Replacement - Final Results

RNS Number : 4352Z

Edinburgh New Income Trust plc

18 July 2008

 



AMENDMENT

This announcement replaces the announcement released on Friday 18 July 2008 at 7.30am (RNS No: 3405Z). Please note that the dividend is payable on 22 August 2008 and not 24 August 2008. Please see below the correct announcement.

News Release

18 July 2008

EDINBURGH NEW INCOME TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2008

Edinburgh New Income Trust's investment objective is to provide ordinary shareholders with an attractive level of income, together with the potential for capital and income growth and its zero dividend preference shareholders with a pre-determined capital entitlement on 31 May 2011.

• Fourth interim dividend of 3.3p per ordinary share payable on 22 August 2008, making a total dividend for the year of 7.2p, an increase of 9.1%

For further information, please contact:

Stewart Methven, Investment Manager, Aberdeen Asset Managers Limited    Tel: [phone]

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.

  EDINBURGH NEW INCOME TRUST PLC

MANAGEMENT REPORT

1. CHAIRMAN'S STATEMENT

Shareholders will need no reminding that the UK stockmarket went through an extremely turbulent period in the Trust's past financial year, and that our net asset value and share price have fallen further since the year end. For the year to 31 May 2008, the Trust's total assets less current liabilities fell by 19.1%. The adverse effect of gearing in a falling market led to net asset value per ordinary share (NAV) falling by 32.6% to 103.9p in capital terms and by 28.6% in total return terms. By way of comparison, the FTSE All-Share Index fell by 7.1% on a total return basis. The ordinary share price fell by 34.7% to 90.5p, reflecting a widening of the discount to NAV at which the shares currently trade.

The zero dividend preference (ZDP) share price rose to 119.0p, almost in line with its underlying net asset value of 119.1p. As total assets of the trust have fallen, this has had the effect of reducing the capital cover of the ZDPs from 2.21 times at the end of May 2007 to 1.77 times at the end of May 2008.

The reasons for the divergence between the portfolio and index will be explored more fully within the Managers' Review, although the primary reasons were under representation in some of the lower yielding sectors of the market which performed strongly (mining and aerospace), and the relatively higher weight in smaller companies, which performed poorly.

Dividends

The Board is pleased to announce a fourth interim dividend of 3.3p, which will be paid on 22 August 2008 to shareholders on the register on 25 July 2008. This brings the total dividend to 7.2p, and represents an increase of 9.1% on the previous year. Dividend growth in the market has been strong, and our revenue return per ordinary share for the year to 31 May 2008 was 8.41p. In view of the uncertain outlook, the opportunity has been taken to retain a proportion of earnings and strengthen revenue reserves, which will represent 3.12p per share after the payment of the fourth dividend. 

Gearing

The Trust has significant structural capital gearing through its zero dividend preference shares. This is to our benefit when share prices rise, but the effect of gearing is to exacerbate the downside in falling markets. At the end of May 2008 equity investments totalled £34.9m and the level of actual gearing, being the ratio of equity investments to ordinary shareholders funds, was 164%.

The Board has controls in place to ensure that actual gearing does not exceed 190%, and to that end levels of cash held within the portfolio were increased over the course of the financial year to 10.8% of total assets, and have been increased further to around 17% at the date of this report. 

Board

During the year, Ronnie Hanna stepped down from the Board owing to a conflict of interest through his position as Chairman of Glasgow Income Trust plc, whose management contract was assumed by Aberdeen Asset Managers Limited. We thank Ronnie for the contribution he has made to the Board since its launch in May 2005, and before that, to Edinburgh High Income Trust.

We are pleased to welcome Jo Elliot to the Board, who was appointed on 16 April 2008. Jo is deputy chief executive of Quayle Munro Holdings plc, and a former non executive director of Edinburgh High Income Trust. He brings with him a wealth of financial experience and knowledge and he has many years' experience of investment companies. He has taken over the role of chairman of the Audit Committee.  

Management Agreement

On 16 January 2008 the investment management agreement was transferred under a novation agreement from Edinburgh Fund Managers plc, a wholly owned subsidiary of Aberdeen Asset Management PLC to Aberdeen Asset Managers Limited, also a wholly owned subsidiary of Aberdeen Asset Management PLC. The terms of the management agreement, including the management fee and notice period, remain unchanged.

VAT on Management Fees

As reported in the Interim Report, the European Court of Justice has ruled that management fees charged to UK investment trusts should be exempt from VAT. VAT is no longer being charged on our investment management fees. Your Board has taken steps to reclaim past VAT paid on management fees since the Trust's launch in 2005 and is currently in discussion with the Manager on this issue. A rebate will be due to the Company due course. However, a number of legal and procedural matters still require to be resolved and, as such, no asset is yet being recognised in the financial statements.  

Outlook

There can be no question that the economic outlook is more difficult than it has been for many years, with on-going concerns about the banking sector, the housing market, and rising oil and other commodity prices, and it is clear that these are leading to much slower economic growth here and elsewhere. Trading conditions are becoming much more difficult with profits and dividends under pressure, and there is no expectation of any immediate relief through interest rate cuts by the authorities. 

The Managers expect markets to remain nervous and volatile in the immediate future, but point out that share prices in many sectors have already fallen sharply - in anticipation of these very difficulties. Looking further ahead, however, the Managers remain confident about the longer term attractions of the stocks held in the portfolio.  

Annual General Meeting

The Directors are proposing at this year's Annual General Meeting to make amendments to the Company's articles of association to reflect changes required as a result of the implementation of the Companies Act 2006. The proposed changes are detailed in the Appendix to the Notice of Meeting.

The Company's Annual General Meeting takes place at 40 Princes Street, Edinburgh on 30 September 2008 and I look forward to seeing as many of you there as possible.

David Ritchie 

Chairman

17 July 2008

  2. MANAGER'S REVIEW

The year to the end May 2008 witnessed a challenging environment for equity markets in general, but particularly difficult for income-seeking managers. The global monetary tightening and ensuing sub prime debt issues led to a dramatic reduction in the availability, and an increase in the cost, of credit. Accompanying this was a surge in commodity prices, putting upward pressure on inflation. This has reduced the ability of the MPC to reduce interest rates in the face of the slowing economy. Subsequent to the year end, markets have taken a further step downwards, and this will be addressed in the outlook section. 

Portfolio Review

During the year under review, total assets less current liabilities of the Company fell from £48.7 million as at 31 May 2007 to £39.4 million at 31 May 2008, a fall of 19.1%. The total return, which includes the receipt of dividends, from Edinburgh New Income's equity portfolio was -15.8%. This compares with a total return fall in the FTSE All-Share Index of 7.1%. The negative impact of the structural gearing in falling equity markets meant that the net asset value per ordinary share fell by 32.6%, while the NAV total return over the year was -28.6%.

The poor performance of the portfolio in relation to that of the FTSE All-Share Index was predominantly the result of two factors: - the strength of commodity markets and the impact that a slowing economic backdrop had on investment style, with the return to favour of growth at the expense of value investing. 

In terms of the impact of the former, although the Oil Sector has been relatively robust in performance terms it has been the Mining sector which has accounted for the bulk of the shortfall in returns from the portfolio when compared with the FTSE All-Share Index. Here, the share prices have benefited from the strength in commodity prices and we have had limited exposure as a result of the lack of yield available on these stocks. Looking at the impact of the latter, risk aversion and concerns about the impact of the credit crunch led to greater investor focus on stocks with near term earnings visibility, with the consequence that growth stocks outperformed value stocks. Edinburgh New Income's portfolio tends to consist of more value orientated stocks, as these tend to fulfil the higher yield requirements of the Trust. The increased risk aversion in the market place also impacted significantly on some of the higher yielding small companies. Despite the weaker capital performance of the portfolio, the underlying portfolio performed well in operating terms, producing healthy levels of dividend increases. This can be seen in the growth of the revenue return per share, from 7.47p to 8.41p.

The financial year started against a backdrop of rising interest rates and increasing default rates on sub prime lending in the US. As the period unfolded, the associated impact of higher defaults brought with it a desire from banks to protect capital, witnessed by tighter lending criteria and an increase in LIBOR, the inter bank lending rate. The high profile collapse of Northern Rock was an early casualty of the dislocation in the wholesale funding market, as the tight credit conditions impacted on the real economy. While the policy response from the US Federal Open Market Committee (FOMC) was immediate, with sharp reductions to the fed funds rate, the UK has seen a more muted response, given the MPC's inflation objective. Indeed, the period under review saw an interest rate rise to 5.75% before the subsequent cuts to 5%. The strength of commodity and energy prices have impacted upon inflation, pushing the most recent reading for the CPI to 3% and this effectively rules out interest rate cuts in the short term. Economic growth has slowed, with first quarter GDP coming in at a revised 0.4% quarter on quarter, although it has been the weakness in the housing market which has attracted the most attention. Mortgage availability has dropped as credit conditions tightened, and this has resulted in a sharp slowdown in housing activity. House prices have started to fall, and with these falls, consumer confidence has been impacted. 

As the availability of funding fell, so did the level of corporate activity, one of the supportive aspects to the UK market. While a number of deals were completed, including the joint bid for Scottish & Newcastle by Carlsberg and Heineken, and the purchase of EMAP by Guardian Media, there were also a number of private equity deals that failed, including the approaches for Sainsbury and Mitchells & Butler. One other significant corporate event was the approach by BHP Billiton to rivals Rio Tinto, although the nature of its all paper offer was more akin to Vodafone's approach to Mannesmann at the height of the tech boom, its impact being confined to the Mining sector. Similarly, after a period of what has rather clumsily been referred to as de-equitisation (where more capital has been retired from the equity market than has been issued), the reverse is now true following the recapitalisation of the banking sector. 

The strength of commodity prices coupled to corporate activity led to dramatic outperformance from the Mining sector. The recent surge in the oil price has also translated to stronger performance from the Oil sector, although the real gainers here were not so much the integrated majors, but some of the smaller exploration and production companies. While the portfolio has holdings in Lonmin, BP and Royal Dutch Shell, the lack of yield available in the sector, coupled with what we see as stretched valuation multiples in the Mining sector, has led us to be underweight in this area. Other beneficiaries of the high level of uncertainty within the market were the Aerospace & Defence and Tobacco sectors, both offering security of near term earnings visibility. The list of weak sectors was much longer, with the majority of the more economically sensitive sectors underperforming, including Construction, Travel & Leisure, General Retailers, Media and Banks. Real Estate fell on the back of rising bond yields, while also in Financials, the Life Assurance sector was weak as a result of lower equity markets. Less readily explainable was the underperformance of some of the more defensive sectors, including Fixed Line Telecomms, Pharmaceuticals and Food Retailers.

At the stock level, the portfolio benefited from a number of takeovers across a range of sectors. Resolution, after a contested takeover battle succumbed to a bid from Pearl, EMI was bought by private equity firm Terra Firma, Scottish & Newcastle agreed to a cash bid from the Carlsberg /Heineken JV while EMAP was taken over by Guardian Media. Elsewhere, the portfolio has benefited from an approach to TDG. The approaches to BPP and Close Brothers came to nothing. In terms of other features, the strength of capital investment in the mining and oil sectors lead to strong performances in AMEC and Fenner, tobacco company BAT performed well on the back of the integration benefits in its US operations, while AB Foods benefited from its defensive characteristics. HMV in the retail space enjoyed something of a recovery under new management, while Standard Chartered in the banking sector bucked the trend, given its Asian focus. These were overshadowed by weakness in some of the economically exposed areas, including Tomkins, hotel owner Millennium & Copthorne, electrical retailer Kesa and GKN, the international aerospace and auto supplier. Premier Foods was hit by rising wheat costs in its bread division, while the Life Assurance companies, Aviva, Legal & General and Friends Provident all were hit by weak equity markets. While HSBC and Standard Chartered outperformed, the more domestically exposed Royal Bank of Scotland and Barclays were weak on the back of capital raising exercises. 

Portfolio Activity

The dislocated nature of the market, with performance concentrated in a very narrow area, resulted in a greater opportunity set of higher yielding companies than has been available for some time. New holdings were established in AB Foods, a stable cash generative business with a strong balance sheet and the Prudential, which has expanding Asian and US franchises, combined with a degree of self help in its UK operations. Its shares have been weak, and we think that the market has ignored the value of its Asian and US franchise. An initial position in Land Securities was purchased, as rising bond yields had resulted in a falling asset value and share price. It now offers an above average yield, and with a well let property portfolio, it offers the scope to grow this dividend. As some of the more economically exposed stocks struggled, in what has transpired to be a premature move in light of the sharp deterioration in the economic backdrop, we established positions in media company Daily Mail & General Trust, and the international building merchant Wolseley. Whitbread, was added towards the period end, this company benefiting from the roll out of its Premier Inn hotel chain. Elsewhere, positions in drug companies AstraZeneca and GlaxoSmithKline, food manufacturer Premier Foods and hotel owner Millennium & Copthorne were added to.

Against a backdrop of risk aversion in the market, smaller companies performed badly, and we took this opportunity to initiate a holding in McBride, the provider of private-label household and personal care products. Expansion into Europe and synergy benefits from acquisitions offer the scope for margin expansion. Similarly, the holding in TT Electronics was topped up on weakness.

Aside from the above mentioned takeovers, the purchases were funded from a number of disposals. Headlam was sold on the back of consumer concerns, Alliance & Leicester on wholesale funding issues, and Electrocomponents on fears that it would cut its dividend. Johnson Services was sold after its newly appointed chief executive left the group, citing that he was hamstrung by the level of debt within the business. Elsewhere, some profits were taken on HSBC, Lonmin, Unilever and HMV.

Outlook

Anxieties over food and oil price inflation, higher interest rates, and a weakening housing market have eroded consumer confidence and increased concerns on an economic slowdown, while inflation fears significantly restrict the scope for the Bank of England to reduce interest rates to ameliorate the situation. Meantime, investor sentiment has deteriorated markedly and share prices in many sectors of the market have been hit very hard. It is not clear for how long this will persist, and we have raised cash balances in the portfolio as some protection against the current uncertainties. Looking further ahead, however, the current weakness in the prices of many shares has thrown up increased opportunities in soundly financed higher yielding companies to the benefit of the longer term investor.   

Aberdeen Asset Managers Limited

17 July 2008

3. PERFORMANCE TABLES

	31 May 2008	31 May 2007	% change
Total assets less current liabilities	£39,384,000	£48,659,000	(19.1)
Total equity Shareholders' funds	£21,320,000	£31,621,000	(32.6)
Ordinary shares
Net asset value (including undistributed revenue for the period)	103.9p	154.1p	(32.6)
Share price	90.5p	138.5p	(34.7)
Discount (see glossary of terms)	(12.9%)	(10.1%)
Total dividend for period	7.20p	6.60p	9.1
ZDP shares
Capital return
Net asset value (p)	119.1p	112.3p	6.1
Share price (p)	119.0p	116.5p	2.1
Capital cover (gross assets{A}/final repayment entitlement of ZDPs)	1.77	2.21
Gearing
Actual gearing ratio (equities/ordinary shareholders' funds)	163.7%	140.5%
Potential gearing (total assets/ordinary shareholders' funds)	184.7%	153.9%
Capital gearing (ratio of borrowings (ZDPs) to gross assets)	45.9%	35.0%
Expense ratio (as % of average total assets less current liabilities)	1.16%	1.13%

{A} Excluding revenue reserves, as wholly attributable to the Ordinary Shareholders.

Performance (total return)A

	1 year return	3 year return
	%	%
Ordinary share price	-30.6	+4.7
Net asset value per Ordinary share	-28.6	+20.6
{A} Represents capital return plus dividends reinvested.

3. BUSINESS REVIEW

The Board has prepared this Business Review in accordance with the requirements of Section 234ZZB of the Companies Act 1985.

Principal Activity and Status

The Company was incorporated as a public limited company on 22 April 2005 and was listed on the London Stock Exchange on 31 May 2005.

The business of the Company is that of an investment trust and the directors do not envisage any change in this activity in the foreseeable future.

The Company is registered as a public limited company and is an investment company as defined by Section 833 of the Companies Act 2006. The Company has been approved by HM Revenue & Customs as an investment trust for the purposes of Section 842 of the Income and Corporation Taxes Act 1988 for the year ended 31 May 2007. The directors are of the opinion that the Company has conducted its affairs for the year ended 31 May 2008 so as to be able to continue to obtain approval as an investment trust under Section 842 of the Income and Corporation Taxes Act 1988 for that year, although approval for the year would be subject to review were there to be any enquiry under the Corporate Tax Self Assessment regime.

The Company has conducted its affairs so as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The directors intend that the Company will continue to conduct its affairs in this manner in the future.

Investment Objective and Policy

The investment objective is to provide the holders of ordinary shares with an attractive level of income, together with the potential for both income and capital growth, and to provide holders of zero dividend preference shares with a pre-determined return of capital.

Performance

An outline of the performance, market background, investment activity and portfolio strategy during the period under review, as well as the investment outlook, is provided in the Chairman's Statement and Manager's Review.

Dividends

The Company has declared dividends totalling 7.2p per ordinary share in respect of the year to 31 May 2008 (2007 - 6.6p) which meets the Company's intention at the time of its launch. The Board anticipates that income from companies in which it is invested will increase over time, enabling a progressive dividend distribution policy to be followed.

Risks and Uncertainties

The Board has adopted a matrix of the key risks that affect its business. The principal risks are as follows:

• Stockmarket risk: The Company is exposed to the effect of variations in share prices due to the nature of its business. A fall in the value of its portfolio will have an adverse effect on shareholders' funds, which will be exacerbated by the gearing effect of the zero dividend preference shares. It is not the aim of the Board to eliminate entirely the risk of capital loss, rather it is its aim to seek capital growth so that the gearing effect will multiply the gains for ordinary shareholders. However, the Board has to have regard to the damage which will result from a significant fall in share prices and has in place controls which may require sales of equity investments in declining markets, in order to prevent the ratio of total equity investments to ordinary shareholders funds exceeding 190%. An aim is to ensure that the future capital entitlement of the zero dividend preference shares can always be met.

• Capital structure risk: The Company's capital structure and its accounting policies mean that the capital accrual on the zero dividend preference shares and 50% of the management fee are charged to the capital account rather than the revenue account. While this enables a higher dividend payment than would otherwise be the case, it means that total assets have to rise by approximately 3.1% in the next twelve months in order to maintain the level of ordinary shareholders' funds in existence at the period end.  

• Income/dividend risk: The investment objective of the Company, to provide ordinary shareholders with an attractive level of income, means that the investment managers have to achieve an above average dividend yield on the investments in the portfolio. A consequence is that the performance of the equity portfolio may not always match that of the stockmarket as a whole, with a consequential impact on shareholder returns. The Board's aim is to maximise returns consistent with achieving its dividend requirements.

• Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. A breach of section 842 of the Income and Corporation Taxes Act 1988 could result in the Company being subject to capital gains tax on portfolio investments. Breaches of other regulations such as the UKLA listing rules, could lead to a number of detrimental outcomes and reputational damage. Breaches of controls by service providers such as the Manager could also lead to reputational damage or loss.

The directors have adopted a robust framework of control which is designed to monitor all key risks facing the Company, and to provide a monitoring system to enable the directors to mitigate these risks as far as possible. A full analysis of the directors' system of internal controls is set out in the Corporate Governance Report.

Monitoring Performance - Key Performance Indicators

The following key performance indicators (KPIs) have been identified by the Board for determining the progress of the Company:

	Year to 31 May 2008
Dividend	7.2p
Total NAV return per ordinary share	-28.6%
Discount	12.9%
Total expense ratio	1.1%

At each Board meeting, the directors consider a number of performance measures, including the above KPIs to assess the Company's success in achieving its objectives. Although the Company has no defined benchmark the portfolio is largely drawn from the large, mid and small cap components of the FTSE All-Share Index. The total return from the FTSE All-Share Index was -7.1% for the year under review.

Resources

The Company has no employees. The management of the Company has been delegated to Aberdeen Asset Managers Limited.  

Environmental Policy

As an investment trust, the Company has no direct social or environmental responsibilities. Its focus is on ensuring that its portfolio is properly managed and invested. The Company has, however, adopted an environmental policy, details of which are set out in the Corporate Governance Report.

DIRECTOR'S RESPONSIBILITY STATEMENT

The Directors confirm to the best of their knowledge that:

·        the financial statements, prepared in accordance with applicable UK accounting standards, give a true and fair view of the assets, liabilities, financial position and return of the Company; and

·        the Directors’ Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces.

For Edinburgh New Income Trust plc

David Ritchie 

Chairman

  INCOME STATEMENT (audited)

		Year ended 31 May 2008
		Revenue	Capital	Total
	Notes	£'000	£'000	£'000
(Losses)/gains on investments	8	-	(9,445)	(9,445)
Income	2	2,068	-	2,068
Investment management fee	3	(139)	(138)	(277)
Administration expenses	4	(204)	-	(204)
		_______	_______	_______
Net return on ordinary activities before finance costs and taxation		1,725	(9,583)	(7,858)
Finance costs of ZDP Shareholders		-	(1,026)	(1,026)
		_______	_______	_______
Net return on ordinary activities before and after taxation		1,725	(10,609)	(8,884)
		_______	_______	_______
Return per Ordinary share (pence)	7	8.41	(51.70)	(43.29)
		_______	_______	_______

______________________________________________________________________________________________

		Year ended 31 May 2007
		Revenue	Capital	Total
	Notes	£'000	£'000	£'000
(Losses)/gains on investments	8	-	7,651	7,651
Income	2	1,862	-	1,862
Investment management fee	3	(176)	(176)	(352)
Administration expenses	4	(154)	-	(154)
		_______	_______	_______
Net return on ordinary activities before finance costs and taxation		1,532	7,475	9,007
Finance costs of ZDP Shareholders		-	(964)	(964)
		_______	_______	_______
Net return on ordinary activities before and after taxation		1,532	6,511	8,043
		_______	_______	_______
Return per Ordinary share (pence)	7	7.47	31.73	39.20
		_______	_______	_______

The total column of this statement represents the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued in the period.

A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement.

The accompanying notes are an integral part of the financial statements.

BALANCE SHEET (audited)

		As at	As at
		31 May 2008	31 May 2007
	Notes	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	8	34,909	44,413
		_________	_________
Current assets
Debtors and prepayments	9	313	264
AAA Money Market funds		3,215	3,750
Cash and short term deposits		1,058	364
		_________	_________
		4,586	4,378
Creditors: amounts falling due within one year	10	(111)	(132)
		_________	_________
Net current assets		4,475	4,246
		_________	_________
Total assets less current liabilities		39,384	48,659
Creditors: amounts falling due in more than one year	11	(18,064)	(17,038)
		_________	_________
Net assets		21,320	31,621
		_________	_________
Share capital and reserves
Called-up share capital	12	205	205
Special reserve		20,035	20,035
Capital reserve		(238)	10,371
Revenue reserve		1,318	1,010
		_________	_________
Ordinary Shareholders' Funds		21,320	31,621
		_________	_________
Net asset value per Ordinary share (pence)	13	103.9	154.1
		_________	_________

The accompanying notes are an integral part of the financial statements.

  RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS (audited)

For the year ended 31 May 2008

				Capital	Capital
		Share	Special	reserve	reserve	Revenue
		capital	reserve	-realised	-unrealised	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 May 2007		205	20,035	1,979	8,392	1,010	31,621
Return on ordinary activities after taxation		-	-	(1,046)	(9,563)	1,725	(8,884)
Dividends paid	6	-	-	-	-	(1,417)	(1,417)
		________	________	________	________	________	________
Balance at 31 May 2008		205	20,035	933	(1,171)	1,318	21,320
		________	________	________	________	________	________
For the period ended 31 May 2007				Capital	Capital
		Share	Special	reserve	reserve	Revenue
		capital	reserve	-realised	-unrealised	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 May 2006		205	20,035	648	3,208	832	24,928
Expenses of share issue		-	-	4	-	-	4
Return on ordinary activities after taxation		-	-	1,327	5,184	1,532	8,043
Dividends paid	6	-	-	-	-	(1,354)	(1,354)
		________	________	________	________	________	________
Balance at 31 May 2007		205	20,035	1,979	8,392	1,010	31,621
		________	________	________	________	________	________

The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.

The accompanying notes are an integral part of the financial statements.

   CASHFLOW STATEMENT (audited)

		Year ended		Year ended
		31 May 2008		31 May 2007
	Notes	£'000	£'000	£'000	£'000
Net cash inflow from operating activities	14		1,633		1,266
Financial investment
Purchases of investments		(5,561)		(8,170)
Sales of investments		5,504		9,840
		_______		_______
Net cash (outflow)/inflow from financial investment			(57)		1,670
Equity dividends paid			(1,417)		(1,354)
			_______		_______
Net cash inflow before use of liquid resources and financing			159		1,582
Net cash inflow/(outflow) from management of liquid resources			535		(3,750)
			_______		_______
Increase/(decrease) in cash			694		(2,168)
			_______		_______
Reconciliation of net cash flow to movements in net debt
Increase/(decrease) in cash as above			694		(2,168)
Net change in liquid resources			(535)		3,750
Net change in debt due in more than one year			(1,026)		(964)
			_______		_______
Movement in net debt in the year			(867)		618
Net debt as at 1 June			(12,924)		(13,542)
			_______		_______
Net debt as at 31 May	15		(13,791)		(12,924)
			_______		_______

The accompanying notes are an integral part of the financial statements.

  Notes:

1.    Accounting policies

A summary of the principal accounting policies, all of which have been consistently applied throughout the year and the preceding year is set out below:

(a)    Basis of accounting

The financial statements have been prepared on a going concern basis and in accordance with applicable UK Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice for 'Financial Statements of Investment Trust Companies' (issued in 2003 and revised in December 2005). They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements have been prepared on a going concern basis. 

During the year the Company adopted FRS 29 'Financial Instruments: Disclosures'. This standard is primarily concerned with the disclosure of financial instruments and risks. These disclosures can be found primarily in note 16.

(b)    Valuation of investments

Investments have been designated upon initial recognition as fair value through the profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured as fair value. Subsequent to initial recognition, investments are valued at fair value. For listed investments, this is deemed to be bid market prices or closing prices for SETS (London Stock Exchange's electronic trading service) stocks sourced from The London Stock Exchange. Gains and losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Income Statement and are ultimately recognised in the unrealised capital reserve.

(c)    Income

Income from equity investments (other than special dividends), including taxes deducted at source, is included as a revenue item in the Income Statement by reference to the date on which the investment is quoted ex dividend. Special dividends are credited to capital or revenue in the Income Statement, according to the circumstances. Short term deposit interest is dealt with on an accruals basis.

(d)    Expenses

All expenses are accounted for on an accruals basis. Expenses are charged through the revenue column of the Income Statement except as follows:

- transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Income Statement.

- the Company charges 50% of investment management fees to capital, in accordance with the Board's expected long term return in the form of capital gains and income respectively from the investment portfolio of the Company.

(e)    Taxation

Deferred tax

Deferred taxation is recognised in respect of all temporary differences that have originated but not reversed at the Balance Sheet date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Balance Sheet date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying temporary differences can be deducted. Temporary differences are differences arising between the Company's taxable profits and its results as stated in the Financial Statements which are capable of reversal in one or more subsequent periods.

Due to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided for deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.  

(f)    Capital reserves

Realised

Gains or losses on investments realised in the year that have been recognised in the Income Statement are transferred to the realised capital reserve. In addition, any prior unrealised gains or losses on such investments are transferred from the unrealised capital reserve to realised capital reserve on disposal of the investment.

Unrealised

Increases and decreases in the fair value of investments are recognised in the Income Statement and are then transferred to the unrealised capital reserve.

(g)    Compound growth entitlement of the Zero Dividend Preference ('ZDP') shares

The increase in the annual compound growth entitlement of the ZDP shares is accrued on a daily basis as a finance cost through the capital column of the Income Statement and allocated to the capital reserve.

		2008	2007
2.	Income	£'000	£'000
	Income from investments
	UK dividend income	1,831	1,693
	Overseas dividends	20	45
		_________	_________
		1,851	1,738
		_________	_________
	Other income
	Deposit interest	217	124
		_________	_________
	Total income	2,068	1,862
		_________	_________

		2008			2007
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Investment management fee	£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fee	133	132	265	150	150	300
	Irrecoverable VAT thereon	6	6	12	26	26	52
		_______	______	______	_______	______	_______
		139	138	277	176	176	352
		_______	______	______	_______	______	_______

The fees disclosed above were paid to Edinburgh Fund Managers plc ('EFM') for the period to 15 January 2008. On 16 January 2008, the investment management agreement was transferred under a novation agreement from EFM, a wholly owned subsidiary of Aberdeen Asset Management PLC, to Aberdeen Asset Managers Limited ('AAM'), also a wholly owned subsidiary of Aberdeen Asset Management PLC. Therefore, fees due from this date were paid to AAM. The terms of the investment management agreement, including the management fee and notice period (six months by either party), remain unchanged.

The management fee is charged at 0.65% of gross assets less the value of any investment funds managed by AAM. 50% of the management fee is charged to capital. The fee was subject to VAT at the appropriate rate for the 3 months to 31 August 2007 only. Note 18 provides further information on the current status of VAT charged on management fees and its implications for the Company.

The balance due to AAM (2007 - EFM) at the year end was £65,000 (2007 - £80,000) excluding VAT. 

		2008			2007
		Revenue	Capital	Total	Revenue	Capital	Total
4.	Administration expenses	£'000	£'000	£'000	£'000	£'000	£'000
	Directors' fees  (excluding irrecoverable VAT)	44	-	44	52	-	52
	Auditor's remuneration  (excluding irrecoverable VAT):
	-fees payable to the Company's auditors for the audit of the annual accounts	17	-	17	16	-	16
	Contributions to Investment Trust Initiative	42	-	42	20	-	20
	Custody fees and bank charges	10	-	10	10	-	10
	Registrars fees	24	-	24	12	-	12
	Printing	10	-	10	3	-	3
	Other	57	-	57	41	-	41
		_______	______	______	_______	______	_______
		204	-	204	154	-	154
		_______	______	______	_______	______	_______

An annual contribution based on 0.035% of funds under management, for the Investment Trust Initiative, was paid to Edinburgh Fund Managers plc in respect of marketing and promotion of the Company.

With the exception of the Directors' fees and Auditors' remuneration, irrecoverable VAT has been included under the relevant expense line above. Irrecoverable VAT on Directors' fees and Auditors' remuneration is included within other expenses.

Directors' emoluments of £44,000 (2007 - £52,000) relate entirely to fees.

			2008	2007
5.	Taxation		£'000	£'000
	(a)	Analysis of charge for year
		Corporation tax	-	-
			_________	_________
		Total current tax (note 5(b))	-	-
			_________	_________

(b)    Factors affecting current tax charge for year

The tax assessed for the year is lower than the standard rate of corporation tax in the UK for a large company (29.7%). The differences are explained below:

			2008	2007
			£'000	£'000
		Net revenue on ordinary activities before taxation	1,725	1,532
			_________	_________
		Net revenue on ordinary activities multiplied by the standard rate of corporation tax of 29.7%	512	460
		Effects of:
		UK dividend receipts not chargeable to corporation tax	(544)	(508)
		Excess management expenses	32	48
			_________	_________
		Current tax charge for the year	-	-
			_________	_________

Due to the Company's status as an investment trust, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided for deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.

(c)    Provision for deferred taxation

There was no provision for deferred taxation made for this year. 

The Company has not recognised a deferred tax asset of £276,000 (2007 - £205,000) arising as a result of excess management charges. These expenses would only be utilised if the Company has profits chargeable to corporation tax in future accounting periods.

		2008	2007
6.	Dividends	£'000	£'000
	Amounts recognised as distributions to equity holders in the period:
	Fourth interim dividend paid on 24 August 2007 - 3.0p (2006 - 3.0p)	616	616
	First interim dividend paid 26 October 2007 - 1.3p (2006 - 1.2p)	267	246
	Second interim dividend paid 15 February 2008 - 1.3p (2007 - 1.2p)	267	246
	Third interim dividend paid 16 May 2008 - 1.3p (2007 - 1.2p)	267	246
		_________	_________
		1,417	1,354
		_________	_________

The fourth interim dividend for 2008 has not been included as a liability in these financial statements.

The table below sets out total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 842 of the Income and Corporation Taxes Act 1988 are considered. The revenue available for distribution by way of dividend for the year is £1,725,000 (2007 - £1,532,000).

		2008	2007
		£'000	£'000
	First interim dividend paid 26 October 2007 - 1.3p (2006 - 1.2p)	267	246
	Second interim dividend paid 15 February 2008 - 1.3p (2007 - 1.2p)	267	246
	Third interim dividend paid 16 May 2008 - 1.3p (2007 - 1.2p)	267	246
	Fourth interim dividend payable 24 August 2008 - 3.3p (2007 - 3.0p)	677	616
		_________	_________
		1,478	1,354
		_________	_________

		2008		2007
7.	Return per share	£'000	p	£'000	p
	Revenue return	1,725	8.41	1,532	7.47
	Capital return	(10,609)	(51.70)	6,511	31.73
		_________	_________	_________	_________
	Total return	(8,884)	(43.29)	8,043	39.20
		_________	_________	_________	_________
	Weighted average number of Ordinary shares in issue		20,519,056		20,519,056
			_________		_________

			2008	2007
			Listed	Listed
			in UK	in UK
8.	Investments		£'000	£'000
	Fair value through profit or loss:
	Opening fair value		44,413	38,489
	Opening unrealised appreciation		(8,392)	(3,208)
			_________	_________
	Opening book cost		36,021	35,281
	Purchases at cost		5,558	8,113
	Sales	- proceeds	(5,617)	(9,840)
		- realised profits	118	2,467
			_________	_________
	Closing book cost		36,080	36,021
	Closing unrealised appreciation		(1,171)	8,392
			_________	_________
	Closing fair value		34,909	44,413
			_________	_________
	Investments listed on a recognised investment exchange		34,909	44,413
			_________	_________
	(Losses)/gains on investments
	Realised gains on sales		118	2,467
	Movement in unrealised appreciation		(9,563)	5,184
			_________	_________
			(9,445)	7,651
			_________	_________

Transaction costs 

During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within (losses)/gains on investments in the Income Statement. The total costs were as follows:    

		2008	2007
		£'000	£'000
	Purchases	35	46
	Sales	6	11
		_________	_________
		41	57
		_________	_________

		2008	2007
9.	Debtors: amounts falling due within one year	£'000	£'000
	Net dividends and interest receivable	191	254
	Prepayments	9	10
	Amounts due from brokers	113	-
		_________	_________
		313	264
		_________	_________

		2008	2007
10.	Creditors: amounts falling due within one year	£'000	£'000
	Amounts due to brokers	-	3
	Management fees (excluding VAT)	65	80
	Other creditors	46	49
		_________	_________
		111	132
		_________	_________

		2008	2007
11.	Creditors: amounts falling due in more than one year	£'000	£'000
	Issue of Zero Dividend Preference shares	15,167	15,167
	Accrued finance costs	2,897	1,871
		_________	_________
		18,064	17,038
		_________	_________

15,166,618 Zero Dividend Preferences shares (ZDP) were issued under a Placing and Reconstruction Scheme. The ZDP shares had an initial capital entitlement of 100p per share, growing to approximately 141.85p on 31 May 2011. The assets of the Company over which the ZDP shares have a prior ranking entitlement do not include the Company's accumulated revenue reserves, which will be attributable to the Ordinary shares.

		2008		2007
		Authorised	Issued and fully paid	Authorised	Issued and fully paid
12.	Called-up share capital	£'000	£'000	£'000	£'000
	Ordinary shares of 1p each	500	205	500	205
		_________	_________	_________	_________

As at 31 May 2008 there were 20,519,056 (2007 - 20,519,056) Ordinary shares of 1p in issue.

13.    Net asset value per share 

The net asset value per share and the net assets attributable to Shareholders at the period end, calculated in accordance with the Articles of Association were as follows:

		Net asset  value per share  attributable 2008	Net asset  values attributable 2008	Net asset  value per share  attributable 2007	Net asset  values attributable 2007
		p	£'000	p	£'000
	Zero Dividend Preference share	119.10	18,064	112.34	17,038
		_________	_________	_________	_________
	Ordinary share	103.90	21,320	154.11	31,621
		_________	_________	_________	_________

The net asset value per ZDP share is based on funds attributable to ZDP Shareholders and on 15,166,618 (2007 - 15,166,618) ZDP shares, being the number of ZDP shares in issue at the year end.

The net asset value per Ordinary share is based on funds attributable to Ordinary Shareholders and on 20,519,056 (2007 - 20,519,056) Ordinary shares, being the number of Ordinary shares in issue at the year end.

14.	Reconciliation of net total return before finance costs and	2008	2007
	taxation to net cash inflow from operating activities	£'000	£'000
	Net total return on ordinary activities before finance costs and taxation	(7,858)	9,007
	Less: losses/(gains) on investments	9,445	(7,651)
	Decrease/(increase) in accrued income	63	(74)
	Decrease/(increase) in other debtors	1	(5)
	Decrease in other creditors	(18)	(11)
		_________	_________
	Net cash inflow from operating activities	1,633	1,266
		_________	_________

		At			At
		31 May		Non-cash	31 May
		2007	Cashflow	movements	2008
15.	Analysis of changes in net debt	£'000	£'000	£'000	£'000
	Cash at bank	364	694	-	1,058
	AAA Money Market funds	3,750	(535)	-	3,215
	Debt due after more than one year	(17,038)	-	(1,026)	(18,064)
		_________	_________	_________	_________
	Net debt	(12,924)	159	(1,026)	(13,791)
		_________	_________	_________	_________

16.    Risk management, financial assets and liabilities 

The Company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The Company also has the ability to enter into derivative transactions in the form of forward foreign currency contracts and futures and options for the purpose of managing currency and market risks arising from the Company's activities.

The main risks the Company faces from its financial instruments are (i) market price risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk.

The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors, other than for currency disclosures.

(i)    Market price risk

The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk.  

Interest rate risk

Interest rate movements may affect:

- the fair value of the investments in fixed interest rate securities;

- the level of income receivable on cash deposits; 

- interest payable on the Company's variable rate borrowings. 

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.

Cash balances can be managed to reduce the effective level of gearing. The Company places funds with authorised deposit takers from time to time and is therefore potentially at risk from the failure of any such institution of which it is a creditor. 

Interest risk profile

The interest rate risk profile of the portfolio of financial assets and liabilities at the Balance Sheet date was as follows:

	Weighted  average interest rate	Fixed rate	Floating rate
At 31 May 2008	%	£'000	£'000
Assets
Sterling	5.55	-	4,273
	_________	_________	_________
Total assets	5.55	-	4,273
	_________	_________	_________
Liabilities
Zero Dividend Preference share	5.84	(18,064)	-
	_________	_________	_________
Total liabilities	-	(18,064)	-
	_________	_________	_________
	Weighted  average interest rate	Fixed rate	Floating rate
At 31 May 2007	%	£'000	£'000
Assets
Sterling	5.38	-	4,114
	_________	_________	_________
Total assets	5.38	-	4,114
	_________	_________	_________
Liabilities
Zero Dividend Preference share	5.84	(17,038)	-
	_________	_________	_________
Total liabilities	-	(17,038)	-
	_________	_________	_________

15,166,618 Zero Dividend Preferences shares (ZDP) have an initial capital entitlement of 100p per share, growing to approximately 141.85p on 31 May 2011. 

The floating rate assets consist of cash deposits on call earning interest at prevailing market rates.

The Company's equity portfolio and short-term debtors and creditors have been excluded from the above tables.

All financial liabilities are measured at amortised cost.

Interest rate sensitivity

The sensitivity analyses below have been determined based on the exposure to interest rates at the balance sheet date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.

If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's:

- profit for the year ended 31 May 2008 would increase / decrease by £43,000 (2007 - increase / decrease by £41,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances.

• the Company holds no financial instruments that will have an equity reserve impact.

In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives.

Foreign currency risk

None of the Company's investment portfolio is invested in overseas securities and the Balance Sheet cannot be affected by movements in foreign exchange rates.

The revenue account is subject to currency fluctuation arising on overseas income but the effect in immaterial and the Company does not hedge this currency risk.

Foreign currency risk exposure by currency of denomination:

	31 May 2008			31 May 2007
	Investments £'000	Net  monetary  assets £'000	Total currency exposure £'000	Investments £'000	Net  monetary  assets £'000	Total currency exposure £'000
Sterling	34,909	4,273	39,182	44,413	4,114	48,527
	_________	_________	_________	_________	_________	_________

Other price risk

Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments, which amounted to £34,909,000 (2007 - £44,413,000) at the year end.

The Company has two objectives, to provide Ordinary Shareholders with an attractive level of income, together with the potential for capital and income growth, and to provide ZDP Shareholders with a fixed capital return of 141.85p per share (£21,514,000) on 31 May 2011. The Company aims to achieve this through investing in a portfolio of diversified securities which, given the income requirements of the Company, are likely to yield in excess of the yield available on the broader UK Equity market.

Other price risk sensitivity 

If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to ordinary Shareholders for the year ended 31 May 2008 would have increased / decreased by £3,491,000 (2007 - increase / decrease of £4,441,000) and equity reserves would have increased / decreased by the same amount.

(ii)    Liquidity risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.  

Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. In addition, all current assets and current liabilities are receivable/payable within 3 months and the ZDP's are payable within 3 years.

(iii)    Credit risk

This is failure of the counter party to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.

The risk is not significant, and is managed as follows: 

- where the investment manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default;

- investment transactions are carried out with a large number of brokers, whose credit rating of which is taken into account so as to minimise the risk to the Company of default;

- investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the investment manager, and limits are set on the amount that may be due from any one broker;

- cash is held only with reputable banks. 

Credit risk exposure

In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 May was as follows:

	Balance	Maximum	Balance	Maximum
	Sheet	exposure	Sheet	exposure
	2008	2008	2007	2007
	£'000	£'000	£'000	£'000
Loans and receivables	304	304	254	254
AAA Money Market funds	3,215	3,215	3,750	3,750
Cash at bank and in hand	1,058	1,058	364	364
	_________	_________	_________	_________
	4,577	4,577	4,368	4,368
	_________	_________	_________	_________

None of the Company's financial assets is past due or impaired.

Fair values of financial assets and financial liabilities

The fair and book value of the financial liabilities are stated below:

	Book  value	Fair value{A}	Book  value	Fair value{A}
	£'000	£'000	£'000	£'000
	2008	2008	2007	2007
Zero Dividend Preference share	18,064	18,048	17,038	17,669
{A}Based on market value at the year end.	_________	_________	_________	_________

All other assets and liabilities of the Company are included in the Balance Sheet at fair value. 

17.       Capital management policies and procedures

The objective of the Company is to provide Ordinary Shareholders with an attractive level of income, together with the potential for capital and income growth and to provide ZDP Shareholders with a pre-determined capital entitlement on 31 May 2011.

The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to Shareholders through the optimisation of the debt and equity balance.

The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:

• the planned level of gearing which takes account of the Investment Manager's views on the market;
  
• the level of equity and ZDP shares in issue;
  
• the extent to which revenue in excess of that which is required to be distributed should be retained.

The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.

The Company does not have any externally imposed capital requirements.

18.    Contingent assets

On 5 November 2007, the European Court of Justice ruled that management fees for investment trusts should be exempt from VAT. HMRC has announced its intention not to appeal against this case to the UK VAT Tribunal and therefore protective claims which have been made in relation to the Company will be processed in due course. The Board is currently in the process of quantifying the potential repayment that should be due. However, the amount the Company will receive, the period to which it will refer, and the timescale for receipt are all uncertain and hence the Company has made no provision in these financial statements for any such repayment. The Company has not been charged VAT on its investment management fees from 1 September 2007.

19.    The fourth interim dividend of 3.3p per share will be paid on 24 August 2008 to shareholders on the register at the close of business on 25 July 2008. The ex-dividend date is 23 July 2008.

20.    The income statement, balance sheet, reconciliation of movement in shareholders' funds, cashflow statement and the notes to the accounts set out above do not represent full financial statements in accordance with Section 240 of the Companies Act 1985 and are extracted from the financial statements for the year ended 31 May 2008. The audit report on the statutory financial statements for 2008 is unqualified and will be delivered to the Registrar of Companies.

21.    The Annual Report and Accounts will be posted to shareholders in August 2008 and copies will be available from the investment manager or from the Company's website, www.edinburghnewincome.co.uk.

For Edinburgh New Income Trust plc

Aberdeen Asset Managers Limited, Company Secretary

END 

 

END

 

 

FR FGGMNDRGGRZM