15th Dec 2008 12:56
M&G Recovery Investment Company Limited
Second Interim Results Announcement
15 December 2008
Performance during the period
The Company's revenue earnings per Package Unit were 2.84p. In respect of thereview period, the Company declared two quarterly dividends of 0.5p and 1.45pper Ordinary Share, making a total of 1.95p (3.9p per Package Unit), comparedwith a total of 1.0p per Ordinary Share (2.0p per Package Unit) declared atthe same stage last year. It should be noted that the increase in the secondquarterly dividend represents a payment from the Company's reserves prior towinding up at the end of March 2009. The October rate of inflation, asmeasured by the Retail Prices Index (RPI) is 4.2%. As at the period end, themid-market price yield on the Company's Package Units was 6.0%, compared withthe yield of 5.3% on the FTSE All-Share Index.On a net asset value (NAV) basis, each Package Unit produced a negative totalreturn of 28.2% over the six months to 31 October 2008. Stripping out theeffect of gearing, stock performance was in fact ahead of the FTSE All-ShareIndex. However, due to gearing, arising both through the Company's borrowingand the structure of the Package Units, the Company's total return performancewas exactly in line with the level of the negative return on the index overthe same period. Following repayment of the outstanding borrowings in June,the Company's financial gearing at the period end as a percentage of totalassets less current liabilities was nil.
The market price discount to NAV of the package units widened slightly during the review period from 5.0% to 5.5%, the mid-market price at the period end being 65.0p and the NAV 68.81p. On a mid-market price basis, there was a negative total return on the Company's Package Units of 28.5%.
Long term performance
The Company continues to meet its income objectives. Two quarterly dividendswere declared in respect of the review period, providing shareholders with alevel of income well above that offered by the FTSE All-Share Index. Theacceleration of dividend payments with a second quarterly dividend of 1.45preflects the decision of the Board to pay out the majority of the remainingreserves ahead of the Company's wind-up. Dividends in the second half, whichwill be a five month period, may therefore be well below the payments made inthe second half of the year ended 30 April 2008.The Company has delivered increasing dividends every year since its launch inFebruary 2002. Although the NAV total return on the Package Units matched thaton the FTSE All-Share Index during the six months to 31 October 2008, therelative equity performance was very strong. The outperformance of theportfolio against the FTSE All-Share Index over the review period was 5.9%.The repayment of all debt (in June), a reduction in the equity exposure to 70%and a commensurate increase in gilts exposure also helped to defend againstthe structural gearing in a very weak equity market. Structural gearingreduced performance by 8.7% over the review period. Over the past three andfive years and since launch, the Company's NAV total return has lagged behindthat on the FTSE All-Share Index. This has reflected a sustained period ofunderperformance of the FTSE All-Share Index by higher yielding stocks as lowyielding global growth / resource stocks were preferred. More recently, theCompany has been held back by financial and structural gearing despitesignificantly improved equity performance.
Outlook
The UK economy and the economies of other developed countries have entered arecession which may prove both severe and protracted. Weakness seems set topersist well into 2009 and on a broad front, the situation is likely to beexacerbated by the fragility of the banking system and limitations on thesupply of credit. Consumer confidence is low, and with unemployment risingsharply, households are likely to place a higher priority on rebuilding theirsavings than on maintaining spending. Most commentators also anticipatefurther weakness in the housing market. Manufacturers face shrinking demandboth at home and abroad. However, there are a number of potentially positivedevelopments which may mitigate the impact of recession. Inflationarypressures are abating rapidly, providing the Bank of England with scope to cutbase rates from the current 2%, although the key issue is whether thesereductions will be reflected in actual rates charged by the banks. Consumersentiment may also benefit from the recent VAT cut and targeted infrastructurespending. Finally, even though 2009 is set to be a challenging year for theworld economy, the recent slump in the value of sterling should help exportersand reduce the current account deficit.Investor confidence is very depressed, which is hardly surprising given thehigh level of uncertainty over the financial system and the broader worldeconomy. Over the remainder of the Company's life, the business environment isexpected to stay extremely difficult. Many companies are likely to reportlower profits, though this impact may be softened by cost cutting programmesand by an emphasis on cash conservation rather than expansion. Furtherdividend cuts are anticipated, both in the banking sector and elsewhere. Muchof this uncertainty is reflected in a depressed level of stockmarketvaluations. For example, the current yield on the FTSE All-Share Index of 5.3%is well above the 4.1% yield on ten-year gilts. Even a modest improvement inthe economic and business outlook could trigger a substantial stockmarketrally. In addition, share price falls have often been indiscriminate, withstocks in financially sound companies with solid growth prospects sufferingundeserved weakness. This provides an ideal opportunity to buy shares in topquality companies on highly attractive terms.UK government bonds (gilts) have benefited from both their safe haven statusand rising optimism that inflation is set to subside rapidly from its currentabove-target level. Talk of deflation could provide additional support.However, yields on short-dated securities (1.78% on one-year stocks) arealready pricing in lower base rates. Moreover, issuance of government debt isset to rise substantially to fund the widening public sector deficit arisingfrom lower tax revenues and increased spending on unemployment benefit, bankbail-outs and reflation measures.We anticipate the Company's dividends in respect of the second half to belower than in the second half of the year ending 30 April 2008 as reserveshave been reduced and there is only a five month period remaining before thewinding up of the Company at the end of March 2009. The Company's investmentportfolio is defensively positioned and is, therefore, well placed to copewith challenging market conditions.
Loan repayment
The Company has repaid the balance of its loan facility with the Royal Bank ofScotland International Limited (`the Loan') in full, being the sum of ‚£22.4m,with effect from 30 June 2008. This decision reflected the fact that in viewof market conditions, the Manager had reduced the Company's exposure to TheM&G High Yield Corporate Bond Fund in favour of cash and short dated gilts andgiven the Company's impending winding up on 31 March 2009, the directors, onthe advice of the Manager, considered the repayment of the Loan to be in theinterests of the Company's shareholders as a whole. The related interest rateswap was closed out on 27 June 2008.
M&G Recovery Investment Trust PLC in Liquidation
On 1 December 2008, the Company announced that it had been notified by theliquidators of M&G Recovery Investment Trust PLC ('RIT') that they hadreceived from the Manager a repayment representing a recovery from HMRC of VATincurred by RIT on investment management fees paid to the Manager during theperiods March 1992 to December 1996 and April 2001 to March 2002 plus interestthereon. This amount, net of any tax liability incurred by RIT in respect ofthe repayment, is to be paid in due course by the liquidators of RIT to theCompany under the terms of RIT's winding up and reconstruction. As such therepayment will be a capital payment and will enhance the net asset value ofthe Company's ordinary shares and package units. An amount of ‚£1,397,986(equivalent to 0.59 pence per ordinary share and 1.18 pence per package unit),which represents the liquidators' estimate of the net payment to be receivedby the Company, was reflected in the Company's published net asset values witheffect from those calculated as at 12 p.m. on 1 December 2008.
Winding-up proposals
The Company today issued the following announcement to the London and Channel Islands Stock Exchanges:
Proposed reconstruction
The Board of M&G Recovery Investment Company Limited (the `Company') is proposing to put forward proposals to coincide with its scheduled wind up date of 31 March 2009. Under the proposals, the Company will be wound up and its shareholders will be offered the choice of the following:
- a tax and cost efficient rollover into new shares to be issued by M&G High Income Investment Trust plc (`HIT');
- a full cash exit (at liquidation value); and
- an investment in at least one open-ended investment company managed by M&G, the Company's investment manager.
HIT is listed in London, managed by the same investment team at M&G as theCompany and has both a similar investment objective and structure (beingclosed-ended and split capital). The Company currently has gross assets of‚£124 million whilst HIT has gross assets of ‚£141 million and has a wind-update of 17 March 2017. As part of the proposals, M&G will make a significantcommitment in relation to the costs of the proposals. Further precise detailsof the scheme will be announced in February 2009.
To the best of my knowledge and belief this statement includes a fair review of the information required by the FSA handbook CDTR 4-2-7R and DTR 4-3-8R.
J E HallamChairman
Income Statement (unaudited)
2008 2007 Revenue Capital Total Revenue Capital Totalfor the three months ended 31 October ‚£'000 ‚£'000
‚£'000 ‚£'000 ‚£'000 ‚£'000
Net (losses) / gains on investments - (14,932) (14,932) - 5,051 5,051Income 1,830 - 1,830 2,569 - 2,569Investment management fee (163) (163) (326) (204) (204) (408)Other expenses (70) - (70) (74) - (74)Profit / (loss) before finance costs and taxation 1,597 (15,095) (13,498) 2,291 4,847 7,138Finance costs: Appropriations - (1,887) (1,887) - (1,754) (1,754)Finance costs: Dividends (1,180) - (1,180) (1,180) - (1,180)Interest payable and similar charges - - - (177) (178) (355)Profit / (loss) on ordinary activities before taxation 417 (16,982) (16,565) 934 2,915 3,849Tax on ordinary activities - - - - - -Profit / (loss) for the period 417 (16,982)
(16,565) 934 2,915 3,849
Return per Zero Dividend Share - 0.98p 0.98p - 0.91p 0.91pEarnings / return per Ordinary Share 0.68p (7.20)p (6.52)p 0.90p 1.24p 2.14pEarnings / return per Package Unit 1.36p (13.42)p (12.06)p 1.80p 3.39p 5.19p 2008 2007 Revenue Capital Total Revenue Capital Totalfor the six months ended 31 October ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000Net losses on investments - (34,271) (34,271) - (3,299) (3,299)Gain on closure of interest rate swap - 80 80 - - -Income 3,944 - 3,944 4,716 - 4,716Investment management fee (340) (340) (680) (425) (425) (850)Other expenses (149) - (149) (150) - (150)Profit / (loss) before finance costs and taxation 3,455 (34,531) (31,076) 4,141 (3,724) 417Finance costs: Appropriations - (3,740) (3,740) - (3,477) (3,477)Finance costs: Dividends (4,602) - (4,602) (4,248) - (4,248)Interest payable and similar charges (114) (113) (227) (385) (385) (770)Loss on ordinary activities before taxation (1,261) (38,384) (39,645) (492) (7,586) (8,078)Taxation - - - - - -Loss for the period (1,261) (38,384)
(39,645) (492) (7,586) (8,078)
Return per Zero Dividend Share - 1.93p 1.93p - 1.80p 1.80pEarnings / return per Ordinary Share 1.42p (16.26)p (14.84)p 1.59p (3.21)p (1.62)pEarnings / return per Package Unit 2.84p (30.59)p
(27.75)p 3.18p (4.62)p (1.44)p
The total column of this statement is the profit and loss account of the Company,prepared in accordance with IFRS. The supplementary revenue and capital columns areboth 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 thereforethe Company has no equity shares. The profit / (loss) for the period is attributableto the Ordinary Shareholders. There are no minority interests.
Statement Of Movements In Net Assets Attributable To Shareholders (unaudited)
2008 2007for the six months ended 31 October ‚£'000 ‚£'000Loss for the period (39,645) (8,078)Add finance costs: Appropriations 3,740 3,477Net movement in fair value of swap 1 (25)Net movement in net assets attributable to shareholders (35,904) (4,626)Opening net assets attributable to shareholders (all non-equity) 157,663 185,326Closing net assets attributable to shareholders (all non-equity) 121,759 180,700Balance Sheet (unaudited) 31.10.2008 31.10.2007 30.04.2008as at ‚£'000 ‚£'000 ‚£'000Non-current assetsPortfolio of investments 118,899 201,686 170,369Current assetsDebtors 1,651 1,011 2,319
Cash at bank and short-term deposits 2,837
1,694 9,388 4,488 2,705 11,707Total assets 123,387 204,391 182,076Current liabilities (1,628) (1,390) (24,413)
Total assets less current liabilities 121,759 203,001 157,663Non-current liabilities - (22,301) -Net assets attributable to shareholders (all non-equity) 121,759 180,700 157,663
Net Assets Attributable To Shareholders (unaudited)
31.10.2008 31.10.2007 30.04.2008as at ‚£'000 ‚£'000 ‚£'000Zero Dividend Shareholders 104,001 96,483 100,152Ordinary Shareholders 17,758 84,217 57,511
Net assets attributable to shareholders (all non-equity) 121,759 180,700 157,663
Net Asset Values Applicable to Each Class of Shareholding (unaudited) as at 31 October
2008 2007Net asset value per Zero Dividend Shareholders 53.77p 49.88pNet asset value per Ordinary Shareholders 7.52p 35.68pNet asset value per Package Unit 68.81p 121.24p
Cash Flow Statement (unaudited)
2008 2007for the six months ended 31 October
‚£'000 ‚£'000Operating activities:Loss before taxation (39,645) (8,078)Adjustments for:
Finance costs: Appropriations 3,740 3,477Finance costs: Dividends 4,602 4,248Interest payable and similar charges 227 770Effective interest adjustments (11) (9)Stock dividends - (281)
Investments held at fair value through profit or loss: Net losses on investments
34,271 3,299Capital distributions 478 -Purchases of investments (43,422) (25,297)Sales of investments 59,580 32,519Decrease in other receivables 1,066 1,113(Decrease) / increase in other payables (83) 18Net cash inflow from operating activities before financing 20,803 11,779Financing activitiesDividends paid (non-equity) (4,602) (4,250)Annual monitoring fee paid - (2)Interest paid on bank loan (352) (790)Repayment of bank loan (22,400) (5,600)Net cash used in financing activities (27,354) (10,642)Net (decrease) / increase in cash and cash equivalents (6,551) 1,137Cash and cash equivalents at the start of the period 9,388 557Cash and cash equivalents at the end of the period 2,837 1,694Basis of accounting: These financial statements have been prepared in accordancewith International Financial Reporting Standards (IFRS), comprising standards andinterpretations approved by the International Accounting Standards Board (IASB)and interpretations issued by the International Financial ReportingInterpretations Committee (IFRIC) of the IASB. The financial statements arepresented in pounds sterling and have been prepared on a going concern basisunder the historical cost convention except for the measurement of investments atfair value.The FSA Handbook has been amended to implement the Transparency ObligationsDirective (Disclosure and Transparency Rules) Instrument 2006 and as a result theCompany is now required to prepare its financial statements under IFRS.Previously the financial statements were prepared in accordance with UnitedKingdom Generally Accepted Accounting Practice (UK GAAP) including the Statementof Recommended Practice: 'Financial Statements of Investment Trust Companies'(SORP) issued by the Association of Investment Companies in December 2005.
Kleinwort Benson (Channel Islands) Fund Services Limited Company Secretary 15 December 2008
M & G RECOVERY INVESTMENT COMPANY LIMITEDRelated Shares:
MGR.L