Interim Results
For immediate release
20 May 2008
To: City Editors
Finsbury Growth & Income Trust PLC
Announces Interim Results for the six months to 31 March 2008
Financial Highlights: (Unaudited) (Audited) % change
31 March 2008 30 September
2007
Share price 246.0p 307.5p -20.0
Net asset value per share 259.3p 315.4p -17.8
(Discount) of share price to net (5.1)% (2.5)% n/a
asset value per share
Shareholders' funds £136.6m £166.1m -17.8
Market capitalisation £129.6m £161.9m -20.0
Six months to Six months to One year to
31 March 2008
31 March 30 September
2007
2007
Share price (total return)# -20.0% +10.4% +5.3%
Net asset value per share (total -17.8% +9.6% +6.9%
return)#
FTSE All-Share Index (total return) -10.2% +9.2% +12.2%
Dividends Year ending Year ending 30
30 September September 2007
2008
First interim dividend 4.4p per 4.2p per share
share
Second interim dividend Yet to be 4.8p per share
declared
# Source - Fundamental Data for the AIC
For and on behalf of
Frostrow Capital LLP, Secretary
20 May 2008
- ENDS -
The following are attached:
* Chairman's Statement
* Investment Manager's Review
* Income Statement
* Reconciliation of Movements in Shareholders' Funds
* Balance Sheet
* Cash Flow Statement
* Notes to the interim accounts
For further information please contact:
Alastair Smith/Mark Pope, Frostrow Capital LLP 020 3008 4911/4913
Jo Stonier, Quill Communications 020 7758 2236
Nick Train, Lindsell Train Limited 020 7227 8200
Chairman's Statement
I would like to take this opportunity to place on record the Company's
gratitude to Michael Reeve for 17 years of outstanding leadership during which
the Company has grown from a size of approximately £20m to £132m (as at 16 May
2008).On behalf of the Board and shareholders alike I would like to wish him a
long and happy retirement.
Performance
The period under review has been a challenging one for stock markets as a whole
and in my first Chairman's Statement since taking over in January, I am
disappointed to have to report that in the six months to 31 March 2008 your
Company's net asset value per share declined by 17.8%, on a total return basis.
This compares to a fall of 10.2% in the Company's benchmark, the FTSE All-Share
Index, measured on a total return basis.
The market price of your Company's shares decreased by 20.0% over the six month
period leading to a widening in the discount of the Company's share price to
the net asset value per share from 2.5% to 5.1%.
The six months under review have been dominated by much publicised difficult
credit markets, exposure to sub-prime debt and the state of the banking sector
generally. The Company's exposure to the banking sector and the lack of
exposure to commodity companies have undoubtedly hindered investment
performance, together with the fact that, in part, the Company's investment
portfolio is invested in currently `out of favour' sectors of the market. Your
Board remains supportive of the Investment Manager's strategy and continues to
believe that the strategy will deliver superior investment returns over the
longer term.
Share Capital
The Company has been active in buying back shares for treasury where they were
offered at a discount greater than 5.0% to the net asset value per share. A
total of 642,396 shares were repurchased for treasury in late 2007 and early
2008 in accordance with the Company's stated policy. These shares were then
reissued to new shareholders in early 2008 at a price representing a narrower
discount to net asset value per share than that at which they had been bought
into treasury. At 31 March 2008 a further 123,000 shares had been repurchased
to be held as treasury shares and as at the date of this report a total of
518,750 shares are held in treasury.
Return and Dividend
The Income Statement shows a total loss per share of 51.33p made up of a
revenue return per share of 4.11p and a capital loss per share of 55.44p.
Your Board has declared an interim dividend of 4.4 p per share (2007: 4.2p)
which was paid on 6 May 2008 to shareholders on the register at the close of
business on 4 April 2008.
Borrowings
Your Company has two fixed term committed revolving credit facilities: one of £
20m and a further one of £10m. These are subject to variable rates of interest
but can be fixed at any time. As at 31 March 2008, a total of £14m was drawn
down under these facilities.
VAT
As mentioned in the Company's annual report, the Company is taking steps to
recover VAT paid to its previous and current investment managers, Close
Investments Limited (formerly Close Finsbury Asset Management Limited) and
Lindsell Train Limited respectively. Given the volume of claims HMR&C have to
process, it is likely to be a significant period of time before any amounts are
refunded. The amounts involved are not expected to have a material impact on
the Company's net asset value. The Company will take credit for VAT recovered
when any such recovery can be assessed with reasonable certainty.
Savings Plans
The investment plans managed by Close Investments on behalf of the Company
have, subject to FSA rules, recently been transferred to Alliance Trust Savings
Limited. Existing plan members should have received confirmation of the
transfer including their new account details. It is our hope that being
included in the much larger, market-wide scheme run by Alliance Trust Savings
Limited will lead to increased private investor interest in the Company.
Outlook
The economic outlook remains uncertain and, against a backdrop of poor
liquidity in the banking sector and high inter-bank borrowing costs, stock
market conditions will continue to be difficult, although interestingly the
recent announcement of enormous rights issues by leading banks has given the
market some measure of reassurance. Your Company remains fully invested and
provides shareholders with a geared exposure to a recovery in equity markets.
Dividend growth has generally been strong across the investment portfolio and
your Board remains confident as to the long term outlook for equity markets.
Anthony Townsend
Chairman
20 May 2008
Investment Manager's Review
We are disappointed with our investment performance for the past six months.
Below we analyse the investment portfolio in the context of this
disappointment, highlighting areas where shareholders may reasonably be
concerned.
At outset we regret to report one permanent loss of capital value - arising
from the disposal of our longstanding investment in Bradford & Bingley (B&B),
at a loss to book cost of some 30%. We had thought B&B a conservative lender,
with a trusted and valuable brand. We exited the shares because we were unable
to square our original analysis with the bank's revelations of its significant
investments in "sub-prime" debt. B&B shares have fallen 40.0% since we sold,
but this is thin comfort.
Staying with banks, we are also disappointed that we failed to foresee the
extent to which fears about a systemic financial crisis would hit the value of
the bank preference shares in which we are invested. We hold three such stocks,
HBOS 9.25%, HBOS 9.75% and NatWest 9.0%, amounting to 8.1% of the investment
portfolio. We look for two benefits from owning this paper. First, delivery of
a stream of high and safe dividends. Next, we hope the preference shares will
provide security or "defensiveness" into any economic downturn - that they
might even go up in value during a period of pressure on corporate profits and
falling interest rates. In fact, while investors are concerned about not so
much the dividend-paying capacity of a given financial institution, but its
very survival, our hopes have proven irrelevant and all bank paper, both
ordinary and preference, has fallen. Only once these fears abate will
preference shares recover, perhaps after a round of rights issues. Issuance of
new ordinary shares is not dilutive to the interests of preference
shareholders, indeed it enhances the security of the preference dividends.
Separately, our investment in bank ordinary shares amounts to 9.1% of the
investment portfolio, via Lloyds and HBOS and here we think investors may
underestimate the support to profits that will be provided by their savings
divisions. Companies that may benefit from a prolonged pick-up in the UK
savings ratio are an important theme for our strategy - including not only
Halifax and Scottish Widows (owned by Lloyds), but Hargreaves Lansdown,
Rathbone and Schroders.
Away from financials the key investment issue for the Company has been our
longstanding lack of exposure to mining companies. This is for reasons of
investment principle. These principles deter us from investing in companies
with unpredictable and cyclical profits, because bitter experience suggests
that the turning points are hard to spot. Miners certainly exhibit highly
volatile returns on their capital. This is because during any upturn both the
volumes and prices of the commodities they sell rise in tandem, delivering
extraordinary gearing to the Profit and Loss account. In a downturn the
opposite applies. Some bulls argue that mining companies are a buy because
basic commodities are actually running out. The poor recent share price
performance of BP and Shell, despite soaring oil prices, is a warning that this
argument is flawed. If the miners really are running down their reserves, they
should be valued as annuities, like the UK oil majors, rather than, as now,
growth stocks. The reality is though, that every day new mining projects are
being announced. Today these capacity increases are rewarded with rising share
prices, just as the telephone companies were applauded for putting down ever
more fibre-optic capacity in 2000. Sooner or later the increased supply will
cause returns to plummet - look at British Telecom.
Considered dispassionately, our reluctance to invest in commodity companies has
disadvantaged shareholders. In the end our job is to beat the market and
pursuing this objective while not owning miners has tied one hand behind our
backs. On the other hand, adhering to the house philosophy that has worked for
us is important for the integrity of Lindsell Train Limited and for our
clients. We conclude that shareholders may choose to sell their investment if
they disapprove of the investment portfolio which results from the application
of our philosophy, but that they should definitely sell if they see us
capitulating and buying "hot" commodity shares, in an effort to recover
underperformance!
Another question that has exercised us over the period is the appropriate level
of your Company's borrowings. With the FTSE All-Share down over the last six
months and some of our investments falling by more, it is all too easy to see
in hindsight that any gearing has worked against shareholders' interests.
Indeed, we reacted, cutting borrowings from £24.9m at 30 September 2007 to £
14.0m by the end of March and to £13.3m as at the date of this report. Much of
the reduction came from the sale of 35.0% of the investment in the London Stock
Exchange, at prices close to its all-time high. Gearing now stands at 9.5% of
the Company's net asset value. It is our intention to maintain the gearing at
c.10.0% of the Company's net asset value. This we regard as a "reasonable"
level of leverage, offering shareholders geared exposure to the eventual
recovery in equity markets. We work on the assumption that the investment
portfolio will generate a return well in excess of the cost of sterling debt in
the medium term, particularly if interest rates continue to decline, as seems
possible.
In conclusion, we have two observations:
First, the biggest disappointment for us today is that so much of the
investment portfolio is so evidently out of favour. In this circumstance, we
can do little better than hunker down and wait for fashion to change. We assure
you we will not be bumped out of an underperforming strategy at the bottom - a
cardinal sin in our opinion;
Next, we are bullish about the markets and the strategy. In part this is simply
our temperamental optimism and we draw comfort from the proposition - "the
worse it feels, the greater the scope for positive surprises". The Bear Stearns
collapse certainly made us feel as bad as we can remember in 25 years. So far
as shareholders are concerned, what is important is not so much whether this
optimism is misplaced for the next quarter or so, but the fact that the
investment portfolio remains fully invested across a range of securities, some
of which have fallen markedly and are very unloved.
For instance, nearly 30.0% of the investment portfolio is invested in three
shares - Cadbury, Diageo and Unilever. Each offers exposure to the strongest
investment idea we have today. Each is materially undervalued, in our opinion.
The theme is consumption growth in the Emerging Markets, where billions of new
consumers offer a multi-decade growth opportunity to these companies. Each is
advantaged in that they already own resonant brands and have established
distribution in these regions. As to valuation, we monitor transactions between
branded goods owners and note that the multiples paid to acquire genuine global
brands continue to escalate. Scottish & Newcastle commanded a takeout price of
3.0x annual sales and 22x EV/EBITDA (Enterprise Value/Earnings before Interest,
Tax, Depreciation and Amortisation). Pernod has just paid 5.25x sales and an EV
/EBITDA multiple of 21x for Absolut vodka. By contrast, the comparable ratings
for our holdings are as follows - Cadbury 1.9x and11.5x, Diageo 4.0x and 13.0x
and Unilever 1.8x and 10.8x.
In addition, dividend growth across the investment portfolio has been strong -
relative to our expectations and to current inflation. Last year over 60.0% of
the companies by value increased their dividends by at least 10.0% (including
over a quarter by 20.0%). Meanwhile, over 95.0% of the ordinary shares
increased dividends by at least 5.0%, double the rate of UK inflation. These
increases are historic and we already know that the HBOS distribution will be
lower in the current year, however, with the investment portfolio already
offering a dividend yield higher than the market average, the majority of the
companies are building up significant latent share value.
In confirmation of that assertion, we note that our in-house valuation work
generates a weighted target upside for the investment portfolio of some 65.0%
higher than current prices. For instance, we agree with Nelson Peltz' target
price for Cadbury of c. £10 per share (he is the US raider who has built a
stake in Cadbury, possibly with aggressive intentions). For us these target
prices are not short term objectives, but they do demonstrate substantial
opportunity for the strategy.
Nick Train, Lindsell Train Limited
Investment Manager
20 May 2008
Income Statement
For the six months ended 31 March 2008
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31 March 2008 31 March 2007 30 September 2007
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains - (28,432) (28,432) - 15,253 15,253 - 7,401 7,401
on investments
held at fair
value through
profit or loss
Income (note 2,776 - 2,776 2,591 - 2,591 6,253 - 6,253
2)
Investment (162) (330) (492) (203) (412) (615) (415) (895) (1,310)
management,
management and
performance
fees
(note 3)
Other expenses (233) - (233) (244) - (244) (513) - (513)
Return/(loss) 2,381 (28,762) (26,381) 2,144 14,841 16,985 5,325 6,506 11,831
on ordinary
activities
before finance
charges and
taxation
Finance (217) (441) (658) (210) (427) (637) (470) (954) (1,424)
charges
Return/(loss) 2,164 (29,203) (27,039) 1,934 14,414 16,348 4,855 5,552 10,407
on ordinary
activities
before
taxation
Taxation on - - - - - - - - -
ordinary
activities
Return/(loss) 2,164 (29,203) (27,039) 1,934 14,414 16,348 4,855 5,552 10,407
on ordinary
activities
after taxation
Return/(loss) 4.11p (55.44)p (51.33)p 3.82p 28.44p 32.26p 9.44p 10.79p 20.23p
per share
(note 4)
The total column of this statement represents the Income Statement of the
Company. The revenue and capital return columns are supplementary to this and
are prepared under guidance published by the Association of Investment
Companies.
All items in the above statement derive from continuing operations. The Company
had no recognised gains or losses other than those declared in the Income
Statement.
Reconciliation of Movements in Shareholders' Funds
Six months ended 31 Called Share Special Capital Capital Revenue Total
March 2008 up premium reserve redemption reserves reserve
share £'000
capital account £'000 reserve £'000 £'000
£'000 £'000
£'000
At 30 September 2007 13,162 35,482 12,424 3,453 97,023 4,511 166,055
Net (loss) return - - - - (29,203) 2,164 (27,039)
from ordinary
activities
Second interim - - - - - (2,527) (2,527)
dividend (4.8p per
share) for the year
ended 30 September
2007
Shares issued net of 37 432 - - - - 469
issue expenses
Repurchase of shares - - - - (2,055) - (2,055)
into treasury
Sale of shares from - - - - 1,677 - 1,677
treasury
At 31 March 2008 13,199 35,914 12,424 3,453 67,442 4,148 136,580
Six months ended 31
March 2007
At 30 September 2006 12,309 25,414 12,424 3,453 91,471 3,907 148,978
Net return from - - - - 14,414 1,934 16,348
ordinary activities
Second interim - - - - - (2,068) (2,068)
dividend (4.2p per
share) for the year
ended 30 September
2006
Shares issued net of 578 6,658 - - - - 7,236
issue expenses
At 31 March 2007 12,887 32,072 12,424 3,453 105,885 3,773 170,494
Year ended 30
September 2007
At 30 September 2006 12,309 25,414 12,424 3,453 91,471 3,907 148,978
Net return from - - - - 5,552 4,855 10,407
ordinary activities
Second interim - - - - - (2,068) (2,068)
dividend (4.2p per
share) for the year
ended 30 September
2006
First interim dividend - - - - - (2,183) (2,183)
(4.2p per share) for
the year ended 30
September 2007
Shares issued net of 853 10,068 - - - - 10,921
issue expenses
At 30 September 2007 13,162 35,482 12,424 3,453 97,023 4,511 166,055
Balance Sheet
As at 31 March 2008
(Unaudited) (Unaudited) (Audited)
31 March2008 31 March 2007 30 September 2007
£'000 £'000 £'000
Fixedassets
Investments held at fair 148,344 193,127 189,042
value through profit or
loss
Current assets
Debtors 1,691 1,789 1,753
Bank balances and short 741 140 507
term deposits
2,432 1,929 2,260
Current liabilities
Creditors (196) (212) (397)
Bank loans (14,000) (24,350) (24,850)
(14,196) (24,562) (25,247)
Net current liabilities (11,764) (22,633) (22,987)
Total net assets 136,580 170,494 166,055
Capital and reserves
Called up share capital 13,199 12,887 13,162
Share premium account 35,914 32,072 35,482
Special reserve 12,424 12,424 12,424
Capital redemption 3,453 3,453 3,453
reserve
Capital reserve - 46,753 44,810 43,800
realised
Capital reserve - 20,689 61,075 53,223
unrealised
Revenue reserve 4,148 3,773 4,511
Equity shareholders' 136,580 170,494 166,055
funds
Net asset value pershare 259.3p 330.7p 315.4p
(note 5)
Cash Flow Statement
For the six months ended 31 March 2008
(Unaudited) (Unaudited) (Audited)
31 March 2008 31 March 2007 30 September 2007
£'000 £'000 £'000
Net cash inflow from 2,078 1,319 4,083
operating activities(note
7)
Servicing of finance
Loan and bank overdraft (795) (714) (1,376)
interest paid
Financial investment
Purchase of investments (1,869) (12,153) (15,890)
Sale of investments 14,106 71 71
Net cash inflow/(outflow) 12,237 (12,082) (15,819)
from financial investment
Equity dividends paid (2,527) (2,068) (4,251)
Net cash inflow/ 10,993 (13,545) (17,363)
(outflow)before financing
Financing
Issue of new shares 469 7,236 10,921
Repurchase of shares into (2,055) - -
treasury
Sale of shares from 1,677 - -
treasury
(Repayment)/drawdown of (10,850) 4,350 4,850
loans
Net cash(outflow)/ (10,759) 11,586 15,771
inflow from financing
Increase/(decrease)in cash 234 (1,959) (1,592)
Reconciliation of net cash
flow to movement in net
debt
Increase/(decrease) in cash 234 (1,959) (1,592)
resulting from cashflows
Decrease/(increase) in debt 10,850 (4,350) (4,850)
Movement in debt 11,084 (6,309) (6,442)
Net debt at start of period (24,343) (17,901) (17,901)
/year
Net debt at end of period/ (13,259) (24,210) (24,343)
year
Notes to the interim accounts
1. Basis of Preparation
The financial statements have been prepared under the historical cost
convention except for the measurement of investments which are valued at
fair value, and in accordance with applicable accounting standards and with
the Statement of Recommended Practice `Financial Statements of Investment
Trust Companies' dated December 2005.
The same accounting policies used for the year ended 30 September 2007 have
been applied.
2. Income
(Unaudited) (Unaudited) (Audited)
Six months ended Six months Year ended
ended 30
31 March 2008 September
31 March 2007 2007
£'000 £'000 £'000
Franked investment income 2,697 2,507 6,074
Fixed interest income 47 72 145
Money market dividend 28 - 25
Bank interest 4 12 9
Total 2,776 2,591 6,253
3. Investment Management, Management and Performance Fees
(Unaudited) (Unaudited) (Audited)
Six months Six months Year ended
ended ended
30 September
31 March 2008 31 March
2007 2007
£'000 £'000 £'000
Investment management fee 331 262 594
Management fee 137 261 477
Performance fee - - 44
VAT thereon* 24 92 195
Total 492 615 1,310
* With effect from 1 October 2007 no VAT has been charged on investment
management fees
4. Return/(loss) pershare
The total return per share is based on the total loss attributable to equity
shareholders of £27,039,000 (six months ended 31 March 2007: return of £
16,348,000; year ended 30 September 2007: return of £10,407,000) and on
52,671,134 shares (six months ended 31 March 2007: 50,677,895; year ended 30
September 2007: 51,438,470), being the weighted average number of shares in
issue.
The revenue return per share is calculated by dividing the net revenue
return of £2,164,000 (six months ended 31 March 2007: return of £1,934,000;
year ended 30 September 2007: return of £4,855,000) and on 52,671,134 shares
(six months ended 31 March 2007: 50,677,895; year ended 30 September 2007:
51,438,470), being the weighted average number of shares in issue.
The capital loss per share is calculated by dividing the net capital loss
attributable to shareholders of £29,203,000 (six months ended 31 March 2007:
return of £14,414,000; year ended 30 September 2007: return of 5,552,000) by
the weighted average number of shares in issue as above.
5. Net asset value per share
The net asset value per share is based on net assets attributable to shares
of £136,580,000 (31 March 2007: £170,494,000 and 30 September 2007: £
166,055,000) and on 52,674,423 shares in issue (excluding treasury shares)
(31 March 2007: 51,547,423 and 30 September 2007: 52,647,423).
6. Transaction costs
Purchase transaction costs for the six months ended 31 March 2008 were £
22,000 (six months ended 31 March 2007: £80,000; year ended 30 September
2007: £108,000).
Sales transaction costs for the six months ended 31 March 2008 were £31,000
(six months ended 31 March 2007: £nil; year ended 30 September 2007: £nil).
7. Reconciliation of net total(loss)/return before finance costs and taxation
to net cash inflow from operating activities
(Unaudited)Six monthsended31 March 2008
£'000
(Unaudited)
Six months ended 31 March 2007
£'000
(Audited)
Year ended
30 September
2007
£'000
Total (loss)/return before finance charges and taxation
Capital loss/ (return) before finance charges and taxation
(26,381)
28,762
16,985
(14,841)
11,831
(6,506)
Net revenue before finance costs and taxation
Increase in accrued income and prepayments
Decrease/(increase) in debtors
(Decrease)/increase in creditors
Investment management, management and performance fees charged to capital
2,381
(182)
244
(35)
(330)
2,144
(433)
(10)
30
(412)
5,325
(162)
(245)
60
(895)
Net cash inflow from operating activities
2,078
1,319
4,083
8. 2007Accounts
The figures and financial information for the year ended 30 September 2007
are extracted from the latest published accounts of the Company and do not
constitute statutory accounts for the year.
Those accounts have been delivered to the Registrar of Companies and
included the Report of the Auditors which was unqualified and did not
contain a reference to any matters to which the auditors drew attention by
way of emphasis without qualifying the report, and did not contain a
statement under either Section 237(2) or 237(3) of the Companies Act 1985.
Finsbury Growth & Income Trust PLC
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