Lindsell Train Inv. LTI Final Results
Lindsell Train Inv. (LTI) - Final Results
RNS Number : 0317F
Lindsell Train Investment Trust PLC
08 June 2012
THE LINDSELL TRAIN INVESTMENT TRUST PLC
Announcement of Results for the Year to 31 March 2012
Objective of the Company
To maximise long-term total returns with a minimum objective to maintain the
real purchasing power of Sterling capital as measured by the annual average
yield on the UK 2.5% Consolidated Loan Stock.
Financial highlights
Performance comparisons 1 April 2011 - 31 March 2012
Middle market share price per Ordinary Share # +9.0%
Net asset value per Ordinary Share† + 10.2%
Benchmark* + 4.2%
MSCI World Index (Sterling) + 1.6%
UK RPI Inflation (all items) + 3.6%
# Calculated on a total return basis.
† The net asset value at 31 March 2012 has been adjusted to include the
dividend of £3.65 per Ordinary Share paid on 29 July 2011.
* The index of the annual average yield on the UK 2.5% Consolidated Loan
Stock between the relevant dates.
Chairman's Statement
The net asset value ('NAV') total return of the Company over the last year
increased by 10.2%, exceeding the benchmark (up 4.2%) and compared to a return
from world markets (MSCI World Index in Sterling) of 1.6%. This represents an
annual increase higher than the annualised total NAV return since launch,
which now stands at 9.0%. The share price total return last year was less than
the rise in the NAV, at 9.0%, reflecting a small contraction in the premium at
which shares trade over NAV to 1.7%.
The Company has traded at a premium to NAV for about two years and we believe
that shareholders, at least in part, attribute this to a perception that the
valuation the Directors place on the holding in Lindsell Train Limited
('LTL'), using the pricing formula understates its 'true' value. Whilst the
Directors recognise that there is no exact or correct value for an unlisted
investment such as LTL, their aim is to arrive at a conservative but realistic
value using a rationale that shareholders can understand and interpret. Our
valuation balances the illiquid minority nature of the investment with the
strong flow of dividends which LTL provides.
Our conservatism is influenced by two factors in particular. The first is
that the Company owns a minority shareholding at just less than 25%. This
means that, in theory at least, the other shareholders can muster the 75%
majority required to vote changes to LTL's Shareholders' Agreement or Articles
of Association. This is important as the Articles of Association places
restrictions on the trading in LTL shares whilst the Shareholders' Agreement
contains two crucial safeguards for minority shareholders. One is to restrict
compensation payments to LTL employees to approximately 25% of LTL's revenues
and the other to ensure that 80% of net profits are paid as dividends so long
as LTL has adequate shareholders' capital. These two provisions have, over the
years, ensured that the Company has received a material tangible return from
its investment in LTL, one that in the year to March 2012 amounted to a
dividend that was more than twelve times the cost of the initial investment.
The other factor is that LTL is still largely reliant on its two founding
partners. Only in the last two years have additional investment staff been
recruited. The founders are now supported by two directors responsible for,
on the one hand, marketing and client support and on the other,
administrative, finance and compliance functions. In the last year, LTL
recruited a highly experienced individual in a non-executive role to assist
further in strengthening its future growth.
Dwelling on these issues is even more relevant today as LTL has had another
successful year with its value rising more than any of the Company's other
investments, up 36.5%. It now represents 13.6% of NAV and its dividends made
up 36% of the Company's total revenue during the year. LTL's funds under
management increased 20% to £1.6bn with growth concentrated in its UK and
Global strategies. Long-term investment performance remains promising and last
year all the Lindsell Train pooled funds outperformed their benchmarks. Whilst
this is all extremely encouraging both for LTL and the Company it only goes to
emphasise the importance of this one investment to the Company.
Elsewhere the Company's residual investments in undated gilts performed well,
generating a total return of 24%. If you remember, the positions in long
dated fixed interest have been reduced over the years from more than 50% of
NAV to just 8% now, over a period in time when fixed interest has generated
much better returns than global equities. The Managers think that this
outperformance is unlikely to last much longer, which makes them keen to seek
an opportunity to switch the remainder into equities on any further strength
in the bond markets.
Similar to previous years the contribution from our quoted equities was
focused on one or two large holdings. Lately AG Barr contributed most to the
Company's performance but this year it was another drinks company, Diageo,
that took up the reins. At 10.3% of NAV it was up 27%. Diageo owns ten of the
top twenty world spirits brands and in addition one of the best beer brands
around - Guinness - that accounts for as much as 20% of its total revenues.
The company generates prodigious cash flow which, aside from funding a
dividend growing at 6% p.a., is likely to be used to acquire and strengthen
the portfolio of brands even further.
Nintendo dragged returns down most, falling in value by 45% on account of a
horrific year for profits caused by weak sales and high costs associated with
launching new consoles. This has prompted further additions to the position.
The Managers take some solace that at current prices c.75% of its market
capitalisation is backed by cash alone but expect real support to come from
improved sales once the new consoles and the associated games gain popularity
with consumers.
The Directors recommend a total dividend of £4.15 per share for the year to
March 2012. We have decided to break it down into an ordinary dividend of
£3.87 and a special dividend of £0.28, with the special dividend reflecting
the income earned by the Company from LTL performance fees. The Company's
policy to retain the maximum permitted earnings according to investment trust
regulations remains unchanged but in past years when this would have led to a
temporary fall in the dividend the Directors maintained the prior year's
payment. In the future in such circumstances the Directors would propose to
maintain the ordinary dividend only. We show below how previous dividends
would have been split if the new policy above had been followed.
Year to March Ordinary (£) Special (£) Year to March Ordinary (£) Special (£)
2008 1.97 0.13 2010 3.61 0.04
2009 3.30 0.35 2011 3.72 0.28
The Managers try to avoid distractions provided by macro political and
economic events, focusing on the strengths of individual investments. This
approach has served shareholders well in the past and the Board has confidence
that it will continue to do so in the future.
D L Adamson
Chairman
8 June 2012
Investment Manager's Report
Is a policy of buy and hold, such as we pursue for your Company (to a fault,
even we sometimes wonder), a rational approach to the investment challenge? As
so often, it depends - sometimes yes, but not others.
We've been thinking about this question in relation to our major holding in AG
Barr (10.73% of assets), which is trading pretty much at the same share price
as two years ago (when, to be fair, we sold 23% of the position). The stock
has done nothing in the interim, despite delivering satisfactory trading
results, of which there was another set in March 2012. The truth is Barr's
shares had got ahead of themselves during 2010 and have been "growing into the
rating" ever since. And, what is more, it seemed plausible enough to us back
then that the shares might tread water for an indefinite period. Yet we didn't
sell more. Why?
In part we held off because we were confident of Barr's dividend growth, up
another 9% at recent results and we covet the long run dividend stream it
provides. Next, we knew that the strong cash generation - enjoyed by all
owners of successful soft drinks brands - would quickly pay down Barr's modest
debt and permit the acquisition of new brands, or, as has transpired, the
build of new production capacity for existing brands in a new geography. This
cash generation is a competitive advantage for Barr and similar companies in
your portfolio, but because opportunities arrive haphazardly, it is impossible
to know exactly when the competitive advantage will boost the share price. The
idea here is that the cash generation provides a valuable "optionality" for
these companies - you know that something good may come of their superior
economics, you just don't know quite what or when. Or, to paraphrase Charlie
Munger - with good companies the next surprise is often a good surprise; with
a challenged business the next surprise is almost always unwelcome.
This "optionality" or propensity for good things to happen to good companies
is an important element of our attempt to deliver good long run stock market
returns. In the short term, though, numerically-minded analysts are,
understandably, unwilling to accord anything in their valuation models for so
intangible a factor. But this unwillingness is very close to our core
investment proposition - that other investors fail to ascribe correct or full
value to the shares of wonderful companies.
In summary, right or wrong, we are always reluctant to sell out of exceptional
businesses, except on the most excessive of valuations (which did not pertain
for Barr in 2010). Hindsight continually whispers into one's ear that such a
policy is not optimal - why not sell, find another stock, then trade back into
Barr after its couple of years in the doldrums? But in real-time this is not
such an easy thing to deduce or execute. Our conviction about the calibre of
Barr's business and about the likelihood that its pricing power will protect
long term shareholders against the ravages of inflation is much stronger than
our conviction that the shares may or may not take a pause for breath.
Having said all this, it is true, we regret to admit to shareholders, that we
wish we had sold more Nintendo back in 2007/8, given that the stock has now
fallen 85% from those peaks. A period of dull, sideways shuffling is one
thing, but falls of this magnitude signal other investors' concerns that
Nintendo's business is broken or irreparably outmoded. And the necessity this
has imposed on us - to determine the viability of a given business model - is
not and never should be, a standard part of our investment approach. The whole
point, for us, is to invest in unusually predictable business types. We have,
nonetheless, added to the Nintendo holding in 2012.
We did so for three reasons. First, the clear success of the new 3DS handheld
in Japan, selling more quickly there than any other console ever launched by
any manufacturer. The rock solid, cash rich balance sheet is another source of
comfort. Finally, we recently read Walter Isaacson's biography of Steve Jobs
and see in the latter's controversial, but eventually extraordinarily
successful strategy for Apple clear parallels to Nintendo. Specifically, Jobs
always insisted Apple remain a "closed" company - in the sense that it
designed all its own hardware and software as a seamless package and refused
either to license its software to other hardware makers, or to welcome other
operating systems onto its own platforms. Jobs argued this policy of
integration allowed Apple to focus on the design of "insanely great" products.
Today, Nintendo is chastised by investors for not offering its game franchises
to other platforms - notably Apple, of course - and for continuing to design
its own, often idiosyncratic hardware. We think Nintendo is correct to stick
to its principles and expect the company to come up with new, innovatory
products - like a 3D device that does not require special goggles - that will
once again capture customer and investor enthusiasm. Apple stock fell from $11
in 1995 to a low of $3.2 in 1997 (over 70%), during a hiatus in its product
development. Over $500 today, its investors were well rewarded for keeping
faith in the Apple business model. We hope it will prove right to keep faith
with Nintendo too through a similar hiatus.
N Train
Investment Manager, Lindsell Train Limited
8 June 2012
Income Statement for the years ended 31 March 2012
and 31 March 2011
2012 2011
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 3,546 3,546 - 3,408 3,408
Exchange gains on
currency balances - 97 97 - 1 1
Losses on forward
currency contracts - - - - (235) (235)
Losses on futures
contracts - (188) (188) - (24) (24)
Income 1,535 - 1,535 1,287 - 1,287
Investment
management fees (245) (127) (372) (250) (469) (719)
Other expenses (229) (15) (244) (245) (2) (247)
Net return before
finance costs and
tax 1,061 3,313 4,374 792 2,679 3,471
Interest payable and
similar charges (5) - (5) (3) - (3)
Return on ordinary
activities before
tax 1,056 3,313 4,369 789 2,679 3,468
Tax on ordinary
activities (9) - (9) (29) - (29)
Return on ordinary
activities after tax
for the financial
year 1,047 3,313 4,360 760 2,679 3,439
Return per Ordinary
Share £5.23 £16.57 £21.80 £3.80 £13.40 £17.20
All revenue and capital items in the above statement derive from continuing
operations.
The total columns of this statement represent the profit and loss accounts of
the Company. The revenue and capital return columns are supplementary to this
and are prepared under the guidance published by the Association of Investment
Companies.
A Statement of Total Recognised Gains and Losses is not required as all gains
and losses of the Company have been reflected in the above statement.
No operations were acquired or discontinued during the year.
Reconciliation of Movements in Shareholders' Funds
for the years ended 31 March 2011 and 31 March 2012
Share Special Capital Revenue Total
capital reserve reserve reserve
£'000
£'000 £'000 £'000 £'000
For the year ended 31 March
2012
At 31 March 2011 150 19,850 20,926 1,657 42,583
Return on ordinary activities
after tax for the financial
year - - 3,313 1,047 4,360
Dividends paid - - - (730) (730)
At 31 March 2012 150 19,850 24,239 1,974 46,213
For the year ended 31 March
2011
At 31 March 2010 150 19,850 18,247 897 39,144
Return on ordinary activities
after tax for the financial
year - - 2,679 760 3,439
At 31 March 2011 150 19,850 20,926 1,657 42,583
Balance Sheet as at 31 March 2012 and 31 March 2011
2012 2011
£'000 £'000 £'000 £'000
Fixed assets
Investments held at fair value through profit
or loss 46,311 42,176
Current assets
Debtors 4,663 4,116
Cash at bank 239 1,076
4,902 5,192
Creditors: amounts falling due within one
year (5,000) (4,785)
Net current (liabilities)/assets (98) 407
Net assets 46,213 42,583
Capital and reserves
Called up share capital 150 150
Special reserve 19,850 19,850
20,000 20,000
Capital reserve 24,239 20,926
Revenue reserve 1,974 1,657
Equity shareholders' funds 46,213 42,583
Net asset value per Ordinary Share £231.06 £212.92
Cash Flow Statement for the years ended 31 March 2012 and 31 March 2011
2012 2011
£'000 £'000
Net cash inflow from operating activities 522 217
Servicing of finance (5) (3)
Taxation (11) (30)
Financial investment (1,095) (218)
Net cash outflow before financing (589) (34)
Equity dividends paid (730) -
Decrease in cash in the year (1,319) (34)
Reconciliation of net cash flow to movement in net (debt)/funds
Decrease in cash in the year (1,319) (34)
Exchange movements 97 1
Opening net funds 755 788
Closing net funds (467) 755
Notes
1. Basis of accounting and comparative information
These financial statements have been prepared on the historical cost basis of
accounting, except for the measurement at fair value of investments. The
financial statements have been prepared in accordance with UK Generally
Accepted Accounting Practice (UK GAAP), the AIC Statement of Recommended
Practice 'Financial Statements of Investment Trust Companies and Venture
Capital Trusts' dated January 2009. All of the Company's operations are of a
continuing nature.
The accounting policies are consistent with the policies set out in the Annual
Report of the Company for the year to 31 March 2011.
The statutory accounts for the year ended 31 March 20121 have been finalised
on the basis of the financial information presented by the Directors in this
announcement and will be delivered to the Registrar of Companies following the
Company's Annual General Meeting.
The statutory accounts for the year ended 31 March 2011, have been delivered
to the Registrar of Companies and received an audit report which was
unqualified, did not include a reference to any matters to which the auditors
drew attention by way of emphasis without qualifying the report, and did not
contain statements under s498(2) and 498(3) of the Companies Act 2006.
2. Net Asset Value per Ordinary Share
The net asset value per Ordinary Share and the net asset value at the year end
calculated in accordance with the Articles of Association were as follows:
Net asset value per Net asset value
share attributable attributable
2012 2011 2012 2011
£ £ £'000 £'000
231.06 212.92 46,213 42,583
The movements during the year of the assets attributable to each Ordinary
Share were as follows:
Ordinary
Shares
£'000
Total net assets attributable at 42,583
beginning of year
Total recognised gains for the year 4,360
Dividends paid during the year (730)
Total net assets attributable at end 46,213
of year
The net asset value per Ordinary Share is based on net assets of £46,213,000
(2011: £42,583,000) and on 200,000 Ordinary Shares (2011: 200,000), being the
number of Ordinary Shares in issue at the year end.
3. Income
2012 2011
£'000 £'000
Income from investments
Overseas dividends 164 179
Overseas stock dividends 38 115
UK dividends 1,165 825
UK fixed interest income 168 167
1,535 1,286
Other income
Deposit interest - 1
Total income comprises
Dividends 1,367 1,119
Interest 168 168
1,535 1,287
4. Return per Ordinary Share
2012 2011
Total return per Ordinary share:
Total return £4,360,000 £3,439,000
Weighted average number of Ordinary Shares
in issue during the year 200,000 200,000
Total return per Ordinary Share £21.80 £17.20
The total return per Ordinary Share detailed above can be further analysed
between revenue and capital, as below:
2012 2011
Revenue return per Ordinary share:
Revenue return £1,047,000 £760,000
Weighted average number of Ordinary Shares
in issue during the year 200,000 200,000
Revenue return per Ordinary Share £5.23 £3.80
2012 2011
Capital return per Ordinary share:
Capital return £3,313,000 £2,679,000
Weighted average number of Ordinary Shares
in issue during the year 200,000 200,000
Capital return per Ordinary Share £16.57 £13.40
5. Status
The Directors conduct the affairs of the Company with a view to maintaining
approved company status as an investment trust, and concomitant exemption
from UK capital gains tax. HM Revenue & Customs approval has been received
for all financial years to 31 March 2011, but this does not preclude a
subsequent enquiry into a tax return from being opened.
6. Dividend
A final dividend of 415p per Ordinary Share (2011: 365p) is proposed for the
year ended 31 March 2012 and if approved by Shareholders at the forthcoming
Annual General Meeting will be paid on 3 August 2012 to Shareholders on the
register at close of business on 13 July 2012 (ex-dividend 11 July 2012).
7. Investment Policy
The Investment Policy of the Company is to invest:
• in a wide range of financial assets including equities, unquoted equities,
bonds, funds, cash and other financial investments globally with no
limitations on the markets and sectors in which investment may be made,
although there may be bias towards Sterling assets, consistent with a
Sterling-dominated investment objective. The Directors expect that the
flexibility implicit in these powers will assist in the achievement of the
absolute returns that the investment objective requires;
• in Lindsell Train managed fund products, subject to Board approval, up to
25% of its gross assets;
• to retain a holding, currently 24.9%, in Lindsell Train Limited in order to
benefit from the growth of the business of the Company's Investment Manager.
Diversification
The Company expects to invest in a concentrated portfolio of securities with
the number of equity investments averaging fifteen companies. The Company will
not make investments for the purpose of exercising control or management and
will not invest in securities of or lend to any one company (or other members
of its group) more than 15% by value of its gross assets. The Company will not
invest more than 15% of gross assets in other closed-ended investment funds.
Gearing
The Directors' policy is to permit borrowings up to 50% of the net asset value
of the Company in order to enhance returns where and to the extent that this
is considered appropriate.
Dividends
The Directors' policy is to pay annual dividends consistent with retaining the
maximum permitted earnings in accordance with investment trust regulations.
8. Principal risks
Non-financial risks to which the Company is exposed include market, economic
and regulatory factors, and loss of services by third party suppliers.
The price of shares is subject to the interaction of supply and demand, market
and economic influences, net asset value per share and the general perceptions
of investors. The share price will accordingly fluctuate and the Company
cannot guarantee that it will appreciate. The Company's activities are
conducted within operational and regulatory environments and could be
materially impacted by a failure of systems at third party service providers,
a loss of key member(s) of the investment management team, breach of
applicable tax regulation/legislation, or breach of the UKLA Listing Rules.
Market risk
The fair values or future cash flows of the Company's financial instruments
may fluctuate due to changes in market risk. Market risk encompasses mainly
equity price risk but also foreign exchange risk and interest rate risk.
Market risk is monitored by the Board on a quarterly basis and on a continuous
basis by the Investment Manager.
The company transacts futures contracts, which alter the exposure to equity
price risk.
Interest rate risk
The Company is only exposed to significant interest rate risk through its
overdraft facility with Morgan Stanley & Co. International plc. Borrowing
varied throughout the year as part of a Board endorsed policy. Borrowings at
the year end consisted of €236,000 and ¥30,567,000 with a Sterling equivalent
of £196,000 and £233,000 respectively and of a Sterling borrowing of £277,000.
If that level of borrowing were maintained for a year a 1% change in LIBOR (up
or down) would decrease or increase net revenue by £7,100 or 3.53p per
Ordinary Share (2011: £3,200 or 1.60p per Ordinary Share).
Other price risk
If the fair value of the Company's investments at the year end
increased/decreased by 10% then it could have the effect of £4,631,000 or
£23.16 per Ordinary Share (2011: £4,218,000 or £21.09 per Ordinary Share) on
the capital return
Derivative exposure
At 31 March 2012 there was one open forward currency contract increasing the
exposure to the US Dollar by US$6,300,000 against Sterling of £4,021,000 which
matured on 19 April 2012.
Liquidity risk
Liquidity risk is not significant in normal market conditions as the majority
of the Company's investments are listed on recognised stock exchanges and for
the most part readily realisable securities which can be easily sold to meet
funding commitments if necessary. Short-term flexibility is achieved by the
use of overdrafts as required and are repayable on demand.
Credit risk
Credit risk is mitigated by diversifying the counterparties through whom the
Investment Manager conducts investment transactions. The credit-standing of
all counterparties is reviewed periodically with limits set on amounts due
from any one broker.
Counterparty risk
Morgan Stanley & Co. International plc ('MSI'), a wholly owned subsidiary of
Morgan Stanley & Co. ('MS'), is the principal clearing broker and custodian to
the Company. These services include the provision to the Company of margin
financing, clearing, settlement and foreign exchange facilities. Under the
agreement MSI is able to pledge or use the Company's securities to a maximum
of 140% of any gross borrowing that the Company has outstanding with MSI. MSI
provides custody for the Company's securities (also through its network of
sub-custodians) in keeping with the FSA rules, with the assets held in
segregated client accounts and separately distinguishable from those of MSI's
own proprietary assets. However, pledged or used securities may be co-mingled
with MSI's assets and thus in the event of MSI's bankruptcy, the Company could
be ranked as a general creditor to MSI. The Directors view this as a
significant counterparty risk. To avoid this eventuality the Company
eliminated its borrowing from MSI in 2008 in order to prevent MSI pledging any
of the Company's securities to third parties. Following government action to
stabilise the financial system both in the UK and USA and the specific
measures to boost MS's capital the Directors believe that counterparty risk is
reduced but nonetheless continue to restrict the Company's borrowings from
MSI.
9. Availability of financial statements
The financial information in this Announcement does not constitute the
statutory accounts of the Company for the year ended 31 March 2012 nor for the
year ended 31 March 2011 as defined in the Companies Act but is derived from
those accounts. The Annual Report & Accounts of the Company for the year
ended 31 March 2012 can be viewed and downloaded from the website of the
Company's Investment Manager by visiting www.lindselltrain.com and going to
the bottom of the page. Neither the contents of the Company's website nor the
contents of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into or forms part of this
announcement.
Hard copies of the Annual Report & Accounts for the year to 31 March 2012 will
be posted to shareholders shortly, and further copies will be available from
the Registered Office of the Company.
10. Director's Confirmation Statement
The Directors of the Company (Donald Adamson (Chairman), Dominic Caldecott,
Rory Landman, Michael Lindsell and Michael Mackenzie) as the persons
responsible within the Company, hereby confirm to the best of their knowledge:
a) that the financial statements in the Announcement of which this Statement
forms part have been prepared in accordance with applicable UK accounting
standards and give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
b) the Management Report, which comprises the Chairman's Statement, Investment
Manager's Report, and notes 7 & 8 above includes a fair review of the
development and performance of the business and position of the Company,
together with the principal risks and uncertainties which the Company
faces.
Phoenix Administration Services Limited
Corporate Secretary
8 June 2012
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR BKFDPQBKDPAK -0- Jun/08/2012 14:59 GMT
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