EcofinGlobal U&I Tst - Annual Financial Report
18/12/2023 16:25
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RNS Number : 1990X Ecofin Global Utilities Inf Tst PLC 18 December 2023
ECOFIN GLOBAL UTILITIES AND INFRASTRUCTURE TRUST PLC (the "Company")
Annual Results Announcement for the year ended 30 September 2023
LEI: 2138005JQTYKU92QOF30
This announcement contains regulated information.
Ecofin Global Utilities and Infrastructure Trust plc (the "Company" or "EGL")
is an authorised UK investment trust whose objectives are to achieve a high,
secure dividend yield on a portfolio invested primarily in the equities of
utility and infrastructure companies in developed countries and long-term
growth in the capital value of the portfolio while preserving shareholders'
capital in adverse market conditions.
· During the year ended 30 September 2023, the Company's net asset
value ("NAV") per share total return was -8.6%. The Company's share price
total return was -21.9%;
· Four quarterly dividends were paid during the year totalling
7.70p per share;
· The Company's revenue return per share increased by 9.2%
year-over-year as a result of continuing strong growth in investment income.
Due to this, and to reflect your board's confidence in the growth prospects of
EGL, we have decided to increase the quarterly dividend to 2.05p per share
(8.20p per annum) with effect from the dividend to be paid in February 2024.
At the current share price and increased dividend rate, the Company's shares
yield 4.7%;
· The portfolio is exposed to the broader return opportunities in
the infrastructure and utilities sectors which are at least in line with EGL's
target total return of 6-12% p.a. over the longer term.
Summary As at or year to As at or year to
30 September 2023 30 September 2022
Net assets attributable to shareholders (£'000) 211,977 233,052
Net asset value ("NAV") per share(1) 183.54p 208.14p
Share price (mid-market) 164.00p 218.00p
(Discount)Premium to NAV(1) (10.6)% 4.7%
Revenue return per share 7.01p 6.42p
Dividends paid per share 7.70p 7.20p
Dividend yield (1,2) 4.7% 3.3%
Gearing on net assets (1,3) 11.2% 11.0%
Ongoing charges ratio (1,4) 1.27% 1.35%
1. Please refer to Alternative Performance Measures in the annual report.
2. Dividends paid (annualised) as a percentage of share price.
3. Gearing is the Company's borrowings (including the net amounts due from
brokers) less cash divided by net assets attributable to shareholders.
4. The ongoing charges ratio is calculated in accordance with guidance issued
by the Association of Investment Companies ("AIC") as the operating costs
(annualised) divided by the average NAV (with income) throughout the period.
Performance for periods to 30 September 2023 (total returns in £) 1 year 3 years 5 years Since admission(5) Since admission
% % % % per annum
NAV per share (6) -8.6 24.1 53.9 72.9 8.1
Share price (6) -21.9 14.7 60.2 95.9 10.1
Indices (6,7)
S&P Global Infrastructure Index -3.1 27.8 24.9 33.2 4.2
MSCI World Utilities Index -8.2 9.8 30.9 42.4 5.2
MSCI World Index 11.8 35.4 55.5 105.1 10.8
FTSE All-Share Index 13.6 39.3 19.4 41.2 5.0
FTSE ASX Utilities Index 14.8 40.8 60.3 31.5 4.0
Source: Bloomberg, Ecofin
5. The Company was incorporated on 27 June 2016 and its investment activities
began on 13 September 2016 when the liquid assets of Ecofin Water & Power
Opportunities plc ("EWPO") were transferred to it. The formal inception date
for the measurement of the Company's performance is 26 September 2016, the
date its shares were listed on the London Stock Exchange.
6. Total return includes dividends paid and reinvested immediately. Please
also refer to the Alternative Performance Measures in the Annual Report.
7. The Company does not have a formal benchmark index. For comparison purposes
the S&P Global Infrastructure Index and MSCI World Utilities Index are the
global sector indices deemed the most appropriate. The other indices are
provided for general interest.
Chairman's Statement
Performance
The last few months of your Company's financial year proved challenging and
resulted in a poor year for shareholder returns. The net asset value (NAV)
total return was -8.6% over the year to 30 September, including the
reinvestment of dividends. The share price total return was -21.9%, reflecting
a share price discount which emerged during the summer. The MSCI World
Utilities Index and the S&P Global Infrastructure Index produced total
returns of -8.2% and -3.1% respectively in sterling terms. In comparison,
global equities, measured by the MSCI World Index, returned 11.8%.
As our investment manager explains on the following pages, share prices of
renewables-focussed developers in particular, whose long life assets vital to
the energy transition require large upfront investment commitments, came under
substantial pressure, especially in the second part of the year in the US.
This was because increased long term interest rates created a drop in the
present value of these businesses' long term cash flows, exacerbated by
shareholders becoming more risk-averse and uncertainty about the course of
energy prices. Companies in the portfolio with more diversified and inflation
protected business models, such as European integrated utilities,
environmental services and transportation infrastructure, performed better but
listed infrastructure overall underperformed rising global equity markets by a
significant margin. Sterling's strength, particularly against the US dollar
(+9%), also contributed to the NAV's decline, as did our use of debt which
contributed -0.1%.
From inception in September 2016 to the financial year-end, the NAV total
return has averaged 8.1% per annum and the share price total return 10.1% per
annum, in line with our expectations for companies in the portfolio whose core
assets respond to essential needs, operate within solid regulatory frameworks
and have predictable and sustainable cash flows.
Dividends
The Company's revenue return per share increased by 9.2% year-over-year as a
result of continuing strong growth in investment income even though higher
rates increased borrowing costs. Due to this, and to reflect your board's
confidence in the growth prospects of EGL, we have decided to increase the
quarterly dividend to 2.05p per share (8.20p per annum) with effect from the
dividend to be paid in February 2024. At the current share price and increased
dividend rate, the Company's shares yield 4.7%.
Share price, issuances and buybacks
During the first eight months of the financial year, the Company was issuing
new shares in response to daily demand when the share price traded at a small
premium to NAV (4.6 million shares were issued). During the summer, as the NAV
fell, the share price declined faster, resulting in a discount of 10.6% at the
financial year end.
The infrastructure investment trust sector has seen discounts widen to
unprecedented levels. The wider investment trust universe has also shown
significant share price weakness. We know that we cannot expect our actions to
be wholly successful to bring our own discount down until investor confidence
returns. That said, we firmly believe in the continuing ability of your
Company to prosper and we began to repurchase shares on 31 July. By year-end,
1.1 million shares had been repurchased with an additional 380,000 shares
repurchased thereafter.
Your board
On 12 September 2023 the board was pleased to appoint Joanna Santinon as a
non-executive director of the Company. Joanna, an experienced accountant and
financial professional, will become the chair of the audit committee when Iain
McLaren retires from the board at the AGM in March 2024.
Continuation vote
Pursuant to the Company's Articles of Association, the board is required to
put a continuation vote to shareholders every five years. As the last time
such a vote occurred was in 2019, a continuation vote will be put to
shareholders at the Annual General Meeting to be held on 6 March 2024. Given
the performance of the Company since inception and the strong growth outlook
for its investment universe, your board has no hesitation recommending to
shareholders that they vote in favour of the Company continuing as an
investment company for a further five year period.
Outlook
Since 30 September (to 14 December), the Company's NAV has increased by 7.3%
and the share price by 7.8% (both on a total return basis).
Although geopolitical tensions are unnerving investors and interest rates are
likely to remain much higher than in recent years, there are reasons to feel
optimistic that the performance of the Company's investment sectors and
portfolio will improve. Your investment manager is confident that the energy
transition will continue, aided by further policy support and improvements in
technology. Global investment in renewable energy and power transmission is
driven by the need for energy security, by the continuing cost and reliability
improvement of renewables, and by growing customer demand.
Share prices have mostly decoupled from the underlying prospects for growth in
demand for electricity, from the outlook for pricing and from the drivers for
infrastructure renewal. Utilities should deliver predictable non-cyclical
earnings growth amidst the uncertainty of the global economic outlook. The
portfolio's exposure to companies operating and investing to upgrade water,
waste and transportation infrastructure reflects the broader return
opportunities in the infrastructure sector which are at least in line with
EGL's target total return of 6-12%p.a. over the longer term. Although the cost
of our borrowings has escalated, we retain a modest level of gearing because
our investment manager believes that it will continue to enhance returns over
the medium term given current share prices.
We believe that your Company is well placed to resume the achievement of its
performance objectives.
David Simpson
Chairman
18 December 2023
Investment Manager's Report
Markets and our sectors
During EGL's fiscal year to 30 September 2023, equity markets were driven
higher by cyclical and technology stocks, while the portfolio's more defensive
ones were out of favour and underperformed. Global economic growth exceeded
most expectations (except in China), inflation moderated but remained well
above target, and interest rates were rising. The MSCI World Utilities Index
total return was -8.2% and the total return on the S&P Global
Infrastructure Index, which has a significant energy infrastructure component,
was -3.1%.
EGL's investment universe was already underperforming when, from mid-summer
2023, longer term bond yields accelerated their move higher, were sold off
aggressively and between August and September EGL's NAV declined by 10%. For
the year, EGL's NAV total return was -8.6%, of which approximately one-half
was attributable to the significant strength of sterling while leverage
contributed around -0.1%.
Over the 12 months, pan-European diversified utilities performed well. For
these large integrated utilities, power prices were declining from 2022's
crisis levels but power retail and trading businesses were thriving. European
transportation and environmental services, which offer sound pricing models
with contractual inflation hedges, performed relatively well too.
North American utilities, on the other hand, especially renewables developers,
saw their valuations grind lower. Issues around cost inflation, supply chains
and permit delays for renewables were rarely out of the headlines. Wildfires
were a constant reminder of climate risks but the main adverse factor for
renewables, utilities and infrastructure was rising interest rates. These
sectors are big users of capital and the higher cost of capital weighs on the
present value of future cash flows while also raising concerns about future
returns. This is especially so in the US where there can be insufficient cost
hedging or inflation indexation in contracts. The impact on share prices was
more dramatic than its financial impact, leaving valuations for many
fast-growing renewables developers at very depressed levels.
Compounding these issues were summertime profit warnings from Siemens Energy
and Orsted (not held in the portfolio) who cited cost pressures and
technological difficulties for US offshore wind, and also by NextEra Energy
Partners. It halved its aggressive renewables growth targets in September due
to funding costs - the benchmark 10-year US government bond yield had
increased from 3.8% to 4.8% since 30 June. These profit warnings came at a
time when confidence that policy and operating environments were supportive of
ambitious global renewables targets was already shaky. By 30 September, the
underperformance of US utilities versus the S&P 500 index year-to-date was
close to 30%, a divergence unprecedented over the prior 3 decades.
This underperformance of utilities contrasted with the earnings progress of
most portfolio companies, their outlook, dividend paying abilities and capital
investment plans in what are often highly regulated businesses. Earnings per
share expectations have generally been increasing, particularly for European
integrated utilities but also, though to a lesser extent, for US peers.
Companies are benefitting from power prices which, although lower than 2022,
remain well above pre-Ukraine crisis levels. Meanwhile, Power Purchase
Agreement (PPA) data shows that renewables operators overall are able to pass
through the effects of cost inflation to customers while contracted power
prices for new projects are adjusting upward to reflect the higher cost of
capital and overall equipment costs to maintain project returns.
Performance summary
Disappointingly, the share price performance of some of the portfolio's large
holdings was poor. The second half of EGL's financial year was especially
challenging (NAV -11.9% total return) because increases in bond yield created
a severe headwind to the perceived value of long term cash flows and growth.
NextEra Energy and its high-yield subsidiary NextEra Energy Partners (NEP)
together pulled the NAV lower by c. 5% over the year, mostly in the last days
of September. Other North American holdings, including regulated utilities
Dominion Energy and American Electric Power and the higher growth renewables
specialists AES and Brookfield Renewables, were also very weak. Chinese shares
in the portfolio spanning wind, solar and water supply underperformed all
year.
NextEra and NEP deserve further explanation. NextEra has been one of the most
successful transformation stories in EGL's global investment universe over the
past several years, from a traditional low-growth Florida-based utility into a
growth engine, thanks to successful investments in renewable energy. It has
gained exposure to what we consider to be some of the highest quality and
return wind development projects in the US. Given its size (market
capitalisation of over $130bn) and stature in the energy transition, it has
been widely held by specialist and generalist investors. NextEra remains one
of the most significant contributors to EGL's NAV since inception.
Amongst other things, NextEra develops greenfield renewable energy projects
and, once operating, some of these are 'dropped down' to NEP, its $5bn market
cap, part-owned and listed subsidiary. These operating assets produce
cashflows through long-term contracts which are paid to investors. Late
September, in view of the latest jump higher in funding costs, NEP halved its
expected dividend growth rate from 12% to 6% p.a. for the next few years,
generating significant distress in the share prices of renewables companies
worldwide. NextEra's shares fell 30% on the news, removing its premium
valuation. The market questioned NextEra's ability to finance its usual pace
of development and the new management's communication skill. Over 50% of
NextEra's earnings still comes from its regulated utility and guidance has
been reconfirmed for 6-8% p.a. earnings growth and 10% p.a. dividend per share
growth until 2026. NextEra must now prove its ability to generate and finance
growth but, in our view, Q3 results were a good start.
AES reported additions to its already strong renewables development pipeline
but a slightly reduced EPS growth rate of 6-8% p.a. for 2023-2027 due to the
dilutive effect of its coal phase-out. Its shares were under constant pressure
as rates rose.
Xinyi Energy's shares (pure solar operator in China) were punished because the
company cut its dividend citing keenness to take advantage of higher returns
on solar projects (solar panel costs have declined sharply) to accelerate
growth. Drax, Europe's largest biomass power generator, which supplies 5% of
the UK's electricity, suffered from a lack of clarity on subsidies and the
timing of approval of its BECCS project.
The ten best contributors to NAV included several pan-European utilities
(Enel, Engie, Endesa, E.ON, SSE). These companies are amongst the largest
renewables developers globally too, and they have exposure to retail power
markets which recovered well since last year and/or significant transmission
and distribution businesses where returns are sustained by regulators. The
list also included environmental (Veolia) and transportation services (Vinci
and Ferrovial) businesses, plus the US's largest nuclear fleet owner,
Constellation Energy, which has a strong free cash flow profile and continued
to raise guidance. Over the 6 months since 31 March, this list was almost
identical except Williams Companies (US energy infrastructure) replaced SSE
amongst the better performers.
Purchases and sales
Since the half-year report, we have reallocated some funds from Europe to the
US due to the striking dispersion of returns in the year-to-date and to
relative valuations. In the process, we further diversified the North American
exposure. We added to the portfolio Southern Company, a diversified energy
producer set for above average earnings and dividend growth driven by its
long-term contracts, and Edison International, a 'wires-focused' utility with
expected growth of 7-9% p.a., in step with California's demanding clean energy
goals. We increased holdings in Exelon, American Electric Power, AES and Xcel
Energy, as well as in NextEra Energy Partners, whose shares we expect to
rebound strongly as the interest rate cycle turns.
We also added Hong Kong-listed Chinese solar operator Xinyi Energy to the
portfolio and increased holdings significantly in Iren (Italian networks,
power and water infrastructure and environmental services) and Vinci
(transportation infrastructure and construction worldwide), funded by profit
taking in several of the European portfolio's stronger performers (Veolia,
Engie, Endesa) and in Constellation Energy. At the same time, we reduced
gearing.
Income and gearing
Portfolio companies continued to deliver solid growth in income from
investments, despite the poor share price performance of many utilities.
Dividend receipts increased by 20% reflecting the larger size of the portfolio
(weighted average number of shares +10.7%) and underlying growth. This rate of
increase, along with cost controls, meant that net revenue return per share
increased by 9.2% despite the increased cost of borrowings.
Gearing averaged 12% during the first half of the fiscal year and was 13.4% at
31 March 2023 but we significantly reduced borrowings thereafter because the
positive spread between dividend yields and the cost of borrowings was being
eroded. Due to NAV weakness, the gearing ratio declined less notably.
Despite the cost of borrowings, we expect to continue to take advantage of
gearing offers when individual shares or sub-sectors are excessively
undervalued. We have, however, adjusted higher the expected total return
hurdle to determine whether to use borrowings.
Strategy
At present, long term interest rates are driving equity markets and there is
plenty of uncertainty on the medium-term global growth and geopolitical
outlook. Many pure renewables and some utility share valuations have de-rated
so significantly that they ascribe little value to growth; scepticism
regarding both growth and yield at the same time is overly pessimistic. These
sectors need a peak in interest rates and bond yields to stabilise the net
present value of operating cash flows, the value of growth and to rekindle
investor optimism. Nonetheless, with the earnings outlook we're observing,
there are compelling investment opportunities at current levels.
Decarbonisation and electrification trends have strong momentum with key
drivers such as increasing renewables, manufacturing re-shoring and energy
efficiency driving investment. Corporates and consumers will continue to
replace carbon-emitting energy sources with renewables, ensuring renewables
growth at a reasonable rate of return. Power purchase agreement (PPA) prices
have been increasing in Europe and the US to reflect, and more than offset,
higher capital expenditure and financing costs, according to LevelTen Energy.
This implies better pricing power and higher internal rates of return today
than in 2020. Utilities are forward selling power for the next few years at
prices which are significantly higher than those embedded in brokers'
forecasts which mostly assume that power prices will revert to historical
levels.
We continue to take advantage of the diversity in EGL's investment universe.
The portfolio now has more exposure to electric transmission and distribution
with, for example, SSE, National Grid, Terna-Rete Ellectrica Naziona, a
Rome-based pure play high-voltage transmission owner/operator, and Edison
International, one of the largest pure electric transmission and distribution
companies in the world. These businesses are highly regulated, have some
upside protection to inflation and interest rates via their regulated return
on capital models and are key enablers of the decarbonising of the grid. They
are spending capital on interconnections to newly built renewables assets and
to manage the consequent loads on grids. Environmental services and
transportation infrastructure services add some economic sensitivity but debt
costs are generally well hedged, revenues (tolls, for example) are mostly
inflation-linked, changes to allowed returns on capital effectively offset
rising bond yields, and valuations are low.
Ecofin Advisors Limited
Investment Manager
18 December 2023
Principal and emerging risks associated with the Company
Principal and emerging risks associated with the Company The directors have
carried out a robust assessment of the principal and emerging risks facing the
Company, including those which could threaten its business model, future
performance, solvency and liquidity. The specific financial risks associated
with foreign currencies, interest rates, market prices, liquidity, credit,
valuations and the use of derivatives - which may or may not be material to
the Company - are described in note 16 to the Financial Statements. The board
conducts this assessment by reviewing a detailed risk matrix on a regular
basis. A full analysis of the directors' review of internal controls is set
out in the Corporate Governance Statement on page 28.
The principal risks facing the Company are summarised below along with, where
appropriate, the steps taken by the board to monitor and mitigate such risks.
Performance and market risk
The performance of the Company depends primarily on the investment strategy,
asset allocation and stock selection decisions taken by the Investment Manager
within the parameters and constraints imposed by the Company's investment
policy. The investment policy guidelines can only be materially changed by
proposing an ordinary resolution at a General Meeting for shareholders'
approval. The Company invests in securities which are listed on recognised
stock exchanges so it is regularly exposed to market risk and the value of the
Company's portfolio can fluctuate, particularly over the short term, in
response to developments in financial markets.
The board has put in place limits on the Company's gearing, portfolio
concentration, and the use of derivatives which it believes to be appropriate
to ensure that the Company's investment portfolio is adequately diversified
and to manage risk. The board meets formally at least four times a year with
the Investment Manager to review the Company's strategy and performance, the
composition of the investment portfolio and the management of risk. The board
examines the sources of investment performance, which are described in
attribution analyses prepared by the Investment Manager's head of risk for
each meeting, volatility measures, liquidity and currency exposure, and the
Company's gearing. The Investment Manager's head of risk monitors and helps to
manage portfolio risk. Investment performance could be adversely affected by
changes within the investment management team at Ecofin. The board monitors
these through regular dialogue with the Investment Manager. The Investment
Manager takes steps to reduce the likelihood of such an event by ensuring
appropriate succession planning and the adoption of a team-based approach.
Protracted separation of NAV and share price
While some investors may view the opportunity to purchase a share of the
Company at a discount to its NAV as attractive, the volatility of the price of
a share and the premium/discount adds to the risks associated with an
investment in the Company's shares. The directors review the level of the
premium/discount on a regular basis and will use their ability as granted by
shareholders to address any sustained or significant discount or premium to
NAV, as and when it is appropriate, through the repurchase or issuance of
stock. The repurchase of stock will be subject to, but not limited to, market
conditions and availability of cash resources.
Income risk
The Company is committed to paying its shareholders regular quarterly
dividends and to increasing the level of dividends paid over time. The
dividends that the Company can pay depend on the income it receives on its
investment portfolio, the extent of its distributable reserves and, to a
lesser extent, its level of gearing and accounting policies. Cuts in dividend
rates by portfolio companies, a change in the tax treatment of the dividends
received by the Company, a significant reduction in the Company's level of
gearing or a change to its accounting policies could adversely affect the net
income available to pay dividends.
The board monitors the net revenue forecast, including each component revenue
and expense line item, prepared by the Administrator for quarterly board
meetings. These are discussed in some detail to assess the Investment
Manager's level of confidence in the income growth profile of the portfolio
and to mitigate any risk of revenue shortfall relative to expectations.
The board applied successfully to cancel the Company's share premium account
in November 2016 and the resulting special reserve is available, when the
board considers it appropriate, to augment the net revenue available to pay
dividends to shareholders.
Environmental, social and governance ("ESG") considerations
ESG considerations and policies have become some of the most critical issues
confronting companies and their shareholders and can have a significant impact
on the business models, sustainability and even viability of individual
companies. These sustainability issues are a key area of focus for the board,
and the board maintains a regular oversight of the Investment Manager in this
area.
ESG factor analysis is undertaken on all portfolio holdings and prospective
investments by the Investment Manager, a specialist investor in sustainable
infrastructure and the energy transition. In a rapidly changing environment
surrounding sustainability and ESG, Ecofin works to determine the best
practices to incorporate into investment criteria and to make reporting
available to the market. As a long-standing specialist in the Company's
sectors, Ecofin actively engages with portfolio companies and investments in
an effort to drive continuous improvement in their sustainability practices
and metrics. The board regularly reviews the way ESG considerations are
integrated into the decision making process by the Investment Manager to
mitigate risk at the stock selection and portfolio levels.
Liquidity risk
While the Company invests principally in highly liquid securities listed on
recognised stock exchanges in developed economies, it also invests to a
limited extent in securities traded in emerging markets and in securities
which are more thinly traded. As the Company is a closed-end investment
company it does not run the risk of having to liquidate investments on
unattractive terms to meet redemptions by investors although it is exposed to
price risk; that is, that it will be unable to liquidate a position in a
thinly traded security at the valuation at which it is carried in the
Company's accounts. It is also exposed to a risk that its prime broker,
Citigroup Global Markets Limited ("Citigroup"), which provides a flexible
borrowing facility, could request that borrowings be repaid with three days'
notice. The board reviews the liquidity profile of the Company's portfolio on
a regular basis. The Investment Manager's head of risk also keeps the
liquidity risk profile of the Company's portfolio under close review. The
liquidity analysis regularly shows that, if required, 98% of the portfolio
could be liquidated within five business days assuming trades to accomplish
this accounted for up to 30% of average daily trading volumes.
Cyber security risk
The threat of cyber-attack, in all guises, is regarded as at least as
important as more traditional physical threats to business continuity and
security. The Company's third-party service providers (including Ecofin, BNP
Paribas, Apex (formerly Maitland), Citibank and Computershare) have confirmed
the policies and procedures they have in place and their commitment to alert
the board to any breaches. The Investment Manager has procedures in place to
maintain the best practices in the fight against cybercrime. TortoiseEcofin
has a cyber security insurance policy in place.
Operational risks
Disruption to, or failure of, the Investment Manager's dealing system, the
Depositary's or Custodian's records or BNP Paribas' accounting systems may
prevent accurate reporting and monitoring of the Company's financial position.
The risk of fraud or other control failures or weakness within these service
providers could result in losses to the Company.
In common with most other investment trusts, the Company has no executive
directors, executive management or employees. The Company delegates key
operational tasks to third-party service providers which are specialists in
their fields: the management of the investment portfolio to the Investment
Manager, Ecofin Advisors Limited; the preparation and maintenance of the
financial statements and maintenance of its records to the Administrator and
Company Secretary, BNP Paribas S.A. and Apex Fund Administration Services (UK)
Limited (formerly Maitland Administration Services Limited), respectively; the
worldwide custody of the assets to Citigroup; and the safekeeping and
oversight services to Citibank UK Limited ("Citibank") as Depositary. The
board reviews the performance of these third-party service providers and their
risk control procedures on a regular basis as well as the terms on which they
provide services to the Company.
Legal, regulatory and compliance risks
To qualify as an investment trust, the Company must comply with Section 1158
of the Corporation Tax Act 2010 ('Section 1158'). Details of the Company's
approval are given under Status on page 20. Were the Company to breach Section
1158, it may lose investment trust status and, consequently, gains within the
Company's portfolio would be subject to capital gains tax. The Section 1158
qualification criteria are continually monitored by the Administrator and the
results reported to the board regularly. The Company must also comply with the
provisions of the Companies Act 2006 and, since its shares are listed on the
London Stock Exchange, the FCA Listing Rules, Market Abuse Regulation ('MAR'),
Disclosure Guidance and Transparency ('DTRs'), and, as an investment trust,
the Alternative Investment Fund Managers Directive ('AIFMD'). A breach of the
Companies Act could result in the Company and/or directors being fined or the
subject of criminal proceedings. Breach of the FCA Listing Rules or DTRs could
result in the Company's shares being suspended from listing, which in turn
would breach Section 1158. The board relies on the services of its Company
Secretary, the Investment Manager and its professional advisers to ensure
compliance with the Companies Act 2006, the FCA Listing Rules, DTRs, MAR and
AIFMD.
The following risks, although not viewed as critical, have also been
identified as important in our risk assessment.
Other risks
In the opinion of the directors, an investment in the shares of the Company
entails a greater than average degree of risk, in the context of the
investment trust industry, because the Company employs gearing, as explained
on page 14 of the annual report. In addition to the risks borne by the Company
described above, investors in the shares of the Company are exposed to risks
due to the investment policy (described on page 13 of the annual report) of
the Company. These are risks that cannot be mitigated without changing the
investment policy.
Gearing and capital structure
The board has authorised the Investment Manager to utilise gearing, in the
form of borrowings under the Company's prime brokerage facility, although the
gearing is not structural in nature and can be reduced at any time. Whilst the
use of gearing will enhance the NAV per share when the value of the Company's
assets is rising, it has the opposite effect when the underlying asset value
is falling. In the event that the prime brokerage facility were to be
renegotiated or terminated, the Company might not be able to finance its
borrowings on as favourable terms.
Non-OECD or emerging markets
The Company's policy on diversification, noted on page 13 of the annual
report, permits the Investment Manager to invest up to 10% of its investments,
measured at the time of acquisition, in the securities of companies
incorporated in countries which are not members of the OECD - such as emerging
markets - and quoted on stock exchanges in such countries. Investment in
emerging markets may involve a higher degree of risk and expose the Company
to, among other things, less well developed legal and corporate governance
systems, a greater threat of unilateral government action with respect to
regulation and taxation, and a higher risk of political, social and economic
instability than an investment in developed, OECD markets. These risks are
mitigated through diversification and fundamental analysis.
Foreign exchange risk
As noted in the investment policy on page 13 of the annual report, the
Company's Financial Statements are prepared in sterling and its shares are
denominated in sterling. Many of the Company's investments, however, are
denominated in currencies other than sterling and, as a result, the value of
the Company's investment portfolio is exposed to fluctuations in exchange
rates. Although the Company may hedge non-sterling exposure from time to time,
it is not the Company's policy to try to minimise or eliminate foreign
exchange risk as over the long term this could restrict the investment returns
potentially available to sterling-based investors in international securities.
There is a risk that the NAV will be depressed, therefore, if sterling
appreciates significantly against foreign currencies.
Political risk
The board has considered the political uncertainties prevailing in the UK and
the rest of the world and the risks associated with potential changes to
regulations, laws and/or taxes. The board continues to believe that the
Company's strategy of investing in an internationally diversified portfolio of
companies is the correct model to achieve its investment objectives.
On behalf of the Board
Apex Fund Administration Services (UK) Limited
Company Secretary
18 December 2023
Management Report and Directors' Responsibilities Statement
Management report
Listed companies are required by the FCA's Disclosure Guidance and
Transparency Rules (the "Rules") to include a Management Report in their
Financial Statements. This information is included in the Strategic Report on
pages 13 to 19 of the annual report inclusive (together with the sections of
the annual report and accounts incorporated by reference) and the Directors'
Report on pages 20 to 24 of the annual report. Therefore, a separate
Management Report has not been included.
Directors' responsibilities statement
The directors are responsible for preparing the Strategic Report, the
Directors' Report and the Financial Statements in accordance with applicable
law and regulations.
Company law requires the directors to prepare Financial Statements for each
financial year. Under that law the directors have elected to prepare the
Financial Statements in accordance with United Kingdom Accounting Standards,
comprising FRS 102 "The Financial Reporting Standard applicable in the UK and
Republic of Ireland", and applicable law (United Kingdom Generally Accepted
Accounting Practice ("UK GAAP")). Under company law the directors must not
approve the Financial Statements unless they are satisfied that they 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 those Financial Statements, the directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the Financial
Statements; and
• prepare the Financial Statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and 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
Act 2006. 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.
The annual report and accounts is published on the Investment Manager's
website https://ecofininvest.com/egl and the directors are responsible for the
maintenance and integrity of the corporate and financial information about the
Company included on this website. The work carried out by the Auditor does not
involve consideration of the maintenance and integrity of this website and,
accordingly, the Auditor accepts no responsibility for any changes that may
have occurred to the annual report and accounts since it was initially
presented on the website.
Directors' confirmation statement
The directors listed on page 12 of the annual report as the persons
responsible within the Company hereby confirm that, to the best of their
knowledge:
a) the Financial Statements within the annual report and accounts of which
this statement forms a part have been prepared in accordance with applicable
accounting standards and give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
b) the Management Report, which comprises the Chairman's Statement,
Investment Manager's Report, Strategic Report (including risk factors) and
note 16 to the Financial Statements, includes a fair review of the development
and performance of the business and position of the Company, together with the
principal risks and uncertainties that it faces.
Having taken advice from the audit committee, the directors consider that 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.
The directors have reached these conclusions through a process which is
described in the Report of the Audit Committee on page 32 of the annual
report.
On behalf of the Board
David Simpson
Chairman
18 December 2023
Statement of Comprehensive Income
Year ended 30 September 2023 Year ended 30 September 2022
Notes Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)gains on investments held at fair value through profit or loss - (28,012) (28,012) - 16,129 16,129
Foreign exchange gains/(losses) - 1,774 1,774 - (3,076) (3,076)
Investment income 2 11,822 - 11,822 9,835 - 9,835
Investment management fees (904) (1,355) (2,259) (1,089) (1,089) (2,178)
Administrative expenses (835) - (835) (885) - (885)
Net return before finance costs and taxation 10,083 (27,593) (17,510) 7,861 11,964 19,825
Finance costs (458) (686) (1,144) (118) (118) (236)
Net return before taxation 9,625 (28,279) (18,654) 7,743 11,846 19,589
Taxation (1,606) - (1,606) (1,104) - (1,104)
Net return after taxation 8,019 (28,279) (20,260) 6,639 11,846 18,485
Return per ordinary share (pence) 7.01 (24.72) (17.71) 6.42 11.46 17.88
The total column of the Statement of Comprehensive Income is the profit and
loss account of the Company.
The revenue and capital columns are supplementary to this and are published
under guidance from the AIC.
All revenue and capital returns in the above statement derive from continuing
operations. No operations were acquired or discontinued during the year ended
30 September 2023.
The Company has no other comprehensive income and therefore the net return on
ordinary activities after taxation is also the total comprehensive income for
the year.
Statement of Financial Position
Notes As at As at
30 September 2023 30 September 2022
£'000 £'000
Non-current assets
Equity securities valued at fair value through profit or loss 227,513 258,334
Current assets
Debtors and prepayments 8,432 1,409
Creditors: amounts falling due within one year
Prime brokerage borrowings (20,002) (25,613)
Other creditors (3,966) (1,078)
(23,968) (26,691)
Net current liabilities (15,536) (25,282)
Net assets 211,977 233,052
Share capital and reserves
Called-up share capital 1,154 1,119
Share premium account 50,548 40,801
Special reserve 114,398 116,976
Capital reserve 45,877 74,156
Revenue reserve - -
Total shareholders' funds 211,977 233,052
Net asset value per ordinary share (pence) 183.54 208.14
The Financial Statements were approved by the Board of Directors and
authorised for issue on 18 December 2023 and were signed on its behalf by:
David Simpson
Chairman
Statement of Changes in Equity
For the year ended 30 September 2023
Notes Share capital Share premium account Special reserve * Capital reserve* Revenue reserve* Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 October 2022 1,119 40,801 116,976 74,156 - 233,052
Return after taxation - - - (28,279) 8,019 (20,260)
Issue of ordinary shares 46 9,747 - - - 9,793
Buyback of ordinary shares (11) - (1,808) - - (1,819)
Dividends paid 3 - - (770) - (8,019) (8,789)
Balance at 30 September 2023 1,154 50,548 114,398 45,877 - 211,977
For the year ended 30 September 2022
Notes Share capital Share premium account Special reserve * Capital reserve* Revenue reserve* Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 October 2021 1,007 15,500 117,730 62,310 - 196,547
Return after taxation - - - 11,846 6,639 18,485
Issue of ordinary shares 112 25,301 - - - 25,413
Dividends paid - - (754) - (6,639) (7,393)
Balance at 30 September 2022 1,119 40,801 116,976 74,156 - 233,052
( )
*These reserves are available for distribution.
Statement of Cash Flows
Notes Year ended Year ended
30 September 2023 30 September 2022
£'000 £'000
Net return before finance costs and taxation (17,510) 19,825
(Decrease)/inrease in accrued expenses (134) 228
Overseas withholding tax (1,417) (786)
Deposit interest income (4) (37)
Dividend income (11,818) (9,798)
Realised (gains)/losses on foreign exchange transactions (1,774) 3,076
Dividends received 11,307 9,462
Deposit interest received 4 37
Interest paid (1,055) (236)
Losses/(gains) on investments 28,012 (16,129)
(Decrease)/increase in other debtors (8) 1
Net cash flow from operating activities 5,603 5,643
Investing activities
Purchases of investments (88,966) (76,989)
Sales of investments 88,153 56,277
Net cash used in investing activities (813) (20,712)
Financing activities
Movement in prime brokerage borrowings (5,611) (10,260)
Dividends paid (8,789) (7,393)
Share issue proceeds 9,793 25,413
Share buyback costs (1,659) -
Net cash (outflow)/inflow from financing activities (6,266) 7,760
Decrease in cash (1,476) (7,309)
Analysis of changes in cash during the year
Opening balance - 11,251
Foreign exchange movement 1,476 (3,942)
Decrease in cash (1,476) (7,309)
Closing balance - -
Notes to the Financial Statements
For the year ended 30 September 2023
1. Accounting policies
(a) Basis of preparation
The Financial Statements have been prepared in accordance with the Companies
Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"),
including the Financial Reporting Standard applicable in the U.K. and Republic
of Ireland ("FRS 102") and with the Statement of Recommended Practice
'Financial Statements of Investment Trust Companies and Venture Capital
Trusts' issued in April 2021. The Financial Statements are prepared in
Sterling which is the functional currency of the Company and rounded to the
nearest £'000. They have also been prepared on a going concern basis and
approval as an investment trust has been granted by HMRC.
The Company's assets consist substantially of equity shares in companies
listed on recognised stock exchanges and in most circumstances are realisable
within a short timescale. The board has set limits for borrowing and regularly
reviews actual exposures and cash flow projections. The Company has prime
broker borrowings to draw upon, and these borrowings are repayable on demand.
Having taken these factors into account as well as the impact of Covid-19 and
having assessed the principal risks and other matters set out in the Viability
Statement in the annual report the directors believe that, after making
enquiries, the Company has adequate resources to continue in operational
existence for the foreseeable future and has the ability to meet its financial
obligations as they fall due for a period of at least twelve months from the
date of approval of this Report. Accordingly, they continue to adopt the going
concern basis of accounting in preparing the financial statements.
Further detail is included in the Directors' Report (unaudited) in the annual
report.
2. Income
Year ended Year ended
30 September 2023 30 September 2022
£'000 £'000
Income from investments (revenue account)
UK dividends 1,715 1,254
Overseas dividends 9,991 7,966
Stock dividends 112 578
11,818 9,798
Other income (revenue account)
Deposit interest 4 37
Total income 11,822 9,835
During the year to 30 September 2023 the Company received special dividends
totalling £83,000 (30 September 2022: £416,000), all of which was recognised
as capital and is included in the capital column of the Statement of
Comprehensive Income.
3. Dividends on ordinary shares
Year ended Year ended
30 September 2023 30 September 2022
£'000 £'000
Fourth interim for 2021 of 1.65p (paid 30 November 2021) - 1,666
First interim for 2022 of 1.85p (paid 28 February 2022) - 1,874
Second interim for 2022 of 1.85p (paid 31 May 202) - 1,893
Third interim for 2022 of 1.85p (paid 31 August 2022) - 1,960
Fourth interim for 2022 of 1.85p (paid 30 November 2022) 2,082 -
First interim for 2023 of 1.95p (paid 28 February 2023) 2,200 -
Second interim for 2023 of 1.95p (paid 31 May 2023) 2,234 -
Third interim for 2023 of 1.95p (paid 31 August 2023) 2,273 -
8,789 7,393
The proposed fourth interim dividend for 2023 has not been included as a
liability in these Financial Statements as it was not payable until after the
reporting date.
Set out below are the total dividends paid and proposed in respect of the
financial period, which is the basis on which the requirements of Section
1158-1159 of the Corporation Tax Act 2010 are considered. The revenue
available for distribution by way of dividend for the year was £8,019,000 (30
September 2022: £6,639,000).
Year ended Year ended
30 September 2023 30 September 2022
£'000 £'000
Three interim dividends of 1.95p each (2022: three interim dividends of 1.85p 6,707 5,727
each)
Fourth interim dividend 1.95p (2022: 1.85p) 2,247 2,082
8,954 7,809
The amount reflected above for the cost of the fourth interim dividend for
2023 is based on 115,245,663 ordinary shares, being the number of ordinary
shares in issue on the ex-dividend date 26 October 2023.
4. Return per ordinary share
Year ended 30 September 2023 Year ended 30 September 2022
£'000 p £'000 p
Returns are based on the following figures:
Revenue return 8,019 7.01 6,638 6.42
Capital return (28,279) (24.72) 11,846 11.46
Total return (20,260) (17.71) 18,485 17.88
Weighted average number of ordinary shares in issue 114,418,153 103,375,349
5. NAV per ordinary share
The NAV attributable to the ordinary shares and the NAV per ordinary share at
the year-end were as follows:
As at As at
30 September 2023 30 September 2022
Net asset value attributable (£'000) 211,977 233,052
Number of ordinary shares in issue 115,495,663 111,968,423
Net asset value per share (p) 183.54 208.14
6. Related party transactions and transactions with the Investment Manager
Fees payable during the year to the directors and their interests in shares of
the Company are considered to be related party transactions and are disclosed
within the Directors' Remuneration Report in the annual report. The balance of
fees due to directors at the year-end was £nil (30 September 2022: £nil).
The Company has an agreement with Ecofin Advisors Limited for the provision of
investment management services. Details of fees earned during the year and
balances outstanding at the year-end are disclosed in note 3 to the Financial
Statements in the annual report.
The information contained in this Annual Financial Report Announcement has
been prepared in accordance with International Financial Reporting Standards
("IFRS") as adopted by the European Union ("EU") and as applied in accordance
with the provisions of the Companies Act 2006 (the "Act"). These comprise
standards and interpretations of the International Accounting Standards
("IAS") and Standing Interpretations Committee as approved by the
International Accounting Standards Committee ("IASC") that remain in effect,
to the extent that IFRS have been adopted by the EU. The results for the
year ended 30 September 2023 are audited but do not constitute statutory
accounts as defined in Section 434 of the Act. The statutory accounts have
not yet been delivered to the Registrar of Companies. Full statutory accounts
for the year ended 30 September 2022 included an unqualified audit report and
have been filed with the Registrar of Companies.
The Annual Report and Financial Statements will be posted to shareholders and
will shortly be available on the Investment Manager's website
(www.ecofininvest.com/egl) or in hard copy format from the Company's
Registered Office. A copy of the Annual Report will be submitted to the FCA's
National Storage Mechanism and will be available for inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) . The Annual Report
will also be available on the Investment Manager's website at
www.ecofininvest.com/egl.
For further information, please contact:
Elspeth Dick, CFA
Ecofin Advisors Limited
Telephone: 020 7451 2929
Faith Pengelly
Apex Fund Administration Services (UK) Limited
Company Secretary
01245 398 950
18 DECEMBER 2023
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