Final Results

RNS Number : 0317F

Lindsell Train Investment Trust PLC

08 June 2012

 



THE LINDSELL TRAIN INVESTMENT TRUST PLC
Announcement of Results for the Year to 31 March 2012
Objective of the Company
To maximise long-term total returns with a minimum objective to maintain the real purchasing power of Sterling capital as measured by the annual average yield on the UK 2.5% Consolidated Loan Stock.
Financial highlights
Performance comparisons 1 April 2011  -  31 March 2012
Middle market share price per Ordinary Share #	+9.0%
Net asset value per Ordinary Share†	+ 10.2%
Benchmark*	+ 4.2%
MSCI World Index (Sterling)	+ 1.6%
UK RPI Inflation (all items)	+ 3.6%
#  Calculated on a total return basis.
†  The net asset value at 31 March 2012 has been adjusted to include the dividend of £3.65 per Ordinary Share paid on 29 July 2011.
*  The index of the annual average yield on the UK 2.5% Consolidated Loan Stock between the relevant dates.
Chairman's Statement The net asset value ('NAV') total return of the Company over the last year increased by 10.2%, exceeding the benchmark (up 4.2%) and compared to a return from world markets (MSCI World Index in Sterling) of 1.6%.  This represents an annual increase higher than the annualised total NAV return since launch, which now stands at 9.0%. The share price total return last year was less than the rise in the NAV, at 9.0%, reflecting a small contraction in the premium at which shares trade over NAV to 1.7%. The Company has traded at a premium to NAV for about two years and we believe that shareholders, at least in part, attribute this to a perception that the valuation the Directors place on the holding in Lindsell Train Limited ('LTL'), using the pricing formula understates its 'true' value.  Whilst the Directors recognise that there is no exact or correct value for an unlisted investment such as LTL, their aim is to arrive at a conservative but realistic value using a rationale that shareholders can understand and interpret.  Our valuation balances the illiquid minority nature of the investment with the strong flow of dividends which LTL provides.  Our conservatism is influenced by two factors in particular.  The first is that the Company owns a minority shareholding at just less than 25%.  This means that, in theory at least, the other shareholders can muster the 75% majority required to vote changes to LTL's Shareholders' Agreement or Articles of Association. This is important as the Articles of Association places restrictions on the trading in LTL shares whilst the Shareholders' Agreement contains two crucial safeguards for minority shareholders. One is to restrict compensation payments to LTL employees to approximately 25% of LTL's revenues and the other to ensure that 80% of net profits are paid as dividends so long as LTL has adequate shareholders' capital. These two provisions have, over the years, ensured that the Company has received a material tangible return from its investment in LTL, one that in the year to March 2012 amounted to a dividend that was more than twelve times the cost of the initial investment.  The other factor is that LTL is still largely reliant on its two founding partners.  Only in the last two years have additional investment staff been recruited.  The founders are now supported by two directors responsible for, on the one hand, marketing and client support and on the other, administrative, finance and compliance functions.  In the last year, LTL recruited a highly experienced individual in a non-executive role to assist further in strengthening its future growth. Dwelling on these issues is even more relevant today as LTL has had another successful year with its value rising more than any of the Company's other investments, up 36.5%. It now represents 13.6% of NAV and its dividends made up 36% of the Company's total revenue during the year. LTL's funds under management increased 20% to £1.6bn with growth concentrated in its UK and Global strategies. Long-term investment performance remains promising and last year all the Lindsell Train pooled funds outperformed their benchmarks. Whilst this is all extremely encouraging both for LTL and the Company it only goes to emphasise the importance of this one investment to the Company. Elsewhere the Company's residual investments in undated gilts performed well, generating a total return of 24%.  If you remember, the positions in long dated fixed interest have been reduced over the years from more than 50% of NAV to just 8% now, over a period in time when fixed interest has generated much better returns than global equities. The Managers think that this outperformance is unlikely to last much longer, which makes them keen to seek an opportunity to switch the remainder into equities on any further strength in the bond markets. Similar to previous years the contribution from our quoted equities was focused on one or two large holdings. Lately AG Barr contributed most to the Company's performance but this year it was another drinks company, Diageo, that took up the reins. At 10.3% of NAV it was up 27%. Diageo owns ten of the top twenty world spirits brands and in addition one of the best beer brands around - Guinness - that accounts for as much as 20% of its total revenues. The company generates prodigious cash flow which, aside from funding a dividend growing at 6% p.a., is likely to be used to acquire and strengthen the portfolio of brands even further. Nintendo dragged returns down most, falling in value by 45% on account of a horrific year for profits caused by weak sales and high costs associated with launching new consoles.  This has prompted further additions to the position.  The Managers take some solace that at current prices c.75% of its market capitalisation is backed by cash alone but expect real support to come from improved sales once the new consoles and the associated games gain popularity with consumers. The Directors recommend a total dividend of £4.15 per share for the year to March 2012. We have decided to break it down into an ordinary dividend of £3.87 and a special dividend of £0.28, with the special dividend reflecting the income earned by the Company from LTL performance fees.  The Company's policy to retain the maximum permitted earnings according to investment trust regulations remains unchanged but in past years when this would have led to a temporary fall in the dividend the Directors maintained the prior year's payment. In the future in such circumstances the Directors would propose to maintain the ordinary dividend only.  We show below how previous dividends would have been split if the new policy above had been followed. Year to March Ordinary (£) Special (£) Year to March Ordinary (£) Special (£) 2008 1.97 0.13 2010 3.61 0.04 2009 3.30 0.35 2011 3.72 0.28 The Managers try to avoid distractions provided by macro political and economic events, focusing on the strengths of individual investments.  This approach has served shareholders well in the past and the Board has confidence that it will continue to do so in the future. D L Adamson Chairman 8 June 2012
Investment Manager's Report Is a policy of buy and hold, such as we pursue for your Company (to a fault, even we sometimes wonder), a rational approach to the investment challenge? As so often, it depends - sometimes yes, but not others. We've been thinking about this question in relation to our major holding in AG Barr (10.73% of assets), which is trading pretty much at the same share price as two years ago (when, to be fair, we sold 23% of the position). The stock has done nothing in the interim, despite delivering satisfactory trading results, of which there was another set in March 2012. The truth is Barr's shares had got ahead of themselves during 2010 and have been "growing into the rating" ever since. And, what is more, it seemed plausible enough to us back then that the shares might tread water for an indefinite period. Yet we didn't sell more. Why? In part we held off because we were confident of Barr's dividend growth, up another 9% at recent results and we covet the long run dividend stream it provides. Next, we knew that the strong cash generation - enjoyed by all owners of successful soft drinks brands - would quickly pay down Barr's modest debt and permit the acquisition of new brands, or, as has transpired, the build of new production capacity for existing brands in a new geography. This cash generation is a competitive advantage for Barr and similar companies in your portfolio, but because opportunities arrive haphazardly, it is impossible to know exactly when the competitive advantage will boost the share price. The idea here is that the cash generation provides a valuable "optionality" for these companies - you know that something good may come of their superior economics, you just don't know quite what or when. Or, to paraphrase Charlie Munger - with good companies the next surprise is often a good surprise; with a challenged business the next surprise is almost always unwelcome. This "optionality" or propensity for good things to happen to good companies is an important element of our attempt to deliver good long run stock market returns. In the short term, though, numerically-minded analysts are, understandably, unwilling to accord anything in their valuation models for so intangible a factor. But this unwillingness is very close to our core investment proposition - that other investors fail to ascribe correct or full value to the shares of wonderful companies. In summary, right or wrong, we are always reluctant to sell out of exceptional businesses, except on the most excessive of valuations (which did not pertain for Barr in 2010). Hindsight continually whispers into one's ear that such a policy is not optimal - why not sell, find another stock, then trade back into Barr after its couple of years in the doldrums? But in real-time this is not such an easy thing to deduce or execute. Our conviction about the calibre of Barr's business and about the likelihood that its pricing power will protect long term shareholders against the ravages of inflation is much stronger than our conviction that the shares may or may not take a pause for breath. Having said all this, it is true, we regret to admit to shareholders, that we wish we had sold more Nintendo back in 2007/8, given that the stock has now fallen 85% from those peaks. A period of dull, sideways shuffling is one thing, but falls of this magnitude signal other investors' concerns that Nintendo's business is broken or irreparably outmoded. And the necessity this has imposed on us - to determine the viability of a given business model - is not and never should be, a standard part of our investment approach. The whole point, for us, is to invest in unusually predictable business types. We have, nonetheless, added to the Nintendo holding in 2012. We did so for three reasons. First, the clear success of the new 3DS handheld in Japan, selling more quickly there than any other console ever launched by any manufacturer. The rock solid, cash rich balance sheet is another source of comfort. Finally, we recently read Walter Isaacson's biography of Steve Jobs and see in the latter's controversial, but eventually extraordinarily successful strategy for Apple clear parallels to Nintendo. Specifically, Jobs always insisted Apple remain a "closed" company - in the sense that it designed all its own hardware and software as a seamless package and refused either to license its software to other hardware makers, or to welcome other operating systems onto its own platforms. Jobs argued this policy of integration allowed Apple to focus on the design of "insanely great" products. Today, Nintendo is chastised by investors for not offering its game franchises to other platforms - notably Apple, of course - and for continuing to design its own, often idiosyncratic hardware. We think Nintendo is correct to stick to its principles and expect the company to come up with new, innovatory products - like a 3D device that does not require special goggles - that will once again capture customer and investor enthusiasm. Apple stock fell from $11 in 1995 to a low of $3.2 in 1997 (over 70%), during a hiatus in its product development. Over $500 today, its investors were well rewarded for keeping faith in the Apple business model. We hope it will prove right to keep faith with Nintendo too through a similar hiatus. N Train Investment Manager, Lindsell Train Limited 8 June 2012

Income Statement for the years ended 31 March 2012 and 31 March 2011
		2012			2011
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments		-	3,546	3,546	-	3,408	3,408
Exchange gains on currency balances		-	97	97	-	1	1
Losses on forward currency  contracts		-	-	-	-	(235)	(235)
Losses on futures contracts		-	(188)	(188)	-	(24)	(24)
Income		1,535	-	1,535	1,287	-	1,287
Investment management fees		(245)	(127)	(372)	(250)	(469)	(719)
Other expenses		(229)	(15)	(244)	(245)	(2)	(247)
Net return before finance costs and tax		1,061	3,313	4,374	792	2,679	3,471
Interest payable and similar charges		(5)	-	(5)	(3)	-	(3)
Return on ordinary activities before tax		1,056	3,313	4,369	789	2,679	3,468
Tax on ordinary activities		(9)	-	(9)	(29)	-	(29)
Return on ordinary activities after tax for the financial year		1,047	3,313	4,360	760	2,679	3,439
Return per Ordinary Share		£5.23	£16.57	£21.80	£3.80	£13.40	£17.20
All revenue and capital items in the above statement derive from continuing operations. The total columns of this statement represent the profit and loss accounts of the Company. The revenue and capital return columns are supplementary to this and are prepared under the guidance published by the Association of Investment Companies. A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement. No operations were acquired or discontinued during the year.

Reconciliation of Movements in Shareholders' Funds for the years ended 31 March 2011 and 31 March 2012
	Share capital £'000	Special reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
For the year ended 31 March 2012
At 31 March 2011	150	19,850	20,926	1,657	42,583
Return on ordinary activities after tax for the financial year	-	-	3,313	1,047	4,360
Dividends paid	-	-	-	(730)	(730)
At 31 March 2012	150	19,850	24,239	1,974	46,213
For the year ended 31 March 2011
At 31 March 2010	150	19,850	18,247	897	39,144
Return on ordinary activities after tax for the financial year	-	-	2,679	760	3,439
At 31 March 2011	150	19,850	20,926	1,657	42,583

Balance Sheet as at 31 March 2012 and 31 March 2011
		2012		2011
		£'000	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss			46,311		42,176
Current assets
Debtors		4,663		4,116
Cash at bank		239		1,076
		4,902		5,192
Creditors: amounts falling due within one year		(5,000)		(4,785)
Net current (liabilities)/assets			(98)		407
Net assets			46,213		42,583
Capital and reserves
Called up share capital			150		150
Special reserve			19,850		19,850
			20,000		20,000
Capital reserve			24,239		20,926
Revenue reserve			1,974		1,657
Equity shareholders' funds			46,213		42,583
Net asset value per Ordinary Share			£231.06		£212.92

Cash Flow Statement for the years ended 31 March 2012 and 31 March 2011
	2012	2011
	£'000	£'000
Net cash inflow from operating activities	522	217
Servicing of finance	(5)	(3)
Taxation	(11)	(30)
Financial investment	(1,095)	(218)
Net cash outflow before financing	(589)	(34)
Equity dividends paid	(730)	-
Decrease in cash in the year	(1,319)	(34)
Reconciliation of net cash flow to movement in net (debt)/funds
Decrease in cash in the year	(1,319)	(34)
Exchange movements	97	1
Opening net funds	755	788
Closing net funds	(467)	755

Notes 1.  Basis of accounting and comparative information These financial statements have been prepared on the historical cost basis of accounting, except for the measurement at fair value of investments.  The financial statements have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP), the AIC Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' dated January 2009.  All of the Company's operations are of a continuing nature. The accounting policies are consistent with the policies set out in the Annual Report of the Company for the year to 31 March 2011. The statutory accounts for the year ended 31 March 20121 have been finalised on the basis of the financial information presented by the Directors in this announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The statutory accounts for the year ended 31 March 2011, have been delivered to the Registrar of Companies and received an audit report which was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report, and did not contain statements under s498(2) and 498(3) of the Companies Act 2006.  2.  Net Asset Value per Ordinary Share The net asset value per Ordinary Share and the net asset value at the year end calculated in accordance with the Articles of Association were as follows: Net asset value per share attributable Net asset value attributable 2012 2011 2012 2011 £ £ £'000 £'000 231.06 212.92 46,213 42,583 The movements during the year of the assets attributable to each Ordinary Share were as follows: Ordinary Shares £'000 Total net assets attributable at beginning of year 42,583 Total recognised gains for the year 4,360 Dividends paid during the year (730) Total net assets attributable at end of year 46,213 The net asset value per Ordinary Share is based on net assets of £46,213,000 (2011: £42,583,000) and on 200,000 Ordinary Shares (2011: 200,000), being the number of Ordinary Shares in issue at the year end. 3.  Income 2012 2011 £'000 £'000 Income from investments Overseas dividends 164 179 Overseas stock dividends 38 115 UK dividends 1,165 825 UK fixed interest income 168 167 1,535 1,286 Other income Deposit interest - 1 Total income comprises Dividends 1,367 1,119 Interest 168 168 1,535 1,287 4.  Return per Ordinary Share 2012 2011 Total return per Ordinary share: Total return £4,360,000 £3,439,000 Weighted average number of Ordinary Shares in issue during the year 200,000 200,000 Total return per Ordinary Share £21.80 £17.20  The total return per Ordinary Share detailed above can be further analysed between revenue and capital, as below: 2012 2011 Revenue return per Ordinary share: Revenue return £1,047,000 £760,000 Weighted average number of Ordinary Shares in issue during the year 200,000 200,000 Revenue return per Ordinary Share £5.23 £3.80 2012 2011 Capital return per Ordinary share: Capital return £3,313,000 £2,679,000 Weighted average number of Ordinary Shares in issue during the year 200,000 200,000 Capital return per Ordinary Share £16.57 £13.40 5.  Status The Directors conduct the affairs of the Company with a view to maintaining approved company status  as an investment trust, and concomitant exemption from UK capital gains tax.  HM Revenue & Customs approval has been received for all financial years to 31 March 2011, but this does not preclude a subsequent enquiry into a tax return from being opened. 6.  Dividend A final dividend of 415p per Ordinary Share (2011: 365p) is proposed for the year ended 31 March 2012 and if approved by Shareholders at the forthcoming Annual General Meeting will be paid on 3 August 2012 to Shareholders on the register at close of business on 13 July 2012 (ex-dividend 11 July 2012). 7.  Investment Policy The Investment Policy of the Company is to invest: • in a wide range of financial assets including equities, unquoted equities, bonds, funds, cash and other financial investments globally with no limitations on the markets and sectors in which investment may be made, although there may be bias towards Sterling assets, consistent with a Sterling-dominated investment objective. The Directors expect that the flexibility implicit in these powers will assist in the achievement of the absolute returns that the investment objective requires; • in Lindsell Train managed fund products, subject to Board approval, up to 25% of its gross assets; • to retain a holding, currently 24.9%, in Lindsell Train Limited in order to benefit from the growth of the business of the Company's Investment Manager. Diversification The Company expects to invest in a concentrated portfolio of securities with the number of equity investments averaging fifteen companies. The Company will not make investments for the purpose of exercising control or management and will not invest in securities of or lend to any one company (or other members of its group) more than 15% by value of its gross assets. The Company will not invest more than 15% of gross assets in other closed-ended investment funds. Gearing The Directors' policy is to permit borrowings up to 50% of the net asset value of the Company in order to enhance returns where and to the extent that this is considered appropriate. Dividends The Directors' policy is to pay annual dividends consistent with retaining the maximum permitted earnings in accordance with investment trust regulations. 8.  Principal risks Non-financial risks to which the Company is exposed include market, economic and regulatory factors, and loss of services by third party suppliers. The price of shares is subject to the interaction of supply and demand, market and economic influences, net asset value per share and the general perceptions of investors. The share price will accordingly fluctuate and the Company cannot guarantee that it will appreciate. The Company's activities are conducted within operational and regulatory environments and could be materially impacted by a failure of systems at third party service providers, a loss of key member(s) of the investment management team, breach of applicable tax regulation/legislation, or breach of the UKLA Listing Rules. Market risk The fair values or future cash flows of the Company's financial instruments may fluctuate due to changes in market risk. Market risk encompasses mainly equity price risk but also foreign exchange risk and interest rate risk. Market risk is monitored by the Board on a quarterly basis and on a continuous basis by the Investment Manager. The company transacts futures contracts, which alter the exposure to equity price risk. Interest rate risk The Company is only exposed to significant interest rate risk through its overdraft facility with Morgan Stanley & Co. International plc. Borrowing varied throughout the year as part of a Board endorsed policy.  Borrowings at the year end consisted of €236,000 and ¥30,567,000 with a Sterling equivalent of £196,000 and £233,000 respectively and of a Sterling borrowing of £277,000. If that level of borrowing were maintained for a year a 1% change in LIBOR (up or down) would decrease or increase net revenue by £7,100 or 3.53p per Ordinary Share (2011: £3,200 or 1.60p per Ordinary Share). Other price risk If the fair value of the Company's investments  at the year end increased/decreased by 10% then it could have the effect of £4,631,000 or £23.16 per Ordinary Share (2011: £4,218,000 or £21.09 per Ordinary Share) on the capital return Derivative exposure At 31 March 2012 there was one open forward currency contract increasing the exposure to the US Dollar by US$6,300,000 against Sterling of £4,021,000 which matured on 19 April 2012. Liquidity risk Liquidity risk is not significant in normal market conditions as the majority of the Company's investments are listed on recognised stock exchanges and for the most part readily realisable securities which can be easily sold to meet funding commitments if necessary. Short-term  flexibility is achieved by the use of overdrafts as required and are repayable on demand. Credit risk Credit risk is mitigated by diversifying the counterparties through whom the Investment Manager conducts investment transactions. The credit-standing of all counterparties is reviewed periodically with limits set on amounts due from any one broker. Counterparty risk Morgan Stanley & Co. International plc ('MSI'), a wholly owned subsidiary of Morgan Stanley & Co. ('MS'), is the principal clearing broker and custodian to the Company.  These services include the provision to the Company of margin financing, clearing, settlement and foreign exchange facilities.  Under the agreement MSI is able to pledge or use the Company's securities to a maximum of 140% of any gross borrowing that the Company has outstanding with MSI. MSI provides custody for the Company's securities (also through its network of sub-custodians) in keeping with the FSA rules, with the assets held in segregated client accounts and separately distinguishable from those of MSI's own proprietary assets. However, pledged or used securities may be co-mingled with MSI's assets and thus in the event of MSI's bankruptcy, the Company could be ranked as a general creditor to MSI.  The Directors view this as a significant counterparty risk.  To avoid this eventuality the Company eliminated its borrowing from MSI in 2008 in order to prevent MSI pledging any of the Company's securities to third parties.  Following government action to stabilise the financial system both in the UK and USA and the specific measures to boost MS's capital the Directors believe that counterparty risk is reduced but nonetheless continue to restrict the Company's borrowings from MSI. 9.  Availability of financial statements The financial information in this Announcement does not constitute the statutory accounts of the Company for the year ended 31 March 2012 nor for the year ended 31 March 2011 as defined in the Companies Act but is derived from those accounts.  The Annual Report & Accounts of the Company for the year ended 31 March 2012 can be viewed and downloaded from the website of the Company's Investment Manager by visiting  www.lindselltrain.com  and going to the bottom of the page. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement. Hard copies of the Annual Report & Accounts for the year to 31 March 2012 will be posted to shareholders shortly, and further copies will be available from the Registered Office of the Company. 10.  Director's Confirmation Statement The Directors of the Company (Donald Adamson (Chairman), Dominic Caldecott, Rory Landman, Michael Lindsell and Michael Mackenzie) as the persons responsible within the Company, hereby confirm to the best of their knowledge: a) that the financial statements in the Announcement of which this Statement forms part have been prepared in accordance with applicable UK accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and b) the Management Report, which comprises the Chairman's Statement, Investment Manager's Report, and notes 7 & 8 above includes a fair review of the development and performance of the business and position of the Company, together with the principal risks and uncertainties which the Company faces. Phoenix Administration Services Limited Corporate Secretary 8 June 2012

 

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