26th Jun 2008 14:18
M&G Recovery Investment Company Limited
Final Results Announcement
26 June 2008
Chairman's Statement and Management Report
Performance during the period
The Company's revenue earnings per Package Unit were 6.32p. In respect of the year, the Company declared three quarterly dividends of 0.5p per Ordinary Share (1.0p per Package Unit) and a final dividend of 1.45p per Ordinary Share (2.90p per Package Unit), bringing the total for the year to 2.95p per Ordinary Share (5.9p per Package unit). This represents an increase of 5.4% compared with the previous year and is again comfortably ahead of the inflation rate of 4.2% as measured by the latest Retail Prices Index (RPI). As at the year end, the yield on the Company's Package Units was 5.9%, compared with the yield of 3.6% on the FTSE All-Share Index.
On a net asset value (NAV) basis, each Package Unit produced a negative total return of 16.3% over the year to 30 April 2008. This was below negative returns of 4.3% and 8.0% respectively on the FTSE All-Share Index and the FTSE 350 Higher Yield Index over the same period.
The result for the year is particularly disappointing, because following a modest negative return at the interim stage, the second half of the year saw a widening of the shortfall against the FTSE All-Share Index, rather than the hoped-for recovery. Market conditions became even more challenging in the second half of the year. Low-yielding mining shares continued their dramatic out performance, the FTSE 250 Index of medium-sized companies underperformed the FTSE 100 Index by 11% over the year, and the gap between returns on the FTSE 350 Higher Yield Index and its lower yield counterpart also widened.
Approximately two-thirds of the shortfall in performance against the FTSE All-Share Index derived from gearing in the portfolio, both through financial gearing and through the structure of the package units. One-third of the shortfall came through stock and bond performance. Stock performance was close to the FTSE High Yield Index, reflecting the weak performance of high yield stocks. High yield corporate bonds were hit by a flight to quality in the wake of the credit crisis.
The Package Unit market price discount to NAV narrowed slightly over the year from 6.6% to 5.0%, the mid-market price at the year end being 95.50p and the NAV 100.50p. On a mid-market price basis there was a negative total return on the Company's Package Units of 14.8%. The Company's gearing at the year end was 12.4% of total assets less current liabilities. The Company repaid ‚£5.6 million of its floating rate loan with The Royal Bank of Scotland on 29 June 2007.
Long term performance
The Company continues to meet its core income objectives. Four quarterly dividends were declared in respect of the year, providing shareholders with a level of income well above that offered by the FTSE All-Share Index. This continues the Company's record for delivering increasing dividends every year since its launch in February 2002. The poor performance of the Company's NAV during the year has already been discussed. Unfortunately, this shortfall was sufficiently large to adversely influence the Company's longer term record, outweighing the impact of out performance relative to the FTSE All-Share Index in earlier years. Over two years, three years, five years and since inception in 2002, the total return on the Company's NAV has been below that on the FTSE All-Share Index.
Outlook
The outlook for the UK economy over the coming year is uncertain. However, there is good reason to expect that recent weakness will be sustained and that the rate of gross domestic product (GDP) growth in 2008 will slow to between 1.5% and 1.7% - about half the level of recent years. Consumer confidence stands at the lowest level since the early 1990s, reflecting both public uncertainties over the economic outlook and increasing strain on household incomes. Such pressures, particularly from higher energy and food prices, are unlikely to abate. Moreover, no early recovery in the housing market is in sight, with mortgage lending in decline and house prices set to continue falling. Other service sectors, particularly financial activities, are likely to remain subdued. Even manufacturing which has benefited from the weakness of sterling (down 9% over the past six months on a trade-weighted basis), faces slower demand from Europe and other advanced industrial markets. Inflation is set to remain well above target levels, thereby limiting the Bank of England's ability to further reduce base rates.
Investors remain cautious although some of the gloom has lifted since mid-March, following central bank interventions to ease the problems of the banking sector. There is also tentative optimism that the worst of losses from credit securities has now passed. Uncertainty also remains over the likely impact of slower growth in both the UK and other advanced industrial countries on company profits. So far, any negative impact has been limited to specific sectors, but a more generalised slowdown is anticipated, which could require further downgrades to consensus forecasts of around 4% in 2008 for the FTSE All-Share Index. However, some comfort can be drawn from the healthy financial position of most UK companies and from the low valuation accorded to the UK stock market. Moreover, thanks to sharp contrasts in the performance of different sectors, valuations among sectors perceived to be vulnerable, particularly financials and consumer-orientated areas are at historically depressed levels. Many of these offer substantial yields and would show a rapid recovery if even a glimmer of improving profitability was evident. However, the timing of such a recovery is difficult to forecast.
The outlook for government bonds, at least in the near term, is clouded by rising inflation. Corporate bond markets are also likely to be affected by weakness in government bond prices. However, they stand to benefit from any return to normality in credit markets. Improvements for higher yield corporate bonds with poorer credit ratings will be much more heavily influenced by the extent of the economic slowdown and particularly by the rate of defaults among companies issuing them.
We remain optimistic that the Company's record for dividend growth can be sustained on an annualised basis and shareholders should note that this is an 11 month period. Although recent news from the banks has not been helpful, the Company is well diversified and its income should prove resilient through its significant holdings in blue chip oil, pharmaceuticals, telecommunications and utilities stocks.
Loan repayment
The Company recently announced its decision to repay the balance of its loan facility with the Royal Bank of Scotland International Limited in full, being the sum of ‚£22.4m, with effect from 30 June 2008. This decision reflects the fact that in view of recent market conditions, the manager has been reducing the Company's exposure to the M&G High Yield Corporate Bond Fund in favour of cash and short dated gilts and given the Company's winding up on 31 March 2009, the directors, on the advice of the manager, consider that the repayment of the loan to be in the interests of the Company's shareholders as a whole. The related interest rate swap will be closed out on 27 June 2008.
Winding up
As an investment company with a limited life, the Company will wind-up on or immediately before 31 March 2009. The directors will work with the Company's advisers and M&G to devise a range of tax effective rollover options in addition to a return of cash.
Presentation by investment manager
The Board is pleased to announce that an additional presentation will be given by the investment manager at 11.00am on Friday 8 August 2008 at Governor's House, Laurence Pountney Hill, London EC4R 0HH (nearest tube station Cannon Street) for those shareholders unable to make the Annual General Meeting in Guernsey on 7 August 2008. The presentation will include a review of the Company's investment performance over the past year and details of its future strategy.
Responsibility statements
To the best of my knowledge and belief:
a) this statement includes 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; and
b) the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and losses of the Company.
J E HallamChairmanIncome Statement (audited) 2008 2007 Revenue Capital Total Revenue Capital Total for the year ended 30 April ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Net (losses) / gains on - (26,832) (26,832) - 16,205 16,205investments Income 9,301 - 9,301 8,809 - 8,809 Investment management fee (817) (817) (1,634) (849) (849) (1,698) Other expenses (293) - (293) (266) - (266) Profit / (loss) before 8,191 (27,649) (19,458) 7,694 15,356 23,050finance costs and taxation
Finance costs: Appropriations - (7,045) (7,045) - (6,604) (6,604)
Finance costs: Dividends (6,608) - (6,608) (6,303) - (6,303)
Interest payable and similar (745) (745) (1,490) (876) (875) (1,751) charges
Profit / (loss) on ordinary 838 (35,439) (34,601) 515 7,877 8,392 activities before taxation
Taxation - - - - - - Profit / (loss) for the 838 (35,439) (34,601) 515 7,877 8,392period Return per Zero Dividend - 3.64p 3.64p - 3.38p 3.38pShare Earnings / return per 3.16p (15.02)p (11.86)p 2.84p 3.28p 6.12pOrdinary Share
Earnings / return per Package 6.32p (26.40)p (20.08)p 5.68p 9.94p 15.62p Unit
The total column of this statement is the Income Statement of the Company, prepared in accordance with IFRS. The supplementary revenue and capital columns are both prepared under guidance from the Association of Investment Companies.
All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period.
Each class of the Company's shares meets the definition of a liability and therefore the Company has no equity shares. The profit / (loss) for the period is attributable to the Ordinary Shareholders. There are no minority interests.
Statement Of Movements In Net Assets Attributable To Shareholders (audited) 2008 2007 for the year ended 30 April ‚£'000 ‚£'000 (Loss) / gain for the period (34,601) 8,392 Add finance costs: 7,045 6,604Appropriations Net movement in fair value of (107) 486swap Repurchase of Package Units - (3,794)(including related costs) Net movement in net assets (27,663) 11,688attributable to shareholders Opening net assets attributable to 185,326 173,638shareholders (all non-equity) Closing net assets attributable to 157,663 185,326shareholders (all non-equity) Balance Sheet (audited) 2008 2007 as at 30 April ‚£'000 ‚£'000 Non-current assets Portfolio of investments 170,369 211,731 Current assets Debtors 2,319 2,666 Cash at bank and short-term deposits 9,388 557 11,707 3,223 Total assets 182,076 214,954 Current liabilities (24,413) (1,754) Total assets less current liabilities 157,663 213,200 Non-current liabilities - (27,874) Net assets attributable to shareholders 157,663 185,326(all non-equity) Net Assets Attributable To Shareholders (audited) 2008 2007 as at 30 April ‚£'000 ‚£'000 Zero Dividend Shareholders 100,152 92,918 Ordinary Shareholders 57,511 92,408 Net assets attributable to shareholders 157,663 185,326(all non-equity) Net Asset Values Applicable to Each Class of Shareholding (audited) as at 30 April 2008 2007 Net asset value per Zero Dividend 51.78p 48.04pShareholders Net asset value per Ordinary Shareholders 24.36p 39.16p Net asset value per Package Unit 100.50p 126.36pCash Flow Statement (audited) 2008 2007 for the year ended 30 April ‚£'000 ‚£'000 Operating activities (Loss) / profit before taxation (34,601) 8,392 Adjustments for: Finance costs: Appropriations 7,045 6,604 Finance costs: Dividends 6,608 6,303 Interest payable and similar charges 1,490 1,751 Effective interest adjustments (24) 49 Stock dividends (406) (301) Investments held at fair value through profit or loss: Net (losses) / gain on investments 26,832 (16,205) Capital distributions 345 1,728 Purchases of investments (51,666) (50,713) Sales of investments 66,991 53,581 (Increase) / decrease in other receivables (108) 74 Increase / (decrease) in other payables 41 (22) Net cash inflow from operating activities 22,547 11,241before financing Financing activities Dividends paid (non-equity) (6,610) (6,336) Repurchase of package units - (3,794) Bank interest paid - (1) Interest paid on bank loan (1,506) (1,722) Repayment of bank loan (5,600) - Net cash used in financing activities (13,716) (11,853) Net increase / (decrease) in cash and cash 8,831 (612)equivalents Cash and cash equivalents at the start of the 557 1,169year Cash and cash equivalents at the end of the 9,388 557year
Basis of accounting: These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), comprising standards and interpretations approved by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IASB . The financial statements are presented in pounds sterling and have been prepared on a going concern basis under the historical cost convention except for the measurement of investments at fair value.
The FSA Handbook has been amended to implement the Transparency Obligations Directive (Disclosure and Transparency Rules) Instrument 2006 and as a result the Company is now required to prepare its financial statements under IFRS. Previously the financial statements were prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) including the Statement of Recommended Practice: 'Financial Statements of Investment Trust Companies' (SORP) issued by the Association of Investment Companies in December 2005.
First time adoption of IFRS: These are the first financial statements of the Company to be prepared in accordance with IFRS. The date of transition to IFRS for the Company is 1 May 2007. The adoption of IFRS and the retrospective application of the IFRS accounting polices to the opening balance sheet as at 1 May 2007 and all subsequent periods has not resulted in any changes to the opening or closing balance sheet or income statement. Presentational changes have been made to the cash flow statement to reanalyse dividends paid to Ordinary Shareholders and bank interest paid as financing activities; and capital distributions, purchases of investments and sales of investments as operating activities.
Note
The results for 2007 are based on financial statements which carry an unqualified audit report and include no matters of adverse comment.
The 2008 figures have been extracted from the audited financial statements which will carry an unqualified audit report with no matters of adverse comment.
The Annual Report and Financial Statements for 2008 will be posted to shareholders on or before 08 July 2008 and will be available on the M&G website, www.mandg.co.uk. The Annual General Meeting will be held at 11.40 a.m. on 07 August 2008 at Dorey Court, Admiral Park, St. Peter Port, Guernsey, GY1 3BG.
There will also be an additional presentation to shareholders unable to make The Annual General Meeting. This will be held at Governor's House, Laurence Pountney Hill, London EC4R 0HH on 08 August 2008, at 11.00am.
Kleinwort Benson (Channel Islands) Fund Services Limited Company Secretary 26 June 2008
M & G RECOVERY INVESTMENT COMPANY LIMITEDRelated Shares:
MGR.L