Half Yearly Report

RNS Number : 2292U

Lindsell Train Investment Trust PLC

28 November 2013

 



THE LINDSELL TRAIN INVESTMENT TRUST PLC

Report for the Half Year ended 30 September 2013

Highlights for the Half Year

Performance comparisons 1 April 2013 - 30 September 2013
Mid-market share price per Ordinary Share #	+15.9%
Net asset value per Ordinary Shareˆ	+3.6%
Benchmark *	+2.0%
MSCI World Index (Sterling)	+2.6%
UK RPI Inflation (all items)	+1.3%

#	Calculated on a total return basis
*	The index of the annual average yield on the UK 2.5% Consolidated Loan Stock between the relevant dates
ˆ	The net asset value at 30 September 2013 has been adjusted to include the dividend of £6.25 per Ordinary Share paid on 2 August 2013.

                (Source:  Bloomberg / Phoenix Administration Services Limited)

Objective of the Company

The objective of the Company is to maximise long-term total returns with a minimum objective to maintain the real purchasing power of Sterling capital as measured by the annual average yield on the UK 2.5% Consolidated Loan Stock.

Investment Policy

The Investment Policy of the Company is to invest:

•  in a wide range of financial assets including equities, unquoted equities, bonds, funds, cash and other financial investments globally with no limitations on the markets and sectors in which investment may be made, although there may be a bias towards Sterling assets consistent with a Sterling-denominated investment objective.  The Directors expect that the flexibility implicit in these powers will assist in the achievement of the absolute returns that the investment objective requires;

•  in Lindsell Train managed fund products, subject to Board approval, up to 25% of its gross assets;

•  to retain a holding in Lindsell Train Limited, currently representing 24.4% of its issued Ordinary share capital, in order to benefit from the growth of the business of the Company's Investment Manager.

Diversification

The Company expects to invest in a concentrated portfolio of securities with the number of equity investments averaging fifteen companies.  The Company will not make investments for the purpose of exercising control or management and will not invest in securities of or lend to any one company (or other members of its group) more than 15% by value of its assets (before deducting borrowings).  The Company will not invest more than 15% of gross assets in other closed-ended investment funds.

Gearing

The Directors' policy is to permit borrowings up to 50% of the net asset value of the Company in order to enhance returns where and to the extent that this is considered appropriate.

Dividends

The Directors' policy is to pay annual dividends consistent with retaining the maximum permitted earnings in accordance with investment trust regulations.

Chairman's Statement The net asset value ('NAV') of the Company was up 3.6% (including dividends) over the first half of the year and in doing so exceeded the benchmark (up 2.0%) and the performance of global equity markets  as measured by the rise in the MSCI World Index (in Sterling) of 2.5%. This performance was materially influenced by the rise in the value of the biggest holding, Lindsell Train Ltd. ('LTL') that was up 37% and represented 21% of NAV at the end of September. LTL continues to garner new assets and build investment and support infrastructure.  This, together with the rise in markets, has increased  funds under management to £2.9bn. Assuming the continued success of the asset management company in achieving outperformance for its clients and increasing its asset base, it remains  a most important source of potential  further value creation for shareholders .  However, it is also worth  repeating  my previous cautionary note that  any reversal in LTL's fortunes represents the biggest risk for the company now that it has become such a large percentage of assets and bearing in mind that its dividends make up almost half of the company's revenues. The other holdings of the Company fared less well in aggregate, especially the core consumer franchises. Unilever, Heineken, Diageo and AG Barr, that collectively make up a third of the NAV, fell back 12%, 6%, 5% and 4% respectively. This was perhaps not so surprising given the strong performance over recent years but some weakness in sales due to the effect of falling emerging market currencies was an important factor that impacted the share price of Unilever in particular. The investment in the Lindsell Train Global Equity Fund underperformed its index by 2.6% which reflected the true performance of Lindsell Train's broader global equity strategy without the influence of LTL. The Lindsell Train Japanese Equity Fund underperformed by 8% over the six months, again largely as a result of the disappointing performance of its consumer franchises, together with its healthcare companies. There was a little more activity than usual in the Company's portfolio. The position in Marston's was  sold (see Manager's report) and some of the proceeds used to add to the holdings in Pearson and Unilever. Whilst  the Company's selection of quality companies has risen in valuation over the last five years, the Manager continues to believe that current values are well supported by future prospects. The Company's share price continued to trade at a premium to the NAV throughout the six months and ended September at a premium of 19%. The Directors repeat their caution to potential new investors from buying shares at such an elevated premium. A general fall in markets could impact  the value of our quoted equities and, perhaps more significantly, the value of the 21% we have invested in LTL. Together these  could  quickly eliminate  the premium, and potentially  translate into material capital losses for such investors in the short term. The effect could be further magnified if the Company's share price were to trade at a discount to NAV, which has been the case for significant periods since the Company's launch. D Adamson Chairman 28 November 2013

Investment Manager's Report We pay a lot of attention to the dividend declarations made by the boards of the companies we invest in.  In part this is because we know how crucial growing dividends are to our long term total returns.  In addition, although we are aware of and understand the academic work that arguing that investors can be indifferent to the decisions companies make about retaining earnings or distributing those earnings as dividends - nonetheless  we continue to place value on the "reality" of dividends received, compared to the "notional" quality of earnings.  Dividend payments are exact; earnings reports are open to interpretation.  In short, for us dividend announcements send an important signal to market participants about what executives believe is the likely long term sustainable growth rate for cash flow of their company. Accordingly, we present here a quick review of the most recent dividend or interest announcements from the publically traded securities in your portfolio. The two irredeemable Gilts have paid their coupons, of course.  But by the end of the current reporting period this security of income was more lowly valued by other investors - the prices dropped c. 6.5%.  At these levels they offer a running yield of c. 4.25%.  We are not sellers on this basis. Barr increased its most recent dividend by 8%.  This reminder of growing cash flows is welcome, as we and its other shareholders come to terms with the disappointment of Barr's failure to consummate its nearly merger with Britvic - although this was absolutely not the company's fault.  Barr's growth opportunities, profitability and pristine balance sheet still make for a wonderful equity asset. Diageo delivered 9% dividend growth.  We know that its shares and those of some other consumer stocks we own are currently out of favour, as other investors look for cyclical recovery stories.  It is so important to remember, though, that these global brand owners are not mature companies - indeed their best growth is still to come.  Diageo's near double digit dividend increase is a meaningful consolation for us in the meantime.  Unilever's last two quarterly dividends are 18% higher than the same pair last year in Sterling terms.   The underlying rate of dividend growth is more truly 10.5%, which was the increase in its Euro payment.  However both stand as a pointed reminder of the company's potency as a cash machine. Pearson maintained its multi-decade record of annual real dividend growth with a 7% hike.  At the period end Pearson's shares offered a 3.7% dividend yield.  Now, dividend yield is never sufficient, on its own, to justify buying or selling a stock.  But we can't help making the contrast between today's yield and that at the all time peak in Pearson's price, back in early 2000.  The yield then was under 1%, as investors thrilled to the opportunities the internet offered the company.  Since then Pearson's dividend has rather more than doubled, while the shares are down over 40%.  And its internet opportunity is more real and imminent than ever. Reed Elsevier's rehabilitation with investors in 2013 - shares up c. 35% so far - was encouraged by its 11% dividend increase.  We think Reed can become valued as one of Europe's most reliable "growth" companies over the next few years.  If we put Reed's growing earnings on a 20x "growth" rating we still get to a much higher warranted price than the market awards. Finsbury Growth & Income Trust increased its final dividend by just under 10%, in part benefiting from some of the same dividend growth histories outlined here. London Stock Exchange's  4% dividend uplift is perhaps the only mild disappointment in this list.  Mind you, having paid a maiden annual dividend of 3.2p in 2000/01, it's hard to be too churlish about 2013's 29.5p - up almost 10-fold (during a period that was not exactly days of wine and roses for the UK stock market). Kraft may not be an exciting business - domestic US grocery brands, but a 5% dividend lift on top of its 3.8% current yield gives us a warm feeling about its capacity to generate steady financial returns. Mondelez - the global snack asset spun out of Kraft grew its dividend by 8%, a quicker pace than new Kraft, but with a lower starting dividend yield - 1.8%.  It will be interesting to see which company does best over the next 5 years. eBay pays no dividend, which is fine, given its obvious reinvestment opportunities.  eBay's earnings have risen 44-fold since 2000.  We might quibble about some aspects of the earnings quality, but the quantum of the growth and, in particular, Paypal's opportunity keep us supporters. Heineken is another currently unfashionable consumer brand company, with a hefty exposure to low growth European beer markets.  The recent 9% dividend increase suggests that management and the dynastic majority owner still think there is plenty of cash growth mileage in owning the world's biggest international beer brand. Nintendo forecasts a doubling and more of its dividend into 2014, as its earnings rebound from operating and currency losses.  We will see.  Shares were up 11% over the six month period, one of our best performers, as Nintendo's proprietary software drives unexpectedly strong sales of its latest handheld gaming device.  Plenty still to prove. Our conclusion is that the dividend paying potential of the constituents of your portfolio is sound.  We expect total returns to follow. We exited a longstanding holding over the Summer.  This was Marstons, the brewer and pub owner/manager.  We sold after the shares had gained nearly 70% from their lows in 2011.  At that price the enterprise value of the company - its equity plus debt - was in the order of £2.0bn and in the vicinity of what we analyse to be fair.  We still like the business of community pubs, particularly those that brew and retail their own cask ales - so it is conceivable we will return to Marstons' shares if another valuation opportunity presents. N Train Lindsell Train Limited - Investment Manager 28 November 2013

Income Statement

	Six months ended			Six months ended			Year ended
	30 September 2013			30 September 2012			31 March 2013
	Unaudited			Unaudited			Audited
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments	-	2,137	2,137	-	4,084	4,084	-	13,100	13,100
Exchange (losses)/gains on currency balances	-	(177)	(177)	-	35	35	-	(247)	(247)
(Losses)/gains on forward currency  contracts	-	(262)	(262)	-	(47)	(47)	-	195	195
(Losses)/gains on futures contracts	-	(104)	(10$)	-	190	190	-	(242)	(242)
Income	873	-	873	987	-	987	2,078	-	2,078
Investment management fees	(182)	-	(182)	(144)	(1,350)	(1,494)	(301)	(1,698)	(1,999)
Other expenses	(189)	(2)	(191)	(140)	(13)	(153)	(260)	(14)	(274)
Net return before finance costs and tax	502	1,592	2,094	703	2,899	3,602	1,517	11,094	12,611
Interest payable and similar charges	(18)	-	(18)	(5)	-	(5)	(16)	-	(16)
Return on ordinary activities before tax	484	1,592	2,076	698	2,899	3,597	1,501	11,094	12,595
Tax on ordinary activities	(9)	-	(9)	(11)	-	(11)	(18)	-	(18)
Return on ordinary activities after tax for the financial  period	475	1,592	2,067	687	2,899	3,586	1,483	11,094	12,577
Return per Ordinary Share	£2.37	£7.96	£10.33	£3.43	£14.50	£17.93	£7.41	£55.47	£62.88

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 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 period.

Reconciliation of Movements in Shareholders' Funds
	Share capital £'000	Special reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
For the six months ended 30 September 2013
At 31 March 2013	150	19,850	35,333	2,627	57,960
Return on ordinary activities after tax for the  financial period	-	-	1,592	475	2,067
Dividends paid	-	-	-	(1,250)	-
At 30 September 2013	150	19,850	36,925	1,852	58,777
For the six months ended 30 September 2012
At 31 March 2012	150	19,850	24,239	1,974	46,213
Return on ordinary activities after tax for the financial period	-	-	2,899	687	3,586
Dividends paid	-	-	-	(830)	(830)
At 30 September 2012	150	19,850	27,138	1,831	48,969
For the year ended 31 March 2013
At 31 March 2012	150	19,850	24,239	1,974	46,213
Return on ordinary activities after tax for the  financial period	-	-	11,094	1,483	12,577
Dividends paid	-	-	-	(830)	-
At 31 March 2013	150	19,850	35,333	2,627	57,960

Balance Sheet

	30 September	30 September	31 March
	2013	2012	2013
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	59,541	50,484	58,571
Current assets
Forward currency contracts held at fair value through profit or loss	3,891	3,900	4,146
Debtors	188	368	790
Cash at bank	1,525	509	1,739
	5,604	4,777	6,675
Current liabilities
Forward currency contracts held at fair value through profit or loss	(3,920)	(3,881)	(4,163)
Futures held at fair value through profit or loss	(22)	(27)	(127)
Bank overdraft	(2,099)	(986)	(1,237)
Other payables	(327)	(1,398)	(1,759)
	(6,368)	(6,292)	(7,286)
Net current (liabilities)/assets	(764)	(1,515)	(611)
Net assets	58,777	48,969	57,960
Capital and reserves
Called up share capital	150	150	150
Special reserve	19,850	19,850	19,850
	20,000	20,000	20,000
Capital reserve	36,925	27,138	35,333
Revenue reserve	1,852	1,831	2,627
Equity shareholders' funds	58,777	48,969	57,960
Net asset value per Ordinary Share	£293.89	£244.85	£289.80

 Cash Flow Statement

	Six months ended	Six months ended	Year ended
	30 September	30 September	31 March
	2013	2012	2013
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Net cash (outflow)/inflow from operating activities	(788)	556	734
Servicing of finance	(17)	(4)	(16)
Taxation	(12)	(12)	(18)
Financial investment	1,168	(245)	1,346
Net cash inflow/(outflow) before financing	351	(785)	2,046
Equity dividends paid	(1,250)	(830)	(830)
Decrease in cash in the period	(899)	(45)	1,216
Reconciliation of net cash flow to movement in net debt
Decrease/(increase) in cash in the period	(899)	(45)	1,216
Exchange movements	(177)	35	(247)
Opening net funds	502	(467)	(467)
Closing net debt	(574)	(477)	502
Represented by
Cash at bank	1,525	509	1,739
Overdrafts	(2,099)	(986)	(1,237)
	(574)	(477)	502
Reconciliation of operating profit to net cash inflow from operating activities
Net return before finance costs and taxation	2,095	3,602	12,611
Gains on investments held at fair value	(2,137)	(4,084)	(13,100)
Movements in derivative contracts held	(105)	(65)	35
Gains on exchange movements	177	(35)	247
Decrease/(increase) in other debtors	281	50	(205)
Decrease/(increase) in accrued income	578	12	(574)
(Decrease)/increase in creditors	(1,677)	(1,076)	1,720
Net cash inflow from operating activities	(778)	556	734

  Notes to the accounts

1. The financial information for the year ended 31 March 2013 included in this half-year report has been based upon the Company's full accounts for the year to 31 March 2013, which carried an unqualified audit report and did not include statements under Sections 498(2) or 498(3) of the Companies Act 2006.  Those accounts have been filed with the Registrar of Companies. 2. The Financial Statements for the six months ended 30 September 2013 have been prepared on a basis consistent with the accounting policies adopted by the Company in its statutory accounts for the year ended 31 March 2013. 3. The Income Statement for the six months ended 30 September 2013, six months ended 30 September 2012 and year ended 31 March 2013 have been prepared in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies" issued by The Association of Investment Companies in January 2009, which has been adopted by the Company. 4. The Income Statement includes the results of the Company and together with the Reconciliation of Movements in Shareholders' Funds, Balance Sheet and Cash Flow Statement at 30 September 2013 are unaudited and do not constitute full statutory accounts within the meaning of Section 435 of the Companies Act 2006.

5.  Income
	Six months ended 30 September 2013	Six months ended 30 September 2012	Year ended 31 March 2013
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Overseas dividends	107	88	216
Overseas stock dividends	-	29	-
UK dividends	681	786	1,692
UK fixed interest	85	84	170
	873	987	2,078
6.  Investment management fees
	Six months ended 30 September 2013	Six months ended 30 September 2012	Year ended 31 March 2013
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Investment management fee	213	168	359
Manager's performance fee provision	-	1,350	1,698
Rebate of investment management fee	(39)	(24)	(58)
	182	1,494	1,999
7.  Other expenses
	Six months ended 30 September 2013	Six months ended 30 September 2012	Year ended 31 March 2013
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Administration fee	40	35	77
Directors' fees	39	39	79
Auditor's remuneration for:
- audit of the financial statements of the Company	15	11	22
- other services relating to taxation	5	1	8
Legal and professional fees	8	13	24
Provision for VAT written off	14	17	-
Other*	68	24	50
	189	140	260
Capital charges	2	13	14
	191	153	274
* Includes registrar's fees, printing fees, safe custody fees, London Stock Exchange/ FSA fees and Directors' & Officers' liability insurance

8. Effective rate of tax The effective rate of tax reported in the revenue column of the income statement for the six months ended 30 September 2013 is 1.86% (year ended 31 March 2013: 1.20% and six months ended 30 September 2012: 1.56%) based on revenue return before tax of £484,000 (year ended 31 March 2013: £1,501,000 and six months ended 30 September 2012: £698,000).  This differs from the standard rate of tax, 23% (year ended 31 March 2013 and six months ended 30 September 2012: 24%) as a result of income not taxable for Corporation Tax purposes. 9. Net asset value per Ordinary Share Six months ended 30 September 2013 Six months ended 30 September 2012 Year ended 31 March 2013 Unaudited Unaudited Audited Net assets attributable £58,777,000 £48,969,000 £57,960,000 Ordinary Shares in issue at the period end 200,000 200,000 200,000 Net asset value per Ordinary Share £293.89 £244.85 £289.80 10. Return per Ordinary Share Six months ended 30 September 2013 Six months ended 30 September 2012 Year ended 31 March 2013 Unaudited Unaudited Audited Total return per Ordinary Share Total return £2,067,000 £3,586,000 £12,577,000 Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 Total return per Ordinary Share £10.33 £17.93 £62.88 The total return per Ordinary Share detailed above can be further analysed between revenue and capital, as below: Revenue return per Ordinary Share Revenue return £475,000 £687,000 £1,483,000 Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 Revenue return per Ordinary Share £2.37 £3.43 £7.41 Capital return per Ordinary Share Capital return £1,582,000 £2,899,000 £11,094,000 Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 Capital return per Ordinary Share £7.96 £14.50 £55.47 11. The investment in Lindsell Train Limited (LTL), representing 24.4% of the Investment Manager, is held as part of the investment portfolio and is accounted for and disclosed in the same way as other investments in the portfolio. The Directors of the Company review the fair value of the investment in LTL at the end of each quarter using the simple average of: (a) 1.5% of LTL's most recent funds under management ignoring any differences between types of asset class and fee structure; and (b) LTL's net earnings (adjusted for a notional increase in total staff costs at 45% of revenues excluding performance fees*) divided by the annual average yield on 2.5% Consolidated Loan Stock plus an equity risk premium of 4.5%. The Board reserves the right to vary the valuation methodology at its discretion. * The Board judged it necessary to adjust for the comparatively low level of staff costs, a function of the salary and bonus cap agreed between LTL and LTIT at inception. 12. It is the intention of the Directors to conduct the affairs of the Company so that the Company satisfies the conditions for approval as an Investment Trust Company set out in Sections 1158/1159 of the Corporation Tax Act 2010.

Interim Management Report The Directors are required to provide an Interim Management Report in accordance with the UK Listing Authority's Disclosure and Transparency Rules.  They consider that the Chairman's Statement, the Investment Manager's Report, the statement below on related party transactions and the Directors' Responsibility Statement below together constitute the Interim Management Report for the Company for the six months ended 30 September 2013. The Directors confirm that, except as stated above, no related party transactions were undertaken by the Company in the first six months of the current financial year, and there have been no changes to the related party disclosures set out in the Annual Report of the Company for the year ended 31 March 2013. The Half Year Report has not been reviewed by the Company's auditor, Grant Thornton UK LLP.

Directors' Responsibility Statement

The non-executive Directors of the Company (Donald Adamson (Chairman), Dominic Caldecott, Rory Landman, Michael Lindsell and Michael Mackenzie) confirm that to the best of their knowledge:

(a)	the condensed set of Financial Statements, which has been prepared in accordance with the Accounting Standards Board's pronouncements on interim reporting, give a true and fair view of the assets, liabilities, financial position and profit of the Company;
(b)	the Interim Management Report includes a fair review, as required by Disclosure and Transparency Rule 4.2.7 R, of the important events that have occurred during the first six months of the financial year, their impact on the condensed set of Financial Statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
(c)	the Interim Management Report includes a fair review of the information concerning related party transactions as required by DTR 4.2.8 R.

The Half Year Report was approved by the Board of Directors on the date of this announcement, and the Responsibility Statement signed on its behalf by Mr Donald Adamson, Chairman.

By order of the Board

Phoenix Administration Services Limited

Secretary

28 November 2013

Copies of the Half Year Report will be sent to shareholders shortly and may be obtained from the Company's Registered Office:   Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW.  (T) [phone]    (E)  [e-mail]

A soft copy (PDF) of the Half Year Report can be found by following the links on the below website*:  

http://www.lindselltrain.com/p/fLTIT1.htm

* Except for the above announcement the content of the Company's web-pages and the content of any websites which may give access to, or be accessed through hyperlinks on, the Company's web-pages are not incorporated into or form part of this announcement.

 

END

 

 

IR GMMZMNRDGFZM