TIDMCRV
RNS Number : 2867H
Craven House Capital PLC
30 November 2015
30 November 2015
Craven House Capital plc
("Craven House" or the "Company")
Annual Results for year ended 31 May 2015
CHAIRMAN'S REPORT
The year ending May 2015 proved to be a frustrating period for
Craven House Capital. As first revealed in our half year
announcement, we are disappointed to report a decrease in Net Asset
Value (NAV) from GBP5.5 million last year to GBP4.7 million at year
end. This reduction is primarily due to the write down of Pressfit
Holdings, which was listed on the AIM Market and then delisted from
the market during the period.
More broadly, the emerging and frontier markets in which we
operate have suffered over the past year and a half. These markets
are highly sensitive to international capital flows. Morgan Stanley
estimates that total net capital outflows from the 19 largest
emerging market economies reached $940 billion in the 13 months to
the end of July 2015, almost double the net $480 billion that
flowed out during three quarters during the 2008/09 financial
crisis. The outflows mark a sharp reversal from the robust infusion
of funds emerging markets received in the six years following the
crisis.
We do not think this trend has run its course. In fact, we
believe capital will continue to flee the emerging markets. This
trend will be reinforced when the US interest rates begin to climb.
Carry trades will be unwound and the landscape where capital was
recently abundant will now be barren. A flood of liquidity will
soon turn to drought. We believed the influx of capital was
excessive and the outflow will be equally if not more so.
The macroeconomic climate in Brazil, South Africa, China,
Argentina, Russia as well as smaller markets will continue to
present challenges for operating companies resulting in a
significantly higher cost of capital. As owners of emerging market
assets this will likely result in significantly longer time
horizons before we can exit current investments. However, as
providers of capital to companies operating in these challenging
environs, we expect to see opportunities to invest on improved
terms. This holds true for existing portfolio companies as well as
future investments. Patient permanent capital is most effective
when markets are in turmoil and funding is scarce.
For the first several years at Craven House we struggled to find
good investments at compelling valuations. We looked at hundreds of
opportunities. Of these only twenty-five or so potential
investments merited serious diligence. Of these, only a handful
resulted in firm offers to invest. Such has been our frustration.
Now we believe the tide has reversed and we expect to see a much
larger number of investable deals with far fewer capital providers
offering terms. This should provide us the opportunity to invest
against the tide. To butcher an old value investor's saw, "We seek
to be courageous when others are fearful and fearful when others
are courageous." For the past several years institutional capital
has led a fearless charge into the most remote and dangerous
corners of the emerging markets and now many of those same brave
warriors are running like scalded dogs. We will seek to take
advantage of this inflection point but it may require a good deal
of patience until the inflection point is reached and the markets
fully capitulate. Equity valuations have begun to soften
significantly and we expect to see irrational valuations in
emerging market corporate credit as investors flee for no reason
other than every other institutional investor is hitting the eject
button.
In the other regions we operate, mainly crisis and post crisis
developed countries in Europe; we continue to see chances to
effectively deploy capital. In particular Ireland, Greece, Cyprus
and Portugal seem to be opening up to investors willing to invest
in small and mid sized companies. These smaller companies still
struggle to find financing. The banks are still very hesitant to
provide growth and acquisition capital and the vast majority of
private equity funds and other capital sources will not look at
companies with Enterprise Values (EV) less than EUR100 million. In
Europe small to mid sized companies with less than EUR25 million in
EBITDA have historically relied on the banking sector to provide
most if not all of their capital. Having focused their efforts on
the beleaguered property sector for the last five years, many
European banks are actively trying to reduce their loan books to
operating companies. We are starting to see acquisition
opportunities at compelling valuations. Banks are no longer
ignoring impaired loans to operating companies thereby providing an
opportunity to recapitalize or acquire on favourable terms. To that
end it remains our stated objective to complete a transformational
acquisition at a valuation that rewards shareholders for their
patience.
Selected Portfolio Company Highlights
Pressfit Plc
The Pressfit investment is emblematic of both the trading
environment in the emerging markets and the receptiveness (or lack
thereof) of the public markets for smaller listed companies with
operations in China. We should have seen this coming and in some
ways we did but we lacked the courage to act. When Pressfit
management first indicated their desire to list on the AIM market
we expressed our belief that the timing was not ideal for admission
to the quoted markets in London. However, management and other
large shareholders were convinced it was the appropriate and
necessary to take the company to the next level. We were outvoted
and frankly did not put forth the impassioned opposition we should
have.
Shortly after the introduction to the AIM market Pressfit's
share price fell precipitously on very thin volume. We did not and
do not believe this was representative of the company's true value
but it was a shock to some investors and management. This
melancholy situation was further exacerbated when the company's
NOMAD, Daniel Stewart Plc, had its authorization to act as a NOMAD
revoked. The company then struggled to find a NOMAD in the
requisite time period and saw its shares delisted through no fault
of its own. The message this sent to suppliers and customers was
not helpful and demoralized both management and the workforce.
Too late, we intervened as both shareholder and creditor to the
company. After prolonged negotiations the CEO resigned and Craven
House in conjunction with another large shareholder, AMCO,
subsequently stepped in to restructure and reorient the company.
AMCO and its management in Europe and Asia are experienced in the
pipefittings and fixtures industry and we remain long term positive
on the sector. The adoption of press fittings in general and the
products Pressfit produces is increasing rapidly in Asia and Europe
and we plan on capitalizing on this trend. New health and building
codes will only increase the demand for the product. However, we
have written down the investment on our books in accordance with a
fair value policy at the balance sheet date and expect the
investment to remain illiquid for the next year or more. While we
had hoped to achieve a profitable exit by now, we are prepared to
roll up our sleeves to create long-term value, accepting that we
should have intervened more aggressively earlier and made a more
adamant protest to the listing.
South African Agricultural Land Portfolio
We remain very bullish on Agriculture globally and in South
Africa. South Africa is struggling to cope with the pronounced
downturn in commodities. Their economy is highly leveraged to the
price of precious and base metals and the rapid decline in these
markets has hurt the economy and the currency. The South African
Rand has lost significant purchasing power since we first invested
in 2013. The currency has fallen from just under 9 ZAR to the US
Dollar to over 14 ZAR to the dollar since we entered the market.
This has spooked many international investors. As an example, it
impacted on our negotiation for the sale of our vegetable
dehydration facility and farmland with a European investor. This
investor was a company with current vegetable dehydration
operations in Austria and Hungary. They provide ingredients to
major international food companies globally. They made a firm offer
for our operation at a price that would have locked in a
significant gain on our investment. However, as the South African
economy began to struggle and the currency cratered their financing
from Europe fell away and they were unable to complete the
transaction. We have had subsequent offers above our cost basis and
negotiations continue. We must be prepared to wait until the cycle
turns before we seek an exit. We are presently evaluating what to
do with these investments. Our belief is that the underlying ZAR
value is not relevant. The business sells an agricultural product
sold globally in US dollars and will only benefit from the fall in
local operating costs. Given this underlying situation we believe
our patience will be rewarded.
Brazilian Ocean Front Land
Brazil, like South Africa, has suffered from declining commodity
prices and a falling currency. It has also captivated the
international press with stories of corruption in the government
and state owned industry. There is talk of impeaching the president
and the infrastructure for the upcoming Olympic Games is said to be
well behind schedule. This environment has reversed investor
sentiment towards Brazil.
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Despite the headline risk and general economic malaise, our
interest in a large block of ocean front agricultural land remains
a solid investment priced in Brazilian reals (BRL) but valued in US
dollars. In most of South America agricultural land is priced in
dollars regardless of the underlying local currency. This, as
mentioned above, is due to the fact that the agricultural sector is
export based and produces a commodity sold around the world in US
dollars. Our view is that the falling local currency and production
costs will result in stable or increasing agricultural land prices.
At present we are in discussions with several agricultural
producers who have expressed interest in the agricultural land. Our
preferred outcome is a transaction that will see Craven House sell
the inland portion of the land while retaining control of the ocean
front parcel. This may or may not happen and will require
significant dialogue with the local authorities but we believe this
is the best way to maximize the long-term value for shareholders.
If it does not materialize we are comfortable holding on to the
parcel for an indefinite period. We are comfortable with the
operating hypothesis that ocean front land will increase in value
over time.
Irish Hotel Mortgage
As previously announced, Craven House has begun to exit its
position in a first mortgage against the Green Isle Hotel in
Dublin. This represents a successful restructuring of an attractive
asset where Craven House invested in a distressed situation in
different portions of the capital structure. We invested in both
the debt and equity of an insolvent hotel operator and worked to
recapitalize the insolvent enterprise. We believe there will be
further distressed opportunities in Ireland as well as in Greece,
Portugal and Cyprus.
Conclusion
As shareholders and managers we align our interests with all
other stakeholders. It is unpleasant to report our first decrease
in NAV since we took control of the company. We don't like to be
the bearer of bad news but we gladly shoulder the bad news burden
rather than overpay for assets. During the period ending May 31(st)
2015 we abandoned three transactions after spending months
evaluating and negotiating a prospective acquisition. This is a
painful process and we had to work hard to repress the natural
desire to finish what we started. In each of the three cases we
could not reach the level of comfort necessary to commit our
capital. In two of the three cases it was a matter of valuation. We
could not bring ourselves to overpay. In the third we could not get
comfortable with the management. All three aborted deals consumed
our time and capital. It was difficult to walk away but with the
benefit of time and perspective we are confident we made the
correct decision. In a fourth transaction we were outbid or as
investment industry professionals say "re-traded" after we thought
we had a deal agreed. We had a choice to make. We either increased
our bid beyond what we thought the business was worth or walk away
after all the effort and expense that went into analyzing the
business and transaction. We had no choice but to walk away.
As managers we receive no performance fees for the year and will
not receive any performance fees until such time as the NAV rises
above its previous high. As shareholders our portfolio suffers
alongside other shareholders when the market fails to reward our
methodology. While we understand the frustration of some
shareholders, especially those with a near term investment horizon,
we believe that our contrarian DNA and willingness to wait for deep
value opportunities will pay off. We will not pull the proverbial
trigger unless we are highly confident an investment will increase
the NAV on a per share basis.
As always, we want to warn shareholders that our patience has no
bounds and we are willing to do nothing if doing nothing is the
best course of action. We will wait until the right opportunity
comes along at the right price with the right long term prospects.
Famed international investor Jim Rogers was quoted in the Book
Market Wizards, "I just wait until there is money lying in the
corner, and all I have to do is go over there and pick it up. I do
nothing in the meantime." Given the current state of markets we
think this is an apt metaphor.
Mark Pajak
Acting Chairman
INCOME STATEMENT
FOR THE YEAR ENDED 31 MAY 2015
2015 2014
GBP'000 GBP'000
CONTINUING OPERATIONS
Revenue - 249
Gross Portfolio return (705) (845)
Administrative expenses (229) (307)
OPERATING LOSS (932) (903)
Finance costs 4 (27) (16)
Finance income 4 48 39
-------- --------
LOSS BEFORE INCOME TAX 5 (911) (880)
Income tax 6 - -
-------- --------
LOSS FOR THE PERIOD (911) (880)
======== ========
Loss per share expressed
In pence per share:
Basic and Diluted 7 (0.11) (0.13)
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MAY 2015
2015 2014
GBP'000 GBP'000
LOSS FOR THE PERIOD (911) (880)
OTHER COMPREHENSIVE - -
INCOME
TOTAL COMPREHENSIVE
LOSS FOR THE PERIOD (911) (880)
============ ============
STATEMENT OF FINANCIAL POSITION
AS AT 31 MAY 2015
2015 2014
Notes GBP'000 GBP'000
ASSETS
NON-CURRENT ASSETS
Property, plant 8 - -
and equipment
Investments at
fair value through
profit or loss 9 4,673 6,095
--------- ---------
4,673 6,095
--------- ---------
CURRENT ASSETS
Trade and other
receivables 10 312 114
Cash and cash equivalents 11 217 -
--------- ---------
529 114
--------- ---------
TOTAL ASSETS 5,202 6,209
========= =========
EQUITY
SHAREHOLDERS' EQUITY
Called up share
capital 12 8,526 8,519
Share premium 7,391 7,310
Retained earnings (11,210) (10,299)
--------- ---------
TOTAL EQUITY 4,707 5,530
--------- ---------
LIABILITIES
CURRENT LIABILITIES
Trade and other
payables 13 104 339
Financial liabilities-borrowings
Interest bearing
loans and borrowings 14 391 340
--------- ---------
495 679
--------- ---------
TOTAL LIABILITIES 495 679
--------- ---------
TOTAL EQUITY AND
LIABILITIES 5,202 6,209
========= =========
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MAY 2015
Called Profit
up share and loss Share Total
capital account premium equity
GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1 June 2013 8,313 (9,419) 4,948 3,842
Changes in equity
Issue of share capital 206 - 2,362 2,568
Total comprehensive
income - (880) - (880)
---------- ---------- ---------- ----------
Balance at 31 May 2014 8,519 (10,299) 7,310 5,530
Changes in equity
Issue of share capital 7 - 81 88
Total comprehensive
income - (911) - (911)
---------- ---------- ---------- ----------
Balance at 31(st) May
2015 8,526 (11,210) 7,391 4,707
---------- ---------- ---------- ----------
STATEMENT OF CASH FLOWS
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FOR THE YEAR ENDED 31 MAY 2015
2015 2014
Notes GBP'000 GBP'000
Cash flows from operating
activities
Cash used in operations 1 (564) (103)
Interest paid (13) (16)
Net cash used in operating
activities (577) (119)
Cash flows used in investing
activities
Purchase of fixed asset
investments - (2,382)
Sale of fixed asset investments 717 -
Advance of loans 321 -
Repayment of loans (270) (123)
Interest received 42 39
-------- --------
Net cash (used in)/from
investing activities 810 (2,466)
Cash flows from financing
activities
Share issue - 2,568
-------- --------
Net cash from financing
activities - 2,568
-------- --------
Increase/(decrease) in cash
and cash equivalents 233 (17)
Cash and cash equivalents
at the beginning 2 (16) 1
of the year
Cash and cash equivalents
at the end of the 2 217 (16)
======== ========
Year
Cash and cash equivalents
consist of: 217 (16)
Cash and cash equivalents
included in current
assets/(Trade and other
payables)
NOTES TO THE STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MAY 2015
1. RECONCILIATION OF LOSS BEFORE INCOME TAX TO CASH USED IN OPERATIONS
2015 2014
GBP'000 GBP'000
Loss before income tax (911) (880)
Finance costs 27 16
Finance income (48) (39)
Decrease/(increase) in
value in investments 705 884
-------- --------
(227) (19)
Increase in trade and other
receivables (198) (35)
(Decrease)/increase in
trade and other payables (139) (49)
-------- --------
Cash used in operations (564) (103)
======== ========
2. CASH AND CASH EQUIVALENTS
The amounts disclosed on the statement of cash flow in respect
of cash and cash equivalents are in respect of these statement of
financial position amounts:
Year ended 31 May 2015
31.5.15 1.6.14
GBP'000 GBP'000
Cash and cash equivalents 217 (16)
Year ended 31 May 2014
31.5.14 1.6.13
GBP'000 GBP'000
Cash and cash equivalents (16) 1
======== ========
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MAY 2015
1. ACCOUNTING POLICIES
Basis of preparation
These financial statements have been prepared in accordance with
International Financial Reporting Standards and IFRIC
interpretations and with those parts of the Companies Act 2006
applicable to companies reporting under IFRS.
Craven House Capital plc is a company incorporated in the United
Kingdom under the Companies Act. The address of the registered
office is given on the company information page. The Company is
listed on the AIM Market of the London Stock Exchange (code:
CRV).
The financial statements have been prepared under the historical
cost convention, except to the extent varied below for fair value
adjustments required by accounting standards, and in accordance
with applicable International Financial Reporting Standards (IFRS)
as adopted for use by the European Union. The principal accounting
policies are set out below.
These financial statements are presented in pounds sterling,
rounded to the nearest GBP'000. Pounds sterling is the currency of
the primary economic environment in which the company operates.
The accounting policies adopted by the Company are consistent
with those of the previous financial year except for the treatment
of the subsidiary. For the year commencing 1 June 2014 the company
has adopted provisions in IFRS 10 to treat its subsidiary as an
investment at fair value through profit or loss. Accordingly
comparatives have been represented to reflect this change in
accounting policy.
Going concern
The company's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Chairman's Report, the financial statements
include the Company's objectives, policies and processes for
managing its capital; its financial risk management objectives;
details of its financial instruments; and its exposures to credit
risk and liquidity risk. The company has considerable financial
resources. As a consequence, the directors believe that the company
is well placed to manage its business risks successfully despite
the current uncertain economic outlook. The directors have a
reasonable expectation that the company has adequate resources to
continue in operational existence for the foreseeable future. Thus
they continue to adopt the going concern basis of accounting in
preparing the annual financial statements.
Changes in accounting standards
IFRS 10, 11 and 12 are effective for the first time in the year
ended 31 May 2015. The principal changes as a result of these
standards arise from IFRS 10, as well as "Investment Entities"
(Amendments to IFRS 10, IFRS 12 and IAS 27).
Under IFRS 10, companies are able to consider whether they are
classed as an investment entity.
An investment entity is an entity that:
(a) obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management
services;
(b) commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income, or both; and
(c) measures and evaluates the performance of substantially all
of its investments on a fair value basis.
In assessing whether a company meets the definition of an
investment entity, the following
characteristics must be considered:
(a) it has more than one investment;
(b) it has more than one investor;
(c) it has investors that are not related parties of the entity;
and
(d) it has ownership interests in the form of equity or similar
interests.
The directors have considered the definition of an investment
entity in IFRS 10 as well as the associated application guidance.
The directors considered that Craven House Capital met the
definition of an investment entity.
Previously, the financial information presented included that of
Craven House Capital plc and its subsidiary undertaking, Craven
House Industries Limited ('CHI'). With effect from this accounting
period, the investment in CHI will be accounted for at fair value
through profit and loss and CRV is therefore presenting information
for them as an individual entity and not as a group. This has had
no impact on the net assets reported in prior periods.
GBP596,000 that was classified as investment in subsidiary in
the 2014 financial statements has been represented as investments
at fair value through profit and loss in the comparative statement
of financial position. The transitional provisions inserted into
IAS 27 by the Investment Entities amendments have been applied, and
that those transitional provisions required retrospective
application.
Standards, amendments and interpretations to be published
standards not yet effective
A number of new standards and amendments to standards and
interpretations have been issued but are not yet effective and in
some cases have not yet been adopted by the EU.
The directors do not expect that the adoption of these standards
will have a material impact on the financial statements of the
Group in future periods, except that IFRS 9 will impact both the
measurement and disclosures of financial instruments and IFRS 15
may have an impact on revenue recognition and related disclosures.
At this point it is not practicable for the directors to provide a
reasonable estimate of the effect of IFRS 9 and IFRS 15 as their
detailed review of these standards is still ongoing.
Financial assets
Purchases or sales of financial assets are recognised at the
date of the transaction. Where appropriate criteria are met, the
Company makes use of the option of designating fixed asset
investments upon initial recognition as financial assets at fair
value through profit or loss. These criteria include that the fixed
asset investment should meet the Company's published Investing
Policy and form part of the Company's managed portfolio or similar
investments. Such financial assets are carried at fair value and
movements in fair value are taken through the profit and loss
account. For quoted securities, fair value is either the bid price
or the last traded price, depending on the convention of the
exchange on which the investment is quoted.
Measurement
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Financial assets at fair value through profit or loss are
initially recognised at fair value. Transaction costs are expensed
through the profit or loss. Subsequent to initial recognition, all
financial assets at fair value through profit or loss are measured
at fair value in accordance with International Private Equity and
Venture Capital Valuation ("IPEVCV") guidelines, as the Group's
business is to invest in financial assets with a view to profiting
from their total return in the form of capital growth and income.
Gains and losses arising from changes in the fair value of the
financial assets at fair value through profit or loss are presented
in the period in which they arise.
Valuation of investments
Some of the Company's assets and liabilities are measured at
fair value for financial reporting purposes. The Investment Manager
determines the appropriate valuation techniques and inputs for fair
value measurements.
In estimating the fair value of an asset or a liability, the
Investment Manager uses market-observable data to the extent it is
available. The Investment Manager reports its findings to the board
of directors of the Company every quarter to explain the cause of
fluctuations in the fair value of the assets and liabilities.
Information about the valuation techniques and inputs used in
determining the fair value of various assets and liabilities are
disclosed in notes 9 and 15.
Financial instruments that are measured subsequent to initial
recognition at fair value are grouped into Levels 1 to 3 based on
the degree to which the fair value is observable:
Level 1 fair value measurements are those derived from quoted
prices (unadjusted) in active markets for identical assets or
liabilities; and
Level 2 fair value measurements for those derived from inputs
other than quoted prices included within Level 1 that are
observable for the assets or liability, either directly or
indirectly.
Level 3 fair value measurements are those derived from inputs
that are not based on observable market data.
At the balance sheet date all of the Company's financial assets
fell into Level 3.
a) Quoted investments
Where investments are quoted on recognised stock markets and an
active market in the shares exists, the company values those
investments at closing mid-market price on the reporting date.
Where an active market does not exist those quoted investments are
valued by the application of an appropriate valuation methodology
as if the relevant investment was unquoted.
b) Unquoted investments
In estimating the fair value for an unquoted investment, the
Company applies a methodology that is appropriate in light of the
nature, facts and circumstances of the investment and its
materiality in the context of the total investment portfolio using
reasonable data, market inputs, assumptions and estimates. Any
changes in the above data, market inputs, assumptions and estimates
will affect the fair value of an investment which may lead to a
recognition of an impairment loss in the statements of
comprehensive income if an indication of impairment exists.
The carrying value of unquoted investments at the balance sheet
date was GBP4,673,984.
Financial liabilities and equity
Financial liabilities are classified according to the substance
of the contractual arrangements entered into. An equity instrument
is any contract that evidences a residual interest in the assets of
the group after deducting all its liabilities.
Revenue recognition
Revenue recognition depends on the type of revenue
concerned:
-- Management fees are recognised as they are earned.
-- Interest income and expense is recognised on an accruals basis as finance income.
-- Investments are revalued periodically and any change in value
recognised on the revaluation date as gross portfolio return.
The above policies on revenue recognition result in both
deferred and accrued income.
Property, plant and equipment
Depreciation is provided at the following annual rates in order
to write off each asset over its estimated useful life.
Computer equipment - 33% on cost
Taxation
The tax expense represents the sum of the tax currently payable
and deferred tax at rates substantively enacted at the balance
sheet date.
Current tax
The tax currently payable is based on taxable profit for the
year. Taxable profit differs from net profit as reported in the
income statement because it excludes items of income or expense
that are taxable or deductible in other years and it further
excludes items that are never taxable or deductible. The Company's
liability for current tax is calculated using tax rates that have
enacted by the balance sheet date.
Deferred tax
Deferred tax is recognised in respect of all timing differences
that have originated but not reversed at the balance sheet date
where transactions or events that result in an obligation to pay
more tax in the future or a right to pay less tax in the future
have occurred at the balance sheet date. Timing differences between
the Company's taxable profits and its results as stated in the
financial information that arises from the inclusion of gains and
losses in tax assessments in periods different from those in which
they are recognised in the financial information.
Foreign currencies
In preparing the financial statements of the Company,
transactions in currencies other than the entity's functional
currency are recorded at the rates of exchange prevailing at the
dates of the transactions. At each balance sheet date, monetary
items denominated in foreign currencies are retranslated at the
rates prevailing at the date when the fair value was determined.
Non-monetary items that are measured in terms of historical cost in
a foreign currency are not retranslated.
Exchange differences are recognised in profit or loss in the
period in which they arise except for exchange differences on
monetary items receivable from or payable to a foreign operation
for which settlement is neither planned nor likely to occur; which
form part of the net investment in a foreign operation and which
are recognised in the foreign currency translation reserve.
For the purposes of presenting sterling financial statements,
the assets and liabilities of the Company's foreign operations are
expressed using exchange rates prevailing at the balance sheet
date. Income and expense items are translated at the average
exchange rate for the period, unless exchange rates fluctuated
significantly during that period, in which case the exchange rates
at the dates of the transactions are used. Exchange differences
arising, if any, are classified as equity and recognised in a
foreign currency translation reserve.
Hire purchase and leasing commitments
Rentals paid under operating leases are charged to the profit
and loss account on a straight line basis over the period of the
lease.
Segment reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the directors. The directors, who
are responsible for allocating resources and assessing performance
of the operating segments, have been identified as the senior
management that make strategic decisions. The Company is
principally engaged in investment business; the directors consider
there is only one business segment significant enough for
disclosure.
Critical accounting estimates and judgements
Preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of accounting policies and the reported
amounts of assets, liabilities, income and expenses. The estimates
and associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making
judgements about carrying values of assets and liabilities that are
not readily apparent from other sources.
In particular, significant areas of estimation, uncertainty and
critical judgements in applying accounting policies that have the
most significant effect on the amount recognised in the financial
statements are in the following areas:
Valuation of investments
The Company has made a number of investments in the form of
loans or equity instruments in private companies operating in
emerging markets. The investee companies are generally at a key
stage in their development and operating in an environment of
uncertainty in capital markets. Should planned development prove
successful, the value of the Company's investment is likely to
increase, although there can be no guarantee that this will be the
case. Should planned development prove unsuccessful, there is a
material risk that the Company's investments may be impaired. The
carrying amounts of investments are therefore highly sensitive to
the assumption that the strategies of these investee companies will
be successfully executed.
2. SEGMENTAL REPORTING
The operating segment has been determined and reviewed by the
directors to be used to make strategic decisions. The directors
consider there to be a single business segment being that of
investing activities, therefore there is only one reportable
segment.
3. EMPLOYEES AND DIRECTORS
2015 2014
GBP'000 GBP'000
Wages and salaries - Directors'
remuneration 30 48
======== ========
The average monthly number if employees during the year was as
follows:
2015 2014
Directors 3 3
===== =====
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Directors' remuneration was split as follows;
2015 2014
GBP'000 GBP'000
Fees 30 30
Share based payments - 18
-------- --------
Total 30 48
======== ========
Further details of directors' remuneration is included in the
Director's Report.
The highest paid director received emoluments and benefits as
follows:
2015 2014
GBP'000 GBP'000
Fees 30 30
======== ========
Desmond Holdings Ltd is the Company's Investment Manager. The
directors are the key management of the Company. There were no
directors (2014: none) to whom retirement benefits were accruing
under money purchase schemes.
4. NET FINANCE INCOME
2015 2014
GBP'000 GBP'000
Finance income:
Interest receivable 48 39
-------- --------
48 39
======== ========
Finance costs:
Loan interest 27 16
-------- --------
27 16
======== ========
Net finance income 21 23
======== ========
5. LOSS BEFORE INCOME TAX
The loss before income tax is stated after
charging/(crediting):
2015 2014
GBP'000 GBP'000
Rental charges 2 2
Depreciation -owned assets - 1
Fees payable to the Company's
auditor for the audit of
the Company's annual accounts 13 13
Fees payable to the Company's
auditor for other services
- tax services 3 3
* other services 2 2
Foreign exchange (gains)/losses (16) (12)
======== ========
6. INCOME TAX
Analysis of charge in the year
2015 2014
GBP'000 GBP'000
Current tax: - -
Deferred tax - -
Tax on profit on ordinary - -
activities
======== ========
2015 2014
GBP'000 GBP'000
Loss on ordinary activities
before tax (911) (880)
======== ========
Analysis of charge in the year
2015 2014
GBP'000 GBP'000
Profit on ordinary activities
multiplied by small companies
rate of corporation tax
in the UK of 20% (2014:
20%) (182) (176)
Effects of:
Loss carried forward 182 176
-------- --------
Current tax charge for - -
the year as above
======== ========
At 31 May 2015 the Company had UK tax losses of approximately
GBP2,891,000 (2014: GBP1,980,000) available to be carried forward
and utilised against future taxable profits. A deferred tax asset
has not been recognised due to uncertainties over when profits will
arise.
7. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the earnings
attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period.
Diluted loss per share earnings per share has not been disclosed
as the inclusion of unexercised warrants would be
anti-dilutive.
Reconciliations are set out below.
2015
Earnings Weighted average Per-share
GBP'000 number of amount
shares Pence
Basic EPS
Earning attributable
to ordinary
shareholders (911) 799,920,183 -0.11
2014
Earnings Weighted average Per-share
GBP'000 number of amount
shares pence
Basic EPS
Earning attributable
to ordinary
shareholders (880) 673,998,159 -0.13
8. PROPERTY, PLANT AND EQUIPMENT
Computer
Equipment
GBP'000
COST
At 1 June 2014 2
Additions -
-----------
At 31 May 2015 2
-----------
DEPRECIATION
At 1 June 2014 2
Charge for the year -
-----------
At 31 May 2015 2
-----------
NET BOOK VALUE
At 31 May 2015 -
===========
At 31 May 2014 -
===========
9. INVESTMENTS Investments at fair value through profit or loss
The Company adopted the recent investment methodology prescribed
in the IPEVCV guidelines to value its investments at fair value
through profit and loss.
The Company had the following holdings at 31 May 2015:
Pressfit Holdings PLC 22.60%
Ceniako Limited 49.00%
Craven House Industries
Ltd 95.00%
EmVest Barvale (Pty) Ltd 49.00%
EmVest Evergreen (Pty)
Ltd 49.00%
EmVest Evergreen Properties
(Pty) Ltd 49.00%
EmVest Foods (Pty) Ltd 49.00%
Royalty Sports Brands Ltd 49.00%
Farm Lands of Africa Ltd 50.00%
Investments that are held as part of the Company's investment
portfolio are carried in the balance sheet at fair value even
though the Company may have significant influence over those
companies. This treatment is permitted by IAS 28 - Investment in
Associates, which requires investment held by venture organisations
to be excluded from its scope where those investments are
designated, upon initial recognition, as at fair value through
profit or loss and accounted for in accordance with IAS 39, with
changes in fair value recognised in profit or loss in the period of
change. The Company has no interests in associates through which it
carries on its business.
Investments at fair value through profit or loss
Quoted Unquoted
Investments Investments Total
GBP'000 GBP'000 GBP'000
At 1 June 2013 887 3,710 4,597
Additions - 2,382 2,382
Revaluations (190) (672) (862)
Effect of foreign
exchange - (22) (22)
Reclassification (686) 686 -
-------------- -------------- ----------
At 31 May 2014 11 6,084 6,095
============== ============== ==========
Disposals - (717) (717)
Revaluations (586) (119) (705)
Effect of foreign - - -
exchange
Reclassification 575 (575) -
At 31 May 2015 - 4,673 4,673
====== ====== ======
Unquoted investments
Convertible
Equity loans Loan Total
GBP'000 GBP'000 GBP'000 GBP'000
At 1 June 2013 2,987 124 599 3,710
Additions 2,382 - - 2,382
Revaluations (1260) (33) 621 (672)
Effect of foreign
exchange (22) - - (22)
Reclassification 686 - - 686
---------- -------------- ---------- ------------
At 31 May 2014 4,773 91 1,220 6,084
========== ============== ========== ============
Disposals - - (717) (717)
Effect of foreign exchange 25 - (144) (119)
Reclassification (575) - - (575)
At 31 May 2015 4,223 91 359 4,673
====== === ====== ======
Quoted investments at 31 May 2015 relate to shares held in Farm
Lands of Africa Inc, a company listed on the OTC market in New
York. These shares have been measured on a Level 3 basis due to
these not being traded in an active market.
Unquoted investments at 31 May 2015 have been measured on a
Level 3 basis as no observable market data was available. These
investments are as follows:
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Shares in Pressfit Holdings Plc are valued at GBP516,648,
representing a 22.6% holding. These have been valued using an
earnings multiple as the Directors believe this is the best
indication of the fair value of the investment at the reporting
date. They are not aware of any circumstances to indicate an
impairment of this investment.
Shares in Ceniako Limited valued at GBP718,301, representing a
49% holding. These have been valued at the price paid by Craven
House Capital as the Directors believe that the price of recent
investment continues to represent the best indication of the fair
value at the year end.
Shares in Craven House Industries Limited are valued at
GBP653,442, representing a 95% holding. These have been valued at
the price paid by the Company for its 50.1% stake in Finishtec
Acabamento Tecnicos em Matais Ltd, as the Directors believe that
the price of recent investment continues to represent the best
indication of the fair value at the year end in light of supporting
forecasts.
Shares in EmVest Barvale (Pty) Ltd valued at GBP411,338,
representing a 49% holding. These have been valued at the price
paid by Craven House Capital, as the Directors believe that this is
the best indication of the value at the year end.
Shares in EmVest Evergreen (Pty) Ltd valued at GBP0,
representing a 49% holding. These have not been attributed a value
as the Directors believe that this is the best indication of the
value at the year end.
Shares in EmVest Evergreen Properties (Pty) Ltd valued at
GBP462,697, representing a 49% holding. These have been valued at
the price paid by Craven House Capital, during the year, as the
Directors believe that this is the best indication of the value at
the year end.
Shares in EmVest Foods (Pty) Ltd valued at GBP154,232,
representing a 49% holding. These have been valued at the price
paid by Craven House Capital, as the Directors believe that this is
the best indication of the value at the year end based in
supporting forecasts.
Shares in Royalty Sports Brands Ltd valued at GBP1,306,799,
representing a 49% holding. These have been valued at the price
paid by Craven House Capital, as the Directors believe that this is
the best indication of the value at the year end.
Shares in Farm Lands of Africa Ltd valued at zero, representing
a 50% holding. The value of the shares have been written down to
zero as the Directors believe that this is the best indication of
the value at the year end considering the Ebola outbreak in
Guinea.
A convertible loan to Pressfit Holdings Plc valued at GBP91,376.
This has been valued based on the number of shares that Craven
House Capital would receive on conversion using the same earning
multiple as the shares held above as these can be converted at any
time at Craven House's option.
A loan with Greentel Limited valued at GBP359,150 The year end
valuation is based on the agreed conversion of the loan into a
facility of EUR500,000 to be repaid on or before 14 November 2016,
which the Directors believe is the most appropriate indicator of
the year end valuation based on the information available to them
regarding net assets.
Further details on the investments are contained in the
Chairman's report on pages 2 to 5.
10. TRADE AND OTHER RECEIVABLES
2015 2014
GBP'000 GBP'000
Current:
Other receivables 247 56
Prepayments and accrued
income 65 58
-------- --------
312 114
======== ========
11. CASH AND CASH EQUIVALENTS 2015 2014
GBP'000 GBP'000
Bank accounts 217 -
======== ========
12. CALLED UP SHARE CAPITAL
Authorised
Equity shares Nominal 2015 2014
Number: Class: Value: GBP'000 GBP'000
2,280,038,212 Ordinary 0.001 2,280 2,280
77,979,412 Deferred 0.09 7,018 7,018
77,979,412 Deferred 0.009 702 702
-------- --------
10,000 10,000
======== ========
Allotted, called up
and fully paid
Equity shares Nominal 2015 2014
Number: Class: Value: GBP'000 GBP'000
805,540,872 Ordinary 0.001 806 799
(2014: 798,466,557)
77,979,412 Deferred 0.09 7018 7018
77,979,412 Deferred 0.009 702 702
-------- --------
8,526 8,519
======== ========
The deferred shares carry no entitlement to receive notice of
any general meeting, to attend, speak or vote at such general
meeting. Holders are not entitled to receive dividends, and on a
winding up of the Company holders of deferred shares are entitled
to a return of capital only after the holder of each Ordinary share
has received a return of capital together with a payment of GBP1
million per share. The deferred shares may be cancelled at any time
for no consideration by way of a reduction in capital.
On 18 March 2015, the Company allotted 7,074,315 new ordinary
shares to Desmond Holdings Ltd in lieu of the performance fee due
for the year ended 31(st) May 2014. The value of the performance
being GBP88,400.This was included as a liability at 31(st) May
2014.
During the year the Company extended the time scale of
82,226,266 fully transferable exercisable warrants issued in the
year ended 31(st) May 2012. At the date of issue the warrants could
be exercised on or before 30(th) June 2014, this period has now
been extended to 30(th) June 2016.
13. TRADE AND OTHER PAYABLES
2015 2014
GBP'000 GBP'000
Current:
Bank overdraft - 16
Trade payables 76 212
Accruals and deferred
income 28 111
104 339
======== ========
14. FINANCIAL LIABILITIES - BORROWINGS
2015 2014
GBP'000 GBP'000
Current:
Other loans 391 340
======== ========
Term and debt repayment schedule 1 year
or less
GBP'000
Other loans 391
==========
Other loans of GBP391,000 comprise a convertible loan made by Mr
E Kalimtgis, a shareholder, totalling GBP311,000 and loans made by
Wise Star Capital Investment Limited, a Hong Kong investment
company. The loans were provided to enable the Company to make
qualifying investments under its Investing Policy and to provide
working capital for the Company.
The loan provided by Mr E Kalimtgis is a convertible loan which
includes interest payable at a rate of 6% per annum. The loan was
provided for 12 months dated 22(nd) October 2014 with the holder
having the option of converting the principal portion of GBP300,000
into 24,000,000 fully paid Ordinary Shares of 0.1p pence per share
at the conversion price of 1.25 pence per share. The loan has been
extended to 22(nd) October 2016 post year end. The directors do not
consider the value of the conversion rights attaching to the loans
to be a material component of equity.
The loan provided by Wise Star Capital Investment Limited
includes interest payable at a rate of 6% per annum. The loan was
provided for 12 months dated 1st September 2011; however this loan
has since been extended to at least 31(st) May 2016. The amount
owed to Wise Star Capital Investment Limited at the balance sheet
date was GBP80,000.
15. FINANCIAL INSTRUMENTS
Financial risk management objectives and policies
Management has adopted certain policies on financial risk
management with the objective of:
i. ensuring that appropriate funding strategies are adopted to
meet the Company's short-term and long-term funding requirements
taking into consideration the cost of funding, gearing levels and
cash flow projections;
ii. ensuring that appropriate strategies are also adopted to
manage related interest and currency risk funding; and
iii. ensuring that credit risks on receivables are properly
managed.
Financial instrument by category
The accounting policies for financial instruments have been
applied to the line items below:
Financial assets at fair value through profit or loss
Financial instruments that are measured subsequent to initial
recognition at fair value are grouped into Levels 1 to 3 based on
the degree to which the fair value is observable:
Level 1 fair value measurements are those derived from quoted
prices (unadjusted) in active markets for identical assets or
liabilities; and
Level 2 fair value measurements for those derived from inputs
other than quoted prices included within Level 1 that are
observable for the assets or liability, either directly or
indirectly.
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Level 3 fair value measurements are those derived from inputs
that are not based on observable market data.
At the balance sheet date all of the Company's financial
investments fell into Level 3.
Unquoted equity investments held at fair value through profit or
loss are valued in accordance with the IPEVCV guidelines as
follows;
2015 2014
GBP'000 GBP'000
Investment valuation
methodology
Earnings multiple 517 -
Recent investment
price 3,706 4,864
4,223 6,084
========== ==========
Level 3 valuations include inputs based on non-observable market
data. IFRS 13 requires an entity to disclose quantitative
information about the significant unobservable inputs used. 88% of
Level 3 equity investments are held at recent investment price,
where no significant judgement has been applied to the valuation
inputs. 12% of Level 3 investments are valued on an earnings
multiple basis where significant judgement has been applied to the
valuation inputs. An earnings multiple of 9 has been used to
calculate the value, which the Directors consider to be appropriate
given the operating sector of the investment and after allowing for
a suitable marketability discount range. Any increase/decrease in
the earnings multiple would result in an increase/decrease in the
valuation.
IFRS 13 and IFRS 7 requires the Directors to consider the impact
of changing one or more of the inputs used as part of the valuation
process to reasonable possible alternative assumptions. After due
consideration and noting that the valuation methodology applied to
over 88% of the Level 3 investments (by valuation) is based on
recent investment price, the Directors believe that changes to
reasonable possible alternative input assumptions (a reasonable
discount to the earnings multiple) for the valuation of the
remainder of the portfolio could lead to a change in the fair value
of the portfolio. The impact of these changes could result in an
increase in the valuation of the equity investments by GBP155,088
or a decrease in the valuation of equity investments by
GBP68,608.
The valuation method applied to each equity investment is that
which is considered most appropriate with regard to the stage of
development of the investee business and the IPEVCV guidelines. In
applying the price of recent investment valuation methodology the
basis used is either the initial cost of the investment, or, where
there has been subsequent follow-on investment, the price at which
a significant new investment was made.
Investments in debt instruments are valued at their recoverable
amounts.
All other financial instruments, including cash and cash
equivalents, trade and other receivables, trade and other payables
and loans and borrowings, are measured at amortised cost.
Due to their short-term nature, the carrying values of cash and
cash equivalents, trade and other receivables, trade and other
payables and loans and borrowings approximates their fair
value.
Credit risk
The Company's credit risk is primarily attributable to other
receivables. Management has a credit policy in place and the
exposure to credit risks is monitored on an ongoing basis. In
respect of other receivables, individual credit evaluations are
performed whenever necessary. The Company's maximum exposure to
credit risk is represented by loans, both those held as unquoted
investments and included in other receivables, and cash balances.
The Company monitors the financial position of borrowing entities
on an ongoing basis and is satisfied with the quality of the debt.
Investment of surplus cash balances are reviewed on an annual basis
by the Company and it is satisfied with the choice of
institution.
Interest rate risk
The Company currently operates with positive cash and cash
equivalents as a result of issuing share capital in anticipation of
future funding requirements. As the Company has no borrowings from
the bank and the amount of deposits in the bank are not
significant, the exposure to interest rate risk is not significant
to the Company. The effect of a 10% increase or fall in interest
rates obtainable on cash and on short-term deposits would be to
increase or decrease the Company's profit by less than GBP1,000
(2014: Less than GBP1,000).
Liquidity risk
The Company manages its liquidity requirements by the use of
both short-term and long-term cash flow forecasts. The Company's
policy to ensure facilities are available as required is to issue
equity share capital in accordance with agreed settlement terms
with vendors or professional firms, and all are due within one
year.
The table below summarises the maturity profile of the Company's
financial liabilities based on contractual discounted payments.
Less 3 to
On than 12
demand 3 months months Total
Year ended
31 May 2015 GBP000 GBP000 GBP000 GBP000
Trade payables 76 - - 76
Accruals and
deferred income 28 - - 28
Interest bearing
loans and borrowings - - 80 391
104 0 80 495
------- --------- ------- -------
Year ended
31 May 2014
Bank overdraft 16 - - 16
Trade payables 212 - - 212
Accruals and
deferred income 111 - - 111
Interest bearing
loans and borrowings - - 70 340
339 0 70 679
------- --------- ------- -------
Post year end, GBP311,000 of loans shown as due in 3-12 months
have been extended. Had the extension been agreed pre-year end,
GBP311,000 would be shown as due in 1-5 years.
Price risks
The Company's securities are susceptible to price risk arising
from uncertainties about future value of its investments. This
price risk is the risk that the fair value of future cash flows
will fluctuate because of changes in market prices, whether those
changes are caused by factors specific to the individual investment
or financial instrument or its holder or factors affecting all
similar financial instruments or investments traded in the
market.
During the year under review, the Company did not hedge against
movements in the value of its investments. A 10% increase/decrease
in the fair value of investments would result in a GBP467,300
(2014: GBP609,500) increase/decrease in the net asset value.
While investments in companies whose business operations are
based in emerging markets may offer the opportunity for significant
capital gains, such investments also involve a degree of business
and financial risk, in particular for unquoted investments.
Generally, the Company is prepared to hold unquoted investments
for a middle to long time frame, in particular if an admission to
trading on a stock exchange has not yet been planned. Sale of
securities in unquoted investments may result in a discount to the
book value.
Currency risks
The Company is exposed to foreign currency risk on its
investments held at fair value and adverse movements in foreign
exchange rates will reduce the values of these investments. There
is no systematic hedging in foreign currencies against such
possible losses on translation/realisation. Otherwise the Company
operates primarily within its local currency.
The sensitivity to a reasonable possible change in US$ exchange
rates, with all other variables held constant, would be GBP94,000
(2014: GBP73,000) which would directly affect both profits before
tax and the effect on pre tax equity. This is assuming a 5%
variance. The impact on the profit before tax and pre tax equity is
due to the fair value adjustment of assets and liabilities. The
Company's exposure to other foreign currency changes is not deemed
to be material.
Capital management
The Company's financial strategy is to utilise its resources to
further grow its portfolio. The Company keeps investors and the
market informed of its progress with its portfolio through periodic
announcements and raises additional equity finance at appropriate
times.
The Company regularly reviews and manages its capital structure
for the portfolio companies to maintain a balance between the
higher shareholder returns that might be possible with certain
levels of borrowing for the portfolio and the advantages and
security afforded by a sound capital position, and makes
adjustments to the capital structure of the portfolio in the light
of changes in economic conditions. Although the Company has
utilised loans from shareholders to acquire investments, it is the
Company's policy as far as possible to finance its investing
activities with equity and not to have gearing in its
portfolio.
At the balance sheet date the capital structure of the Company
consisted of borrowings disclosed in note 14, cash and cash
equivalents and equity comprising issued capital and reserves.
16. RELATED PARTY DISCLOSURES
During the year, the Company entered into the following
transactions with related parties and connected parties:
Loans from Wise Star Capital Investment Limited
At the year end the Company owed GBP80,000 to Wise Star Capital
Investment Limited, Mark Pajak was Director of Wise Star Capital
Investment Limited during the year. Details of the loan are set out
in note 14.
Loans from Mr E Kalimtgis
During the year the Company received a loan of GBP300,000 from
Evangellos Kalimtgis, a shareholder. GBP11,000 interest was charged
in the year. At the year end the balance owed to Evangellos
Kalimtgis was GBP311,000. Details of the loan are set out in note
14.
Management fees payable to Desmond Holdings Limited
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