Interim Results

To: Stock Exchange For immediate release: 28 October 2004 Securities Trust of Scotland plc Interim results for the period to 30 September 2004 Chairman's statement Following the announcement of the company's results for the year to 31 March 2004, on 29 April, the Board initiated a strategic review of the company's investment objectives and policy, which has resulted in a number of actions over the last few months: We have purchased £10 million nominal of TrustCo Finance plc 11.5% debenture stock 2016 and intend to surrender this to TrustCo. This will have the effect of cancelling the company's existing £10 million loan from Trustco. Holders of the company's 12% debenture stock 2013 have approved a proposal for the company to repay this stock early at a price that would give a yield of 0.30% over the reference gilt. The board intends to repay a £50 million 7.43% term loan that falls due on 3 December 2004. We will replace this, in part, with a short-term revolving credit facility of up to £25 million. These changes will mean that an outstanding £50 million of 6.25% debenture stock 2031 and the short-term credit facility will represent all of the company's debt. The company's debt will fall from £125 million to a range of £50-75 million, depending on the use of the short-term facility. As a percentage of shareholders' funds of £328.5 million (as at 30 September 2004), gearing will fall from 38% to 15-23%. It is estimated that the early repayment of the two debentures will cost approximately £11.5 million, equivalent to 3.5% of shareholders' funds as at 30 September 2004. The company currently adopts an accounting policy whereby 70% of finance costs and investment management fees are charged to capital, and 30% to revenue. The proposed repayment of debt, together with the associated removal of the investment management fee on the debt repaid, represents savings of £2.1 million to the revenue account and £4.9 million to the capital account each year. The latter figure is equivalent to 1.5% of shareholders' funds as at 30 September 2004. Changes to the structure of the portfolio Despite the ongoing savings from the change to the company's capital structure, the reduction in total assets will require a marginal increase in the yield on the company's equity portfolio in order to maintain the company's progressive dividend policy. It is anticipated that, assuming a full drawdown of the £25 million short-term facility, the company will typically invest 85-90% of its total assets in equities, at an average yield of 110-115% of that of the FTSE All-Share index. The remaining 10-15% will be invested in cash and fixed interest securities. The board has imposed a restriction on the investment managers that equity gearing may not exceed 120%, nor be less than 80%. These limits will be subject to regular review, with the manager having to take into consideration the company's absolute, and not just relative, return. There has been increased domination of the index by the largest-cap stocks over recent years. So the board has agreed that the managers should have greater freedom to deviate from the benchmark index, thereby allowing greater emphasis on stock picking. The main focus will be on an above-average yielding portfolio with scope to deliver superior dividend growth. Performance review Over the six months to 30 September 2004, the company's net asset value (NAV) per share increased by 4.1%. That compares with the 3.4% gain registered by the benchmark FTSE All-Share index. This outperformance was recorded even after the cost of early repayment of the TrustCo debenture, which was equivalent to 1.3% of NAV as at 30 September 2004. The total return of the company's NAV per share underperformed the benchmark due to this and to the lack of a dividend payment by the company in the interim period. However, rising by 3.7%, the company's share price also outperformed the benchmark. As it failed to match the increase in NAV per share, the discount widened marginally, from 15.7% at 31 March 2004 to 16.1% at 30 September 2004. Income Earnings per share have fallen in the period, by 7.7%, to 2.28p, largely due to the timing of dividend receipts. However, the board has declared an interim dividend of 2.00p per share, payable on 17 December to shareholders on the register on 19 November. This is an increase of 57.5% on the 1.27p per share paid for the equivalent period last year. This reduces the disparity between the interim and final (last year: second interim) dividend. From the start of the company's next financial year, the trust intends to move to quarterly dividends. It is the board's current intention, barring unforeseen circumstances, to pay dividends in respect of the financial year to 31 March 2005 totalling no less than the 4.55p per share paid for the financial year to 31 March 2004. On current estimates, this will be covered by earnings. A dividend of 4.55p per share would represent a yield of just over 5% on the share price of 90.5p at 30 September 2004. That compares with the UK Base Rate of 4.75% and the yield on the FTSE All-Share index of 3.2% at the same date. The board remains committed to growing the company's dividend on an annual basis. We have achieved this in each of the last 10 years. Outlook We are conscious that we are undertaking a significant strategic change at a time when the outlook for the UK stockmarket remains uncertain. The Board expects that the reduction in debt and the increased flexibility given to the investment manager will provide him with the opportunity to deliver improved performance for shareholders. Consequently, the Board will keep the implementation of the revised strategy under review and will decide upon its success by no later than 31 December 2005. Any such decision will be accompanied by consultation, as required, with shareholders. Manager's report For a large part of the six months under review the market drifted down, as investors only seemed to respond to bad news and ignored the good. By August, negative sentiment had become extreme, resulting in a relatively inexpensive market valuation. So, when the Monetary Policy Committee of the Bank of England were interpreted as giving a signal that interest rates were close to peaking, sentiment improved and the market rallied. During the period, the UK equity portfolio delivered a total return of 6.7%. This was ahead of the benchmark FTSE All-Share index's return of 5.1%. At the sector level, the portfolio has benefited from our overweight positions in banks, retail, oils and utilities. Our underweight positions in media, support services and food producers also contributed positively to performance. However, some of the more defensive sectors did lag the rally in September. At the stock level, Glenmorangie was a star performer. Its price rose to reflect the announcement that the controlling family was looking to sell. We also benefited from a bid approach for RMC from the Mexican cement manufacture Cemex. Regarding portfolio activity, significant changes included the sale of Kelda. It had risen sharply following a favourable regulatory review. We also reduced our holding of AstraZeneca, where expectations for the new product pipeline look too optimistic. Meanwhile, we bought new holdings in Go-Ahead Group, one of the UK's leading bus and rail companies, Britannic Group, a consolidator of closed books of business in the insurance industry, and Kingfisher, the leading DIY retailer with significant interests overseas. The fixed interest portfolio also performed well, with a total return of 5.0% against the 2.1% return of the FTSE Government All Stocks index. Gearing has been beneficial during the period: both equities and bonds produced positive returns in excess of the average cost of borrowing. We did however take advantage of the rally in the later part of the period to reduce the equity gearing. At 30 September, this stood at 120%, compared with 126% at 31 March. The pace of global economic recovery is now moderating. The best of the rebound in corporate earnings growth is behind us and markets are entering that difficult period when growth is slowing and interest rates are rising. This is not helped by the relentless rise in the oil price. Against this background, we believe our focus on companies with premium yields and high and sustainable free cash flow should result in superior dividend growth for investors. For more information, please contact: Tom Maxwell tmaxwell@martincurrie.com 0131 229 5252 Michael mwoodward@martincurrie.com Woodward SECURITIES TRUST OF SCOTLAND plc Statement of total return (incorporating the revenue account*) for the period to 30 September 2004 Unaudited Revenue Capital Total £'000 £'000 £'000 Gains on - realised - 1,439 1,439 investments - unrealised - 18,080 18,080 Currency losses - - - Income - franked 8,701 - 8,701 - unfranked 320 - 320 Investment management fee (276) (643) (919) Other expenses (284) (14) (298) _______ _______ _______ Net return before finance costs and 8,461 18,862 27,323 taxation Interest payable and similar charges (1,465) (3,417) (4,882) Charge on repurchase of debentures - (4,257) (4,257) _______ _______ _______ Return on ordinary activities before 6,996 11,188 18,184 taxation Taxation on ordinary activities - - - _______ _______ _______ Return on ordinary activities after 6,996 11,188 18,184 taxation Dividends in respect of equity shares (6,093) - (6,093) _______ _______ _______ Transfer to reserves 903 11,188 12,091 _______ _______ _______ Return per ordinary share 2.28p 3.64p 5.92p * The revenue column of this statement is the profit and loss account of the company. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year. The directors have declared an interim dividend on the ordinary share of the company for the year ending 31 March 2005 of 2.00p per share (2004: 1.27p), with an ex dividend date of 17 November 2004 to be paid on 17 December 2004 to shareholders on the register on 19 November 2004. The interim results will be circulated to shareholders in the form of an interim report, copies of which will be available at the company's registered office, Saltire Court, 20 Castle Terrace, Edinburgh EH1 2ES. SECURITIES TRUST OF SCOTLAND plc Statement of total return (incorporating the revenue account*) for the period to 30 September 2003 Unaudited Revenue Capital Total £'000 £'000 £'000 Gains on - realised - 16,192 16,192 investments - unrealised - 26,576 26,576 Currency losses - (113) (113) Income - franked 8,803 - 8,803 - unfranked 1,043 - 1,043 Investment management fee (309) (720) (1,029) Other expenses (300) (14) (314) _______ _______ _______ Net return before finance costs and 9,237 41,920 51,158 taxation Interest payable and similar charges (1,470) (3,430) (4,900) _______ _______ _______ Return on ordinary activities before 7,767 38,491 46,258 taxation Taxation on ordinary activities (74) - (74) _______ _______ _______ Return on ordinary activities after 7,693 38,491 46,184 taxation Dividends in respect of equity shares (3,963) - (3,963) _______ _______ _______ Transfer to reserves 3,730 38,491 42,221 _______ _______ _______ Return per ordinary share 2.47p 12.33p 14.80p * The revenue column of this statement is the profit and loss account of the company. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year. SECURITIES TRUST OF SCOTLAND plc Statement of total return (incorporating the revenue account*) for the year ended 31 March 2004 Audited Revenue Capital Total £'000 £'000 £'000 Gains on - realised - 12,214 12,214 investments - unrealised - 54,492 54,492 Currency losses - (113) (113) Income - franked 17,886 - 17,886 - unfranked 1,427 - 1,427 Investment management fee (593) (1,383) (1,976) Other expenses (636) (28) (664) _______ _______ _______ Net return before finance costs and 18,084 65,182 83,266 taxation Interest payable and similar charges (2,940) (6,861) (9,801) _______ _______ _______ Return on ordinary activities before 15,144 58,321 73,465 taxation Taxation on ordinary activities (74) - (74) _______ _______ _______ Return on ordinary activities after 15,070 58,321 73,391 taxation Dividends in respect of equity shares (14,177) - (14,177) _______ _______ _______ Transfer to reserves 893 58,321 59,214 _______ _______ _______ Return per ordinary share 4.83p 18.70p 23.53p * The revenue column of this statement is the profit and loss account of the company. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year. SECURITIES TRUST OF SCOTLAND plc BALANCE SHEET As at 30 September As at 30 September As at 31 March 2004 2004 2003 (audited) (unaudited) (unaudited) £000 £000 £000 £000 £000 £000 Fixed assets Investments at 440,874 419,876 439,247 market value Current assets Debtors 10,386 3,212 9,450 Cash at bank 1,551 12,343 1,909 _______ _______ _______ 11,937 15,555 11,359 Creditors Amounts falling (60,416) (5,732) (55,422) due within one year _______ _______ _______ Net current (48,479) 9,823 (44,063) (liabilities) / assets _______ _______ _______ Total assets less 392,395 429,699 395,184 current liabilities Creditors Amounts falling (63,942) (123,902) (73,922) due after one year _______ _______ _______ Net assets 328,453 305,797 321,262 attributable to share capital _______ _______ _______ Capital and reserves Called up 76,161 78,006 77,581 ordinary capital Capital 3,919 2,074 2,499 redemption reserve Capital reserve 238,612 214,022 232,324 Revenue reserve 9,761 11,692 8,858 _______ _______ _______ Total 328,453 305,797 321,262 shareholders' funds _______ _______ _______ Net asset value 107.82p 98.00p 103.53p per ordinary share of 25p SECURITIES TRUST OF SCOTLAND plc STATEMENT OF CASH FLOW 6 months to 6 months to Year to 30 September 2004 30 September 2003 31 March 2004 (unaudited) (unaudited) (audited) £000 £000 £000 £000 £000 £000 Operating activities Net dividends and 11,524 11,038 18,029 interest received from investments Interest received from 111 479 599 deposits Investment management (919) (1,029) (1,976) fee Cash paid to and on (35) (39) (78) behalf of directors Bank charges paid (12) (9) (19) Other cash payments (247) (306) (543) _______ _______ _______ Net cash inflow from 10,422 10,134 16,012 operating activities Servicing of finance Interest paid (4,988) (4,910) (9,801) Charge on repurchase (4,257) - - of debenture stock _______ _______ _______ Net cash outflow from (9,245) (4,910) (9,801) servicing of finance Taxation Taxation paid - (74) (74) Taxation recovered - 22 98 _______ _______ _______ Net cash - (52) 24 (outflow)/inflow from taxation Capital expenditure and financial investment Payments to acquire (26,181) (74,434) (104,479 investments ) Receipts from disposal 39,546 63,387 97,640 of investments _______ _______ _______ Net cash inflow / 13,365 (11,047) (6,839) (outflow) from capital expenditure and financial investment Equity dividends paid - (10,140) (24,317) _______ _______ _______ Net cash 14,542 (16,015) (24,921) inflow/(outflow) before financing Financing Movement in long-term (10,000) - - borrowings Repurchase of ordinary (4,900) - (1,528) shares _______ _______ _______ Net cash outflow from (14,900) - (1,528) financing _______ _______ _______ Decrease in cash (358) (16,015) (26,449) _______ _______ _______

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