Schroder Oriental Income Fund Ltd Annual Financial Report (4125X)

TIDMSOI

RNS Number : 4125X

Schroder Oriental Income Fund Ltd

24 November 2017

24 November 2017

ANNUAL REPORT AND ACCOUNTS

Schroder Oriental Income Fund Limited (the "Company") hereby submits its annual financial report for the year ended 31 August 2017 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.1.

The Company's Annual Report and Accounts for the year ended 31 August 2017 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's webpage http://www.schroders.co.uk/orientalincome. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/4125X_-2017-11-23.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/nsm.

Enquiries:

Louise Richard

   Schroder Investment Management Limited                 Tel: [phone] 

Chairman's Statement

I am pleased to be able to report on another successful year for your Company. The NAV per share generated a total return of 20.6% in the financial year, building on the gain of over 32% the prior year. The share price followed suit, returning 20.7%, to reach an all-time high of GBP2.61 at the financial year end.

Some of these exceptional gains over the past two years reflect the depreciation of sterling against other currencies following the Brexit vote. However, Asian equity markets have also performed strongly. That said, the gains this year were of a different character to last year. This year the strength of Asian equity indices was driven by a much narrower range of fashionable "high growth" stocks, particularly in the e-commerce and technology sectors. The low yield of these types of stocks constrains how much a company with a mandate like yours can invest in them. The core strategy of your portfolio is to always seek out companies that generate strong, consistent and predictable earnings, which are attractively priced and which pay a regular and well covered dividend.

So it is no surprise that the Company has underperformed the wider Asian equity markets this year. Neither your Board nor the Manager makes any apology for this. The Company's track record over the past 12 years, where it has generated an annualised return of 13.3%, comfortably outperforming the Asian markets, demonstrates the value of the investment approach. The approach won't be flavour of the month all the time but therein lies opportunity for future gains when investors' focus returns once again to the value embedded in the companies that the Company owns. In the meantime, your Company waits and enjoys robust and growing dividends.

The Company's own dividend payments have also continued to grow strongly. With an underpin of revenue earnings per share rising by 10.1% to 9.94 pence this year, total dividends of 9.20 pence per share for the year ended 31 August 2017 represent growth of 8.2% since last year. Dividends have now increased for the 11th consecutive year and the Association of Investment Companies has listed the Company as a "Next Generation Dividend Hero".

The fact that the Company's shares have traded at a small premium to NAV for much of the year shows the value that shareholders place upon the Company's approach, consistency and dividend growth. Feedback from our shareholders regularly confirms that the Company has an important place in their portfolios in both global income and Asian equity contexts.

The Board recognises the value that shareholders place upon stability of the share price relative to the intrinsic value of the shares and, as a result, the Company has issued 8,161,450 new shares during the year at a slight premium to NAV. A further 3,855,000 shares have been issued since the financial year end. As well as assisting with the stability of the premium, this issuance has the additional benefit of further reducing the Ongoing Charges per share by spreading fixed costs more widely. For the latest financial year, Ongoing Charges reduced to 0.85%, from 0.89% last year. At the forthcoming Annual General Meeting ("AGM"), to be held on 15 December 2017, the Board is seeking to renew the existing authorities to issue shares on a non-pre-emptive basis and to buy back shares for cancellation or holding in treasury.

Also at the AGM, all continuing Directors will be presenting themselves for re-election, in accordance with the Board's policy of annual re-election. However, in line with our refreshment plans, Fergus Dunlop will not be offering himself for re-election, having served nine years as a Director. On behalf of the Board, I would like to thank Fergus for his invaluable contribution during this time.

Your Board is committed to progressive refreshment, balancing fresh perspectives with the benefits of continuity. A search is currently underway to replace Fergus and his retirement follows the appointment of Paul Meader in January 2016 succeeding Chris Sherwell. Another of the long serving directors will retire at the AGM in 2018. Through this process the Board has agreed that four directors is optimal to meet the Company's needs, although this number may vary during periods of refreshment.

Since the year end, your Board has undertaken its annual review of fees payable to the Manager. While the Board remains supportive of the structure of the fee arrangements, which it believes are well aligned to the interests of shareholders, it has reassessed the scale of the performance fee in providing value to shareholders as the Company grows. Consequently, I am pleased to report that the Manager has agreed to reduce the cap on the performance fee from 1.0% to 0.75% of the net assets of the Company calculated at the end of any one accounting period, effective from 1 September 2017. Full details of the performance fee calculation may be found on page 20 of the 2017 Annual Report.

Regulatory change continues apace, with the Manager's response bringing further financial benefits to the Company. The turn of 2017 will see the implementation of MIFID II. There are two consequences for the Company. Firstly, the Manager will issue a Key Information Document about the Company which will be maintained on its webpages. The second relates to the explicit charging for the costs of investment research. Schroders has, however, announced that it does not intend to continue to charge external research costs to its clients, including your Company, and will instead bear this expense itself from 1 January 2018. Your Board welcomes this development in managing the Company's costs for the benefit of shareholders.

Looking forward, whilst "income investing" may have fallen out of fashion temporarily, overall earnings growth in Asia is strong, driven by the first period of synchronised global economic growth since the financial crisis. The Manager's Review on pages 5 to 7 of the 2017 Annual Report notes the value in the portfolio's holdings and how their higher cash flows are being reflected in higher dividends. As has been a general theme during the 12 years since inception of the Company, the Board believes that this will, in due course, be reflected in long-term capital gains, as well as enable us to meet the Company's record of increasing the Company's dividends each year. The Company's fortunes are, of course, always buffeted by the swings of sentiment in global equity markets. However, the Company's mandate towards solid, well managed companies with strong cash flows in one of the world's most dynamic and vibrant economic regions remains as relevant today as at its launch.

I look forward to reporting to you again in the half year report to be published next June.

Robert Sinclair

Chairman

23 November 2017

Manager's Review

The NAV per share of the Company recorded a total return of 20.6% over the 12 months to the end of August 2017.

It has been another strong year for Asian stock markets, registering a rise of just over a quarter in sterling terms. There was understandable uncertainty for the region in the wake of Mr Trump's victory in the US presidential election last November. However, the consequent fears over greater protectionism and heightened geopolitical tension proved to have only a brief impact on the region. From the beginning of 2017, a number of more positive developments came into play. These included increasing evidence of a co-ordinated recovery in the global economy, with leading indicators in the overwhelming majority of developed economies moving into positive territory, mirrored also by similar developments across Asia itself. After a number of years of stagnation, global trade flows have responded, with total trade in dollar terms reaching record highs.

Supported by the benign environment, earnings estimates for Asian companies have been rising consistently over the year, with expectations for 2017 rising from around 10% growth to over 20% relative to 2016. This has been in contrast to the pattern of the previous three years, and has clearly been very supportive for investor sentiment. Free cash flow has also been rising sharply across the region as capital spending remains generally disciplined, underpinning healthy dividend growth.

The period saw a number of potentially troubling geo-political developments, most notably the increasingly belligerent stance of the Democratic People's Republic of Korea, further threatening to destabilise the always delicate relationship between China and the US. Investors have, thus far, been remarkably calm; indeed the market with arguably the greatest proximity to the epicentre, that of South Korea, ended the fiscal year within 5% of all-time highs.

China remained an important determinant of sentiment. Although the external environment was supportive to trade growth, the economy has not shown the same pick up in momentum evident elsewhere. To an extent, this has been a deliberate thrust of policy on the part of the Beijing authorities, reflecting confidence that the measure of stimulus taken in late 2015 could be withdrawn without undue threat to all-important "stability". Consequently, monetary stimulus was gradually reduced through the summer, augmented by policies to rein in the residential property market and greater regulatory scrutiny of unorthodox financing vehicles and off-balance sheet exposures in the banking sector.

In the event, the gentle tightening in China has done no harm to local market returns, although a large measure of the outperformance has been thanks to a strong showing from a relatively small number of large capitalisation internet stocks. Taiwan and Korea have been the other strong performers, with the higher export exposure favouring returns. In contrast, more domestically-oriented markets such as the emerging ASEAN markets did not perform well.

Positioning and performance

The Company has registered a very solid absolute return over the financial year, but has significantly lagged the returns on the reference index which rose 25.8%. The biggest single factor has been the underweighting and stock selection in China, and more particularly the very strong returns from large cap internet stocks which, with minimal, if any, dividend yield, are never likely to feature largely in an income portfolio. Furthermore, a number of markets with relatively low dividend yields (Korea being the most notable) performed well, and in distinct contrast to higher yielding markets such as Thailand and New Zealand.

Hong Kong, Australia, China, Taiwan and Singapore remain the main country exposures in the portfolio, with allocations between 5% and 10% in Thailand and Korea. Key sector exposures are financials, real estate, information technology, materials and telecoms. In terms of changes to the portfolio, we added to Australia, Korea and China, and to a lesser extent to Japan and Singapore, balanced by reductions in Taiwan, Hong Kong and the sale of our sole Indian holding.

Investment outlook

Over the last 12 months, investors have taken a relatively sanguine view of global equity markets. The stance has been rewarded and Asian equities have more than participated in this strength. The scale and extent of returns naturally raises the question of whether enough is enough, and at least a pause for breath, or a correction, is imminent.

Perhaps the first point to make is that many fundamental supports to equity markets remain in force. PMI data (Purchasing Managers' Indices) paints a picture of an impressively co-ordinated upturn in global growth, with 80% of countries solidly in expansion territory. Equity valuations relative to bonds remain in extremely attractive territory, and there have been few of the usual signals that surround a market peak such as narrowing market breadth, widening credit spreads or excess investment by corporates. This suggests that the outlook for the region's exporters remains relatively sound, although the pace of expansion is likely to moderate over coming quarters as comparisons get more demanding.

As regards the external environment for Asia, the extent of any tapering following on from recent Federal Reserve and European Central Bank announcements must be taken seriously. However, the $300bn projected withdrawal by the Federal Reserve over the next 12 months must be seen against a total central bank balance sheet expansion globally of $11trn since 2009, and in aggregate Central Bank balance sheets are likely to still grow until Q4 2018. The key will remain inflation expectations, and the risks here surround tightening labour markets (including a surge in Euro area companies reporting labour shortages) and the impact of supply curtailments in China.

As regards domestic conditions in Asia, the impact of the self-induced (and hopefully controlled) slowdown in Chinese growth will need to be closely monitored. Our calculation is that this can be smoothly managed, aided by the broadly helpful global environment in terms of liquidity (aided by a gently weaker US dollar) and robust trade flows. The October political transition in China has seen a smooth entrenchment of President Xi, but accompanied by the departure of a number of more pro-reform cadres. In all probability, the prospect of real reform has receded, with the exception of supply curtailments in a number of basic industries driven by the pressing need to tackle pollution. Credit growth will remain a key lever of State economic control. Although there must be an eventual end to the process, we believe it is too early to incorporate the serious long-term consequences of the debt build up given that China continues to enjoy a strong external balance and growth is gradually shifting towards services and the consumer.

As we reported at the half way stage, we also take heart from the fact that the corporate sector around the region is generally in robust health. Outside sectors and companies whose investment patterns are determined by state and government-led priorities, capital spending discipline remains impressive, resulting in a strong expansion in underlying cash flows and stronger balance sheets. We continue to see an encouraging flow of positive dividend news. It may be difficult for an income-oriented company such as this to access the high growth low yield areas of the market so much in favour over the last 18 months, but we see solid value across the income universe in Asia.

Schroder Unit Trusts Limited

23 November 2017

Principal risks and uncertainties

The Board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Company's business as an investment company and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit Committee on an ongoing basis. This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and the monitoring system are also subject to robust review at least annually. The last review took place in November 2017.

Although the Board believes that it has a robust framework of internal control in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.

The principal risks and uncertainties faced by the Company have remained unchanged throughout the year under review, except in respect of cyber risk relating to the Company's service providers, which has now been extended beyond the custodian. Cyber risk relating to all of the Company's key service providers is considered an increased threat in light of the rising propensity and impact of cyber attacks on businesses and institutions. To address the risk, the Board is seeking enhanced reporting on cyber risk mitigation and management from its key service providers to ensure that it is managed and mitigated appropriately.

Actions taken by the Board and, where appropriate, its Committees, to manage and mitigate the Company's principal risks and uncertainties are set out in the table below.

 
 Risk                                Mitigation and management 
 
 Strategic 
 
 The Company's investment            Appropriateness of the Company's 
  objectives may become               investment remit periodically 
  out of line with the                reviewed and success of the 
  requirements of investors,          Company in meeting its stated 
  resulting in a wide                 objectives monitored. 
  discount of the share 
  price to underlying                 Share price relative to NAV 
  NAV per share.                      per share monitored and use 
                                      of buy back authorities considered 
                                      on a regular basis. 
 
                                      Marketing and distribution 
                                      activity actively reviewed. 
 The Company's cost base             Ongoing competitiveness of 
  could become uncompetitive,         all service provider fees 
  particularly in light               subject to periodic benchmarking 
  of open ended alternatives.         against competitors. 
 
                                      Annual consideration of management 
                                      and performance fee levels. 
 Investment management 
 
 The Manager's investment            Review of: the Manager's 
  strategy and levels                 compliance with agreed investment 
  of resourcing, if inappropriate,    restrictions, investment 
  may result in the Company           performance and risk against 
  underperforming the                 investment objectives and 
  market and/or peer group            strategy; relative performance; 
  companies, leading to               the portfolio's risk profile; 
  the Company and its                 and appropriate strategies 
  objectives becoming                 employed to mitigate any 
  unattractive to investors.          negative impact of substantial 
                                      changes in markets. 
 
                                      Annual review of the ongoing 
                                      suitability of the Manager, 
                                      including resources and key 
                                      personnel risk. 
 Financial and currency 
 
 The Company is exposed              Risk profile of the portfolio 
  to the effect of market             considered and appropriate 
  and currency fluctuations           strategies to mitigate any 
  due to the nature of                negative impact of substantial 

  its business. A significant         changes in markets or currency 
  fall in regional equity             discussed with the Manager. 
  markets could have an 
  adverse impact on the               The Company has no formal 
  market value of the                 policy of hedging currency 
  Company's underlying                risk but may use foreign 
  investments and,                    currency borrowings or forward 
  as the Company invests              foreign currency contracts 
  predominantly in assets             to limit exposure. 
  which are denominated 
  in a range of currencies, 
  its exposure to changes 
  in the exchange rate 
  between sterling and 
  other currencies has 
  the potential to have 
  a significant impact 
  on returns. 
 
Custody 
 
Safe custody of the                 Depositary reports on safe 
 Company's assets may                custody of the Company's assets, 
 be compromised through              including cash and portfolio 
 control failures by                 holdings, independently reconciled 
 the Depositary, including           with the Manager's records. 
 cyber hacking. 
                                     Review of audited internal 
                                     controls reports covering 
                                     custodial arrangements. 
 
                                     Annual report from the Depositary 
                                     on its activities, including 
                                     matters arising from custody 
                                     operations. 
 
Gearing and leverage 
 
The Company utilises                Gearing is monitored and strict 
 credit facilities. These            restrictions on borrowings 
 arrangements increase               imposed: gearing continues 
 the funds available                 to operate within pre-agreed 
 for investment through              limits so as not to exceed 
 borrowing. While this               25% of the Company's net assets. 
 has the potential to 
 enhance investment returns 
 in rising markets, in 
 falling markets the 
 impact could be detrimental 
 to performance. 
 
Accounting, legal and 
 regulatory 
 
        Breaches of the UK Listing  Confirmation of compliance 
              Rules, the Companies   with relevant laws and regulations 
              (Guernsey) Law, 2008   by key service providers. 
             (as amended) or other 
            regulations with which   Shareholder documents and 
           the Company is required   announcements, including the 
             to comply, could lead   Company's published Annual 
        to a number of detrimental   Report, subject to stringent 
                         outcomes.   review processes. 
 
                                     Procedures established to 
                                     safeguard against disclosure 
                                     of inside information. 
 
Service provider 
 
The Company has no employees        Service providers appointed 
 and has delegated certain           subject to due diligence processes 
 functions to a number               and with clearly-documented 
 of service providers.               contractual arrangements detailing 
 Failure of controls,                service expectations. 
 including as a result 
 of cyber hacking, and               Regular reporting by key service 
 poor performance of                 providers and monitoring of 
 any service provider,               the quality of services provided. 
 could lead to disruption, 
 reputational damage                 Review of annual audited internal 
 or loss.                            controls reports from key 
                                     service providers, including 
                                     confirmation of business continuity 
                                     arrangements and IT controls. 
 

Risk assessment and internal controls

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the Audit Committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition. No significant control failings or weaknesses were identified from the Audit Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this Report.

A full analysis of the financial risks facing the Company is set out in note 20 on pages 44 to 49 of the 2017 Annual Report.

Viability statement

The Directors have assessed the viability of the Company over a five year period, taking into account the Company's position at 31 August 2017 and the potential impacts of the principal risks and uncertainties it faces for the review period.

A period of five years has been chosen as the Board believes that this reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and availability of funding.

In its assessment of the viability of the Company, the Directors have considered each of the Company's principal risks and uncertainties detailed on pages 14 and 15 of the 2017 Annual Report. In particular the Directors have stress-tested a very severe fall in market prices. They have also considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary and on that basis consider that five years is an appropriate time period.

Based on the Company's processes for monitoring operating costs, the Board's view that the Manager has the appropriate depth and quality of resource to achieve superior returns in the longer term, the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment.

Going concern

Having assessed the principal risks and the other matters discussed in connection with the viability statement set out above, and the "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" published by the FRC in 2014, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the financial statements in accordance with applicable Guernsey law and generally accepted accounting principles.

Guernsey company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors should:

- select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors, and then apply them consistently;

- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

- provide additional disclosures when compliance with the specific requirements in International Financial Reporting Standards ("IFRS") is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance;

- state that the Company has complied with IFRS, subject to any material departures disclosed and explained in the financial statements;

- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and

   -        make judgements and estimates that are reasonable and prudent. 

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008 (as amended). They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Each of the Directors, whose names and functions are listed on pages 17 and 18 of the 2017 Annual Report, confirms that, to the best of their knowledge:

- the financial statements, which have been prepared in accordance with IFRS as adopted in the EU and with the Companies (Guernsey) Law, 2008 (as amended), give a true and fair view of the assets, liabilities, financial position and the net return of the Company;

- the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and

- the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Statement of Comprehensive Income

for the year ended 31 August 2017

 
                                                2017                       2016 
                                      Revenue  Capital    Total  Revenue  Capital    Total 
                                      GBP'000  GBP'000  GBP'000  GBP'000  GBP'000  GBP'000 
 -----------------------------------  -------  -------  -------  -------  -------  ------- 
Gains on investments at 
 fair value through profit 
 or loss                                    -   94,537   94,537        -  123,772  123,772 
Net foreign currency losses                 -    (963)    (963)        -  (8,116)  (8,116) 
Income from investments                28,197      446   28,643   24,811      244   25,055 
Other income                               11        -       11       10        -       10 
------------------------------------  -------  -------  -------  -------  -------  ------- 
Total income                           28,208   94,020  122,228   24,821  115,900  140,721 
Management fee                        (1,258)  (2,935)  (4,193)    (997)  (2,326)  (3,323) 
Performance fee                             -  (6,355)  (6,355)        -  (5,287)  (5,287) 
Other administrative expenses           (775)      (5)    (780)    (685)      (5)    (690) 
------------------------------------  -------  -------  -------  -------  -------  ------- 
Profit before finance 
 costs 
and taxation                           26,175   84,725  110,900   23,139  108,282  131,421 
Finance costs                           (223)    (518)    (741)    (271)    (632)    (903) 
------------------------------------  -------  -------  -------  -------  -------  ------- 
Profit before taxation                 25,952   84,207  110,159   22,868  107,650  130,518 
Taxation                              (2,013)     (36)  (2,049)  (1,572)        -  (1,572) 
------------------------------------  -------  -------  -------  -------  -------  ------- 
Net profit and total comprehensive 
income                                 23,939   84,171  108,110   21,296  107,650  128,946 
------------------------------------  -------  -------  -------  -------  -------  ------- 
Earnings per share                      9.94p   34.97p   44.91p    9.03p   45.66p   54.69p 
 

The "Total" column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS. The "Revenue and Capital" columns represent supplementary information prepared under guidance issued by the Association of Investment Companies.

The Company does not have any income or expense that is not included in net profit for the year. Accordingly the "Net profit" for the year is also the "Total comprehensive income" for the year.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

The notes on pages 37 to 50 of the 2017 Annual Report form an integral part of these accounts.

Statement of Changes in Equity

for the year ended 31 August 2017

 
                             Treasury     Capital 
                      Share     share  redemption  Special   Capital   Revenue 
                    capital   reserve     reserve  reserve  reserves   reserve     Total 
                    GBP'000   GBP'000     GBP'000  GBP'000   GBP'000   GBP'000   GBP'000 
------------------  -------  --------  ----------  -------  --------  --------  -------- 
At 31 August 
 2015               148,880   (6,286)          39  150,374    95,104    21,979   410,090 
Issue of shares       1,371         -           -        -         -         -     1,371 
Reissue of shares 
 from treasury            -     6,286           -        -     1,083         -     7,369 
Net profit                -         -           -        -   107,650    21,296   128,946 
Dividends paid 
 in the year              -         -           -        -         -  (19,114)  (19,114) 
------------------  -------  --------  ----------  -------  --------  --------  -------- 
At 31 August 
 2016               150,251         -          39  150,374   203,837    24,161   528,662 
Issue of shares      19,825         -           -        -         -         -    19,825 
Net profit                -         -           -        -    84,171    23,939   108,110 
Dividends paid 
 in the year              -         -           -        -         -  (21,131)  (21,131) 
------------------  -------  --------  ----------  -------  --------  --------  -------- 
At 31 August 
 2017               170,076         -          39  150,374   288,008    26,969   635,466 
------------------  -------  --------  ----------  -------  --------  --------  -------- 
 

The notes on pages 37 to 50 of the 2017 Annual Report form an integral part of these accounts.

Balance Sheet

at 31 August 2017

 
                                             2017      2016 
                                          GBP'000   GBP'000 
Non current assets 
Investments at fair value through 
 profit or loss                           654,213   534,093 
Current assets 
Receivables                                 2,908     3,178 
Cash and cash equivalents                  29,881    33,859 
---------------------------------------  --------  -------- 
                                           32,789    37,037 
 --------------------------------------  --------  -------- 
Total assets                              687,002   571,130 
Current liabilities 
Payables                                 (51,536)  (42,395) 
Derivative financial instruments 
 at fair value through profit or 
 loss                                           -      (73) 
---------------------------------------  --------  -------- 
                                         (51,536)  (42,468) 
 --------------------------------------  --------  -------- 
Net assets                                635,466   528,662 
---------------------------------------  --------  -------- 
Equity attributable to equity holders 
Share capital                             170,076   150,251 
Capital redemption reserve                     39        39 
Special reserve                           150,374   150,374 
Capital reserves                          288,008   203,837 
Revenue reserve                            26,969    24,161 
---------------------------------------  --------  -------- 
Total equity shareholders' funds          635,466   528,662 
---------------------------------------  --------  -------- 
Net asset value per share                 258.63p   222.56p 
 

The notes on pages 37 to 50 of the 2017 Annual Report form an integral part of these accounts.

Cash Flow Statement

for the year ended 31 August 2017

 
                                               2017       2016 
                                            GBP'000    GBP'000 
Operating activities 
Profit before finance costs and taxation    110,900    131,421 
Add back net foreign currency losses            963      8,116 
Less gains on investments at fair value 
 through profit or loss                    (94,537)  (123,772) 
Net (purchases)/sales of investments 
 at fair value through profit or loss      (25,219)     20,287 
Less amortisation of discount on fixed 
 interest securities                              -        (7) 
Decrease/(increase) in receivables              296      (188) 
Increase in payables                          2,341      5,497 
Overseas taxation paid                      (2,074)    (1,473) 
-----------------------------------------  --------  --------- 
Net cash (outflow)/inflow from operating 
 activities before interest                 (7,330)     39,881 
-----------------------------------------  --------  --------- 
Interest paid                                 (739)      (926) 
-----------------------------------------  --------  --------- 
Net cash (outflow)/inflow from operating 
 activities                                 (8,069)     38,955 
-----------------------------------------  --------  --------- 
Financing activities 
Bank loans drawn down                        44,254     91,095 
Bank loans repaid                          (38,192)  (106,141) 
Reissue of shares from treasury                   -      7,369 
Issue of shares                              19,825      1,371 
Dividends paid                             (21,131)   (19,114) 
-----------------------------------------  --------  --------- 
Net cash inflow/(outflow) from financing 
 activities                                   4,756   (25,420) 
-----------------------------------------  --------  --------- 
(Decrease)/increase in cash and cash 
 equivalents                                (3,313)     13,535 
Cash and cash equivalents at the start 
 of the year                                 33,859     18,259 
Effect of foreign exchange rates on 
 cash and cash equivalents                    (665)      2,065 
-----------------------------------------  --------  --------- 
Cash and cash equivalents at the end 
 of the year                                 29,881     33,859 
-----------------------------------------  --------  --------- 
 

Dividends received during the year amounted to GBP27,608,000 (2016: GBP24,706,000) and bond and deposit interest receipts amounted to GBP1,005,000 (2016: GBP449,000).

The notes on pages 37 to 50 of the 2017 Annual Report form an integral part of these accounts.

Notes to the Accounts

for the year ended 31 August 2017

   1.         Accounting policies 

Basis of accounting

The accounts have been prepared in accordance with the Companies (Guernsey) Law, 2008 and International Financial Reporting Standards, which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Accounting Standards Committee ("IASC"), that remain in effect and to the extent that they have been adopted by the European Union ("IFRS").

Where consistent with the requirements of IFRS, the Directors have sought to prepare the accounts on a basis compliant with presentational guidance set out in the statement of recommended practice for investment trust companies (the "SORP") issued by the Association of Investment Companies in November 2014 and updated in January 2017.

The policies applied in these accounts are consistent with those applied in the preceding year.

   2.       Taxation 
 
                                    2017                       2016 
                          Revenue  Capital    Total  Revenue  Capital    Total 
                          GBP'000  GBP'000  GBP'000  GBP'000  GBP'000  GBP'000 
Irrecoverable overseas 
tax                         2,013       36    2,049    1,572        -    1,572 
------------------------  -------  -------  -------  -------  -------  ------- 
 

The Company has been granted an exemption from Guernsey taxation under the Income Tax (Exempt Bodies) Guernsey Ordinance 1989, for which it is charged an annual exemption fee of GBP1,200 (2016: GBP1,200).

   3.       Dividends 

Dividends paid and declared

 
                                            2017     2016 
                                         GBP'000  GBP'000 
2016 fourth interim dividend of 3.80p 
 (2015: 3.40p)                             9,068    8,017 
First interim dividend of 1.60p (2016: 
 1.50p)                                    3,818    3,541 
Second interim dividend of 1.70p 
 (2016: 1.60p)                             4,074    3,777 
Third interim dividend of 1.70p (2016: 
 1.60p)                                    4,171    3,779 
---------------------------------------  -------  ------- 
Total dividends paid in the year          21,131   19,114 
---------------------------------------  -------  ------- 
 
                                            2017     2016 
                                         GBP'000  GBP'000 
Fourth interim dividend declared 
 of 4.20p (2016: 3.80p)                   10,320    9,027 
---------------------------------------  -------  ------- 
 

Under the Companies (Guernsey) Law 2008, the Company may pay dividends out of both capital and revenue reserves, subject to passing a solvency test. However all dividends paid and declared to date have been paid, or will be paid, out of revenue profits. The Company has passed the solvency test for all dividends paid to date.

The fourth interim dividend declared in respect of the year ended 31 August 2016 differs from the amount actually paid due to shares issued after the balance sheet date but prior to the share register record date.

   4.         Earnings per share 
 
                                           2017         2016 
                                        GBP'000      GBP'000 
Net revenue profit                       23,939       21,296 
Net capital profit                       84,171      107,650 
----------------------------------  -----------  ----------- 
Net total profit                        108,110      128,946 
----------------------------------  -----------  ----------- 
Weighted average number of shares 
 in issue during the year           240,721,945  235,746,033 
Revenue earnings per share                9.94p        9.03p 
Capital earnings per share               34.97p       45.66p 
----------------------------------  -----------  ----------- 
Total earnings per share                 44.91p       54.69p 
----------------------------------  -----------  ----------- 
 
   5.       Share capital 
 
                                           2017     2016 
                                        GBP'000  GBP'000 
Ordinary shares of 1p each, allotted, 
 called-up and fully paid: 
Opening balance of 237,541,574 (2016: 
 233,071,574) shares                    150,251  142,594 
Issue of 8,161,450 (2016: 600,000) 
 shares                                  19,825    1,371 
Reissue of nil (2016: 3,870,000) 
 shares from treasury                         -    6,286 
--------------------------------------  -------  ------- 
Closing balance of 245,703,024 (2016: 
 237,541,574) shares                    170,076  150,251 
--------------------------------------  -------  ------- 
 

No shares were held in treasury at the year end (2016: nil).

During the year a total of 8,161,450 shares, nominal value GBP81,615 were issued to the market to satisfy demand, at an average price of 242.91p per share, for a total consideration received of GBP19,825,000.

   6.         Net asset value per share 
 
                                                   2017          2016 
 Net assets attributable to shareholders 
  (GBP'000)                                     635,466       528,662 
 Shares in issue at the year end            245,703,024   237,541,574 
-----------------------------------------  ------------  ------------ 
 Net asset value per share                      258.63p       222.56p 
-----------------------------------------  ------------  ------------ 
 
   7.         Disclosures regarding financial instruments measured at fair value 

The Company's portfolio of investments, comprising investments in equities, equity linked securities and government bonds and any derivatives are carried in the balance sheet at fair value. Other financial instruments held by the Company comprise amounts due to or from brokers, dividends and interest receivable, accruals, cash at bank and drawings on the credit facility. For these instruments, the balance sheet amount is a reasonable approximation of fair value.

The investments are categorised into a hierarchy comprising the following three levels:

Level 1 - valued using quoted prices in active markets.

Level 2 - valued by reference to valuation techniques using observable inputs other than quoted market prices included within Level 1.

Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.

Details of the valuation techniques used by the Company are given in note 1(c) on page 37, and note 1(i) on page 38 of the 2017 Annual Report.

At 31 August 2017, the Company's investment portfolio was categorised as follows:

 
                                                                    2017 
                                                     Level 1  Level 2  Level 3    Total 
                                                     GBP'000  GBP'000  GBP'000  GBP'000 
Investments in equities, equity linked securities 
and government bonds                                 654,213        -        -  654,213 
---------------------------------------------------  -------  -------  -------  ------- 
Total                                                654,213        -        -  654,213 
---------------------------------------------------  -------  -------  -------  ------- 
 
 
                                                                    2016 
                                                     Level 1  Level 2  Level 3    Total 
                                                     GBP'000  GBP'000  GBP'000  GBP'000 
Investments in equities, equity linked securities 
and government bonds                                 534,093        -        -  534,093 
Derivative financial instrument - forward 
 foreign currency contract                                 -     (73)        -     (73) 
---------------------------------------------------  -------  -------  -------  ------- 
Total                                                534,093     (73)        -  534,020 
---------------------------------------------------  -------  -------  -------  ------- 
 

There have been no transfers between Levels 1, 2 or 3 during the year (2016: nil).

   8.         Status of announcement 

2016 financial Information

The figures and financial information for 2016 are extracted from the published Annual Report and Accounts for the year ended 31 August 2016 and do not constitute the statutory accounts for that year. The 2016 Annual Report and Accounts included the Report of the Independent Auditor, which was unqualified.

2017 financial Information

The figures and financial information for 2017 are extracted from the Annual Report and Accounts for the year ended 31 August 2017 and do not constitute the statutory accounts for the year. The 2017 Annual Report and Accounts include the Report of the Independent Auditor, which is unqualified.

Neither the contents of the Company's webpages nor the contents of any website accessible from hyperlinks on the Company's webpages (or any other webpages or website) is incorporated into, or forms part of, this announcement.

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR FEIEFDFWSEFF

(END) Dow Jones Newswires

November 24, 2017 02:02 ET (07:02 GMT)