Businesses need to adapt to AI ‘or risk failure’, says firm’s chairman

Updated: Feb 22, 2024 08:15 PM

Peter Burrows who is stepping down as the chairman of the Bermudian-incorporated investment company UIL Ltd (Photograph supplied)

The chairman of Bermudian-incorporated investment company UIL Ltd is to step down from the board at the end of next month.

Peter Burrows was appointed chairman in 2015 and will be replaced by Stuart Bridges, the current chairman of UIL’s audit and risk committee.

In another move, Peter Durhager has agreed to join the board of UIL, which holds 56.9 per cent of the issued and outstanding shares of West Hamilton, on March 31.

Mr Durhager is the chairman of Somers, one of UIL’s platform investments and in advance of his appointment, he will be retiring from the Somers board after its annual general meeting next month.

Writing in UIL’s half-yearly financial report, Mr Burrows said the six months to December 31, “has continued to be challenging on both the economic and, especially so, the geopolitical front”.

“At UIL this has been compounded given the need to reduce UIL’s bank debt significantly at this time.”

Mr Burrows wrote: “Market volatility has been driven by significant uncertainties in both the economy and social and geopolitical considerations.

“The key economic driver of markets has been the outlook for inflation in the developed world and the central banks’ focus on reducing it through higher central bank interest rates.

“While inflation is now on a lower trend, the remarkable outcome in many economies is that unemployment has remained well below trends and many economies have beaten expectations on GDP.”

However, he said, in the last quarter the market firmly shifted its views on central bank interest rate reductions from “if it will happen to when, especially in the USA”.

“Many central banks take their lead from the US Federal Reserve. The upshot has been strong gains for most markets,” he said. “Going forward we think most central banks have the opportunity to reduce rates.”

Mr Burrows added: “The war in Ukraine has gone on longer than expected and today there continues to be no clear way forward. The outlook is grim as both sides are unable to gain ground.

“The brutal conflict that has erupted in the Middle East is more concerning. These are deep-seated politically ideological differences between many parties in the Middle East established over many years.

“The concern must be that this escalates into a much wider conflict.”

He said that the ongoing friction between the USA and China “continues to deepen, and given these are the two largest economies globally this must pose significant risks at some point in the future, especially for technology businesses on each side of the Pacific Ocean”.

“Overlaid on all this is the USA election. The direction the USA takes matters and its position and influence in the above mentioned conflicts is itself very uncertain,” added Mr Burrows.

On climate-related issues, Mr Burrows said: “An ever increasing factor for investors is climate change. It has clearly had devastating impacts on a number of communities from wildfires in Hawaii to floods in Germany.

“We are seeing whole ecosystems being impacted from prolonged droughts to record temperatures. As investors we need to prepare for these outcomes to continue across the holdings in our portfolio.”

In the report, Mr Burrows noted that “there is a very perceptible shift to embrace artificial intelligence by most businesses”.

“As with most technological developments, those without legacy businesses benefit the most, but eventually all businesses will need to adapt or risk failure.”

Mr Burrows added: “The economic outlook remains positively balanced with inflation and employment expected to weaken and faced with this we expect central banks will lower interest rates.

“There is an ever growing trend of protectionist views, which can quickly grow into real economic headwinds. Add to this the geopolitical tensions and the downside risks are elevated.”

However he said: “We remain cautiously optimistic about the outlook for UIL’s portfolio.”

UIL by the numbers

According to its half-yearly financial report, UIL’s investment performance has improved with its net asset value total return up by 4.2 per cent for the half year which is broadly in line with the wider markets.

The Financial Times Stock Exchange all share total return Index was up 5.1 per cent for the six months to December 31, 2023. UIL’s annual compound net asset value total return since inception in 2003 was unchanged over the half year at 7.8 per cent.

Shareholders’ funds rose 2.1 per cent in the six months to December 31, 2023.

Over the half year, borrowings from the Bank of Nova Scotia, London branch reduced by £22.5 million (about $28 million) from £37.5 million to £15 million (about $47 million to about $19 million).

As a result, total debt including the ZDP shares reduced from £139.9 million (about $177 million) to £121.9 million (about $154 million) over the half year period and gearing reduced from 83.5 per cent to 71.3 per cent.

Since June 2022, UIL has repaid more than £35 million (about $44 million) in bank debt and £52.3 million (about $66 million) in ZDP shares. UIL is set to repay a further £15 million (about $19 million) in bank debt by the end of March 2024.

This is a substantial achievement in these volatile markets, according to the report.

There has been one change in the top ten of UIL’s portfolio during the half year to December 31, 2023. UIL sold its direct holding in Littlepay Mobility Limited to Somers Limited.

Somers ultimately owns the majority holding in Littlepay and UIL will benefit from its 40.4 per cent holding in Somers. Replacing Littlepay is Carebook Technologies Inc, which is listed on the TSX Venture Exchange, and is a leading Canadian provider of innovative digital health solutions.

The report said the board was disappointed to see the ordinary shares discount to NAV end the year at 37.8 per cent.

Given the focus on the continued reduction in the bank facility, no buybacks were undertaken in the half year ended December 31, 2023, added the report.

As at December 31 2023, UIL’s average blended rate of funding costs, including bank debt, remained unchanged at 5.7 per cent. UIL’s longer dated 2024, 2026 and 2028 ZDP shares are trading at high gross redemption yields being 10.8 per cent, 12.5 per cent and 11.6 per cent respectively.

Total revenue income for the half year to December 31, 2023 was £2.3 million (about $3 million), a decrease of 72.9 per cent from £8.5 million (about $10 million) in the prior half year. UIL has reduced a number of holdings and did not receive a distribution from Somers during the half year, significantly decreasing its income.

On the back of higher interest rates, finance costs increased for the half year to December 31, 2023 to £1.5 million (about $2 million), up 36.4 per cent from the prior half year at £1.1 million (about $1.4 million).

The above resulted in revenue return profits decreasing to £19,000 (about $24,000), compared to December 31 2022: £6.5 million (about $8 million), for the half year and revenue return earnings per share of 0.02p, well below 31 December 21, 2022 figure of 7 pence.

The capital return gains for the year ended 31 December 31 2023 of £6.8 million (about $8.6 million) is a small positive.

UIL has agreed with the Bank of Nova Scotia to repay its committed senior secured multicurrency facility at its maturity on 19 March 2024.

Over the six months UIL repaid £22.5 million (about $28 million) and as at December 31 2023 the facility stood at £15 million (about $19 million). The report said £5 million (about $6 million) has recently been repaid and the remaining £10 million (about $12 million) will be repaid on March 19 2024.