Half-yearly report

ABERFORTH GEARED CAPITAL & INCOME TRUST plc HALF YEARLY REPORT For the six months to 30 June 2008 FEATURES Total Returns Total Assets - 11.8% Net Asset Value of Capital - 28.4% Shares1 First Interim Dividend per 5.9p (+55.3%) Income Share 1 Capital Shares asset performance assumes Income Shares have a capital entitlement of 100p each. All data throughout this Half Yearly Report is to, or as at, 30 June 2008 as applicable, unless otherwise stated. CHAIRMAN'S STATEMENT TO SHAREHOLDERS For the six months to 30 June 2008, Aberforth Geared Capital & Income Trust plc (AGCiT) recorded a negative total return on total assets of 11.8%. The Hoare Govett Smaller Companies Index (Excluding Investment Companies) (HGSC (XIC)), which is representative of AGCiT's investment opportunity base, recorded a negative total return of 14.2% for the same period. The FTSE All- Share Index, representative of larger companies, showed a negative total return of 11.2%. AGCiT is a geared investment trust and one effect of the gearing is to magnify the returns at total asset level for the Capital Shareholders. In the recent period of falling equity markets this has resulted in the net asset value of a Capital Share (assuming 100p prior charge for the Income Shares) declining by 28.4% from 579.45p at 31 December 2007 to 414.72p at 30 June 2008. With regard to the Income Shares your Board is pleased to announce a first interim dividend of 5.9p. This represents an increase of 55.3% on the 3.8p paid for the equivalent period in 2007. Whilst the underlying growth in dividends from AGCiT's portfolio remains good, Income Shareholders should not extrapolate this rate of increase for the year as a whole. Your Board is seeking to rebalance the relative weight of the first and second interim dividends with the intention of achieving an approximately even distribution in 2009. In addition, there are a several non recurring items that have served to enhance revenue in the first half of 2008. These items include some "special dividends" and the recovery from HMRC of interest in respect of the VAT that was credited to AGCiT late in 2007. In addition, VAT is no longer charged on investment management fees and this has the effect of reducing the total management costs thus enhancing the distributable earnings for any given level of revenue. The first interim dividend will be paid on 21 August 2008 to Income Shareholders on the register on 1 August 2008. It is anticipated that the "ex dividend" date will be 30 July 2008. I am pleased to report that all the VAT and related interest have now been received from HMRC. In addition, a repayment has also been received directly from your Managers of VAT previously offset by them. In total, therefore, £743,000 has been received by AGCiT in respect of VAT and related interest. The quantum and prompt payment combine to produce an excellent outcome for Shareholders. The Managers' report that follows provides a detailed insight into AGCiT's performance, as well as that of small and large companies during the period under review. However, it seems clear that the stockmarket is attempting to take company valuations down to a level that adequately discounts the potential impact of a recession in the UK. AGCiT's total return on total assets has been a negative 26.7% since 31 May 2007 (corresponding approximately with the peak in the UK smaller companies market). Over this period the trailing P/E on AGCiT's portfolio (weighted average and excluding loss makers) has declined by approximately 40% and the dividend yield has risen by about 60%. This has been a significant and rapid adjustment. The issue is of course whether these much lower valuations adequately reflect the risks ahead. Your Board and Managers are of the view that they do and therefore have moved to a position of using the substantial majority of the debt facilities available to AGCiT, following a period earlier in 2008 when this was not the case. Experience suggests that stockmarkets largely adjust ahead of events and that recovery begins when news flow is still adverse. In the meantime, some comfort can be taken from the value that is prevalent in the portfolio and the fact that many of the investments have strong balance sheets supported by good cash flow together with above average but well covered dividend yields. Alastair C. Dempster Chairman 17 July 2008 MANAGERS' REPORT INVESTMENT BACKGROUND Over AGCiT's first half, returns from major equity markets were generally negative, as the implications of the credit crisis for real economic activity were digested. In the UK, the FTSE All-Share produced a total return of - 11.2%. With sterling having depreciated by 7% against the euro, this performance ranked amongst the weakest of the major markets on a constant currency basis. As is common when the appetite for risk dwindles, small companies performed more poorly, with the HGSC (XIC) down by 14.2% in total return terms. By mid March, stockmarkets seemed to have come to terms with the first-order effects of the credit crunch. Central banks, particularly the Fed, succeeded in restoring a degree of confidence, through a combination of interest rate reductions and less conventional measures, including the rescue of Bear Stearns and Northern Rock. The extreme stress in credit markets during the fourth quarter of last year has abated, though there is evidence of lingering caution: the gap between base rates and LIBOR, the rate at which banks lend to each other, remains significantly above the level that prevailed prior to the credit crisis. With the banks unable or unwilling to increase their lending, economies are set to endure further de-leveraging, an essentially deflationary process that has implications for real economic activity. This second-order effect of the credit crisis started to weigh on equity markets towards the end of the first half. It is most obvious in the housing markets, with the US leading the way. According to the S&P Case Shiller index, US house prices are now 18% below their peaks of two years ago. Meanwhile, in the UK, where the peak was reached as recently as August last year, prices are already down by almost 10%. The risks of these falls to consumer spending and, by extension, to overall economic activity in both countries are obvious. Moreover, in a potentially stagflationary turn of events, this has come at a time when the room for manoeuvre on the part of monetary authorities is limited by the stubborn inflationary threat of rapidly rising commodity prices, most notably the oil price, which has appreciated by 40% since the start of the year. These price movements were evident in the UK's May inflation release, which revealed that the year-on-year change in the CPI had moved to 3.3%, thus triggering another letter from the Governor to the Chancellor. This measure of inflation excludes oil prices, which leaves a 7.8% rise in food prices principally to blame. The RPI, which takes oil prices into account, showed an increase of 4.3%. With short dated gilt yields above long, the yield curve has inverted, which has traditionally been considered an indicator of imminent economic slowdown. INVESTMENT PERFORMANCE Against this background of mounting concern about the outlook for the real economy, equities suffered. AGCiT was not immune, recording a total return at the total assets level of -11.8%. This was, however, ahead of the HGSC (XIC)'s total return of -14.2%. The following paragraphs explain how this out-performance was achieved. The net effect of AGCiT's sector positioning was favourable. In broad terms, the portfolio retains its relatively low exposure to sectors reliant on the domestic economy. These include Real Estate and General Financials, both of which are close to the epicentre of the credit crunch. Moreover, it has had very little exposure to housebuilding, recruitment and regional press, areas of the stockmarket that suffered particularly acutely in the first half. On the other hand, the portfolio is over-weight in capital goods sectors, such as Electronics, Engineering and Aerospace & Defence. These tend to generate their sales and profits overseas and are therefore more insulated from the problems confronting the domestic economy. But AGCiT retains its under- weight positions in Oil and Mining sectors. This is not a reflection of scepticism about the fundamental story of emerging market demand, but is motivated by the stockmarket's willingness at the current time to attribute often lofty valuations, including low or nil dividend yields, to constituents of these sectors. Stock selection was also favourable. The most significant factor in this regard was corporate activity. Going into 2008, your Managers thought it likely that tighter credit conditions would constrain M&A. This has proved the case in the large company world, where big deals such as Alliance Boots would appear to be off the agenda for private equity houses. However, activity further down the size spectrum, generally below the FTSE 250, has proved pleasantly robust. The portfolio has a relatively high exposure to this area of the stockmarket, reflecting particularly low valuations on offer there. Over the first half, AGCiT has seen five bids completed for its holdings. At the end of June, another three holdings were in talks. Three more holdings had been approached, though the talks came to nothing. The buyers, or potential buyers, have been a mix of trade and private equity. Underlining the gap between the intrinsic values of many businesses and the valuations currently accorded to them by the stockmarket, the premiums that they have been prepared to pay have been considerably above the customary range. In turn, enterprise valuations in relation to operating profits have held up: the range for the five completed deals was 14x to 19x, which compares with an average of 7x historic operating profits for the portfolio at the end of June. Somewhat surprisingly given credit conditions, de-equitisation, a term used to describe the trend over recent years to replace equity with debt financing, was still in evidence across the UK stockmarket in the first half, albeit at a reducing rate. A handful of large takeovers and the perennial share buy-back programmes from BP and Shell have so far offset the banks' multi billion pound rights issues. This latter phenomenon has clearly been an issue for the large company world, but if share prices sustain their current momentum your Managers will have to dust off their banking analyses. There have also been several rescue rights issues within the HGSC (XIC). The companies involved have tended to have a domestic focus. AGCiT has a holding in one of these and participated in the fund raising. Given the gloomier outlook for the economy, further rights issues and equity funded deals are inevitable. Dividend payments are a more prosaic form of de-equitisation but over the long term are crucial to equity returns. Once again, the dividend experience of companies within AGCiT's portfolio has been remarkably good. There were 76 holdings at the end of June, a useful cross-section of the small company universe. Of those companies, it was the policy of three not to pay a dividend, while a further four had been listed for less than two years, preventing growth calculations. Of the remaining 69, three cut their dividends, five left them unchanged and 61 reported increases. Of the 69, the median rate of dividend growth was 13%, though this median does not necessarily reflect AGCiT's actual receipts, since it is diluted by the other seven holdings and since the portfolio is actively managed, with a specific rate of dividend growth not targeted. Nevertheless, this rate of growth is considerably above both the rate of inflation and the long term average achieved by equities. INVESTMENT OUTLOOK AGCiT and, indeed, the UK stockmarket as a whole have enjoyed several years of strong profit and dividend growth. This run has extended into the first half of 2008. Clouds are, however, gathering on the horizon as the credit crunch begins to exercise its malign influence, through the housing market, on the domestic economy. If the inflationary pressures of rising commodity prices do indeed compel the Bank of England to raise interest rates this year, as the futures markets are expecting, the risk of outright recession would seem high. The implications of this turn of events for corporate profitability and dividend growth are clearly not good. However, the stockmarket, performing its discounting role, has already moved many share prices lower, with the FTSE All-Share, in capital only terms, sitting 17% below its peak in October last year. This drop has left equities on ostensibly attractive valuations in relation to bonds, albeit running the risk of lower future profits. Small companies have been punished even more severely than large: the HGSC (XIC) is well into a bear market, now over 30% below its peak in May last year. On a historic PE of 9.8x, it is trading on a 6% discount to large companies. Intriguingly, this level of valuation may already be discounting a severe collapse in small company profits similar to declines experienced during the last recession in the early 1990s. Back then, small company profits started to fall sharply in 1991 and did not trough until the middle of 1993. However, the stockmarket discounted a recovery in profits and moved the PE of small companies up to over 18x by the end of 1993. With valuations thus taking the strain, it was possible to make good absolute returns from small companies in a period that saw profits decline by over one third. 30 June 2008 30 June 2007 Characteristics AGCiT HGSC AGCiT HGSC (XIC) (XIC) Number of Companies 76 484 86 487 Weighted Average Market Capitalisation £317m £536m £467m £627m Price Earnings Ratio 9.2x 9.8x 16.5x 15.8x (Historic) Net Dividend Yield 4.2% 3.7% 2.5% 2.0% (Historic) Dividend Cover (Historic) 2.6x 2.8x 2.4x 3.2x Timing a change in the mood of the stockmarket is never easy. At the end of June, AGCiT's portfolio retained a defensive disposition: around one third by value was invested in companies with net cash on their balance sheets and it still had its relatively high exposure towards businesses with overseas profit streams. As such, its average historic PE was 9.2x, a modest 6% discount to the HGSC (XIC). So, for now, your Managers prefer to eschew the opportunity to push that PE downwards aggressively by increasing exposure in the vulnerable domestically oriented businesses, such as the housebuilders, many of which are valued on less than 5x historic earnings. However, at some point it will be right to invest again in these areas of the stockmarket. That process will not feel comfortable and the chances are high that timing will not be perfect. But, given how quickly sentiment can turn, the risks of being `too late' are as great, if not greater, than being `too early'. With valuations for the asset class attractive in absolute terms and in relation to both bonds and large companies, your Managers contend that small companies are closer to the end of their de-rating than the beginning. Aberforth Partners LLP Managers 17 July 2008 INVESTMENT PORTFOLIO Thirty Largest Investments as at 30 June 2008 Valuation % of No Company £'000 Total Business Activity 1 Hampson 5,137 4.9 Aerospace and automotive Industries 2 Spirax-Sarco 4,622 4.4 Engineering Engineering 3 Greggs 3,407 3.2 Retailer of sandwiches, savouries and other bakery products 4 Shanks Group 3,182 3.0 Waste management 5 Interserve 3,003 2.9 Facilities, project & equipment services 6 e2v 2,604 2.5 Manufacture of electronic technologies components and sub-systems 7 Domino 2,444 2.3 Manufacture of industrial Printing printing equipment Sciences 8 UMECO 2,441 2.3 Advance composite materials and supply chain management 9 RPC Group 2,352 2.2 Manufacture of plastic containers and devices 10 Robert Wiseman 2,277 2.2 Processing and distribution of Dairies milk Top Ten Investments 31,469 29.9 11 Senior 2,233 2.1 Automotive and aerospace engineering 12 Low & Bonar 2,220 2.1 Manufacture of industrial textiles 13 Holidaybreak 2,201 2.1 Holiday company 14 Hiscox 2,185 2.1 Insurance 15 Spectris 2,156 2.0 Manufacture of precision instrumentation and controls 16 BSS Group 2,148 2.0 Distribution of plumbing supplies & tools 17 Wincanton 2,107 2.0 Logistics 18 Phoenix IT 2,094 2.0 IT services Group 19 Headlam Group 2,058 2.0 Distribution of floorcoverings 20 Brown (N.) 1,924 1.8 Home shopping catalogue retailer Group Top Twenty Investments 52,795 50.1 21 Halfords Group 1,870 1.8 Retailer of auto, leisure and cycling products 22 Delta 1,841 1.7 Galvanising, manganese products and industrial supplies 23 Wilmington 1,744 1.7 B2B publishing and training Group 24 Kofax 1,743 1.7 Software and related services 25 Nord Anglia 1,612 1.5 International schools and Education learning services 26 Castings 1,537 1.5 Engineering 27 Beazley Group 1,531 1.5 Insurance 28 JD Sports 1,477 1.4 Retailer of sports and Fashion leisurewear 29 Bodycote 1,475 1.4 Engineering 30 Britvic 1,460 1.4 Manufacture and distribution of soft drinks Top Thirty Investments 69,085 65.7 Other Investments 36,132 34.3 (46) Total Investments 105,217 100.0 Net Liabilities (58,654) Total Net Assets 46,563 The Income Statement, Balance Sheet, Summary Reconciliation of Movements in Shareholders' Funds, and Summary Cash Flow Statement are set out below: - INCOME STATEMENT (unaudited) For the six months to 30 June 2008 Revenue Capital Total £ 000 £ 000 £ 000 Realised net losses on sales - (489) (489) Movement in unrealised - (17,085) (17,085) appreciation --------- ---------- ---------- - Net losses on investments - (17,574) (17,574) Dividend income 2,384 636 3,020 Interest income 73 - 73 Other income 9 - 9 Investment management fee (151) (353) (504) Transaction costs - (231) (231) Other expenses (140) - (140) --------- ---------- ---------- - Net return before finance 2,175 (17,522) (15,347) costs and tax Finance costs: Interest (334) (782) (1,116) Change in fair valuation of - 1,007 1,007 interest rate swap --------- ---------- ---------- - 1,841 (17,297) (15,456) Finance costs: Dividends on Income Shares (1,642) - (1,642) classified as financial liabilities --------- ---------- ---------- - Return on ordinary 199 (17,297) (17,098) activities before tax Tax on ordinary activities (2) - (2) --------- ---------- ---------- - Return attributable to 197 (17,297) (17,100) equity shareholders ====== ====== ====== Returns per Share: (Note 4) Income Share 7.50p - 7.50p Capital Share - (164.73p) (164.73p) DIVIDENDS On 17 July 2008 the Board declared a first interim dividend for the year to 31 December 2008 of 5.9p per Income Share (2007 - 3.80p) payable on 21 August 2008. INCOME STATEMENT (unaudited) For the six months to 30 June 2007 Revenue Capital Total £ 000 £ 000 £ 000 Realised net gains on sales - 12,766 12,766 Movement in unrealised - (4,409) (4,409) appreciation --------- ---------- ---------- - Net gains on investments - 8,357 8,357 Dividend income 2,039 176 2,215 Interest income 1 - 1 Other income - - - Investment management fee (183) (426) (609) Transaction costs - (433) (433) Other expenses (108) - (108) --------- ---------- ---------- - Net return before finance 1,749 7,674 9,423 costs and tax Finance costs: Interest (343) (803) (1,146) Change in fair valuation of - 958 958 interest rate swap --------- ---------- ---------- - 1,406 7,829 9,235 Finance costs: Dividends on Income Shares (1,446) - (1,446) classified as financial liabilities --------- ---------- ---------- - Return on ordinary (40) 7,829 7,789 activities before tax Tax on ordinary activities - - - --------- ---------- ---------- - Return attributable to (40) 7,829 7,789 equity shareholders ====== ====== ====== Returns per Share: Income Share 5.73p - 5.73p Capital Share - 74.57p 74.57p INCOME STATEMENT (unaudited) For the year to 31 December 2007 Revenue Capital Total £ 000 £ 000 £ 000 Realised net gains on sales - 19,654 19,654 Movement in unrealised - (32,197) (32,197) appreciation --------- ---------- ---------- - Net losses on investments - (12,543) (12,543) Dividend income 3,925 176 4,101 Interest income 3 - 3 Other income - - - Investment management fee (163) (382) (545) Transaction costs - (636) (636) Other expenses (235) - (235) --------- ---------- ---------- - Net return before finance 3,530 (13,385) (9,855) costs and tax Finance costs: Interest (695) (1,623) (2,318) Change in fair valuation of - (225) (225) interest rate swap --------- ---------- ---------- - 2,835 (15,233) (12,398) Finance costs: Dividends on Income Shares (2,377) - (2,377) classified as financial liabilities --------- ---------- ---------- - Return on ordinary 458 (15,233) (14,775) activities before tax Tax on ordinary activities - - - --------- ---------- ---------- - Return attributable to 458 (15,233) (14,775) equity shareholders ====== ====== ====== Returns per Share: Income Share 11.57p - 11.57p Capital Share - (145.08p) (145.08p) RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS (unaudited) For the six months to 30 June 2008 Capit al Capita Capital Share redem Specia l reserve Reven capit p- l reserv - ue Total al tion reserv e - unreali reser £ 000 £ 000 reser e realis sed ve ve £ 000 ed £ 000 £ 000 £ 000 £ 000 Equity shareholders 105 50 9,674 41,776 9,238 2,820 63,663 funds as at 31 December 2007 Return attributable to - - - (1,219) (16,078) 197 (17,100) equity shareholders ----- ----- ------ ------ ------- ----- ------ Equity shareholders 105 50 9,674 40,557 (6,840) 3,017 46,563 funds as at 30 June 2008 ===== ===== ====== ====== ====== ===== ====== For the six months to 30 June 2007 Capit al Capita Capital Share redem Specia l reserve Reven capit p- l reserv - ue Total al tion reserv e - unreali reser £ 000 £ 000 reser e realis sed ve ve £ 000 ed £ 000 £ 000 £ 000 £ 000 Equity shareholders 105 50 9,674 24,587 41,660 2,362 78,438 funds as at 31 December 2006 Return attributable to - - - 11,280 (3,451) (40) 7,789 equity shareholders ----- ----- ------ ------ ------- ----- ------ Equity shareholders 105 50 9,674 35,867 38,209 2,322 86,227 funds as at 30 June 2007 ===== ===== ====== ====== ====== ===== ====== For the year to 31 December 2007 Capit al Capita Capital Share redem Specia l reserve Reven capit p- l reserv - ue Total al tion reserv e - unreali reser £ 000 £ 000 reser e realis sed ve ve £ 000 ed £ 000 £ 000 £ 000 £ 000 Equity shareholders 105 50 9,674 24,587 41,660 2,362 78,438 funds as at 31 December 2006 Return attributable to - - - 17,189 (32,422) 458 (14,775) equity shareholders ----- ----- ------ ------ ------- ----- ------ Equity shareholders 105 50 9,674 41,776 9,238 2,820 63,663 funds as at 31 December 2007 ===== ===== ====== ====== ====== ===== ====== BALANCE SHEET (unaudited) As at 30 June 2008 30 31 30 June December June 2008 2007 2007 £'000 £'000 £'000 Fixed Assets: Investments Investments at fair value through 105,217 119,420 145,421 profit or loss ------- ------- ------- Current assets Amounts due from brokers 66 - 39 Interest rate swap 653 - 829 Other debtors 663 1,029 522 ------- ------- ------- 1,382 1,029 1,390 ------- ------- ------- Creditors (amounts falling due within one year) Bank overdraft (554) - (1,019) Amounts due to brokers (628) (61) (745) Other creditors (86) (63) (62) ------- ------- ------- (1,268) (124) (1,826) ------- ------- ------- Net current assets/(liabilities) 114 905 (436) ------- ------- ------- Total assets less current 105,331 120,325 144,985 liabilities Creditors (amounts falling due (58,768) (56,662) (58,758) after more than one year) ------- ------- ------- Total net assets 46,563 63,663 86,227 ====== ====== ====== Capital and reserves: Equity interests Called up share capital: Capital shares 105 105 105 Reserves: Capital redemption reserve 50 50 50 Special reserve 9,674 9,674 9,674 Capital reserve - realised 40,557 41,776 35,867 Capital reserve - unrealised (6,840) 9,238 38,209 Revenue reserve 3,017 2,820 2,322 ------- ------- ------- Total equity 46,563 63,663 86,227 ====== ====== ====== Net Asset Values: - per Capital Share 449.28p 620.27p 846.25p - per Income Share (Income 97.51p 94.02p 89.27p Shares are classified as financial liabilities) NOTE The Company had 24.5m Income Shares and 10.5m Capital Shares in issue as at 30 June 2008, 31 December 2007 and 30 June 2007. CASH FLOW STATEMENT (unaudited) For the six months to 30 June 2008 6 months 6 months Year to to to 30 June 30 June 31 December 2008 2007 2007 £'000 £'000 £'000 Net cash inflow from operating 2,831 1,257 2,603 activities ------- ------- ------- Taxation Taxation paid (2) - - ------- ------- ------- Net cash outflow from taxation (2) - - ------- ------- ------- Returns on investments and servicing of finance Interest and other finance costs (1,096) (1,130) (2,324) paid Dividends paid (1,642) (1,446) (2,377) ------- ------- ------- Net cash outflow from returns on investments and servicing of (2,738) (2,576) (4,701) finance ------- ------- ------- Capital expenditure and financial investment Payments to acquire investments (19,952) (33,284) (48,417) Receipts from sales of 16,852 29,581 48,966 investments ------- ------- ------- Net cash (outflow)/inflow from (3,100) (3,703) 549 capital expenditure and financial investment ------- ------- ------- Net cash outflow before (3,009) (5,022) (1,549) financing activities ------- ------- ------- Financing activities Loans drawn down 2,455 4,002 1,548 ------- ------- ------- Net cash inflow from financing 2,455 4,002 1,548 activities ------- ------- ------- Change in cash during the period (554) (1,020) (1) ====== ====== ====== Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities Net return before finance costs (15,347) 9,423 (9,855) and taxation Net losses/(gains) on 17,574 (8,357) 12,543 investments Transaction costs 231 433 636 Decrease/(Increase) in debtors 366 (236) (743) Increase/(Decrease) in creditors 7 (6) 22 ------- ------- ------- Net cash inflow from operating 2,831 1,257 2,603 activities ====== ====== ====== NOTES TO THE FINANCIAL STATEMENTS 1. ACCOUNTING STANDARDS The financial statements have been prepared in accordance with UK generally accepted accounting practice (UK GAAP) and the AIC's Statement of Recommended Practice ``Financial Statements of Investment Trust Companies'' issued in 2005. The total column of the Income Statement is the profit and loss account of the Company. All revenue and capital items in the Income Statement are derived from continuing operations. No operations were acquired or discontinued in the period. The same accounting policies used for the year ended 31 December 2007 have been applied. 2. INVESTMENT MANAGEMENT FEE Six months to 30 June 2008 Revenue Capital Total £'000 £'000 £'000 Investment management fee 151 353 504 ------- ------- ------- Total for six months to 30 June 151 353 504 2008 ====== ====== ====== Six months to 30 June 2007 Revenue Capital Total £'000 £'000 £'000 Investment management fee 156 363 519 VAT paid thereon 27 63 90 ------- ------- ------- Total for six months to 30 June 183 426 609 2007 ====== ====== ====== Year to 31 December 2007 Revenue Capital Total £'000 £'000 £'000 Investment management fee 323 754 1,077 VAT paid thereon 42 98 140 VAT recoverable (202) (470) (672) ------- ------- ------- Total for the year to 31 163 382 545 December 2007 ====== ====== ====== The VAT recoverable recognised during the year to 31 December 2007 represents the repayment of all VAT paid on investment management fees since the company's inception (including all VAT previously offset by the managers). 3. FINANCE COSTS: DIVIDENDS ON INCOME SHARES CLASSIFIED AS FINANCIAL LIABILITIES Six months Six months Year to to to 30 June 30 June 31 December 2008 2007 2007 £'000 £'000 £'000 Amounts recognised as distributions to Income Shareholders: Second interim dividend for the - 1,446 1,446 year to 31 December 2006 of 5.9p paid on 22 February 2007 First interim dividend for the - - 931 year to 31 December 2007 of 3.8p paid on 23 August 2007 Second interim dividend for the 1,642 - - year to 31 December 2007 of 6.7p paid on 21 February 2008 ------- ------- ------- 1,642 1,446 2,377 ====== ====== ====== A first interim dividend for the year to 31 December 2008 of 5.9p will be paid on 21 August 2008 to Income Shareholders on the register on 1 August 2008. 4. RETURNS PER SHARE Six months Six months Year to to to 30 June 30 June 31 December 2008 2007 2007 Return per Income Statement £1,841,000 £1,406,000 £2,835,000 Less: Tax on ordinary activities £2,000 - - --------- --------- --------- Return attributable to Income £1,839,000 £1,406,000 £2,835,000 Shareholders ======== ======== ======== Number of Income Shares in issue 24,500,000 24,500,000 24,500,000 during the period Return attributable to Capital (£17,297,000) £7,829,000 (£15,233,000) Shareholders ======== ====== ======== Number of Capital Shares in 10,500,000 10,500,000 10,500,000 issue during the period 5. NET ASSET VALUE Total net assets have been calculated in accordance with the provisions of Financial Reporting Standard 4. Income Shares are classified as financial liabilities and are carried on the balance sheet at their fair value of 100p each which results in a total fair valuation of the Income Shares of £24,500,000. This valuation does not reflect the rights of the Income Shares under the Articles of Association on a return of assets. Set out below is a reconciliation of the Capital Share net asset value on the basis of Income Shares at 100p each and a reconciliation of Capital and Income share net asset values in accordance with the Articles. Net Asset Value of Capital Shares (based on Income Shares at 100p) As at As at As at 30 June 31 December 30 June 2008 2007 2007 £'000 £'000 £'000 Total net assets 46,563 63,663 86,227 Revenue reserve (3,017) (2,820) (2,322) ------- ------- ------- Net Asset Value of Capital 43,546 60,843 83,905 Shares ====== ====== ====== Number of Capital Shares 10,500,000 10,500,000 10,500,000 NAV per Capital Share (Income 414.72p 579.45p 799.10p Shares at 100p) Net Asset Value of Capital and Income Shares (Articles basis) Capital Income Total Shares Shares £'000 £'000 £'000 Total net assets as at 30 June 46,563 - 46,563 2008 Revenue reserve (3,017) 3,017 - Capital entitlement of Income - 24,500 24,500 Shares at 31 March 2011 (valuation of Income Shares disclosed within Creditors) Adjustment to reflect capital 3,628 (3,628) - entitlement not yet transferred to Income Shareholders in accordance with Articles ------- ------- ------- Net assets per Articles as at 30 47,174 23,889 71,063 June 2008 ====== ====== ====== Number of shares 10,500,000 24,500,000 NAV per share (per Articles) 449.28p 97.51p 6. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR As at As at As at 30 June 31 December 30 June 2008 2007 2007 £'000 £'000 £'000 Loan facility 4,300 1,845 4,300 LIBOR loan facility 30,000 30,000 30,000 Less: unamortised issue costs (32) (37) (42) Income shares 24,500 24,500 24,500 Interest rate swap - 354 - ------- ------- ------- 58,768 56,662 58,758 ====== ====== ====== 7. FURTHER INFORMATION The foregoing do not comprise Statutory Accounts (as defined in section 434(3) of the Companies Act 2006) of the Company. The statutory accounts for the year to 31 December 2007, which contained an unqualified Report of the Auditors , have been lodged with the Registrar of Companies and did not contain a statement required under section 237(2) or (3) of the Companies Act 1985(as amended). All information shown for the six months to 30 June 2008 is unaudited. Certain statements in this announcement are forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by those statements. Forward looking statements regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future. Accordingly, undue reliance should not be placed on forward looking statements. It is anticipated the Half Yearly Report will be posted to shareholders during the week commencing 21 July 2008. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website at www.aberforth.co.uk. Contact: John Evans or David Ross - Aberforth Partners LLP Tel: 0131 220 0733 Aberforth Partners LLP, Secretaries - 17 July 2008 ANNOUNCEMENT ENDS

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