Final Results

RNS Number : 3759W

Lindsell Train Investment Trust PLC

10 June 2008

 



THE LINDSELL TRAIN INVESTMENT TRUST PLC
Objective of the Company
To maximise long-term total returns subject to the avoidance of loss of absolute value and with a minimum objective to maintain the real purchasing power of sterling capital, as measured by the annual average yield on the 2.5% Consolidated Loan Stock.
Financial highlights
Performance comparisons 1 April 2007 - 31 March 2008
Middle market share price per Ordinary Share #	+ 3.6%
Net Asset Value per Ordinary Share ^	+ 1.9%
Benchmark*	+ 4.6%
MSCI World Index (Sterling)	- 5.9%
UK RPI Inflation (all items)	+ 3.8%
^ The Net Asset Value at 31 March 2008 has been adjusted to include the dividend of £1.75 per Ordinary Share paid on 25 July 2007.
* The index of the annual average yield on the 2.5% Consolidated Loan Stock between the relevant dates.
# Calculated on a total return basis

Chairman's Statement The Company's Net Asset Value ('NAV') eked out a small gain of just 1.9% (including the dividend) over the year to the end of March 2008 in what proved to be difficult markets for investors exemplified by the performance of world equities (the MSCI index in Sterling), which fell by 5.9% over the same period. The Company's absolute return benchmark continued to compound at a 4.6% rate and thus offered a better return than that generated by the Company for last year, ending the four consecutive years of outperformance of the Company's NAV versus its benchmark. Since the Company was established in January 2001 the total return of the NAV was 7.7% per annum and the total return of the share price was 7.5% per annum, both exceeding the benchmark annualised return of 4.5% per annum which in turn exceeded annualised inflation (RPI Index) of 3% per annum. Thus over the seven years of its existence the Company has set out what it achieved to do: at a minimum to preserve and preferably to enhance the real value of Shareholders capital.  It has done this by amassing long-term holdings in a select number of companies buttressed by income earning investments. These are accompanied by fixed interest bonds, preference shares and holdings in Lindsell Train managed funds designed to exploit specific themes. All have contributed to the overall return of the Company in different ways at different times. Last year it was the turn of the Lindsell Train long/short funds to generate handsome returns with the Lindsell Train Japan fund rising in value by 35.7% and the Lindsell Train Global Media fund by 14.3%. Most equity positions were to some extent affected by the poor market sentiment but for the second year running Nintendo delivered the biggest positive contribution rising by 53.8%. The success of its strategy to broaden the appeal of its video games to the wider population from the narrow markets of boys and teenage males has created a large temporary monopoly for its products (there is, as yet, no competition) which continues to exceed the expectations of Nintendo itself and investors in general creating huge returns for Shareholders in a relatively short time. As an illustration of its extraordinarily profitable business model Nintendo still employs 3,000 staff, the same number that generated just a third of its current sales three years ago. Nintendo is now the Company's largest holding at 13% of NAV and 17% on a look-through basis.  An important contributor to both the NAV returns last year and since inception was the performance of Lindsell Train Limited ('LTL'), the management company contracted to run the Company's investments in which the Company currently owns a 25% shareholding. In a difficult year for markets LTL expanded funds under management by 6.1% to £486m whilst its track records in its specialist areas of UK and Japan equities continue to gain credibility with its clients and potential clients alike. LTL further improved its profitability and raised its annual dividend payment by 69.4% to a level 3 times that of the original cost of the investment to the Company. In reflection of such positive progress the value of the investment has been revised upwards by 20.9% over the year using the methodology modified by the board in October 2007 (see September 2007 interim report).  As with all the Company's investments the potential to pay dividends, whether the cash is retained for future investment or paid out, remains a key measure of the success of the strategy. This year has proved a bonanza for dividends led by LTL, Nintendo (up by 82.6%) and even the Lindsell Train Japan Fund. As the Company's expenses have only grown marginally, the bulk of which is the interest expense on borrowings, the cost of which peaked in mid-year and thus is little higher than in 2006, net profits are up by 56% and the proposed dividend is up by 20% at £2.10 per share. I am glad to report that the dividend has risen at a respectable annualised rate of 10.4% in the five years since its inaugural dividend paid in 2003.  At the Annual General Meeting this year you will be asked to vote on the continuation of the Company as an investment trust. Your Investment Manager, my fellow Directors and I, who in aggregate represent 18.6% of total voting rights, intend voting for continuation and would encourage you to vote in favour of the Resolution. Despite the current difficult market conditions, we see no reason why the successful investment record achieved to date will not continue for the Company in future and thus enable Shareholders to participate in the financial rewards generated by that success. R M Swire Chairman 10 June 2008

Investment Manager's Report

We regard the announcement of the merger between Mars and Wrigley, after the close of your Company's financial year, as an important affirmation of our investment strategy and, as such, worthy of discussion. The fact that this deal is even possible between two such independently-minded, family-owned entities signifies how intense the pressure is for them and others to find business combinations - combinations that gather globally resonant brands under one wing and permit the costs of further developing those brands be amortised across a wider distribution footprint. Mars has paid a high price for the privilege of adding Wrigley's ubiquitous gum to its product portfolio - 4.0x its annual revenues and c18.0x EBITDA - but strategically the deal looks impeccable. There will be more. Twenty years ago, as we often remind investors in presentations, Wrigley's share price was $3 and today Mars is offering $80 for control. We suspect that very few equities in any geography deliver their owners 26-fold appreciation over twenty years, because very few companies have the assets or competitive advantages to enable them to generate the necessary returns above their cost of capital for decades or longer. In hindsight, it is apparent how Wrigley (which regrettably we do not own) has done it. The company is inherently cash generative - because the cost of manufacture of each stick of gum is a fraction of its retail price, while Wrigley's formidable brand strength deters new entrants - and has thereby succeeded in parlaying its strong national position into a genuinely global presence.  We are keen to build your portfolio around companies with Wrigley-type characteristics, although they are rare - hoping for comparable long term investment returns. Current holdings include Barr, Cadbury, Clarins, Diageo, Heineken and Marstons (held in part for its collection of regional beer brands), amounting to 33% of net assets, not including the additional exposure to branded goods owners through the Lindsell Train funds such as Unilever and Youngs Brewery in Finsbury Growth and Income Trust (FGIT) and Ito-En and Kao in Japan. We have no doubt that all these companies have built real brand equity, enjoy growth opportunities and, certainly, are far more modestly valued than not only Wrigley, but also compared to other recent transactions involving consumer branded goods owners. Pernod Ricard's offer for Absolut Vodka, at 5.0x annual revenues, highlights the strategic undervaluation of Diageo, while stock market investors ascribe only half the value to Cadbury that Mars has to Wrigley. We are excited about the prospects for returns from this part of the portfolio.  Elsewhere, we count ourselves fortunate not to have suffered more in the current bear market for financial companies. We say fortunate because, as a general principle, we like parts of that industry, in particular asset managers and 'consumer-facing' banks. It was only our conviction that even greater value lay elsewhere that saved us from a premature commitment and, as a result, we hold no bank or other financial company ordinary equity. Nonetheless, we must acknowledge that UK financial stocks have impaired the performance of FGIT over the past 12 months and that the one direct exposure in your portfolio to financial paper has not been a success. This last is the sizable and longstanding holding in HBOS 9.25% preference shares. The position has lost 16% of its value over the last 12 months, mitigated by the continuing net dividend return, at today's price, of 7.5% pa. This performance, compared to most financial stocks, is a triumph, but we are disappointed, because we expected the paper to prove 'defensive' and, perhaps even to go up during periods of economic uncertainty and profit contraction. In fact, the recently announced HBOS rights issue is unalloyed good news for our preferred holding, because no additional capital is called for from us, while the security of the preference dividends is further enhanced.  With this enhancement we think the preference shares can recover further - as can AAA-rated government bonds. Our holdings in long dated US treasuries and irredeemable gilts offer a valuable insurance policy against a deflationary outcome to today's economic uncertainties as evidence mounts of declining consumer confidence in the Anglo-Saxon nations.  However, we are not inclined to pessimism, expecting the world to muddle through. Accordingly, we signal to Shareholders what we see as two additional and significant opportunities in equity markets, each of which is represented by the portfolio's investment in the two Lindsell Train funds - Japan and Media. Both of these should offer participation in what we expect to be new bull markets developing over the next few years (implausible though that may seem today). Japan and the Media sector are deeply out of favour. Yet we see not only undervaluation in the fund portfolios (and of the related assets to which we have direct exposure in LTIT), but also increasing evidence of fundamental change, which is creating value for equity owners. In Japan this is evidenced by a sea-change in corporate dividend policy, particularly by the companies we own, lifting payout ratios and the dividend yield of the portfolio. Meanwhile, for owners of unique Media 'content', the Internet is creating new business opportunities. The extraordinary sales growth delivered by Nintendo last year and, we expect, for years to come, combined with its progressive dividend policy capture both these themes and, as a result the company remains our biggest holding and best return prospect.  N Train Investment Manager Lindsell Train Limited 10 June 2008

Income Statement
	Year ended	Year ended
	31 March 2008	31 March 2007

		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments		-	175	175	-	3,954	3,954
Exchange differences		-	(197)	(197)	-	(159)	(159)
Gains on forward currency  contracts		-	2	2	-	116	116
Income		1,373	-	1,373	1,108	-	1,108
Investment management fees		(194)	-	(194)	(265)	-	(265)
Other expenses		(184)	(1)	(185)	(154)	(1)	(155)
Net return/(loss) before finance costs and tax		995	(21)	974	689	3,910	4,599
Interest payable and similar charges		(375)	-	(375)	(292)	-	(292)
Return/(loss) on ordinary activities before tax		620	(21)	599	397	3,910	4,307
Tax on ordinary activities		(14)	-	(14)	(8)	-	(8)
Return/(loss) on ordinary activities after tax for the financial year		606	(21)	585	389	3,910	4,299
Return/(loss) per Ordinary Share		£3.03	£(0.10)	£2.93	£1.95	£19.55	£21.50

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

-  The total columns of this statement represent the profit and loss accounts of the Company. The revenue and capital return columns are supplementary to this and are prepared under the guidance published by the Association of Investment Companies.

-  A Statement of Total recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the 

   above statement.

-  No operations were acquired or discontinued during the year.

Reconciliation of Movements in Shareholders' Funds
	Share capital £'000	Special reserve £'000	Capital reserve realised £'000	Capital reserve unrealised £'000	Revenue reserve £'000	Total £'000
For the year ended 31 March 2008
At 31 March 2007	150	19,850	1,175	9,457	920	31,552
Return on ordinary activities after tax for the financial year	-	-	(9)	(12)	606	585
Dividends paid	-	-	-	-	(350)	(350)
At 31 March 2008	150	19,850	1,166	9,445	1,176	31,787
For the year ended 31 March 2007
At 31 March 2006	150	19,850	1,226	5,496	881	27,603
Return on ordinary activities after tax for the financial year	-	-	(51)	3,961	389	4,299
Dividends paid	-	-	-	-	(350)	(350)
At 31 March 2007	150	19,850	1,175	9,457	920	31,552

Balance Sheet

As at 31 March 2008

As at 31 March 2007

		£'000	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit and loss			35,777		35,869
Current assets
Debtors		420		1,000
Cash at bank		2,235		1,520
		2,655		2,520
Creditors: amounts falling due within one year		(6,645)		(6,837)
Net current liabilities			(3,990)		(4,317)
Net assets			31,787		31,552
Capital and reserves
Called up share capital			150		150
Special reserve			19,850		19,850
			20,000		20,000
Capital reserve - realised			1,166		1,175
Capital reserve - unrealised			9,445		9,457
Revenue reserve			1,176		920
Equity shareholders' funds			31,787		31,552
Net asset value per Ordinary Share			£158.94		£157.76

Cash Flow Statement

	Year ended 31 March 2008	Year ended 31 March 2007
	£'000	£'000
Net cash inflow from operating activities	816	849
Servicing of finance	(372)	(286)
Taxation	(11)	(8)
Financial investment	(251)	(482)
Net cash inflow before financing	684	73
Equity dividends paid	(350)	(350)
Increase/(decrease) in cash in the year	334	(277)
Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash in the year	334	(277)
Exchange movements	(197)	159
Opening net debt	(4,473)	(4,037)
Closing net debt	(4,336)	(4,473)

Notes This preliminary statement is not the Company's statutory accounts. The statutory accounts for the year ended 31 March 2007, have been delivered to the Registrar of Companies and received an audit report which was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report, and did not contain statements under s237(2) and 237(3) of the Companies Act 1985. The statutory accounts for the year ended 31 March 2008 have not yet been approved, audited or filed. The financial statement have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP), the AIC Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' dated January 2003 revised December 2005 and using the same accounting policies as those in the 31 March 2007 statutory accounts. The statutory accounts for the year ended 31 March 2008 will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. Copies will be sent to shareholders shortly and further copies will then be available from the Company's Registered Office at Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW. The net asset value per Ordinary Share is based on net assets of £31,787,000 (2007: £31,552,000) and on 200,000 Ordinary Shares (2007: 200,000), being the number of Ordinary Shares in issue at the year ends. Income Total income comprises: Dividends £1,059,000 (2007: £788,000) and Interest £314,000 (2007: £320,000). Return per Ordinary Share Total return per Ordinary share: The calculation of the total return per Ordinary Share is based on total return on ordinary activities after taxation of £585,000 (2007: £4,299,000) divided by 200,000 Ordinary Shares (2007: 200,000) being the weighted average number of Ordinary Shares in issue during the year. Revenue return per Ordinary Share: The calculation of revenue return per Ordinary Share is based on net revenue on ordinary activities after taxation of £606,000 (2007: £389,000) divided by 200,000 Ordinary Shares (2007: 200,000) being the weighted average number of Ordinary Shares in issue during the year. Capital return per Ordinary Share: The calculation of the capital return per Ordinary Share is based on net capital loss for the financial year of £21,000 (2007: profit £3,910,000) divided by 200,000 Ordinary Shares (2007: 200,000) being the weighted average number of Ordinary Shares in issue during the year. It is the intention of the Directors to conduct the affairs of the Company so that it continues to satisfy the conditions for approval as an investment trust company set out in section 842 of the Income and Corporation Taxes Act 1988. The Directors have proposed a final dividend of 210p (2007: 175p) per Ordinary Share which, if approved by shareholders, will be payable on 8 August 2008 to shareholders registered on 18 July 2008 (ex-dividend 16 July 2008). Phoenix Administration Services Limited Company Secretary 10 June 2008

 

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