Accounts and Results
Group turnover rose 23% to £94.8 million (1996 - £77.3 million) and included, for the first time, revenue from Tecon Rio Grande of £8.6 million. Operating margins on existing operations improved from 8.1% in 1996 to 10.4% due to revised towage tariffs and improved cost control. Realised surpluses on sales of investments at £1.9 million benefited from the liquidation of approximately half the investment portfolio, mentioned in my predecessor's interim statement. These together with net positive interest raised the profit before taxation to £11.8 million (1996 - £7.4 million). There was no significant impact from movements in the US dollar / sterling exchange rate. The $Real devalued 7.9% against the US dollar in line with Brazilian inflation.
In accordance with board policy, profits on investment revaluations arising in earlier years realised through disposal during the year amounted to £5.0 million (1996 £0.1 million) have been included after the profit for the financial year to show the profit attributable to shareholders.
Taxation
The tax charge at £4.1 million represents 35.1% of pre-tax profit, as compared with the 1996 rate of 35.4%. Brazilian tax rates remained unchanged at 25% for corporation tax and 8% for social contribution. Under Brazilian tax legislation, there is no group tax relief, so tax losses incurred in one group company cannot be offset against profits in another, but must be carried forward. Consequently the group's tax rate may be higher than the corporate rate prevailing in Brazil depending on where in the group profits and losses arise.
Dividends
The Board is recommending that the final dividend be increased by 20% to 4.50p (1996 3.75p). If approved by shareholders at the forthcoming Annual General Meeting this will make a total dividend for the year of 5.50p (1996 4.75p) representing 15.7% growth over the prior year. The full year dividend is 3.4 times covered by profit for the financial year.
Balance Sheet
Net assets of the Group increased from £64.5 million to £68.4 million, an increase of £3.9 million. The value of net assets represents 172.27p (1996 - 162.34p) per share of which 119.62p (1996 - 107.35p) per share was attributable to assets located in Brazil and 52.65p (1996 - 54.99p) per share in other assets.
Cashflow
The group continued to generate strong cashflows. The cashflow from operating activities was £19.4 million. Capital expenditure of £15.1 million was incurred mainly in our tug building programme and on equipment for Tecon Rio Grande. Due to the complexities of Brazilian tax legislation the group made unusually high tax payments in 1997 giving rise to a tax asset at the year end. The partial liquidation of the share portfolio realised £12.4 million. Year end cash balances were £25.9 million and our overall net cash position was £0.9 million in surplus. We believe with the continued privatisations in the port and maritime sector there are sufficient quality opportunities to utilise these financial resources. The Board will not approve investments in projects that are not forecast to produce a satisfactory return.
Borrowings and Interest
The Group's borrowings increased from £15.9 million to £22.5 million. New loans were arranged to finance tug construction and purchase cranes for Tecon Rio Grande. During the year we renegotiated a portion of our loan portfolio with the BNDES. The maturity schedule of these loans was extended and the basis for monetary correction changed from the TJLP (Taxa de juros de longo prazo) to the US dollar / $Real exchange rate movement. These loans bear a favourable interest rate of between 2.7% - 3.0% per annum.
The Group's net interest earned in 1997 was £0.5 million (1996 - expense £0.7 million).
Acquisitions
On March 1, 1997 operation of the Tecon Rio Grande container terminal commenced. The results for the ten months have been fully consolidated with a minority interest included for the part attributable to other shareholders. The turnover and operating profit are shown separately on the face of the profit and loss account.
Investment Portfolio
Finsbury Asset Management Limited, which manages the investment portfolio reports as follows: "The period saw many of the major western equity markets strengthen for the first three quarters of the year. Sharp falls in South East Asia in October and the continued decline of the Japanese market combined to unsettle investors for a short time in the fourth quarter before continuing their upward trend to finish the year substantially higher.
During August the Board instructed that £10 million was to be raised out of the equity portfolio. Whilst the holdings of Rea Brothers, Adam & Harvey and the Finsbury Investment Trusts were left untouched (this part of the portfolio now accounts for about 70% of the whole), the remaining market portfolio was trimmed. The prices saw the profile of the market portfolio essentially unchanged, with the geographical exposure as before.
The collapse of the property market in Hong Kong prompted the market into a sharp fall with the Hang Seng closing down 20.3% for the year. The portfolio's direct investment in the area, however, had been sold earlier in the year.
Following the General Election and the new Government's decision to hand over control of interest rates to the Monetary Policy Committee of the Bank of England, the UK experienced a steady increase in base rates. These were deemed necessary to stem the growth in consumer spending.
The portfolio benefited from its heavy exposure to the defensive sectors of Banks, Insurance, Pharmaceuticals and Telecommunications and a number of other strong performing areas during the year. Purchases in Commercial Union (up 19.6% on purchase price by the end of the year) and Vodafone (up 26% by 31st December 1997 on purchase price) contributed significantly as did the purchase of British Energy at 160p and subsequent sale at 422p.
Although concerns about the full impact of problems in Asia remain, continued top line growth in a low inflation environment will provide strong support for leading equity markets. In addition the shrinking equity base through share buybacks, mergers and acquisitions at the same time as a trend towards greater equity ownership by European and US pension funds compounds this shrinking of potential investment opportunities and confirms our positive stance on equity markets for the future."
Directors
Mr. J. F. Gouva Vieira has been appointed Chairman of the Company at the board meeting, May 5, 1998.
Future Prospects
The trading results for the first quarter of 1998 is in line with the corresponding period for 1997. A consortium, of which Wilsons Sons was a member, purchased the Rio de Janeiro state ferry company, Conerj. Conerj provides the main waterborne passenger transport in the bay of Guanabara. It currently transports approximately 24 million passengers and has thirteen operating vessels and its own shipyard.