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Perpetual Income & Growth Investment Trust Plc - Half-year Report

PR Newswire

London, November 16

PERPETUAL INCOME AND GROWTH INVESTMENT TRUST PLC

Half-Yearly Financial Report for the Six Months to 30 September 2018

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Perpetual Income and Growth Investment Trust plc (the ‘Company’) is an investment trust company listed on The London Stock Exchange.

Investment Objective of the Company

The Company’s investment objective is to provide shareholders with capital growth and real growth in dividends over the medium to long term from a portfolio of securities listed mainly in the UK equity market.

Performance Statistics

(1) Source: Refinitiv (Thomson Reuters).

(2) The combined effect of any dividends paid, together with the rise or fall in the share price or NAV. Any dividends received by a shareholder are assumed to have been reinvested in either additional shares (i.e. share price total return) or in the Company’s assets (i.e. NAV total return).

(3) The Benchmark index.

(4) 620,000 shares bought back at an average price of 357.3p in the six months to 30 September 2018.

(5) Gross gearing: borrowings ÷ shareholders’ funds.

(6) Net gearing: borrowings less cash and UK government bond holdings ÷ shareholders’ funds.

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Chairman’s Statement

Performance

I am pleased to report that the net asset value (NAV) total return performance in the six months to 30 September 2018, with dividends reinvested, was a positive 7.7%, although this was slightly behind our benchmark FTSE All-Share Index’s return of 8.3%. It is rather less pleasing that the share price total return was only 4.6% for the period, reflecting a widening of the discount at which the shares traded relative to the NAV, from 9.5% to 12.3% over the six months. The Board is concerned at the level of this discount and shareholders will have seen that we have instituted a share buyback programme to signal that concern, as well as enhancing the NAV per share. However, improved portfolio performance and consequent demand for the shares will be the main driver to reduce the discount level in the medium term.

The Board recognises that every fund manager has their ups and downs. We fully support the consistent investment approach of the portfolio manager, Mark Barnett, which he describes in his report along with details on the performance of the portfolio.

Dividend

The Directors are pleased to declare a second interim dividend of 3.25p per ordinary share in respect of the three months to 30 September 2018. This dividend will be paid on 28 December 2018 to shareholders on the register on 30 November 2018. The shares will be marked ex-dividend on 29 November 2018.

Your Board continues to recognise the importance of dividends to shareholders, particularly in the continuing low interest environment, and is determined to maintain its policy of real growth over the medium to longer term in ordinary dividends paid. In the past special dividends received by the Company have generally been passed on directly to shareholders during the year they are received. This had created volatility of total dividends paid to shareholders. In view of this and the decline in the level of special dividends received and recognised in revenue (for example there were none received in the current period and they represented under 5% of income received in the last two financial years), your Board is reconsidering the practice of automatically paying them out to shareholders when they are relatively small. Instead they would be used to enable ordinary dividends paid to shareholders to be smoothed year-on-year. Very large one-off special dividends would continue to be passed on to shareholders.

Richard LaingChairman16 November 2018

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Portfolio Manager’s Report

Market Review

UK equity markets provided a positive return over the six-month period to 30 September 2018. Markets rallied strongly in April and May on the back of rising oil prices and sterling weakness against the US dollar, which boosted the returns of international earners within the FTSE 100 Index. Markets traded broadly sideways for the remainder of the period, before weakening at the beginning of September as a result of global trade tensions and ongoing Brexit uncertainty.

Expectations that the Bank of England’s Monetary Policy Committee (MPC) would raise interest rates grew during the spring. At its August meeting, the MPC voted unanimously to increase the UK’s base interest rate by 0.25% to 0.75%. The widely anticipated rise was an indication from the MPC that the underlying performance of the UK economy was better than expected. Additionally, the incremental increases over the last 12 months offers the MPC greater flexibility to pare back interest rates if deemed necessary following the final deal negotiated for the UK’s exit from the European Union.

As a result of looming US sanctions against Iran, the oil price rose over the six-month period, reaching a three-year high of US$82 per barrel in September. In contrast, sterling weakened materially to levels last seen in the fourth quarter of 2017, on increasing fears of a hard-Brexit and the European Union’s rejection of the Government’s Chequers plan.

Elsewhere, economic data released during the period showed that the sustained hot weather and growth in real incomes provided a boost to consumer spending. The UK government also authorised the largest public sector pay rise in more than a decade, lifting the 1% cap on pay increases for over a million public sector workers, including teachers, police and prison officers, as well as for NHS staff.

Portfolio Review

The Company’s net asset value, including dividends reinvested, rose by 7.7% during the period under review, compared with a return of 8.3% (total return) by the FTSE All-Share Index.

Industrial sector holdings HomeServe, BCA Marketplace and Capita, provided the largest contributions to performance over the period. HomeServe released full year results in May, which saw record profits and a 25 per cent increase in the dividend, aided by growth in the US operation. Meanwhile the share price of BCA Marketplace rose sharply in June, following an unsuccessful takeover proposal from private equity company Apax. Shares in Capita ended the period higher following the equity issue in May, with investors also encouraged by new contract wins.

Meanwhile, stock selection within the Financials sector also aided performance. Litigation financier Burford Capital provided a positive return over the period. The share price rose sharply in July as the company reported strong results for the first half of 2018. Results included a 61% increase in cash generation on the previous period and confirmation that 72% of the guided full year pre-tax-profit had already been generated. Also within the financial sector, Hiscox provided a positive contribution to returns. Meanwhile, the exclusion from the portfolio of mainstream banks provided a boost to relative returns, with this sector performing weakly over the period.

In the Utilities sector shares in Drax, which supplies 7% of the UK’s power requirements, rose throughout the period, supported by rising wholesale power prices and performance improvements in the production of biomass electricity.

The portfolio’s holdings in the Oil & Gas sector, namely BP and Royal Dutch Shell, performed strongly over the period. The oil majors rallied through April and May, then traded sideways for most of the period before a further rally in September, spurred on mostly by the rising oil price environment. BP was supported by the release of strong results for the first quarter of 2018, which included the continuation of its share buyback programme and an increased dividend. Whilst the portfolio has a significant weighting in the Oil & Gas sector, its relative underweight position versus the FTSE All-Share Index meant that the portfolio did not benefit from the full rise experienced by the market.

There were several holdings that did less well and detracted from returns over the six-month period. In the Consumer Services sector the portfolio’s holdings in travel companies Thomas Cook and easyJet were in this category. Shares in Thomas Cook traded weakly throughout the period, suffering a sharp drop in September on the release of a profit warning. The update cited the impact of weaker trading in the tour operator’s ‘lates’ market (last minute, high-margin holiday sales), after an unusually hot summer across Northern Europe. easyJet meanwhile traded well through the first three months of the period, before its shares weakened on fears of the impact of rising oil prices on profit margins.

The portfolio’s holding in specialist Healthcare company BTG also provided a drag on performance. The shares fell on the release of year-end results during the second quarter, which revealed a pre-tax loss of £70 million on lower sales and slower than expected market development of PneumRx Coils - a treatment for severe emphysema. In June, investor confidence was further dented by news that the US Food & Drug Administration had voted against the approval of its Elevair drug.

British American Tobacco (BAT) has provided exceptional returns to the portfolio over a number of years. However, the shares have come under pressure in recent months, as the stock market has continued to focus on concerns over the outlook for next generation products and flavoured cigarettes. BAT strengthened in the first half of the period, before gains fell away on renewed negative momentum in the sector. BAT was further impacted by news that rival Philip Morris International (PMI) intends to sue for copyright infringement over BAT’s flagship cigarette alternative Glo, compounded by a dimming of sentiment on concerns over the effects of BAT’s competitive pricing of Glo in Japan. However, with the tobacco companies’ focus on pricing power, cash conversion and product innovation they should continue to provide a reliable source of income, underpinning longer term returns to shareholders, while next generation products have the potential to deliver a significant new revenue stream. Furthermore, the steep decline in the valuation of this sector leaves the shares looking increasingly attractive as long-term investments.

Outlook

Over the course of 2018 the UK stock market has been range bound, effectively fluctuating within a 10% range. This pattern is likely to continue for the foreseeable future until the market has clarity over two key issues, namely the extent and duration of rising US interest rates and Brexit. The political uncertainty has been especially damaging and has resulted in a wide degree of polarisation within the market. Companies with substantial overseas revenues have benefitted from the devaluation of sterling and by contrast, UK domestic orientated stocks have generally performed poorly and remain undervalued relative to the broader market.

The extent of this relative cheapness is substantial and although the overall market is not expensive at present the most glaring opportunities rest within domestic sectors. Many are valued at multi-year lows both in absolute terms and relative to the wider market and are discounting a sharp deterioration in profits and a slowdown in the UK economy, both of which look overly pessimistic. Recently published economic indicators point to continued steady, if unspectacular, economic growth in the UK. The level of GDP growth can reasonably be expected to be higher over the remainder of the year, supported by robust employment growth and a recovery in real wages, which in turn should help to strengthen consumption growth. Given the forecast increase in government spending next year and the Treasury’s flexibility to provide further injections after the Brexit date, it is reasonable to expect the UK economy to be more resilient than most forecasts assume.

The key investment themes that underpin the portfolio have remained consistent over the course of this year. The exposure to sterling revenues has been modestly increased as the drawn out Brussels negotiation has exacerbated a pessimistic consensus towards the UK. The exposure to stocks which offer an absolute return that is not correlated with regular business cycles has also been emphasised. These themes remain prominent in the portfolio, alongside a number of global industries namely Oil and Tobacco which remain attractively valued in a market driven by short-termism and an emphasis on new disruptive business models in all industries.

I seek to find quality businesses that can maintain and grow their dividend payments and which are trading on attractive valuations below our estimate of fair value. This valuation led approach underpins the portfolio’s construction process and is crucial to securing long-term returns. The core principles of the strategy employed on the Company’s portfolio are unchanged and are consistent with the strong long-term record. I am convinced that these principles will be the key to future long term sustainable returns for investors. In recent weeks the return of more volatile markets has suggested a breakdown in momentum style investing which has been such a powerful characteristic of the multi-year bull market. It is to be hoped that this change will herald a return to valuation based investing with an emphasis on fundamental company analysis, which will support our investment strategy.

Mark BarnettPortfolio Manager16 November 2018

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Related Parties Transactions

Under UK Generally Accepted Accounting Practice (UK Accounting Standards and applicable law), the Company has identified the Directors as related parties. No other related parties have been identified. No transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.

Principal Risks and Uncertainties

The Board carries out a regular review of the risk environment in which the Company operates. The principal risks and uncertainties identified in this review are summarised below:

• Economic Risk – Economic risk arises from uncertainty about the future prices of the Company’s investments. Market fluctuations, both upward and downward, may arise from external factors which are outside the control of the Board and the Manager.

• Investment Risk – This is the stock specific risk that the stock selection process may not achieve the Company’s published objectives. Poor performance of individual portfolio investments is mitigated by diversification and ongoing monitoring of investment guidelines.

• Financial Risk – The financial risks faced by the Company include market price risk (including currency risk, interest rate risk and other price risk), liquidity risk and credit risk, which includes counterparty and custodial risk.

• Gearing Risk – The use of borrowings will amplify the effect on shareholders’ funds of portfolio gains and losses.

• Share Discount Risk – The Company’s shares may, at times, trade at a wide discount. The Board has put in place both share repurchase and issuance facilities to help the management of this risk.

• Operational Risk – A failure of the systems of financial and non-financial internal controls operated by the Company, the Manager and other external service providers could result in loss of assets and reputational damage as a result of fraud or material misstatement.

• Regulatory Risk – Loss of investment trust status for tax purposes could lead to the Company being subject to tax on the realised capital profits on the sale of its investments. A serious breach of regulatory rules could lead to suspension from the Official List, a fine or qualified audit report and reputational problems.

• Other Risks – The risk that the portfolio manager, Mark Barnett, may become incapacitated or otherwise be unavailable is mitigated by support available from his designated deputy for this portfolio, Martin Walker, and the wider Invesco UK Equities team.

A detailed explanation of these principal risks and uncertainties can be found on pages 12 to 14 of the 2018 annual financial report, which is available on the Company’s section of the Manager’s website at: www.invesco.co.uk/pigit. In the view of the Board these principal risks and uncertainties are equally applicable to the remaining six months of the financial year as they were to the six months under review.

Going Concern

The condensed financial statements have been prepared on a going concern basis. The Directors consider this is the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, being at least 12 months after the approval of this half-yearly financial report. In considering this, the Directors took into account the diversified portfolio of readily realisable securities which can be used to meet funding commitments, and the ability of the Company to meet all of its liabilities and ongoing expenses from its assets. The Directors also considered the revenue forecasts for the year and future dividend payments.

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INVESTMENT PORTFOLIO STATEMENT AT 30 SEPTEMBER 2018

Ordinary shares listed in the UK unless otherwise stated

AIM: Investments quoted on AIM

ADR: American Depositary Receipt

NR: non-rated (by both Moody’s and S&P).

UQ: Unquoted

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CONDENSED INCOME STATEMENT

The total column of this statement represents the Company’s profit and loss account prepared in accordance with UK Accounting Standards. The return on ordinary activities after taxation is the total comprehensive income and therefore no additional statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the period.

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CONDENSED BALANCE SHEET

Registered number 03156676

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CONDENSED RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS

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Notes to the Condensed Financial Statements

1. Accounting Policies

The condensed financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, FRS 104 Interim Financial Reporting and the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in November 2014, as updated in February 2018. The financial statements are issued on a going concern basis.

The accounting policies applied to these condensed financial statements are consistent with those applied in the financial statements for the year ended 31 March 2018.

2. Income

Special dividends of £577,000 have been recognised in capital (30 September 2017: £11,577,000).

3. Investment Management Fees and Finance Costs

The base management fee and finance costs are allocated 70% to capital and 30% to revenue. The base management fee is 0.6% on the first £900 million of assets under management and 0.4% thereafter.

4. Investment Trust Status and Tax

It is the intention of the Directors to conduct the affairs of the Company so that it satisfies the conditions for approval as an investment trust company. As such, no tax liability arises on capital gains. The tax charge represents withholding tax suffered on overseas income.

5. Net Asset Value

The following shows a reconciliation of NAV with debt at par to NAV with debt at market value. The difference in the NAVs arises solely from the valuation of the 4.37% Senior Secured Notes due 8 May 2029 (Notes). The number of ordinary shares at the period end was 239,812,350 (31 March 2018: 240,432,350).

The market value of the Notes used in the above reconciliation, which is based on a comparable quoted debt security, is:

6. Dividends per Ordinary Share

The first interim dividend of 3.25p was paid on 28 September 2018 to shareholders registered on 7 September 2018. The Directors have declared a second interim dividend of 3.25p payable on 28 December 2018 to shareholders registered on 30 November 2018.

7. Share capital

Share capital represents the total number of shares in issue, including treasury shares.

A further 200,000 shares have been bought back into treasury, at an average price of 345.49p, since 30 September 2018.

8. Fair Value Hierarchy Disclosures

The fair value hierarchy analysis for investments held at fair value at the period end is as follows:

Barclays Bank - Nuclear Power Notes 28 February 2019, was transferred to Level 1 (31 March 2018: Level 2) during the period following increased market activity in this holding. The fair value of this holding at the period end was £315,000 (31 March 2018: £37,000).

The unquoted investment holdings of the portfolio make up the whole of Level 3.

9. Status of Half-Yearly Financial Report

The financial information contained within the financial statements in this half-yearly financial report, does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The financial information for the half years ended 30 September 2018 and 30 September 2017 has not been audited. The figures and financial information for the year ended 31 March 2018 are extracted and abridged from the latest audited accounts and do not constitute the statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the Independent Auditor’s report, which was unqualified and did not include a statement under section 498 of the Companies Act 2006.

By order of the BoardInvesco Asset Management LimitedCompany Secretary16 November 2018

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DIRECTORS’ RESPONSIBILITY STATEMENTin respect of the preparation of the half-yearly financial report

The Directors are responsible for preparing the half-yearly financial report using accounting policies consistent with applicable law and UK Accounting Standards.

The Directors confirm that to the best of their knowledge:

– the condensed set of financial statements contained within the half-yearly financial report have been prepared in accordance with the FRC’s FRS 104 Interim Financial Reporting;

– the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the FCA’s Disclosure Guidance and Transparency Rules; and

– the interim management report includes a fair review of the information required on related party transactions.

The half-yearly financial report has not been audited or reviewed by the Company’s auditor.

Signed on behalf of the Board of Directors.Richard LaingChairman16 November 2018