Interim Results
Lindsell Train Investment Trust PLC
14 November 2005
The Lindsell Train Investment Trust plc
Objective of the Company
To maximise long-term total returns subject to the avoidance of loss of absolute value and with a minimum
objective to maintain the real purchasing power of sterling capital, as measured by the annual average
yield on the 2.5% Consolidated Loan Stock.
Financial highlights
Performance comparisons in the current performance period (1 April 2005 - 30 September 2005)
Middle market share price per ordinary share +13.6%
Net Asset Value per ordinary share * +7.7%
Benchmark** +2.3%
MSCI World Index (sterling) +13.6%
UK RPI Inflation (all items) +1.4%
* Adjusted to include the £1.55 dividend paid on 14 July 2005 and the restatement of the net asset value
as at 31 March 2005 in accordance with Financial Reporting Standards 21 and 26 as disclosed in note 2.
** The index of the annual average yield on the 2.5% Consolidated Loan Stock between the relevant dates.
Chairman's Statement
The first six months of the financial year to September 2005 recorded continued progress in achieving the Company's
objective of maintaining or preferably growing sterling purchasing power in real terms. The further advance in the Net
Asset Value ('NAV') of 7.7%, including the July 2005 dividend of £1.55 per share, resulted in the cumulative total
return since the Company's inception exceeding the benchmark (adjusted to account for the payment of performance fees)
for the first time since 2001 (NAV plus dividends: 32.7%; benchmark: 23.4%). As remarked before, the benchmark has
provided an exceptionally stiff hurdle since the Company was incorporated especially when compared to equity markets
that have fallen 21% (as measured by the MSCI World Index in sterling). Looking back over the six months, although
reported inflation (RPI index) annualised at 2.8% which is less than the annualised benchmark of 4.6%, we believe that
the benchmark is a better proxy for the return required to maintain the Company's capital in real terms as it is a
market based measure and instinctively seems closer to the inflation of the basket of goods and services to which we as
shareholders are exposed.
Even more pleasing has been the performance of the share price that returned 13.6% and now trades on the narrowest
discount to NAV for the last two financial years. Like the NAV, the Company's share price has now exceeded the
benchmark (adjusted for the payment of performance fees) since inception (share price plus dividends: 32.7%; benchmark:
23.4%).
Most of the investments held by the Company achieved modest positive returns during the half year. There was a notable
contribution from the holdings in long-term fixed interest at a time when many other investors were concerned that
yields would rise. Specifically, the holdings in preference shares returned 6%, irredeemable gilts 10% and the US bond
advanced 13% with half of the return attributable to the rise in the US dollar versus sterling. The performance of
quoted equities was led by Heineken, the only new holding over the period, and Nintendo that returned 8% and 13%
respectively. Although the Finsbury Growth Trust continued to perform well rising 13%, the Lindsell Train Funds were
disappointing with the Media Fund falling marginally and the Japan Fund by 7%. The Japan Fund continues to struggle in
the face of a rising market led by cyclicals and the expectation of domestic reflation and especially with its bias
towards short positions. We remain confident that both these strategies have the capacity to deliver improved returns
and, furthermore, think they may do so at a time when other investments held by the Company may do less well.
The one unquoted equity, Lindsell Train Ltd., continues to make progress reflected by a rise in funds under management
('FUM') to £240m from £187m at the end of March. Profitability has improved especially as these additional FUM incur
few extra administration costs. In June 2005, following a review of market valuations of similar businesses, the
Directors refined the FUM iteration of the valuation formula by reducing it to 2% from 2.5% on the proportion of
Lindsell Train's FUM not subject to performance fees. Those funds that are able to earn performance fees continue to
be valued at 5% of FUM. The earnings based and net worth based valuation iterations (the three iterations are
averaged) remain unchanged. Including this change the Directors' value of the business increased by 36% over the half
year. We remain hopeful that this trend should be maintained for the remainder of the year as prospects for adding new
business continues to look promising following recent good investment performance.
You will notice that the unaudited accounts have been prepared in accordance with the new UK GAAP requirements. Amongst
other changes it has entailed a valuation of all securities on a 'bid' basis (i.e. the price to a seller of the
security) rather than 'mid' as before. As a result the Company proposes to value its NAV, released to the London Stock
Exchange weekly, on a similar basis from the beginning of January. As a guide this will have the one-off effect of
reducing our reported NAV by approximately 0.5%.
R M Swire
Chairman
Chairman
14 November 2005
Investment Manager's Report
We attempt to earn an absolute return for shareholders, in excess of the benchmark, while minimising, to the fullest
extent we can, the loss of capital value. This objective means it is unlikely that the NAV will ever perform similarly
to the major equity indices in the short term. For instance, we are content with the total returns earned in calendar
2005 to date from the fixed interest securities in the Company, which range from c6.0% delivered by the gilts, to
c15.0%, in sterling from the US Treasury bond, even though the combined contribution is less than that which could have
been earned from investing in a UK equity index-tracker. We are content, because those fixed interest returns
outstripped our benchmark hurdle, with, we judge, low risk. Meanwhile, over the nearly five years since the
establishment of the Company, the NAV performance has in fact significantly exceeded that of mainstream equity markets
(the FT All-Share Index is still down by 8.5% since January 2001) and we believe, looking ahead, that our investment
strategy has every chance of delivering returns that will satisfy investors in both absolute and relative terms.
For that contention to hold, three conditions, at least, have to be met. First, we must ensure we exit our fixed
interest holdings advantageously, before rising UK inflation causes permanent loss of their capital value and erodes
the real value of their income. Next, we must ensure that our growing exposure to various equities delivers
satisfactory returns. Finally we, as your Investment Manager, must succeed in growing the funds under management and
profits of Lindsell Train Limited, because then the Company's 25.0% holding in that private company can be expected to
deliver a rich and increasing flow of dividends and further capital uplift. Here we add some comments on meeting these
conditions to those of the Chairman.
On the first trading day of October 2005 we sold a portion of our US Treasury Bond, amounting to c1.0% of net assets,
using the proceeds to add to the equity portfolio. This action is consistent with our policy of the past few years, of
using the government bond holdings to finance purchase of specific equity assets, where we have a high degree of
confidence that the equity in question can comfortably outperform the bond, from our entry price. The sale should not
be interpreted, though, as a change in our strategic view on Anglo-Saxon bonds as an asset class. Of course, we cannot
be as bullish about bonds as we were when the positions were established, back in 2001, because their prices have risen
and yields fallen. However, we remain convinced that over the next few years there is a strong likelihood of lower
inflation expectations in the US and UK and, hence, higher bond prices. For instance, the recent official report on US
labour costs revealed annual wage inflation to be running at only 2.3%, which is the lowest rate since records began in
1981, hurting the US consumer. Closer to home, we look at the 2005 share price performance of various major UK
corporations exposed to the UK consumer and recognise similar pain - Kingfisher, down 37.0%, Next, down 21.0%, Boots
and even Tesco both down 7.5% and reflect that the returns on the fixed interest assets may not be exciting, but they
are at least still positive. In other words, the bull market in government bonds may be maturing, but is not
necessarily over.
As to your equity portfolio, there were some notable features over the period. The best performer was Nintendo, up
13.0%. The company used the occasion of the Tokyo Game Show in mid-September to reveal the specifications for its new
home console, codenamed 'Revolution'. For once the hype may be justified, because the device appears really to change
the 'gaming experience' (by providing a controller which is touch and motion sensitive, rather than button-driven).
All we are sure of is that Nintendo, still with c40.0% of its market value accounted for by its net cash, is
exceptionally undervalued if this new product catches the imagination of gamers and delivers revenue growth.
Revenue growth was the one feature missing from A.G. Barr's otherwise respectable set of interim results, released late
in the period. Of course, increasing sales are an important component of any equity valuation and Barr's flat
performance for its first six months is a disappointment, that left the shares down 3.0% in September - not a trivial
drop for the Company's largest equity holding. In partial mitigation, revenues for key property, IRN-BRU, rose 5.0%.
Decent growth from this high profit margin brand allowed Barr to report a 6.0% increase in pre-exceptional profits and
lift the interim dividend by 5.4%. Barr's share price has more than doubled since early 2003 and is up 21.0% in
calendar 2005 alone, an uplift that explains its importance in the affairs of the Company, but an uplift, too, that has
removed the gross undervaluation that pertained back then. Nevertheless, we find the shares still full of strategic
interest. The company has c£35.0 million of net cash, against its current stock market value of £180 million and
annual sales of £125 million. This enterprise value/sales ratio of 1.2x appears extraordinarily low compared to the
rush of transactions in the consumer-branded goods sector during 2005.
After the close of the period we began accumulating our second new equity holding of 2005. The first, Heineken, has,
so far, been satisfactory, gaining just under 10.0% since purchase. Any setback in its price will encourage us to add
to the current 2.0% holding. The prime factor in Heineken's recent bounce has been the rally in the US Dollar, to
which the company is very exposed. That consideration also influenced our, so far, tentative investment in Pearson,
which, if anything, is even more exposed to the US Dollar than Heineken. Another factor in our interest in Pearson,
although like the currency, a contributory rather than clinching one, is its dividend yield. At 4.0% net, the equity
yields some 33.0% more than the FT All-Share and in line with that of a long-dated gilt (net), meaning that the Company
sacrifices little or no income when switching into it out of a bond, but gains the prospect of a continuation of the
Pearson's dividend growth, up 85.0% over the past 10 years. At the heart the investment decision, though, is our
conviction that Pearson's roughly £5.0 billion of market value is too low, compared to the roughly £4.0 billion of
annual sales.
Finally, reverting to Lindsell Train Limited, we are pleased by the overall progress of the business - although cannot
be satisfied with the performance of the Japan Fund nor the size of the Media Fund. Total funds under management are
growing, nonetheless, and we believe existing and prospective clients of the company value the disciplined and
consistent way we approach the investment challenge. However, we are under no illusion that it is anything other than
investment performance that will drive Lindsell Train's business and its value within your Company. Here, relative
returns for the Company itself, our UK equity mandates, the Japan long-only record and even the Media Fund - all are at
least credible and in some cases excellent and have attracted recent new investor interest. We hope to translate that
interest into new funds under management, then to meet or exceed the expectations of all our clients.
Nick Train
Investment Manager
Lindsell Train Limited
14 November 2005
The Lindsell Train Investment Trust plc
Statement of Total Return
Six months to Six months to Year ended
30 September 2005 30 September 2004 31 March 2005
Unaudited Unaudited Audited
Restated (Note 8) Restated (Note 9)
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 1,533 1,533 - 1,685 1,685 - 3,456 3,456
Transaction costs on
investment purchases - (6) (6) - (13) (13) - (21) (21)
Exchange differences - 53 53 - (5) (5) - (37) (37)
Gains on forward currency
contracts - 10 10 - 38 38 - 72 72
Income 466 - 466 431 - 431 864 - 864
Investment management fee (66) - (66) (48) - (48) (106) - (106)
Other expenses (72) (1) (73) (57) (1) (58) (116) (1) (117)
Net return before
finance costs and taxation 328 1,589 1,917 326 1,704 2,030 642 3,469 4,111
Interest payable and
similar charges (83) - (83) (109) - (109) (208) - (208)
Return on ordinary
activities before tax 245 1,589 1,834 217 1,704 1,921 434 3,469 3,903
Tax on ordinary activities (2) - (2) (1) - (1) (3) - (3)
Return on ordinary activities
after tax for the period 243 1,589 1,832 216 1,704 1,920 431 3,469 3,900
Return per Ordinary Share £9.16 £9.60 £19.50
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.
Balance Sheet
30 September 30 September 31 March
2005 2004 2005
Unaudited Unaudited Audited
Restated (Note 8) Restated (Note 9)
£'000 £'000 £'000
Fixed assets
Investments 27,834 25,683 25,189
Current assets
Debtors 1,004 863 1,021
Cash at bank and short-term deposits 937 748 796
1,941 1,611 1,817
Creditors: amounts falling due within one (4,440) (5,461) (3,193)
year
Net current liabilities (2,499) (3,850) (1,376)
Total assets less current liabilities 25,335 21,833 23,813
Capital and reserves
Called up share capital 150 150 150
Special reserve 19,850 19,850 19,850
Capital reserve - realised 1,171 (582) 1,124
Capital reserve - unrealised 3,527 1,926 1,985
Revenue reserve 637 489 704
Equity shareholders' funds 25,335 21,833 23,813
Net asset value per Ordinary Share £126.67 £109.16 £119.06
Cash Flow Statement
Six months to Six months to Year ended
30 September 30 September 31 March
2005 2004 2005
Unaudited Unaudited Audited
£'000 £'000 £'000
Net cash inflow from operating activities 349 372 640
Returns on investments and servicing of finance (78) (106) (214)
Taxation (3) (1) (1)
Financial investment (1,118) 68 2,383
(850) 333 2,808
Equity dividends paid (310) (290) (290)
(Decrease)/increase in cash (1,160) 43 2,518
Reconciliation of net cash flow to movement in net debt
(Decrease)/increase in cash in the period (1,160) 43 2,518
Foreign exchange movements 53 (5) (37)
Opening net debt (1,593) (4,074) (4,074)
Closing net debt (2,700) (4,036) (1,593)
Represented by
Cash at bank 937 748 796
Overdrafts (3,637) (4,784) (2,389)
(2,700) (4,036) (1,593)
Statement of Changes in Equity
Capital Capital
Share Special reserve reserve Revenue
capital reserve realised unrealised reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
For the six months ended 30 September 2005
Net assets at 31 March 2005 (as restated - Note 150 19,850 1,124 1,985 704 23,813
9)
Net profit from operating activities - - 47 1,542 243 1,832
Dividends paid - - - - (310) (310)
Net assets at 30 September2005 150 19,850 1,171 3,527 637 25,335
For the six months ended 30 September 2004
Net assets at 31 March 2004 (as restated - Note 150 19,850 (33) (327) 563 20,203
7)
Net (loss)/profit from operating activities - - (549) 2,253 216 1,920
Dividends paid - - - - (290) (290)
Net assets at 30 September2004 150 19,850 (582) 1,926 489 21,833
For the year ended 31 March 2005
Net assets at 31 March 2004 (as restated - Note 150 19,850 (33) (327) 563 20,203
7)
Net profit from operating activities - - 1,157 2,312 431 3,900
Dividends paid - - - - (290) (290)
Net assets at 31 March 2005 150 19,850 1,124 1,985 704 23,813
Notes
1. The financial information for the year ended 31 March 2005 included in this half-year
report has been based upon the Company's full accounts, which for the year to 31 March 2005
carry an unqualified audit report and did not include statements under Section 237(2) or
(3) of the Companies Act 1985 and which have been filed with the Registrar of Companies.
2. The financial statements for the period to 30 September 2005 have been prepared on a
basis consistent with the accounting policies adopted by the Company in its statutory
accounts for the year ended 31 March 2005, except as follows:
UK GAAP is converging with International financial reporting standards ('IFRS') and the
following Financial Reporting Standards ('FRS') have been introduced.
FRS26: 'Financial Instruments: Measurement' requires that quoted investments are valued at
fair value (previously mid market). This is either the bid price or the last traded price,
depending on the convention of the exchange on which the investment is quoted. The
Company's investments have accordingly been revalued to bid price.
FRS 26 also requires that where investments are held at a fair value through the profit and
loss account the transaction costs on investment purchases should be recognised as a
separate item from gains and losses on investments and prior period results have
accordingly been restated as disclosed in the Statement of Total Return. This has no
overall effect on net assets.
FRS 21: 'Events after the Balance Sheet Date' states that dividends declared and approved
by the Company after the balance sheet date should not be recognised as a liability of the
Company at the balance sheet date. Prior period results have accordingly been restated and
this is shown in Notes 7 to 9.
FRS 22: Returns per ordinary share', states that the Company is only permitted to show the
total return per Ordinary Share on the Statement of Total Return. The revenue and capital
returns per share for the periods 30 September 2005, 30 September 2004 and 31 March 2005
are shown in Note 6.
3. The Statement of Total Return for the six months to 30 September 2005, six months to 30
September 2004 and year to 31 March 2005 have been prepared in accordance with the
Statement of Recommended Practice issued in January 2003, 'Financial Statements of
Investment Trust Companies ' which have been adopted by the Company.
4. The Statement of Total Return includes the results of the Company and together with the
Balance Sheet and Cash Flow Statement at 30 September 2005, are unaudited and do not
constitute full statutory accounts within the meaning of Section 240 of the Companies Act
1985.
5. The net asset value per Ordinary Share is based on net assets at 30 September 2005 of
£25,335,000 (31 March 2005: £23,813,000 as restated and 30 September 2004: £21,833,000 as
restated) divided by 200,000 Ordinary Shares in issue at 30 September 2005 (31 March 2005
and 30 September 2004: 200,000).
6. Returns per Ordinary Share:
The return per Ordinary Share is based on net gain on ordinary activities after taxation of £1,832,000 for the six
months to 30 September 2005 (31 March 2005: £3,900,000 and 30 September 2004: £1,920,000) divided by 200,000 (31 March
2005 and 30 September 2004: 200,000) Ordinary Shares being the weighted average number of Ordinary Shares in issue
during the period.
The return per Ordinary Share figure detailed above can be further analysed between revenue and capital, as below:
Six months to Six months to Year ended
30 September 2005 30 September 2004 31 March 2005
Unaudited Unaudited Audited
Restated (Note 8) Restated (Note 9)
£'000 £'000 £'000
Net revenue profit 243 213 431
Net capital profit 1,589 1,704 3,469
Net total profit 1,832 1,920 3,900
Weighted average number of Ordinary Shares in 200,000 200,000 200,000
issue during the period
£ £ £
Revenue return per Ordinary Share 1.21 1.08 2.16
Capital return per Ordinary Share 7.95 8.52 17.34
Total return per Ordinary Share 9.16 9.60 19.50
7. Restatement of opening balances at 31 March
2004
Previously reported Restated
31 March 2004 Adjustments 31 March 2004
Notes £'000 £'000 £'000
Fixed assets
Investments 1 24,182 (101) 24,081
Current assets 914 - 914
Creditors: amounts falling due within one year 2 (5,082) 290 (4,792)
Net assets 20,014 189 20,203
Capital and reserves
Called up share capital 150 150
Special Reserve 19,850 19,850
Capital reserve - realised (33) (33)
Capital reserve - unrealised 1 (226) (101) (327)
Revenue reserve 2 273 290 563
Equity Shareholders' Funds 20,014 189 20,203
Net asset value per Ordinary Share £100.07 £0.94 £101.01
Notes to the above reconciliation
1 Investments are designated as held at fair value in accordance with FRS26 and are carried at bid prices which
total their fair value of £24,081,000 (previously they were carried at mid prices). The aggregate differences,
being a revaluation downwards of £101,000, also decreased capital reserve - unrealised.
No provision has been made for the final dividend on Ordinary Shares for the year ended 31 March 2004 of
£290,000. Under FRS21 a dividend is not recognised until approved by shareholders.
2
8. (a) Restatement of balances as at and for the six months ended 30 September 2004
Previously
reported Restated
30 September 2004 Adjustments 30 September 2004
Note £'000 £'000 £'000
Fixed assets
Investments 1 25,811 (128) 25,683
Current assets 1,611 - 1,611
Creditors: amounts falling due within one (5,461) 0 (5,461)
year
Net assets 21,961 (128) 21,833
Capital and reserves
Called up share capital 150 - 150
Special Reserve 19,850 - 19,850
Capital reserve - realised (582) - (582)
Capital reserve - unrealised 1 2,054 (128) 1,926
Revenue reserve 489 - 489
Equity Shareholders' Funds 21,961 (128) 21,833
Net asset value per ordinary share £109.80 £(0.64) £109.16
Note to the above reconciliation
1 Investments are designated as held at fair value in accordance with FRS26 and are carried at bid prices which
total their fair value of £25,683,000 (previously they were carried at mid prices). The aggregate differences,
being a revaluation downwards of £128,000, also decreased capital reserve - unrealised.
(b) Reconciliation of the Statement of Total Return (restated) for the six months ended 30 September 2004
Earnings
2004 Per Share
Impact
Note £'000 £
Total transfer to reserves per the Statement of Total Return (previously 1,947 -
reported)
Investments held at fair value changed from mid to bid basis at 31 March 2004 1 101 0.51
Investments held at fair value changed from mid to bid basis at 30 September 1 (128) (0.64)
2004
Net return per the Statement of Total Return (restated) 1,920 (0.13)
Note to the above reconciliation
1 The portfolio valuations at 31 March 2004 and 30 September 2004 are required to be valued at fair value
under FRS26. These values are lower than the previous valuations by £101,000 and £128,000 respectively.
9. (a) Restatement of balances as at and for the year ended 31 March 2005
Previously
reported Restated
31 March 2005 Adjustments 31 March 2005
Notes £'000 £'000 £'000
Fixed assets
Investments 1 25,272 (83) 25,189
Current assets 1,817 - 1,817
Creditors: amounts falling due within one 2 (3,503) 310 (3,193)
year
Net assets 23,586 227 23,813
Capital and reserves
Called up share capital 150 - 150
Special Reserve 19,850 - 19,850
Capital reserve - realised 1,124 - 1,124
Capital reserve - unrealised 1 2,068 (83) 1,985
Revenue reserve 2 394 310 704
Equity Shareholders' Funds 23,586 227 23,813
Net asset value per ordinary share £117.93 £1.13 £119.06
Notes to the above reconciliation
1 Investments are designated as held at fair value in accordance with FRS26 and are carried at bid prices which
total their fair value of £25,189,000 (previously they were carried at mid prices). The aggregate differences,
being a revaluation downwards of £83,000, also decreased capital reserve - unrealised.
No provision has been made for dividends on ordinary shares for the year ended 31 March 2005 of £310,000. Under
FRS21 a dividend is not recognised until approved by shareholders.
2
(b) Reconciliation of the Statement of Total Return (restated) for the year ended 31 March 2005
Earnings
2005 Per Share
Impact
Notes £'000 £
Total transfer to reserves per the Statement of Total Return (previously 3,572 -
reported)
Add back dividends paid and proposed 1 310 -
Investments held at fair value changed from mid to bid basis at 31 March 2004 2 101 0.51
Investments held at fair value changed from mid to bid basis at 31 March 2005 2 (83) (0.42)
Net return per the Statement of Total Return (restated) 3,900 0.09
Note to the above reconciliation
1 Ordinary dividends declared and paid during the period are dealt with through the Statement of Changes in
Equity.
2
The portfolio valuations at 31 March 2004 and 31 March 2005 are required to be valued at fair value under
FRS26. These differ from the previous valuations by £101,000 and £83,000 respectively.
10. The investment in Lindsell Train Limited (representing 25% of the Manager) is held as part of the investment
portfolio. Accordingly, the shares are accounted for and disclosed in the same way as other investments in the
portfolio. The valuation of the Company's investment in the Manager, Lindsell Train Limited, is calculated at the end
of each quarter on the basis of fair value as determined by the Directors of the Company. The valuation process is
formula based and takes into account inter alia, the net assets of Lindsell Train Limited, the value of the funds under
its management and the moving average of its monthly earnings which was refined in June 2005 as indicated in the
Chairman's Statement.
11. Following the publication of the Investment Entities (Listing Rules and Conduct of Business) Instrument 2003 on 29
October 2003 the Company announced that it is the Company's policy to invest no more than 15% of its gross assets in
other UK listed investment companies (including UK listed investment trusts) as defined in Listing Rule 15.
12. It is the intention of the Directors to conduct the affairs of the Company so that it satisfies the conditions for
approval as an Investment Trust Company set out in Section 842 of the Income and Corporation Taxes Act 1988.
13. The Interim Report will be sent to shareholders shortly.
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