Half-year Report

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

PR Newswire

London, November 20

Perpetual Income and Growth Investment Trust plc

Half-Yearly Financial Report for the Six Months to 30 September 2019

Key Facts

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.

(2) See Glossary of Terms and Alternative Performance Measures (APM) on pages 66 to 68 of the 2019 annual financial report for the explanation and calculation of APMs.

(3) 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).

(4) The Benchmark index of the Company.

(5) Includes 14,741,342 shares bought back at an average price of 304.9p.

(6) Discount to NAV – debt at market value: (share price less NAV per share with debt at market value) ÷ NAV per share with debt at market value.

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

(8) Net gearing: borrowing less cash ÷ shareholders’ funds.

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Chairman’s Statement

Performance

I am disappointed to report that the net asset value (NAV) total return performance in the six months to 30 September 2019, with dividends reinvested, was –1.2%, compared with +4.6% for our benchmark FTSE All-Share Index. The share price total return was –1.0% for the period. In contrast to the NAV and share price performance, revenue has remained strong.

The portfolio experienced mixed results. The pall over UK focused stocks from the uncertainty around Brexit continued, and the period also saw other setbacks including a short seller attack on Burford Capital and negative market sentiment towards tobacco stocks. In contrast, a number of other holdings, including in particular some focused around UK domestic opportunities, did well. Further details can be found in the Manager’s Report.

The Board is very sensitive to shareholder concerns about the continued weak results. We engage regularly with the portfolio manager, Mark Barnett, who continues to apply his consistent valuation based investment approach. We have also had a number of discussions with Invesco management about the continuing poor performance and about processes around individual portfolio managers. We note the recent appointment of a new Chief Investment Officer, Stephanie Butcher, and have met with her to discuss new initiatives to be put in place with the aim to improve portfolio performance. We will be closely monitoring progress.

Share price discount

The share price discount to NAV ranged between 10.5% and 15.0% during the period. We have ramped up the programme of share buybacks, instituted last year. Through these we are seeking to stabilise the discount, to provide liquidity to take out overhangs in the market and to accrue value to remaining shareholders through realising the discount on the shares bought back. During the period the Company bought back 14.7 million shares at an average discount to NAV of 12.5%. However, reiterating my previous statements, improved portfolio performance and consequent demand for the shares will be the main driver to reduce the discount level.

Dividend

The Directors are pleased to have declared a second interim dividend of 3.4p per ordinary share in respect of the three months to 30 September 2019. This dividend will be paid on 30 December 2019 to shareholders on the register on 29 November 2019. The shares will be marked ex-dividend on 28 November 2019.

Richard Laing

Chairman20 November 2019

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Portfolio Manager’s Report

Market Review

The UK equity market posted a positive return over the six-month period to 30 September 2019. However, as has tended to be the case in recent reporting periods, this headline return masks periods of underlying volatility. Global markets were driven by persistent concerns of a slowdown in economic growth and the fluctuation of US-Sino trade tensions. Meanwhile a trend noted in previous periods continued; internationally orientated sectors within the FTSE 100 continued to lead market performance.

Political uncertainty surrounding negotiations for the exit from the European Union (EU) dominated the domestic agenda. During the period sterling served as the bellwether for the perceived likelihood of a “no-deal” exit. The value of sterling versus international currencies remained weak, with the prorogation of Parliament in August pushing the pound to just US$1.20.

Amid this persistent domestic uncertainty, the Bank of England’s Monetary Policy Committee voted unanimously on four occasions to hold the UK base interest rate at 0.75%. Latterly, officials signalled the potential for a future interest rate cut following the UK’s exit from the EU. Economic data released during the period, showed a slowdown in economic growth during the first half of 2019, a result of weaker business investment and slowing global economic growth. The UK economy expanded in the third quarter, avoiding recession. Employment data remained robust, with the unemployment rate below 4% and more than 800,000 labour market vacancies.

Portfolio Review

The Company’s investments have continued to generate meaningful growth in income that has supported the growth in dividends. However, the capital returns have been disappointing as a consequence of the challenging backdrop facing UK domestically orientated companies, some particular stock specific challenges, and also the consequences of a large forced seller in the UK equity market. The Company’s net asset value, including reinvested dividends, provided a total return of –1.2% over the period under review, compared with a total return of +4.6% by the FTSE All-Share Index.

The portfolio’s core themes of UK domestic value, international growth opportunities, tobacco and non-correlated financials have remained consistent over the past six months. The tilt towards UK domestic companies has been maintained, as persistent negativity towards domestic sectors continues to present compelling opportunities. Exposure to selective global industries, namely oil and tobacco, remains prominent whilst a significant proportion of the portfolio is also invested in non-correlated financials. The low correlation of investments held by the Company with the FTSE All-Share Index affords two important benefits to the portfolio; business risk diversification and income diversification. This is especially important given the concentration of dividend income in the UK stock market.

The portfolio’s UK domestic opportunities theme continued to provide some positive returns over the period. BCA Marketplace, KCOM and Next were the standout contributors within this theme. Both KCOM and BCA Marketplace received private equity bids during the period. KCOM’s Board of Directors recommended a bid in April, but later abandoned it in favour of an enhanced all cash offer from a European infrastructure fund. Meanwhile, BCA Marketplace confirmed in June that it was in advanced discussions with a private equity firm, following an all cash offer for the company. Elsewhere within the portfolio’s domestic theme, Next released a strong trading statement in July, which confirmed better-than-expected full price sales for the second quarter. Half-year results released in September confirmed double-digit growth in online sales, whilst management reaffirmed its full year guidance.

The portfolio’s absolute performance was also supported by its exposure to international growth opportunities. Stock selection within this theme proved decisive, as holdings in BAE Systems and HomeServe were amongst the portfolio’s best performing stocks over the period. HomeServe released full year results in May, which were ahead of market expectations. The company delivered another year of strong organic revenue growth and confirmed a double digit increase in the annual dividend. Meanwhile, BAE Systems traded well over much of the period. The company released supportive half-year results in July that showed double digit profit growth, fuelled by an increase in US defence spending.

Relative performance also benefitted from the portfolio’s zero weighting in the metals & mining sector, which proved highly volatile amid geopolitical tensions. Conversely, the non-inclusion of several highly rated, internationally focussed FTSE 100 stocks proved to be a drag on relative performance.

Tobacco remains a prominent theme, with investments in Altria, British American Tobacco and Imperial Brands. These holdings have previously delivered exceptional returns for shareholders, however more recent performance has continued to prove challenging. Investor sentiment towards the tobacco sector was affected by revived fears around regulation, whilst the release of underwhelming sales data for Imperial Brands’ next generation technology reignited concerns around the outlook for future revenues. The portfolio’s significant weighting in the sector adversely affected relative performance, with negative returns from non-UK index stock Altria being a significant detractor. Despite these persistent concerns, the outlook for the sector remains positive, particularly as the headwinds outlined are reflected in depressed valuations across the sector.

The portfolio’s final theme proved the most substantial driver of weakness during the period. Having been a strong contributor to fund performance over many years, Burford Capital provided the portfolio’s largest negative return over the period. In August 2019, the litigation financer was the subject of a highly critical report from a US firm that specialises in publishing research for short-sellers. This caused a very material fall in the company’s share price. Burford Capital robustly defended itself against the accusations and later announced a series of corporate governance enhancements. Whilst the share price recovered some losses during September, the value of this holding still remained significantly lower at period end.

Elsewhere within the non-correlated financials holdings, Amigo also provided a negative contribution to returns, as concerns grew around the regulatory focus for the guarantor backed loan sector. The share price fell sharply at the end of August on the release of results for the first quarter, when the company cut its full year guidance and announced a change in lending strategy, to prioritise new customer lending over repeat customer lending. Despite these specific challenges, there were a number of holdings in this area that performed well over the period. Most notable was AJ Bell, which has traded very well following the initial public offering (IPO) in December 2018. In April, the company released a strong trading update for the second quarter, which supported positive momentum in the shares. AJ Bell has been a very successful holding for the Company. Initially held as a private, unquoted company, we were extremely supportive of the IPO, which saw significant gains realised for the portfolio.

Other notable contributors within the wider portfolio included PureTech Health. The company’s share price performed very well over the period, supported by positive developments from a number of the firm’s underlying companies. News that PureTech Health is exploring a listing on the US Nasdaq exchange was also well received by the market.

A final comment on performance drivers is that a small number of portfolio holdings experienced notably weak price performance due to challenges facing other shareholders rather than issues with the businesses themselves. While this short-term share price disruption was not isolated to this portfolio, it has been a source of some frustration. We maintain the view that the long-term outlook and inherent value of those companies impacted are unchanged.

Portfolio Manager Outlook

The performance of the UK stock market is likely to be determined by the same macroeconomic and political forces that have dominated sentiment for the past few years. The political uncertainty in many regions has been especially difficult to navigate recently and has been a major headwind to portfolio performance given the extreme polarisation of company valuations that has emerged. I have commented previously that this differential between highly rated global non-cyclical stocks and depressed domestic economically sensitive shares is substantial. This differential sits at a multi-year high and offers the most glaring opportunities within the UK stock market. The portfolio is positioned to take advantage of this perceived mispricing and retains large portfolio weightings in insurance, real estate, retail and support services. 

The extent of this mispricing is perhaps most clearly highlighted by the spread between dividend yields and corporate bond yields over the past ten years. Over this period, dividend yields have remained broadly flat, whilst corporate bond yields have declined markedly. A 650bp (6.5%) shift in the yield differential over the period is notable and represents another strong endorsement of the attraction of equities to an asset neutral investor at the moment. It is also very likely a significant factor behind the strong re-emergence of merger and acquisition activity in recent months. The range and breadth of deals witnessed from industrial and especially financial buyers is clear evidence that there is value available in UK listed companies that can be exploited with finance from accessing the debt markets at very attractive yields. The portfolio has been a beneficiary of two such deals (BCA Marketplace and KCOM) that have been announced since the year end.

In recent weeks sentiment within the market has been extremely volatile as perceptions around a political deal have shifted. This has resulted in a marked change in the composition of the stock and sector leadership, which has favoured the current positioning within the portfolio. Clarity regarding the outcome of the negotiations with Brussels would clearly benefit the performance of the UK stock market and especially this portfolio. The level of pessimism which is discounted in the valuations of many holdings is anticipated to result in material revaluation opportunities from current levels as and when the political fog clears.

Mark Barnett

Portfolio Manager20 November 2019

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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.

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Principal Risks and Uncertainties

The Board carries out a regular review of the risk environment in which the Company operates, including consideration of emerging risks. 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 a share repurchase programme 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 14 to 15 of the 2019 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.

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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 2019

Ordinary shares listed in the UK unless otherwise stated

AIM: Investments quoted on AIM (8.7%)

UQ: Unquoted (1.6%)

ADR: American Depositary Receipts (0.0%)

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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 other 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 3156676

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CONDENSED STATEMENT OF CHANGES IN EQUITY

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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 2019.

2. Income

Special dividends of £354,000 have been recognised in capital (30 September 2018: £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. Dividends paid on Ordinary Shares

The first interim dividend of 3.40p was paid on 30 September 2019 to shareholders registered on 6 September 2019. The Directors have declared a second interim dividend of 3.40p payable on 30 December 2019 to shareholders registered on 29 November 2019.

6. Share Capital, including Movements

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

Subsequent to the period end 4,776,670 ordinary shares were bought back into treasury at an average price of 312.66p.

7. Fair Value Hierarchy Disclosures

FRS 102 sets out three fair value levels. These are:

Level 1 – The unadjusted quoted price in an active market for identical assets that the entity can access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.

Level 3 – Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.

The fair value hierarchy analysis for investments and related forward currency contracts held at fair value at the period end is as follows:

The unquoted investment holdings of the portfolio make up the whole of Level 3 with the exception of Eddie Stobart Logistics which was suspended from AIM and therefore categorised as Level 3. The holding was valued at the period end at £6,355,000 (31 March 2019: £7,409,000 and shown in Level 1) and its value has fallen further since the period end.

8. 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 2029. The number of shares at the period end was 224,671,008 (31 March 2019: 239,412,350).

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

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 2019 and 30 September 2018 has not been audited. The figures and financial information for the year ended 31 March 2019 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 Board

Invesco Asset Management Limited

Company Secretary20 November 2019

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DIRECTORS’ RESPONSIBILITY STATEMENT

in 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 has 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 Laing

Chairman20 November 2019