Half-yearly Report
Half-yearly financial report
for the six months ended 30 June 2008
Equities fell in most major markets in the first half of 2008. The FTSE
All-Share Index fell by 11.2% after inclusion of dividends. Temple Bar's total
assets, after management and other expenses, including accrued income but
before deducting interest payments, fell by 14.8%. Net assets (including the
re-investment of dividends) fell by 17.1%. Post-tax revenue earnings for the
period were £11.9m compared with £10.8m in the equivalent period last year.
The board has declared an interim dividend of 10.50p, an increase of 6% over
the prior year, payable on 30 September 2008 to shareholders on the register at
12 September 2008.
The last twelve months has been one of the worst periods on record for
investors with a 'value' based investment style. This approach focuses on
stocks with high dividend yields, low earnings ratios, strong asset bases and
high levels of sales relative to the value of the underlying business. Value
investing has proved a very durable and effective method for many decades but,
like all styles, has its fallow periods. This is such a time, but our manager
remains committed to this style. It is probably these periods of pain and
discomfort that dissuade a number of investors from following a value style,
thus providing the opportunity for its long-term success.
In contrast, 'momentum' investing, a focus on stocks with positive earnings
upgrades and share price movements, has produced stellar returns for its
followers recently. Investors have searched for safe havens and companies with
seemingly secure growth prospects. However, the share prices of this universe
of stocks have been driven to extreme valuation levels and are, therefore,
highly sensitive to bad news.
Not surprisingly after such diverse movements between stocks with different
characteristics, value now appears very cheap on a variety of valuation
measures.
A number of companies have announced cuts in dividend payments as the
importance of cash conservation grows. As yet, this has had a limited effect on
the portfolio's revenue stream since any cuts have been offset by rises
elsewhere. Further cuts must be expected from a number of companies, some of
which will be held on the portfolio, and it is therefore difficult to forecast
future dividends with high certainty. However, much of our revenue is derived
from companies with strong balance sheets whose dividends are forecast to
continue growing. The Company's large revenue reserve also provides a measure
of security for the dividend.
In the first six months of the year, the weak state of the banking industry
continued to affect the wider economy through the transmission mechanism of
higher interest rates and a marked tightening of lending criteria. This
impacted both the personal and corporate sectors and levels of confidence in
these areas in many western economies, as measured by a number of surveys, fell
to multi-year lows.
While the manager was cognisant of the likelihood of tougher conditions for
both the UK and the US consumer, he also believed that a great deal of bad news
was already discounted in the share prices of companies exposed to this risk.
The value of an equity is a shareholder's call on the long-term future cash
flows of the company and, although short-term outlooks may sometimes appear
bleak, that should not necessarily suggest a share is overvalued provided its
long-term prospects remain sound.
The portfolio remains fairly evenly split between two areas - companies in
sectors whose share prices are typically less sensitive to market gyrations
(generally known as 'low beta' stocks: pharmaceuticals, telecoms, oil, food and
tobacco) and those areas which are more sensitive to market movements such as
retailers, support services, travel and leisure and smaller companies.
While the first group generated some solid performance in the first half, this
was not enough to counter the disappointing performance of many stocks in the
second group. This was despite these stocks standing at, or near to, all time
relative lows when valued relative to their dividends, sales, earnings and
asset bases. Their valuations imply an implosion of earnings so great as to put
in doubt the future of many companies in their current forms. While current
trading is poor for many of these companies, we believe it would have to remain
so for some time before this outcome became probable. We are not minimising the
potential negatives of an earnings downturn but simply questioning whether it
is quite as bad as some share prices suggest.
On the other hand, we remain surprised that other sectors in the market have
escaped relatively lightly from equity market weakness. It is interesting to
note the continued strong momentum of those sectors deemed to be least affected
by a downturn in western economies. The mining sector, our bête noire in recent
years, once again produced noteworthy performance, rising 17% in the six months
to the end of June. This appears ever more anomalous considering the weakness
of many other sectors and the manager continues to believe their current
earnings streams are far above those which will be generated in the
longer-term.
Portfolio activity focused on sales of stocks which the manager believed did
not offer sufficient upside potential to counter the downside risk. DSGI was
sold as the deterioration in the company's balance sheet was hard to reconcile
with information provided by the management and ITV was sold as many of the
positives we had previously identified had been achieved but were negated by
disappointments in advertising revenue, leaving the shares much more expensive
than similar 'value' opportunities in the market. We also significantly reduced
our holding in HBOS as we believed its treasury division's large portfolio of
fixed interest assets could prove to be of lower quality than their high credit
ratings suggested.
We continued to search for outstanding value opportunities. Clearly, these
opportunities are not without risk. However, our role is not to eliminate risk
entirely but to embrace it when it is justified by the potential reward. For
example, we added to our holding in J D Wetherspoon, the pub retailer. The
shares of all pub retailers have fallen heavily due to concerns over the
financial health of their customers, the heavy debt loads many of them carry
and the effects of the smoking ban on their businesses. While these risks
should not be understated, J D Wetherspoon has a very distinct low price
proposition which increases its attractions to its customers during tougher
economic conditions. It also has highly conservative accounting policies which
hide the strong cash generation of the business. We have also been heartened by
recent purchases of shares by the founder and current chairman, Tim Martin, who
now owns almost 25% of the company.
Home Retail was purchased as a new holding for the portfolio. Its major
business, Argos, also has a good reputation amongst its customers as a low
price retailer and continues to win market share from struggling competitors.
While the short-term outlook for their smaller business, Homebase, is clearly
very difficult, the company's strong balance sheet should ensure it is well
placed for recovery.
Outlook
Value investing is as unpopular and unsuccessful now as at virtually any time
we can find in the last eighty years. Although the economic backdrop is not
propitious, our fund manager believes the stocks on the portfolio have
discounted a great deal of bad news and offer excellent long-term value.
Clearly, short-term volatility could cause prices to fall even lower and
perhaps significantly lower if the worst fears of the market are met or even
exceeded. However, portfolios are unlikely to produce the best long-term
returns if managed on worst-case scenarios. The manager is therefore
comfortable to continue with his present mix of low and high beta contrarian
opportunities.
John Reeve
Chairman
22 July 2008
Twenty largest holdings
as at 30 June 2008
Company Valuation % of
£m portfolio
Royal Dutch Shell 46,457 10.50
BP 45,721 10.34
Vodafone 37,834 8.55
GlaxoSmithKline 30,706 6.94
HSBC 28,185 6.38
Unilever 25,053 5.66
AstraZeneca 17,391 3.94
BT 14,070 3.18
Signet 11,028 2.49
Travis Perkins 10,467 2.37
Aviva 9,952 2.25
International Personal Finance 9,351 2.11
UK Treasury 4% 2009 9,280 2.10
Legal & General 9,018 2.04
Wolseley 8,911 2.01
Invensys 7,874 1.78
Centrica 7,799 1.76
Home Retail 6,953 1.57
Thus 6,132 1.39
Wetherspoon (J D) 5,852 1.32
348,034 78.68
Consolidated income statement
for the six months ended 30 June 2008
30 June 2008 30 June 2007 31 December 2007
Income statement Income Income statement
(unaudited) statement (audited)
(unaudited)
Revenue Capital Revenue Capital Revenue Capita
return return Total return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Investment 13,169 - 13,169 11,527 - 11,527 20,989 - 20,989
income
Other 251 - 251 865 - 865 1,535 - 1,535
operating
income
Total 13,420 - 13,420 12,392 - 12,392 22,524 - 22,524
income
Gains on
investments
(Losses)/
gains on - (94,032) (94,032) - 22,971 22,971 - (37,522) (37,522)
fair value
through
profit or
loss assets
13,420 (94,032) (80,612) 12,392 22,971 35,363 22,524 (37,522) (14,998)
Expenses
Management (326) (490) (816) (494) (742) (1,236) (890) (1,335) (2,225)
fees
Other (231) (570) (801) (220) (535) (755) (442) (1,165) (1,607)
expenses
Profit
before
finance
costs and
tax 12,863 (95,092) (82,229) 11,678 21,694 33,372 21,192 (40,022) (18,830)
Finance (917) (1,364) (2,281) (915) (1,356) (2,271) (1,831) (2,747) (4,578)
costs
Profit 11,946 (96,456) (84,510) 10,763 20,338 31,101 19,361 (42,769) (23,408)
before tax
Tax - - - - - - - - -
Profit for 11,946 (96,456) (84,510) 10,763 20,338 31,101 19,361 (42,769) (23,408)
the period
Earnings
per share 20.48p (165.33) (144.85) 18.45p 34.86p 53.31p 33.19p (73.31)p (40.12)p
(basic and p p
diluted)
An interim dividend of 10.50 pence per share (£6,126,000), in respect of the
six months ended 30 June 2008 was declared on 22 July 2008 and is payable on 30
September 2008. 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
was paid on 28 September 2007. A final dividend of 21.07 pence per share (£
12,292,000) in respect of the year ended 31 December 2007 was declared on 12
February 2008 and was paid on 31 March 2008. 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 2008
30 June 30 June 31
2008 2007 December
(unaudited) 2007
(unaudited) £'000
£'000 (audited)
£'000
CASH FLOWS FROM OPERATING ACTIVITIES
(Loss)/profit before tax (84,510) 31,101 (23,408)
Adjustments for:
Purchases of investments ¹ (80,925) (84,379)(182,309)
Sales of investments ¹ 99,107 86,835 169,316
18,182 2,456 (12,993)
Gains on investments 94,032 (22,971) 37,522
Financing costs 2,281 2,271 4,578
Operating cash flows before movements in
working capital 29,985 12,857 5,699
Increase in accrued income and prepayments
(748) (687) (222)
Decrease in receivables 19 1,768 1,749
(Decrease)/increase in payables (2,256) 947 2,379
NET CASH FLOW FROM OPERATING ACTIVITIES
BEFORE AND AFTER INCOME TAX 27,000 14,885 9,605
CASH FLOWS FROM FINANCING ACTIVITIES
Interest paid on borrowings (2,273) (2,279) (4,559)
Bank interest paid - (3) (4)
Equity dividends paid (12,292) (11,598) (17,380)
NET CASH USED IN FINANCING ACTIVITIES
(14,565) (13,880) (21,943)
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 12,435 1,005 (12,338)
Cash and cash equivalents at the start of the
period 3,412 15,750 15,750
Cash and cash equivalents at the end of the
period 15,847 16,755 3,412
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 2008
30 June 30 June 31
2008 2007 December
(unaudited) 2007
£'000 (unaudited)
£'000 (audited)
£'000
NON-CURRENT ASSETS
Investments held at fair value through
profit or loss 442,356 599,620 554,576
CURRENT ASSETS
Cash and cash equivalents 15,847 16,755 3,412
Other receivables 3,538 3,254 2,808
19,385 20,009 6,220
TOTAL ASSETS 461,741 619,629 560,796
CURRENT LIABILITIES
Other payables (828) (1,652) (3,084)
TOTAL ASSETS LESS CURRENT LIABILITIES 460,913 617,977 557,712
NON-CURRENT LIABILITIES
Interest bearing borrowings (63,374) (63,346) (63,372)
NET ASSETS 397,539 554,631 494,340
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 403,888 408,518 411,033
Capital reserves - unrealised (53,602) 101,330 35,708
Retained earnings 27,585 25,115 27,931
TOTAL EQUITY 397,539 554,631 494,340
NET ASSET VALUE PER SHARE 681.41p 950.68p 847.33p
Consolidated statement of changes in equity
for the six months ended 30 June 2008
Ordinary Share Capital Capital
share premium reserve reserve Retained Total
capital account realised unrealised earnings equity
£'000 £'000 £'000 £'000 £'000 £'000
BALANCE AT 1
JANUARY 2008 14,585 5,083 411,033 35,708 27,931 494,340
Profit for the - - (7,145) (89,310) 11,946 (84,509)
period
14,585 5,083 403,888 (53,602) 39,877 409,831
Dividends paid to
equity shareholders - - - - (12,292) (12,292)
BALANCE AS AT 30
JUNE 2008 14,585 5,083 403,888 (53,602) 27,585 397,539
Consolidated statement of changes in equity
for the six months ended 30 June 2007
Ordinary Share Capital Capital
share premium reserve reserve Retained Total
capital account 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 AT 30 JUNE 14,585 5,083 408,518 101,330 25,115 554,631
2007
Responsibility statement
The directors confirm to the best of their knowledge that:
the condensed set of financial statements contained within the half-year report
has been prepared in accordance with the Accounting Standards Board's Statement
'Half-Yearly Financial Reports';
the half-yearly financial report, which incorporates the interim management
report, includes a fair review of the information required by Disclosure and
Transparency Rule 4.2.7R 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 financial year; and
in accordance with Disclosure and Transparency Rule 4.2.8R there have been no
related parties transactions during the six months to 30 June 2008 and
therefore nothing to report on any material effect by such a transaction on the
financial position or performance of the Company during that period.
The half-yearly financial report was approved by the Board on 22 July 2008 and
the above responsibility statement was signed on its behalf by:
John Reeve
Chairman
Notes
1. Comparative figures
The financial information contained in this half-year 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 2008 and 30
June 2007 has not been audited.
The information for the year ended 31 December 2007 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 half-year report is being sent to shareholders and copies will be made
available to the public at the registered office of the Company.
For further information please contact:
Alastair Mundy
Investec Investment Management Limited 020 7597 2000
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