Interim Results
Keystone Investment Trust plc
Interim Results
Six Months to 31 March 2006
Chairman's Statement
Performance
The Company's shares gave a total return to shareholders of 11.1% over the six
months from 30 September 2005 to 31 March 2006. During the same period, the
total return of the net asset value per share was 15.1%, while the total return
of the Company's benchmark for performance measurement purposes, the FTSE
All-Share Index, was 12.7%. (All these figures are with income reinvested.) On
31 March 2006, the discount of the share price relative to net asset value was
13.4%.
The Manager's stock selection has continued to be good and is discussed below.
Gearing and investment guidelines
Equity exposure increased from 113% of net assets at 30 September 2005 to 116%
at 31 March 2006. The gearing limits set by the Board are that the Manager must
now make no net purchases if equity exposure is more than 120% of net assets,
and must make sales if (as a result of market movements) equity exposure rises
to more than 122.5% of net assets. In addition, up to £4 million may be held in
corporate bonds. The Company had no exposure to such bonds during the period
under review.
Dividends
The interim dividend will be 14.0p per share, compared with an interim dividend
of 13.0p last year. The dividend will be paid on 23 June 2006 to shareholders
on the Register on 26 May 2006.
Richard Oldfield
Chairman
25 May 2006
Manager's Report
Market and Economic Review
The UK equity market rose strongly in the six months to 31 March 2006, as
reflected by the 12.7% return from the FTSE All-Share index. These overall
gains masked a subdued start to the period as investors' appetite for equities
weakened on concerns over rising inflation, higher US interest rates and on
speculation that commodities' prices may have peaked. However, this downturn
proved short-lived as an increase in mergers and acquisitions (M&A) activity,
combined with a change in tone from the UK and US central banks, provided the
impetus for investors to re-enter the stockmarket.
Notable M&A activity included Spanish telecommunications company Telefonica's
purchase of O2, BOC's purchase by German rival Linde, P&O's sale to Dubai Ports
and Boots' merger with Alliance Unichem. Towards the end of the review period,
market sentiment remained buoyant as investors remained upbeat about a
continuation of the positive global economic growth environment accompanied by
low inflation. This was evidenced by the strong rise in commodity prices and
reflected in the mining and industrial areas of the market.
Within the UK economic context, GDP growth remained subdued, and both retail
sales growth and manufacturing data continued to display signs of weakness.
Although inflation remained under control, unemployment edged higher. UK
interest rates were left unchanged during the period at 4.5%.
Portfolio Strategy and Review
Over the six-month review period to 31 March 2006, the Net Asset Value Total
Return of the Company was 15.1%, while the FTSE All-Share Total Return was
12.7%. Over the same period, the Trust's Share Price Total Return was 11.1%.
Performance during the period was enhanced by life assurance company Legal &
General (benefiting from an increase in new business inflows), airports
operator BAA (due to bid activity), airline company British Airways (due to
further success in exceeding cost-reduction targets as well as revenue growth
in the premium-traffic market) and support services company Babcock
International (due to bid speculation). In addition, the holding of US tobacco
company Reynolds American performed well.
Portfolio activity was fairly limited over the review period. However, the
Manager initiated a new holding in electricity company Drax to reflect his view
that in the current environment, energy prices are likely to stay high for
longer. This benefit will accrue to shareholders in the form of increased
dividend payments, as Drax has stated its policy to distribute all free
cashflow to shareholders.
Capita Group, which supplies services to the public and private sector, was
also purchased for the Company. In the Manager's view, Capita Group has
excellent earnings visibility as a result of a large existing order book and
the ability to win new business from an increasing number of business sectors
which are turning to outsourced suppliers. Moreover, it has scope for further
dividend increases following a 30% increase in the last financial year.
In the mobile telecommunications sector, the Manager took advantage of the
weakness in Vodafone's share price to add to the Company's holding. The current
valuation is attractive and the majority of the holding was purchased when the
shares were trading with a prospective dividend yield of over 4%. Vodafone's
global business model is coming under increasing scrutiny as, in a number of
markets, it does not hold significant market share. Recently, Vodafone
announced the sale of its Japanese business and the Manager expects Vodafone to
pursue a shareholder-value agenda, which could see further significant asset
disposals - including the US business - and the return of cash to shareholders.
In terms of disposals, the Trust's holding in mobile telecommunications company
O2 was sold following its takeover by Spanish telecommunications company
Telefonica. Also sold from the Trust was food producer Associated British
Foods, where the Manager felt that the strong recent performance of the Primark
clothing division was largely discounted in the valuation and that better
opportunities lay elsewhere.
Outlook
The Manager is mindful that the UK stockmarket has performed well in the past
few years and that further gains of this nature should not automatically be
expected in the future. He is concerned that some of the better performing
areas of the market no longer appear attractively valued. Nevertheless, he
remains cautiously optimistic for the market in 2006. The level of
undervaluation within the largest and often more defensive companies has
increased as investors have favoured the cyclically-biased mid- and small-cap
areas more aggressively. The Manager believes that this area offers some of the
best opportunities in the market going forward.
The Manager is maintaining a defensively positioned portfolio in response to a
belief in a continued subdued level of UK economic growth in 2006.
Specifically, he continues to avoid consumer cyclicals while maintaining a
significant exposure in defensive sectors, such as Utilities, Tobacco,
Pharmaceuticals and Telecoms. Being positioned in these areas will, he
believes, allow scope for the Company to make further gains for investors going
forward.
Mark Barnett
Investment Manager
25 May 2006
Income Statement (Unaudited)
Six months ended 31 March 2006
Revenue Capital Total
£'000 £'000 £'000
Gains on investments - unrealised - 12,856 12,856
Gains on investments - realised - 8,773 8,773
Foreign exchange losses - (110) (110)
Losses on currency hedges - (162) (162)
Special dividends - - -
Income:
UK dividends 2,180 - 2,180
Overseas dividends 346 - 346
STIC interest 212 - 212
UK interest income 135 - 135
Deposit interest 94 - 94
Underwriting commission - - -
Investment management fee (161) (484) (645)
Performance fee - (1,348) (1,348)
Other expenses (157) - (157)
Net return before finance costs
and taxation 2,649 19,525 22,174
Finance costs:
Interest payable (380) (1,138) (1,518)
Distributions in respect of
Non-equity shares (6) - (6)
Return on ordinary activities
before taxation 2,263 18,387 20,650
Tax on ordinary activities (49) - (49)
Return on ordinary activities
after taxation and transfer to 2,214 18,387 20,601
reserves
Return per ordinary share
Basic 16.7p 138.0p 154.7p
The total column of this statement represents the Company's Income Statement,
prepared in accordance with UK Accounting Standards. The supplementary revenue
and capital columns are both prepared under guidance published by the
Association of Investment Trust Companies. All items in the above statement
derive from continuing operations and the Company has no other gains or losses
therefore no statement of recognised gains or losses is presented. No
operations were acquired or discontinued in the period.
Income Statement (Unaudited)
Six months ended Year ended
31 March 2005 30
September
Restated*
2005
Restated*
Revenue Capital Total Total
£'000 £'000 £'000 £'000
Gains on investments - - 9,462 9,462 20,020
unrealised
Gains on investments - realised - 7,909 7,909 15,103
Foreign exchange gains/(losses) - 36 36 (78)
Gains on currency hedges - 585 585 -
Special dividends - - - 21
Income:
UK dividends 1,706 - 1,706 3,979
Overseas dividends 292 - 292 593
STIC interest 348 - 348 692
UK interest income 34 - 34 34
Deposit interest 214 - 214 423
Underwriting commission - - - 16
Investment management fee (133) (391) (524) (1,098)
Performance fee - (1,995) (1,995) (2,145)
Other expenses (151) - (151) (285)
Net return before finance costs
and taxation 2,310 15,606 17,916 37,275
Finance costs:
Interest payable (382) (1,145) (1,527) (3,037)
Distributions in respect of
non-equity shares (6) - (6) (12)
Return on ordinary activities
before taxation 1,922 14,461 16,383 34,226
Tax on ordinary activities (44) - (44) (91)
Return on ordinary activities
after taxation and transfer to 1,878 14,461 16,339 34,135
reserves
Return per ordinary share
Basic 14.1p 108.2p 122.3p 256.7p
* Restated for new UK Accounting Standards
Reconciliation of Movements in Shareholders' Funds (Unaudited)
Called Share Capital Capital Capital Revenue Total
up premium redemption reserve- reserve- reserve
share account reserve realised unrealised
capital
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance as at 1
October
2004 (as previously
stated) 6,685 1,258 466 85,664 13,697 3,454 111,224
Adjustment of
investments
to fair value - - - - (284) - (284)
Add final dividend for
2004 (i) - - - - - 2,307 2,307
Adjustment to
debenture
cost amortised on
effective interest - - - 58 - 20 78
basis
Balance as at 1
October
2004 (restated) 6,685 1,258 466 85,722 13,413 5,781 113,325
Final dividend paid in
2005 (i) - - - - - (2,307) (2,307)
Net return on ordinary
activities - - - 10,442 19,378 4,315 34,135
Interim dividend paid
in
2005 - - - - - (1,738) (1,738)
Balance as at 30
September
2005 (restated) 6,685 1,258 466 96,164 32,791 6,051 143,415
Final dividend (ii) - - - - - (2,473) (2,473)
Net return on ordinary
activities - - - 5,645 12,742 2,214 20,601
Balance as at 31 March 6,685 1,258 466 101,809 45,533 5,792 161,543
2006
(i) The final proposed dividend for the year ended 30 September 2004 was
declared and paid in the year ended 30 September 2005.
(ii) The final proposed dividend for the year ended 30 September 2005 was
declared and paid in the six month period ended 31 March 2006.
Balance Sheet (Unaudited)
At At At
31 March 30 September 31 March
2006 2005 2005
Restated* Restated*
£'000 £'000 £'000
Fixed assets
Investments at fair value
through profit or loss 187,152 162,050 143,748
Current assets
Amounts due from brokers 1,177 - -
Tax recoverable 17 17 17
Unrealised profit on forward contracts - - 76
Prepayments and accrued income 1,102 578 1,702
Certificates of deposit 14,997 - -
Cash at bank 106 23,667 25,586
17,399 24,262 27,381
Creditors: amounts falling due within
one year
Bank overdraft - (49) -
Amounts due to brokers (1,080) (424) -
Unrealised loss on forward contracts (11) (31) -
Accruals and deferred income (1,109) (1,075) (1,035)
Performance fee due and deferred - (651) (2,340)
(2,200) (2,230) (3,375)
Net current assets 15,199 22,032 24,006
Total assets less current liabilities 202,351 184,082 167,754
Creditors: due after more than one year
Debenture stock (39,527) (39,520) (39,513)
Cumulative preference shares (250) (250) (250)
Provisions for liabilities and charges (1,031) (897) (345)
Net assets 161,543 143,415 127,646
Capital and reserves
Called up share capital 6,685 6,685 6,685
Share premium account 1,258 1,258 1,258
Capital redemption reserve 466 466 466
Other reserves:
Capital reserve - realised 101,809 96,164 90,710
Capital reserve - unrealised 45,533 32,791 23,174
Revenue reserve 5,792 6,051 5,353
Equity Shareholders' funds 161,543 143,415 127,646
Net asset value per share
Basic 1208.4p 1072.8p 954.8p
* Restated for new UK Accounting Standards
Cash Flow Statement (Unaudited)
Six months Year to Six months
to to
31 March 30 September 31 March
2006 2005 2005
Restated* Restated*
£'000 £'000 £'000
Cash flow from operating activities (241) 3,359 1,850
Servicing of finance (1,516) (3,033) (1,516)
Capital expenditure and financial
investment
Purchase of fixed asset investments (37,652) (63,381) (33,394)
Proceeds from sale of fixed asset 33,660 66,684 36,323
investments
Equity dividends paid (2,473) (4,045) (2,306)
Net cash (outflow)/inflow before
management
of liquid resources and financing (8,222) (416) 957
Management of liquid resources 8,569 287 (1,626)
Increase/(decrease) in cash in the 347 (129) (669)
period
Decrease in debt (8) (14) (6)
Exchange movements (292) (51) 543
Cash (outflow)/inflow from movement in
liquid resources (8,569) (287) 1,626
Movement in net debt in the period (8,522) (481) 1,494
Net debt at beginning of period (16,152) (15,671) (15,671)
Net debt at end of period (24,674) (16,152) (14,177)
* Restated for new UK Accounting Standards
Notes to the Interim Accounts
1. Changes in Accounting Policies
The accounts have been prepared in accordance with applicable United Kingdom
Accounting Standards and with Statement of Recommended Practice ("SORP")
"Financial Statements of Investment Trust Companies", issued by the Association
of Investment Trust Companies in 2005.
The same accounting policies used for the year ended 30 September 2005 have
been applied, with the following exceptions:
(a) Investments are recognised on the date they are traded and are classified
as held at fair value through profit or loss. Financial assets designated as
fair value through profit or loss are measured at subsequent reporting dates at
fair value, which is the bid price. Prior to 1 January 2005, these were valued
at mid price.
(b) Dividends are not recognised in the accounts unless there is an obligation
to pay at the balance sheet date. Proposed dividends are thus recognised in the
period in which they are either approved by or paid to shareholders.
(c) Debentures - FRS 26 requires interest bearing borrowings to be recognised
at amortised cost, using the effective interest method. Previously the
debentures were recognised at amortised cost using the straight line method.
(d) Non-equity preference shares are required to be shown as a liability on the
balance sheet and dividends payable thereon are recognised as finance costs.
Previously the preference shares were shown as part of share capital with no
effect on the profit for the period. The reconciliation of net cash flow to the
movement in net debt is also effected.
Comparatives have been restated to reflect these changes and are disclosed in
note 9.
2. Transaction costs on purchases of £231,000 (30 September 2005: £391,000; 31
March 2005: £206,000) and on sales of £64,000 (30 September 2005: £124,000; 31
March 2005: £68,000) are included within gains and losses on investments.
3. The equity portfolio includes £14,575,000 (30 September 2005: £12,993,000;
31 March 2005: £12,031,000) of equities denominated in currencies other than
pounds sterling. In order to manage the currency risk, the Manager has hedged
their currency exposure into sterling through the use of forward foreign
exchange contracts. The gains and losses to date on these contracts are more or
less exactly offset by the changes in value of the equity investments due to
currency movements. These are fair value hedges through profit or loss.
4. STIC interest comprise income from investments in Short-Term Investments
Company (Global Series) PLC. UK interest income includes interest income from
Certificates of Deposit.
5. The performance fee is based on a calendar year.
31 March 30 September 31 March
2006 2005 2005
£ £ £
Performance fee relating to
31 December 2005 317,000 - -
31 December 2004 - 1,248,000 1,650,000
Provision for performance fee
relating to
31 December 2006 1,031,000 - -
31 December 2005 - 897,000 345,000
Total 1,348,000 2,145,000 1,995,000
Under the management agreement with INVESCO Asset Management Limited the
Company recognised a deferred performance fee in creditors for the three years
to 31 December 2005. This fee, totalling £651,000, became payable as at 31
December 2005.
6. The returns per ordinary share are based on the net revenue return
attributable to equity shareholders and on 13,368,799 (30 September 2005 and
March 2005: 13,368,799) ordinary shares, being the number of ordinary shares in
issue in the period.
7. The basic net asset value per ordinary share is calculated on net assets
attributable to equity shareholders of £161,543,000 (30 September 2005: £
143,415,000 (restated); 31 March 2005: £127,646,000 (restated) and on
13,368,799 (30 September 2005 and 31 March 2005: 13,368,799) ordinary shares in
issue.
8. The Directors have declared an interim dividend of 14.00p (2005: 13.00p) per
ordinary share in respect of the six months ended 31 March 2006. This will be
paid on 23 June 2006 to ordinary shareholders registered on 26 May 2006.
9. Restatement of balances for effects of new UK Accounting Standards
(a) Balance Sheet as at 30 September 2005
Previously
reported Restated
as at as at
30 September 30 September
2005 Adjustments 2005
£'000 £'000 £'000
Investments i 162,519 (469) 162,050
Current Assets 24,262 - 24,262
Creditors: less than one
year
Bank overdraft (49) - (49)
Forwards (31) - (31)
Creditors (424) - (424)
Proposed dividend ii (2,473) 2,473 -
Accruals (1,075) - (1,075)
Performance fee deferred (651) - (651)
(4,703) 2,473 (2,230)
Total assets less current 182,078 2,004 184,082
liabilities
Creditors: more than one
year
Debentures iii (39,606) 86 (39,520)
Cumulative preference iv - (250) (250)
shares
(39,606) (164) (39,770)
Provisions (897) - (897)
Net current assets 141,575 1,840 143,415
Share capital 6,685 - 6,685
Share premium 1,258 - 1,258
Capital redemption 466 - 466
reserve
Capital - realised iii 96,100 64 96,164
Capital - unrealised i 33,260 (469) 32,791
Revenue reserve ii, 3,556 2,495 6,051
iii
Equity Shareholders' funds 141,325 2,090 143,415
Cumulative preference iv 250 (250) -
shares
Total Shareholders' funds 141,575 1,840 143,415
Net asset value per 1057.1p 15.7p 1072.8p
ordinary share
(b) Balance Sheet as at 31 March 2005
Previously
reported Restated
as at as at
31 March 31 March
2005 Adjustments 2005
£'000 £'000 £'000
Investments i 144,078 (330) 143,748
Current Assets 27,381 - 27,381
Creditors: less than one
year
Proposed dividend ii (1,738) 1,738 -
Accruals and deferred (3,375) - (3,375)
income
(5,113) 1,738 (3,375)
Total assets less current 166,346 1,408 167,754
liabilities
Creditors: more than one
year
Debentures iii (39,596) 83 (39,513)
Cumulative preference iv - (250) (250)
shares
(39,596) (167) (39,763)
Provisions (345) - (345)
Net current assets 126,405 1,241 127,646
Share capital 6,685 - 6,685
Share premium 1,258 - 1,258
Capital redemption 466 - 466
reserve
Capital - realised iii 90,648 62 90,710
Capital - unrealised i 23,504 (330) 23,174
Revenue reserve ii, 3,594 1,759 5,353
iii
Equity Shareholders' funds 126,155 1,491 127,646
Cumulative preference iv 250 (250) -
shares
Total Shareholders' funds 126,405 1,241 127,646
Net asset value per 943.7p 11.1p 954.8p
ordinary share
(c) Balance Sheet as at 30 September 2004
Previously
reported Restated
as at as at
30 September 30 September
2004 Adjustments 2004
£'000 £'000 £'000
Investments i 130,559 (284) 130,275
Current Assets 25,248 - 25,248
Creditors: less than one
year
Amounts due to brokers (716) - (716)
Unrealised forward (3) - (3)
currency losses
Amounts due to (1) - (1)
subsidiary
Proposed dividend ii (2,307) 2,307 -
Accruals and deferred (1,031) - (1,031)
income
(4,058) 2,307 (1,751)
Total assets less current 151,749 2,023 153,772
liabilities
Creditors: more than one
year
Debentures iii (39,584) 78 (39,506)
Cumulative preference iv - (250) (250)
shares
Performance fee deferred (408) - (408)
(39,992) (172) (40,164)
Provisions (283) - (283)
Net assets 111,474 1,851 113,325
Share capital 6,685 - 6,685
Share premium 1,258 - 1,258
Capital redemption 466 - 466
reserve
Capital - realised iii 85,664 59 85,723
Capital - unrealised i 13,697 (284) 13,413
Revenue reserve ii,iii 3,454 2,326 5,780
Equity Shareholders' funds 111,224 2,101 113,325
Cumulative preference iv 250 (250) -
shares
Total Shareholders' funds 111,474 1,851 113,325
Net asset value per 832.0p 15.7p 847.7p
ordinary share
(d) Income Statement for the year ended 30 September 2005
Note £'000
Revenue return (as previously reported) 4,313
Capital return (as previously reported) 29,999
Total return 34,312
Adjustment for revaluation of investments to
fair value:
- for 30 September 2004 i 284
- for 30 September 2005 i (469)
Adjustment to debenture interest on iii 8
effective interest basis
Total return (restated) 34,135
Notes
i Listed investments are classified as held at fair value through profit or
loss, being the bid price. Previously these were carried at mid price.
ii Dividends are not recognised until they are approved by or paid to
shareholders, thus no provision is made for proposed dividends and these are
added back to revenue reserves.
iii Debentures, being interest bearing liabilities, are carried at amortised
cost under the effective interest method. Previously these were recognised at
amortised cost using the straightline method.
iv Cumulative preference shares are recognised as a liability. Previously these
were recognised as non-equity share capital.
10. It is the intention of the Directors to conduct the affairs of the Company
so that it satisfies the conditions for approval as an investment trust company
set out in section 842 of the Income and Corporation Taxes Act 1988.
11. The foregoing information at 30 September 2005 is an abridged version of
the Company's full accounts which carry an unqualified Auditor's report and
have been filed with the Registrar of Companies, after adjusting for the
effects of new accounting standards.
By Order of the Board
INVESCO Asset Management Limited
Secretary
25 May 2006
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