TIDMMRCH
RNS Number : 6197B
Merchants Trust PLC
24 September 2018
21 September 2018
LEI: 5299008VJFXCUD2EG312
THE MERCHANTS TRUST PLC
Half-Yearly Financial Report
For the six months ended 31 July 2018
Highlights
-- Dividends declared for the first six months of 2018/19 are
12.9p per share, up 4.9 % on last year.
-- NAV total return* +7.4%, compared with + 5.0% on the FTSE All-Share Index.
-- Share Price total return +8.7%
-- Ordinary shares yield 5.0% at 492.0p, compared with 3.8% on
the FTSE All-Share Index at the close of business on 20 September
2018.
* Debt at market value
Interim management report
Half year results
When I last wrote to shareholders, six months ago, I reported a
year of positive asset returns in both absolute and relative terms.
I am pleased to announce that this outperformance has been
maintained, both at portfolio and NAV level: your company has
delivered robust results over the six months to 31 July 2018, with
NAV total return of +7.4%, significantly ahead of the FTSE
All-Share Index (+5.0%). You will find more information on the
performance of the investment portfolio in the Investment Manager's
Review on pages 5 to 9, and an attribution analysis on page 2.
Net earnings and dividends
Earnings in the first six months of the current year, to 31 July
2018, were 15.61p per ordinary share (2017: 15.05p).
Towards the end of 2017, the company announced the refinancing
of the first tranche of its long-term borrowing, replacing it with
new borrowings at a much lower interest rate. This factor, together
with your board's confidence in the ongoing potential for income
growth generation within the investment portfolio, has enabled
dividends to grow faster. The board has declared a second quarterly
dividend of 6.5p per ordinary share, payable on 15 November 2018 to
shareholders on the register at close of business on 5 October
2018. A Dividend Reinvestment Plan (DRIP) is available for this
dividend and the relevant Election Date is 19 October 2018 and the
ex-dividend date is 4 October 2018.
We are proud to be an AIC 'Divided Hero', an elite group of
investment trust companies that have increased their dividends each
year for 20 years or more. The company's dividend has increased for
36 consecutive years, and a high and growing yield remains a key
objective of the company. The total distribution declared for the
first half of 2018/19 is 12.9p, an increase of 4.9% on the same
period last year (12.3p). It is the board's intention to at least
maintain quarterly dividends at the current level for the rest of
the year, which would lead to a minimum annual dividend of 25.9p
for 2018/19, an increase of 4.4% on the previous year.
As at 31 July 2018, the company's revenue reserve, after
deducting the first and second quarterly dividends, represented
14.0p per share (2017 - 13.3p).
Net asset value
As at 31 July 2018, the NAV per ordinary share (with debt at
market value) was 550.1p. On a capital basis, the NAV per ordinary
share (with debt at market value) increased by 5.0%, outperforming
the benchmark return of 2.8%.
The total return reflects both the change in net asset value per
ordinary share and the ordinary dividends paid. For the six months
to 31 July 2018, the NAV per ordinary share increased by 7.4%,
whilst the FTSE All-Share Index increased by 5.0%.
Material events and transactions
At the company's annual general meeting, held in May, all
resolutions put to shareholders were passed.
The third quarterly dividend of 6.2p per share was paid on 2
March 2018 to shareholders on the register on 26 January 2018. A
final dividend of 6.3p per share was paid on 30 May 2018 to
shareholders on the register on 20 April 2018. The total paid and
declared for the year ended 31 January 2018 was 24.8p.
There were no related party transactions in the period.
Since the period end, the first quarterly dividend for the year
ending 31 January 2019 of 6.4p per share was paid on 22 August 2018
to shareholders on the register on 13 July 2018.
Buybacks and share issuances
As explained in the annual report, we have a policy in place to
(i) issue new shares when the company's ordinary shares are trading
at a premium to NAV with debt at market value and (ii) buy back
shares for holding in treasury to help dampen share price
volatility when it is at a sustained discount to NAV. Since this
programme was approved by shareholders at the AGM in May this year,
we have seen the shares trading at a lower discount than the
equivalent period last year (averaging 4.7% since 16 May 2018).
Accordingly, there have been no share issuances or buybacks during
the period.
Gearing
The company has gearing in place which is deployed in the market
for investment purposes. Towards the end of the last financial year
we refinanced a debenture taken out in 1987 with new borrowing (in
the form of loan notes) at a much lower interest rate. Following
the refinancing, gearing amounts to GBP112 million, or 17.8% at 31
May, and comprises a long term debenture maturing in 2023, secured
bonds maturing in 2029 and the recently acquired loan notes,
maturing in 2052.
As illustrated in the table below, the portfolio's gearing
delivered a gross beneficial effect of +1.1% after the cost of
finance is deducted. Other costs, management fees and
administration costs reduced the total return by -0.4%.
Performance attribution analysis against FTSE Capital Income Total
All-Share Index return return return
% % %
Return of Index 2.8 2.2 5.0
Relative return of portfolio 0.9 0.8 1.7
--------------- ------------ -----------
Return of portfolio 3.7 3.0 6.7
--------------- ------------ -----------
Impact of gearing on portfolio 0.9 0.6 1.5
Movement in market value of debt 0.2 - 0.2
Finance costs -0.4 -0.2 -0.6
Management fee -0.1 -0.1 -0.2
Administration expenses - -0.1 -0.1
Other 0.7 -0.8 -0.1
--------------- ------------ -----------
Change in net asset value per ordinary share
(debt at market value) 5.0 2.4 7.4
--------------- ------------ -----------
Board Succession
Board composition and succession is a continuous conversation
for the directors. By the time of the next AGM in 2019 I will have
completed nine years as Chairman and it is the current intention
that I will retire during the course of next year. The board has
begun its search for a new Chairman under the leadership of our
Senior Independent Director, Sybella Stanley.
Prospects
Stock markets have experienced increasing volatility over the
period and the risk profile for the UK economy remains elevated,
primarily because of Brexit uncertainties as well as high levels of
debt and rising interest rates. In spite of the political
uncertainty in the UK and elsewhere, UK equities remain reasonably
priced on a long term basis.
Market volatility creates its own opportunities, as our
investment manager explains later, and we would remind shareholders
that the UK stock market is not the same as the UK economy since
many of the companies listed on the London Stock Exchange are truly
international in nature, including some of the world's largest and
best-known multinationals. Indeed, the UK stock market offers
access to a diverse range of industries and markets and is
predominantly exposed to economies outside the UK.
Over time, our fund managers have proven their ability to
uncover many interesting investment opportunities that offer both
good yields and prospects for attractive total returns. By focusing
on individual stocks, they remain confident that they can continue
to do that, aiming to ensure that Merchants' diversified portfolio
continues to deliver a high and rising income together with capital
growth for its shareholders.
Simon Fraser
Chairman
199 Bishopsgate
London EC2M 3TY
21 September 2018
Principal Risks and Uncertainties
The principal risks and uncertainties facing the company,
together with the board's controls and mitigation, are broadly
unchanged from those described in the annual report for the year
ended 31 January 2018 under the headings below:
-- Investment and Portfolio Risks
-- Business and Strategy Risks
-- Operational Risks
The board's approach to mitigating these risks and uncertainties
is set out in the explanation with the Risk Map in the annual
report. In the board's view these will remain the principal risks
and uncertainties for the six months to 31 January 2019.
Responsibility statements
The directors confirm to the best of their knowledge that:
-- The condensed set of financial statements contained within
the half-yearly financial report has been prepared in accordance
with FRS102 and FRS104, as set out in Note 2, the Accounting
Standards Board's Statement 'Half-Yearly Financial Reports';
and
-- The interim management report includes a fair review of the
information required by Disclosure and Transparency Rule 4.2.7 R of
important events that have occurred during the first six months of
the financial year and their impact on the condensed set of
financial statements, and a description of the principal risks and
uncertainties for the remaining six months of the financial year;
and
-- The interim management report includes a fair review of the
information concerning related parties transactions as required by
the Disclosure and Transparency Rule 4.2.8 R.
Simon Fraser
Chairman
21 September 2018
Investment Manager's Review
Economic and market background
Political developments have dominated news flow in the first
half of this year. For most of my career, there has been a broad
consensus amongst western governments that globalisation and the
promotion of free trade were not only positive drivers of economic
activity and prosperity, but were almost immutable forces that
would continue indefinitely. That consensus is beginning to be
challenged. US President Donald Trump has been threatening and
imposing tariffs and trade barriers, with predictable retaliation
from Europe and Asia.
Negotiations between the UK and EU on Brexit have been tortuous,
with a deeply divided Conservative government struggling to agree
an official UK position, let alone being able to forge agreement
with the EU. Political division was also a feature in continental
Europe with negotiations taking months for Angela Merkel to be
reappointed as German Chancellor, after their elections, and an
anti-establishment coalition government being formed in Italy.
Although British people like discussing politics, the favourite
national subject is the weather. It did not disappoint this year,
with "The Beast from the East" extended winter freeze partly
responsible for the UK economy having a slow start to the year,
with very modest growth in the first quarter. Economic growth
accelerated in the second quarter, whilst sustained high
temperatures in the early summer were helpful for pubs and other
leisure related sectors.
The stock market largely shrugged off political and economic
developments, as it did in the first half of last year. After a
weak start, the FTSE All-Share rallied to produce a total return of
5.0% in the period. Sector performances showed less of a clear
pattern than last year. Certain defensive sectors performed well,
such as food retail, pharmaceuticals and beverages, whilst others
were weak: telecommunications, tobacco and food producers. Other
strong performing large sectors included media, aerospace &
defence and oil & gas producers, whilst the laggards included
banks, financial services, life insurance and mining.
Investment Performance
We show on page 2 Merchants' performance attribution for the
period. The table breaks down the Net Asset Value (NAV) performance
between the performance of the investment portfolio and other
factors. Overall the NAV total return was 7.4% compared to the FTSE
All-Share Index benchmark return of 5.0%. The total return on the
investment portfolio was 6.7%. Gearing had a beneficial effect of
+1.5% gross, or +1.1% after taking account of the -0.6% cost of
finance and the +0.2% movement in the value of debt. Fees, expenses
and other costs came to -0.4%.
The portfolio performed well during the first half with a total
return of 6.7%, which was 1.7% ahead of the 5.0% return on the FSTE
All-Share Index benchmark. There was only one significant impact
from sector selection. Not owning any tobacco shares for most of
the period was beneficial to performance as the poor performance of
the sector held back the index return. Tobacco shares were weak in
response to poor cigarette industry volume trends in several major
markets in 2017, as well as slowing growth of next generation
tobacco products in the key Japanese market.
The table below shows the individual stock contributors to
performance compared to the index. The largest single positive
impact came from not owning tobacco company British American
Tobacco, for the reasons cited above. Several stocks in the
portfolio benefitted from takeover activity. NEX shares rose by
over 60% in response to a bid by CME Group. UBM, a top 5 holding at
the start of the year, continued to perform very well ahead of the
Informa takeover concluding. Sainsbury returned over 30% in
response to their proposed merger with Asda, and Inmarsat recovered
from a depressed level, after receiving a potential takeover
approach, even though the company rebuffed the proposal.
Elsewhere, GlaxoSmithKline shares rallied on strong sales of
their new shingles vaccine and as management agreed to buy out the
minority stake in their consumer health joint venture with
Novartis, whilst ruling out the purchase of Pfizer's consumer
business, which could have strained the balance sheet. Meggitt, the
aerospace and defence company performed well, late in the period,
as the company confirmed an improving trading outlook in their
civil aerospace and defence markets, an important part of our
investment thesis for this and other companies in the sector. BHP
Billiton outperformed a weak mining sector, partly due to the
announced sale of their US on-shore oil assets to BP. Finally
amongst the top ten contributors, the portfolio benefitted from not
owning two other shares that performed poorly and held back the
market return, Vodafone and Glencore.
A number of financial companies were among the top ten negative
contributors to relative performers. The biggest impact was from
Standard Life Aberdeen, where outflows of client assets under
management have continued since the merger that formed the
business. The shares also reacted poorly to a complex deal to sell
the life assurance assets to Phoenix, with investors concerned
about headline earnings dilution, despite recent reassurance on
that point, and the announcement of a large share buy-back. Another
company that had been formed by a merger, TP ICAP, also saw its
shares fall heavily following a profit warning that saw the Chief
Executive Officer leave the company. TP ICAP warned that the
company would not achieve all of the cost savings targeted in the
deal, and would also see additional cost increases.
Fund managers Ashmore and Man Group saw their shares pull back
after strong performance last year, with Ashmore in particular
affected by worsening sentiment towards the emerging markets asset
class. Lloyds Banking Group also underperformed modestly amid
general uncertainty over the economic outlook.
Outside the financial sectors, Equiniti shares came back sharply
after strong performance last year carried on into the first few
weeks of the year, although the impact on performance was modest,
as we had significantly reduced the holding at higher levels.
Performance was also impacted by not owning certain shares that
performed well and helped the index return; specifically the
pharmaceutical stocks AstraZeneca and Shire, as well as Sky and
Tesco.
Table of Estimated Contribution to Investment Performance
Relative to FTSE All-Share Index
31 January 2018 to 31 July 2018
Positive % over/under Negative % over/under
Contribution weight Contribution weight
British American
Tobacco 0.7 - Standard Life -1.0 +
---- ----------- -------------- ----- -----------
UBM 0.7 + TP ICAP -0.8 +
---- ----------- -------------- ----- -----------
GlaxoSmithKline 0.6 + AstraZeneca -0.5 -
---- ----------- -------------- ----- -----------
Vodafone Group 0.5 - Shire -0.3 -
---- ----------- -------------- ----- -----------
NEX 0.5 + Ashmore -0.3 +
---- ----------- -------------- ----- -----------
Glencore 0.4 - Man -0.2 +
---- ----------- -------------- ----- -----------
Sainsbury (J) 0.4 + Lloyds -0.2 +
---- ----------- -------------- ----- -----------
Meggitt 0.4 + Sky -0.2 -
---- ----------- -------------- ----- -----------
Inmarsat 0.3 + Tesco -0.2 -
---- ----------- -------------- ----- -----------
BHP Billiton 0.2 + Equiniti -0.2 +
---- ----------- -------------- ----- -----------
Portfolio Changes
With investor sentiment reacting to political developments and
changes in the economic outlook, there was a modest level of
volatility within the stock market. This created several
opportunities to either buy companies at attractive valuations or
reduce and sell holdings as they approached full valuations.
Overall, in the period, we added five new companies to the
portfolio and sold out of two completely, leaving a portfolio of 48
holdings. There were also significant additions and reductions to a
number of the existing positions. The new investments spanned a
broad range of sectors and included both domestic and
multi-national businesses.
The biggest new investment was Imperial Brands, the producer of
cigarettes, tobacco and vaping products. We have not owned Imperial
for nearly five years, or any tobacco company for almost a year, on
concerns about high valuations and structural changes within the
industry, such as competition from new products like e-cigarettes.
However, after a period of extremely weak performance, the sector
had de-rated significantly. Imperial Brands became lowly priced,
with a dividend yield of around 7% and strong cash flow. Whilst
there are challenges in the industry, Imperial has a strong suite
of next generation products and the company's cigarette portfolio
has been streamlined, with an improved focus on stronger brands in
recent years.
We purchased shares in ITV, the UK's leading commercial
television company. ITV has just under half of the UK's TV
advertising market and 99% of all commercial audiences of over 5m
viewers. It makes a third of its profits from the studio business
which sells content and formats in the UK and internationally. The
shares had been poor performers due to a difficult advertising
environment in 2017 and wider structural concerns about changes in
the TV market. These concerns brought the valuation down to an
unusually attractive level, which included a 5% dividend yield.
Although there are some risks we will continue to monitor, we see
ITV as having a strong business selling traditional TV advertising,
supplemented by growth opportunities for its own online and
subscription services. Furthermore, its expanding studios business
is increasingly valuable within a consolidating media industry.
In early March, we bought a holding in the real estate company
Hammerson, which owns prime retail shopping centres such as the
Bull Ring in Birmingham, premium outlets like Bicester Village, as
well as prime retail properties in Ireland and France. The share
price had fallen significantly, on concerns about the outlook for
retail property, as online shopping takes share from store based
sales. More specifically, the stock market reacted negatively to
Hammerson's proposed combination with its peer Intu, which owns the
Trafford Centre in Manchester, amongst other assets, pushing the
shares down to an extreme discount of 40% to its net asset value.
At that level Hammerson had a dividend yield comfortably over 5%,
despite a good track record of earnings and dividend growth, and we
saw compelling value, given the quality of the asset base. The low
valuation of the shares, tempted sector peer Klepierre to approach
Hammerson's board about a possible takeover bid, although this
approach was rejected.
Another purchase was St James's Place, a wealth management and
financial advice business with GBP90bn of assets under management.
The business has an exceptional growth record. Over the last
decade, St James's Place has grown its advisor numbers by 9% p.a.,
funds under management by 17% p.a. and dividends by 25% p.a. This
type of businesses is normally too highly priced for our value
based investment approach, however, a period of sideways share
price movement left the shares offering good value. St James's
Place had a dividend yield over 4%, and a valuation underpinned by
the existing book of business, even without future asset inflows.
We believe the company is not only cheap, but also well positioned,
with a strong competitive position in a structurally growing
market.
The final new purchase was Keller, the world leader in
geotechnical engineering (ground engineering), with roughly a 10%
share of this fragmented market. The industry has structural growth
opportunities, as rising city populations and ageing infrastructure
around the world create increasing demand for complex underground
structures and strong foundations for tall buildings and other
large structures. Despite a good long term growth record, the
company's shares were trading on a low valuation, possibly
suffering from a UK discount, despite the fact that less than 5% of
sales come from the UK.
The portfolio also inherited two new holdings, GVC and Informa,
following the takeovers of Ladbrokes and UBM respectively. In
addition to the new purchases, we took advantage of share price
weakness to add significant amounts of money to several other lowly
priced, high yielding and fundamentally sound businesses, including
Standard Life Aberdeen, Tyman, TP ICAP, Land Securities and Legal
& General.
There were two complete disposals. We sold NEX Group, the
electronic exchange and financial information and services
business. The company was being taken over by the American CME
group at a high valuation, reflecting its strategic value and
growth potential. We also sold Kier, the construction and services
company. Whilst we like Kier's diversified business model and its
focus on lower risk, smaller construction contracts, the company
has a high level of debt which could be problematic should there be
a downturn in the sector.
We took a significant amount of money out of the oil sector. BP
and Royal Dutch Shell were the largest two partial sales, and their
combined weighting in the portfolio was reduced from approximately
13% at the start of the year to just under 10.5%. Two years ago the
stock market was concerned about whether the dividends of these
companies were sustainable and they both carried extremely high
dividend yields, but since then, their profitability has recovered
due to cost cutting and rising oil prices and the shares have
delivered a very strong performance, taking the shares closer to
our estimate of fair value. The fundamental earnings recovery has
been so strong that BP has just raised its interim dividend by a
small amount, which would have been unthinkable in 2016. Other
notable reductions to positions included Sainsbury, which rallied
on the proposed merger with Asda, Informa following the UBM
takeover, and Lloyds Bank for risk control reasons.
Derivatives Strategy
Merchants operates a covered call strategy on a limited
proportion of the portfolio to generate additional income. In
"writing" or selling an option, we give the purchaser the right to
buy a specific number of shares in a company at an agreed "strike"
price within a fixed period. In exchange Merchants receives an
option premium which is taken to revenue. We get the full benefit
of any move in the share price up to the strike price but not
beyond. If the share price rises above the strike price there is a
potential "opportunity" cost (but not a cash cost) to Merchants as
the option holder can exercise their option to buy the shares at
the strike price.
The option strategy once again delivered its primary objective
of income generation, with approximately GBP400,000 of option
premium accrued. Strong performance from some of the oil shares
where we had written options led to a number of option exercises.
This meant that the strategy was loss making over the six months
after taking account of the opportunity costs incurred from option
exercises. However, we were happy to reduce positions at the
valuations represented by the strike prices.
Outlook
There are a number of risks to the outlook for economies and
markets. On the political front there is continuing uncertainty
over the Brexit negotiations with a wide range of potential
outcomes. There is a weak and divided Conservative government, with
a socialist opposition with sharply different views on economic
policy and the role of the state, especially concerning privatised
businesses like rail and utilities. Trade tensions are increasing
around the world, with the US raising tariffs, and provoking a
response in China, the EU, Turkey and elsewhere.
On the domestic scene, the Bank of England has recently raised
interest rates for the second time this cycle, after the emergency
cut following the Brexit referendum. Higher interest rates increase
borrowing costs and can lead to slower economic growth in the
future, as well as potentially affecting stock price valuations due
to a higher discount rate.
All of these factors may put pressure on share prices. At the
very least, this is a particularly difficult environment in which
to have a high degree of confidence in any one specific course of
future events.
However, there are several positive factors to consider as well.
The UK economy is growing at a reasonable pace, albeit after slow
first quarter. Unemployment is at extremely low levels and there
are few signs of systemic stress, apart from in particular
industries such as retail, which face specific structural
pressures. Interest rates are rising but remain extremely low by
historic standards. In any case, the majority of UK listed
companies' sales and profits comes from overseas, mostly outside of
the EU. This provides investors with a considerable level of
protection from the worst case Brexit scenarios, especially as any
weakness of sterling would result in an appreciation of the value
of these overseas earnings.
Another supporting factor is that equity valuations in the UK
are close to long term averages, and are lower than for many other
leading stock markets. So some element of downside is already
priced into shares. Indeed, many domestically oriented shares are
at significant discounts to their long term average valuations.
In this environment, our strategy is not to position the
portfolio for one specific scenario, but to place a strong emphasis
on portfolio construction. We aim to hold a broadly diversified
portfolio of companies, across many different industries, both
domestically exposed and those with multinational or global
businesses. We vary position sizes according to the upside
potential in individual shares and the level of risk in that
company and the industry. We have also been diversifying the
portfolio's income generation, with a lower proportion now coming
from the ten largest contributors.
We consider three broad categories of risk; operational,
financial and valuation risk. Operational risk can be thought of as
the risk to a specific business or an industry, and can include the
level of competitive intensity in the industry, product cycles,
technology risks, management ability and depth, cyber security,
regulatory changes and many other operational factors. Clearly the
level of operational risk varies enormously from one company to
another and across different industries. Financial risk looks at
the level of leverage in the business, including other liabilities
such as leases and pension fund deficits, and also the levels of
liquidity and access to capital. Companies often get into trouble
when operational difficulties combine with high leverage, so we are
particularly focused on companies with high levels of operational
and financial risk, and we have made some specific reductions to
such positions in recent months.
Finally, valuation risk is also very important. A highly priced
company can suffer a significant loss of value if high expectations
are disappointed. Conversely, a low valuation often means that
expectations are already depressed, so that incremental
disappointments may already be priced in, and any surprise positive
news flow can lead to large share price gains.
Due to the modest valuation of the UK stock market, we have been
able to identify many attractively priced companies that meet our
investment criteria. Specifically we are looking for fundamentally
sound businesses, trading on reasonable valuations, that benefit
from supportive structural and cyclical thematic trends. The five
new companies introduced into the portfolio this year are a
representative sample of the diverse range of attractive
opportunities available, spanning different industries, some more
domestically focused, and others more international. By focusing on
the risk factors above and careful position sizing, we believe the
Merchants' portfolio should be able to deliver a healthy level of
income, income growth and capital returns in the medium to long
term.
Simon Gergel
Allianz Global Investors
THE MERCHANTS TRUST PLC
Twenty Largest Equity Holdings as at 31 July 2018
Market Total
Value Assets
GBP'000s %* Principal Activity
----------------------- -------- ------ -------------------------------
GlaxoSmithKline 48,568 6.66 Pharmaceuticals & Biotechnology
Royal Dutch Shell B 47,765 6.55 Oil & Gas Producers
HSBC Holdings 31,278 4.29 Banks
BHP Billiton 29,858 4.09 Mining
BP 28,635 3.92 Oil & Gas Producers
Standard Life Aberdeen 25,523 3.50 Financial Services
BAE Systems 23,351 3.20 Aerospace & Defence
Legal & General 22,461 3.08 Life Insurance
Imperial Brands 21,915 3.00 Tobacco
Lloyds Banking Group 20,398 2.80 Banks
Prudential 19,940 2.73 Life Insurance
SSE 19,313 2.65 Electricity
Tate & Lyle 17,404 2.38 Food Producers
Meggitt 17,186 2.35 Aerospace & Defence
Tyman 16,183 2.22 Construction & Materials
Green King 15,503 2.12 Travel & Leisure
Pennon Group 14,689 2.01 Gas, Water & Multiutilities
Inmarsat 13,849 1.90 Mobile Telecommunications
Land Securities Group 13,194 1.81 Real Estate
National Express Group 12,592 1.73 Travel & Leisure
459,605 62.99
-------- ------
* Total assets include current liabilities
Portfolio Analysis as at 31 July 2018
Sector Market Total
Value Assets
GBP'000s %**
Financials 208,522 28.57
Industrials 119,548 16.38
Consumer Services 98,093 13.44
Oil & Gas 76,400 10.47
Consumer Goods 57,201 7.84
Health Care 48,568 6.66
Utilities 46,560 6.38
Basic Materials 40,640 5.57
Telecommunications 13,849 1.90
Net current assets 20,398 2.79
729,779 100.00
--------- -------
** Total assets include current liabilities
As at 31 July 2018 call options were written over 0.53% of the
portfolio (valued at strike price). During the period, income
generated from call options amounted to GBP390,560.
THE MERCHANTS TRUST PLC
Summary of Unaudited Results
INCOME STATEMENT
For the six months ended 31 July 2018
2018
Revenue Capital Total Return
GBP'000s GBP'000s GBP'000s
(Note 1)
Gains on investments at fair value
through profit or loss - 25,533 25,533
Gains on foreign currencies - - -
Income from investments 18,573 - 18,573
Other income 425 - 425
Investment management fee (433) (805) (1,238)
Administrative expenses (429) (1) (430)
--------- --------- --------------------
Profit before finance costs and taxation 18,136 24,727 42,863
Finance costs: interest payable and
similar charges (1,168) (2,130) (3,298)
Profit on ordinary activities before
taxation 16,968 22,597 39,565
Taxation - - -
Profit after taxation attributable
to ordinary shareholders 16,968 22,597 39,565
========= ========= ====================
Earnings per ordinary share (Note
4)
(basic and diluted) 15.61p 20.78p 36.39p
2018
BALANCE SHEET GBP'000s
As at 31 July 2018
Fixed Assets
Investments at fair value through profit or loss 709,381
Net current assets 20,398
--------------------
Total assets less current liabilities 729,779
Creditors - amounts falling due after one year (110,327)
Total net assets 619,452
====================
Called up share capital 27,182
Share premium account 33,718
Capital redemption reserve 293
Capital reserve 529,023
Revenue reserve 29,236
--------------------
Equity shareholders' funds 619,452
====================
Net asset value per ordinary share 569.7p
The net asset value is based on 108,728,464 ordinary shares in
issue at 31 July 2018.
THE MERCHANTS TRUST PLC
Summary of Unaudited Results
INCOME STATEMENT
For the six months ended 31 July 2017
2017
Revenue Capital Total Return
GBP'000s GBP'000s GBP'000s
(Note 1)
Gains on investments at fair value
through profit or loss - 40,059 40,059
Gains on foreign currencies - 5 5
Income from investments 18,342 - 18,342
Other income 432 - 432
Investment management fee (418) (777) (1,195)
Administrative expenses (387) (1) (388)
--------- --------- -------------
Profit before finance costs and taxation 17,969 39,286 57,255
Finance costs: interest payable and
similar charges (1,601) (2,933) (4,534)
Profit on ordinary activities before
taxation 16,368 36,353 52,721
Taxation - - -
Profit after taxation attributable
to ordinary shareholders 16,368 36,353 52,721
========= ========= =============
Earnings per ordinary share (Note
4)
(basic and diluted) 15.05p 33.44p 48.49p
2017
BALANCE SHEET GBP'000s
As at 31 July 2017
Fixed Assets
Investments at fair value through profit or loss 680,069
Net current liabilities (19,390)
-------------
Total assets less current liabilities 660,679
Creditors - amounts falling due after one year (75,904)
Total net assets 584,775
=============
Called up share capital 27,182
Share premium account 33,718
Capital redemption reserve 293
Capital reserve 495,713
Revenue reserve 27,869
-------------
Equity shareholders' funds 584,775
=============
Net asset value per ordinary share 537.8p
The net asset value is based on 108,728,464 ordinary shares in
issue at 31 July 2017.
2018
BALANCE SHEET GBP'000s
As at 31 January 2018
Fixed Assets
Investments at fair value through profit or loss 685,350
Net current assets 18,571
----------
Total assets less current liabilities 703,921
Creditors - amounts falling due after one year (110,443)
Total net assets 593,478
==========
Called up share capital 27,182
Share premium account 33,718
Capital redemption reserve 293
Capital reserve 506,426
Revenue reserve 25,859
----------
Equity shareholders' funds 593,478
==========
Net asset value per ordinary share 545.8p
The net asset value is based on 108,728,464 ordinary shares in
issue at 31 January 2018.
THE MERCHANTS TRUST PLC
STATEMENT OF CHANGES IN EQUITY
Called Share Capital
Up Premium Redemption Capital Revenue
Share Account Reserve Reserve Reserve Total
Capital GBP'000s GBP'000s GBP'000s GBP'000s GBP'000s
GBP'000s
----------- ----------- ------------- ----------- ----------- -----------
Six months ended
31 July 2018
Net assets at 1
February 2018 27,182 33,718 293 506,426 25,859 593,478
Revenue profit - - - - 16,968 16,968
Dividends on ordinary
shares (Note 3) - - - - (13,591) (13,591)
Capital profit - - - 22,597 - 22,597
Net assets at 31
July 2018 27,182 33,718 293 529,023 29,236 619,452
----------- ----------- ------------- ----------- ----------- -----------
Six months ended
31 July 2017
Net assets at 1
February 2017 27,182 33,718 293 459,360 24,765 545,318
Revenue profit - - - - 16,368 16,368
Dividends on ordinary
shares (Note 3) - - - - (13,264) (13,264)
Capital profit - - - 36,353 - 36,353
Net assets at 31
July 2017 27,182 33,718 293 495,713 27,869 584,775
----------- ----------- ------------- ----------- ----------- -----------
THE MERCHANTS TRUST PLC
CASH FLOW STATEMENT
for the six months ended 31 July 2018 and comparative
periods
Six Months Six Months
to 31 July to 31 July
2018 2017
GBP'000s GBP'000s
Operating activities
Profit before finance costs and
taxation 42,863 57,255
Less: Gains on investments at fair
value (25,533) (40,059)
Less: Gains on foreign currency - (5)
Purchase of fixed asset investments
held at fair value through profit
or loss (124,680) (91,540)
Sales of fixed asset investments
held at fair value through profit
or loss 128,031 93,263
Increase in other receivables (2,010) (1,682)
Increase in other payables 733 1,228
Net cash inflow from operating
activities 19,404 18,460
Financing activities
--------------------- -----------------
Interest paid (3,372) (4,792)
Dividends paid on cumulative preference
stock (22) (21)
Dividends paid on ordinary shares (13,591) (13,264)
--------------------- -----------------
Net cash outflow from financing
activities (16,985) (18,077)
--------------------- -----------------
Increase in cash and cash equivalents 2,419 383
--------------------- -----------------
Cash and cash equivalents at the
start of the year 20,096 14,485
Effect of foreign exchange rates - 5
Cash and cash equivalents at the
end of the year 22,515 14,873
Comprising:
Cash at bank 22,515 14,873
THE MERCHANTS TRUST PLC
Note 1 - Financial Statements
The half-yearly financial report has been neither audited nor
reviewed by the company's auditors. The financial information for
the year ended 31 January 2018 has been extracted from the
statutory financial statements for that year which have been
delivered to the Registrar of Companies. The auditors' report on
those financial statements was unqualified and did not contain a
statement under section 498 of the Companies Act 2006.
The total return column of the Income Statement is the profit
and loss account of the company.
All revenue and capital items derive from continuing operations.
No operations were acquired or discontinued in the period.
Allianz Global Investors GmbH, UK Branch (AllianzGI), acts as
Investment Manager to the company. Details of the services and fee
arrangements are given in the latest annual financial report of the
company, which is available on the company's website at
www.merchantstrust.co.uk.
Note 2 - Accounting Policies
The Company presents its results and positions under 'The
Financial Reporting Standard applicable in the UK and Republic of
Ireland' (FRS 102), which forms part of revised Generally Accepted
Accounting Practice ('New UK GAAP') issued by the Financial
Reporting Council.
The condensed set of financial statements has been prepared on a
going concern basis in accordance with FRS 104, 'Interim Financial
Reporting' and the Statement of Recommended Practice - 'Financial
Statements of Investment Trust Companies and Venture Capital
Trusts' (SORP). They have also been prepared on the assumption that
approval as an investment trust will continue to be granted.
The interim financial statements and the net asset value per
share figures have been prepared in accordance with FRS 102 using
the same accounting policies as the preceding annual accounts.
Note 3 - Dividends on Ordinary Shares
Dividends paid on ordinary shares in respect of earnings for
each period are as follows:
Six months Six months
to to
31 July 31 July
2018 2017
GBP'000s GBP'000s
Third quarterly dividend 6.20p
paid 2 March 2018 (2017 - 6.10p) 6,741 6,632
Final dividend 6.30p paid 30 May
2018 (2017 - 6.10p) 6,850 6,632
----------------- -----------
13,591 13,264
----------------- -----------
In accordance with FRS 102 section 32 'Events After the End of
the Reporting Period', dividends payable at the period end have not
been recognised as a liability. Details of these dividends are set
out below.
Six months Six months
to to
31 July 31 July
2018 2017
GBP'000s GBP'000s
------------------------------------- ----------- -----------
First quarterly dividend 6.40p
paid 22 August 2018 (2017 - 6.10p) 6,959 6,632
Second quarterly dividend 6.50p
payable 15 November 2018 (2017
- 6.20p) 7,067 6,741
14,026 13,373
----------- -----------
Note 4 - Earnings per Ordinary Share
The earnings per ordinary share is based on a weighted number of
shares 108,728,464 (31 July 2017 - 108,728,464) ordinary shares in
issue.
Note 5 - Fair Value Hierarchy
Investments and derivative financial instruments are designated
as held at fair value through profit or loss in accordance with FRS
102 sections 11 and 12.
FRS 102 as amended for fair value hierarchy disclosures (March
2016) sets out three fair value levels.
Level 1: The unadjusted quoted price in an active market for
identical assets or liabilities that the entity can access at the
measurement date. A financial instrument is regarded as quoted in
an active market if quoted prices are readily and regularly
available from an exchange, dealer, broker, industry group, pricing
service, or regulatory agency, and those prices represent actual
and regularly occurring market transactions on an arm's length
basis.
Level 2: Inputs other than quoted prices included within Level 1
that are observable (i.e., developed using market data) for the
asset or liability, either directly or indirectly.
When quoted prices are unavailable, the price of a recent
transaction for an identical asset provides evidence of fair value
as long as there has not been a significant change in economic
circumstances or a significant lapse of time since the transaction
took place.
Level 3: Inputs are unobservable (i.e., for which market data is
unavailable) for the asset or liability.
With the exception of those financial liabilities measured at
amortised cost, all other financial assets and financial
liabilities are either carried at their fair value or the balance
sheet amount is a reasonable approximation of their fair value.
As at 31 July 2018, the financial assets at fair value through
profit and loss of GBP709,358,000 (31 July 2017: GBP679,944,000; 31
January 2018: GBP685,298,000) are categorised as follows:
Level Level Level
1 2 3 Total
GBP'000s GBP'000s GBP'000s GBP'000s
Financial assets at fair
value through profit or loss
at 31 July 2018
Equity investments 709,353 - - 709,353
Financial instruments - - 28 28
Derivative financial instruments
- written call options (23) - - (23)
------------- --------- --------- -------------
709,330 - 28 709,358
------------- --------- --------- -------------
Financial assets at fair
value through profit or loss
at 31 July 2017
Equity investments 680,041 - - 680,041
Financial instruments - - 28 28
Derivative financial instruments
- written call options (125) - - (125)
--------- --------- -------------
679,916 - 28 679,944
------------- --------- --------- -------------
Financial assets at fair
value through profit or loss
at 31 January 2018
Equity investments 685,321 - - 685,321
Financial instruments - - 28 28
Derivative financial instruments
- written call options (51) - - (51)
------------- --------- --------- -------------
685,270 - 28 685,298
------------- --------- --------- -------------
For exchange listed equity investments the quoted price is
either the bid price or the last traded price depending on the
convention of the relevant exchange. For written options the value
of the option is marked to market based on traded prices. Financial
instruments valued using valuation techniques level 3 have, in the
absence of relevant trading prices or market data, been valued
based on the directors' best estimate. There are no investments
held which are valued in accordance with level 2.
Note 6 - Status of the Company
The company applied for and was accepted as an approved
investment trust for accounting periods commencing on or after 1
February 2013, subject to it continuing to meet eligibility
conditions at section 1158 Corporation Taxes Act 2010 and the
on-going requirements for approved companies in Chapter 3 Part 2
Investment Trust (Approved Company) (Tax) Regulations 2011
(Statutory Instrument 2011/2999).
Note 7 - Transactions with the Investment Manager and related
parties
As disclosed in the annual report, the existence of an
independent board of directors demonstrates that the company is
free to pursue its own financial and operating policies and
therefore, under FRS102 Section 33: Related Party Disclosures, the
investment manager is not considered to be a related party. The
company's related parties are its directors.
There are no other identifiable related parties as at 31 July
2018, 31 July 2017 and 31 January 2018.
For further information, please contact:
Allianz Global Investors
Adam Gent, Head of Retail/Wholesale Northern Europe
Tel: 020 3246 7178
or
Allianz Global Investors
Simon Gergel, Fund Manager
Tel: 020 3246 7431
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR FKDDKOBKDCCB
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