TEA PLANTATIONS INVESTMENT TRUST PLC
PRELIMINARY ANNOUNCEMENT OF ANNUAL RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2003
CHAIRMAN'S STATEMENT
INTRODUCTION
I have pleasure in presenting my report for the year ended 30 September 2003,
your Company's sixth full year.
TRADING RESULTS 1
For the year ended 30 September 2003, the Company had gross revenue of �109,854
(2002: �94,801); after deducting management expenses, interest and taxation,
the return on ordinary activities was a loss of �109,361 (2002: loss of �
111,794). However there was a capital surplus of �776,462 (2002: capital loss �
384,643), and as a result the net asset value on 30 September 2003 had risen to
54.61p (2002: 48.30p). The revenue return per Ordinary share for the year was a
loss of 1.04p per share (2002: loss of 1.06p per share).
TRADING BACKGROUND
Sri Lanka, which is the principal area of our investments, enjoyed a resurgence
of confidence following the successful outcome of negotiations on peace making
between the Liberation Tigers of Tamil Eelam (L.T.T.E.) and the Prime
Minister's team. This has remained intact, if at times it has appeared fragile,
as a result of the interference of the different factions that need to be
parties to any settlement. The difficulty is to satisfy the aspirations of
virtual autonomy required by the L.T.T.E., whilst not upsetting the Tamil
parties that have not been linked to the Tiger movement, as well as the Muslim
minority that compose a large proportion of the population of the Northern and
Eastern Sector.
At the time of writing there has been a break down in relations between the
President and the Prime Minister, which is making progress impossible. As a
result the Norwegian Peace Team has left Sri Lanka and will only return when
the two main parties have settled their differences.
The Colombo Stock Market has reflected the confidence of investors in the
overall state of the economy, coupled with the strains of the international
situation particularly in the Gulf. Last September the all share index closed
at 856.5; by the end of March 2003 it had slipped to 739.0, only to recover as
the year progressed and rising to 1292.4 by 30 September 2003. In early
December, it stood at 1172.5 (1 December, 2003). The Plantation Index meanwhile
dropped from 210.0 at 30 September 2002 to 172.1 at the end of March 2003.
After the Iraq war it began to regain lost ground and at the end of September
2003 it was 216.5. It stood at 204.6 (1 December 2003).
The production of the principal world tea producers to the end of September
2003 is ahead of last year's by about 40 million Kgs, but this is almost
entirely from within India. Sri Lanka and Kenya, the two major export sources
are running much in line with the previous year and this had the effect of
stabilizing the market, without exciting it. The surplus in India is mostly of
poor quality and this has led to the better varieties selling at a premium.
Prices to date are a little below last year and the Colombo all tea average to
the end of September stands US$1.50 per Kg, some US$0.09 below Kenya. The price
as at 30 September was US$1.63 per Kg for Sri Lanka against Kenya at US$1.69
per Kg.
Meanwhile rubber has been enjoying a return to profitability, with RSS being
quoted at the end of September at US$1.08 per Kg as opposed to US$0.84 per Kg a
year ago; (2001: US$0.53 per Kg).
Balance sheets and cash flows within the plantation sector need a much
longer-term recovery in commodity prices. There is no doubt that last year, in
spite of the Iraq war, has been one of more stability in the tea and rubber
markets and Sri Lanka is looking more resilient.
However the margin between cost of production and realisation proceeds is
narrow. Negotiation with labour unions for a wage deal in 2004 will need to be
conducted with great care if Sri Lanka is not going to slip into the almost
impossible position, which prevails today in Kerala. There, the closing of
uneconomic gardens and labour taking a reduced wage or having to resort to
selling green leaf for which there is little demand has made conditions for
estate workers a very real problem.
The Plantations in which we are invested are far slimmer than was the case five
years ago. Investment in the factories as well as improvements in the
agricultural condition of the estates has made them more dependable when facing
either a decline or a rise in price levels, but it is the fragility of the
capital base that is holding back returns.
CURRENT TRADING AND OUTLOOK
Results in the Company have rallied substantially on capital appreciation in
the last year rather than on dividend income, which in the foreseeable future
is likely to continue to be the case.
VALUATION OF UNLISTED INVESTMENTS
The Directors' have received and adopted an independent valuation for the
unquoted investments in the portfolio, as at 30 September 2003, which takes
into account the value of the plantations and management fees receivable from
them. These investments were valued at �1,700,597, and given their
significance, a copy of the valuation will be reproduced in full in the
Company's annual report.
INVESTMENT MANAGER
As at the end of the year, Blakeney Management Limited resigned as Investment
Manager, and I would like to record my thanks to them for the services they
have rendered to the Company. I am pleased to announce that Laxey Partners were
appointed Investment Manager with effect from 1 October 2003.
Mr D.E.H. Panter
Chairman
19 December 2003
INVESTMENT MANAGER'S REPORT
Schlozer, the German eighteenth century historian is quoted as saying "history
without politics is mere monkish chronicles". Well, Sri Lanka and investment is
exactly the same. Whether we like it or not, and in general not, the
performance of our companies and the investment climate is heavily dependent on
politics, which are fluid to say the least. The current situation is heavily
over shadowed by the peace talks in the North and the power struggle between
the President and the Prime Minister, which is likely to rumble until the next
presidential elections in two years time.
UPDATE ON THE POLITICAL SITUATION
The fourth round of talks between the President and the Prime Minister ended
with no change in the President's stance regarding the retention of the defence
portfolio. However, it is reported that she is to offer the creation of a
National Security Ministry, under which the President had only agreed to
gazette peace-related matters including the role of Norway and the Sri Lanka
Monitoring Mission. So she would retain all other defence matters under the
traditional defence portfolio. Meanwhile the Prime Minister is still
maintaining his stance that he would require the full powers of the Defence
Ministry in order to pursue the peace process. However, based on the executive
powers vested in the President, she would retain the ultimate powers of defence
as Commander In Chief. Therefore, we are of the opinion that the Prime Minister
would now be in a position to handle the peace process and consult with the
President if both parties agree to the latest offer. There are positive signs
on cohabitation, Sri Lanka style. It was also reported that the President has
asked the Prime Minister to handle matters pertaining to the Ministries of
Defence, Interior Affairs and Media during the committee stage of the Budget
debate. This we believe is a positive sign on the continuation of the
cohabitation, as the President has ruled out the option of appointing her
nominees to handle the Budget debate.
It is not difficult to see that the peace process and the struggle for power
are intrinsically linked. The President has the major executive power, but the
last parliamentary elections showed the Prime Minister to have the support of
the country and so undermining the President, who only has two years remaining.
We believe this will continue for the next two years and that is a serious
point when considering the Tea Plantations Investment Trust (TPIT) portfolio.
Interest rates have fallen in the second half of the year from 10.76% to 8.95%,
which is good news as all the plantation companies have borrowed quite heavily.
Rates are still high in comparison to world rates, but inflation is also slowly
falling supporting further rate falls. GDP growth has also continued the strong
pattern of 2002, which saw growth of 4.0% following a number of negative years
and is forecast to grow approximately 4.8% in 2003.
TEA AND RUBBER
There has been very little movement in tea prices in US$, for the last three
years and rising labour costs have kept all the plantations under pressure.
That said this is the first year the portfolio is showing that all companies
within it are profitable. The portfolio has either March or December year ends
but for the year to date they are all the right side of the line. They have
been helped by the price of rubber, which continues to be strong, but
nevertheless this is a major achievement. Since TPIT was launched in 1997 the
plantations have radically improved their efficiency, operating practices and
management, but the fall in tea prices has eaten up most of this gain. Tea
prices are now roughly 30% below where they were when TPIT was launched.
We do see two years of potential political turmoil, but interest rates are
moving lower and TPIT is well positioned to gain if tea prices improve. We will
include the independent valuation in the annual report for the first time,
which we hope will be of interest.
There have been a number of portfolio events worthy of note. The first is
simply a comment that Metropolitan Resource Holdings, the majority owner of
Bogawantalawa and of Eco Power, the hydro electric power company, is doing very
well. It is listed but hardly ever trades. At current prices and at our current
estimates we believe it is valued at between 2 and 3 times this year's earnings
and growing.
Secondly, James Finlay Colombo have sold at a very low valuation, their two
plantations to their 100% owned parent company, which is owned by John Swire &
Sons Limited. It is worth noting that James Finlay Colombo originally bought
the shares at Rs.1605m (�14.32m) and recently sold them for RS.501m (�3.13m).
Consequent to the sale, James Finlay Colombo have been released from guarantees
for the plantations' borrowings of Rs.309m (�1.93m). In Sri Lanka regardless of
their controlling stake, no minority approval is required, and the minority
shareholders were not consulted about this transaction. We believe they have
sold it far too cheaply and have behaved with little regard to UK standards of
corporate governance. We and the other major minority shareholder are
challenging them in court. TPIT continues to own shares in the listed company
James Finlay Colombo, which now no longer own any plantations.
Thirdly, Forbes Plantations is having a rights issue at Rs.5 and the valuation
at 30 September has reflected this as a write down even though the rights issue
hasn't actually happened yet.
Fourthly, TPIT has for its size substantial cash resources. We have been
reticent to commit further funds to long term investment as the Company is due
to wind up in 2007.
Blakeney Management Limited
19 December 2003
TEA PLANTATIONS INVESTMENT TRUST PLC
PRELIMINARY ANNOUNCEMENT OF RESULTS
The Directors announce the unaudited statement of results for the year ended 30
September 2003 as follows:
STATEMENT OF TOTAL RETURN
(incorporating the revenue account)
1 October 2002 1 October 2001
to 30 September 2003 to 30 September 2002
Revenue Capital Total Revenue Capital Total
� � � � � �
Gains/(losses) on - 801,548 801,548 - (356,789) (356,789)
investments
Income from 101,839 - 101,839 73,351 - 73,351
investments
Interest receivable 8,015 - 8,015 21,450 - 21,450
Investment (25,086) (25,086) (50,172) (27,854) (27,854) (55,708)
management fee
Other expenses (186,622) - (186,622) (170,695) - (170,695)
Return on ordinary
activities
before taxation (101,854) 776,462 674,608 (103,748) (384,643) (488,391)
Taxation on ordinary (7,507) - (7,507) (8,046) - (8,046)
activities
Return on ordinary
activities
after taxation (109,361) 776,462 667,101 (111,794) (384,643) (496,437)
Transfer to/(from) (109,361) 776,462 667,101 (111,794) (384,643) (496,437)
reserves
pence pence pence pence pence pence
Return per Ordinary (1.04) 7.35 6.31 (1.06) (3.64) (4.70)
share
BALANCE SHEET
As at As at
30 September 2003 30 September 2002
� �
Fixed asset investments
Listed (at market value) 2,824,723 3,440,484
Unquoted (at directors' valuation) 1,700,597 1,412,724
4,525,320 4,853,208
Current assets
Debtors 1,073,358 64,962
Cash at bank 223,151 238,541
1,296,509 303,503
Creditors - amounts falling due (55,829) (57,812)
within one year
Net current assets 1,240,680 245,691
Total assets less current 5,766,000 5,098,899
liabilities
Share capital and reserves
Share capital 2,639,429 2,639,429
Share premium account 5,662,800 5,662,800
Capital reserve (2,274,769) (3,051,231)
Revenue reserve (261,460) (152,099)
5,766,000 5,098,899
As at As at
30 September 2003 30 September 2002
pence pence
Net asset value per Ordinary 54.61 48.30
share
SUMMARISED CASH FLOW STATEMENT
Year ended Year ended
30 September 2003 30 September 2002
� �
Net cash outflow from operating (94,800) (126,666)
activities
Net tax received 3,691 1,352
Capital expenditure and financial
investment
Purchases of investments (1,524,592) (821,852)
Sales of investments 1,600,311 999,758
Net cash inflow from capital 75,719 177,906
expenditure and financial
investment
Net cash (outflow)/inflow (15,390) 52,592
(Decrease)/increase in cash (15,390) 52,592
The above financial information does not constitute statutory financial
statements as defined in Section 240 of the Companies Act 1985. The comparative
financial information is based on the statutory financial statements for the
year ended 30 September 2002, on which the auditors, Ernst & Young LLP, gave an
unqualified report. These accounts have been delivered to the Registrar of
Companies and did not contain a statement required under Section 237 (2) or (3)
of the Companies Act 1985.
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