Investment Co. Regulatory News (INV)

The Investment Company Plc - Half-year Report

PR Newswire

London, February 21

THE INVESTMENT COMPANY PLC

HALF-YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

The Investment Company plc presents its Half-Yearly Report for the six-month period ended 31 December 2017. It is referred to as TIC, the Company or the Group in the text of this report.

CORPORATE SUMMARY

Investment Objective

The Company’s investment objective is to provide shareholders with an attractive level of dividends coupled with capital growth over the long term through investment in a portfolio of equities, preference shares, loan stocks, debentures and convertibles.

Investment Policy

The Company invests in equities and fixed income securities. Fixed income securities are expected to include preference shares, loan stocks, debentures, notes, convertibles and related instruments and be issued by UK quoted companies with a wide range of market capitalisations. The conversion rights or equity warrants are normally expected to convert into the underlying equity of the quoted company. The equity portion of the portfolio would principally invest in UK-quoted companies, with a wide range of market capitalisations, which are anticipated to pay a growing stream of dividends.

Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Company’s direct investments, as described below. The Company will not enter into uncovered short positions.

Risk diversification

Portfolio risk is mitigated by investing in a diversified spread of investments. Investments in any one company shall not, at the time of acquisition, exceed 15% of the value of the Company’s investment portfolio. In the long term, it is expected that the Company’s investments will generally be a portfolio of around 75 or more different companies, most of which will represent individually no more than 5% of the value of the Company’s total investment portfolio, as at the time of acquisition.

The Company will not invest more than 10% of its gross assets, at the time of acquisition, in other listed closed-ended investment funds, whether managed by the Manager or not, except that this restriction shall not apply to investments in listed closed-ended investment funds which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds.

Unquoted investments

The Manager may invest in unquoted fixed income securities from time to time subject to prior Board approval.

Investment strategy

The Manager uses a bottom-up investment approach to selecting a diversified portfolio of equity and fixed income securities.

The investment approach can be described as active and universal, as the Company will not seek to replicate any benchmark and will target a significant proportion of issues from smaller quoted companies within an overall diversified portfolio. Potential investments are assessed against the key criteria including, yield, along with an assessment of the prospects of underlying corporate growth prospects, market positions, calibre of management and risk and financial resilience.

Dividend Policy

The dividend policy has been adjusted to make it more sustainable, taking the dividend in the first year after reorganisation, being the year ended 30 June 2014, which amounted to 20.7p and seeking to grow it gradually going forward. Any growth in the dividend beyond 20.7p will be reflected in the quantum of the fourth interim dividend.

Capital Structure

As at 31 December 2017, and the date of this report, the Company has in issue 4,772,049 ordinary shares of 50p each. In addition, there are 1,717,565 fixed rate preference shares of 50p in issue, all of which are held by a wholly-owned subsidiary of the Company. The Company holds no shares in Treasury.

At general meetings of the Company, holders of ordinary shares are entitled to one vote on a show of hands and on a poll, to one vote for every share held. Fixed rate preference shares are non-voting.

Total Assets and Net Asset Value

The Group had total net assets of £17.7 million and a NAV of 369.96p per ordinary share at 31 December 2017.

SUMMARY OF RESULTS

* The total return per ordinary share is based on total comprehensive income as detailed in the Condensed Consolidated Statement of Comprehensive Income.

FINANCIAL CALENDAR

CHAIRMAN’S STATEMENT

Half-Year to 31 December 2017

This statement covers the half year ended 31 December 2017.

There was a pick-up in world growth over the six-month period, as the US FED chose to fund most US Government expenditure from its reserves in 2017 rather than bond issuance. Prospects for the UK were more constrained as retail prices rose a little faster than wages, after the devaluation of Sterling in 2016. Even so, the FTSE All Share Index rose 5.5% as oil and metal prices recovered. In contrast, the FTSE Actuaries UK Conventional Gilts All Stocks Index rose only 0.1% over the period, as the decades of bond yield reductions came to an end. The Company’s NAV, which has a portfolio invested in both fixed income and equities, was 0.5% lower over the six-month period. Two dividends amounting to 10.7p were declared during the half-year. 

Following the Company’s reorganisation in June 2013, the strategy sought to fund a premium, and ultimately growing dividend to shareholders. The plan was to do this through investing a greater proportion of the portfolio in high-yielding Loan Stocks issued by quoted companies, which frequently carry a degree of participation in the issuer’s share price growth if they perform strongly. A second advantage of the intended strategy was that the Company’s return was not expected to be closely correlated with the movements of mainstream markets.

Since June 2013, there have been fewer Convertible Loan Notes issued than we had expected, which has constrained the full benefits anticipated from the change in portfolio mix. The Board believe this performance to be disappointing and following a review of alternatives, and shareholder approval of the continuation vote at the Annual General Meeting, the Board has appointed Fiske plc (“Fiske”) as investment manager, subject to approval from the Financial Conduct Authority. This was announced on 1 February 2018.

Fiske is an independent stockbroking and investment management firm. It provides a range of services to private investors, trustees, charities, pension funds and institutional clients, looking after client assets totalling some £480million. Fiske is very familiar with the Company and its investment portfolio having provided administration and custodian services for a number of years prior to the move to Miton in 2013.

The Board notes that there has been and continues to be some overlap between Fiske and the Company. In addition, the Board has also made new arrangements for the administration and other aspects of running the Company with the aim of reducing costs.

Going forward, the absence of global productivity improvement will ultimately stifle dividend growth. Certainly, the ultra-low level of bond yields implies asset returns generally may be more modest over the coming ten years, with more numerous corporates vulnerable to disappointment. Therefore we believe that an actively managed strategy is all the more appropriate in future, since adding value is just as much about avoiding stocks and corporates that disappoint, as it is about backing those that have the most promising upside. 

Sir David Thomson

Chairman

• February 2018

MANAGER’S REPORT

Performance

The US dollar remained weak against several international currencies during 2017, which greatly reduced the currency pressure on many of the emerging market economies. As this pattern became more established during 2017, the improving economic trend gathered some momentum. At the end of the period, the trend has worked up into a recovery in world growth. The US dollar weakness has assisted Sterling too, which, in spite of the Brexit headwinds, has continued to perform better than many expected.

The synchronous pick up in world growth began to drive up commodity prices over the six month period. The improving trend in commodity and oil stocks boosted the FTSE 100 Index towards new highs in December 2017, with the FTSE All Share Index appreciating 5.5% over the six months.

Approximately half of the portfolio is invested in fixed income securities and the other half in equities. Stocks such as Anglo Pacific, Bilby, K3, Capital, SCS and Strix all increased by more than 30% over the half-year, with Strix, in particular, rising over 46% since its admission to the Exchange in early August. However these significant gains were offset when Bagir, a lowly valued international clothing business, suffered a slowdown in orders in July. We note that just after the end of the half-year, an industry leader in the textile sector bought into Bagir at a share price well above its previous market level but well below our initial purchase price.

Whilst the UK Gilt market was largely flat over the half year, some of the fixed income holdings in the portfolio have nevertheless appreciated. The Phoenix 7.25% Perpetual Notes continued to appreciate, whilst the REA Finance 9.5% Bonds matured at the end of the period. Meanwhile the Convertible Loan Stocks held by the Company are continuing to pay out generous yields, but at this stage the value of their conversion into the underlying equities has yet to come through.

Overall the NAV was down 0.5% in the half-year, which is disappointing when compared to the returns on the wider equity market. This NAV return includes the two dividends, which were declared in the half year, that amounted to 2.9% in aggregate.

Portfolio

The largest corporate exposure in the portfolio is to Phoenix Life through a 7.25% perpetual note together with a smaller holding of ordinary shares. Stobart Group, which performed strongly in previous periods, remains the largest equity holding in the Company.

Whilst there has been some ongoing issuance of Convertible Loan Notes over the period under review, we have continued to find few with sufficiently attractive risk/reward ratios. Therefore a large portion of the portfolio has largely remained invested in ordinary equities – including many smaller quoted companies – that have been selected on the basis that they tend to pay premium dividend yields. Generally smaller quoted companies tend to have greater growth potential, and we believe this factor will become more important to investors.

New holdings over the half-year were established in Strix, a kettle switch manufacturer with a global market position, and Sabre Insurance, a car insurance business that helps those that need non-standard policies. Both offer the prospect of an attractive dividend income, along with good opportunities for share price appreciation. 

Prospects

After many years of low levels of capital expenditure, we anticipate that the ongoing growth in corporate cashflow will ultimately disappoint. Less corporate cashflow ultimately leads to less tax take for governments, and lower safety margins on dividends. For now, corporates are bridging the cashflow shortage through taking on more debt, and skimping on wage rises for staff.

We make these points to highlight that the nature of investing in a multicap portfolio across both corporate notes and equities greatly differs from many other strategies. Specifically the portfolio has sought to invest in Convertible Loan Notes issued by companies with the prospect of an attractive cash payback over the coming years. If the projects succeed, the added cashflow funds dividend growth for shareholders, along with the prospect of some capital gain alongside. 

However, over the last three years we have not found as many of these opportunities with acceptable risk parameters as we would have liked. Therefore, the Board has determined that it is imperative that the operational costs of the Company be reduced through taking on the role of the AIFM directly, and arranging for Fiske to oversee the management of the portfolio. Following shareholder approval of the continuation vote at the AGM in December, the Board has put in place arrangements to appoint Fiske as the new manager of the portfolio. We wish all shareholders and the Company well in the future.

Gervais Williams and Martin Turner

Miton Asset Management Limited

21 February 2018

TWENTY LARGEST INVESTMENTS

At 31 December 2017

INTERIM MANAGEMENT REPORT AND DIRECTORS’ RESPONSIBILITY STATEMENT

Interim Management Report

The important events that have occurred during the period under review, the key factors influencing the financial statements and the principal risks and uncertainties for the remaining six months of the financial year are set out above.

The principal risks facing the Group are substantially unchanged since the date of the Report and Accounts for the year ended 30 June 2017 and continue to be as set out in that report.

Risks faced by the Group include, but are not limited to, market risk (which comprises market price risk, interest rate risk, liquidity risk, and credit and counterparty risk). Details of the Company’s management of these risks and exposure to them is set out in the Company’s Report and Accounts for the year ended 30 June 2017.

There have been no significant changes in the related party disclosures set out in the Annual Report.

Responsibility Statement

The Directors confirm that to the best of their knowledge:

• the condensed set of financial statements has been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as adopted by the European Union; and gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and

• this Half-Yearly Financial Report includes a fair review of the information required by:

This Half-Yearly Financial Report was approved by the Board of Directors on 21 February 2018 and the above responsibility statement was signed on its behalf by Sir David Thomson, Chairman.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 31 December 2017

The total column of this statement is the Consolidated Statement of Total Comprehensive Income of the Group prepared in accordance with International Financial Reporting Standards ("IFRS"). The supplementary revenue and capital columns are prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies (“AIC SORP”).

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period.

The notes below form part of these financial statements.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 31 December 2017

CONDENSED CONSOLIDATED BALANCE SHEET

As at 31 December 2017

The notes on pages below form part of these financial statements.

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 31 December 2017

The notes on pages below form part of these financial statements.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Significant accounting policies

Basis of preparation

The condensed consolidated financial statements, which comprise the unaudited results of the Company and its wholly owned subsidiaries, Abport Limited and New Centurion Trust Limited, together referred to as the “Group”, have been prepared in accordance with IFRS, as adopted by the European Union, and as applied in accordance with the provisions of the Companies Act 2006. The financial statements have been prepared in accordance with the AIC SORP, except to any extent where it is not consistent with the requirements of IFRS. The accounting policies are as set out in the Report and Accounts for the year ended 30 June 2017.

The half-year financial statements have been prepared in accordance with IAS 34 “Interim Financial Reporting”.

The financial information contained in this half year financial report does not constitute statutory accounts as defined by the Companies Act 2006. The financial information for the periods ended 31 December 2017 and 31 December 2016 have not been audited or reviewed by the Company’s Auditor. The figures and financial information for the year ended 30 June 2017 are an extract from the latest published audited statements and do not constitute the statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and include a report of the Auditor, which was unqualified and did not contain a statement under either Section 498(2) or 498(3) of the Companies Act 2006.

Going concern

The Directors have made an assessment of the Group’s ability to continue as a going concern and are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future (being a period of 12 months from the date these financial statements were approved). Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern, having taken into account the liquidity of the Group’s investment portfolio and the Group’s financial position in respect of its cash flows, borrowing facilities and investment commitments (of which there are none of significance). Therefore, the financial statements have been prepared on the going concern basis and on the basis that approval as an investment trust will continue to be met.

2. Income

3. Return per ordinary share

Returns per share are based on the weighted average number of shares in issue during the period. Normal and diluted return per share are the same as there are no dilutive elements on share capital.

4. Dividends per ordinary share

Amounts recognised as distributions to equity holders in the period.

The Board declared a second interim dividend of 5.00p per ordinary share, which was paid on 16 February 2018 to shareholders registered at the close of business on 26 January 2018. This dividend has not been included as a liability in these financial statements.

5. Issued ordinary share capital

The Company does not hold any shares in Treasury as at 31 December 2017 (31 December 2016: Nil and 30 June 2017: Nil)

6. Issued preference share capital

The 1,717,565 fixed rate preference shares of 50p each are non-voting, entitled to receive a cumulative dividend of 0.01p per share per annum, and are entitled to receive their nominal value, 50p, on a distribution of assets or a winding up. These are a component of the equity of the Company. The whole of the issue is held by New Centurion Trust Limited, a wholly owned subsidiary of the Company, which has no impact on the consolidated accounts, the Group NAV or the return per ordinary share.

7. Net asset value per ordinary share 

Net asset value per ordinary share is based on net assets at the period end and 4,772,049 (31 December 2016: 4,772,049 and 30 June 2017: 4,772,049) ordinary shares in issue at the period end excluding shares held in Treasury.

8. Management fee

Under the terms of the Management Agreement, the Manager is entitled to receive from the Company or any member of the Group in respect of its services provided under this Agreement, a management fee payable monthly in arrears equal to one-twelfth of 1% per calendar month of the NAV of the Company. For these purposes, the NAV shall be calculated as at the last business day of each month and is subject to the ongoing charges ratio of the Company not exceeding 2.5% per annum in respect of any completed financial year.

At 31 December 2017 an amount of £11,889 (31 December 2016: £44,102 and 30 June 2017: £7,284) was outstanding and due to the AIFM.

9. Fair value hierarchy

The fair value is the amount at which an asset could be sold in an ordinary transaction between market participants at the measurement date, other than a forced or liquidation sale. The Group measures fair values using the following hierarchy that reflects the significance of the inputs used in making the measurements.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset as follows:

Level 1 – valued using quoted prices, unadjusted in active markets for identical assets and liabilities.

Level 2 – valued by reference to valuation techniques using observable inputs for the asset or liability other than quoted prices included in Level 1.

Level 3 – valued by reference to valuation techniques using inputs that are not based on observable market data for the asset or liability.

The table below sets out fair value measurement of financial instruments as at 31 December 2017, by the level in the fair value hierarchy into which the fair value measurement is categorised.

The Company’s subsidiary, Abport Limited, completes trading transactions. The value of the current asset investments held for trading is the expected price of realisation. The difference between the sale and purchase of assets is recognised as trading income in the Condensed Consolidated Statement of Comprehensive Income.

Reconciliation of Level 3 investments

The following table summarises Level 3 investments that were accounted for at fair value.

10. Transactions with the Manager and related parties

As disclosed in note 8 a fee is paid to the Manager in respect of its service provided to the Company. There were no other identifiable related parties at the half year.

DIRECTORS AND ADVISERS

DIRECTORS (all non-executive)

Sir David Thomson Bt. (Chairman)

M. H. W. Perrin (Audit Committee Chairman and Senior Independent Director)

S. J. Cockburn

P. S. Allen

ADVISERS

An investment company as defined under Section 833 of the Companies Act 2006.

A copy of the Half-Yearly Financial Report will be submitted shortly to the National Storage Mechanism (“NSM”) and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/NSM.

The Half-Yearly Financial Report will be posted to shareholders shortly. The Report will also be available for download from the following website: www.mitongroup.com/tic or on request from the Company Secretary.

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.