Final Results

RNS Number : 9613H

Lowland Investment Co PLC

11 November 2008

 



LOWLAND INVESTMENT COMPANY PLC

                                  Annual Financial Report for the year ended 30 September 2008


11 November 2008

This announcement contains regulated information

Financial Highlights

	Year ended 30 September 2008	Year ended 30 September 2007	Change %
Net asset value per ordinary share	675.4p	1,044.3p	-35.3
Dividends per ordinary share:
Interim paid	10.0p	9.0p	+11.1
Final proposed	16.5p	14.5p	+13.8
	--------	--------
Total	26.5p	23.5p	+12.8
	--------	---------
Share price per ordinary share	625.0p	1,091.0p	-42.7
Revenue return per ordinary share	33.0p	27.9p	+18.3
Issued share capital	26,417,427	26,417,427	-
Market capitalisation	£165.1m	£288.2m	-42.7
Gearing	15.8%	1.4%
Total Expense Ratio (excluding VAT write back)	0.74%	0.72%

MANAGEMENT REPORT

Chairman's Statement

For the year ended 30 September 2008, Lowland's net asset value fell by 35.3%, its revenue return per share increased by 18.3% and it is recommended that the dividend be increased by 12.8%.

Performance for the year to 30 September 2008 

Assets

During the year the Company's net asset value fell from 1044.3p to 675.4p, a decrease of 35.3%, which compares with a fall in the Company's benchmark, the FTSE All-Share Index, of 25.1%. The underperformance is disappointing, but this is the first time in 10 years that the net asset value has not outperformed the FTSE All-Share Index. 

Earnings and Dividend

The outcome for revenue return was in marked contrast to the capital performance. The revenue return per share was 33.0p, a rise of 18.3%, compared with the 27.9p achieved last year. The recommended final dividend is 16.5p per ordinary share, making a total dividend for the year of 26.5p, an increase of 12.8% from last year's 23.5p. 

This level of dividend is near to the minimum permissible under Investment Trust rules which requires that the trust retains not more than 15% of income from shares and securities in any year. The reason we have decided to pay the minimum is partly that this year's earnings have benefited from the inclusion of £831,000 (equivalent to approximately 3p per share) from the one off VAT reclaim relating to prior years, explained in my half year statement, and partly by the likelihood that dividends from companies held in our portfolio will be lower overall next year. The income received from the banking and house building sectors, for example, will be markedly down. However, the boost to our revenue reserve from this year's retained earnings will take it to in excess of one year's dividend payment. The Board believes that this will mean that, barring unforeseen circumstances, our progressive dividend policy will be able to continue. The dividend has increased every year since 1966.

Investment Report

Our bias towards smaller companies and value situations did not serve our performance well during the year under review. In periods of economic slowdown, cyclical companies suffer and for this reason many of our cyclical holdings were sold and the portfolio was degeared during 2007. Towards the end of 2007, after the initial market fall and the start of a decline in interest rates, the Manager began to believe strongly that the worst was over and became a net buyer of equities for the Company reintroducing gearing to the portfolio which at the year end of 30 September 2008, stood at 15.8%. The shares bought, including clearing banks, property and house building companies, had mostly retreated considerably from their peaks in the early part of 2007 and if this had been a normal cyclical correction this should have proved a winning policy. However, this has not been a normal slowdown and the problems in parts of the banking sector did not respond to the treatment of interest rate cuts. As we have seen, the contagion has affected the global banking system and has now begun also to affect the wider economy. With the benefit of hindsight, the extent of the problem, of a scale not experienced since the 1974 crisis, was underestimated.

The Board

We are delighted that Karl Sternberg has agreed to join the Board in January 2009. He is a Director of JP Morgan Income & Growth Investment Trust Plc and Chief Investment Officer and Chairman of the Investment Committee of Oxford Investment Partners Limited (OXIP). Before establishing OXIP, he was Chief Investment Officer for Deutsche Asset Management (Europe and Asia Pacific), one of the largest fund management companies in Europe. He will bring considerable and varied investment experience which will complement the balance of the Board. We will continue to plan for the succession and refreshment of the Board over the next few years.

Annual General Meeting

At the Annual General Meeting on Thursday 18 December 2008, one of the items of special business to be put to the shareholders is a special resolution to adopt new articles of association to reflect the provisions of the Companies Act 2006. As usual our Portfolio Manager, James Henderson, will be making a presentation and all shareholders are most welcome to attend.

 Outlook

It has been a very difficult period for equities as credit markets have moved rapidly from being excessively easy to being excessively tight. This has resulted in a banking crisis of extraordinary proportions which is being tackled by concerted global action but will have potentially serious implications for the world's economy next year and beyond. Since our year end, as at 6 November 2008, the FTSE All-Share Index has fallen by 13.5% and Lowland's net asset value has fallen by 23.2%. Some smaller companies have suffered very severe falls which the Manager believes will in most cases prove unjustified. 

Compared with 1974, the UK economy is not suffering the high levels of inflation it experienced then nor are the problems, outside the financial sector, yet as severe. The discipline of holding stocks that will pay growing dividends is one that should continue to work. Good and bad companies have experienced falling stock prices regardless of their prospects but those with good dividend potential will see their share prices appreciate. The predominant focus in stock selection is to identify these companies. We believe confidence will return and we will stick to our approach which, aided by a reasonable level of gearing, should lead to good returns again being achieved. 

 MANAGEMENT REPORT (continued)

Principal Risks and Uncertainties

The Board has drawn up a matrix of risks facing the Company and has put in place a schedule of investment limits and restrictions, appropriate to the Company's investment objective and policy, in order to mitigate these risks as far as practicable. The principal risks which have been identified and the steps taken by the Board to mitigate these are as follows:

·          Investment and Strategy

An inappropriate investment strategy, for example, in terms of asset allocation or level of gearing, may result in underperformance against the Company’s benchmark index and the companies in its peer group, and also in the Company’s shares trading on a wider discount. The Board manages these risks by ensuring a diversification of investments and a regular review of the extent of borrowings. The Manager operates in accordance with investment limits and restrictions and policy determined by the Board, which includes limits on the extent to which borrowings may be employed. The Board reviews the limits and restrictions on a regular basis and the Manager confirms adherence to them every month. The Manager provides the Board with management information, including performance data and reports and shareholder analyses. The Directors monitor the implementation and results of the investment process with the Portfolio Manager at each Board meeting and monitor risk factors in respect of the portfolio. Investment strategy is reviewed at each meeting.

·          Market

Market risk arises from uncertainty about the future prices of the Company’s investments. Although the Company invests almost entirely in securities that are quoted on recognised markets, share prices may move rapidly. The companies in which investments are made may operate unsuccessfully, or fail entirely. A fall in the market value of the Company’s portfolio would have an adverse effect on shareholders’ funds. The Board reviews the portfolio each month and mitigates this risk through diversification of investments in the portfolio.

 

·          Accounting, legal and regulatory

In order to qualify as an investment trust, the Company must comply with section 842 of the Income and Corporation Taxes Act 1988 (‘s.842’). A breach of s.842 could result in the Company losing investment trust status, and, as a consequence gains in the Company’s portfolio would be subject to Corporation Tax. The s.842 criteria are monitored by the Manager and the results are reported at each Board meeting.

 

The Company must comply with the provisions of the Companies Acts and since its shares are listed on the London Stock Exchange, the UKLA’s Listing and Disclosure Rules. A breach of the Companies Acts could result in the Company and/or the Directors being fined or the subject of criminal proceedings. A breach of the UKLA Rules could result in the suspension of the Company’s shares; which in turn would breach s.842. The Board relies on its Company Secretary and advisers to ensure adherence to the Companies Acts and UKLA Rules.

 

·          Operational

Disruption to, or the failure of, the Manager’s accounting, dealing or payment systems or the custodian’s records could prevent the accurate reporting or monitoring of the Company’s financial position. The Manager contracts some of the operational functions (principally those relating to trade processing, investment administration and accounting), to BNP Paribas Fund Services UK Limited.

 

·          Financial

The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk and credit risk.

Statement of Directors’ Responsibilities

In accordance with Disclosure and Transparency Rule 4.1.12, the directors state, to the best of their knowledge, that:

 

·    the financial statements, prepared in accordance with applicable accounting standards give a true and fair view of the assets, liabilities, financial position and net revenue of the Company; and

 

·    the Report of the Directors includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces.

 

Signed on behalf of the Board of directors

 

John Hancox

Chairman 

11 November 2008

  Audited Income Statement

for the year ended 30 September 2008

	Year ended 30 September 2008			Year ended 30 September 2007
	Revenue Return £'000	Capital Return £'000	Total £'000	Revenue Return  £'000	Capital Return £'000	Total £,000
(Losses)/gains on investments held at fair value through profit or loss	-	(99,709)	(99,709)	-	27,749	27,749
Income from investments (note 2)	11,974	-	11,974	9,566	-	9,566
Other interest receivable and similar income (note 3)	352	-	352	160	-	160
	---------	---------	---------	---------	---------	---------
Gross revenue and capital (losses)/gains	12,326	(99,709)	(87,383)	9,726	27,749	37,475
Management fee	(1,319)	-	(1,319)	(1,479)	-	(1,479)
Write-back of prior-years VAT	831	-	831	-	-	-
Other administrative expenses	(357)	-	(357)	(310)	-	(310)
	---------	---------	---------	---------	---------	---------
Net return/(loss) on ordinary activities before finance charges and taxation	11,481	(99,709)	(88,228)	7,937	27,749	35,686
Finance charges	(2,700)	-	(2,700)	(929)	-	(929)
	---------	---------	---------	---------	---------	---------
Net return/(loss) on ordinary activities before taxation	8,781	(99,709)	(90,928)	7,008	27,749	34,757
Taxation on net return/(loss) on ordinary activities	(57)	-	(57)	(30)	-	(30)
	---------	---------	---------	---------	---------	---------
Net return/(loss) on ordinary activities after taxation	8,724	(99,709)	(90,985)	6,978	27,749	34,727
	=====	=====	=====	=====	=====	=====
Return/(loss) per ordinary share  - basic and diluted (note 4)	33.0p	(377.4p)	(344.4p)	27.9p	110.8p	138.7p
	=====	=====	=====	=====	=====	=====

The total columns of this statement represents the Income Statement of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The Company had no recognised gains or losses other than those disclosed in the Income Statement and Reconciliation of Movements in Shareholders' Funds. 

Audited Reconciliation of Movements in Shareholders' Funds

for the years ended 30 September 2008 and 30 September 2007

Year ended 30 September 2008	Called Up Share Capital £'000	Share Premium Account £'000	Capital Redemption Reserve £'000	Other Capital Reserves £'000	Revenue Reserve £'000	Total £'000
At 30 September 2007	6,604	53,561	1,007	207,542	7,154	275,868
Net (loss)/return on ordinary  activities after taxation	-	-	-	(99,709)	8,724	(90,985)
Final dividend (14.50p) for the year ended 30 September 2007 paid 21 December 2007 (note 5)	-	-	-	-	(3,830)	(3,830)
Interim dividend (10.0p) for the year ended 30 September 2007 paid 15 June 2008 paid 20 June 2008 (note 5)	-	-	-	-	(2,642)	(2,642)
	---------	---------	---------	---------	---------	---------
At 30 September 2008	6,604	53,561	1,007	107,833	9,406	178,411
	=====	=====	=====	=====	=====	=====
Year ended 30 September 2007	Called Up Share Capital £'000	Share Premium Account £'000	Capital Redemption Reserve £'000	Other Capital Reserves £'000	Revenue Reserve £'000	Total £'000
At 30 September 2006	6,067	29,895	1,007	179,793	5,455	222,217
Net return on ordinary activities after taxation	-	-	-	27,749	6,978	34,727
Final dividend (12.75p) for the year ended 30 September 2006 paid 22 December 2006 (note 5)	-	-	-	-	(3,094)	(3,094)
Interim dividend (9.0p) for the year ended 30 September 2007 paid 15 June 2007 (note 5)	-	-	-	-	(2,185)	(2,185)
Issue of 2,149,473 new shares	537	23,666	1,007	-	-	24,203
	---------	---------	---------	---------	---------	---------
At 30 September 2007	6,604	53,561	1,007	207,542	7,154	275,868
	=====	=====	=====	=====	=====	=====

  Audited Balance Sheet

at 30 September 2008

	2008 £'000	2007 £'000
Investments held at fair value through profit or loss
Listed at market value in the United Kingdom	184,265	263,849
Quoted on AIM	15,551	23,879
Listed at market value overseas	3,690	3,258
Unquoted at directors' valuation	3,111	4,618
	-----------	---------
	206,617	295,604
	-----------	---------
Current assets
Debtors	5,279	2,058
Cash at bank	1,116	43
	-----------	---------
	6,395	2,101
Creditors: amounts falling due within one year	(28,601)	(15,837)
	-----------	-----------
Net current liabilities	(22,206)	(13,736)
	-----------	-----------
Total assets less current liabilities	184,411	281,868
Creditors: amounts falling due after more than one year	(6,000)	(6,000)
	-----------	-----------
Total net assets	178,411	275,868
	======	======
Capital and reserves
Called up share capital	6,604	6,604
Share premium account	53,561	53,561
Capital redemption reserve  Other capital reserves	1,007 107,833	1,007 207,542
Revenue reserve	9,406	7,154
	-----------	-----------
Equity shareholders' funds	178,411	275,868
	======	======
Net asset value per ordinary share	675.4p	1,044.3p
	======	======

  Audited Cash Flow Statement

for the year ended 30 September 2008

	2008 £'000	2008 £'000	2007 £'000	2007 £'000
Net cash inflow from operating activities		10,307		7,540
Servicing of finance
Interest paid	(2,687)		(927)
	----------		---------
Net cash outflow from servicing of finance		(2,687)		(927)
Taxation
Overseas withholding tax recovered	5		-
	----------		---------
Net tax recovered		5		-
Financial investment
Purchase of investments	(88,718)		(64,433)
Sales of investments	74,802		64,025
	----------		-----------
Net cash outflow from financial investment		(13,916)		(408)
Equity dividends paid		(6,472)		(5,279)
		----------		---------
Net cash (outflow)/inflow before financing activities		(12,763)		926
Financing
Issue of shares	-		566
Issue expenses paid relating to prior year transaction	-		(60)
Net loans drawndown/(repaid)	14,069		(1,660)
	-----------		-----------
		14,069		(1,154)
		----------		----------
Increase/(decrease) in cash		1,306		(228)
		----------		----------
Reconciliation of net cash flow to movement  in net debt
Increase/(decrease) in cash as above		1,306		(228)
Net cash (inflow)/outflow from movement in loans		(14,069)		1,660
Exchange movements		(16)		22
		---------		----------
Movement in net debt		(12,779)		1,454
Net debt at 1 October		(19,691)		(21,145)
		----------		-----------
Net debt at 30 September		(32,470)		(19,691)
		----------		-----------

  Notes to the Accounts:

1.	Accounting policies
	The financial statements are prepared on a going concern basis and on the historical cost basis of accounting, modified to include the revaluation of fixed asset investments at fair value, and in accordance with the Companies Act 1985, Accounting Standards applicable in the United Kingdom and the Revised Statement of Recommended Practice - 'Financial Statements of Investment Trust Companies' dated December 2005 (the 'Revised SORP'). All of the Company's operations are of a continuing nature. The same accounting policies used for the year ended 30 September 2007 have been applied.
2.	Income from investments		2008 £'000		2007 £'000
	Franked
	Quoted investments		10,206		8,645
	Special dividends (quoted)		-		101
	Unquoted		43		43
			--------		-------
			10,249		8,789
	Unfranked
	Overseas dividend income  Property income dividends		1,374 214		367 7
	Interest income		137		403
			--------		--------
			11,974		9,566
			=====		=====
3.	Other interest receivable and similar income		2008 £'000		2007 £'000
	Deposit interest		22		133
	Stock lending fees		273		17
	Underwriting commission		57		10
			-------		-------
			352		160
			=====		=====
4.	Return per ordinary share - basic and diluted
	The return per ordinary share is based on the net loss attributable to the ordinary shares of £90,985,000 (year ended 30 September 2007: return of £34,727,000) and on 26,417,427 ordinary shares (year ended 30 September 2007: 25,039,409) being the weighted average number of ordinary shares in issue during the year. The return per ordinary share can be further analysed between revenue and capital, as below:
		2008 £'000		2007 £'000
	Net revenue return	8,724		6,978
	Net capital (loss)/return	(99,709)		27,749
		---------		---------
	Net total (loss)/return	(90,985)		34,727
		=====		=====

  Notes to the Accounts (continued):

	Weighted average number of ordinary shares in issue during the year			26,417,427	25,039,409
	Revenue return per ordinary share			33.0p	27.9p
	Capital(loss)/return per ordinary share			(377.4p)	110.8p
				--------	--------
	Total (loss)/return per ordinary share			(344.4p)	138.7p
				=====	=====
	The Company does not have any dilutive securities, therefore basic and diluted returns per share are the same.
5.	Dividends paid and payable on the ordinary shares
	Dividends on ordinary shares	Register Date	Payment Date			2008 £'000	2007 £'000
	Final dividend (12.75p) for the year ended 30 September 2006	17 November 2006	22 December 2006			-	3,094
	Interim dividend (9.0p) for the year ended 30 September 2007	18 May 2007	15 June 2007			-	2,185
	Final dividend (14.50p) for the year ended 30 September 2007	14 November 2007	21 December 2007			3,830	-
	Interim dividend (10.0p) for the year ended 30 September 2008	21 May 2008	20 June 2008			2,642	-
						--------	-------
						6,472 =====	5,279 ====

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. Previously dividends were recognised in respect of the period to which they related. The total dividend payable in respect of the financial year, which form the basis of one of the tests under Section 842 of the Income and Corporation Taxes Act 1988, are set out below.

		2008 £'000
	Revenue available for distribution by way of dividend for the year	8,724
	Interim dividend (10.0p) for the year ended 30 September 2008	(2,642)
	Proposed final (16.5p) for the year ended 30 September 2008 (based on 26,417,427 ordinary shares in issue at 8 November 2008)	(4,359)
		----------
	Undistributed revenue for section 842 purposes*	1,723
		======
	*Undistributed revenue equates to 14.4% of income from investments of £11,974,000

  Notes to the Accounts (continued):

6.	Called up share capital
				2008 £'000	2007 £'000
	Authorised
	80,000,000 (2007: 80,000,000) ordinary  shares of 25p each			20,000	20,000
				======	======
	Allotted, issued and fully paid
	26,417,427 (2007: 26,417,427) ordinary  shares of 25p each			6,604	6,604
				======	======
	In May 2007 the Company issued 2,149,473 ordinary shares at a price of 1126p to Greene King Loan Note holders. The total consideration received was £24,203,000.
7.	Net asset value per ordinary share
	The net asset value per ordinary share is based on the net assets attributable to ordinary shares of £178,411,000 (2007: £275,868,000) and on 26,417,427 (2007: 26,417,427) shares in issue on 30 September 2008.
8.	2008 Accounts
	The figures and financial information for the year ended 30 September 2008 are compiled from an extract of the latest accounts and do not constitute statutory accounts. These accounts included the report of the auditors which was unqualified and did not contain a statement under either section 237(2) or section 237(3) of the Companies Act 1985. The accounts have not yet been delivered to the Register of Companies.
9.	2007 Accounts
	The figures and financial information for the year ended 30 September 2007 are compiled from an extract of the latest published accounts and do not constitute the statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 237(2) or section 237(3) of the Companies Act 1985.
10.	Dividend
	The recommended final dividend of 16.5p per ordinary share, if approved by shareholders, will be paid on 22 December 2008 to holders of ordinary shares on the register of members at close of business on 17 November 2008. The Company's shares will be quoted ex-dividend on 15 November 2008.
11.	Annual Report
	The Annual Report and Accounts will be posted to shareholders in November 2008 and will be available on the Company's website (www.lowlandinvestment.com) or in hard copy format from the Company's Registered Office (to) 17 November 2008, 4 Broadgate, London, EC2M 2DA or from 17 November 2008 at 201 Bishopsgate, London EC2M 3AE.
12.	Annual General Meeting
	The Annual General Meeting will be held on Thursday, 18 December 2008 at 11.30 am at  201 Bishopsgate, London EC2M 3AE.

Twenty Largest Holdings as at 30 September 2008

Rank (2008)	Rank (2007)	Company	Valuation 2007 £'000	Purchases £'000	Sales £'000	(Depreciation)/ Appreciation £'000	Valuation 2008 £'000
1	(1)	BP	13,336	-	(2,776)	(1,744)	8,816
2	(3)	Senior	11,711	-	-	(3,166)	8,545
3	(4)	HSBC	9,271	917	(1,761)	(318)	8,109
4	(2)	Royal Dutch Shell	12,072	-	(3,533)	(2,227)	6,312
5	(8)	GlaxoSmithKline	6,388	-	-	(424)	5,964
6	(13)	Royal Bank of Scotland	4,943	4,254	-	(3,310)	5,887
7	(19)	Aviva	4,048	3,366	-	(2,134)	5,280
8	(15)	AstraZeneca	4,286	2,291	(1,862)	205	4,920
9	(*)	Barclays	1,340	5,258	(646)	(1,228)	4,724
10	(18)	Hiscox	4,082	320	-	(471)	3,931
11	(10)	Carclo	5,540	-	-	(1,762)	3,778
12	(16)	Amlin	4,179	-	(284)	(344)	3,551
13	(7)	Vodafone	7,722	-	(2,357)	(1,837)	3,528
14	(11)	Hill & Smith	5,118	-	-	(1,728)	3,390
15	(*)	Novae	3,223	581	-	(421)	3,383
16	(12)	Meggitt	5,076	439	-	(2,200)	3,315
17	(*)	Inmarsat Ventures	2,968	-	-	190	3,158
18	(9)	Renold	6,045	-	-	(3,023)	3,022
19	(*)	Tesco	3,294	-	-	(387)	2,907
20	(*)	Croda	2,880	-	-	(164)	2,716
			---------	---------	---------	---------	---------
			117,522 =====	17,426 =====	(13,219) =====	(26,493) =====	95,236 =====

These investments total £95,236,000 or 46.1% of the portfolio.

* Not in the 20 largest investments last year.

For further information please contact:

James H Henderson

Portfolio Manager, Lowland Investment Company plc

Telephone: [phone]

James de Sausmarez

Head of Investment Trusts, Henderson Global Investors

Telephone: [phone]

Sarah Gibbons-Cook
Investor Relations and PR Manager, Henderson Global Investors
Telephone: [phone]

- ENDS -

 

END

 

 

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