Half Yearly Report

RNS Number : 0239M

Edinburgh New Income Trust plc

21 January 2009

 



News Release

21 January 2009

EDINBURGH NEW INCOME TRUST PLC

HALF YEARLY FINANCIAL REPORT FOR THE SIX MONTHS TO 30 NOVEMBER 2008

Edinburgh New Income Trust plc's investment objective is to provide ordinary shareholders with an attractive level of income, together with the potential for capital and income growth and its zero dividend preference shareholders with a pre-determined capital entitlement on 31 May 2011.

•    Second interim dividend of 1.3p per ordinary share payable on 20 February 2009.

For further information, please contact:

Stewart Methven, Investment Manager, Aberdeen Asset Management PLC    Tel: [phone]

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.

EDINBURGH NEW INCOME TRUST

INTERIM BOARD REPORT FOR THE SIX MONTHS TO 30 NOVEMBER 2008

Investors in the UK equity market have experienced a torrid six months, enduring not only the slide into recession of the global economy, but also the near collapse of the global financial system. Against this background, in the six months to 30 November 2008 the Trust's net asset value per share (NAV) fell by 55.2% to 46.5p in capital terms, and by 52.4% in total return terms. The share price fell by 48.6% to 46.5p. By way of a comparison, the FTSE All-Share Index fell by 29.3% on a total return basis.

The Trust's total assets fell in value by 28.5% but the greater fall in the net asset value attributable to ordinary shareholders was a direct consequence of the capital gearing through the zero dividend preference shares (ZDPs). Gearing was controlled by sales of £8.5 million of equities, albeit into falling markets, and gearing levels ranged between 160% and 190% over the period. It has been a salutary reminder that, whatever the benefits of gearing in rising markets, gearing has a seriously adverse effect on equity shareholders when security prices fall.

The share price of the ZDPs rose to 123.0p, compared with an underlying net asset value of 122.6p. The capital cover of the ZDPs, which compares the gross assets to the final repayment entitlement of the ZDPs before charges, fell from 1.77 times at the end of May 2008 to 1.25 times at the end of November 2008. 

Dividends

A first interim dividend of 1.3p (2007-1.3p) was declared and paid in October 2008. The Board has declared a second interim dividend of 1.3p which will be paid on 20 February 2009. There remains considerably greater than normal uncertainty about the outlook for dividends from UK companies, and the interest rates that we earn on cash deposits have fallen sharply. Nevertheless, in the absence of unforeseen circumstances, the Board's aim is to maintain the total dividend at last year's level of 7.2p.

Market Review

The period under review covers a time of exceptional instability in the global financial system. Financial market turmoil became increasingly acute in September and October, following a number of high profile banking and insurance collapses and subsequent rescues. It was however the collapse of Lehman Brothers which appeared to accelerate the level of distress in financial markets. Stockmarkets had, up until this tipping point, been impacted by the combination of deteriorating global economic growth coupled with the lagged effects of high commodity and energy prices on inflation. These inflationary pressures had prevented a more accommodative stance from Central Banks, and indeed, it was as recently as July that the ECB raised interest rates. What followed in September and October however, led to a sharp contraction in global economic activity, as destocking prompted a rapid reduction in manufacturing schedules across a wide variety of industries. Share prices of companies reliant on industrial activity experienced particularly sharp falls, although with this further reduction in investor confidence, weakness was not just confined to this area. The risk aversion within the market has seen strong performances from those traditionally more defensive areas of the market, and while the Trust is well represented by Utilities, Pharmaceuticals and Tobacco, one of the strongest areas of the market was the Oil sector, despite the sharp reduction in commodity prices. 

Gearing

At the end of November 2008, equity investments totalled £17.5m, which resulted in a ratio of total equity investments to ordinary shareholders funds of 183%. Total potential gearing, were all cash balances invested in equity investments, would be 295%. The intention is that effective gearing should be limited to 190%.

VAT on Management Fees

As previously reported, the European Court of Justice ruled that management fees charged to UK investment trusts should be exempt from VAT. VAT is no longer being charged on our investment management fees. I am pleased to report that a rebate of £108,668 has been agreed with the Manager, which reflects a recovery of the full VAT on management fees since the Trust's launch in 2005. It is hoped that a further payment, representing the interest recovered from HMRC, will be credited in due course. 

Outlook

It is now clear that we are facing what may prove to be the most serious global recession for a generation or more, exacerbated by a fragile banking system that has been close to systemic collapse. Governments worldwide are providing fiscal and monetary stimulus on an unprecedented scale, and there will come a point when the attention of markets will turn to how this might be funded, but the more immediate focus is on whether or when these initiatives might start to have an effect.

Equity markets have fallen sharply, and valuation multiples are factoring in a very significant deterioration in company profitability to levels from which it is difficult to believe that profitability will not eventually recover, though it is equally clear that conditions could yet deteriorate further in the short run. For the longer term investor, the Managers believe that patience will be rewarded.

Events during the period

At the Company's AGM on 30 September 2008 all resolutions were passed. At the reconvened Separate Class Meetings of Ordinary and ZDP shareholders held on 16 October 2008, the resolutions to adopt new articles of association were passed.  

Risks and Uncertainties

The Board has adopted a matrix of the key risks that affect its business. The principal risks are as follows:

• Stockmarket risk: The Company is exposed to the effect of variations in share prices due to the nature of its business. A fall in the value of its portfolio will have an adverse effect on shareholders' funds, which will be exacerbated by the gearing effect of the zero dividend preference shares. It is not the aim of the Board to eliminate entirely the risk of capital loss, rather it is its aim to seek capital growth so that the gearing effect will multiply the gains for ordinary shareholders. However, the Board has to have regard to the damage which will result from a significant fall in share prices and has in place controls which may require sales of equity investments in declining markets, in order to prevent, if possible, the ratio of total equity investments to ordinary shareholders funds exceeding 190%. An aim is to ensure that the future capital entitlement of the zero dividend preference shares can always be met.

• Capital structure risk: The Company's capital structure and its accounting policies mean that the capital accrual on the zero dividend preference shares and 50% of the management fee are charged to the capital account rather than the revenue account. A consequence is that the value of the portfolio must rise, or these charges will result in a drop in net asset value for ordinary shareholders. 

• Income/dividend risk: The investment objective of the Company, to provide ordinary shareholders with an attractive level of income, means that the investment managers have to achieve an above average dividend yield on the investments in the portfolio. A consequence is that the capital performance of the equity portfolio may not always match that of the stockmarket as a whole, with a consequential impact on shareholder returns. The Board's aim is to maximise returns consistent with achieving its dividend requirements.

• Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. Breaches of regulations, such as section 842 of the Income and Corporation Taxes Act 1988, the UKLA Listing Rules and the Companies Act, could lead to a number of detrimental outcomes and reputational damage. 

The Company has established a framework for managing these risks which is evolving continually as the Company's investment activities change in response to market developments.  

Directors' Responsibility Statement

The Directors are responsible for preparing the half yearly financial report, in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

• the condensed set of financial statements within the half yearly financial report has been prepared in accordance with Accounting Standards Board's Statement 'Half Yearly Financial Reports'; and

• the Interim Board Report includes a fair view of the information required by 4.2.7R and 4.2.8R of the FSA's Disclosure and Transparency Rules.

For Edinburgh New Income Trust plc

David Ritchie

Chairman

21 January 2009

INCOME STATEMENT

	Six months ended  30 November 2008			Six months ended  30 November 2007
	(unaudited)			(unaudited)
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Losses on investments held at fair value	-	(11,131)	(11,131)	-	(5,250)	(5,250)
Income	936	-	936	969	-	969
Investment management fee	(53)	(53)	(106)	(75)	(75)	(150)
VAT recoverable on investment management fee	55	54	109	-	-	-
Administration expenses	(100)	-	(100)	(105)	-	(105)
	_______	______	______	_______	_______	______
Net return before finance costs and taxation	838	(11,130)	(10,292)	789	(5,325)	(4,536)
Finance costs of ZDP Shareholders	-	(535)	(535)	-	(506)	(506)
	_______	______	______	_______	_______	______
Net return on ordinary activities before and after taxation	838	(11,665)	(10,827)	789	(5,831)	(5,042)
	_______	______	______	_______	_______	______
Return per Ordinary share (pence)	4.08	(56.85)	(52.77)	3.84	(28.42)	(24.58)
	_______	______	______	_______	_______	______

The total column of this statement represents the profit and loss account of the Company.

No Statement of Total Recognised Gains and Losses has been prepared as all gains and losses have been reflected in the Income Statement.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued in the period.

  INCOME STATEMENT

	Year ended 31 May 2008
	(audited)
	Revenue	Capital	Total
	£'000	£'000	£'000
Losses on investments held at fair value	-	(9,445)	(9,445)
Income	2,068	-	2,068
Investment management fee	(139)	(138)	(277)
Administration expenses	(204)	-	(204)
	_______	_______	_______
Net return before finance costs and taxation	1,725	(9,583)	(7,858)
Finance costs of ZDP Shareholders	-	(1,026)	(1,026)
	_______	_______	_______
Net return on ordinary activities before and after taxation	1,725	(10,609)	(8,884)
	_______	_______	_______
Return per Ordinary share (pence)	8.41	(51.70)	(43.29)
	_______	_______	_______

The total column of this statement represents the profit and loss account of the Company.

No Statement of Total Recognised Gains and Losses has been prepared as all gains and losses have been reflected in the Income Statement.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued in the period.

  BALANCE SHEET 

	As at	As at	As at
	30 November	30 November	31  May
	2008	2007	2008
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	17,506	39,947	34,909
	_________	_________	_________
Current assets
Debtors and prepayments	231	496	313
AAA Money Market funds	12	2,715	3,215
Cash and short term deposits	10,611	736	1,058
	_________	_________	_________
	10,854	3,947	4,586
	_________	_________	_________
Creditors: amounts falling due within one year	(212)	(653)	(111)
	_________	_________	_________
Net current assets	10,642	3,294	4,475
	_________	_________	_________
Total assets less current liabilities	28,148	43,241	39,384
Creditors: amounts falling due after more than one year
Zero Dividend Preference shares	(18,599)	(17,544)	(18,064)
	_________	_________	_________
Net assets	9,549	25,697	21,320
	_________	_________	_________
Capital and reserves
Called-up share capital	205	205	205
Special reserve	20,035	20,035	20,035
Capital reserve	(11,903)	1,217	(238)
Revenue reserve	1,212	917	1,318
	_________	_________	_________
Equity Shareholders' funds	9,549	25,697	21,320
	_________	_________	_________
Net asset value per Ordinary share (pence)	46.54	125.23	103.90
	_________	_________	_________

Reconciliation of Movements in Shareholders' Funds

Six months ended 30 November 2008 (unaudited)

	Share	Special	Capital	Revenue
	capital	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000
Balance at 31 May 2008	205	20,035	(238)	1,318	21,320
Return on ordinary activities after taxation	-	-	(11,665)	838	(10,827)
Dividends paid	-	-	-	(944)	(944)
	______	_______	______	_______	_______
Balance at 30 November 2008	205	20,035	(11,903)	1,212	9,549
	______	_______	______	_______	_______
Six months ended 30 November 2007(unaudited)
	Share	Special	Capital	Revenue
	capital	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000
Balance at 31 May 2007	205	20,035	10,371	1,010	31,621
Return on ordinary activities after taxation	-	-	(5,831)	789	(5,042)
Dividends paid	-	-	-	(882)	(882)
	______	_______	______	_______	_______
Balance at 30 November 2007	205	20,035	4,540	917	25,697
	______	_______	______	_______	_______
For the year ended 31 May 2008 (audited)
	Share	Special	Capital	Revenue
	capital	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000
Balance at 31 May 2007	205	20,035	10,371	1,010	31,621
Return on ordinary activities after taxation	-	-	(10,609)	1,725	(8,884)
Dividends paid	-	-	-	(1,417)	(1,417)
	______	_______	______	_______	_______
Balance at 31 May 2008	205	20,035	(238)	1,318	21,320
	______	_______	______	_______	_______

  CASHFLOW STATEMENT 

	Six months ended	Six months ended	Year ended
	30 November 2008	30 November 2007	31  May  2008
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Net total return before finance costs and taxation	(10,292)	(4,536)	(7858)
Adjustment for:
Losses/(gains) on investments at fair value through profit or loss	11,131	5,250	9,445
Decrease/(increase) in accrued income	83	108	63
Increase in other debtors	(113)	(4)	1
Decrease in other creditors	(25)	(27)	(18)
	_________	_________	_________
Net cash inflow from operating activities	784	791	1,633
Net cash (outflow)/inflow from financial investment	6,502	(572)	(57)
Equity dividends paid	(944)	(882)	(1,417)
	_________	_________	_________
Net cash (outflow)/inflow before financing	6,342	(663)	159
Net cash inflow/(outflow) from management of liquid resources	3,203	1,035	535
	_________	_________	_________
Increase/(decrease) in cash	9,545	372	694
	_________	_________	_________
Reconciliation of net cash flow to movement in net funds
Increase/(decrease) in cash as above	9,545	372	694
Net change in liquid resources	(3,203)	(1,035)	(535)
Net changes in debt due in more than one year	(527)	(506)	(1,026)
	_________	_________	_________
Movement in net debt	5,815	(1,169)	(867)
Opening net debt	(13,791)	(12,924)	(12,924)
	_________	_________	_________
Closing net debt	(7,976)	(14,093)	(13,791)
	_________	_________	_________
Represented by:
Cash at bank	7,703	736	1,058
Certificates of Deposit	2,908	-	-
AAA Money Market funds	12	2,715	3,215
Debt due after more than one year	(18,599)	(17,544)	(18,064)
	_________	_________	_________
Net debt	(7,976)	(14,093)	(13,791)
	_________	_________	_________

  Notes:

1.	Accounting policies
	(a)	Basis of accounting
		The accounts have been prepared under the historical cost convention, as modified to include the revaluation of investments and in accordance with applicable UK Accounting Standards, with pronouncements on half-yearly reporting issued by the Accounting Standards Board and with the Statement of Recommended Practice for 'Financial Statements of Investments Trust Companies' (December 2005). They have also been prepared on the assumption that approval as an investment trust will continue to be granted.
		The financial statements and the net asset value per share figures have been prepared in accordance with UK Generally Accepted Accounting Practice ('UK GAAP').
		The interim accounts have been prepared using the same accounting policies as the preceding annual accounts.
	(b)	Dividends payable
		Dividends are recognised in the period in which they are paid.

		Six months ended	Six months ended	Year  ended
		30 November 2008	30 November 2007	31 May  2007
2.	Income	£'000	£'000	£'000
	Income from investments
	UK dividend income	735	858	1,831
	Overseas dividends	16	9	20
	Stock dividend	26	-	-
		___________	___________	___________
		777	867	1,851
		___________	___________	___________
	Other income
	AAA Money Market funds interest	53	91	180
	Deposit interest	102	10	36
	Underwriting commission	4	1	1
		___________	___________	___________
		159	102	217
		___________	___________	___________
	Total income	936	969	2,068
		___________	___________	___________

3.

The Manager has agreed to refund £109,000 to the Company for VAT charged on investment management fees for the period 1 January 2004 to 31 August 2007 and this has been included in these interim accounts. This repayment has been allocated to revenue and capital in line with the accounting policy of the Company for the periods in which the VAT was charged.

		Six months ended	Six months ended	Year  ended
		30 November 2008	30 November 2007	31 May  2008
4.	Return per Ordinary share	p	p	p
	Revenue return	4.08	3.84	8.41
	Capital return	(56.85)	(28.42)	(51.70)
		___________	___________	___________
	Total return	(52.77)	(24.58)	(43.29)
		___________	___________	___________
	These figures are based on the following attributable assets:
		Six months ended	Six months ended	Year ended
		30 November 2008	30 November 2007	31 May 2008
		£'000	£'000	£'000
	Revenue return	838	789	1,725
	Capital return	(11,665)	(5,831)	(10,609)
		___________	___________	___________
	Total return	(10,827)	(5,042)	(8,884)
		___________	___________	___________
	Weighted average number of Ordinary shares in issue	20,519,056	20,519,056	20,519,056
		___________	___________	___________

		As at	As at	As at
5.	Net asset value per share	30 November 2008	30 November 2007	31 May  2008
	Ordinary
	Attributable net assets (£'000)	9,549	25,697	21,320
	Number of Ordinary shares in issue	20,519,056	20,519,056	20,519,056
	Net asset value per share (p)	46.54	125.23	103.90
	Zero Dividend Preference
	Attributable net assets (£'000)	18,599	17,544	18,064
	Number of ZDP shares in issue	15,166,618	15,166,618	15,166,618
	Net asset value per share (p)	122.63	115.67	119.10

6.	Dividends
	Ordinary dividends on equity shares deducted from reserves are analysed below:
		Six months ended	Six months ended	Year ended
		30 November 2008	30 November 2007	31 May  2008
	Fourth interim dividend 2008 - 3.3p (2007 - 3.0p)	677	616	616
	First interim dividend 2009 - 1.3p (2008 - 1.3p)	267	266	267
	Second interim dividend 2008 - 1.3p	-	-	267
	Third interim dividend 2008 - 1.3p	-	-	267
		___________	___________	__________
		944	882	1,417
		___________	___________	__________
	The Company has declared a second interim dividend in respect of the year ending 31 May 2009 of 1.3p net (2008 - 1.3p) per Ordinary share which will be paid on 20 February 2009 to Ordinary Shareholders on the register on 30 January 2009. This dividend has not been included as a liability in these financial statements.

			Investment
			holding
		Realised	gains/ (losses)	Total
7.	Capital reserve	£'000	£'000	£'000
	Six months ended 30 November 2008 (unaudited)
	At 31 May 2008	933	(1,171)	(238)
	Movement in investment holdings fair value losses	-	(6,766)	(6,766)
	Losses on realisation of investments at fair value	(4,365)	-	(4,365)
	Finance costs of ZDP Shareholders	(535)	-	(535)
	Capital expenses	1	-	1
		__________	___________	_________
	At 30 November 2008	(3,966)	(7,937)	(11,903)
		__________	___________	_________
	Six months ended 30 November 2007 (unaudited)
	At 31 May 2007	1,979	8,392	10,371
	Movement in investment holdings fair value gains	-	(5,069)	(5,069)
	Losses on realisation of investments at fair value	(181)	-	(181)
	Finance costs of ZDP Shareholders	(506)	-	(506)
	Capital expenses	(75)	-	(75)
		__________	___________	_________
	At 30 November 2007	1,217	3,323	4,540
		__________	___________	_________
	Year ended 31 May 2008 (audited)
	At 31 May 2007	1,979	8,392	10,371
	Movement in investment holdings fair value gains	-	(9,563)	(9,563)
	Gains on realisation of investments at fair value	118	-	118
	Finance costs of ZDP Shareholders	(1,026)	-	(1,026)
	Capital expenses	(138)	-	(138)
		__________	___________	_________
	At 31 May 2008	933	(1,171)	(238)
		__________	___________	_________

8.	Transaction costs
	During the six months ended 30 November 2008 expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within losses on investments in the Income Statement. The total costs were as follows:
		Six months ended	Six months ended	Year  ended
		30 November 2008	30 November 2007	31 May 2008
		£'000	£'000	£'000
	Purchases	9	17	35
	Sales	6	2	6
		__________	___________	_________
		15	19	41
		__________	___________	_________

9.	The financial information contained in this Half-Yearly Financial 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 November 2008 and 30 November 2007 have not been audited.
	The information for the year ended 31 May 2008 has been extracted from the latest published audited financial statements 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.

10.	This Half-Yearly Report was approved by the Board on 21 January 2009.

11.    The half yearly financial report is available on the Company's website, www.edinburghnewincome.co.uk and the interim report will be posted to shareholders in February 2009 and copies will be available from the Manager.

For Edinburgh New Income Trust plc

Aberdeen Asset Management Limited, SECRETARY

 

END

 

 

IR PUUCUGUPBGCG