October 2, 2018 - 6:30 AM EDT
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BlackRock Emerging Europe Plc - Half-year Report

BLACKROCK EMERGING EUROPE PLC (LEI - 549300OGTQA24Y3KMI14)

Half Yearly Financial Results Announcement for Period Ended 31 July 2018

PERFORMANCE RECORD

FINANCIAL HIGHLIGHTS




Attributable to ordinary shareholders 
As at 
31 July 
2018 
(unaudited) 
As at 
31 January 
2018 
(audited) 


Change 
US Dollar
Net assets (US$’000) 167,327  206,427  -18.9 
Net asset value per ordinary share (US$ cents) 465.88c  574.75c  -18.9 
– with dividends reinvested -16.4 
MSCI Emerging Markets Europe 10-40 Index (net return in US Dollar)1 455.34  525.64  -13.4 
Ordinary share price (mid-market) (US$ cents)2 447.32c  549.64c  -18.6 
– with dividends reinvested -16.0 
 --------   --------   -------- 
Sterling
Net assets (£’000)2 127,555  145,156  -12.1 
Net asset value per ordinary share (pence) 355.14p  404.16p  -12.1 
– with dividends reinvested -9.3 
MSCI Emerging Markets Europe 10-40 Index (net return in Sterling)1 347.11  369.62  -6.1 
Ordinary share price (mid-market)(pence)2 341.00p  386.50p  -11.8 
– with dividends reinvested -8.9 
 --------   --------   -------- 
Discount to net asset value 4.0%  4.4%  – 
 --------   --------   -------- 
Gross market exposure3 96.1%  98.4%  – 
 ========   ========   ======== 

Sources: BlackRock and Datastream.

1              Net return indices calculate the reinvestment of dividends net of withholding taxes using the tax rates applicable to institutional investors who are not resident in the local market.
2              Based on a £:US$ exchange rate of 1.3118 (31 January 2018: 1.4221).
3              Long positions plus short positions as a percentage of net assets.

For the six 
months 
ended 
31 July 
2018 
(unaudited) 
For the six 
months 
ended 
31 July 
2017 
(unaudited) 




Change 
Revenue
Net revenue after taxation (US$’000) 3,420  4,854  -29.5 
Revenue profit per ordinary share (US$ cents) 9.52c  13.51c  -29.5 
 ========   ========   ======== 

Source: BlackRock.

CHAIRMAN’S STATEMENT FOR THE SIX MONTHS ENDED 31 JULY 2018

RETURN OF CAPITAL TO SHAREHOLDERS
It is not without some sadness that I present what is likely to be the Company’s final interim report and my final Chairman’s Statement to shareholders following the announcement on 17 August 2018 of the Board’s intention to put the Company into liquidation.

The Board of BlackRock Emerging Europe plc has always recognised its role is to act in the best interests of shareholders and to maintain the highest standards of corporate governance. The Board has regularly consulted with the Company’s major shareholders to understand their objectives and used their input to guide its strategy and policies. As a result, back in June 2013, the Board undertook to provide shareholders with an opportunity to exit their investment in the Company at NAV less applicable costs prior to 21 June 2018. These proposals took the form of a 100% cash exit and were published in May 2018. On 14 June 2018, the Board announced that elections to exit had been received in respect of approximately 60% of the Company’s shares in issue, and that this would result in the remaining assets of the Company being below £50 million (lower than the minimum level which the Board deemed necessary for the Company to continue). Consequently, the tender offer did not proceed and instead proposals to put the Company into voluntary liquidation will be published shortly. These proposals will also offer shareholders the option of rolling all or part of their holding into new C shares to be issued by BlackRock Frontiers Investment Trust plc (BRFI). It is envisaged that these proposals will be put to a shareholder vote at a General Meeting to be held in November 2018, and subject to shareholder approval at this meeting, will be implemented shortly afterwards. More information in respect of the proposals and a detailed timetable will be included in the Circular which is due to be published shortly.

Since BlackRock took over the mandate in 2009 to 31 July 2018, the Company’s shareholders have seen the share price rise by more than 146% in Sterling terms (118% on a US Dollar basis). This is almost double the return of the reference index. The Company has also been a top decile performer in comparison with its open-ended peers as well as the best performer in the AIC European Emerging Markets closed-ended peer group over this period and has enjoyed the tightest discounts to Net Asset Value. With these very strong absolute and relative returns in mind, the Board fully understands that many shareholders have opted to take profits on their positions. It is their decision as to where they choose to invest their money and they should be free to seek out the most promising investment opportunities, wherever they are to be found.

MARKET OVERVIEW
The Emerging Europe region experienced another bout of political turbulence during the period under review with almost all countries in the MSCI Emerging Markets Europe 10-40 Index recording negative returns. Markets in Turkey fell by more than 37% driven by high inflation and expanding fiscal deficits. Greece also ended the period 18.4% lower (despite the country reaching a successful agreement with its creditors to complete the Third Bailout Programme) as markets followed wider European market sentiment and trended down. Russia’s performance was also disappointing, with markets declining by 3.0% despite improving economic data on the back of political tension around US sanctions. Elsewhere in the region, Hungary and Poland also declined in reaction to the wider market sell off. The Czech Republic was the top performer during the period and the only country with a positive return, although this was marginal (up by just 0.7%).

PERFORMANCE
Against this background, the Company’s net asset value (NAV) fell by 16.4% and the share price fell by 16.0% (both in US Dollar terms on a total return basis) (9.3% and 8.9% respectively in Sterling terms) during the period under review. The MSCI Emerging Markets Europe 10-40 Index fell by 13.4% and 6.1% in US Dollar and Sterling terms over the same period. Since the appointment of BlackRock as investment manager on 1 May 2009 up to 31 July 2018 the Company’s NAV has increased by 100.9% in US Dollar terms and 126.9% in Sterling terms, compared with the benchmark returns of 56.2% and 76.4% respectively (all percentages with dividends reinvested).

Details of the factors which have contributed to performance are set out in the Investment Manager’s Report.

Since the period end and up until the close of business on 28 September 2018 the Company’s NAV has decreased by 3.8% in US Dollar terms and decreased by 3.3% in Sterling terms compared with a decrease in the benchmark of 1.1% in US Dollar terms and a decrease of 0.5% in Sterling terms (all percentages with dividends reinvested).

EARNINGS
In the six months to 31 July 2018, revenue earnings per share were 9.52 cents (31 July 2017: 13.51 cents).

BOARD
As announced on 14 June 2018, and given the outcome of the tender offer, the Directors of the Company have asked me to remain on the Board as Chairman to provide continuity while the Board considered alternative proposals to put forward to shareholders. I will stand down as Chairman and a Director of the Company at the date that the Company is placed into liquidation.

SHARE BUYBACKS
There were no shares purchased during the period under review or since the period end up to the date of publication of this report.

OUTLOOK
The last few months have seen increasing volatility in both European and Global Emerging Markets, with many economies in crisis and concerns over global growth stagnating. Geopolitical tensions have augmented market uncertainty with economic sanctions impacting ever more countries. These conditions, although challenging, represent an excellent investment opportunity for active managers to generate alpha for investors. Whilst the Board regrets that the Company will no longer be able to take advantage of these opportunities, it is delighted with the Company’s very strong performance record since BlackRock took over management in 2009 and the excellent returns delivered to shareholders as set out above. Shareholders should note that the Portfolio Managers will continue to invest in accordance with the Company’s investment mandate until the reconstruction proposals are approved by shareholders.  These proposals will be put to a shareholder vote at a General Meeting (expected to be held on or around 15 November 2018).

As Chairman I would like to close this final statement by congratulating the Portfolio Managers, Sam Vecht and Chris Colunga, for producing such excellent results and thanking BlackRock and my fellow Board members for their diligence and commitment to the effective running of the Company in the interests of shareholders.

Neil England
2 October 2018

INTERIM MANAGEMENT REPORT AND RESPONSIBILITY STATEMENT

The Chairman’s statement and the Investment Manager’s Report give details of important events which have occurred during the period and their impact on the financial statements.

PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks faced by the Company can be divided into various areas as follows:

  • Counterparty risk;

  • Investment performance risk;

  • Legal & compliance risk;

  • Operational risk;

  • Market risk (including political risk);

  • Financial risk; and

  • Marketing risk
     

The Board reported on the principal risks and uncertainties faced by the Company in the Annual Report and Financial Statements for the year ended 31 January 2018. A detailed explanation can be found on pages 9 to 11 and in note 17 on pages 57 to 67 of the Annual Report and Financial Statements which are available on the website maintained by BlackRock, at www.blackrock.co.uk/beep.

In the view of the Board, there have not been any changes to the fundamental nature of these risks since the previous report and these principal risks and uncertainties are equally applicable to the remaining six months of the financial year or until the Company is put into liquidation.

GOING CONCERN
The financial statements for the six-month period ended 31 July 2018 have been prepared on a basis other than going concern. As announced on 17 August 2018, the Board intends to put forward proposals to put the Company into voluntary liquidation and to offer shareholders the option of electing for any combination of receiving cash at net asset value less costs and rolling their investment into new C shares to be issued by BlackRock Frontiers Investment Trust plc. The Directors anticipate that a General Meeting will be convened in November 2018 at which the necessary Special Resolutions will be proposed. A separate Circular outlining details of the proposals along with the notice of the General Meeting will be sent to the shareholders in October 2018.

RELATED PARTY DISCLOSURE AND TRANSACTIONS WITH THE INVESTMENT MANAGER
BlackRock Fund Managers Limited (BFM) was appointed as the Company’s Alternative Investment Fund Manager (AIFM) with effect from 2 July 2014. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Both BFM and BIM (UK) are regarded as related parties under the Listing Rules. Details of the management fees payable are set out in note 4 and note 15.

The related party transactions with the Directors are set out in note 14.

DIRECTORS’ RESPONSIBILITY STATEMENT
The Disclosure Guidance and Transparency Rules (DTR) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.

The Directors confirm to the best of their knowledge that:

  • the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with the Financial Reporting Council’s Standard, FRS 104 ‘Interim Financial Reporting’; and

  • the Interim Management Report together with the Chairman’s Statement and Investment Manager’s Report, include a fair review of the information required by 4.2.7R and 4.2.8R of the FCA’s Disclosure Guidance and Transparency Rules.
     

The half yearly financial report has not been audited or reviewed by the Company’s Auditor.

The half yearly financial report was approved by the Board on 2 October 2018 and the above responsibility statement was signed on its behalf by the Chairman.

Neil England
For and on behalf of the Board
2 October 2018

INVESTMENT MANAGER’S REPORT

SIX MONTH MARKET REVIEW
In the six months ended 31 July 2018, the MSCI Emerging Markets Europe 10-40 Index returned -13.4% in US Dollar terms (-6.1% in Sterling terms) (all percentages with income reinvested).

All countries in the index posted negative returns over the period, except for the Czech Republic (+0.7%).

Markets in Turkey declined the most (down by 37.4%) driven by the weakness of the Turkish currency (down by 31.0% over the six month period). Turkey has a vulnerable economy with large reliance on external funding; persistently high inflation and expanding fiscal deficits have been putting pressure on the currency. The central bank’s decision not to hike rates, combined with higher interest rates in the US, has increased investors’ concerns over the monetary policy of the central bank. This has been exacerbated by the strained relations between Turkey and the US over a myriad of issues.

Amongst Central and Eastern Europe (CEE) countries, Hungary (-19.4%) and Poland (-16.9%) also declined, reacting to the broader market sell off and giving up gains from the previous period. In the EU, Consumer Price Index (CPI) statistics were lower than expected and the central banks did not increase rates, which led to weakness in financials across the region. The Czech Republic (+0.7%) was the period’s top performer, beating Central Europe, as its banks are less exposed to interest rate expectations and the largest utility saw corporate action speculation.

Markets in Greece fell by 18.4% and ended the period in negative territory, despite a good start. Performance was strong in April as the Greek banks successfully passed the European Central Bank (ECB) stress test without having to raise fresh capital. The country also reached a successful agreement with its creditors to complete the Third Bailout Programme. The market, however, followed the wider European markets down in May.

Russia (-3.0%) declined despite improving economic data, positive earnings revisions and oil price strength. Performance was driven by the political tensions around sanctions imposed on Russia by the US. Despite this negative market sentiment, the economy appeared to be strong. Inflation continued to stabilise below the Central Bank of Russia’s 4% target. The country also announced new measures which will help to improve fiscal discipline further, including an increase in the pension age, a VAT hike and higher taxes on the oil industry. All percentages stated above are in US Dollar terms, unless otherwise stated.

SIX MONTH PERFORMANCE REVIEW
The Company delivered -16.4% in US Dollar terms for the 6-month period ended 31 July 2018 and underperformed the MSCI Emerging Markets Europe 10-40 Index by 3.0% in US Dollar terms over the same time period.

The main detractor from performance was the stock selection in Russia. Specifically, the portfolio overweight in Sberbank was the largest detractor from absolute returns as the stock fell by 26% over the period following the US sanctions announcement in April. Only partially offsetting this was the portfolio overweight in Russian energy names, such as Rosneft, Lukoil and Novatek, which all generated strong returns following the rally in oil prices.

Stock selection in Hungary weighed on performance too. The portfolio’s position in pharmaceutical name, Gedeon Richter, failed to be as defensive as we had hoped. The stock declined following concerns from the European Medicines Agency regarding the safety of one of their drugs. The review has been completed and no adverse finding was made. We maintain the position in the stock as we believe the US regulator will likely soon approve the same drug and that the higher margin and faster growth will drive up both the company’s revenues and margins.

In Poland, the overweight in Alior Bank detracted from absolute performance as it sold off in line with the regional banks.

The overall portfolio underweight in Turkey benefited relative performance. In particular, the underweight in Turkish banks (including Garanti Bank and Akbank) contributed to relative returns. However on an absolute basis there was no place to hide and the portfolio positions in Migros Ticaret, a supermarket chain, and in household appliances manufacturer Arçelik, detracted from returns.

THANK YOU AND GOODBYE
From the date when BlackRock took over the mandate on 1 May 2009 to 31 July 2018, our shareholders have seen the share price rise by more than 146% (in Sterling terms), against 76.4% for the MSCI Emerging Markets Europe 10-40 Index (net return in Sterling terms) (on a US Dollar basis the Company’s share price rose by 118%). The Company has been a top decile performer compared to other open-ended peers as well as the best performer in its closed-ended peer group in the AIC Emerging European Markets sector over this period.

Perhaps most astonishing is the backdrop against which these returns have been generated between 2009 and 2018. In Eastern Europe we have witnessed three bailouts in Greece, a coup attempt in Turkey, the Russian annexation of a part of Ukraine (both countries we invest in), the resulting sanctions on Russia, and more recently new sanctions placed on Turkey. The Ruble has lost almost half of its value vs the US Dollar over the period, and the Lira has lost more than two-thirds of its value.

The results appear to support the Company’s investment process, and perhaps more importantly its main tenet, that it is much easier to make excess returns when others are panicking, as that is when the best value tends to present itself. In fact during the last three years (31 July 201531 July 2018), arguably the most challenging endured by the region, the Company’s NAV per share has outperformed the FTSE 100, the MSCI World and the much vaunted S&P 500 indices.

When we look around at the world today we are excited because we see so much opportunity both in our region and throughout the Global Emerging Market complex. Some economies are on the cusp of defaulting, select currencies are falling over, global trade may be cooling, volatility has returned to the markets and economic sanctions are distorting ever larger portions of the globe. The road ahead for investors will not be an easy one, but we do believe it can be a profitable one. Our greatest regret is that we will not be able to take advantage of these opportunities in this particular Company.

This leaves us only to thank the Board for their support, and you, our investors, for coming along this journey with us. We hope that it has proven profitable for you.

Sam Vecht and Christopher Colunga
BlackRock Investment Management (UK) Limited

2 October 2018

PORTFOLIO ANALYSIS AS AT 31 JULY 2018






Russia 





Poland 





Greece 





Turkey 





Hungary 





Other 

 

Net 
current 
assets* 



Net 
assets 
31.07.18 



Net 
assets 
31.01.18 

MSCI EM 
Europe 
10-40 
Index 
31.07.18 
Consumer Discretionary  –   –   –  1.6   –   –   –  1.6  0.5  4.1 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Consumer Staples 4.1   –   –  2.9   –  2.2   –  9.2  10.5  4.9 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Energy 31.5   –   –   –   –   –   –  31.5  26.3  38.0 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Financials 13.7  19.0  6.6   –   –  2.8   –  42.1  39.0  29.8 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Health Care  –   –   –   –  3.6   –   –  3.6  5.8  0.8 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Industrials  –   –   –   –   –   –   –   –  1.2  2.4 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Information Technology 1.8   –   –   –   –   –   –  1.8  3.1  1.1 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Materials  –   –   –   –   –  1.4   –  1.4  4.3  11.6 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Real Estate  –   –   –   –   –   –   –   –   –  0.2 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Telecommunication Services 4.9   –   –   –   –   –   –  4.9  7.7  4.0 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Utilities  –   –   –   –   –   –   –   –   –  3.1 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Other  –   –   –   –   –   –  3.9  3.9  1.6   – 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
% net assets 31.07.18 56.0  19.0  6.6  4.5  3.6  6.4  3.9  100.0   –   – 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
% net assets 31.01.18 57.9  15.1  7.0  7.9  3.7  6.8  1.6   –  100.0   – 
 --------   --------   --------   --------   --------   --------   --------   --------   --------   -------- 
MSCI EM Europe 10-40 Index 31.07.18 55.5  20.1  5.1  11.6  4.6  3.1   –   –   –  100.0 
 ========   ========   ========   ========   ========   ========   ========   ========   ========   ======== 

*               Net current assets excludes investments held at fair value through profit and loss.

The table above shows the analysis of the net assets as at 31 July 2018 by sector and region, compared with the net assets as at 31 January 2018 and the MSCI EM Europe 10-40 Index breakdown as at 31 July 2018.

FIFTEEN LARGEST INVESTMENTS AS AT 31 JULY 2018

Sberbank – 13.7% (2018: 9.6%) is Russia’s largest state-owned bank. It has branches throughout the country and has a 46% share in the retail deposit market. The bank continues to build on its restructuring strategy that has driven much of its success over the past few years, improving its services and the efficiency with which they are delivered. It has a strong capital base and is increasing its dividend.

Lukoil – 12.3% (2018: 9.2%) was formed in 1991 following the merger of three state-run companies in western Siberia. The three companies were called Langepasneftegaz, Urayneftegaz and Kogalymneftegaz and this heritage is preserved in the company’s current name. Today, the company is the largest privately-owned company in Russia by proved oil reserves. Lukoil is a highly competitive oil producer even at low oil prices and generates significant free cash flow which supports its progressive dividend policy and share buybacks.

Gazprom – 7.8% (2018: 8.9%) is Russia’s largest gas producer and transporter, with a pipeline export monopoly. Despite its status as one of the most profitable companies in the world, Russian energy giant, Gazprom has been out of favour with investors. We believe that the risks of Gazprom are more than priced into the valuation and the company pays an attractive dividend yield.

PKO Bank Polski – 6.6% (2018: 7.4%) is Poland’s largest bank. PKO has one of the strongest deposit franchises in the country, meaning it has a structurally lower cost of funding than peers. The bank trades at attractive valuations and should benefit from interest rate increases when they occur.

Novatek – 5.9% (2018: 5.1%) is Russia’s largest independent natural gas producer. The company is set to enter a new phase of growth through launching its Yamal LNG project and breaking ground on the even larger Arctic LNG2.

Rosneft Oil Company – 5.5% (2018: 4.2%) is the leader of Russia’s petroleum industry specialising in exploration, production, and refining. The company has been undergoing a restructuring phase, increasing efficiency, acquiring new assets within Russia and abroad, whilst disposing of stakes in mature fields. The production growth profile coupled with improving cash flow make the company attractive.

Alior Bank – 4.7% (2018: 0.0%) is the largest challenger bank in Poland and benefits from a strong IT platform. The bank trades at attractive valuations and is seeing rapid earnings growth as it completes a restructuring programme.

Lenta – 4.1% (2018: 4.6%) is one of the largest retail chains in Russia and the country’s largest hypermarket chain. The company continues to grow its business, and should benefit from improved consumer spending which is not reflected in the current valuation.

PZU – 3.9% (2018: 4.1%) is Poland’s largest insurance company, active in both the life and non-life segments for over 16 million customers. Its scale and unparalleled distribution network – both through direct sales and a network of 12,000 agents – provide a strong competitive advantage that enables the company to generate attractive returns.

Bank Pekao – 3.8% (2018: 5.3%) is the second largest bank in Poland with its headquarters in Warsaw. The bank trades at attractive valuations, has decent growth and pays a large dividend.

Gedeon Richter – 3.6% (2018: 3.7%) is a generic pharmaceuticals producer in Central Eastern Europe and Russia that is currently in the process of transforming itself into a specialty pharmaceutical company. In the past, it has largely developed APIs (Active Pharmaceutical Ingredients) and generics, but it is now starting to generate an increasing share of its profits from higher margin, innovative drugs both for women’s health care and the central nervous system. We hold the stock on the premise that these higher margin and faster growing specialty drugs will drive up both the company’s revenues and margins.

Mobile TeleSystems – 3.6% (2018: 3.6%) is the largest mobile operator in Russia and CIS. The company provides mobile and fixed line voice and data telecommunications services, including data transfer, broadband, pay-television and various value-added services, as well as selling equipment and accessories. The industry has improving competitive dynamics and the stock pays an attractive dividend yield.

National Bank of Greece – 3.4% (2018: 3.6%) is a leading banking and financial services company in Greece. It has one of the strongest capital bases in the country and has been showing steady improvement in the quality of its loan book.

Alpha Bank – 3.2% (2018: 3.4%) is the third largest Greek bank by total assets, and the largest by market capitalization. The bank offers a wide range of high-quality financial products and services, including retail banking, SMEs and corporate banking, asset management and private banking, the distribution of insurance products, investment banking, brokerage and real estate management.

Migros Ticaret – 2.9% (2018: 2.8%) is one of the biggest supermarket chains in Turkey. It engages in the retail sale of food and beverages, and consumer and durable goods. We purchased the stock with the expectation that high inflation should benefit the retail sector relative to other sectors in Turkey.

All percentages reflect the value of the holding as a percentage of net assets. Percentage in brackets represents the value of the holding at 31 January 2018. Together, the fifteen largest investments represents 85.0% of net assets (31 January 2018: 78.8%).

INVESTMENTS AS AT 31 JULY 2018

Country of 
operation 
Market 
value 
US$’000 
% of 
net assets 
Financials
Sberbank Russia  22,935  13.7 
PKO Bank Polski Poland  11,018  6.6 
Alior Bank Poland  7,854  4.7 
PZU Poland  6,500  3.9 
Bank Pekao Poland  6,383  3.8 
National Bank of Greece Greece  5,663  3.4 
Alpha Bank Greece  5,365  3.2 
Erste Group Bank Austria  4,602  2.8 
 --------   -------- 
70,320  42.1 
 --------   -------- 
Energy
Lukoil Russia  20,662  12.3 
Gazprom Russia  13,074  7.8 
Novatek Russia  9,807  5.9 
Rosneft Oil Company Russia  9,233  5.5 
 --------   -------- 
52,776  31.5 
 --------   -------- 
Consumer Staples
Lenta Russia  6,825  4.1 
Migros Ticaret Turkey  4,826  2.9 
MHP Ukraine  3,800  2.2 
 --------   -------- 
15,451  9.2 
 --------   -------- 
Telecommunication Services
Mobile TeleSystems Russia  5,976  3.6 
Sistema Russia  2,168  1.3 
 --------   -------- 
8,144  4.9 
 --------   -------- 
Health Care
Gedeon Richter Hungary  6,019  3.6 
 --------   -------- 
6,019  3.6 
 --------   -------- 
Information Technology
Mail.Ru Russia  3,084  1.8 
 --------   -------- 
3,084  1.8 
 --------   -------- 
Consumer Discretionary
Arçelik Turkey  2,716  1.6 
 --------   -------- 
2,716  1.6 
 --------   -------- 
Materials
Eldorado Gold Pan Emerging Europe  2,370  1.4 
 --------   -------- 
2,370  1.4 
 --------   -------- 
Total investments 160,880  96.1 
 --------   -------- 
Net current assets* 6,466  3.9 
Preference shares (19) – 
 --------   -------- 
Net assets 167,327  100.0 
 ========   ======== 

*     Net current assets excludes investments held at fair value through profit and loss and preference shares

Application of the liquidation basis of preparation requires net realisable or settlement values to be reflected. Until shareholders have elected to exit for cash or rollover into the BlackRock Frontiers Investment Trust plc, it is not possible to determine to what extent the portfolio will need to be sold down. In addition, there are other factors which make some disposal costs hard to quantify until the sale is executed (for example the market value impact of selling the portfolio over a short period).   Consequently, as it is not possible to reliably estimate the cost of disposing of the Company’s investments, disposal costs have not been included in the reconciliation above.

The total number of investments held at 31 July 2018 was 21 (31 January 2018: 28). All investments are in equity shares unless otherwise stated.

During the period, the Company entered into CFDs to gain short exposure on individual securities. At the period end, no short CFDs were held (31 January 2018: one) with a fair value profit of US$nil (31 January 2018: fair value loss of US$102,000) and an underlying market value of US$nil (31 January 2018: US$3,476,000).

The Company did not hold any equity interest comprising more than 3% of any company’s ordinary share capital as at 31 July 2018.

INCOME STATEMENT (LIQUIDATION BASIS) FOR THE SIX MONTHS ENDED 31 JULY 2018





Note 
Revenue US$’000 Capital US$’000 Total US$’000
Six months ended Year 
ended 
31.01.18 
(audited) 
Six months ended Year 
ended 
31.01.18 
(audited) 
Six months ended Year 
ended 
31.01.18 
(audited) 
31.07.18 
(unaudited) 
31.07.17 
(unaudited) 
31.07.18 
(unaudited) 
31.07.17 
(unaudited) 
31.07.18 
(unaudited) 
31.07.17 
(unaudited) 
(Losses)/gains on investments held at fair value through profit or loss  –   –   –  (37,380) 9,364  49,550  (37,380) 9,364  49,550 
Gains on foreign exchange  –   –   –  75  26  75  26 
(Losses)/gains on contracts for difference (90) (93) (107) 1,769  (347) 21  1,679  (440) (86)
Income from investments held at fair value through profit or loss 4,500  5,987  7,533   –   –   –  4,500  5,987  7,533 
Other income 28   –   –   –  28 
    --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Total income 4,411  5,897  7,454  (35,536) 9,023  49,597  (31,125) 14,920  57,051 
    --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Expenses
Investment management fees (213) (204) (421) (497) (475) (981) (710) (679) (1,402)
Other operating expenses (274) (168) (507) (184) (40) (58) (458) (208) (565)
Liquidation costs  –   –   –  (514)  –   –  (514)  –   – 
    --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Total operating expenses (487) (372) (928) (1,195) (515) (1,039) (1,682) (887) (1,967)
    --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Net profit/(loss) on ordinary activities before finance costs and taxation 3,924  5,525  6,526  (36,731) 8,508  48,558  (32,807) 14,033  55,084 
Finance costs (36) (9) (14) (85) (21) (32) (121) (30) (46)
    --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Net profit/(loss) on ordinary activities before taxation 3,888  5,516  6,512  (36,816) 8,487  48,526  (32,928) 14,003  55,038 
Taxation (468) (662) (822)  –   –   –  (468) (662) (822)
    --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Net profit/(loss) on ordinary activities after taxation 3,420  4,854  5,690  (36,816) 8,487  48,526  (33,396) 13,341  54,216 
    --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Earnings/(loss) per ordinary share (US$ cents) 10  9.52  13.51  15.84  (102.50) 23.63  135.11  (92.98) 37.14  150.95 
    ========   ========   ========   ========   ========   ========   ========   ========   ======== 

The total column of this statement represents the Company’s profit and loss account. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period. All income is attributable to the equity holders of the company.

The net profit/(loss) for the period disclosed above represents the Company’s total comprehensive income.

STATEMENT OF CHANGES IN EQUITY (LIQUIDATION BASIS) FOR THE SIX MONTHS ENDED 31 JULY 2018



Note
Called up 
share 
capital 
US$’000 
Share 
premium 
account 
US$’000 
Capital 
redemption 
reserve 
US$’000 

Capital 
reserves 
US$’000 

Revenue 
reserve 
US$’000 


Total 
US$’000 
For the six months ended 31 July 2018 (unaudited)
At 31 January 2018 4,092  41,684  5,930  163,248  (8,527) 206,427 
Total comprehensive income:
(Loss)/profit for the period  –   –   –  (36,816) 3,420  (33,396)
Transactions with owners, recorded directly to equity:
Tender costs 7  –   –   –  (317)  –  (317)
Dividend paid1  –   –   –   –  (5,387) (5,387)
 --------   --------   --------   --------   --------   -------- 
At 31 July 2018 4,092  41,684  5,930  126,115  (10,494) 167,327 
 --------   --------   --------   --------   --------   -------- 
For the six months ended 31 July 2017 (unaudited)
At 31 January 2017 4,133  41,684  5,889  114,768  (11,523) 154,951 
Total comprehensive income:
Profit for the period  –   –   –  8,487  4,854  13,341 
Transactions with owners, recorded directly to equity:
Ordinary shares purchased for cancellation (1)  –  (46)  –  (46)
Treasury shares cancelled (40)  –  40   –   –   – 
Dividend paid2  –   –   –   –  (2,694) (2,694)
 --------   --------   --------   --------   --------   -------- 
At 31 July 2017 4,092  41,684  5,930  123,209  (9,363) 165,552 
 --------   --------   --------   --------   --------   -------- 
For the year ended 31 January 2018 (audited)
At 31 January 2017 4,133  41,684  5,889  114,768  (11,523) 154,951 
Total comprehensive income:
Profit for the year  –   –   –  48,526  5,690  54,216 
Transactions with owners, recorded directly to equity:
Ordinary shares purchased for cancellation (1)  –  (46)  –  (46)
Treasury shares cancelled (40)  –  40   –   –   – 
Dividend paid2  –   –   –   –  (2,694) (2,694)
 --------   --------   --------   --------   --------   -------- 
At 31 January 2018 4,092  41,684  5,930  163,248  (8,527) 206,427 
 ========   ========   ========   ========   ========   ======== 

1              Final dividend of 15.00 cents per share for the year ended 31 January 2018, declared on 23 March 2018 and paid on 28 June 2018.
2              Final dividend of 7.50 cents per share for the year ended 31 January 2017, declared on 28 March 2017 and paid on 28 June 2017.

The transaction costs incurred on the acquisition and disposal of investments amounted to US$50,000 and US$60,000 respectively for the six months ended 31 July 2018 (six months ended 31 July 2017: US$100,000 and US$104,000; year ended 31 January 2018: US$222,000 and US$160,000). All transaction costs have been included within the capital reserves.

BALANCE SHEET (LIQUIDATION BASIS) AS AT 31 JULY 2018




Note 
31 July 
2018 
US$’000 
(unaudited) 
31 July 
2017 
US$’000 
(unaudited) 
31 January 
2018 
US$’000 
(audited) 
Fixed assets
Investments held at fair value through profit or loss 13   –  156,390  206,683 
    --------   --------   -------- 
Current assets
Investments held at fair value through profit or loss 13  160,880   –   – 
Debtors 1,467  5,136  7,000 
Cash and cash equivalents 6,205  5,084 
Collateral pledged in respect of contracts for difference  –  557   – 
Derivative financial assets  –  80   – 
    --------   --------   -------- 
168,552  10,857  7,001 
    --------   --------   -------- 
Creditors – amounts falling due within one year
Bank overdraft  –   –  (4,794)
Amounts payable in respect of contracts for difference  –  (433) (102)
Liquidation costs (514)  –   – 
Preference shares of £1.00 each (one quarter paid) 11  (19)  –   – 
Other creditors (692) (1,243) (2,342)
    --------   --------   -------- 
(1,225) (1,676) (7,238)
    --------   --------   -------- 
Net current assets/(liabilities) 167,327  9,181  (237)
    --------   --------   -------- 
Total assets less current liabilities 167,327  165,571  206,446 
    --------   --------   -------- 
Creditors – amounts falling due after more than one year
Preference shares of £1.00 each (one quarter paid) 11   –  (19) (19)
    --------   --------   -------- 
Net assets 167,327  165,552  206,427 
    --------   --------   -------- 
Capital and reserves
Called up share capital 12  4,092  4,092  4,092 
Share premium account 41,684  41,684  41,684 
Capital redemption reserve 5,930  5,930  5,930 
Capital reserves 126,115  123,209  163,248 
Revenue reserve (10,494) (9,363) (8,527)
    --------   --------   -------- 
Total shareholders’ funds 167,327  165,552  206,427 
    --------   --------   -------- 
Net asset value per ordinary share (US$ cents) 10  465.88  460.94  574.75 
    ========   ========   ======== 

STATEMENT OF CASH FLOWS (LIQUIDATION BASIS) FOR THE SIX MONTHS ENDED 31 JULY 2018

Six months 
ended 
31 July 
2018 
US$’000 
(unaudited) 
Six months 
ended 
31 July 
2017 
US$’000 
(unaudited) 
Year 
ended 
31 January 
2018 
US$’000 
(audited) 
Operating activities
Net (loss)/profit on ordinary activities before taxation (32,928) 14,003  55,038 
Add back finance costs 121  30  46 
Losses/(gains) on investments held at fair value through profit or loss 35,620  (9,033) (49,613)
Gains on foreign exchange (75) (6) (26)
Sales of investments 74,434  65,641  121,276 
Purchases of investments (66,011) (58,742) (127,378)
Net realised gains/(losses) on contracts for difference 1,658  (340) 236 
Decrease/(increase) in debtors 5,533  (1,827) 190 
(Decrease)/increase in creditors (1,193) 611  742 
Net movement in collateral pledged with brokers –  (124) – 
Tax on investment income (468) (870) (1,049)
 --------   --------   -------- 
Net cash generated from/(used in) operating activities 16,691  9,343  (538)
 --------   --------   -------- 
Financing activities
Ordinary shares purchased for cancellation –  (46) (46)
Tender costs paid (260) –  – 
Interest paid (121) (30) (46)
Dividend paid (5,387) (2,694) (2,694)
 --------   --------   -------- 
Net cash used in financing activities (5,768) (2,770) (2,786)
 --------   --------   -------- 
Increase/(decrease) in cash and cash equivalents 10,923  6,573  (3,324)
 --------   --------   -------- 
Cash and cash equivalents at the beginning of the period (4,793) (1,495) (1,495)
Effect of foreign exchange rate changes 75  26 
 --------   --------   -------- 
Cash and cash equivalents at the end of period 6,205  5,084  (4,793)
 --------   --------   -------- 
Comprised of:
Cash at bank 6,205  5,084 
Bank overdraft –  –  (4,794)
 --------   --------   -------- 
6,205  5,084  (4,793)
 ========   ========   ======== 

NOTES TO THE FINANCIAL STATEMENTS (LIQUIDATION BASIS) FOR THE SIX MONTHS ENDED 31 JULY 2018

1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment trust company within the meaning of section 1158 of the Corporation Tax Act 2010.

2. BASIS OF PREPARATION
The Company presents its results and positions under FRS 102, ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ (FRS 102), which forms part of revised Generally Accepted Accounting Practice (New UK GAAP) issued by the Financial Reporting Council (FRC) in 2013.

As announced on 14 June 2018 and explained in the Chairman’s Statement, the proposed tender offer to the shareholders of the Company would have resulted in the remaining assets of the Company being below the minimum level which the Board deemed necessary for the Company to continue. The Board has therefore concluded that the Company cannot continue as a viable entity and has resolved to prepare these financial statements on a liquidation basis.

The application of the liquidation basis results in the Company’s assets and liabilities being stated at their net realisable or settlement values. Accordingly the following adjustments have been applied:

1)   The value of investments have been recognised as current assets at their fair value on 31 July 2018. Until shareholders have elected to either exit their holding in the Company for cash or transfer into the rollover vehicle (the BlackRock Frontiers Investment Trust plc) it is not possible to determine to what extent the Company’s portfolio will need to be sold down for cash, or the level of portfolio holdings which will need to ultimately be transferred across to the rollover vehicle. In addition, there are other factors which make some disposal costs hard to quantify until the sale is executed (for example the market value impact of selling the portfolio over a short period). Consequently, as it is not possible to reliably estimate the costs of disposing of investments, disposal costs have not been deducted from the value of investments. Up until the point of liquidation, the fair value of investments will be subject to normal market movements.

2)   Preference shares have been recognised as current liabilities.

3)   Other expected costs of liquidation have been recognised as a current liability where an obligation can be estimated reliably.

The condensed set of financial statements has been prepared on a liquidation basis in accordance with FRS 102 and FRS 104, ‘Interim Financial Reporting’ issued by the FRC in March 2015 and the revised Statement of Recommended Practice – ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (SORP) issued by the Association of Investment Companies (AIC) in November 2014 and updated in January 2017.

The accounting policies applied for the condensed set of financial statements, apart from the changes stipulated above in accordance with the preparation of the financial statements under the liquidation basis, are as set out in the Company’s Annual Report and Financial Statements for the year ended 31 January 2018.

3. INCOME
 

Six months 
ended 
31 July 
2018 
US$’000 
(unaudited) 
Six months 
ended 
31 July 
2017 
US$’000 
(unaudited) 
Year 
ended 
31 January 
2018 
US$’000 
(audited) 
Investment income:
UK listed dividends  – 
UK listed special dividends  –  21  21 
Overseas listed dividends 4,500  5,964  7,370 
Overseas listed special dividends  –   –  140 
 --------   --------   -------- 
4,500  5,987  7,533 
Net loss from contracts for difference (90) (93) (107)
 --------   --------   -------- 
4,410  5,894  7,426 
 --------   --------   -------- 
Other income:
Deposit interest 28 
 --------   --------   -------- 
Total income 4,411  5,897  7,454 
 ========   ========   ======== 

Dividends and interest received in cash during the period amounted to US$3,356,000 and US$1,000 (six months ended 31 July 2017: US$4,023,000 and US$3,000; year ended 31 January 2018: US$7,740,000 and US$28,000) respectively.

4. INVESTMENT MANAGEMENT FEE
 

Six months ended
31 July 2018
(unaudited)
Six months ended
31 July 2017
(unaudited)
Year ended
31 January 2018
(audited)
Revenue 
US$’000 
Capital 
US$’000 
Total 
US$’000 
Revenue 
US$’000 
Capital 
US$’000 
Total 
US$’000 
Revenue 
US$’000 
Capital 
US$’000 
Total 
US$’000 
Investment management fee 213  497  710  204  475  679  421  981  1,402 
 ========   ========   ========   ========   ========   ========   ========   ========   ======== 

BFM is the Company’s AIFM, having been authorised as an AIFM by the FCA on 1 May 2014. The management contract is terminable by either party on six months’ notice. BIM (UK) acts as the Company’s Investment Manager under a delegation agreement with BFM. BIM (UK) also acted as the Secretary of the Company throughout the period.

With effect from 1 April 2017 the management fee has been reduced from 1.0% per annum of the Company’s average daily market capitalisation to 0.80% per annum of the Company’s daily net asset value.

The management fee is allocated 70% to capital reserves and 30% to the revenue reserve.

5. OTHER OPERATING EXPENSES
 






Other operating expenses 
Six months 
ended 
31 July 
2018 
US$’000 
(unaudited) 
Six months 
ended 
31 July 
2017 
US$’000 
(unaudited) 
Year 
ended 
31 January 
2018 
US$’000 
(audited) 
Taken to revenue:
Custody fee 55  33  80 
Custody fee – write back1 –  (25) (33)
Depositary fees 12  19 
Audit fee 18  20  41 
Registrar’s fees 15  14  29 
Directors’ emoluments 88  64  189 
Directors’ emoluments – write back –  –  (28)
Marketing fees 16  16  40 
Other administration costs2 70  37  170 
 --------   --------   -------- 
274  168  507 
 --------   --------   -------- 
Taken to capital:
Transaction costs 184  40  58 
 --------   --------   -------- 
458  208  565 
 ========   ========   ======== 
  1. The custody fees at 31 July 2018 include expenses of US$55,000 in respect of the current period (31 July 2017: US$33,000; 31 January 2018: US$80,000) and a writeback of US$nil in respect of prior periods (31 July 2017: US$25,000; 31 January 2018: US$33,000).

  2. Other administration costs of US$37,000 for the six months ended 31 July 2017 included a credit for the write back of old accruals of US$47,000.

    A significant proportion of the Company’s operating expenses are paid in Sterling and are therefore subject to exchange rate fluctuations.

    6. LIQUIDATION COSTS
     

    Further to the proposals outlined in the Chairman’s statement and the decision to prepare the Half Yearly Financial Statements on a liquidation basis, liquidation costs of US$514,000 (inclusive of VAT where relevant) have been accrued as at the balance sheet date. These costs include legal fees (US$118,000), broker’s fees (US$157,000), liquidator’s fees (US$79,000), reporting accountant’s fees (US$24,000), printing and postage costs (US$12,000), registrar’s fees (US$31,000) and other sundry costs of US$27,000. A liquidator’s contingency accrual of US$66,000 is also included in this amount, which is a retention required by the liquidators (in addition to their fee) to cover any unknown and/or unascertained liabilities of the Company that might arise subsequent to the Company being placed into liquidation. To the extent that no such liabilities arise, the retention will be released and the equivalent balance will be distributed in due course. Liquidation costs are stated inclusive of VAT, some of which may be recoverable in the future. A contingent asset for any potentially recoverable VAT has not been recognised.

    7. TENDER COSTS
     

    As outlined in the Chairman’s statement the Board undertook in June 2013 to provide shareholders with an opportunity to exit their investment in the Company prior to 21 June 2018. Costs of US$317,000 (inclusive of VAT where relevant) were incurred as a result of the tender offer process. These costs include legal fees (US$65,000), broker’s fees (US$200,000), printing and postage costs (US$13,000), registrar’s fees (US$32,000) and other sundry costs of US$7,000. Tender costs are stated inclusive of VAT, some of which may be recoverable in the future. A contingent asset for any potentially recoverable VAT has not been recognised.

    8. FINANCE COSTS

Six months ended
31 July 2018
(unaudited)
Six months ended
31 July 2017
(unaudited)
Year ended
31 January 2018
(audited)
Revenue 
US$’000 
Capital 
US$’000 
Total 
US$’000 
Revenue 
US$’000 
Capital 
US$’000 
Total 
US$’000 
Revenue 
US$’000 
Capital 
US$’000 
Total 
US$’000 
Interest on bank overdraft 36  85  121  21  30  14  32  46 
 --------   --------   --------   --------   --------   --------   --------   --------   -------- 
Total 36  85  121  21  30  14  32  46 
 ========   ========   ========   ========   ========   ========   ========   ========   ======== 

9. DIVIDENDS
In accordance with FRS 102, Section 32 ‘Events After the End of the Reporting Period’, dividends payable on the ordinary shares are not included as a liability in the financial statements, as dividends are only recognised when they have been paid.

The Board has not declared an interim dividend (six months ended 31 July 2017: nil; year ended 31 January 2018: 15.00 cents).

10. EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE
Revenue and capital earnings per ordinary share and net asset value per ordinary share are shown below and have been calculated using the following:

Six months 
ended 
31 July 
2018 
(unaudited)
Six months 
ended 
31July 
2017 
(unaudited)
Year 
ended 
31 January 
2018 
(audited)
Net revenue profit attributable to ordinary shareholders (US$’000) 3,420  4,854  5,690 
Net capital (loss)/profit attributable to ordinary shareholders (US$’000) (36,816) 8,487  48,526 
 --------   --------   -------- 
Total (loss)/profit (US$’000) (33,396) 13,341  54,216 
 --------   --------   -------- 
Equity shareholders’ funds (US$’000) 167,327  165,552  206,427 
 --------   --------   -------- 
Earnings per share
The weighted average number of ordinary shares in issue during each period, on which the basic return per ordinary share was calculated, was: 35,916,028  35,916,680  35,916,352 
 --------   --------   -------- 
The actual number of ordinary shares in issue at the end of each period, on which the undiluted net asset value was calculated, was: 35,916,028  35,916,028  35,916,028 
 --------   --------   -------- 
Calculated on weighted average number of ordinary shares
Revenue profit (US$ cents) 9.52  13.51  15.84 
Capital (loss)/profit (US$ cents) (102.50) 23.63  135.11 
 --------   --------   -------- 
Total (loss)/profit (US$ cents) (92.98) 37.14  150.95 
 ========   ========   ======== 

   

As at 
31 July 
2018 
(unaudited) 
As at 
31 July 
2017 
(unaudited) 
As at 
31 January 
2018 
(audited) 
Net asset value per share (US$ cents) 465.88  460.94  574.75 
Ordinary share price (US$ cents)* 447.32  427.33  549.64 
 ========   ========   ======== 

*     The Company’s share price is quoted in Sterling and the above represents the US Dollar equivalent using an exchange rate of 1.3118 pounds to one US Dollar (31 January 2018: 1.4221 pounds to one US Dollar; 31 July 2017: 1.3184 pounds to one US Dollar).

11. PREFERENCE SHARES
 

As at 
31 July 
2018 
US$’000 
(unaudited) 
As at 
31 July 
2017 
US$’000 
(unaudited) 
As at 
31 January 
2018 
US$’000 
(audited) 
Allotted, issued and one quarter paid:
Recognised in Creditors – amounts falling due within one year 19   –   – 
Recognised in Creditors – amounts falling due after more than one year  –  19  19 
 --------   --------   -------- 
Shares in issue at 31 July 2018, 50,000 preference shares of £1.00 each 19  19  19 
 ========   ========   ======== 

As these financial statements are being prepared on a liquidation basis the preference shareholders will have the capital due to them returned within one year.

Accordingly, the amount payable has been reclassified as a creditor falling due within one year as at 31 July 2018.

The preference shares confer no right to receive notice of or attend or vote at any general meeting of the Company except upon any resolution to vary the rights attached to the preference shares. They carry the right to receive a fixed dividend of US$0.01 per preference share per annum, payable on demand. On a winding up or return of capital, the preference shares confer the right to be paid, out of the assets of the Company available for distribution, the capital paid up on such shares pari passu with and in proportion to any amounts of capital paid to ordinary shareholders, but do not confer any right to participate in the surplus assets of the Company. In the period to 31 July 2018 and the previous year, the preference shareholders waived their rights to any preference dividend.

12. SHARE CAPITAL AND SHARES HELD IN TREASURY
 

Ordinary 
shares 
number 
Treasury 
shares 
number 
Total 
shares 
number 
Nominal 
value 
US$’000 
Allotted, called up and fully paid share capital comprised:
Ordinary shares of 10 cents each
At 1 February 2018 35,916,028  5,000,000  40,916,028  4,092 
 --------   --------   --------   -------- 
At 31 July 2018 35,916,028  5,000,000  40,916,028  4,092 
 ========   ========   ========   ======== 

During the period no ordinary shares were repurchased and cancelled (31 July 2017: 11,800 shares; 31 January 2018: 11,800 shares) for a total consideration of US$nil (31 July 2017: US$46,000; year ended 31 January 2018: US$46,000) and no shares were cancelled from treasury (31 July 2017: 400,000 shares; 31 January 2018: 400,000 shares).

13. VALUATION OF FINANCIAL INSTRUMENTS

Financial assets and financial liabilities are either carried in the Balance Sheet at their fair value (investments) or at an amount which is a reasonable approximation of fair value (due from brokers, dividends and interest receivable, due to brokers, accruals, cash and cash equivalents and overdrafts). Section 11 of FRS 102 requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The valuation techniques used by the Company are explained in the accounting policies note on page 50 of the Annual Report and Financial Statements for the year ended 31 January 2018.

The application of the liquidation basis results in the Company’s assets and liabilities being stated at their net realisable or settlement values. Until shareholders have elected to either exit their holding in the Company for cash or transfer into the rollover vehicle (the BlackRock Frontiers Investment Trust plc) it is not possible to determine to what extent the Company's portfolio will need to be sold down for cash, or the level of portfolio holdings which will need to ultimately be transferred across to the rollover vehicle. In addition, there are other factors which make some disposal costs hard to quantify until the sale is executed (for example the market value impact of selling the portfolio over a short period). Consequently, as it is not possible to reliably estimate the costs of disposing of investments, disposal costs have not been deducted from the value of investments. Up until the point of liquidation, the fair value of investments will be subject to normal market movements. The value of investments have been recognised as current assets at their fair value on 31 July 2018.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.

The fair value hierarchy has the following levels:

Level 1 – Quoted market price for identical instruments in active markets
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Company does not adjust the quoted price for these instruments.

Level 2 – Valuation techniques using observable inputs
This category includes instruments valued using quoted prices in active markets for similar instruments in markets that are considered less than active, or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

Valuation techniques used for non-standardised financial instruments such as over-the-counter derivatives, include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity specific inputs.

Level 3 – Valuation techniques using significant unobservable inputs
This category includes all instruments where the valuation technique includes inputs not based on observable market data and the unobservable inputs could have a significant impact on the instrument’s valuation.

This category also includes instruments that are valued based on quoted prices for similar instruments where significant entity determined adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market. The Investment Manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement.

Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes ‘observable’ inputs requires significant judgement by the Investment Manager.

The table below gives an analysis of the Company’s financial instruments measured at fair value at the balance sheet date.


Financial assets at fair value through profit or loss at 31 July 2018 (unaudited) 
Level 1 
US$’000
Level 2 
US$’000
Level 3 
US$’000
Total 
US$’000
Assets:
Equity investments 160,880 160,880
-------- -------- -------- --------
Total 160,880 160,880
======== ======== ======== ========

   


Financial assets/(liabilities) at fair value through profit or loss at 31 July 2017 (unaudited) 
Level 1 
US$’000
Level 2 
US$’000
Level 3 
US$’000
Total 
US$’000
Assets:
Equity investments 156,390  –  – 156,390
Derivative instruments – contracts for difference (gross exposure)  – 4,766  – 4,766
 --------   --------   --------   -------- 
Liabilities:
Derivative instruments – contracts for difference (gross exposure)  – (3,145)  – (3,145)
 --------   --------   --------   -------- 
Total 156,390 1,621  – 158,011
 ========   ========   ========   ======== 

   


Financial assets/(liabilities) at fair value through profit or loss at 31 January 2018 (audited) 
Level 1 
US$’000
Level 2 
US$’000
Level 3 
US$’000
Total 
US$’000
Assets:
Equity investments 206,683  –  – 206,683
Liabilities:
Derivative instruments – contracts for difference (gross exposure)  – (3,476)  – (3,476)
 --------   --------   --------   -------- 
Total 206,683 (3,476)  – 203,207
 ========   ========   ========   ======== 

CFDs were classified as Level 2 investments as their valuation was based on market observable inputs represented by the underlying quoted securities to which these contracts exposed the Company.

There were no transfers between levels for financial assets and financial liabilities during the period recorded at fair value as at 31 July 2018, 31 July 2017 and 31 January 2018. The Company did not hold any Level 3 securities throughout the six months ended 31 July 2018 (six months ended 31 July 2017: nil; year ended 31 January 2018: nil).

14. RELATED PARTY DISCLOSURE
The Board consists of five non-executive Directors, all of whom are considered to be independent by the Board. None of the Directors has a service contract with the Company. The Chairman receives an annual fee of £38,500, the Chairman of the Audit Committee/Senior Independent Director receives an annual fee of £28,500 and each of the other Directors receives an annual fee of £24,250.

At the period end and as at the date of this report members of the Board held ordinary shares in the Company as set out below:

2 October 
2018 
Ordinary 
shares 
31 July 
2018 
Ordinary 
shares 
Rachel Beagles 20,323  20,323 
Mark Bridgeman 8,650  8,650 
Philippe Delpal 12,000  12,000 
Neil England (Chairman) 156,633  156,633 
Robert Sheppard 10,000  10,000 
 ========   ======== 

15. TRANSACTIONS WITH THE AIFM AND THE INVESTMENT MANAGER
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable by either party on six months’ notice. The Board has served protective notice on the Manager, and there are no additional costs associated with the termination of the Management contract as a result of the liquidation proposals. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in note 4 on page 52 in the Annual Report and Financial Statements 31 January 2018.

The investment management fee due for the six months ended 31 July 2018 amounted to US$710,000 (six months ended 31 July 2017: US$679,000; year ended 31 January 2018: US$1,402,000).

At 31 July 2018, US$329,000 was outstanding in respect of the investment management fees (six months ended 31 July 2017: US$937,000; year ended 31 January 2018: US$1,053,000).

In addition to the above services, BlackRock has provided the Company with marketing services. The total fees paid or payable for these services for the period ended 31 July 2018 amounted to US$16,000 excluding VAT (six months ended 31 July 2017: US$16,000; year ended 31 January 2018: US$40,000). Marketing fees of US$26,000 were outstanding at 31 July 2018 (31 July 2017: US$23,000; 31 January 2018: US$47,000).

16. CONTINGENT LIABILITIES
There were no contingent liabilities at 31 July 2018 (31 July 2017: nil; 31 January 2018: nil).

17. PUBLICATION OF NON STATUTORY ACCOUNTS
The financial information contained in this half yearly report does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for the six months ended 31 July 2018 and 31 July 2017 has not been reviewed or audited by the Company’s auditors.

The information for the year ended 31 January 2018 has been extracted from the latest published audited financial statements, which have been filed with the Registrar of Companies. The report of the Auditor on those accounts contained no qualification or statement under sections 498(2) or (3) of the Companies Act 2006.

For further information, please contact:

Sarah Beynsberger, Director, Investment Companies, BlackRock Investment Management (UK) Limited
Tel: 020 7743 2639

Press enquires:

Lucy Horne, Lansons Communications - 020 7294 3689
E-mail: [email protected]

BlackRock Investment Management (UK) Limited
12 Throgmorton Avenue
London
EC2N 2DL

2 October 2018

The Half Yearly Financial Report will also be available on the BlackRock Investment Management website at http://www.blackrock.co.uk/beep.  Neither the contents of the Manager’s website nor the contents of any website accessible from hyperlinks on the Manager’s website (or any other website) is incorporated into, or forms part of, this announcement.


Source: PR Newswire (October 2, 2018 - 6:30 AM EDT)

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