accounting policies and then apply them consistently;

•      make judgements and estimates that are reasonable and prudent;

•      state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements;

•      assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

•      use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

 

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. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

 

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website, which is maintained by the Company's Investment Managers. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL FINANCIAL REPORT

 

We confirm that to the best of our knowledge:

 

·      the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company; and

·      the Strategic Report and Directors' Report 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 it faces.

 

We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

 

Approved by the Board on 19 June 2020 and signed on its behalf by:

 

John Rennocks

Chairman

 



 

STATEMENT OF COMPREHENSIVE INCOME

 

 



for the year to

for the period 7 December 2017



31 March 2020

to 31 March 2019



Revenue

Capital

Total

Revenue

Capital

Total



return

return

return

return

return

return



£'000s

£'000s

£'000s

£'000s

£'000s









(Losses)/gains on investments


-

(149,719)

(149,719)

-

1,271

1,271

Gains on derivative instruments


-

1,521

1,521

-

2,306

2,306

Foreign exchange losses


-

(1,908)

(1,908)

-

(889)

(889)

Investment and other income


23,991

-

21,421

24

21,445

Total income/(loss)


23,991

(150,106)

(126,115)

21,421

2,712

24,133

Management and administration fees


(1,656)

(2,959)

(4,615)

(1,503)

(2,731)

(4,234)

Other expenses


(1,787)

-

(1,644)

-

(1,644)

Profit/(loss) before finance costs and taxation


20,548

(153,065)

(132,517)

18,274

(19)

18,255

Finance costs


(363)

(847)

(106)

(246)

(352)

Profit/(loss) before taxation


20,185

(153,912)

(133,727)

18,168

(265)

17,903

Taxation


(2,179)

(2,134)

(798)

-

(798)

Profit/(loss) for the period


18,006

(156,046)

(138,040)

17,370

(265)

17,105









Earnings per share (basic) - pence


7.88

(68.29)

(60.41)

7.47

(0.12)

7.35

 

All items in the above statement derive from continuing operations.

 

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies.

 

The Company does not have any income or expense that is not included in the profit/(loss) for the period and therefore the profit/(loss) for the period is also the total comprehensive income for the period, as defined in International Accounting Standard 1 (revised).

 

All income is attributable to the equity holders of the Company.

 



 

STATEMENT OF CHANGES IN EQUITY

 

 

 

for the year to 31 March 2020




Ordinary


Capital


Retained earnings



share

Merger

redemption

Special

Capital

Revenue



capital

reserve

reserve

reserve

reserves

reserve

Total


£'000s

£'000s

£'000s

£'000s

£'000s

£'000s

£'000s

Balance as at 31 March 2019

2,298

76,706

47

490,504

(265)

4,865

574,155

Shares purchased by the Company and

cancelled

(20)

-

20

(4,758)

-

-

(4,758)

(Loss)/profit for the year

-

-

-

-

(156,046)

18,006

(138,040)

Dividends paid in the year

-

-

-

-

-

(17,014)

(17,014)

Balance at 31 March 2020

2,278

76,706

67

485,746

(156,311)

5,857

414,343

 

 

for the period 7 December 2017 to 31 March 2019




Ordinary

Redeemable


Capital


Retained earnings



share

deferred

Merger

redemption

Special

Capital

Revenue



capital

shares

reserve

reserve

reserve

reserves

reserve

Total


£'000s

£'000s

£'000s

£'000s

£'000s

£'000s

£'000s

£'000s

Shares issued

2,345

-

577,416

-

-

-

-

579,761

Transfer on issue of redeemable

deferred shares

-

500,000

(500,000)

-

-

-

-

-

Shares purchased by the

Company and cancelled

(47)

(500,000)

-

500,047

(9,496)

-

-

(9,496)

Transfer to special reserve

-

-

-

(500,000)

500,000

-

-

-

Fund launch fees

-

-

(710)

-

-

-

-

(710)

(Loss)/profit for the period

-

-

-

-

-

(265)

17,370

17,105

Dividends paid in the period

-

-

-

-

-

-

(12,505)

(12,505)

Balance as at 31 March 2019

2,298

-

76,706

47

490,504

(265)

4,865

574,155



 

STATEMENT OF FINANCIAL POSITION

 




2020

2019

as at 31 March



£'000s

£'000s

Non-current assets





Investments



418,743

569,134

Current assets





Other receivables



4,739

6,793

Derivative financial instruments



1,344

77

Cash and cash equivalents



40,620

11,668




46,703

18,538

Current liabilities





Other payables



(3,746)

(5,638)

Derivative financial instruments



(278)

(124)




(4,024)

(5,762)

Net current assets



42,679

12,776

Total assets less current liabilities



461,422

581,910

Non-current liabilities





Bank loans



(47,079)

(7,755)

Net assets



414,343

574,155






Equity attributable to equity holders





Ordinary share capital



2,278

2,298

Merger reserve



76,706

76,706

Capital redemption reserve



67

47

Special reserve



485,746

490,504

Capital reserves



(156,311)

(265)

Revenue reserve



5,857

4,865

Total attributable to equity holders



414,343

574,155






Net asset value per ordinary share





Basic - pence



181.84

249.84

 

 



STATEMENT OF CASH FLOWS

 




for the period



for the year to

7 December 2017 to



31 March 2020

31 March 2019



£'000s

£'000s

Operating activities




(Loss)/profit before taxation


(133,727)

17,903

Deduct investment income - dividends


(23,079)

(19,580)

Deduct investment income - interest


(887)

(1,825)

Deduct bank Interest received


(25)

(16)

Add back interest charged


1,210

352

Add back (losses)/gains on investments


149,719

(1,271)

Add back gains on derivative instruments


(1,521)

(2,306)

Add back foreign exchange losses


1,908

889

Increase in other receivables


85

(119)

Increase in other payables


(176)

1,617

Net cash outflow from operating activities before dividends and interest

(6,493)

(4,356)

Interest paid


(1,196)

(349)

Dividends received


21,848

11,039

Bank interest received


25

16

Investment income - interest


1,572

975

Taxation paid


(4,325)

(798)

Net cash inflow from operating activities


11,431

6,527

Investing activities




Purchases of investments


(272,580)

(257,917)

Sales of investments


272,928

126,426

Purchase of derivatives


(2,449)

-

Sales of derivatives


2,858

2,352

Net cash inflow/(outflow) from investing activities


757

(129,139)

Financing activities:




Repurchase of shares for cancellation


(4,758)

(9,496)

Dividends paid


(17,014)

(12,505)

Drawdown of bank loans


64,676

27,785

Repayment of bank loans


(26,033)

(19,941)

Loan from subsidiary


-

150,125

Fund launch fees


-

(710)

Net cash flow from financing activities


16,871

135,258

Increase in cash and cash equivalents


29,059

12,646

Cash and cash equivalents at the start of the period


11,668

-

Effect of movement in foreign exchange


(1,227)

(978)

Cash and cash equivalents as at the end of the period


39,500

11,668

 

Comprised of:




Cash


40,620

11,668

Bank overdraft


(1,120)

-

Total


39,500

11,668

 



 

NOTES

The Directors have declared a fourth quarterly dividend in respect of the year ended 31 March 2020 of 1.925p per share payable on 19 June 2020 to shareholders on the register at close of business on 5 June 2020. The total cost of the dividend, which has not been accrued in the results for the year to 31 March 2020, is £4,348,000 based on 225,853,181 shares in issue at the record date.

 

This statement was approved by the Board on 19 June 2020. The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 March 2020 or 2019 but is derived from those accounts. Statutory accounts for 2019 have been delivered to the Registrar of Companies and those for 2020 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor 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 Report & Accounts for the year ended 31 March 2020 will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism and on the Company's website www.uemtrust.co.uk.  They will be posted to shareholders in early July 2020.

 

 

Legal Entity Identifier: 2138005TJMCWR2394O39


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