Half-yearly Report and interim management state...
The Law Debenture Corporation p.l.c. and its subsidiaries
INTERIM REPORT FOR THE SIX MONTHS TO 30 JUNE 2008 (unaudited)
The Directors recommend an interim dividend of 4.2p on the ordinary shares for
the six months to 30 June 2008. The interim report including the unaudited
results for the period was as follows:
Company summary
From its origins in 1889 Law Debenture has diversified to become a group with a
unique range of activities in the financial services sector. The group divides
into two distinct complementary areas of business.
Investment trust
We are a global growth investment trust, listed on the London Stock Exchange.
Our portfolio of investments is managed by Henderson Global Investors Limited
under a contract terminable by either side on 12 months' notice.
Our objective is to achieve long term capital growth in real terms and steadily
increasing income. The aim is to achieve a higher rate of total return than the
FTSE All-Share Index through investing in a portfolio diversified both
geographically and by industry.
Independent fiduciary services
We are a leading provider of independent fiduciary services. Our activities are
corporate trusts, treasury management, pension trusts, corporate services
(including agent for service of process), structured finance administration and
whistleblowing services. We have offices in London, Sunderland, New York,
Delaware, Hong Kong, the Channel Islands and the Cayman Islands.
Individuals, companies, agencies and organisations throughout the world rely
upon Law Debenture to carry out its duties with the independence and
professionalism upon which its reputation is built.
Registered office
Fifth Floor
100 Wood Street
London EC2V 7EX
Telephone: 020 7606 5451
Email: enquiries@lawdeb.com
(Registered in England No 30397)
Financial summary
Highlights
At At At
30 June 30 June 31 December
2008 2007 2007
pence pence pence
Share price 281.00 362.50 354.50
NAV per share after proposed 280.29 350.15 339.64
dividend
Earnings per share
- Investment trust 6.18 4.82 8.60
- Independent fiduciary services 2.56 3.05 5.63
Group earnings per share 8.74 7.87 14.23
Dividends per share 4.20 4.00 12.00
Performance to 30 June 2008
6 months 12 months
% %
Share price (20.7) (22.5)
NAV total return (16.2) (16.5)
FTSE All-Share Index total return (11.2) (13.0)
Basis of preparation
The results for the period have been prepared in accordance with International
Financial Reporting Standards (IAS 34 - interim financial reporting). There
have been no changes to the group's accounting policies during the period.
Interim management report
Total return
Over the six months to 30 June 2008, our net asset value (total return) fell
16.2 % compared to a fall in the FTSE All-Share Index (total return) of 11.2%.
This underperformance is mainly due to the increased level of gearing in the
period and the exposure of the portfolio to banks, house builders and property
stocks.
Earnings and dividends
Earnings per ordinary share for the period were 8.74p, an increase of 11.1%
over the corresponding period last year. The investment trust benefited from
increased UK dividend income following the acquisition of high yielding
equities. Independent fiduciary services have not had the exceptional level of
special fees which arose last year. The results do not include any potential
recovery of VAT on management fees as there has been no change in the
circumstances since last year end.
The board has declared an interim dividend of 4.2 p, which is an increase of
5.0% over the previous interim dividend of 4.0p. The dividend is payable on 10
September 2008 to shareholders on the register on 8 August 2008. Directors
expect to recommend that the final dividend will at least equal that paid in
respect of 2007.
Investment manager's report
The period has been a poor one for all equity markets and it has been
particularly bad for certain areas of the UK market where the Law Debenture
portfolio has exposure. The chief reason has been the rapid rise in the oil
price which has not only increased company costs and hurt consumers but has
also increased inflationary pressures. This has prevented the expected further
cuts in interest rates, which has hit investor and consumer confidence.
Investors have become risk averse which has meant companies that are in
cyclical industries or have relatively high levels of debt have fallen
particularly severely. Smaller companies' share prices have also suffered as
investors want liquidity.
In this difficult climate, equity raising has been necessary to strengthen
balance sheets. We have taken up the portfolio's rights in Royal Bank of
Scotland. The intention is to buy good quality companies when the share price
undervalues the prospects. However, the buying so far has been done too early.
The downturn will hurt more than initially expected as interest rate falls have
been delayed, but our investment approach remains in place as substantial
fundamental value has emerged in equity markets. The portfolio is being placed
to benefit from a return of investor confidence.
The stock market in the UK has entered bear market territory and the pace of
the economic downturn is accelerating. Share prices have fallen to reflect the
uncertainties about future earnings, but indiscriminate price falls have failed
to acknowledge the strengths of many companies. Overall, UK companies are well
placed to deal with a more difficult environment as in aggregate they are not
overleveraged and have sound business models. This is being ignored as investor
pessimism is reaching extreme levels.
The sustainability of any rally in share prices will depend on whether the
credit markets become more active and the oil price falls. If the latter
happens a substantial rally should occur as inflation worries would be dampened
down and interest rates would fall. This would inject confidence into investor
sentiment towards equities.
The portfolio has had a very poor second quarter. However, prospective dividend
yields and price to book ratios suggest there is good value in the current
portfolio.
Independent fiduciary services
Independent fiduciary services revenue fell by 8.1% and profit before tax by
25.2% as a result of the non-recurrence of exceptional fees in the UK and the
US which arose in the corresponding period last year. The downturn in the level
of activity in the capital markets, seen at the end of last year, has continued
throughout the period, particularly in the area of structured finance. Though
new business opportunities have been limited, Law Debenture continues to be
involved in a wide variety of capital markets transactions.
Law Debenture's service of process business is highly regarded and is
recognised for its quality of service. It has maintained its level of activity
in spite of the market conditions. Our corporate services business has had a
reasonable start to the year, continuing to win appointments both in structured
finance and more widely in other capital market transactions. Our pension
trustee business has had several new business enquiries, resulting in new
appointments in the first half of the year.
Our structured finance administration business has had a difficult six months
and we have looked to expand the range of services we can provide, including a
forensics service for investors.
The level of interest in the independent whistle blowing service provided by
Safecall has been encouraging. Companies are increasingly concerned about the
risk of fraud in the current market environment and the need for our service is
being recognised.
Law Debenture Trust Company of New York has seen difficult market conditions
and a significant reduction in special fees. Our corporate services business in
the US continues to show growth.
In Hong Kong, we have seen an increase in the number of escrow transactions
mostly relating to inward investment. The Channel Islands business continues to
make good progress.
Group income statement
For the period ended 30 June 2008 (unaudited)
30 June 2008 30 June 2007
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
UK dividends 7,511 - 7,511 5,065 - 5,065
UK special dividends 15 - 15 94 - 94
Overseas dividends 1,694 - 1,694 1,259 - 1,259
Interest from securities 60 - 60 51 - 51
9,280 - 9,280 6,469 - 6,469
Bank deposit interest 534 - 534 2,247 - 2,247
Independent fiduciary 15,853 - 15,853 17,258 - 17,258
services fees
Total revenue 25,667 - 25,667 25,974 - 25,974
Net (loss)/ gain on - (74,454) (74,454) - 21,591 21,591
investments held at fair
value through profit or
loss
Gross income and capital 25,667 (74,454) (48,787) 25,974 21,591 47,565
(losses)/gains
Cost of sales (4,439) - (4,439) (4,674) - (4,674)
Administrative expenses (8,452) (218) (8,670) (8,664) (170) (8,834)
Operating (loss)/profit 12,776 (74,672) (61,896) 12,636 21,421 34,057
Finance costs
Interest payable (1,227) - (1,227) (1,227) - (1,227)
(Loss)/profit before 11,549 (74,672) (63,123) 11,409 21,421 32,830
taxation
Taxation (1,323) - (1,323) (2,194) - (2,194)
(Loss)/profit for the 10,226 (74,672) (64,446) 9,215 21,421 30,636
period
(Loss)/return per 8.74 (63.81) (55.07) 7.87 18.30 26.17
ordinary share (pence)
Diluted (loss)/return per 8.72 (63.65) (54.93) 7.81 18.16 25.97
ordinary share (pence)
Statement of total recognised income and expense
For the period ended 30 June 2008 (unaudited)
30 June 2008 30 June 2007
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
(Loss)/profit for the 10,226 (74,672) (64,446) 9,215 21,421 30,636
period
Foreign exchange 34 - 34 (113) - (113)
Total income and expense 10,260 (74,672) (64,412) 9,102 21,421 30,523
relating to the period
Group balance sheet
30 June 30 June 2007 31 December
2008 2007
(unaudited)
(unaudited) (audited)
£000
£000 £000
Assets
Non current assets
Goodwill 4,028 788 4,185
Property, plant and equipment 630 699 666
Intangible assets 39 67 46
Investments held at fair value 358,228 375,499 423,494
through profit or loss
Deferred tax assets 340 470 332
Total non current assets 363,265 377,523 428,723
Current assets
Trade and other receivables 5,637 15,232 4,320
Other accrued income and prepaid 5,038 3,571 3,693
expenses
Cash and cash equivalents 21,386 83,218 34,685
Total current assets 32,061 102,021 42,698
Total assets 395,326 479,544 471,421
Current liabilities
Trade and other payables 7,277 10,469 8,583
Short term borrowings 72 60 65
Corporation tax payable 1,855 1,342 1,852
Other taxation including social 443 461 509
security
Deferred income 3,807 4,259 3,767
Total current liabilities 13,454 16,591 14,776
Non current liabilities
Long term borrowings 39,297 39,270 39,284
Retirement benefit obligations 17 833 257
Deferred income 7,649 8,067 7,871
Deferred purchase consideration 1,986 190 2,143
Total non current liabilities 48,949 48,360 49,555
Total net assets 332,923 414,593 407,090
Group cash flow statement
For the period ended 30 June 2008
30 June 30 June 31 December
2008 2007 2007
(unaudited) (unaudited)
(audited)
£000 £000 £000
Operating activities
Cash generated from operating 8,328 9,687 27,544
activities
Taxation (1,182) (1,465) (2,497)
Interest paid (1,227) (1,227) (2,459)
Operating cash flow 5,919 6,995 22,588
Investing activities
Capital expenditure (58) (58) (129)
Expenditure on intangible assets - - (33)
Purchase of investments (51,018) (40,348) (117,682)
Sale of investments 41,564 51,383 70,538
Acquisition of subsidiary undertaking - (630) (1,905)
Cash flow from investing activities (9,512) 10,347 (49,211)
Financing activities
Dividends paid (9,353) (8,311) (12,994)
Proceeds of increase in share capital 92 26 69
Purchase of own shares (534) (307) (277)
Net cash flow from financing (9,795) (8,592) (13,202)
activities
Net (decrease)/ increase in cash and (13,388) 8,750 (39,825)
cash equivalents
Cash and cash equivalents at 34,620 74,521 74,521
beginning of period
Exchange gains/(losses) on cash and 82 (113) (76)
cash equivalents
Cash and cash equivalents at end of 21,314 83,158 34,620
period
Cash and cash equivalents comprise
Cash and cash equivalents at end of 21,386 83,218 34,685
period
Bank overdrafts (72) (60) (65)
21,314 83,158 34,620
Analysis of the investment portfolio
By geographical location
United North Europe Japan Pacific Total
Kingdom America £000 £000 £000 £000
£000 £000
Valuation at 31 313,900 6,906 58,703 16,241 27,744 423,494
December 2007
Purchases 35,159 7,480 8,379 - - 51,018
Cost of acquisition (152) (8) (58) - - (218)
Sales proceeds (28,951) - (12,613) - - (41,564)
(Depreciation)/ (64,584) 1,310 (4,950) (829) (5,449) (74,502)
appreciation
Valuation at 30 June 255,372 15,688 49,461 15,412 22,295 358,228
2008
Per cent of total 71.3 4.4 13.8 4.3 6.2 100.0
By Sector (excluding cash)
As at As at
30 June 31 December
2008 2007
% %
Oil & gas 12.8 11.3
Basic materials 1.2 2.1
Industrials 20.4 17.4
Consumer goods 11.6 13.1
Health care 8.6 8.1
Consumer services 6.9 7.6
Telecommunications 3.5 4.5
Utilities 2.2 2.8
Financials 22.6 23.0
Technology 0.5 0.5
Pooled equity investments 9.7 9.6
100.0 100.0
Group statement of changes in equity
Share Share Own Capital Share Translation Capital Retained Total
capital premium shares redemption based reserve reserves earnings
payment
£000 £000 £000 £000 £000 £000 £000 £000 £000
Balance at 1 5,888 7,477 (1,603) 8 195 (261) 368,000 27,386 407,090
January 2008
Net (loss)/profit - - - - - - (74,672) 10,226 (64,446)
Foreign exchange - - - - - 34 - - 34
Total income and - - - - - 34 (74,672) 10,226 (64,412)
expenditure
Movement in own - - (534) - - - - - (534)
shares
Issue of shares 1 91 - - - - - - 92
Dividend relating - - - - - - - (9,353) (9,353)
to 2007
Share based - - - - 40 - - - 40
payment
Total equity 5,889 7,568 (2,137) 8 235 (227) 293,328 28,259 323,923
shareholders'
funds at 30 June
2008
Group segmental analysis
Investment trust Independent fiduciary Total
services
30 30 Jun 31 Dec 30 Jun 30 Jun 31 Dec 30 Jun 30 Jun 31 Dec
Jun 2007 2007 2008 2007 2007 2008 2007 2007
2008
£000 £000 £000 £000 £000 £000 £000 £000 £000
Segment revenue 9,280 6,469 11,662 15,853 17,258 32,418 25,133 23,727 44,080
Other income - - 27 - - 102 - - 129
Cost of sales - - - (4,439) (4,674) (8,371) (4,439) (4,674) (8,371)
Administration (927) (1,131) (1,850) (7,525) (7,533) (15,188) (8,452) (8,664) (17,038)
costs
8,353 5,338 9,839 3,889 5,051 8,961 12,242 10,389 18,800
Interest (net) (977) 491 711 284 529 1,153 (693) 1,020 1,864
Profit for the 7,376 5,829 10,550 4,173 5,580 10,114 11,549 11,409 20.664
period before
taxation
Taxation (145) (183) (481) (1,178) (2,011) (3,527) (1,323) (2,194) (4,008)
Profit for the 7,231 5,646 10,069 2,995 3,569 6,587 10,226 9,215 16,656
period
Return per ordinary 6.18 4.82 8.60 2.56 3.05 5.63 8.74 7.87 14.23
share (pence)
Investment portfolio valuation
as at 30 June 2008
UK unless otherwise
stated.
* Holdings were acquired after 31 December
2007
£000 %
Oil & gas
Oil & gas producers
BP 13,992 3.91
Royal Dutch Shell 13,615 3.80
BG 6,525 1.82
Total (Fra) 2,637 0.74
36,769 10.27
Oil equipment & services
Schlumberger (USA) 2,699 0.75
John Wood 2,467 0.69
National Oilwell Varco 2,229 0.62
(USA)
Saipem (Italy) 1,694 0.46
9,089 2.52
Basic materials
Chemicals
Asahi Kasei (Japan) 1,054 0.29
Croda 960 0.27
Delta * 883 0.25
2,897 0.81
Forestry & paper
Mondi 1,334 0.37
1,334 0.37
Industrials
Construction & materials
Carillion * 2,820 0.79
Balfour Beatty 1,488 0.42
CRH (Ireland) 1,445 0.40
Marshalls 307 0.09
Heywood Williams 34 0.01
6,094 1.71
Aerospace & defence
Senior 9,287 2.59
Rolls Royce 3,242 0.90
Smiths 2,896 0.81
Meggitt 2,865 0.80
18,290 5.10
£000 %
General industrials
Smith (DS) 1,246 0.35
Tomkins 1,133 0.32
Acertec 175 0.05
2,554 0.72
Electronic & electrical
equipment
Applied Materials (USA) 4,796 1.34
Morgan Crucible 4,422 1.23
TT Electronics 1,668 0.47
Neopost (Fra) 1,426 0.40
Abacus 366 0.10
12,678 3.54
Industrial engineering
Hill & Smith 4,466 1.25
Weir Group 3,752 1.05
Cummins (USA) * 3,292 0.92
ABB (Switz) * 1,573 0.44
Renold 1,540 0.43
Caterpillar (USA) * 1,484 0.41
16,107 4.50
Industrial transportation
AP Moller-Maersk (Den) 2,758 0.77
Kuehne & Nagel (Switz) 1,816 0.51
Wincanton 1,363 0.38
Autologic 688 0.19
6,625 1.85
Support services
Interserve 2,888 0.81
SGS (Switz) 2,885 0.81
Sodexho (Fra) 2,403 0.67
Deutsche Post (Ger) 1,657 0.46
Augean 672 0.19
Johnson Service 252 0.07
10,757 3.01
£000 %
Consumer goods
Automobiles & parts
GKN 2,230 0.62
Toyota Motor (Japan) 1,662 0.46
3,892 1.08
Beverages
Diageo 3,973 1.11
Pernod-Ricard (Fra) 645 0.18
Dr Pepper Snapple Group 588 0.16
(USA)
5,206 1.45
Food producers
Unilever 3,213 0.90
Nestlé (Switz) 3,057 0.85
Cadbury 1,881 0.52
Uniq 1,492 0.42
Dairy Crest 660 0.18
Premier Foods 230 0.06
10,533 2.93
Household goods
Reckitt Benckiser 3,816 1.07
Bellway 2,825 0.79
Redrow 2,134 0.60
Essilor (Fra) 2,041 0.57
Puma (Ger) 1,672 0.47
Bovis Homes 1,019 0.28
13,507 3.78
Leisure goods
Alba 337 0.09
337 0.09
Tobacco
British American Tobacco 8,086 2.26
8,086 2.26
Health care
Health care equipment &
services
Fresenius (Ger) 4,015 1.12
Smith & Nephew 2,601 0.73
Fresenius Medical Care 1,932 0.54
(Ger)
8,548 2.39
£000 %
Pharmaceuticals &
biotechnology
GlaxoSmithKline 8,678 2.42
AstraZeneca 5,781 1.61
Shire 4,323 1.21
Novartis (Switz) 1,928 0.54
Sanofi-Aventis (Fra) 940 0.26
Astellas Pharma (Japan) 747 0.21
22,397 6.25
Consumer services
Food & drug retailers
Tesco 4,432 1.24
4,432 1.24
General retailers
Next 2,665 0.74
Inditex (Spain) 1,862 0.52
Dunelm 1,088 0.30
Lawson (Japan) 980 0.26
Findel 834 0.23
Topps Tiles * 272 0.08
7,701 2.13
Media
Reed Elsevier 2,192 0.61
Pearson 1,536 0.43
BSkyB 1,415 0.40
Toppan Printing (Japan) 998 0.28
Thomson Reuters * 968 0.27
WPP 484 0.14
Johnston Press 414 0.12
Yell 299 0.08
8,306 2.33
Travel & leisure
British Airways 1,236 0.35
Carnival 864 0.24
Marstons * 706 0.20
Greene King 669 0.19
Carnival (USA) 600 0.16
Avis Europe 297 0.08
Thomas Cook Group 34 0.01
4,406 1.23
£000 %
Telecommunications
Fixed line
telecommunications
BT 2,597 0.73
Colt Telecom 7.625% 15 DEC 1,583 0.44
2009
Cable & Wireless 1,508 0.42
5,688 1.59
Mobile telecommunications
Vodafone 4,939 1.38
Inmarsat 1,904 0.53
6,843 1.91
Utilities
Electricity
Scottish & Southern Energy 2,806 0.78
Iberdrola (Spain) 1,090 0.30
3,896 1.08
Gas water & multiutilities
National Grid 2,143 0.60
Severn Trent 1,969 0.55
4,112 1.15
Financials
Banks
HSBC 10,850 3.03
Royal Bank of Scotland 10,310 2.88
Lloyds TSB 3,574 1.00
Barclays 3,495 0.98
Alliance & Leicester 2,722 0.76
Standard Chartered 2,143 0.60
Deutsche Postbank (Ger) 1,821 0.51
BNP Paribas (Fra) 1,494 0.42
National Bank of Greece 1,178 0.33
(Gre)
HBOS 911 0.25
38,498 10.76
Nonlife insurance
Amlin 3,257 0.91
Hiscox 2,861 0.80
6,118 1.71
£000 %
Life insurance / assurance
Aviva 3,933 1.10
Irish Life & Permanent 2,878 0.80
(Ire) *
Prudential 2,096 0.59
Legal & General 1,804 0.50
Old Mutual 1,485 0.41
Friends Provident 1,181 0.33
Standard Life 322 0.09
13,699 3.82
Real estate
Hammerson 3,570 1.00
Land Securities 3,388 0.95
Mucklow (A&J) Group 2,400 0.67
Great Portland Estate 2,199 0.61
Segro 1,771 0.49
St Modwen Properties 1,667 0.47
Unibail-Rodamco (Fra) 640 0.18
15,635 4.37
General financial
Deutsche Börse (Ger) 1,930 0.54
Intermediate Capital Group 1,847 0.52
Provident Financial 1,391 0.39
International Personal 1,375 0.38
Finance
6,543 1.83
Equity investment
instruments
Henderson Asia Pacific 22,295 6.22
Capital Growth (Pacific)
Henderson Japan Capital 9,971 2.78
Growth (Japan)
Herald Investment Trust 2,406 0.67
34,672 9.67
Technology
Software & computer
services
Sage 1,774 0.50
1,774 0.50
Principal risks and uncertainties
The principal risks of the group relate to the investment activities and
include market price risk, foreign currency risk, liquidity risk, interest rate
risk and credit risk. These are explained in the notes to the annual accounts.
In the view of the board these risks are applicable to the remaining six months
of the financial year as they were to the period under review.
Related party transactions
There have been no related party transactions during the period which have
materially affected the financial position or performance of the group. During
the period transactions between the Corporation and its subsidiaries have been
eliminated on consolidation. Details of related party transactions are given in
the notes to the annual accounts.
Directors' responsibility statement
We confirm that to the best of our knowledge:
* the condensed set of financial statements has been prepared in accordance
with IAS 34 Interim Financial Reporting as adopted by the EU;
* the interim management report includes a fair review of the information
required by:
a. DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of
important events that have occurred during the first six months of the
financial year and 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 year; and
b. DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the entity during that period.
On behalf of the board
Douglas McDougall
24 July 2008
Notes
1. These are not statutory accounts in terms of section 240 of the Companies
Act 1985 and are unaudited. The figures and financial information for the
year ended 31 December 2007 have been extracted from the 2007 report and
accounts, which have been filed with the Registrar of Companies. Those
accounts included an unqualified auditors' report and did not contain a
statement under section 237 of the Companies Act 1985.
2. The calculations of NAV and earnings per share are based on:
NAV: shares at end of the period 117,023,883 (2007: 117,066,384)
Income: average shares during the period 117,027,094 (2007: 117,072,235)
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