Half-yearly Report
CHAIRMAN'S STATEMENT
Most equity markets worldwide continued to rise in the first half of 2007 and,
although the biggest gains were made in some developing markets, UK equities
added to their progress of recent years. The FTSE All-Share Index produced a
total return of 7.6%. Temple Bar's total assets, after management and other
expenses, including accrued income but before deducting interest payments, rose
by 5.7%. Net assets (including the re-investment of dividends) increased by
5.9%. Post-tax revenue earnings for the period were £10.8m compared with £10.5m
in the equivalent period last year.
The board has declared an interim dividend of 9.91p, an increase of 6% over the
prior year, payable on 28 September 2007 to shareholders on the register at 14
September 2007.
The two themes prevalent in the market's advance in previous years, merger and
acquisition activity and commodity market strength, continued to dominate
investors' thoughts. Although there were a number of bids and mergers, rumours
of action, driven by the high level of cash held by private equity funds,
covered a much longer list. Of the consummated deals, there was an interesting
trend towards increasing size.
The manager's strongly held view that many of the largest stocks by market
capitalisation (the 'mega caps') in the UK market were cheap was vindicated by
the performance of Royal Dutch Shell, Vodafone, Unilever and BSkyB. These
stocks have been mathematically cheap for some time; investors are now happier
to accept that the outlook for these companies is far more positive than many
commentators had suggested. The biggest positive to the portfolio in the first
half of the year was the proposed merger of Reuters and Thomson. Yet again
this illustrates that our process of buying deeply out of favour stocks can pay
great dividends in the longer term. Just four years ago, many investors firmly
believed that Reuters was strained both financially and strategically. The
shares have risen six-fold since then, demonstrating that high confidence in a
view can be misplaced, however well informed it may seem.
The performance of the Temple Bar portfolio was negatively affected by two
areas highlighted in the Annual Report and Accounts. Two stocks, HMV and
Jessops have caused us further discomfort as they struggled to adapt to their
fast changing markets. However, Jessops has now secured bank financing until
the end of 2008, providing it with time to focus on operational issues. HMV is
in talks to dispose of its Japanese division which would greatly improve the
strength of its balance sheet.
Our lack of exposure to the mining sector also hurt performance. The fund
manager believes the supply/demand mismatch caused by strong growth in the
Chinese economy and speculative buying from financial investors cannot be
sustained and that a reversal could be dramatic in time and quantum. China is
becoming increasingly self-sufficient in metal production and there are also
indications that its government would prefer to see an increase in the rate of
growth of consumer expenditure balanced by a reduction in the growth of
spending on commodity intensive capital projects. Any fundamental sell-off in
commodities could very well be exacerbated by short-term investors also selling
aggressively.
There were other themes that one might have expected to have a greater effect
on UK equities. The Monetary Policy Committee of the Bank of England increased
short-term interest rates further as the UK economy maintained its momentum and
inflationary pressures continued to mount. While this drove long-term bond
yields higher, equities were largely unaffected.
The developing crisis in the sub-prime mortgage market in the USA was also
virtually disregarded by the UK equity market. Rising interest rates have
forced an increasing number of sub-prime customers into arrears on their
mortgages and created large losses for many investors exposed to them through
bond investments.
Currently, the market believes the problem is contained and that there will be
no contagious effects on the US economy. We find it hard, at this stage, to be
as sanguine.
There could be wider implications for the economy as banks tighten their
lending standards and if securitisation markets shrink. As the US economy has
become increasingly dependent on debt in recent years, a slowdown in loan
growth or, even worse, a reduction in the overall level of debt could have a
damaging effect on economic growth and financial markets.
Given the paucity of vital information, it is difficult to know how to best
protect a portfolio from such eventualities. The most obvious conclusion is
that amongst listed vehicles banks are most clearly in the firing line. They
lend to buyers of financial assets, are large issuers and buyers of securitised
assets and are highly geared companies. For that reason, we continue to have
an underweight position in the bank sector.
Activity on the portfolio remained low during the period under review. A number
of holdings reached our assessment of fair value and were sold: Wichford,
Millennium & Copthorne, easyJet, N Brown, TDG, Alpha Airports, Spirent and St
Ives. We partially sold other stocks as they approached fair value: Britvic,
Cable & Wireless and Prudential.
Purchases were mainly of existing holdings such as Royal Dutch Shell, BP, HSBC
and Unilever although in recent months some new holdings in smaller companies
have been established. For example, we have bought shares in Devro, a sausage
skin manufacturer and Thus, a UK-focused business telecommunications company.
Outlook
The number of holdings on the portfolio has reduced further in the first six
months of the year and the largest 25 holdings now represent 80% of the gross
assets of the Trust. We continue to find most value in stocks which the market
judges to have a minimal chance of corporate activity. We therefore have
sizeable positions in many of the 'mega caps'. Similarly, we have a smattering
of medium-sized companies which have previously rejected bids, such as Signet
and JJB Sports, or in which large stakes are held by management thought
unlikely to concede control: JD Wetherspoon.
The manager believes we are in the last leg of the bull market; a time
typically characterised by more volatile markets. Investors continue to shrug
off most bad news and minor market corrections and, somewhat perversely, appear
to gain confidence from each ensuing recovery.
However, the last leg of a bull market can often be both elongated and
spectacular. The manager believes the best policy currently is to remain at
least 90% of gross assets invested but with great emphasis on stocks offering
the most attractive mix of balance sheet strength, low valuations, high
dividend yields and the flexibility to move operating costs in line with their
turnover.
24 July 2007
John Reeve
Twenty Largest Holdings
as at 30 June 2007
Company Valuation % of
£m portfolio
Royal Dutch Shell 54.2 8.8
BP 47.9 7.7
HSBC 43.3 7.0
Vodafone 42.6 6.9
GlaxoSmithKline 34.7 5.6
Unilever 28.3 4.6
Royal Bank of Scotland 28.1 4.6
BT 23.4 3.8
AstraZeneca 21.8 3.5
Signet 16.1 2.6
Legal & General 13.5 2.2
HBOS 12.8 2.1
Prudential 11.9 1.9
Reuters 11.7 1.9
Daily Mail & General Trust 11.3 1.8
ITV 11.1 1.8
Kingfisher 10.8 1.7
Taylor Nelson Sofres 10.7 1.7
Centrica 9.8 1.6
British Sky Broadcasting 9.8 1.6
453.8 73.4
Consolidated Income Statement
for the six months ended 30 June 2007
30 June 2007 30 June 2006 31 December
2006
Income Income
Statement Statement Income
Statement
(unaudited) (unaudited)
(audited)
Revenue Capital Revenue Capital Revenue Capital
Return
Return Total Return Return Total Return Return Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Investment 11,527 - 11,527 11,862 - 11,862 20,410 - 20,410
income
Other 865 - 865 244 - 244 390 - 390
operating
income
Total 12,392 - 12,392 12,106 - 12,106 20,800 - 20,800
income
Gains on
investments
Gains on
fair value
through - 22,971 22,971 - 17,647 17,647 - 69,689 69,689
profit or
loss assets
12,392 22,971 35,363 12,106 17,647 29,753 20,800 69,689 90,489
Expenses
Management (494) (742) (1,236) (443) (665) (1,108) (921) (1,382) (2,303)
fees
Other (220) (535) (755) (215) (740) (955) (426) (1,172) (1,598)
expenses
(714) (1,277) (1,991) (658) (1,405) (2,063) (1,347) (2,554) (3,901)
Profit
before
finance
costs and
tax 11,678 21,694 33,372 11,448 16,242 27,690 19,453 67,135 86,588
Finance (915) (1,356) (2,271) (917) (1,356) (2,273) (1,833) (2,749) (4,582)
costs
Profit 10,763 20,338 31,101 10,531 14,886 25,417 17,620 64,386 82,006
before tax
Tax - - - - - - - - -
Profit for 10,763 20,338 31,101 10,531 14,886 25,417 17,620 64,386 82,006
the period
Earnings
per Share
(basic and 18.45p 34.86p 53.31p 18.05p 25.52p 43.57p 30.20p 110.36p 140.56p
diluted)
An interim dividend of 9.91 pence per share (£5,782,000), in respect of the six
months ended 30 June 2007 was declared on 24 July 2007 and is payable on 28
September 2007.
An interim dividend of 9.35 pence per share (£5,455,000) in respect of the six
months ended 30 June 2006 was declared on 25 July 2006 and paid on 30 September
2006.
A final dividend of 19.88 pence per share (£11,598,000) in respect of the year
ended 31 December 2006 was declared on 20 February 2007 and paid on 30 March
2007.
The total column of this statement represents the Group's Income Statement,
prepared in accordance with IFRS. The supplementary revenue return and capital
return columns are both prepared under guidance published by the Association of
Investment Companies. All terms in the above statement derive from continuing
operations.
All income is attributable to the equity holders of the parent company. There
are no minority interests.
Consolidated cash flow statement
for the six months ended 30 June 2007
30 June 2007 30 June 2006 31 December
2006
(unaudited) (unaudited)
£'000 £'000 (audited)
£'000
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 31,101 25,417 82,006
Adjustments for:
Purchases of investments ¹ (84,379) (136,732) (168,918)
Sales of investments ¹ 86,835 129,751 172,514
2,456 (6,981) 3,596
Gains on investments (22,971) (17,647) (69,689)
Financing costs 2,271 2,273 4,582
Operating cash flows before movements in
working capital
12,857 3,062 20,495
(Increase)/decrease in accrued income and
prepayments
(687) (595) 505
Decrease in receivables 1,768 347 4,113
Increase /(decrease)in payables 947 (14,776) (14,958)
NET CASHFLOW FROM OPERATING ACTIVITIES
BEFORE AND AFTER TAX
14,885 (11,962) 10,155
CASH FLOWS FROM FINANCING ACTIVITIES
Interest paid on borrowings (2,279) (2,279) (4,559)
Bank interest paid (3) (6) (10)
Equity dividends paid (11,598) (11,044) (16,499)
NET CASH USED IN FINANCING ACTIVITIES
(13,880) (13,329) (21,068)
NEW INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS
1,005 (25,291) (10,913)
Cash and cash equivalents at the start of
the period
15,750 26,663 26,663
Cash and cash equivalents at the end of
the period
16,755 1,372 15,750
¹ Purchases and sales of investments are considered to be operating activities
of the Company, given its purpose, rather than investing activities.
Consolidated balance sheet
as at 30 June 2007
30 June 2007 30 June 2006 31 December
2006
(unaudited) (unaudited)
£'000 £'000 (audited) £
'000
Non-current assets
Investments held at fair value through
profit or loss
599,620 537,639 579,105
Current assets
Cash and cash equivalents 16,755 1,372 15,750
Other receivables 3,254 9,202 4,335
20,009 10,574 20,085
Total assets 619,629 548,213 599,190
Current liabilities
Other payables (1,652) (887) (705)
Total assets less current liabilities 617,977 547,326 598,485
Non-current liabilities
Interest bearing borrowings (63,346) (63,332) (63,357)
NET ASSETS 554,631 483,994 535,128
Equity attributable to equity holders
Ordinary share capital 14,585 14,585 14,585
Share premium 5,083 5,083 5,083
Capital reserves - realised 408,518 361,564 382,482
Capital reserves - unrealised 101,330 78,446 107,028
Retained earnings 25,115 24,316 25,950
TOTAL EQUITY 554,631 483,994 535,128
NET ASSET VALUE PER SHARE 950.68p 829.60p 917.25p
Consolidated statement of changes in equity
for the six months ended 30 June 2007
Ordinary Share Capital Capital
premium reserve reserve
Share Retained Total
capital reserve realised unrealised earnings equity
£'000 £'000 £'000 £'000 £'000 £'000
BALANCE AT 1
JANUARY 2007
14,585 5,083 382,482 107,028 25,950 535,128
Profit for the - - 26,036 (5,698) 10,763 31,101
period
14,585 5,083 408,518 101,330 36,713 566,229
Dividends paid to
equity shareholders
- - - - (11,598) (11,598)
BALANCE AS AT 30
JUNE 2007
14,585 5,083 408,518 101,330 25,115 554,631
Consolidated statement of changes in equity
for the six months ended 30 June 2006
Ordinary Share Capital Capital
premium reserve reserve
Share Retained Total
capital reserve realised unrealised earnings equity
£'000 £'000 £'000 £'000 £'000 £'000
BALANCE AT 1
JANUARY 2006
14,585 5,083 333,041 92,083 24,829 469,621
Profit for the - - 28,523 (13,637) 10,531 25,417
period
14,585 5,083 361,564 78,446 35,360 495,038
Dividends paid to
equity shareholders
- - - - (11,044) (11,044)
BALANCE AT 30 JUNE
2006 14,585 5,083 361,564 78,446 24,316 483,994
1. Comparative Figures
The financial information contained in this interim report does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. The
financial information for the six months ended 30 June 2007 and 30 June 2006
has not been audited.
The information for the year ended 31 December 2006 does not constitute
statutory accounts, but has been extracted from the latest published audited
accounts, which have been filed with the Registrar of Companies. The report of
the auditors on those accounts contained no qualification or statement under
section 237 (2) or (3) of the Companies Act 1985.
2. Publication
This interim report is being sent to shareholders and copies will be made
available to the public at the registered office of the Company.
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