Law Debenture Corp - Half-year Report
26/07/2024 07:00
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RNS Number : 9181X Law Debenture Corp PLC 26 July 2024
The Law Debenture Corporation p.l.c. today published its results for the
half-year ended 30 June 2024
Leading UK Equity income sector performer over short, medium and longer term
with another good overall performance in H1 2024
Group Highlights:
· Net asset value (NAV) total return with debt and Independent
Professional Services (IPS) business at fair value (FV) for H1 2024 delivered
a performance of 9.7% compared to our benchmark, the FTSE All-Share Index, at
7.4%. With debt at par the return was 9.6%.
· Share price total return marginally outperformed the FTSE Actuaries
All-Share Index with a total return of 7.7% for H1 2024.
· Another good performance from IPS with revenue up 8.8%, profit
before tax up by 9.2% and valuation up 4.9% to £221m (compared to 30 December
2023).
· Continued low ongoing charges of 0.48%, compared to the industry
average of 1.21%.
YTD 1 year 3 years 5 years 10 years
% % % % %
NAV total return (with debt at par)(1) 9.6 16.2 16.5 48.7 113.2
NAV total return (with debt at fair value) (1) 9.7 15.0 25.8 61.1 125.5
FTSE Actuaries All-Share Index Total Return(2) 7.4 13.0 23.9 30.9 77.8
Share price total return(2) 7.7 14.7 26.8 78.0 137.2
Change in Retail Price Index(3) 2.0 2.7 27.1 33.4 50.8
· Winner 2023 Investment Company of the Year Awards in November, in
association with the AIC, in the UK Income category for the third year
running.
· Winner in the Active-Income category for the second year in a row at
the September's 2023 AJ Bell Investment Awards.
Dividend Highlights:
· Declared a first interim dividend of 8.0 pence per ordinary share, paid
in July 2024, representing an increase of 4.9% over the prior year's first
interim dividend.
· It is the Board's intention for each of the first three interim
dividends for 2024 to be equivalent to a quarter of Law Debenture's total 2023
dividend of 32.0 pence per ordinary share. Continued good performance and
growth of the IPS business supports the Board's intention to maintain or
increase the total dividend in 2024.
· Dividend yield of 3.6% based on our closing share price of 889
pence on 24 July 2024.
· Total dividend income from the portfolio of £19.9m (June 2023:
£19.3m).
IPS Highlights:
· Wholly-owned independent provider of professional services. Accounts
for 20% of H1 2024 NAV but has funded approximately 34% of dividends in the
last 10 years.(4)
· IPS enters its seventh consecutive year of consistent mid to high
single digit growth with net revenues of £26.2m (June 2023: £24.1m) up 8.8%
with profit before tax up by 9.2% (compared to 30 June 2023).
Longer Term Record:
· 135 years of history with a long-term track record of value
creation for shareholders.
· Long-term NAV (at FV) outperformance of the benchmark over one,
three, five and ten years.
· Strong long-term record with share price total return over 10 years of
137.2% (FTSE All-Share: 77.8%).
· £10,000 invested in Law Debenture ten years ago would be worth
£23,720 as at 30 June 2024(5).
· Over 45 years of increasing or maintaining dividends to
shareholders.
Robert Hingley, Chairman, said:
"Law Debenture has delivered a solid overall first half performance and
succeeded in its aim to provide a steadily increasing income for our
shareholders whilst achieving long-term capital growth in real terms. The
market backdrop has been relatively supportive though within the investment
trust sector, there has been a widening of discounts. Against this background,
we are pleased that IPS has shown continued good growth and that, overall, we
have outperformed our benchmark. We are confident that the combination of a
well positioned equity portfolio and continued growth in our IPS business will
deliver attractive long-term returns for our shareholders."
Denis Jackson, Chief Executive Officer, commented:
"Against a backdrop of continued macroeconomic uncertainty and elevated
interest rates, Law Debenture has delivered a good overall performance in the
first half of 2024. Our portfolio managers have performed well in absolute and
relative terms and continue to believe an undervalued UK stock market offers
investors the opportunity to own resilient, cash-generative and well-managed
businesses at attractive valuation multiples. The income from the IPS business
offers our portfolio managers greater flexibility in their investment
selection, helping set Law Debenture apart from other UK equity income trusts.
Law Debenture is resilient by design and has demonstrated strong performance
over the short, medium and longer term. Though there are a number of
geopolitical issues to monitor and the near-term economic outlook is not
without its challenges, we are confident that our ongoing investment in IPS
leaves it well positioned for medium-term growth in-line with our mid to high
single percentage target."
Past performance is not a guide to future performance. The value of an
investment and any income from it is not guaranteed and may go down as well as
up and investors may not get back the amount invested.
1 NAV is calculated in accordance with the Association of Investment Companies
(AIC) methodology, based on performance data held by Law Debenture including
the fair value of the IPS business and long-term borrowings.
2 Source: Refinitiv.
3 Source: Office for National Statistics.
4 Calculated for the 10 years ended 31 December 2023.
5 Calculated on a total return basis assuming dividend re-investment between
30 June 2014 and 30 June 2024.
THE LAW DEBENTURE CORPORATION P.L.C. AND ITS SUBSIDIARIES
HALF YEARLY REPORT FOR THE SIX MONTHS TO 30 JUNE 2024 (UNAUDITED)
Financial summary
Six months Six months Twelve months
30 June 2024 30 June 2023 31 December 2023
£000 £000 £000
Net Asset Value - with debt and IPS at fair value* 1,120,611 1,009,140 1,048,304
Total Net Assets per the statement of financial position 913,156 812,578 854,229
Pence Pence Pence
NAV per share at fair value(1,2*) 857.88 775.92 802.67
Revenue return per share:
Investment portfolio 13.78 13.29 22.41
Independent professional services 5.22 4.80(3) 11.02
Group revenue return per share 19.00 18.09 33.43
Capital return/(loss) per share 43.78 (5.26) 24.47
Dividends per share(4) 8.00 7.625 32.00
Share price 845 767 801
% % %
Ongoing charges(5*) 0.48 0.48 0.49
Net gearing* 12 13 13
Premium/(discount)* (1.50) (1.15) (0.21)
(1) Please refer below for calculation of NAV.
(2) NAV is calculated in accordance with the AIC methodology, based on
performance data held by Law Debenture including the fair value of the IPS
business and long-term borrowings.
(3) Revenue per share is calculated using the weighted average shares in issue
as at 30 June 2024.
(4) The second interim dividend is not due to be announced until September
2024 and has not been factored in the calculation presented. The Board have
indicated their intention to pay three interim dividends of 8.0p in respect of
2024, each representing a quarter of the total 2023 dividend declared of
32.0p. The final dividend will be declared in February/March 2025.
(5) Ongoing charges are calculated based on AIC guidance, using the
administrative costs of the investment trust and include the Janus Henderson
investment management fee, charged at an annual rate of 0.30% of the NAV of
the investment portfolio. There is no performance related element to the fee.
* Items marked "*" are alternative performance measures (APM). For a
description of these measures, see page 155 of the annual report and financial
statements for the year ended 31 December 2023.
Half yearly management report
Introduction
I am pleased to report that The Law Debenture Corporation p.l.c. (Law
Debenture) has delivered another solid performance against a relatively
subdued macroeconomic backdrop, with global interest rates remaining at
relatively elevated levels as Central Banks seek to bear down on inflationary
pressures.
Despite this backdrop, the combination of our well-diversified portfolio and
another good performance from our Independent Professional Services (IPS)
business has enabled Law Debenture to marginally outperform our benchmark, the
FTSE Actuaries All-Share Index. This delivered a 7.4% total return over the
six-month period, while Law Debenture's Net Asset Value (NAV), with debt and
IPS at fair value, delivered a return of 9.7%. With debt at par, our NAV
delivered a return of 9.6%.
Our Investment Managers continue to build on their successful long-term record
of outperformance against our benchmark, the FTSE Actuaries All Share Index,
and drivers of their performance are covered in detail in their report. Our
IPS business is now well into its seventh year of consistent mid-to-high
single-digit growth, with net revenue up 8.8% and profit before tax up 9.2%.
Our IPS business accounts for 20% of Law Debenture's NAV, but has funded
approximately 34% of dividends over the past decade. As a result, our
Investment Managers have increased flexibility in selecting what they feel are
strong business models and attractive valuation opportunities, which we
believe will continue to position the equity portfolio for future longer-term
growth.
Dividend
We are pleased to continue building on our 45-year record of maintaining or
increasing dividends. We recently declared a first interim dividend of 8.0
pence per ordinary share, representing an increase of 4.9% over the prior
year's first interim dividend. This highlights the benefits of IPS's income
streams, as well as Law Debenture's strong revenue reserves.
This dividend was paid on 4 July 2024 to shareholders on the register at close
of business on 31 May 2024. Based on the closing share price on 24 July 2024
of 889 pence, the dividend yield per Law Debenture share is 3.6%(1).
Over the last 10 years, we have increased the dividend by 113%(2) in
aggregate, which compares favourably with our sector peers.
It is the Board's current intention to recommend that the total dividend in
relation to 2024 maintains or increases the total 2023 dividend of 32 pence
per ordinary share. Our shareholders will be asked to vote on the final
dividend at our AGM in 2025.
Independent Professional Services
DIVISION Net revenue(1) Net revenue(1) Growth
30 June 2024 30 June 2023 2023/2024
£000 £000 %
Pensions 8,957 8,597 4.2%
Corporate Trust 6,434 5,818 10.6%
Corporate Services 10,837 9,693 11.8%
Total 26,228 24,108 8.8%
(1) Revenue shown is net of cost of sales.
Corporate Trust
Following the volatile interest rate and inflation backdrop since the pandemic
and the spike in energy prices, economic conditions in our main markets were
much more stable in the first half of 2024, and we are pleased to report
revenue growth of 10.6%.
Capital Markets deal activity is a key driver of new business growth and,
having been a Bond Trustee since our inception 135 years ago, we have seen
many market peaks and troughs. A year ago, new issuance levels were at their
lowest since 2014 and capacity in this area was being reduced by all the major
banks.
As interest rates and inflation stabilise and economic growth returns, there
are encouraging signs that Corporates have increased confidence to invest in
their businesses. Deal activity, albeit off a low base, has increased and Debt
Capital Markets issuance levels in Europe were up 16% in the first half of the
year (Source: Dealogic). While not a record period for appointments, we have
nonetheless benefited from the increased activity. Highlights include acting
as trustee on bonds issued by Centrica and Santander. In addition, our strong
reputation in the Japanese convertible bond market served us well, closing six
such transactions so far this year.
As previously noted, the strength of our Corporate Trust business lies in its
diversified revenue streams, some elements of countercyclicality and a linkage
of our annual fee income to inflation.
Our Escrow product continues to build its reputation for quality of service
and flexibility. An escrow solution allows two commercial parties to transact
with a trusted independent entity in the middle, ensuring payments are only
made once certain conditions of the transaction have been met by both sides
prior to completion. Corporate M&A is important to us and deal volumes in
Europe, up 35% (Source: Dealogic) in the first half of the year, provided us
with increased opportunities.
Pensions escrows are also an important market given the increased number of
surpluses that have emerged following the return of inflation and interest
rates to more normalised levels. We are increasingly active too in Litigation,
Real Estate, Sporting/Live Entertainment Events and supporting various law
firms who no longer provide escrow services.
Post-issue work, when a bond issuer runs into financial difficulty, can lead
to counter-cyclical incremental revenues for us. When bonds default, the
workflow, risk and revenue profiles of our role can materially change. A key
duty of the bond trustee is to be the legal creditor of the issuer on behalf
of the bondholders. Our role in such default situations requires material
incremental work that, given a favourable outcome, can lead to significant
additional income. However, defaults can often take years to play out and the
results are uncertain.
Most of the debt capital markets transactions on our books, built up over many
decades, have contractual inflation-linked fee increases for our services. As
inflation spiked in late 2022, this fed through to our revenues. In turn, as
inflation has fallen, this has placed downward pressure on the rate of growth
of these contracted revenues.
We have invested in three additional transaction managers (two of whom are
lawyers) to join our new business team in the first half and increased our
investment in business development activity. We are confident that this
business will continue to produce solid returns for our shareholders over
time.
Pensions
The first half of 2024 continued to demonstrate the importance of effective
pension scheme trusteeship and governance. Many schemes have reported improved
funding positions, resulting in increased interest in buy-in/buy-out
strategies as well as corporate sponsors working with trustees to consider the
viability of running pension schemes with a surplus on a long-term basis. The
changing nature of pension issues underlines the value in having independent
professional pension support. This includes growing interest from scheme
trustees in a corporate sole trustee approach, addressing succession planning,
resource constraints and the need for specialist skills.
The long-awaited release of the General Code from the Pensions Regulator has
also encouraged more schemes to look at their governance and risk management.
The increased regulatory requirements mean that there is a need for more
expertise and relevant experience from professional trustees and governance
executives to help manage schemes properly and effectively.
With the change in government, it is likely that there will continue to be
reforms to workplace pension schemes which will require further consideration
and action. There may also be a more comprehensive review of the pension
landscape. Previous reviews led to substantial changes which companies and
pension scheme board needed help to navigate. It is very likely that further
support will be needed.
We had a solid first half of 2024, winning new clients with wins for the
Trustee business across DB, DC and CST. Following strong growth in 2023,
Ireland continued to have a pleasing number of wins across DB, DC and
transfers into DC MasterTrusts.
We continue to recruit into our Manchester Pensions team, with our footprint
in the Northwest increasing substantially. Our outsourced governance team,
Pegasus, continues to provide excellent support to corporate sole trustee
clients and resource relief to in-house teams. There has also been an increase
in project work.
Overall, Pensions revenues for the H1 were £9.0m. YOY net revenue growth H1
2024 v H1 2023 is 4.2%.
Corporate Services
Our Corporate Services businesses reported net revenue growth of 11.8%.
Service of Process
This remains our business which has the least recurring revenues and is most
dependent on global macro-economic factors and activity in capital markets.
Major economies, such as the UK and US, allow overseas businesses to sign
legal documents subject to their laws, provided that they have either a
registered address or appointed agent for service of process in the governing
jurisdiction. We act as the agent for service of process to thousands of
clients from all over the world each year.
The greater the amount of global economic activity and capital markets new
issuance, the greater the demand for our product. Given the improving
conditions in primary capital markets, return to economic growth in major
economies and improved economic outlook more generally, as would be expected,
Service of Process revenues picked up nicely in the first half of 2024.
Corporate Secretarial Services (CSS)
Our CSS business remains a work in progress. At the time of acquisition just
over three years ago, we noted that this business was not "cost out" but "cost
in". The business was "non-core" to the seller and we found that it had
materially underinvested in technology, infrastructure, people, skills and
training. Successfully addressing these issues has taken longer, and cost
more, than we had originally planned and there remains more work to do.
Nonetheless, we have made real progress. Many of our key performance
indicators (KPIs) have improved, including customer satisfaction, contract
renewal and staff turnover. We continue to invest in automating our processes
and have put in place new contracts and service level agreements with our
clients. We have increased our staffing levels by 50%, established clear KPIs,
and implemented training and career progression frameworks.
Overall, we now believe that we have laid the foundations for longer-term
success. Our focus is now turning towards growing our client footprint and our
market share in this growing market.
Revenues in this business remained broadly flat in H1 2024.
Structured Finance
This business provides accounting and administrative services to special
purpose vehicles (SPVs). Typical buyers of our services are asset managers,
hedge funds and challenger banks. They use SPV structures to warehouse and
provide long-term funding for real assets. Examples include credit card
receivables, mortgages, real estate and aircraft leases.
We saw healthy levels of enquiry, new business wins and solid revenue growth
in the first half of the year. Of particular note is the growth in Private
Credit as an asset class. Typical buyers of our Structured Finance product are
active in this growing market. Pension and Endowment funds have demand for
quality assets where they can obtain an illiquidity premium for term
financing. Interest rates appear to have stabilised off a higher base yield
(approx. 4-5%) in most major markets compared to close to zero from 2009 to
2021. Post the Global Financial Crisis, Commercial Banks generally are smaller
users of their balance sheets to provide capital to their clients,
particularly where capital rules may be onerous. Investment Banks have
identified these demand/supply drivers and are committing substantial capital
and resourcing to Private Credit.
Safecall
We achieved record levels of reports, new business wins and revenues in the
first half of the year. Whistleblowing remains at the centre of major news
stories. Consequently, product awareness continues to grow. Politicians from
all sides are promoting new legislation and regulatory standards across most
developed markets.
Among our achievements in H1 were the roll-out of a new investigations
management software and the appointment of a Head of Training to accelerate
revenue growth: as the number of whistleblowing reports rises, clients have
demanded the tools and knowledge to manage cases effectively and efficiently.
The outlook for this business is bright.
Central overview
While refreshing our five-year strategic plan last year, we challenged
ourselves on the operational requirements to underpin our growth.
For some time now, we have been striving to bring our historically disparate
collection of businesses together as 'One Law Debenture' and, accordingly have
invested steadily in areas such as culture, HR, IT, Finance and our office
spaces.
Having put these foundations in place, we are now preparing ourselves for more
wholesale business transformation. We aspire to change the way we work
internally while protecting our ability to serve our clients in a bespoke and
nimble way. The first steps have been taken to streamline processes, use
technology to drive straight-through processing of invoices, systemise
management information and enhance our control environment.
The five-year transformation to our Target Operating Model will see investment
in our people, systems, processes and controls to allow us to scale as a
single operating business. After a spike, we expect to see a slowdown in the
rate of growth of our operational costs as we use technology more effectively,
and an increase in fee earning colleagues' capacity to serve their clients as
we improve engagement transparency and reduce their administrative load. We
will have more insightful management information to drive decisions and
improve client experience, and be able to respond to our key performance
indicators quicker. We will continue to invest in technology to allow us to
scale our business efficiently, minimising the need to increase central costs
over time.
Environmental, Social and Governance (ESG)
Our 2023 Annual Report gives a detailed review of our ESG commitments and
progress to date.
Highlights for the half-year centre around our continued commitment to
diversity and inclusion. We were delighted to improve even further our
rankings in the FTSE 250 Women Leaders' Review, not only maintaining our
first-place position in the Financial Services sector, but moving in to first
place overall.
Having been shortlisted last year in the inaugural INSEAD Alumni Balance in
Business Awards, this year we were thrilled to win in two categories,
Trailblazer Exco and Direct Reports, as well as the Overall Board, Exco and
Direct Reports. Other short listed companies included a number of our clients
and market leaders such as Lloyds Banking Group, M&S and HSBC.
We have seen the positive impact of focus on gender balance in our business
and, now that we have made such pleasing progress, 2025 and beyond will see us
broadening our DE&I focus towards wider inclusion topics.
Outlook
We believe that the combination of IPS with the investment portfolio is a
unique and well-diversified model and I am cautiously optimistic about the
Group's progress in the second half of 2024 and beyond, though the near-term
economic outlook is not without its challenges.
We continue to look for opportunities to grow IPS through organic investment
in some of our fastest-growing businesses. We are encouraged by good new
business momentum and continue to invest in operational fitness, talent, and
technology to ensure we gain market share and maintain longer-term growth in
line with our mid-to-high single percentage target.
Our Investment Managers continue to invest in what they feel is a
differentiated selection of high-quality businesses with competitive advantage
and good long-term growth prospects. We are confident that their disciplined
approach of buying at attractive entry point valuations will continue to
deliver over the longer-term for our shareholders. The Board supports their
view that the UK stock market continues to offer investors the opportunity to
own resilient, cash-generative and well-managed business models that are well
positioned to produce attractive longer-term returns.
Denis Jackson
Chief Executive
25 July 2024
(1) Based on the total dividend paid in relation to 2023 of 32.0p per share.
(2) Based on the period 2013 to 2023.
Investment managers' report
Overview
The Trust has modestly outperformed in the first six months of the year,
rising 9.7% (NAV total return with debt at FV), compared to 7.4% for the FTSE
All-Share Index, our benchmark. The earnings for the period were 13.8p, with
the investment trust portfolio holdings contributing 73% of the total
earnings. Despite a subdued economic backdrop, companies held in the portfolio
in aggregate made reasonable operating progress. Amongst the larger companies
this progress has been rewarded with share appreciation. The banking sector in
particular saw share prices rise as a result of earnings upgrades. Many of the
smaller company holdings are also making operational progress but investor
interest in them remains low. The lack of interest creates opportunities to
buy good companies at low share prices. We have been using the period to
refresh the portfolio, reflected in eight new UK holdings purchased in the
first half of the year. The belief that valuations are low was reinforced by
the high level of proposed and successful takeover activity as companies used
the low valuations to make approaches to buy other companies. There have been
recommended offers for IDS (Royal Mail), Hipgnosis Song Fund and DS Smith,
while there were rejected offers for Anglo American, XP Power and Direct Line.
Activity
During the six months we maintained our historically high weight in UK
equities (89% as at the end of June). Despite a positive return (for both the
FTSE All-Share benchmark and this portfolio) during the six months, UK
equities continue to trade at a large valuation discount relative to overseas
peers (see graph below). This persistent discount is something we are seeing
evidenced in the number of takeover approaches. As a result of what we see as
a compelling valuation opportunity, we have maintained the level of gearing
during the period, ending June at 12% relative to 13% at calendar year end.
Within the UK equities portfolio there were new purchases in the six months
including global insurer Beazley, supermarket Sainsbury and office owner Great
Portland Estates. There were also additions to several existing holdings
including building materials suppliers Ibstock and Marshalls, medical device
producer Smith & Nephew and BT. There is no end market commonality to
these purchases, but in all cases we think they are making operational
progress that is not reflected in their current valuation.
These purchases were funded by sales including IDS (previously Royal Mail),
which was sold after the takeover offer was recommended by the Board. We also
sold the position in Hipgnosis Songs Fund following the takeover approach.
Elsewhere we have taken profits in some 'recovery' names that have performed
well including Rolls-Royce and Marks & Spencer. In both cases we continue
to hold a position but have taken some profits in recognition that there has
been an earnings recovery and the valuation has risen from low levels.
Performance review
In the years following Brexit it has often been smaller, domestically focussed
businesses that have underperformed the UK market. Therefore, while UK
equities as a whole trade on a valuation discount to overseas, beneath this
there is a subset of domestic businesses where sentiment and performance has
been weakest. Meanwhile many of these businesses are making good operational
progress, which in our view is yet to be reflected in their valuation. For
this reason we have been gradually shifting the portfolio in the direction of
these smaller businesses, adding to positions including AFC Energy, Castings
and ITM Power. This is reflected in what is now a sizeable 'overweight'
position in small and medium sized companies, as shown in the table below
(comparing the second and third columns).
Law Debenture portfolio weight FTSE All-Share benchmark weight (%) Index total return (%)
(%)
FTSE 100 47.1 84.4 7.9
FTSE 250 22.6 13.5 4.8
FTSE Small Cap 6.2 2.1 6.7
FTSE AIM All-Share 9.3 - 1.1
Source: Janus Henderson Investors, Factset, Morningstar. Weights for portfolio
and benchmark as at end of June 2024 (note the weights do not add up to 100%
because of the overseas weight and some UK shares held outside of these
indices). Index total return for 6 months to end June 2024.
The top five absolute contributors to performance during the six months were:
Stock £000 Appreciation % Appreciation
Rolls-Royce 18,541 49.8
Barclays 6,780 35.8
NatWest 5,940 41.7
DS Smith 3,796 36.7
Boku 3,356 36.4
Source: Performance data held by Law Debenture based on market prices.
It is notable that three of the top five best performers during the six months
were banks. At the end of last year, the expectation was that interest rates
would reduce quickly and meaningfully as 2024 progressed. This proved overly
optimistic. While inflation has come down, it has come down more slowly than
forecast, meaning UK interest rates have (for now) remained flat. This 'higher
for longer' interest rate environment benefits the banks in their lending
margins, while loan losses remain historically low. This combination led to
earnings upgrades at a time when bank valuations were low and the shares
performed well as a result. Elsewhere Rolls-Royce also performed well
following further earnings upgrades, helped by cost savings as well as an
ongoing recovery in flying hours.
The top five largest detractors during the six months were:
Stock £000 Depreciation % Depreciation
Vanquis Banking Group (3,764) (61.2)
Oxford Nanopore Technologies (2,926) (57.6)
Rio Tinto (2,408) (11.0)
Spectris (2,097) (26.2)
Halfords (1,918) (29.6)
Source: Performance data held by Law Debenture based on market prices.
There is little commonality to the detractors during the six months, with the
exception that in the current market environment there is an unwillingness to
pay for 'blue sky' scenarios. This has impacted the small holdings in Oxford
Nanopore (gene sequencing) and Surface Transforms (ceramic brakes for electric
vehicles). In both companies there have been operational setbacks but the end
market potential remains large. In the case of consumer lender Vanquis, the
shares fell as a result of higher than expected costs leading to earnings
downgrades. The valuation remains very low relative to its potential returns
but there is a high degree of market scepticism following disappointments.
Under a new management team we do not think the valuation reflects the
potential for turnaround and have maintained the holding.
Income
Dividend income received from the portfolio rose modestly in the first half of
the year, totalling £19.9m compared to £19.3m in the same period last year.
As a reminder the largest contributor to income within the Trust remains the
IPS business, which allows us as portfolio managers to invest across the
breadth of the UK (and global) equity markets, including in companies that do
not currently pay a dividend. As we have often seen in recent years, a number
of the best performers during the first half were those with low or no
dividends (such as Rolls-Royce), which we were able to hold in size due to the
benefits of the combined structure.
Outlook
Companies have been faced with an assortment of challenges in recent years.
Many of them are now receding. The 'cost of living crisis' has partially
eased, with wage increases now outstripping inflation. The problem in supply
chains originating from Covid and then rippling out are mainly solved. The
uncertainties around trade as a result of Brexit are clearer. The rise in
interest rates is over and they are likely to come down later in the year. A
reduction in rates will stimulate economic activity as investment projects go
ahead and the resulting pick up in sales will improve corporate profitability.
When turnover improves it is often the case company operating margins expand.
The extent of the operational gearing is often a positive surprise to
investors. All of this creates a good background for investors in equities. It
will be happening at a time that UK valuations judged by historic norms are
very low. The cocktail of falling interest rates, low valuations, economic
growth and disciplined company behaviour is an exciting mix. Therefore, we
remain positive on the outlook for UK equities, and the gearing level of the
Trust reflects this. The improved prospects for UK companies should also help
lead to further sustainable dividend growth.
After the period end, the Labour party had a resounding victory in the General
Election. It does not alter our investment approach of focussing on individual
companies, however the new government's emphasis on economic growth may
benefit UK companies that are closely tied to the broader economy, such as the
construction sector.
James Henderson and Laura Foll
Investment Managers
25 July 2024
Sector distribution of portfolio by value
30 June 2024 31 December 2023
Oil and gas 10.6% 10.3%
Basic materials 5.4% 6.0%
Industrials 25.5% 25.6%
Consumer goods 8.7% 7.8%
Health care 5.5% 6.0%
Consumer services 11.3% 10.4%
Telecommunications 2.2% 1.9%
Utilities 3.6% 3.1%
Financials 25.4% 27.4%
Technology 1.8% 1.5%
Geographical distribution of portfolio by value
30 June 2024 31 December 2023
United Kingdom 88.8% 88.2%
North America 3.6% 3.2%
Europe 6.3% 7.4%
Japan 1.3% 1.2%
Fifteen largest holdings: investment rationale
as at 30 June 2024
Rank Company Location % of portfolio Approx Market Cap. Valuation Purchases Sales Appreciation/ (Depreciation) Valuation
2024 Dec 2023 £000 £000 £000 June 2024
£000 £000
1 Rolls Royce UK 3.97 £70.49bn 37,263 - 16,062 18,541 39,742
2 Shell UK 3.54 £102.55bn 32,119 - - 3,300 35,419
3 HSBC UK 2.96 £120.39bn 27,555 - - 2,099 29,654
4 BP UK 2.71 £82.37bn 26,571 - - 515 27,086
5 Barclays UK 2.57 £15.30bn 18,915 - - 6,780 25,695
6 GlaxoSmithKline UK 2.51 £70.42bn 20,158 3,848 - 1,078 25,084
7 Flutter Entertainment UK 2.24 £11.37bn 21,576 - - 837 22,413
8 Marks & Spencer UK 2.00 £3.81bn 21,792 - 2,991 1,240 20,041
9 Rio Tinto UK 1.95 £46.71bn 21,908 - - (2,408) 19,500
10 NatWest UK 1.56 £20.93bn 14,254 - 4,609 5,940 15,585
11 Tesco UK 1.54 £16.15bn 14,673 - - 778 15,451
12 National Grid UK 1.49 £36.74bn 13,851 - - 1,070 14,921
13 Anglo American UK 1.37 £28.00bn 10,838 - - 2,923 13,761
14 BT Group UK 1.37 £10.56bn 8,943 2,725 - 2,011 13,679
15 Senior UK 1.36 £0.79bn 15,118 - - (1,484) 13,634
Calculation of net asset value (NAV) per share
Valuation of our IPS business
Accounting standards require us to consolidate the income, costs and taxation
of our IPS business into the Group income statement below. The assets and
liabilities of the business are also consolidated into the Group column of the
statement of financial position below. A segmental analysis is provided below
of these accounts, which shows a detailed breakdown of the split between the
investment portfolio, IPS business and Group charges.
Consolidating the value of the IPS business in this way fails to recognise the
value created for shareholders by the IPS business. To address this, the NAV
performance we have published for the Group, since December 2015, has included
a fair value for the standalone IPS business.
The current fair value of the IPS business is calculated based on historical
earnings before interest, taxation, depreciation and amortisation ('EBITDA')
for the second half of 2023, and the EBITDA for the half year to 30 June 2024,
with an appropriate multiple applied.
The calculation of the IPS valuation and methodology used to derive it are
included in the previous annual report at Note 13 on page 135. In determining
a calculation basis for the fair valuation of the IPS business, the Directors
have taken external professional advice from PwC LLP. The multiple applied in
valuing IPS is from comparable companies sourced from market data, with
appropriate adjustments to reflect the difference between the comparable
companies and IPS in respect of size, liquidity, margin and growth. A range of
multiples is then provided by PwC from which the Board selects an appropriate
multiple to apply. The make-up of our IPS business is unique meaning we do not
have a like for like comparator group to benchmark ourselves against.
Historically our core comparators have been Sanne Group, Intertrust, Link
Administration Holdings and JTC. However, Sanne, Intertrust and more recently,
Link Administration have been acquired and are no longer listed. Given
only JTC continues to be publicly listed, PwC have also considered the wider,
less comparable companies listed below, but only to broadly assess market
movements in the relevant and complimentary service sectors. The table below
shows a summary of performance of our comparators:
Company Revenue LTM* LTM EV/EBITDA Revenue EBITDA margin LTM
(£m)
30 June 2024 CAGR FY20 -
LTM 2024
Law Deb IPS 55 10.5x 12.4% 32.0%
SEI Investments Company 1,554 13.4x 5.9% 25.6%
SS&C Technologies Holding, Inc 4,414 10.1x 6.6% 33.6%
EQT Holdings Limited 88 14.2x 13.4% 24.3%
Perpetual Limited 702 8.7x 26.5% 20.8%
JTC PLC 257 18.2x 22.3% 28.0%
Begbies Traynor Group plc 129 6.3x 16.4% 16.4%
Christie Group plc 66 14.1x 11.8% -0.2%
* LTM refers to the trailing 12 months 'results' which are publicly available.
Source: Capital IQ.
The multiple selected for the current period is 10.5x, which is broadly in
line with the mean multiple of the comparator group. The multiple selected is
consistent with that used at both the half year and year end of 2023.
It is hoped that our initiatives to inject growth into the IPS business will
result in a corresponding increase in valuation over time. As stated above,
management is aiming to achieve mid to high single digit growth in 2024. The
valuation of the IPS business has increased by £129m (142%) since the first
valuation of the business as at 31 December 2015.
Valuation guidelines require the fair value of the IPS business be established
on a stand-alone basis. The valuation does not therefore reflect the value of
Group tax relief from the investment portfolio to the IPS business.
In order to assist investors, the Company restated its historical NAV in 2015
to include the fair value of the IPS business for the last ten years. This
information is provided in the annual report within the 10 year record.
Long-term borrowing
The methodology of fair valuing all long-term borrowings is to benchmark the
Group debt against A rated UK corporate bond yields.
Calculation of NAV per share
The table below shows how the NAV at fair value is calculated. The value of
assets already included within the NAV per the Group statement of financial
position that relates to IPS is removed (£52.1m) and substituted with the
calculation of the fair value and surplus net assets of the business
(£221.1m). The fair value of the IPS business has increased by 4.9% due to a
combination of higher surplus net assets being available and a higher EBITDA.
An adjustment of £38.4m is then made to show the Group's debt at fair value,
rather than the book cost that is included in the NAV per the Group statement
of financial position. This calculation shows NAV fair value for the Group as
at 30 June 2024 of £1,120.6m or 857.88 pence per share:
30 June 2024 31 December 2023
£000 Pence per share £000 Pence per share
Net asset value (NAV) per Group statement of financial position 913,156 699.06 854,229 654.07
Fair valuation of IPS: EBITDA at a multiple of 10.5x (31 December 2023: 10.5x) 193,211 147.91 185,063 141.70
IPS net assets attributable to IPS valuation 27,923 21.38 25,729 19.70
Fair value of IPS business 221,134 169.29 210,792 161.40
Removal of IPS net assets included in Group net assets (52,064) (39.86) (49,956) (38.25)
Fair value uplift for IPS business 169,070 129.43 160,836 123.15
Debt fair value adjustment 38,385 29.39 33,239 25.45
NAV at fair value 1,120,611 857.88 1,048,304 802.67
£000 % £000 %
NAV attributable to IPS 221,134 20 210,792 20
See commentary for the breakdown of the assets already included in the NAV per
the financial statements.
The Financial Statements NAV at fair value calculated above differs to the
published NAV at fair value for 28 June 2024 (half year NAV released by RNS on
1 July 2024). As such, please see below for a reconciliation:
Reconciliation of published NAV to results NAV: £000 Pence per share
Performance NAV cum income with debt at fair value 1,115,635 854.07
Reconciliation of shareholders' funds to net assets:
Performance NAV (916,436) (701.57)
Financial Statements NAV 913,156 699.06
Revised IPS valuation uplift:
Performance NAV (valuation per 31 December 2023) (160,836) (123.13)
Financial Statements NAV 169,070 129.43
Revised Fair Value of Debentures:
Performance NAV (38,363) (29.37)
Financial Statements NAV 38,585 29.39
Total NAV at fair value per results 1,120,611 857.88
Group income statement
for the six months ended 30 June 2024 (unaudited)
30 June 2024 30 June 2023
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
UK dividends 18,322 - 18,322 16,005 - 16,005
UK special dividends - 1,432 1,432 - - -
Overseas dividends 1,552 - 1,552 3,291 - 3,291
Overseas special dividends - - - - - -
Dividends received from subsidiaries - - - - - -
Total dividend income 19,874 1,432 21,306 19,296 - 19,296
Interest income 397 - 397 440 - 440
Independent professional services fees† 30,178 - 30,178 27,174 - 27,174
Other income 562 - 562 393 - 393
Total income 51,011 1,432 52,443 47,303 - 47,303
Net gain/(loss) on investments held at fair value through profit or loss - 59,528 59,528 - (3,285) (3,285)
Total income and capital gains/(losses) 51,011 60,960 111,971 47,303 (3,285) 44,018
Cost of sales (4,062) - (4,062) (3,141) - (3,141)
Administrative expenses (20,687) (1,318) (22,005) (19,391) (1,045) (20,436)
Operating profit/(loss) 26,262 59,642 85,904 24,771 (4,330) 20,441
Finance costs
Interest payable (818) (2,454) (3,272) (818) (2,454) (3,272)
Profit/(loss) before taxation 25,444 57,188 82,632 23,953 (6,784) 17,169
Taxation (631) - (631) (625) - (625)
Profit/(loss) for the period 24,813 57,188 82,001 23,328 (6,784) 16,544
Return per ordinary share (pence) 19.00 43.78 62.78 18.09 (5.26) 12.83
Diluted return per ordinary share (pence) 18.98 43.77 62.75 18.08 (5.26) 12.82
† IPS fees are presented gross. Please refer to Note 6 on page 28 of the
half year report for a reconciliation to the net revenue.
Group statement of comprehensive income
for the six months ended 30 June 2024 (unaudited)
30 June 2024 30 June 2023
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
Profit/(loss) for the period 24,813 57,188 82,001 23,328 (6,784) 16,544
Foreign exchange (loss) on translation of foreign operations (390) (217) (607) - (168) (168)
Total comprehensive income/(loss) for the period 24,423 56,971 81,394 23,328 (6,952) 16,376
Group statement of financial position
as at 30 June 2024 (unaudited)
Unaudited Unaudited Audited
30 June 2024 30 June 2023 31 December 2023
£000 £000 £000
Non-current assets
Goodwill 19,009 19,010 19,006
Property, plant and equipment 2,265 1,838 2,267
Right-of-use asset 3,727 4,584 4,131
Other intangible assets 2,948 2,971 3,034
Investments held at fair value through profit or loss 1,000,911 918,221 965,226
Retirement benefit asset 7,597 7,973 7,440
Total non-current assets 1,036,457 954,597 1,001,104
Current assets
Trade and other receivables 30,988 18,363 21,496
Contract assets 15,558 9,576 8,604
Cash and cash equivalents 27,260 33,520 31,439
Total current assets 73,806 61,459 61,539
Total assets 1,110,263 1,016,056 1,062,643
Current liabilities
Trade and other payables 5,585 18,865 22,553
Lease liability 792 964 1,025
Corporation tax payable 1,773 1,718 2,198
Other taxation including social security 2,330 2,376 1,842
Contract liabilities 14,039 6,139 8,000
Total current liabilities 24,519 30,062 35,618
Non-current liabilities and deferred income
Long-term borrowings 163,911 163,931 163,889
Contract liabilities 2,373 3,151 2,403
Deferred tax liability* 1,788 1,344 1,788
Lease liability 4,516 4,990 4,716
Total non-current liabilities 172,588 173,416 172,796
Total net assets 913,156 812,578 854,229
Equity
Called up share capital 6,557 6,530 6,557
Share premium 107,110 102,812 107,110
Own shares (3,926) (4,180) (3,926)
Capital redemption 8 8 8
Translation reserve 2,659 2,687 2,659
Capital reserves 751,247 655,463 694,276
Retained earnings 49,501 49,258 47,545
Total equity 913,156 812,578 854,229
Total equity pence per share† 696.03 624.78 651.13
* The deferred tax liability has been re-classified as non-current to align
with the disclosure requirements outlined in IAS 1.56.
† Please refer to page 20 of the half year report for calculation of total
equity pence per share.
Group statement of cash flows
for the six months ended 30 June 2024 (unaudited)
Unaudited Unaudited Audited
30 June 2024 30 June 2023 31 December 2023
£000 £000 £000
Cash flows from operating activities (before dividends received and taxation 3,112 3,603 11,268
paid)
Cash dividends received 20,057 17,958 32,964
Taxation paid (770) - -
Cash generated from operating activities 22,399 21,561 44,232
Investing activities
Acquisition of property, plant and equipment (274) (191) (874)
Acquisition of right of use assets - - -
Expenditure on intangible assets (303) - (54)
Purchase of investments (less cost of acquisition) (91,809) (51,631) (98,934)
Sale of investments 102,107 21,130 62,093
Interest received 397 - 1,197
Cash flow from investing activities 10,118 (30,692) (36,572)
Financing activities
Interest paid (3,272) (3,272) (6,544)
Dividends paid (32,470) (21,236) (40,518)
Payment of lease liability (623) (629) (1,272)
Proceeds of increase in share capital - 19,913 24,237
Purchase of own shares - (1,052) (798)
Net cash flow from financing activities (36,365) (6,276) (24,895)
Net (decrease)/increase in cash and cash equivalents (3,848) (15,407) (17,235)
Cash and cash equivalents at beginning of period 31,439 49,559 49,559
Foreign exchange (losses)/gains on cash and cash equivalents (311) (632) (886)
Cash and cash equivalents at end of period 27,260 33,520 31,439
Group statement of changes in equity
as at 30 June 2024 (unaudited)
Share capital Share premium Own shares Capital redemption Translation reserve Capital reserves Retained earnings Total
£000 £000 £000 £000 £000 £000 £000 £000
Balance at 1 January 2024 6,557 107,110 (3,926) 8 2,659 694,276 47,545 854,229
Profit/(loss) for the period - - - - - 57,188 24,813 82,001
Foreign exchange - - - - - (217) (390) (607)
Total comprehensive profit/(loss) for the period - - - - - 56,971 24,423 81,394
Issue of shares - - - - - - - -
Dividend relating to 2023 - - - - - - (11,971) (11,971)
Dividend relating to 2024 - - - - - - (10,496) (10,496)
Total equity at 30 June 2024 6,557 107,110 (3,926) 8 2,659 751,247 49,501 913,156
Group segmental analysis
Investment Portfolio Independent Professional Services Total
30 June 30 June 2023 31 Dec. 2023 30 June 30 June 2023 31 Dec. 2023 30 June 30 June 2023 31 Dec. 2023
2024 2024 2024
£000 £000 £000 £000 £000 £000 £000 £000 £000
Revenue
Dividend income 19,874 19,296 33,504 - - - 19,874 19,296 33,504
IPS revenue†
Corporate Services - - - 13,119 11,744 25,041 13,119 11,744 25,041
Corporate Trust - - - 8,079 6,800 16,043 8,079 6,800 16,043
Pensions - - - 8,980 8,630 17,459 8,980 8,630 17,459
Segment income 19,874 19,296 33,504 30,178 27,174 58,543 50,052 46,470 92,047
Other income 562 393 1,369 - - - 562 393 1,369
Cost of sales (112) (75) (221) (3,950) (3,066) (8,034) (4,062) (3,141) (8,255)
Administration costs (1,712) (1,856) (4,271) (18,975) (17,535) (35,437) (20,687) (19,391) (39,708)
Return before interest and tax 18,612 17,758 30,381 7,253 6,573 15,072 25,865 24,331 45,453
Interest payable (net) (614) (624) (1,302) 193 246 864 (421) (378) (438)
Return, including profit on ordinary activities before taxation 17,997 17,134 29,079 7,447 6,819 15,936 25,444 23,953 45,015
Taxation - - - (631) (625) (1,626) (631) (625) (1,626)
Return, including profit attributable to shareholders 17,997 17,134 29,079 6,816 6,194 14,310 24,813 23,328 43,389
Return per ordinary share (pence) 13.78 13.29 22.41 5.22 4.80 11.02 19.00 18.09 33.43
Assets 1,027,295 931,689 980,587 82,968 84,367 82,056 1,110,263 1,016,056 1,062,643
Liabilities (166,203) (176,373) (176,314) (30,904) (27,105) (32,100) (197,107) (203,478) (208,414)
Total net assets 861,092 755,315 804,273 52,064 57,263 49,956 913,156 812,578 854,229
† Please refer to Note 6 on page 28 of the half year report for a breakdown
of net revenue by department.
The capital element of the income statement is wholly attributable to the
investment portfolio.
Principal risks and uncertainties
The principal Group risks include investment performance and market risk,
cyber and technology risk and IPS concentration risk. ESG considerations are
our emerging risk.
These top risks are explained along with mitigating actions in the Risk
Management section of the Annual Report for the year ended 31 December 2023.
In the view of the Board these risks and uncertainties are as applicable to
the remaining six months of the financial year as they were to the period
under review. As part of ongoing risk management to identify new risks and
developments, the Board continues to review and assess risks, uncertainties
and impacts during the course of the year.
Related party transactions
There have been no related party transactions during the period which have
materially affected the financial position or performance of the Group. During
the period, transactions between the Corporation and its subsidiaries have
been eliminated on consolidation. Details of related party transactions are
given in the notes to the annual accounts for the year ended 31 December 2023.
Directors' responsibility statement
We confirm that to the best of our knowledge:
· the condensed set of financial statements have been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted by the UK and
gives a true and fair view of the assets, liabilities, financial position and
profit of the Group as required by DTR 4.2.4R;
· the half yearly report includes a fair review of the information
required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an
indication of important events that have occurred during the first six months
of the current financial year and their impact on the condensed set of
financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being
related party transactions that have taken place in the first six months of
the current financial year and that have materially affected the financial
position or performance of the entity during that period.
On behalf of the Board
Robert Hingley
Chairman
25 July 2024
Past performance is not a guide to future performance. The value of an
investment and any income from it is not guaranteed and may go down as well as
up and investors may not get back the amount invested.
Notes to the condensed consolidated financial statements
1. Basis of preparation
The condensed set of financial statements included in this half yearly
financial report has been prepared in accordance with International Accounting
Standards (IASs) in conformity with the requirements of the Companies Act 2006
and in accordance with International Financial Reporting Standards (IFRS) as
adopted and endorsed by the UK.
The financial resources available are expected to meet the needs of the Group
for the foreseeable future. The financial statements have therefore been
prepared on a going concern basis.
The Group's accounting policies during the period are the same as in its 2023
annual financial statements, except for those that relate to new standards
effective for the first time for periods beginning on (or after) 1 January
2024, and will be adopted in the 2024 annual financial statements.
2. Presentation of financial information
The financial information presented herein does not amount to full statutory
accounts within the meaning of section 435 of the Companies Act 2006 and has
neither been audited nor reviewed pursuant to guidance issued by the Auditing
Practices Board. The annual report and financial statements for 2023 have been
filed with the Registrar of Companies. The independent auditor's report on the
annual report and financial statements for 2023 was unqualified, did not
include a reference to any matters to which the auditor drew attention by way
of emphasis without qualifying the report, and did not contain a statement
under section 498(2) or (3) of the Companies Act 2006.
3. Calculations of NAV and earnings per share
The calculations of NAV and earnings per share are based on:
NAV: shares at end of the period 130,626,088 (30 June 2023: 130,057,740; 31
December 2023: 130,602,252) being the total number of shares on issue, 568,279
(30 June 2023: 577,809; 31 December 2023: 589,640) less shares acquired by the
ESOT in the open market.
Income: average shares during the period 130,615,834 (30 June 2023:
128,924,615; 31 December 2023: 129,785,836) being the weighted average number
of shares on issue after adjusting for shares held by the ESOT.
4. Listed investments
Listed investments are all traded on active markets and as defined by IFRS 13
are Level 1 financial instruments. As such they are valued at unadjusted
quoted bid prices. Unlisted investments are Level 3 financial instruments.
They are valued by the Directors using unobservable inputs including the
underlying net assets of the instruments.
5. Note to the statement of cash flows
The presentation of the cash flow statement has been updated in line with that
in the 2023 annual report. As such, this note accompanies the statement of
cash flows above.
Unaudited Unaudited Audited
30 June 30 June 31 December 2023
2024 2023
£000 £000 £000
Operating profit/(loss) before interest and taxation 85,507 20,441 82,125
Adjust for non-cash flow items:
(Gains)/losses on investments (59,528) 3,285 (37,379)
Movement in amortised cost of borrowings 22 22 (20)
Depreciation of property, plant and equipment 276 149 403
Depreciation of right-of-use assets 405 456 891
Amortisation of intangible assets 499 379 892
(Increase)/decrease in receivables (2,307) (1,060) (3,221)
(Decrease)/increase in payables (7,559) (950) 2,027
Decrease/(increase) in deferred income 6,009 91 1,204
(Decrease)/increase in other taxation payable 2 (679) (1,290)
Normal pension contributions in excess of cost (157) (573) (1,400)
Dividends receivable (20,057) (17,958) (32,964)
Cash flows from operating activities (before dividends received and taxation 3,112 3,603 11,268
paid)
6. Breakdown of net revenue per department
The table below illustrates a breakdown of net revenue per department:
Gross Revenue Cost of sales Net Revenue
30 June 2024 30 June 2023 31 Dec. 2023 30 June 2024 30 June 2023 31 Dec. 2023 30 June 2024 30 June 2023 31 Dec. 2023
£000 £000 £000 £000 £000 £000 £000 £000 £000
Pensions 8,980 8,630 17,459 23 (33) (63) 8,957 8,597 17,396
Corporate Trust 8,079 6,800 16,043 1,645 (982) (3,570) 6,434 5,818 12,473
Corporate Services 13,119 11,744 25,041 2,282 (2,051) (4,401) 10,837 9,693 20,640
Total IPS income 30,178 27,174 58,543 3,950 (3,066) (8,034) 26,228 24,108 50,509
7. Investments
A full list of investments is included on the website each month.
8. Half yearly report 2024
The 2024 half yearly report will be available on the website shortly via the
following link:
https://www.lawdebenture.com/investment-trust/shareholder-information/annual-reports-and-half-yearly-reports
(https://www.lawdebenture.com/investment-trust/shareholder-information/annual-reports-and-half-yearly-reports)
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