Half-yearly Report
Half-yearly report for the six months ended 30 June 2010
Chairman's Statement
The total return on the net assets of Temple Bar during the first
half of 2010 was -6.0%, which compares with a total return for the FTSE
All-Share Index of -6.2%. Post-tax revenue earnings for the half year were
£10.2m compared with £11.5m in the equivalent period last year.
The Board has declared an unchanged interim dividend of 10.50p
payable on 30 September 2010 to shareholders on the register at 17 September.
The decision of the BP board to omit the three remaining quarterly dividends
in 2010 significantly reduced our expected revenue for this year, leading to a
forecast revenue deficit - the difference between the revenue received and
dividends and other payments - for 2010. Temple Bar's substantial revenue
reserves provide a significant cushion against short term negative events,
such as the loss of the BP dividend. The board will continue to reassess
dividend policy against the development of revenue income over the balance of
the year and the emerging outlook, including that for the restoration of the
BP dividend.
John Reeve
28 July 2010
Manager's Report
The Elephant in the Room
It is not usual to start commentaries by focusing on individual
stocks, but it seems appropriate to deal with the elephant in the room first.
We began the year with BP as the second largest holding on the portfolio. We
believed its low valuation, strong operational cash flow, high dividend yield
and strong balance sheet made it an attractive investment. However, the
Deepwater Horizon rig disaster and the consequent oil spill in the Gulf of
Mexico created significant selling pressure on the shares. Investors feared
that liabilities arising from the events could greatly affect BP's future. The
company's failure to halt the leak, PR problems and a heavy dose of political
rhetoric combined to make a bad situation worse.
While there has been plenty of commentary on BP's future in the
last few months, much is simply guesswork. However, it is fairly easy to
create some very negative scenarios for shareholders. In reaching our
investment conclusions on the shares, we have focused on just a couple of
areas. Historically, disasters in which companies have been considered (or
found) guilty of misdemeanours have resulted in fines large enough to
represent a pound of flesh, but insufficient to bankrupt the guilty parties.
Typically, payments have been deferred by either legal wrangling or by
agreement and, therefore, financed through cash generated by the business.
Usually, shares of these troubled companies have bottomed while the crises
were on-going and then increased significantly in the years that followed. In
BP's case we believe extraordinarily large fines run the risk of dissuading
other oil companies from operating in the Gulf of Mexico and, as a result,
might force the oil price up. Our conclusion is that a fine which is harsh but
fair seems the likely settlement.
We, therefore, decided to play the averages and purchased further
shares in BP towards the end of June. Of course, this is an uncomfortable
purchase and significant operational setbacks in the next few weeks or a
downgrade of BP's credit rating may push the shares down again. However, we
believe we will be amply rewarded for these risks. This decision was
particularly difficult because we will not receive further dividends on BP
during 2010 and possibly for longer.
Equity Markets
Equity markets illustrated schizophrenic characteristics in the
first six months of the year. After the calmness of the first quarter when the
FTSE All-Share Index rose by 5.4%, UK equities had their worst second quarter
of the year for 40 years (falling 12.6%) as the woes of the Greek and Spanish
economies hit the headlines. Together with fears over what effect government
austerity programmes would have, investors once again took a decision to step
away from investing in highly geared companies and those whose profitability
was particularly dependent on the UK consumer or the UK Government.
Winners and Losers on the Portfolio
As outlined above, BP was a problematic performer and H&R Block,
the US tax return specialists, fell as its market share continued to drop and
the industry moved further on-line. However, Signet Jewelers reported strong
results particularly in comparison with some shocking figures from their
closest peers. AstraZeneca was also strong as investors focused on longer term
prospects rather than short term concerns and the Market Vectors (Gold shares)
ETF performed well as more investors searched for some kind of portfolio
insurance. Two of our smaller companies, Devro and Games Workshop, rose as
management at both continued positively to impact operational performance.
Portfolio Activity
Portfolio activity remained low relative to most market
participants. In searching for unrecognised value we do not expect to find
many stocks of interest - the equivalent of finding £50 notes on a busy
street. But when we do find stocks that excite us we typically become long
term holders.
In the first six months of the year we added to BT as we believed
positive newsflow was being ignored, or at least under-emphasized, relative to
some of the more high profile negative news such as the large pension deficit.
We also added to Drax when the stock slipped on further downgrades.
New acquisitions included UK Commercial Property and British Land -
good quality property with long term leases is undervalued, although not
wildly cheap - SIG, which has been in the doldrums since announcing a profits
warning soon after a rights issue and Qinetiq, which has a new chief executive
who we believe has plenty of opportunities to squeeze cash from the business.
We reduced our holdings in Devro and Compass as their prices better
reflected the companies' prospects and we reduced our large position in
Vodafone. Mobile telecommunications remains a very competitive and capital
hungry business. Valuations are low, but perhaps justifiably so.
Our relative inactivity may look anomalous given the number of
statistically cheap stocks in the equity market. However, we often find much
to worry about in low valuations (particularly if price earnings ratios are
used to define cheapness) be it high levels of debt, structurally challenged
or untested business models, suspect accounting or the presence of supernormal
profits.
Outlook and Portfolio Positioning
The mountains of debt created in the good times will not diminish
quickly; in fact recent activity here has been a sophisticated game of pass
the debt parcel from those who definitely can't pay to those who probably
can't pay. However, it is dangerous to be too bearish; investors often become
bored with worrying about something for too long and convince themselves that
a muddle through can be negotiated.
On most standard valuation bases, equities are cheap relative to
their valuations over the last few decades. Additionally, other asset classes
such as government bonds or short term interest rates are so unattractively
priced that, to many investors, equities seem the most attractive game in
town. Investors therefore must decide whether to invest in equity markets
which are cheap, but against a backdrop of very great uncertainty.
The previous few paragraphs illustrate why we desist from making
macro-economic and market forecasts and, even more importantly, why we avoid
using them to shape the portfolio. Isaac Newton, after having been wiped out
in the South Sea Bubble, commented that `I can calculate the motions of
heavenly bodies...but not the madness of people'. With markets moving around
so violently in the short term on such little new information, there must be
easier ways of making money than guessing the next way investors will jump.
The four largest positions on the portfolio relative to their
weightings in the FTSE All-Share Index illustrate our ambivalence towards
placing a macro-economic framework around our stock selection process.
Signet's exposure to jewellery markets in both the UK and US, together with
its lack of dividend and primary listing in Bermuda, are clear turn offs for
many investors but, in our view, these negatives leave Signet's shares trading
at a significant discount to our estimate of their fair value. Similarly,
Travis Perkins is totally reliant on building related work in the UK and
despite its reputation as a `best in class' operator, investors are either
reluctant to pay up for the probable recovery in profitability over the next
few years or just refuse to believe these forecasts will be met.
For Signet and Travis Perkins, one could worry about double dip
recessions, L shaped recoveries and other negative outcomes, but any long term
holder of these companies expects a cyclical earnings stream. If that stream
begins with a period of low growth rather than high growth the impact on the
company's value is minimal. However, many market participants shy away from
this earnings profile. Happily, this provides us with an opportunity as any
weakness in the shares may well more than compensate for the depth of the
downturn.
Our other two largest overweight positions, GlaxoSmithKline and
Unilever, complement Signet and Travis Perkins well as they are relatively
insensitive to the economic cycle. The pharmaceutical industry has issues
which concern investors; lack of new blockbuster drugs, existing drugs losing
their patents and government pressure on drug pricing, such that the sector is
by no means bomb proof. However, we believe these fears are overdone and that
some of the financial characteristics of the company are significantly
under-rated. Similarly, there are pressures in food manufacturing such as high
levels of branded competition and the increasing share of the market taken by
private label, but Unilever, after years of trailing its competition, is now
firmly on the front foot having stepped up its innovation, advertising and
cost efficiencies.
We own shares with no knowledge of when, or even if, other
investors will agree with our theses but experience suggests the stocks'
different sensitivities determine they will have varying performance profiles.
We believe this gives the portfolio good balance at a time of great
uncertainty.
Alastair Mundy
Investec Asset Management Limited
28 July 2010
Twenty largest holdings as at 30 June 2010
Company Sector Valuation % of
£m portfolio
HSBC Banks 42,168 8.29
Royal Dutch Shell Oil & Gas 36,430 7.16
GlaxoSmithKline Health Care 35,351 6.95
Unilever Food & Beverage 31,597 6.21
BP Oil & Gas 27,300 5.37
Signet Jewelers Retail 26,540 5.22
Vodafone Telecommunications 26,124 5.13
AstraZeneca Health Care 25,742 5.06
Industrial Goods &
Travis Perkins Services 16,972 3.34
BT Telecommunications 14,511 2.85
Personal & Household
British American Tobacco Goods 14,258 2.80
Nationwide Building Society PIBS* Banks 12,982 2.55
Centrica Utilities 12,428 2.44
Industrial Goods &
Charter International Services 10,529 2.07
UK Commercial Property Real Estate 10,259 2.02
H&R Block Retail 9,099 1.79
Market Vectors ETF Financial Services 7,755 1.52
Industrial Goods &
Invensys Services 7,303 1.43
Drax Utilities 7,202 1.41
Compass Travel & Leisure 7,171 1.41
381,721 75.02
* Permanent Interest Bearing Shares
Consolidated income statement for the six months ended 30 June 2010
30 June 2010 30 June 2009 31 December 2009
Income statement Income 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 income 11,738 - 11,738 11,593 - 11,593 20,988 - 20,988
Other operating income 41 - 41 384 - 384 1,081 - 1,081
Total income 11,779 - 11,779 11,977 - 11,977 22,069 - 22,069
(Losses)/gains on
investments
(Losses)/gains on fair value
through profit or loss - (38,309) (38,309) - 9,175 9,175 - 131,412 131,412
assets
11,779 (38,309) (26,530) 11,977 9,175 21,152 22,069 131,412 153,481
Expenses
Management fees (373) (559) (932) (281) (422) (703) (660) (990) (1,650)
Other expenses (315) - (315) (255) - (255) (537) - (537)
Transaction costs - (292) (292) - (133) (133) - (310) (310)
VAT recoverable - - - 976 880 1,856 976 880 1,856
Profit/(loss) before finance
costs and tax
11,091 (39,160) (28,069) 12,417 9,500 21,917 21,848 130,992 152,840
Finance costs (915) (1,373) (2,288) (908) (1,363) (2,271) (1,831) (2,746) (4,577)
Profit/(loss) before tax 10,176 (40,533) (30,357) 11,509 8,137 19,646 20,017 128,246 148,263
Tax - - - - - - - - -
Profit/(loss) for the period 10,176 (40,533) (30,357) 11,509 8,137 19,646 20,017 128,246 148,263
Earnings per share (basic 17.26p (68.75)p (51.49)p 19.61p 13.87p 33.48p 33.98p 217.70p 251.68p
and diluted)
An interim dividend of 10.50 pence per share (£6,191,000) in
respect of the six months ended 30 June 2010 was declared on 28 July 2010 and
is payable on 30 September 2010. An interim dividend of 10.50 pence per share
(£6,191,000) in respect of the six months ended 30 June 2009 was declared on
27 July 2009 and was paid on 30 September 2009. A final dividend of 23.0 pence
per share (£13,561,000) in respect of the year ended 31 December 2009 was
declared on 23 February 2010 and was paid on 31 March 2010. 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 items 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 2010
30 June 2010 30 June 31 December
(unaudited) 2009 2009
£'000
(unaudited) (audited)
£'000
£'000
CASH FLOWS FROM OPERATING
ACTIVITIES
(Loss)/profit before tax (30,357) 19,646 148,263
Adjustments for:
Purchases of investments ¹ (57,975) (137,225) (193,313)
Sales of investments ¹ 53,991 126,505 187,581
(3,984) (10,720) (5,732)
Losses/(gains) on investments 38,309 (9,175) (131,412)
Financing costs 2,288 2,271 4,577
Operating cash flows before
movements in working capital
6,256 2,022 15,696
Decrease in accrued income
and prepayments
(457) (552) (389)
(Increase)/decrease in (954) 1,001 984
receivables
Increase in payables 2,977 - 114
NET CASH FLOW FROM OPERATING
ACTIVITIES BEFORE AND AFTER
INCOME TAX
7,822 2,471 16,405
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issue of new - 2,067 2,067
shares
Unclaimed distributions - - 2
Interest paid on borrowings (2,279) (2,261) (4,558)
Bank interest paid - - (2)
Equity dividends paid (13,561) (13,171) (19,362)
NET CASH USED IN FINANCING
ACTIVITIES
(15,840) (13,365) (21,853)
NET DECREASE IN CASH AND CASH
EQUIVALENTS
(8,018) (10,894) (5,448)
Cash and cash equivalents at
the start of the period
8,899 14,347 14,347
Cash and cash equivalents at
the end of the period
881 3,453 8,899
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 2010
30 June 2010 30 June 31 December
2009
(unaudited) 2009
£'000 (audited)
(unaudited) £'000
£'000
NON-CURRENT ASSETS
Investments held at fair
value through profit or
loss 507,284 424,340 541,611
CURRENT ASSETS
Cash and cash equivalents 881 3,453 8,899
Other receivables 4,873 3,610 3,462
5,754 7,063 12,361
TOTAL ASSETS 513,038 431,403 553,972
CURRENT LIABILITIES
Other payables (3,555) (464) (580)
TOTAL ASSETS LESS CURRENT 509,483 430,939 553,392
LIABILITIES
NON-CURRENT LIABILITIES
Interest bearing (63,413) (63,377) (63,404)
borrowings
NET ASSETS 446,070 367,562 489,988
EQUITY ATTRIBUTABLE TO
EQUITY HOLDERS
Ordinary share capital 14,740 14,740 14,740
Share premium 8,507 8,507 8,507
Capital reserves 395,426 315,850 435,959
Retained earnings 27,397 28,465 30,782
TOTAL EQUITY 446,070 367,562 489,988
NET ASSET VALUE PER SHARE 756.56p 623.40p 831.03p
Consolidated statement of changes in equity for the six months ended 30 June 2010
Ordinary Share
premium
share Capital Retained Total
capital account reserve earnings equity
£'000 £'000 £'000 £'000 £'000
BALANCE AT 1 JANUARY 14,740 8,507 435,959 30,782 489,988
2010
Loss for the period - - (40,533) 10,176 (30,357)
14,740 8,507 395,426 40,958 459,631
Dividends paid to
equity shareholders
- - - (13,561) (13,561)
BALANCE AT 30 JUNE 2010 14,740 8,507 395,426 27,397 446,070
Consolidated statement of changes in equity for the six months ended 30 June 2009
Ordinary Share
premium
share Capital Retained Total
capital account reserve earnings equity
£'000 £'000 £'000 £'000 £'000
BALANCE AT 1 JANUARY 14,647 6,533 307,713 30,127 359,020
2009
Profit for the period - - 8,137 11,509 19,646
14,647 6,533 315,850 41,636 378,666
Dividends paid to
equity shareholders
- - - (13,171) (13,171)
Issue of share capital 93 1,974 - - 2,067
BALANCE AT 30 JUNE 2009 14,740 8,507 315,850 28,465 367,562
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
2010 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 28
July 2010 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 434-436 of the
Companies Act 2006. The financial information for the six months ended 30 June
2010 and 30 June 2009 has not been audited.
The information for the year ended 31 December 2009 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 498(2) or (3) of the Companies Act
2006.
2. Publication
This half-year report is being send 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 Asset Management Limited 020 7597 2000
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