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Virgin Credit Card:
Market Cap
£99.75m
Change Today
0.000p ()
Share Price
75.50p
Update - Final Results
Value Catalyst Fund Limited (The)
20 September 2006
The Value Catalyst Fund Limited
Chairman's Statement
The year in review
I am pleased to report that in the twelve months ended 30th June, 2006 the Net
Asset Value ("NAV") of The Value Catalyst Fund Limited ("VCF" or the
"Company") increased by 12.82% (dividends reinvested).
For the period from inception to 30th June, 2006 the Company's NAV has
increased by 118.32% (dividends reinvested).
The listing on the Alternative Investment Market (AIM) was successfully
completed in December 2005. This should have the impact of increasing
marketability for shares in the fund, whilst also enhancing the investment
adviser's opportunities to pursue the fund's aim of maximising total return.
On behalf of the shareholders I should like to express my thanks to the team
at Laxey Partners for the excellent overall performance.
John Bourbon
Chairman
19th September, 2006
Investment Advisor's Report
At cross purposes!
Part of the lot of being an activist shareholder is having to constantly address
the unsaid issues that face shareholders or companies. Near the top of the list
are jobs for the directors, either executive or non-executive. We're not quite
sure how many times a non-executive has told us that he (or she) doesn't do it
for the salary but in most cases, we're sorry: we just don't believe you. It
doesn't seem to matter how wealthy people are, the idea of an extra £15k works
wonders and by the time you reach the chairman you can normally multiply
everything by two. That's just for funds. For operating companies the numbers
get much larger, although the excuses are often the same. It simply amazes us
the hog wash that some people soak up from company directors, when really they
are keen to simply find anything which keeps them in gainful employment.
What a surprise you might say, but shareholders, especially those claiming to
be professional shareholders need to be ruthless with those they choose to run
their investments. This might sound obvious but it amazes us just how little
focus on the correct people shareholders have when the chairman or CEO position
needs to be filled. To us this is something the private equity world has
excelled at. Some might call them no more than glorified head hunters. Whatever
they do, it has worked - even after paying their performance fees! They expend
considerable effort picking the right people, in fact it's top of their list and
so it should be. To us, all too often, institutional shareholders are more than
happy to approve whoever the board suggests and we believe they are just not
interacting enough on a critical decision. We have tried to find some data on
pension fund deficits in private equity firms - but couldn't, although we feel
confident that there are a lot fewer holes there than at the traditional fund
managers. The point is, the so called long-term and supportive shareholder is
often asleep at the wheel. We don't advocate wholesale change to every company
but long term institutional shareholders with pension fund deficits
should ask themselves why those holes are there and why the private equity
world, with its focus on the best possible management, is winning.
How we see risk
As an absolute return vehicle the investment advisor aims to minimise market
risk, currency risk and interest rate risk.
Market risk (beta) will be reduced by the selective use of derivative and
synthetic positions, including futures, stock shorts and index swaps while
capturing stock-specific risk (alpha). This procedure is applied to all
investments. Using regression and volatility analysis we will determine the
beta for the investment against a list of possible hedges while considering the
degree of the investment's leverage. We will also consider the relative costs
of the hedge versus the expected return of the investment and the capital used
in order to hedge in an effort to maximise the fund's performance.
If using futures did not provide a sufficiently tight correlation between the
investment and the hedge then additional analysis would be conducted to include
the use of short stock positions. If neither of these options was available we
would consider use of other instruments such as index swaps. The betas will
then be monitored on a continuing basis and the hedge adjusted accordingly.
The fund's aggregate estimated market exposure is monitored daily.
If we perceived the value of an investment to have a large exposure to a move in
interest rates, such as the capitalisation rate of a property company, then we
would consider the use of interest rate futures to reduce this risk.
All currency risks are eliminated by the use of forward contracts.
As a result the fund's performance has shown little correlation to the market.
The graph in the annual report shows our estimated exposure versus a rolling
beta of the funds performance against a composite index comprising of 50%
developed markets and 50% emerging markets. From the divergence of the estimated
exposure with the rolling beta, it can clearly be seen that the current
investment and hedging policy has been very successful in reducing market risk
while the fund continues to produce absolute returns.
Closed-end funds tend to be easier to hedge than operating companies, where
large positions can introduce greater volatility to the portfolio and greater
stock specific risk. Should this be a concern? Well yes if we don't believe
we can extract the return and exit we anticipate, but no if we feel confident
that is possible. It is vital that we can always see an exit and a liquidity
event and that's where being an activist is so important to the equation. By our
actions we can create liquidity events that help us control risk.
Investment Advisor's Report: Portfolio Review
It has been another busy year and we are continuing to find plenty of
opportunities, despite the often repeated statement that discounts are narrow.
Well they might be in the UK but there are plenty of opportunities in different
markets and we expect the next year's report to be covering some of the
positions we are currently building up in non-UK funds. Below is a recap of
some of the larger positions your Company has been actively engaged in during
the year.
Edinburgh Small Companies Trust PLC ("EFS")
Edinburgh Small Companies Trust plc is a UK incorporated investment trust,
investing in UK quoted mid-sized companies.
Laxey Partners first acquired a stake in EFS (22.3% across all funds) in April
2006 when the company was trading at a 20% discount to NAV. To address this
discount, we requisitioned the company to propose a 50% tender at Net Asset
Value, as well as the introduction of a mechanism to manage any future discount
drift, namely, a buy-back facility. If greater than 50% tender then there is
clearly a share register that would prefer its capital returned and the company
will be put into liquidation.
On the 20th of July EFS published a circular in response to our requisition and
to our delight the board went so far as to state that it:
"unanimously recommends that Shareholders vote in favour of the resolution
proposed by Laxey...."
Unanimous board backing for a Laxey proposal? We think this may well be a first!
At the time of writing the tender was still to happen, so it is unclear if the
company will meet all tender requests or liquidate, but the resolution to
approve the reorganisation was supported by 95% of those who voted.
As at the 30th June, 2006 your Company had a 6.64% economic interest in EFS,
worth $8,363,240, 3.76% of the Company's NAV.
Saurer AG
A Swiss company, Saurer AG manufactures and markets textile machinery and
transmission systems for special vehicles.
Across its funds, Laxey Partners held a 26% stake in Saurer AG and following a
lively AGM in May, a Laxey representative was elected to the board, against the
company's wishes, to undertake a strategic review. However, the company did not
wish to carry out such a review so we called an EGM to replace the chairman and
a number of board members with a team of operating professionals, who would form
the majority of the board going forward and be able to conduct such a review.
The week following our EGM notice we sold our stake to a Swiss company called
Unaxis at CHF120 a share, which was just short of the appraised future value
for the company.
As at the 30th June, 2006 your Company had a 5.10% economic interest in Saurer,
worth $55,987,041, 25.15% of the Company's NAV.
Freeport PLC
Freeport PLC operates three factory outlet shopping centres on mainland Europe.
The largest and most important of which is in Portugal. Freeport used to be
predominately a UK based company, but after selling its UK assets, all that is
left are the three European centres. It's really the rump of the original
company.
At the end of 2005, Laxey Partners and other shareholders blocked the proposed
re-organisation of Freeport - the board had wanted to move the company off-shore
to Jersey. Whilst there is nothing wrong with Jersey or Guernsey as a
jurisdiction it does leave more to the discretion of the directors than being UK
domiciled. Since then, Sean Collidge, chairman and CEO has left Freeport (citing
shareholder pressure).
Well the incentive structure for Sean wasn't great for shareholders. Based on
valuations, it encouraged "full" valuations of the centres. It also encouraged
distributions regardless at what price assets where sold at i.e. less than the
valuations the incentive payments had just paid out on. Not ideal, but under
shareholder pressure the non-executives rallied and realized that they needed to
address the positions of chairman and CEO and Collidge subsequently left the
company. The same executives that put all the incentives in place for Sean in
the first place!
At the time of writing a temporary chairman (although he appears keen to make it
a full time job), is dealing with a number of offers for the company. Clearly
the new temporary chairman may not want to sell the company because he would
then need another job and it will be interesting to see how co-operative he
will be with potential bidders. The jury is out.
As at the 30th June, 2006 your Company had a 7.26% economic interest in Freeport,
worth $22,446,586, 10.08% of the Company's NAV.
Absolute Europe AG and Absolute US AG
Part of the Absolute fund dynasty of Switzerland, the family consolidation
process that has seen Absolute Private Equity AG and Absolute Managers AG merge
continues. The sector that is funds of private equity funds has been very
lucrative to your Company over the last couple of years and we continue to see
opportunities. We don't have a position in it but the new KKR fund, which was
launched at the beginning of this year in a €5bn fanfare, is already trading 15%
below its issue price and following an all too familiar pattern.
This time, Absolute Europe (focus: European hedge funds) and Absolute US (focus:
North American hedge funds) are to merge. Before they do, Absolute Europe is to
distribute 40% of its market capitalisation (expected in October) and Absolute US
has announced the addition of a buy-back facility (for up to 10% of the shares in
issue).
As at the 30th June, 2006 your Company had a 0.43% economic interest in Absolute
Europe, worth $1,820,091, 0.82% of the Company's NAV.
As at the 30th June, 2006 your Company had a 0.43% economic interest in Absolute
US, worth $2,375,844, 1.07% of the Company's NAV.
NERA ASA
NERA is a Norwegian telecoms company focused on transmission and satellite
services. In May, in a deal orchestrated by us, Eltek ASA (a Norwegian telecoms
supplier) proposed the merger of NERA and Eltek. This is a great outcome for NERA
as the combined entity really does seem to have a logical synergy. We had
previously replaced the chairman and CEO of NERA but were still disappointed with
the progress being made. The injection of the dynamic Eltek team should see the
benefits of the combined entity in the next year, although we have now completed
our active participation (other than support for the current management).
As at the 30th June, 2006 your Company had a 4.39% economic interest in NERA,
worth $12,107,672, 5.44% of the Company's NAV.
Roto Smeets De Boer NV ("RSDB")
A graphic and printing services business, RSDB is based in the Netherlands and
serves Northern Europe and Hungary although 70% of its sales are to the Dutch
market; it is the largest printing company in the Netherlands. From its three
divisions: Roto Smeets; PlantijnCasparie and Media Partners it offers a range of
services from printing magazines and promotional materials to their distribution.
The company is listed on the EM Amsterdam Exchange.
Despite its excellent technology, machinery and a solid customer base, RSDB has
drifted and gone largely unnoticed in the market; in its field, it is ranked 8th
or 9th in Europe. It is considerably undervalued and its management has been
criticised for doing little to raise the company's profile.
Over sixty-five percent of the RSBD shares in issue are in the hands of five
shareholders and Laxey Partners, across its funds, has a 19% stake. Share trading
is modest and infrequent, at best.
We would like to see the company de-list and join forces with another player in
its ongoing consolidation. Discussions with one interested party ended in May.
Regrettably, this process was handled poorly and as a consequence, Laxey has
worked closely with the company's Supervisory Board to replace its CEO and to
appoint a new chairman (to the Supervisory Board); which sits above the company's
Executive Board.
One to watch.
As at the 30th June, 2006 your Company had a 4.86% economic interest in RSDB,
worth $6,999,557, 3.14% of the Company's NAV.
Active Capital Trust PLC ("AIT")
AIT is a UK incorporated closed-end fund. Its aim is to achieve an absolute
return from capital appreciation via investment in public and private capital
issues at the early stage of their development.
AIT had the aim of paying shareholders 155p (99.9p per ordinary share plus an
amount equal to an absolute return of 7.5% p.a., on or before 31st May, 2007).
In the event that the fund was unable to pay this amount shareholders would be
given the opportunity to consider the future of the fund. Therefore, investors
who are able to buy shares at a substantial discount have what amounts to a
win-win situation. Either the fund achieves the payment of the target amount
or the fund is highly likely to be restructured and the discount captured.
Whilst the restructuring is not certain the presence of this kind of structure
attracts investors who will make it more likely!
With this in mind and with almost a quarter of the portfolio in cash, the fund
announced a tender offer for 30% of the shares in issue; with subsequent tenders
following designed to cap the discount at 10%. Prior to this announcement, the
fund was trading at around a 12% discount and has moved to the 7-8% range since.
As a back stop, shareholders will be given the opportunity to vote on the
company's future at the AGM in 2009 if certain performance objectives are not
achieved.
The first, 30% tender occurred on the 11th of July. Across its funds, Laxey
tendered just under half of its position at 97% of NAV.
As at the 30th June, 2006 your Company had a 2.75% economic interest in AIT,
worth $3,576,548, 1.61% of the Company's NAV.
Laxey Partners Limited
Portfolio Statement
As at 30th June, 2006
2006 2006 2005 2005
Market % of Market % of total
value total value net assets
US$ assets US$
Description
Investment funds - long 173,249,948 77.82 184,607,885 103.10
Investment funds - long
swaps (1,225,228) (0.55) (485,545) (0.27)
Investment funds - short (5,769,759) (2.59) (7,337,686) (4.10)
Investment funds - long
swaps 2,774,824 1.25 24,005 0.01
Investment funds - short
swaps (162,915) (0.07) (42,262) (0.02)
Equities - long 245,788,469 110.39 126,705,828 70.76
Equities - long swaps (345,630) (0.16) 50,738 0.03
Equities - short (51,470,723) (23.12) (27,454,381) (15.33)
Equities - short swaps (828,751) (0.37) - -
Equities - warrants 320,178 0.14 369,657 0.21
Fixed income 27,466 0.01 - -
Index swaps - short (461,051) (0.21) (637,602) (0.36)
Futures - long 643,289 0.29 9,119 0.01
Futures - short (2,635,633) (1.18) (345,536) (0.19)
------------ -------- ------------ -------
359,904,484 161.65 275,464,220 153.85
Other assets less
liabilities (137,259,315) (61.65) (96,411,305) (53.85)
------------ -------- ------------ -------
Total net assets 222,645,169 100.00 179,052,915 100.00
============ ======== ============ =======
2006 2005
Analysis of investments by currency % of % of
investments investments
British pound 26.05 38.11
United States dollar 12.26 20.27
Euro 17.26 14.76
Other 44.43 26.86
--------- -------
100.00 100.00
========= =======
2006 2005
Analysis of investments by geographical % of % of
sector investments investments
Asia ex. Japan 9.87 3.70
Chile (0.20) 9.65
Egypt 0.26 1.10
Europe Developed ex UK 16.87 18.92
European Emerging 3.61 5.28
European Regional Developed 0.45 0.39
Greece 1.09 2.46
Hungary 0.67 0.92
Netherlands 2.11 -
Norway 4.23 5.45
Other 10.67 10.28
South Korea 2.88 2.80
Switzerland 16.61 8.12
Taiwan 0.11 0.64
UK 14.72 27.80
USA 16.05 2.49
--------- -------
100.00 100.00
========= =======
Income Statement
For the year ended 30th June, 2006
2006 2005
US$ US$
Income
Dividends 11,938,611 7,513,962
Interest 1,409,191 440,984
Net realised gains on realisation of
financial assets and liabilities at
fair value through the profit
and loss 60,002,290 4,578,797
Net unrealised (loss)/gains on
financial assets and liabilities
other than currency forwards at fair
value through the profit and loss (20,187,948) 26,653,802
Net unrealised (loss)/gains on
currency forwards at fair value
through the profit and loss (9,263,591) 8,657,020
--------- ---------
Total investment income 43,898,553 47,844,565
--------- ---------
Expenses
Dividends payable on short positions 1,233,114 1,043,334
Interest expense 10,188,253 4,470,509
--------- ---------
Investment expenses 11,421,367 5,513,843
--------- ---------
Investment management fee 5,556,441 4,370,915
Performance fee 955,464 2,043,146
Administration fee 375,468 300,485
Audit fees 30,430 30,430
Directors' fees 102,091 52,877
Other expenses 1,353,679 2,123,627
--------- ---------
Total other expense 8,373,573 8,921,480
--------- ---------
Total expenses 19,794,940 14,435,323
--------- ---------
Net profit 24,103,613 33,409,242
========= =========
Earnings per ordinary share
Basic and fully US$20.57 US$30.77
diluted ========= =========
Balance Sheet
As at 30th June, 2006 2006 2005
US$ US$
Assets
Investment funds - long 173,249,948 184,607,885
Investment funds - long 2,774,824 24,005
swaps
Investment funds - short 5,220 -
swaps
Equities - long 245,788,469 126,705,828
Equities - long swaps 704,516 96,368
Equities - warrants 320,178 369,657
Index swaps - short 360,607 33,475
Debt securities 27,466 -
Futures - long 643,289 9,119
Futures - short 157,274 217,201
Amounts receivable on currency
forwards 5,374,306 9,043,418
Cash at bank and brokers 3,932,564 1,286,644
Cash held as margin at 27,114,413 20,416,083
brokers
Amounts due from outstanding sale
settlements 11,516,901 1,743,606
Other debtors and accrued income 1,690,020 248,625
---------- ---------
Total assets 473,659,995 344,801,914
========== =========
Equity
Share capital 1,327 1,186
Share premium 135,071,990 110,683,952
Retained earnings 87,571,852 68,367,777
---------- ---------
Total shareholders' funds 222,645,169 179,052,915
---------- ---------
Liabilities
Investment funds - short 5,769,759 7,337,686
Investment funds - short swaps 168,135 42,262
Investment funds - long swaps 1,225,228 485,545
Equities - long swaps 1,050,146 45,630
Equities - short swaps 828,751 -
Equities - short 51,470,723 27,454,381
Index swaps - short 821,658 671,077
Futures - short 2,792,907 562,737
Amounts payable on currency forwards 7,114,357 1,519,878
Overdrawn balances at 166,677,377 119,346,722
brokers
Amounts due for outstanding purchase
settlements 7,274,001 1,893,417
Other creditors and accrued expenses 5,821,784 6,389,664
---------- ---------
Total liabilities 251,014,826 165,748,999
---------- ---------
Total liabilities and equity 473,659,995 344,801,914
========== =========
Net asset value per ordinary share US$181.33 US$164.81
========== =========
Statement of Changes in Net Assets
For the year ended 30th June, 2006
Share Share Retained
capital premium earnings Total
US$ US$ US$ US$
Balance at 1st
July, 2004 1,183 110,260,105 37,558,081 147,819,369
Increase in net
assets arising
from operations - - 33,409,242 33,409,242
Dividend - - (2,599,546) (2,599,546)
Issue of shares 3 423,847 - 423,850
------- --------- --------- ---------
Balance at 30th
June, 2005 1,186 110,683,952 68,367,777 179,052,915
------- --------- --------- ---------
Balance at 1st
July, 2005 1,186 110,683,952 68,367,777 179,052,915
Increase in net
assets arising
from operations - - 24,103,613 24,103,613
Dividend - - (4,899,538) (4,899,538)
Issue of shares 141 24,388,038 - 24,388,179
------- --------- --------- ---------
Balance at 30th
June, 2006 1,327 135,071,990 87,571,852 222,645,169
======= ========= ========= =========
Cash Flow Statement
For the year ended 30th June, 2006
2006 2005
US$ US$
Operating activities
Dividends received 10,502,399 9,162,084
Interest received 1,404,008 428,286
Dividends paid on short (1,607,098) (1,078,640)
positions
Management fee paid (4,714,246) (3,099,273)
Administration fee paid (367,971) (296,152)
Performance fee paid (2,043,146) (1,819,184)
Other expenses paid (2,155,997) (1,643,672)
Interest paid (9,474,362) (4,208,232)
Increase in cash held as margin (6,698,330) (5,701,267)
--------- ---------
Net cash outflow from operating
activities (15,154,743) (8,256,050)
--------- ---------
Investing activities
Purchase of investments (507,868,139) (280,730,178)
Sale of investments 458,849,506 251,286,688
---------- ----------
Net cash outflow from investing
activities (49,018,633) (29,443,490)
---------- ----------
Financing activities
Dividend paid (756,111) (2,175,696)
Subscriptions 20,244,752 -
received ---------- ----------
Net cash inflow/(outflow) from
financing activities 19,488,641 (2,175,696)
---------- ----------
Decrease in cash and cash equivalents (44,684,735) (39,875,236)
Opening cash and cash equivalents (118,060,078) (78,184,842)
---------- ----------
Closing cash and cash equivalents (162,744,813) (118,060,078)
========== ==========
Notes to the Financial
Statements
For the year ended 30th June, 2006
1. Accounting policies
(a) Basis of preparation
The financial statements have been prepared in accordance with the
historical cost convention as modified by the revaluation of investments.
The principal accounting policies which have been applied are set out below,
such policies complying with International Financial Reporting Standards.
The Company has adopted the US$ as its measurement and reporting currency.
The Company trades in a number of different currencies and markets and as a
consequence the Directors have determined that the measurement currency of
the Company is the currency in which shares are issued.
2. Dividend
2006 Dividend
Total
US$
2005 Dividend
Paid 30th September 2005
Dividend of US$4.51 per ordinary 4,899,538
share =========
2004 Dividend
Paid 25th September, 2004
Dividend of US$2.40 per ordinary 2,599,546
share =========
3. Investments
2006 2005
US$ US$
Long positions:
Market value 421,233,316 311,281,687
========== =========
Cost 371,213,177 246,032,508
========== =========
Short positions:
Market value (61,328,832) (35,817,467)
========== =========
Proceeds (51,868,410) (31,315,953)
========== =========
4. Share capital
2006 2006 2005 2005
Number US$ Number US$
Authorised share capital
Founder shares of US$1 100 100 100 100
each
Ordinary shares of 49,900,000 49,900 49,900,000 49,900
US$0.001 each
-------- --------
50,000 50,000
======== ========
2006 2006 2005 2005
Number US$ Number US$
Issued share capital
Founder shares of US$1 100 100 100 100
each --------- -------- --------- --------
Ordinary shares of
US$0.001 each
At 1st July, 2005 1,086,372 1,086 1,083,144 1,083
Issued during year 141,417 141 3,228 3
--------- -------- --------- --------
At 30th June, 2006 1,227,789 1,227 1,086,372 1,086
--------- -------- --------- --------
Total issued share 1,327 1,186
capital ======== ========
In September 2005, the Company issued 23,358 Ordinary Shares to shareholders
who elected to reinvest their 2005 dividend. In November and December 2005,
the Company issued 31,076 and 86,983 Ordinary Shares respectively.
5. Reserves
2006 2005
US$ US$
Share premium
At 1st July, 2005 110,683,952 110,260,105
Relating to issues of 24,388,038 423,847
shares ---------- ---------
At 30th June, 2006 135,071,990 110,683,952
========== =========
Retained earnings
At 1st July, 2005 68,367,777 37,558,081
Net profit for the year 24,103,613 33,409,242
Dividend (4,899,538) (2,599,546)
---------- ---------
At 30th June, 2006 87,571,852 68,367,777
========== =========
6. Net asset value per ordinary share
The net asset value per ordinary share is based on the net assets
attributable to ordinary shares and the number of ordinary shares in issue
at 30th June, 2006.
2006 2005
Total Per Total Per Share
Share
US$ US$ US$ US$
Net asset value 222,645,169 181.33 179,052,915 164.81
========= ======== ========= ========
7. Earnings per ordinary share
The basic earnings per ordinary share is based on the increase in net
assets arising from operations (before appreciations) during the year
of US$24,103,613 (2005: US$33,409,242) and the weighted average number
of ordinary shares in issue during the year of 1,171,696 (2005:
1,085,603).
8. Publication of Non-Statutory Accounts
The financial information set out in this preliminary announcement does not
constitute statutory accounts. The balance sheet as at 30 June 2006 and the
group profit and loss account, statement of changes in net assets, consolidated
cash flow statement and associated notes for the year then ended have been
extracted from the Company's 2006 financial statements upon which the auditor's
opinion is unqualified.
9. Copies of Annual Report
Copies of the annual report and accounts will be sent to shareholders. Further
copies will be available from HSBC Securities Services (Isle of Man) Limited,
12-13 Hill Street, Douglas, Isle of Man, IM1 1EF.
This information is provided by RNS
The company news service from the London Stock Exchange