03:29 Fri 31 Jul 2020
Law Debenture Corp - Half-year Report
The following amendment has been made to the Half Year Report announcement under RNS number 6825U: Footnote 3 relating to the Financial Summary has been corrected in relation to the intention to pay a full year dividend of not less than
Group Highlights:
· 2020 dividend to be at least equal to 2019 level of
· Dividend yield of 5%1
· Solid performance from the
· Transitioned to quarterly dividends, creating greater regularity and predictability around dividend payments
· On-going charges remain low at 0.48% compared to the industry average of 1.04%2
Investment Portfolio Highlights:
· NAV total return (with debt at par) for the six months declined 16.5%3 compared to a 17.5%4 decline in the benchmark FTSE Actuaries All-Share Total Return Index
· Sizeable net investor during period, investing
·
· Moving to daily NAV publication from the start of August to increase transparency
Performance
|
YTD % |
1 year % |
3 years % |
5 years % |
10 years % |
NAV total return (with debt at par)3* |
(16.5) |
(10.6) |
(2.0) |
24.1 |
144.7 |
NAV total return (with debt at fair value)3* |
(18.6) |
(13.0) |
(4.8) |
18.1 |
129.7 |
FTSE Actuaries All-Share Index Total Return5 |
(17.5) |
(13.0) |
(4.6) |
15.2 |
91.8 |
Share price total return5* |
(16.5) |
(7.3) |
2.0 |
21.9 |
163.9 |
Change in Retail Price Index5 |
0.3 |
1.1 |
7.5 |
13.0 |
30.6 |
· Leading wholly owned independent provider of professional services, a key differentiator to other investment trusts
· Revenues grew by 6.5% and earnings per share by 6.6%
Longer Term
· 131 years of value creation
· 113%6 increase in dividend over the last ten years
· 41 years of increasing or maintaining dividends to shareholders
· Diversified and highly repeatable nature of IPS revenues funded 35%7 of dividends for the trust over the preceding 10 years
Commenting,
"The spread of Covid-19 has resulted in some very challenging months for the global economy.
The pandemic has highlighted how advantageous
Commenting,
"I am grateful to our talented team for their incredible work and best in class client service through the pandemic. Despite the difficult macroeconomic backdrop, our IPS business grew revenues by 6.5% and earnings per share by an impressive 6.6%.
As we look ahead, we remain focused on execution within our IPS business where we continue to see significant opportunities to grow our market share. We have an excellent investment management team, who the Board is confident are well placed to continue to position the equity portfolio for future longer-term growth and outperformance."
Company History:
From its origins in 1889,
Investment Portfolio:
Our portfolio of investments is managed by
Our objective is to achieve long term capital growth in real terms and steadily increasing income. The aim is to achieve a higher rate of total return than the FTSE Actuaries All-Share Index Total Return through investing in a diversified portfolio of stocks.
We are a leading provider of independent professional services, built on three excellent foundations: our Pensions,
Companies, agencies, organisations and individuals throughout the world rely upon
|
+44 (0)20 7606 5451
+44 (0)20 7353 4200 |
* Items marked "*" are considered to be alternative performance measures. For a description of these measures, see page 115 of the annual report and financial statements for the year ended
1 Based on a closing share price of
2
3 NAV is calculated in accordance with the
4
5 Source: Bloomberg
6 Calculation based on the increase in annual dividend per share between
7 Dividends paid to shareholders between
Half yearly report for the six months to
Financial summary
|
30 June 2020 |
30 June 2019 |
31 December 2019 |
Net assets1 |
642,705 |
784,213 |
830,139 |
|
Pence |
Pence |
Pence |
Net Asset Value (NAV) per share at fair value1,2* |
543.93 |
663.67 |
702.17 |
Revenue return per share |
|
|
|
- Investment portfolio |
6.33 |
11.76 |
22.18 |
- Independent professional services |
4.18 |
3.92 |
8.54 |
- Group charges |
- |
- |
(0.04) |
Group revenue return per share |
10.51 |
15.68 |
30.68 |
Capital (loss)/return per share |
(131.86) |
50.42 |
79.27 |
Dividends per share3 |
13.0 |
6.60 |
26.00 |
Share price |
517.00 |
592.00 |
650.00 |
|
% |
% |
% |
Ongoing charges4* |
0.48 |
0.43 |
0.48 |
Gearing4 |
19 |
7 |
9 |
Discount* |
(5.0) |
(10.8) |
(7.4) |
* Items marked "*" are considered to be alternative performance measures. For a description of these measures, see page 115 of the annual report and financial statements for the year ended
1 Please refer to later in this statement for calculation of net asset value.
2 NAV is calculated in accordance with the
3 Whilst the second interim dividend is not due to be announced until
4 Source: AIC. Ongoing charges are based on the costs of the investment trust and include the
Half yearly management report
Introduction
The Covid-19 pandemic has had a profound impact on the investment trust industry. The impact has not just been felt in the well documented volatility in markets and wide spread dividend cuts, but also by our growing global workforce of 154 people.
During the first three weeks of March, all of our employees transitioned to remote working as Covid-19 took a firm grip on the world's economy.
Since that time, all of our employees have had to adapt their working practices significantly and have made huge sacrifices in both their personal and professional lives. My enduring memory of the last six months will be the way that all of our staff, unselfishly, and with no prompting from me, brought the very best of our collective experience to bear to solve the rapidly evolving needs of our clients. I am proud of the kindness that our staff showed to one another and the calm, measured and thoroughly professional way in which they applied themselves. We are lucky to have them and must continue to invest in them and in their wellbeing.
Dividend
In April, our AGM was held virtually for the first time in your Company's 131 year history. The Corporation declared, and our shareholders overwhelmingly approved, a 50% increase in our final dividend payment for 2019.
With significant turmoil in global markets as a result of the Covid-19 pandemic, a large number of quoted companies cut their dividends in response to the collapse of global revenues. We recognised that this was happening at a time when the recipients of those dividends may themselves be increasingly reliant on that income.
A great advantage of the investment trust structure is the ability to retain a portion of income received each year in order to smooth dividends in times of market stress. With that backdrop, the unique advantage of
We were able to use these qualities to our shareholders' advantage. Our first quarterly dividend payment of
Part of the reason for the confidence in our dividend is that we have done this for a long time. The business itself was founded as a Corporate Trustee 131 years ago; in every single one of the last 41 years we have either increased or at least maintained that dividend. Indeed, in the last 10 years the dividend has more than doubled. We intend to pay two further interim dividends of
1 Group retained earnings as at
2 Based on a closing share price of
Our Investment Portfolio
The impact on global stock markets of the Covid-19 pandemic has been profound. Every business has been affected in some way, as our way of life changed overnight. For many businesses, at least initially, this impact has been a negative one. For a smaller proportion, the impact has been positive, as change drove strong demand for certain pockets of products.
Your investment portfolio has shared in some of that pain. At the peak of market dislocation on 23 March, the FTSE Actuaries All Share Index against which we benchmark our performance was down 34.3%. With a predominately
Since then, we have seen a partial recovery from markets and a strengthening of demand for our shares which, as I write to you today, have gained 24.8%5 from that low. The net asset value total return performance (with debt at par) for the first half of 2020 declined by 16.5%, compared to a decline of 17.5% by the benchmark. With a mandate to grow capital for our shareholders, we can never be comfortable reporting such a decline. We can, and do however, take comfort from our outperformance of the benchmark on a year to date, one, three, five and 10 year performance metric6.
The unique combination of our IPS business with our investment portfolio, as we have noted above, provides a significant advantage for our Investment Managers with regards to portfolio construction. Put simply, the cash that we generate from that IPS business has allowed James and Laura to avoid potential value traps, as other income funds may be forced into a narrower selection of stocks to maintain their own dividend yield. You can hear from James and Laura in their own words later in this results statement on the drivers behind the performance of the portfolio for the period and their outlook on markets in these challenging economic circumstances.
We are fortunate to have secured their expert services for a management fee of 30 basis points. Our ongoing charges ratio is currently 483 basis points compared to a sector average of 1034 basis points, which we believe makes the trust excellent value for money. In light of continued market volatility, we will be providing a daily NAV to the market from the start of August. This is another step in our journey of increasing transparency for our shareholders.
DIVISION |
|
Revenue7 |
Revenue7 |
Growth 2019/2020 % |
Pensions |
|
5,098 |
5,839 |
14.5 |
|
|
4,372 |
4,878 |
11.6 |
Corporate Services |
|
5,991 |
5,735 |
(4.0) |
Total |
|
15,461 |
16,470 |
6.5 |
3 Calculated based on data held by
4 Source:
5 Based on a closing share price of
6
7 Revenue shown is net of cost of sales.
We have often talked about the advantage of our unique structure, but it is at points like this in the cycle where that benefit is even more pronounced. Firstly, the capital valuation of the IPS business (which currently accounts for 17% of the net asset value of the Group), while linked to, is not directly correlated with markets. This provides a diversification of risk for our investors, compared to broader market movements. Secondly, as noted above, it allows James and Laura a genuine flexibility in portfolio construction. Thirdly, within the IPS business, our diverse revenue streams have afforded our shareholders a great deal of resilience in these challenging economic circumstances.
Over the course of the first half of 2020 we have been able to grow our revenues by 6.5% and earnings per share by 6.6% compared to 2019. This builds on revenue growth of 9.0% and earnings per share growth of 9.2% in 2018 and on revenue growth of 7.5% and earnings per share growth of 8.5% in 2019. Over the past two and a half years we have grown revenue by 20.8% and earnings per share by 22.1%. We are proud that our business has been able to deliver these results for shareholders in such a difficult economic environment.
.
Our Pensions business
Our Pensions business has posted its fourth year of positive growth, with revenue increasing by 14.5% compared to the first half of 2019. Today, we service more than 200 schemes, with oversight of over
The requirement for excellent governance of pension schemes is not dependent on economic conditions. In fact, with extreme market dislocation comes heightened risk. Covid-19 has brought many challenges to the pensions industry, including the weakening of employer covenants; cash constraints in large corporates to fund deficits; and concerns around the administration of schemes and the payment of pensions in light of remote working requirements. In these circumstances, the focus of the management teams of the sponsor may legitimately be elsewhere. This highlights the benefit of our sole trustee and Pegasus offerings to take away the administrative burden of a highly complex area. Over the past two years, our Pegasus business, which provides outsourced pensions executive services, has doubled the size of its' team and grown revenue by 85%, Revenues for the first half of 2020 have more than doubled compared to the same period in 2019.
In addition to supporting our clients on a day to day basis through these turbulent times, we have also been providing innovative solutions to broader strategic problems. We have been involved in several transformational deals and industry initiatives, including playing an instrumental role in Premier Foods PLC's landmark agreement regarding the restructure of its pension schemes. Cash contributions required to the schemes have reduced by between
Our
Our
In addition to this structural advantage, there is a strong degree of counter-cyclicality to this business. In times of economic stress, we are often required to do additional work for our clients as they seek waivers or restructure their debt. Our post issue work has seen a 47.6% increase in revenue in the first half of 2020. compared to the same period in the prior year. This in turn has contributed to overall revenue growth in the
In addition to the stability and predictability of our revenues, despite more than 130 years in this business, we still display the ability to innovate. We have been quick to support new clients as countries have needed to urgently source PPE to combat the Covid-19 crisis, providing a small, but absolutely critical contribution through our escrow services to help to solve those procurement issues. Working with both new and existing clients in the year, we have acted as trustee on almost
Our Corporate Services business
Our diversified pool of businesses has served us well during this challenging period but our Corporate Services business suffered the greatest collective headwinds. This line of business is made up of three distinct revenue streams being core Corporate Services, the
Our company secretarial, special purpose vehicle accounting and administrative services offering continued to grow nicely from a small base, with a particularly strong first quarter. We made new hires during the period and will continue to do so to stay ahead of demand. We are relatively small compared to the market opportunity and are confident we can significantly increase our footprint.
Our
With the onset of Covid-19 in March, the growth of this business did slow from the c.20% seen in the prior two calendar years, as many purchasing decisions were understandably placed on hold. Conversely, the value of our proposition to the management teams and boards of our clients has never been clearer. Employees used our service to raise concerns around working conditions, allowing employers to quickly adapt to new working practices. We have received much unsolicited praise for our work and have an increased confidence in both the quality and value of our product. As we start the second half of the year, new business enquiries are returning to more normal levels. We remain optimistic regarding our ability to grow our market share around the world.
Our service of process business is highly transactional and is our business with the least contractual recurring revenues. Put simply, sharp contractions in the global economy mean less deals are signed, which in turn reduces demand for a service of process agent. History tells us that the drop off in revenues that we saw from March onwards is similar to the sharp drop off that we saw in 2008 at the height of the global financial crisis. History tells us too that demand should recover well as the subsequent restructuring phase of economic hardship gets a full head of steam. We have deep relationships around the globe that have been built over many decades, and remain sanguine that our opportunities will increase as the world economy begins to recover. In the meantime we continue to invest in the technology platform that supports this business and in developing digital distribution channels that we believe will differentiate our offering.
Outlook
The next six months will undoubtedly bring ongoing challenges due to the pandemic and the
As announced previously
We have listened to our investors who are seeking regular, reliable income and have moved to a quarterly dividend cycle. We are currently providing a dividend yield of 5%, which we have sustained at a time of profound and widespread dividend cuts across the wider market. Our dividend is underpinned by the diversified and highly repeatable nature of the revenues of our professional services business. We believe, and our track record over the past three years demonstrates, we can continue to grow over time. We have an excellent long term track record of outperformance versus our benchmark and believe we are at a favorable point in the investment cycle to identify quality companies that have been mispriced by the market.
Despite these unprecedented challenges, our
This combination of factors underpins my belief that
Chief Executive
Investment manager's review
Investment approach and process
The challenges facing the global economy as a result of the Covid-19 pandemic are well documented, albeit the longer term implications are still uncertain. For managers looking to provide a much needed source of income as well as a long term capital return to shareholders, the almost unprecedented dividend cuts implemented by companies have made the markets in 2020 particularly difficult to navigate.
In markets such as these, the advantages of the investment trust structure, when compared to open ended investment products, become even more pronounced. Specifically we know the Board had the advantage of entering this period of global uncertainty with the strongest reserves position in the
We have a diversified investment portfolio, which aims to be a one-stop-shop for investors seeking quoted market exposure to quality companies. Our overall approach of the portfolio has not changed, either as a result of the current pandemic or the change in sector from the AIC's Global sector to the
The majority of the portfolio, 80.3%, was in
Although our focus remains the
Our long standing benchmark is the FTSE Actuaries All-Share Index Total Return. The portfolio performance for the period is discussed in more detail below.
Portfolio performance and activity
The trust's NAV fell 16.5% on a total return basis (with debt at par) in the first half of 2020. While it is always disappointing to see the NAV decline in absolute terms, this decline was modestly less than the FTSE All-Share benchmark which fell 17.5% during the same time period. We go into more detail in the portfolio attribution section below, but predominantly the outperformance was driven by two alternative energy names held (
The largest change in positioning year to date is that we were sizeable net investors during the period, investing
Net investment during the six months was concentrated in the
New positions established during the six months included Anglo American, Marks & Spencer, Linde, Tesco, Boku and Ricardo. There is deliberately no common theme across these additions; they range from small to large companies, domestically focused to international, and the impact on their businesses of Covid-19 varies widely. For example Boku, which sells mobile payments technology, has benefitted during the period with mobile payment volumes growing materially as consumers transitioned to spending online. For Tesco, the effect of Covid-19 has been broadly neutral, with higher sales largely offset by additional costs, while for Marks & Spencer the effect has been negative as the majority of their clothing & home sales were temporarily paused (although the share price, in our view, more than reflects this difficult trading period).
If there were to be a commonality across the additions to the portfolio it would be that the majority have chosen to temporarily suspend their dividends as a result of Covid-19. This is not a coincidence. It has come about because, in our view, the best total return opportunities in the market currently reside in areas that have been most affected by the virus and have therefore chosen to temporarily suspend payments. When these companies return to paying dividends, and some have already signalled their desire to do so, the prices that we have been purchasing the shares will, we think, result in an attractive dividend yield in the future. The unique structure of
Portfolio attribution
At the sector level, the largest positive contributor to returns relative to the FTSE All-Share benchmark was oil & gas. This splits into two distinct categories; the larger position in alternative energy names (
Conversely the largest detractor from returns relative to the benchmark was the sizeable position in the industrials sector, specifically companies exposed to civil aerospace including Rolls-Royce and Senior. We go into those companies in more detail in the detractors section below.
1 Source: Investec.
2 Dividends paid to shareholders between
Top five contributors
The following five stocks produced the largest absolute contribution for 2020:
Stock |
Share price total return (%) |
Contribution (£m) |
|
103.1 |
12.4 |
ITM Power |
275.2 |
6.3 |
|
19.5 |
1.8 |
Microsoft |
14.5 |
1.4 |
Cellnex Telecom Sau |
51.0 |
1.0 |
Source: Bloomberg calendar year share price total return as at
As the need to reduce global carbon emissions becomes evident, there is a growing interest in alternatives to fossil fuels. One area of focus is the role that hydrogen can play in the transition to a lower carbon economy. We have two companies exposed to the area,
ITM Power announced a joint venture with industrial gases company Linde (also held in the portfolio), and
Another strong performer during the period was
As noted above, we have now exited the Microsoft position on the basis of valuation following strong performance. Cellnex, a Spanish telecoms infrastructure business, also performed well, benefitting from its defensive revenue streams at a time of high economic uncertainty and also from the perception that large, incumbent telcoms companies will continue to sell their tower assets to specialist tower companies.
Top five detractors
The following five stocks produced the largest negative impact on the portfolio valuation for 2020:
Stock |
Share price total return (%) |
Contribution (£m) |
Royal Dutch Shell |
-45.3 |
-12.7 |
Hammerson |
-73.4 |
-7.6 |
Rolls Royce |
-60.5 |
-6.8 |
Senior |
-57.9 |
-6.5 |
Carnival |
-72.9 |
-6.0 |
Source: Bloomberg calendar year share price total return as at
The largest detractor from returns on an absolute basis was Royal Dutch Shell. The sharp fall in the oil price as a result of falling demand (particularly in transportation) meant their ability to generate free cash flow was substantially reduced. As a result the Board took the (in our view logical) decision to reduce the dividend by two thirds to a level which we now view as sustainable, and which has the potential to grow if the oil price recovers. The share price performance has been disappointing and (with hindsight) the company was over-distributing. However, at the newly rebased level the shares are still paying an approximately 4% dividend yield and on an oil price recovery the shares could recover.
One of the main detractors from performance at the sub-sector level has been civil aerospace, where we have three holdings exposed materially to the supply chain; engine maker Rolls-Royce and components manufacturers Senior and Meggitt. The sharp fall in flying hours that will occur this year has been a seismic shock for the aerospace industry; considerably worse in terms of the hit to passenger miles flown than the financial crisis of 9/11. It will likely take several years for passenger numbers to recover to 2019 levels. This backdrop creates a challenging environment for the supply chain in terms of, for example, excess capacity that needs to come out and likely pricing pressure from Boeing and Airbus. However, we need to view these challenges in the context of how weak the shares have already been, the cost savings programmes that are being accelerated, and the other businesses that the companies operate in (for example all three companies also operate in defence as an end market, which is proving resilient). In our view the very challenging end market in civil aerospace is well known and understood, and on balance we have decided to maintain our exposure to the area.
Also among the largest detractors were retail property owner Hammerson and cruise ship operator Carnival, both of which had their business models severely disrupted as a result of Covid-19. In the case of Hammerson, the majority of their tenants had to close stores during 'lockdown' and as a result rental receipts were poor. This came at a time when retail property values were already under pressure from the shift in consumer spending to online. In our view these structural factors will persist but there will continue to be a value for prime retail properties, such as Bicester village (in which Hammerson own a stake) or the Bullring in
Income
Investment income during the period fell to
Given the strength of the reserves and the contribution of the IPS business, the Board recently announced its intention for the 2020 dividend to be at least equal to the 2019 level of 26.0p per share (paid in quarterly instalments). We fully support this decision and crucially do not think that it impacts the way the portfolio has always been managed, which is to treat income as an output and focus on growing the capital.
Outlook
There is large divergence in economic forecasts from reputable analysts. It is not clear how consumers and corporates in aggregate are going to behave as 'lockdown' is eased. The consumers saving ratio has substantially risen while peacetime has never seen government indebtedness expand faster. Companies, given the increased cost of production as they comply with social distancing, may use an increase in demand to raise prices while the changes to trading patterns forced by the approach of Brexit are unclear.
We take comfort from the fact that
Investment Managers
30 July 2020
Sector distribution of portfolio by value
|
30 June 2020 % |
31 December 2019 % |
Oil and gas |
10.4 |
9.7 |
Basic materials |
8.6 |
6.4 |
Industrials |
21.2 |
23.2 |
Consumer goods |
6.0 |
5.2 |
Health care |
8.6 |
8.9 |
Consumer services |
9.6 |
10.2 |
Telecommunications |
1.4 |
1.1 |
Utilities |
4.7 |
4.0 |
Financials |
27.5 |
28.9 |
Technology |
2.0 |
2.4 |
Geographical distribution of portfolio by value
|
30 June 2020 % |
31 December 2019 % |
|
80.3 |
80.7 |
|
6.7 |
8.3 |
|
10.2 |
7.8 |
|
1.2 |
1.1 |
Other Pacific |
0.9 |
0.9 |
Other |
0.7 |
1.2 |
Fifteen largest holdings
at 30 June 2020
|
|
% of |
Approx. Market |
Valuation 2019 |
Purchases |
Sales |
Appreciation /(Depreciation) |
Valuation 2020 |
Rank |
Company |
portfolio |
Cap. |
£000 |
£000 |
£000 |
£000 |
£000 |
1 |
GlaxoSmithKline |
3.91 |
£82bn |
29,792 |
- |
- |
(2,386) |
27,406 |
2 |
Ceres Power |
3.09 |
£924m |
12,052 |
- |
(2,869) |
12,428 |
21,611 |
3 |
Rio Tinto |
2.43 |
£57bn |
16,884 |
- |
- |
173 |
17,057 |
4 |
Royal Dutch Shell |
2.18 |
£96bn |
27,994 |
- |
- |
(12,694) |
15.300 |
5 |
Relx |
2.00 |
£37bn |
14,288 |
- |
- |
(263) |
14,025 |
6 |
National Grid |
1.99 |
£37bn |
13,307 |
- |
- |
618 |
13,925 |
7 |
Herald Investment Trust |
1.86 |
£1bn |
12,580 |
- |
- |
476 |
13,056 |
8 |
|
1.77 |
£6bn |
12,575 |
- |
- |
(180) |
12,395 |
9 |
Dunelm |
1.75 |
£2bn |
11,097 |
- |
- |
340 |
12,247 |
10 |
Prudential |
1.62 |
£32bn |
13,506 |
- |
- |
(2,125) |
11,381 |
11 |
AstraZeneca |
1.49 |
£111bn |
13,609 |
- |
(3,962) |
789 |
10,436 |
12 |
HSBC |
1.42 |
£78bn |
15,606 |
- |
- |
(5,629) |
9,977 |
13 |
BP |
1.40 |
£62bn |
15,091 |
- |
- |
(5,262) |
9,829 |
14 |
Urban Logistics REIT |
1.33 |
£258m |
9,933 |
- |
- |
(620) |
9,313 |
15 |
Morgan Advanced Materials |
1.32 |
£688m |
11,095 |
979 |
- |
(2,795) |
9,279 |
Calculation of net asset value (NAV) per share
Valuation of our IPS Business
Accounting standards require us to consolidate the income, costs and taxation of our IPS business into the Group income statement. The assets and liabilities of the business are also consolidated into the Group column of the statement of financial position. A segmental analysis is provided which shows a detailed breakdown of the split between the investment portfolio, IPS business and Group charges.
Consolidating the value of the IPS business in this way failed to recognise the value created for the shareholder by the IPS business. To address this, from December 2015, the NAV we have published for the Group has included a fair value for the standalone IPS business.
The current fair value of the IPS business is calculated based upon historical earnings before interest, taxation, depreciation and amortisation (EBITDA) for the second half of 2019, and the EBIDTA for half year 2020, with an appropriate multiple applied.
The calculation of the IPS valuation and methodology used to derive it are included in the previous annual report at note 14. In determining a calculated basis for the fair valuation of the IPS business, the Directors have taken external professional advice. The multiple applied in valuing IPS is from comparable companies sourced from market data, with appropriate adjustments to reflect the difference between the comparable companies and IPS in respect of size, liquidity, margin and growth. A range of multiples is then provided by the professional valuation firm, from which the Board selects an appropriate multiple to apply. The multiple selected for the current year is 8.7x, which represents a discount of almost 39% on the mean multiple across the comparable businesses.
It is hoped that our initiatives to inject growth into the IPS business will result in a corresponding increase in valuation over time. As stated above, management is aiming to achieve mid to high single digit growth in 2020. The valuation of the business has increased by £21.6m/23.8% since the first valuation of the business as at 31 December 2015.
Valuation guidelines require the fair value of the IPS business be established on a stand-alone basis. The valuation does not therefore reflect the value of Group tax relief from the investment portfolio to the IPS business.
In order to assist investors, the Company restated its historical NAV in 2015 to include the fair value of the IPS business for the last ten years. This information is provided in the annual report within the 10 year record.
Long-term borrowing
The methodology of valuing all long-term borrowings is to benchmark the Group debt against A rated
Calculation of NAV per share
The table below shows how the NAV at fair value is calculated. The value of assets already included within the NAV per the Group statement of financial position that relate to IPS are removed (£23,179,000) and substituted with the calculation of the fair value and surplus net assets of the business £112,056,000. The fair value of the business has declined by 3.6% in light of the impact on multiples of the Covid-19 pandemic and resulting market instability, partially offset by the increase in EBITDA. An adjustment of (£47,680,000) is then made to show the Group's debt at fair value, rather than the book cost that is included in the NAV per the Group statement of financial position. This calculation shows an NAV fair value for the Group as at 30 June 2020 of £642,705,000 or 543.93 pence per share:
|
30 June 2020 |
31 December 2019 |
||
|
£000 |
Pence per share |
£000 |
Pence per share |
Net asset value (NAV) per Group statement of financial position |
609,206 |
515.58 |
775,272 |
655.76 |
Fair valuation of IPS: EBITDA at a multiple of 8.7x (2019: 9.2x) |
102,086 |
86.40 |
105,938 |
89.61 |
Surplus net assets |
9,970 |
8.44 |
16,367 |
13.84 |
Fair value of IPS business |
112,056 |
94.84 |
122,305 |
103.45 |
Removal of assets already included in NAV per financial statements |
(23,179) |
(19.62) |
(30,445) |
(25.75) |
Fair value uplift for IPS business |
88,877 |
75.22 |
91,860 |
77.70 |
Debt fair value adjustment |
(47,680) |
(40.36) |
(36,992) |
(31.29) |
Dividend |
(7,698) |
(6.51) |
- |
- |
NAV at fair value |
642,705 |
543.93 |
830,139 |
702.17 |
Group income statement
for the six months ended 30 June 2020 (unaudited)
|
30 June 2020 |
30 June 2019 |
|||||
|
Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
|
|
|
|
|
|
|
|
|
6,654 |
- |
6,654 |
11,990 |
- |
11,990 |
|
|
458 |
- |
458 |
893 |
- |
893 |
|
Overseas dividends |
1,986 |
- |
1,986 |
2,131 |
- |
2,131 |
|
Overseas special dividends |
- |
- |
- |
85 |
- |
85 |
|
|
9,098 |
- |
9,098 |
15,099 |
- |
15,099 |
|
|
|
|
|
|
|
|
|
Interest income |
88 |
- |
88 |
358 |
- |
358 |
|
Independent professional services fees |
18,633 |
- |
18,633 |
17,634 |
- |
17,634 |
|
Other income |
16 |
- |
16 |
27 |
- |
27 |
|
|
|
|
|
|
|
|
|
Total income |
27,835 |
- |
27,835 |
33,118 |
- |
33,118 |
|
|
|
|
|
|
|
|
|
Net gain on investments held at fair value through profit or loss |
- |
(152,698) |
(152,698) |
- |
62,730 |
62,730 |
|
Total income and capital (losses)/gains |
27,835 |
(152,698) |
(124,863) |
33,118 |
62,730 |
95,848 |
|
|
|
|
|
|
|
|
|
Cost of sales |
(2,163) |
- |
(2,163) |
(2,172) |
- |
(2,173) |
|
Administrative expenses |
(11,943) |
(1,145) |
(13,088) |
(11,114) |
(1,166) |
(12,280) |
|
Operating profit(loss) |
13,729 |
(153,843) |
(140,114) |
19,831 |
61,564 |
81,395 |
|
|
|
|
|
|
|
|
|
Finance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payable |
(660) |
(1,979) |
(2,639) |
(660) |
(1,979) |
(2,639) |
|
|
|
|
|
|
|
|
|
Profit/(loss) before taxation |
13,069 |
(155,822) |
(142,753) |
19,171 |
59,585 |
78,756 |
|
|
|
|
|
|
|
|
|
Taxation |
(650) |
- |
(650) |
(642) |
- |
(642) |
|
|
|
|
|
|
|
|
|
Profit/(loss) for the period |
12,419 |
(155,822) |
(143,403) |
18,529 |
59,585 |
78,114 |
|
|
|
|
|
|
|
|
|
Return per ordinary share (pence) |
10.51 |
(131.86) |
(121.35) |
15.68 |
50.42 |
66.10 |
|
|
|
|
|
|
|
|
|
Diluted return per ordinary share (pence) |
10.51 |
(131.86) |
(121.35) |
15.68 |
50.42 |
66.10 |
|
Statement of comprehensive income
for the six months ended 30 June (unaudited)
|
30 June 2020 |
30 June 2019 |
||||
|
Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
Profit/(loss) for the period |
12,419 |
(155,822) |
(143,403) |
18,529 |
59,585 |
78,114 |
Other comprehensive income for the period |
- |
- |
- |
- |
- |
- |
Foreign exchange on translation of foreign operations |
- |
489 |
489 |
- |
12 |
12 |
Total comprehensive income for the period |
12,419 |
(155,333) |
(142,914) |
18,529 |
59,597 |
78,126 |
Group statement of financial position
|
Unaudited 30 June 2020 £000 |
Unaudited 30 June 2019 £000 |
Audited 31 December 2019 £000 |
|
|
|
|
Assets-Non-current assets |
|
|
|
|
1,966 |
1,952 |
1,930 |
Property, plant and equipment |
78 |
89 |
64 |
Right-of-use asset |
5,632 |
- |
1,057 |
Other intangible assets |
73 |
135 |
104 |
Investments held at fair value through profit or loss |
701,014 |
761,784 |
822,316 |
Retirement benefit asset |
3,180 |
2,969 |
2.700 |
Total non-current assets |
711,943 |
766,929 |
828,171 |
Assets-Current assets |
|
|
|
Trade and other receivables |
9,208 |
6,866 |
7,213 |
Other accrued income and prepaid expenses |
5,822 |
6,540 |
6,438 |
Cash and cash equivalents |
25,504 |
86,467 |
71,236 |
Total current assets |
40,534 |
99,873 |
84,887 |
Total assets |
752,477 |
866,802 |
913,058 |
Current liabilities |
|
|
|
Trade and other payables |
13,376 |
11,525 |
13,010 |
Lease liability |
240 |
- |
730 |
Corporation tax payable |
814 |
662 |
710 |
Deferred tax liability |
150 |
- |
83 |
Other taxation including social security |
714 |
656 |
540 |
Deferred income |
5,417 |
4,719 |
5,625 |
Total current liabilities |
20,711 |
17,562 |
20,698 |
Non-current liabilities and deferred income |
|
|
|
Long-term borrowings |
114,179 |
114,135 |
114,157 |
Deferred income |
2,451 |
3,106 |
2,463 |
Lease liability |
5,803 |
- |
350 |
Provision for onerous contracts |
127 |
135 |
118 |
Total non-current liabilities |
122,560 |
117,376 |
117,088 |
Total net assets |
609,206 |
731,864 |
775,272 |
Equity |
|
|
|
Called up share capital |
5,922 |
5,919 |
5,921 |
Share premium |
9,171 |
8,916 |
9,147 |
Own shares |
(1,533) |
(1,332) |
(1,332) |
Capital redemption |
8 |
8 |
8 |
Translation reserve |
2,386 |
2,123 |
1,897 |
Capital reserves |
541,297 |
663,018 |
697,119 |
Retained earnings |
51,955 |
53,212 |
62,512 |
Total equity |
609,206 |
731,864 |
775,272 |
Net Asset Value (pence) per share |
515.58 |
619.37 |
655.76 |
Group statement of cash flows
|
Unaudited 30 June 2020 £000 |
Unaudited 30 June 2019 £000 |
Audited 31 December 2019 £000 |
||
Operating activities |
|
|
|
||
Operating (loss)/profit before interest payable and taxation |
(140,114) |
81,395 |
136,638 |
||
(Losses)/gains on investments |
153,843 |
(61,564) |
(97,644) |
||
Foreign exchange (gains)/losses |
(26) |
(1) |
20 |
||
Depreciation of property, plant and equipment |
21 |
- |
1,101 |
||
Depreciation of right-of-use assets |
572 |
29 |
55 |
||
Interest on lease liability |
35 |
- |
99 |
||
Amortisation of intangible assets |
37 |
56 |
104 |
||
(Increase) in receivables |
(811) |
(713) |
(958) |
||
Increase/(decrease) in payables |
163 |
(344) |
1,298 |
||
Transfer (from) capital reserves |
(798) |
(867) |
(1,680) |
||
Normal pension contributions in excess of cost |
(480) |
(469) |
(1,000) |
||
Cash generated from operating activities |
12,442 |
17,522 |
38,033 |
||
Taxation |
(479) |
(168) |
(663) |
||
Operating cash flow |
11,963 |
17,354 |
37,370 |
||
Investing activities |
|
|
|
||
Acquisition of property, plant and equipment |
(31) |
(17) |
(21) |
||
Expenditure on intangible assets |
(6) |
(5) |
(23) |
||
Purchase of investments |
(89,827) |
(70,098) |
(163,106) |
||
Sale of investments |
58,089 |
33,445 |
102,888 |
||
Cash flow from investing activities |
(31,775) |
(36,675) |
(60,262) |
||
Financing activities |
|
|
|
||
Interest paid |
(2,639) |
(2,639) |
(5,277) |
||
Dividends paid |
(22,976) |
(15,272) |
(23,050) |
||
Payment of lease liability |
(613) |
- |
(1,777) |
||
Proceeds of increase in share capital |
25 |
12 |
245 |
||
(Purchase) of own shares |
(201) |
(366) |
(366) |
||
Net cash flow from financing activities |
(26,404) |
(18,265) |
(29,625) |
||
Net (decrease) in cash and cash equivalents |
(46,216) |
(37,586) |
(52,517) |
||
Cash and cash equivalents at beginning of period |
71,236 |
124,148 |
124,148 |
||
Foreign exchange gains/(losses) on cash and cash equivalents |
484 |
(95) |
(395) |
||
Cash and cash equivalents at end of period |
25,504 |
86,467 |
71,236 |
||
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
Group statement of changes in equity
|
Share capital £000 |
Share premium £000 |
Own shares £000 |
Capital redemption £000 |
Translation reserve £000 |
Capital reserves £000 |
Retained earnings £000 |
Total £000 |
Balance at 1 January 2020 |
5,921 |
9,147 |
(1,332) |
8 |
1,897 |
697,119 |
62,512 |
775,272 |
Net loss for the period |
- |
- |
- |
- |
- |
(155,822) |
12,419 |
(143,403) |
Foreign exchange |
- |
- |
- |
- |
489 |
- |
- |
489 |
Total comprehensive income for the period |
- |
- |
- |
- |
489 |
(155,822) |
12,419 |
(142,914) |
Issue of shares |
1 |
24 |
- |
- |
- |
- |
- |
25 |
Dividend relating to 2019 |
- |
- |
- |
- |
- |
- |
(22,976) |
(22,976) |
Movement in own shares |
- |
- |
(201) |
- |
- |
- |
- |
(201) |
Total equity at 30 June 2020 |
5,922 |
9,171 |
(1,533) |
8 |
2,386 |
541,297 |
51,955 |
609,206 |
|
|
|
|
|
|
|
|
|
Group segmental analysis
|
Investment Portfolio |
Independent professional services |
Group charges |
Total |
||||||||
|
30 June 2020 |
30 June 2019 |
31 Dec 2019 |
30 June 2020 |
30 June 2019 |
31 Dec 2019 |
30 June 2020 |
30 June 2019 |
31 Dec 2019 |
30 June 2020 |
30 June 2019 |
31 Dec 2019 |
|
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income |
9,098 |
15,099 |
29,201 |
18,633 |
17,634 |
36,815 |
- |
- |
- |
27,731 |
32,733 |
66,016 |
Other income |
12 |
21 |
17 |
4 |
6 |
3 |
- |
- |
- |
16 |
27 |
20 |
Cost of sales |
- |
- |
- |
(2,163) |
(2,173) |
(5,026) |
- |
- |
- |
(2,163) |
(2,173) |
(5,026) |
Adminis-tration costs |
(1,034) |
(865) |
(2,186) |
(10,909) |
(10,249) |
(20,536) |
- |
- |
(113) |
(11,943) |
(11,114) |
(22,835) |
Release onerous contracts |
- |
- |
- |
- |
- |
- |
- |
- |
113 |
- |
- |
113 |
|
8,076 |
14,255 |
27,032 |
5,565 |
5,218 |
11,256 |
- |
- |
- |
13,641 |
19,473 |
38,288 |
Interest (net) |
(600) |
(360) |
(822) |
28 |
58 |
209 |
- |
- |
- |
(572) |
(302) |
(613) |
Return, including profit on ordinary activities before taxation |
7,476 |
13,895 |
26,210 |
5,593 |
5,276 |
11,465 |
- |
- |
- |
13,069 |
19,171 |
37,675 |
Taxation |
- |
- |
- |
(650) |
(642) |
(1,370) |
- |
- |
(50) |
(650) |
(642) |
(1,420) |
Return, including profit attributable to share-holders |
7,476 |
13,895 |
26,210 |
4,943 |
4,634 |
10,095 |
- |
- |
(50) |
12,419 |
18,529 |
36,255 |
Return per ordinary share (pence) |
6.33 |
11.76 |
22.18 |
4.18 |
3.92 |
8.54 |
- |
- |
(0.04) |
10.51 |
15.68 |
30.68 |
Assets |
714,209 |
825,358 |
870,944 |
38,218 |
41,387 |
42,021 |
50 |
57 |
50 |
752,477 |
866,802 |
913,015 |
Liabilities |
(128,105) |
(123,636) |
(126,399) |
(15,039) |
(11,167) |
(11,226) |
(127) |
(135) |
(118) |
(143,271) |
(134,938) |
(137,743) |
Total net assets |
586,104 |
701,722 |
744,545 |
23,179 |
30,220 |
30,795 |
(77) |
(78) |
(68) |
609,206 |
731,864 |
775,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The capital element of the income statement is wholly attributable to the Investment Portfolio.
Principal risks and uncertainties
The principal risks of the Corporation relate to the investment activities and include market price risk, foreign currency risk, liquidity risk, interest rate risk, country/region risk and regulatory risk. These are explained in the notes to the annual accounts for the year ended 31 December 2019. In the view of the board these risks are as applicable to the remaining six months of the financial year as they were to the period under review.
Since the year end the Board has considered the risks faced by the Corporation arising from the Covid-19 pandemic on both the investment portfolio and the ability of the IPS business to operate. More information on the impact is given in the half-yearly management report and in the Investment Manager's report.
The principal risks of the IPS business arise during the course of defaults, potential defaults and restructurings where we have been appointed to provide services. To mitigate these risks we work closely with our legal advisers and, where appropriate, financial advisers, both in the set up phase to ensure that we have as many protections as practicable, and at all other stages whether or not there is a danger of default.
Related party transactions
There have been no related party transactions during the period which have materially affected the financial position or performance of the Group. During the period transactions between the Corporation and its subsidiaries have been eliminated on consolidation. Details of related party transactions are given in the notes to the annual accounts.
Directors' responsibility statement
We confirm that to the best of our knowledge:
· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and gives a true and fair view of the assets, liabilities, financial position and profit of the Group as required by DTR 4.2.4R;
· the half yearly report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period.
On behalf of the board
Robert Hingley
Chairman
30 July 202
Basis of preparation
The results for the period have been prepared in accordance with International Financial Reporting Standards (IAS 34 - Interim financial reporting).
The financial resources available are expected to meet the needs of the Group for the
foreseeable future. The financial statements have therefore been prepared on a going concern basis.
The Group's accounting policies during the period are the same as in its 2019 annual financial statements, except for those that relate to new standards effective for the first time for periods beginning on (or after) 1 January 2020 and will be adopted in the 2020 annual financial statements.
Notes
1. Presentation of financial information
The financial information presented herein does not amount to full statutory accounts within the meaning of Section 435 of the Companies Act 2006 and has neither been audited nor reviewed pursuant to guidance issued by the Auditing Practices Board. The annual report and financial statements for 2019 have been filed with the Registrar of Companies. The independent auditor's report on the annual report and financial statements for 2019 was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report, and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
2. Calculations of NAV and earnings per share
The calculations of NAV and earnings per share are based on:
NAV: shares at end of the period 118,159,734 (30 June 2019: 118,162,211; 31 December 2019: 118,224,400) being the total number of shares in issue less shares acquired by the ESOT in the open market.
Income: average shares during the period 118,169,964 (30 June 2019: 118,168,197; 31 December 2019: 118,181,082) being the weighted average number of shares in issue after adjusting for shares held by the ESOT.
3. Listed investments
Listed investments are all traded on active markets and as defined by IFRS 7 are Level 1 financial instruments. As such they are valued at unadjusted quoted bid prices. Unlisted investments are Level 3 financial instruments. They are valued by the directors using unobservable inputs including the underlying net assets of the instruments.
4. Portfolio investments
A full list of investments is included on the website each month.
5. Half-yearly report 2020
The half-yearly report 2020 will be available on the website in early August via the following link:
https://www.lawdebenture.com/investment-trust/shareholder-information/regulatory-financial-reporting
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