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Reviewed Preliminary Report For The Year Ended 31 December 2013 And Cautionary Announcement
FOORD COMPASS LIMITED
JSE Code: FCPD ISIN: ZAE000054466
Registration Number: 1987/003591/06
REVIEWED PRELIMINARY REPORT FOR THE YEAR ENDED 31 DECEMBER 2013 AND CAUTIONARY ANNOUNCEMENT
ANNUAL INTEREST DISTRIBUTION 94.4 CENTS
INCOME YIELD ON OPENING NET ATTRIBUTABLE ASSET VALUE 11.6%
NET ATTRIBUTABLE ASSET VALUE 963.1 CENTS PER DEBENTURE
CONDENSED STATEMENT OF FINANCIAL POSITION Notes Reviewed Audited
at 31 December 2013 2013 2012
Rm Rm
ASSETS
Current assets
Investments 3 2,325.9 1,292.6
Income receivables and unsettled sales 25.3 15.4
Sundry debtors - 0.5
Cash and deposits 1,371.7 636.5
Total assets 3,722.9 1,945.0
EQUITY AND LIABILITIES
Capital and reserves 97.7 54.7
Ordinary share capital 0.1 0.1
Accumulated profits 97.6 54.6
Non-current liabilities 2,805.6 1,329.4
Unsecured debentures 4 2,789.5 1,326.8
Deferred taxation 16.1 2.6
Current liabilities 819.6 560.9
Accounts payable 5.9 3.1
Short investment positions 3 630.7 470.9
Unsettled purchases 0.9 6.6
Taxation payable 0.9 0.2
Debenture interest payable 181.2 80.1
Total equity and liabilities 3,722.9 1,945.0
Number of debentures in issue 308,448,688 163,551,641
Number of ordinary shares in issue 8,800,070 8,800,070
Cents Cents
NAAV* per debenture (cum interest) 963.1 860.2
NAAV* per debenture (ex interest) 904.4 811.2
NAAV* per ordinary share 1,110.2 621.6
* Net attributable asset value
CONDENSED STATEMENT OF COMPREHENSIVE INCOME Notes Reviewed Audited
2013 2012
Rm Rm
Investment income 91.3 81.8
Realised trading profits 238.6 79.4
Operating expenditure (28.7) (19.0)
Net distributable profit 301.2 142.2
Capital profits on sale of investments 48.0 105.6
Revaluation of investments 280.8 10.8
Net portfolio income before debenture interest 630.0 258.6
Debenture interest (271.1) (128.0)
Increase in carrying value of debentures 4 (281.9) (99.7)
Profit before taxation 77.0 30.9
Taxation expense 5 (27.0) (11.5)
Profit attributable to ordinary shareholders 50.0 19.4
Weighted average number of debentures in issue 287,104,401 160,024,673
Cents Cents
Interest per debenture 94.4 80.0
Earnings per ordinary share 568.2 220.5
Ordinary Accumulated
share capital profits Total
Rm Rm Rm
Balance at 31 December 2011 (audited) 0.1 42.2 42.3
Dividends - (7.0) (7.0)
Profit attributable to ordinary shareholders - 19.4 19.4
Balance at 31 December 2012 (audited) 0.1 54.6 54.7
Dividends - (7.0) (7.0)
Profit attributable to ordinary shareholders - 50.0 50.0
Balance at 31 December 2013 (reviewed) 0.1 97.6 97.7
CONDENSED STATEMENT OF CASH FLOWS Reviewed Audited
2013 2012
Rm Rm
Net cash (outflow) inflow from trading activities (256.3) 184.4
Interest, dividends and taxation paid (189.3) (151.7)
Net cash received from issue of debentures 1,180.8 75.2
Net change in cash and deposits 735.2 107.9
Cash and deposits at beginning of year 636.5 528.6
Cash and deposits at end of year 1,371.7 636.5
AUDITOR'S REVIEW REPORT
These results have been reviewed in terms of ISRE2410 by the company's auditors,
Deloitte & Touche, whose unmodified review report is available for inspection at the
registered office of the company. Any reference to future financial performance included in
this announcement, has not been reviewed or reported on by the company's auditors.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. Basis of preparation and significant accounting policies
The condensed financial statements have been prepared in accordance with the measurement and
recognition requirements of International Financial Reporting Standards (IFRS), the
SAICA Financial Reporting Guides as issued by the Accounting Practices Committee
and Financial Reporting Pronouncements as issued by the Financial Reporting Standards
Council and the information as required by International Accounting Standards (IAS) 34 Interim
Financial Reporting and the requirements of the Companies Act of South Africa. The condensed
financial statements have been prepared under the historical cost convention, except for the
revaluation of financial instruments.
The same accounting policies, presentation and methods of computation are followed
in these condensed financial statements as were applied in the preparation of the
company's financial statements for the year ended 31 December 2012.
2. Operating segments
The company has one principal operating segment and, accordingly, additional segmental
disclosures have not been made.
3. Investments
Investments comprise both long and short positions to listed and unlisted securities. The
investment objective is to achieve a total return of 10% per annum above the annual
change in South African consumer price inflation (CPI) on a rolling five-year basis.
In managing the investment portfolio, securities may be held for trading within twelve months
or may be realised over longer periods as deemed appropriate by the investment
manager.
4. Unsecured debentures Reviewed Audited
2013 2012
Rm Rm
Unsecured debentures comprise
Debenture capital at issue price 2,302.5 1,121.7
Cumulative revaluation of debentures 487.0 205.1
Fair value of debentures 2,789.5 1,326.8
Reconciliation of balance
Balance at beginning of year 1,326.8 1,151.9
Net proceeds on issue of debentures 1,180.8 75.2
Revaluation - current year 281.9 99.7
Balance at end of year 2,789.5 1,326.8
Increase in carrying value of debentures
Net portfolio income before debenture interest 630.0 258.6
90% allocation to debenture holders 567.0 232.7
Less: share of taxation expense (14.0) (5.0)
Less: interest distribution for year (271.1) (128.0)
Revaluation - current year 281.9 99.7
5. Taxation expense
Taxation comprises:
Current taxation charge - current year 13.5 20.3
Deferred taxation charge (credit) - current year 13.5 (8.8)
Net expense per statement of comprehensive income 27.0 11.5
Deferred taxation relates to the revaluation of investments. The share of the net taxation
charge attributable to the unsecured debentures, which amounts to R14.0 million
(2012: R5.0 million), has been deducted from the carrying value of the debentures as set
out in note 4 above.
RESULTS FOR THE YEAR ENDED 31 DECEMBER 2013
Foord Compass's preliminary results for the year ended 31 December 2013 exemplify another
outstanding year for the investment portfolio. The investment return vindicates the
investment strategy that favoured the domestic and global equity markets.
The board of directors has approved a final interest distribution to debenture holders
of 58.7 cents per debenture (2012: 49.0 cents). The total interest distribution accruing
to debenture holders of 94.4 cents per debenture (2012: 80.0 cents) on a weighted average
basis amounts to an appreciable yield of 11.6% on the opening ex-interest net
attributable asset value. For the year ended 31 December 2013, the total return
(income and capital) attributable to debenture holders is 22.4% (2012: 18.8%).
As has been communicated in previous announcements, the debenture capital base almost doubled
after the private placement of debentures early in the year. This increase in the capital base
has the effect of increasing the absolute value of the various components of profit earned
during the year. Elements such as realised trading profits of R238.6 million (2012: 79.4 million)
for the year, and net portfolio income before debenture interest of R630.0 million
(2012: R258.6 million) reflect both the good returns and the enlarged portfolio.
The returns earned on the debentures for the year and the 3, 5 and 10 years to 31 December 2013
are as follows:
1 year 3 years 5 years 10 years
to 31 December 2013 (% per annum)
Income 11.6% 11.1% 11.2% 12.5%
Capital 10.8% 6.8% 5.6% 6.4%
Total return * 22.4% 17.9% 16.8% 18.9%
* Calculated with reference to opening net attributable asset values per debenture
INVESTMENT RETURNS
The investment portfolio's aggregate return of 27.3% for the year was achieved by investments
in domestic equities, foreign assets and the continued short positions in fixed interest
instruments both locally and abroad. This return comfortably exceeded the benchmark CPI + 10%
return of 15.3% and the local equity market return of 21.5%. The portfolio's longer-term track
record bears testament to the benefits of astute active asset management as the annualised
portfolio return over the last 10 years of 23.3% exceeds the relevant benchmarks as set out below
by a substantial margin.
1 year 3 years 5 years 10 years
to 31 December 2013 (% per annum)
Gross portfolio total return 27.3% 21.5% 20.2% 23.3%
CPI + 10% per annum (lagged one month) 15.3% 15.7% 15.1% 15.8%
FTSE/JSE All Share Index 21.5% 16.4% 19.9% 19.5%
MSCI World Index in rands 57.7% 30.7% 17.9% 12.6%
Foreign assets accounted for almost two thirds of the portfolio's total return, reflecting the
gains in developed market equities and the almost 20% depreciation in the South African currency
over the year. Almost a quarter of the total portfolio return was earned by exposure to South
African equities. Selection within these asset classes was again positive.
The returns earned by and the contribution to total return of the various major asset classes
is tabulated below.
2013 2012
Return Contribution Return Contribution
SA shares 29.3% 6.1% 62.7% 12.7%
SA listed property 60.0% 1.0% 46.8% 0.6%
SA bonds -1.0% 0.0% -12.9% -2.6%
Foreign assets 40.4% 18.2% 20.0% 10.1%
Commodities -2.3% 0.0% 0.0% 0.0%
SA cash 5.0% 2.0% 5.3% 2.2%
Total return for year 27.3% 23.0%
PORTFOLIO STRUCTURE AND COMMENT
Although equities (local and foreign) remain the asset classes of choice, the management of
the portfolio's exposure to domestic shares has been especially meticulous. Taking
cognisance of the South African equity market's susceptibility to emerging markets
falling out of favour with global investors, some 40% of the 67% exposure to domestic
equities is by way of derivative positions. The derivative contracts provide scope for upside
participation with limited exposure to downside risks in the South African share market.
The portfolio manager took the opportunity to realise profits in global equities towards
year-end. The disposal accounts for the reduced exposure to foreign assets of 38% relative
to the 48% foreign asset exposure reported at 30 June 2013.
The nascent recovery of the global economy makes QE tapering by the US Federal Reserve a
continued likelihood. The associated and necessary increases in interest rates commenced during
the year but have yet, in the estimation of the fund manager, to reach an acceptable yield.
It is for this reason that the portfolio continues to short both local and foreign government debt.
The effective asset structure of the investment portfolio at 31 December is as follows:
Domestic Foreign Total
2013 2012 2013 2012 2013 2012
Equities 67% 61% 26% 32% 93% 93%
Listed property 1% 2% 0% 0% 1% 2%
Government bonds -9% -16% -5% -9% -14% -25%
Corporate debt 0% 2% 8% 20% 8% 22%
Commodities 4% 0% 2% 1% 6% 1%
Effective cash -1% -1% 7% 8% 6% 7%
62% 48% 38% 52% 100% 100%
OUTLOOK
Economic data suggest that the GDP growth in developed markets experienced in 2013 will build
into 2014 and 2015. The economic doldrums of the last few years has led to the stockpiling
of cash balances on corporate balance sheets, earning negative real interest rates. The
deployment of these cash balances on capital expenditure and the ability of large corporates to
borrow at record low rates should have positive effects on developed equity markets.
As noted above, interest rates (which have been maintained at aberrantly low levels by central
bank intervention) should begin to normalise during 2014 and long-term rates are expected
to continue rising. Monetary policy, however, should remain very accommodative as central
banks (most particularly the US Federal Reserve) seek to avoid raising rates before
unemployment numbers considerably improve.
As developed market economies improve, the impetus to seek yield in emerging markets declines.
This factor, combined with South Africa's precarious twin fiscal and trade deficits, volatile
foreign portfolio flows and labour instability continues to make the rand susceptible to the
weakness already experienced in the last year.
Consequently, the portfolio is positioned to benefit from local and foreign equity strength and
price weakness in bonds.
DEBENTURE HOLDER MEETING AND CAUTIONARY ANNOUNCEMENT
The Chairman's Report in the company's 2012 annual financial statements advised readers of the
prospective changes to the South African tax laws that would affect Foord Compass. The Taxation
Laws Amendment Act, No. 31 of 2013, was promulgated on 12 December 2013. Two sections of the
amended Income Tax Act, No 58 of 1962, affect Foord Compass and its investors. The application
of the new sections serves to increase the company's tax burden. The majority of the debentures
are held by institutional investors in prudentially compliant portfolios. The
returns to debenture holders will be reduced after the revised law becomes effective on
1 April 2014.
The company's vision has always been to be the pre-eminent investment fund. More than a decade
of excellent returns has proven that vision. During the course of the year, the board has given
careful and particular consideration to the purpose of the Foord Compass debentures, their
value in the hands of investors and the best interests of those investors, as well as various
means of mitigating the effects of the new tax legislation.
At a meeting of the board on 17 January 2014, the directors considered a request tabled by a
significant number of debenture holders, to redeem their debentures. In light of this request,
the board resolved to convene a meeting of debenture holders to vote on a special resolution
to redeem all of the debentures. A notice of the debenture holder meeting shall be sent to
debenture holders in due course.
Accordingly, debenture holders are advised to exercise caution when dealing in the company's
debentures until a full announcement is made.
INTEREST DECLARATION AND PAYMENT
Notice is hereby given that a debenture interest payment (number 53) of 58.754 cents per
debenture in respect of the six months ended 31 December 2013 is payable to debenture holders
recorded in the debenture register of the company on the record date. In compliance with the
JSE Listings Requirements, the following dates are applicable:
Last date to trade Friday, 7 February 2014
Debentures trade ex-interest Monday, 10 February 2014
Record date Friday, 14 February 2014
Payment date Monday, 17 February 2014
This reviewed preliminary report was prepared under the supervision of PE Cluer.
Signed on behalf of the board
DG WEST PE CLUER
20 January 2014
Directors: DG WEST (Chairman), PE CLUER, AD COWELL*, D FOORD**, P JUDGE, JC VAN DER HORST
*Australian **British
Company secretary: L GREVLER
www.foordcompass.co.za
Date: 20/01/2014 01:46:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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