REG - Law Debenture Corp - Annual Financial Report
27/02/2024 07:00
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RNS Number : 5253E Law Debenture Corp PLC 27 February 2024
The Law Debenture Corporation p.l.c.
27 February 2024
Leading UK Equity income sector performer over short, medium and longer term
with another creditable year in 2023
The Law Debenture Corporation p.l.c. ("Law Debenture" or the "Company")
releases its results for the year ended 31 December 2023.
Highlights:
· Share price total return marginally outperformed the FTSE Actuaries All-Share
Index with a total return of 8.1% for 2023.
· NAV total return with debt and Independent Professional Services ("IPS")
business at fair value for FY 2023 of 9.4% (8.9% with debt at par),
outperforming index at 7.9%.
· Another good performance from IPS, with net revenue increasing by 11.8%,
profit before tax up by 10.5% and valuation up 6.3% to £185 million
(excluding net assets).
· The Company issued c.3 million new Ordinary Shares at a premium to NAV during
2023, to existing and new investors, with net proceeds of c.£24.2
million to support ongoing investment.
· Continued low ongoing charges of 0.49%(1,) compared to the industry average
of 1.20%(2).
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
· 2023 full year dividend expected to increase by 4.9% to 32.0 pence per
Ordinary Share (2022: 30.5 pence per Ordinary Share).
Proposed 2023 dividend is fully covered by retained profits earned this year
· with no requirement to call upon historical reserves.
· Dividend yield of 4.1% (based on our closing share price of 778 pence on 23
February 2024), proposed Q4 dividend of 9.125 pence per Ordinary Share.
· 7.9% CAGR in dividends over last ten years, reflecting strong IPS cashflow and
good portfolio performance.
Investment Portfolio Highlights
· Consistent share price and NAV (with IPS and debt at fair value)
outperformance of the benchmark over one, three, five and ten years (see table
below).
· Strong long-term record, with share price total return outperforming FTSE
Actuaries All-Share by around 48% over 5 years which compares well with its
key sector peers.
· Revenue from the portfolio of £33.5m (December 2022: £34.5m).
1 year 3 years 5 years 10 years
% % % %
NAV total return(3) (with IPS at fair value and debt at par) 8.9 22.7 51.8 101.4
NAV total return(3) (with IPS and debt at fair value) 9.4 35.1 62.4 111.9
FTSE Actuaries All-Share Index Total Return(4) 7.9 28.1 37.7 68.2
Share price total return(4) 8.1 30.6 85.3 120.2
Change in Retail Price Index(5) 5.3 27.7 32.1 48.9
Please note that past performance cannot be relied on as a guide to future
performance. The value of investments and any income from them can go down as
well as up. Your capital is at risk.
IPS Highlights
· The Company's wholly-owned provider of professional services is a key
differentiator to other investment trusts and offers additional portfolio
flexibility.
· Accounts for c.20% of 2023 NAV, but has funded approximately 34% of dividends
paid by the Company in the last 10 years.
· IPS has now delivered six consecutive years of growth, with a 5 year net PBT
CAGR of c.8.7%.
· 2023 valuation of £185 million (excluding net assets) up 111.4% since 2018.
Longer-Term Record
· 135 years of history.
· Long-term record of valuation creation for shareholders.
· 113% aggregate increase in the dividend over the last 10 years (7.9% CAGR).
· 45 years of increasing or maintaining dividends to shareholders.
Robert Hingley, Chairman, said:
"Law Debenture made creditable overall progress in 2023. The share price
total return of around 8% includes a further good increase in our full-year
total dividend of 4.9%. Law Debenture's long-term record of benchmark
outperformance remains strong."
"We remain confident that, in the long term, the combination of a robust and
well-positioned equity portfolio and continued growth in our IPS business will
deliver attractive returns for our shareholders."
Denis Jackson, Chief Executive Officer, commented:
"2023 has been another year of operational and financial progress for Law
Debenture, despite the continued macroeconomic uncertainty and elevated
interest rates. The overall portfolio and IPS have performed well despite
ongoing market volatility, and we had our 45th year of maintaining or
increasing dividends."
"Law Debenture is resilient by design and has demonstrated strong performance
over the short, medium and longer term. The combination of IPS with the
investment portfolio offers additional flexibility in stock picking and is a
well proven and differentiated model. Despite ongoing macroeconomic
uncertainty in 2024, I am cautiously optimistic about the Company's prospects
for this year and beyond. The investment portfolio is well diversified and
attractively valued. Our ongoing investment in IPS leaves it well positioned
for medium-term growth in-line with our mid to high single percentage target."
Investment Portfolio
Our portfolio of investments is managed by James Henderson and Laura
Foll of Janus Henderson Investors.
Our objective is to achieve long-term capital growth in real terms and
steadily increasing income. The aim is to achieve a higher rate of total
return than the FTSE Actuaries All-Share Index Total Return through investing
in a diversified portfolio of stocks.
Independent Professional Services
We are one of the leading providers of independent professional services,
built on three excellent foundations: our Pensions, Corporate Trust and
Corporate Services businesses. We operate internationally, with offices in
the UK, New York, Ireland, Hong Kong, Delaware and the Channel Islands.
Companies, agencies, organisations and individuals throughout the world rely
upon Law Debenture to carry out our duties with the independence and
professionalism upon which our reputation is built.
The Law Debenture Corporation +44 (0)20 7606 5451
Denis Jackson, Chief Executive Officer
Hester Scotton, Chief Financial Officer
Trish Houston, Chief Operating Officer
Teneo (Financial PR) +44 (0)20 7260 2700
David Allchurch/Doug Campbell/Oliver Bell
(1) Calculated based on data held by Law Debenture for the year ended 31
December 2023.
(2) Source: Association of Investment Companies (AIC) industry average as
at 31 December 2023.
(3) NAV is calculated in accordance with the AIC methodology, based on
performance data held by Law Debenture including fair value of the IPS
business and long-term borrowings. NAV is shown with debt measured at par and
with debt measured at fair value and both total returns account for
shareholder returns through dividends.
(4) Source: Refinitiv.
(5) Source: Office for National Statistics.
ANNUAL FINANCIAL REPORT
YEAR ENDED 31 DECEMBER 2023 (AUDITED)
This is an announcement of the Annual Financial Report of The Law Debenture
Corporation p.l.c. as required to be published under DTR 4 of the FCA Listing
Rules.
The Directors recommend a final dividend of 9.125 pence per share making a
total for the year of 32.0 pence per share. Subject to the approval of
shareholders, the final dividend will be paid on 11 April 2024 to holders on
the register of the record date of 8 March 2024. The Annual Financial Report
has been prepared in accordance with International Financial Reporting
Standards (IFRS) as adopted by the UK.
The financial information set out in this Annual Financial Report does not
constitute the Company's statutory accounts for 2022 or 2023. Statutory
accounts for the years ended 31 December 2022 and 31 December 2023 have been
reported on by the Independent Auditor. The Independent Auditor's Reports on
the Annual Report and Financial Statements for 2022 and 2023 were unqualified,
did not draw attention to any matters by way of emphasis and did not contain a
statement under 498(2) or 498(3) of the Companies Act 2006.
Statutory accounts for the year ended 31 December 2022 have been filed with
the Registrar of Companies. The statutory accounts for the year ended 31
December 2023 will be delivered to the Registrar in due course.
The financial information in this Annual Financial Report has been prepared
using the recognition and measurement principles of International Accounting
Standards, International Financial Reporting Standards and Interpretations
adopted for use in the UK (collectively Adopted IFRSs). The accounting
policies adopted in this Annual Financial Report have been consistently
applied to all the years presented and are consistent with the policies used
in the preparation of the statutory accounts for the year ended 31 December
2023. The principal accounting policies adopted are unchanged from those used
in the preparation of the statutory accounts for the year ended 31 December
2022.
Financial summary
31 December 2023 31 December 2022 Change
£000 £000 %
Net Asset Value - with debt and IPS at fair value (1)* 1,048,304 972,566 7.79
Total Net Assets per the statement of financial position 854,229 799,067 6.90
Pence Pence
Net Asset Value (NAV) per share at fair value (1)* 802.67 761.69 5.38
Revenue return per share
Portfolio 22.41 24.06 (6.86)
Independent professional services 11.02 10.38 6.36
Group revenue return per share 33.43 34.44 (2.87)
Capital return/(loss) per share 24.47 (103.17) 123.72
Dividends per share 32.00 30.50 4.92
Share price (4) 801 771 3.89
% %
Ongoing charges (3)* 0.49 0.49
Gearing (3) 13 12
Discount/(premium)* (0.21) 1.22
For reconciliation of the NAV at fair value per the above published year end
NAV please refer to page 36 of the Annual Report.
Performance
1 year 3 years 5 years 10 years
% % % %
NAV total return(2)* (with IPS at fair value and debt at par) 8.9 22.7 51.8 101.4
NAV total return(2)* (with IPS and debt at fair value) 9.4 35.1 62.4 111.9
FTSE Actuaries All-Share Index Total Return(4) 7.9 28.1 37.7 68.2
Share price total return(4)* 8.1 30.6 85.3 120.2
Change in Retail Price Index(5) 5.3 27.7 32.1 48.9
Relative performance (NAV at FV) 1.4 7.0 24.7 43.7
Relative performance (Share Price) 0.2 2.4 47.6 52.0
* Items marked "*" are considered to be alternative performance measures and
are described in more detail on pages 155 to 157 of the Annual Report.
1 Please refer below or to page 36 of the annual report for calculation of net
asset value. Please note change in NAV per share in the financial summary does
account for the effect of dividends on total return.
2 NAV is calculated in accordance with the AIC methodology, based on
performance data held by Law Debenture including fair value of the IPS
business and long-term borrowings. NAV is shown with debt measured at par and
with debt measured at fair value and both total returns account for
shareholder returns through dividends.
3 Ongoing charges are calculated based on AIC guidance, using the
administrative costs of the investment trust and include the Janus Henderson
Investors' management fee, charged at the annual rate of 0.30% of the NAV.
There is no performance related element to the fee. Gearing is described in
the strategic report below and in our alternative performance measures in the
annual report.
4 Source: Refinitiv.
5 Source: Office for National Statistics.
Chairman's statement
Performance
Law Debenture has again performed creditably in the face of macroeconomic
conditions which continue to be challenging for many consumers and businesses
alike. 2023 saw global interest rates continue to rise to levels that are
above those experienced for the majority of the period post the global
financial crisis of 2008/09. Equity markets have also had to contend with
global economic uncertainty, relatively high levels of inflation, combined
with the ongoing war in Ukraine and the Israel/Palestine conflict, all of
which has resulted in ongoing market volatility. Nonetheless, the combination
of our diversified Portfolio and another good IPS performance has enabled Law
Debenture to continue to deliver on its commitment to produce capital growth
over the longer term and steadily increasing dividend income. Law Debenture's
long-term record of benchmark outperformance remains strong, with share price
outperformance of the FTSE Actuaries All-Share Index over the last five years
of c.48%. I am proud that Law Debenture has been a leading performer in the UK
Equity Income sector over the long term, which reflects well on the hard work
of our investment managers and talented employees.
Our benchmark, the FTSE Actuaries All-Share Index, delivered a 7.9% total
return in 2023. The Company's share price total return marginally outperformed
this with a total return of 8.1% for 2023. The Net Assets Value ('NAV') with
debt and the independent professional services ('IPS') business at fair value
delivered a return of 9.4%.
We were delighted to receive recognition for all the hard work of our great
team of people in the shape of two awards. At the 2023 Investment Company of
the Year Awards in November, in association with the AIC, we were named winner
in the UK Income category for the third year running and in the Active-Income
category for the second year in a row at the September 2023 AJ Bell Investment
Awards. The continued success in industry-leading awards demonstrates the
excellent short and longer-term track record of our investment managers,
supported by the IPS business.
Dividend
We retain a proud record of increasing or maintaining our dividend payments
for the 45(th) year in a row. The current climate has naturally affected
yields from our Portfolio, and it is likely that the enduring impact of the
past year's difficulties will continue to affect dividend flows. However, the
consistent and reliable cash flows from our diversified IPS business have
helped ensure that we can continue our strong dividend record. Subject to your
approval, we propose paying a final dividend of 9.125 pence per ordinary
share. The proposed 2023 dividend is fully covered by retained profits earned
this year, with no requirement to call upon reserves.
The dividend will be paid on 11 April 2024 to holders on the register on the
record date of 8 March 2024. This will provide shareholders with a total
dividend of 32 pence per share for 2023, an increase of 4.9% compared with
2022. This represents a dividend yield of 4.1% based on our closing share
price of 778 pence on 23 February 2024. Over the last 10 years, we have
increased the dividend by 113% in aggregate which ranks Law Debenture very
high versus its key sector peers.
Capital structure
In 2023, the Group issued 3.0 million new ordinary shares at a premium to NAV,
to existing and new investors, with net proceeds of £24.2m to support ongoing
investment. Shares were issued at a premium to NAV to be accretive to existing
shareholders.
Our Portfolio
James Henderson and Laura Foll, our investment managers, continue to invest in
a differentiated selection of well-managed and high-quality businesses with
competitive advantage and good long-term growth prospects. Dividend income of
£33.5m from the Portfolio was slightly lower than in 2022. This was driven by
a combination of factors but most influential was a reduction in special
dividend income in 2023. However, it is pleasing to report a total capital
profit for the year of £31.7m. Of this, £37.4m relates to movements in the
value of the holdings within the Portfolio.
We remain confident that James's and Laura's disciplined approach of buying at
attractive entry point valuations will continue to deliver over the longer
term for our shareholders. More detailed commentary on the Portfolio's
performance with a review from our investment managers can be found below.
IPS
We believe our professional services business has been a crucial
differentiator in driving consistent long-term outperformance compared to
other UK income funds and, the Board believes, is well positioned to continue
this, with a strong platform built in recent years from which to grow further.
Although accounting for only c.20% of our NAV (with IPS and Debt at Fair
Value), the IPS business has funded around a third of our dividends in the
last 10 years and has now delivered a compound annual growth in profit before
tax of 8.7% over the last five years. Through its strong cashflow and
consistent mid-to high single digit growth rates, IPS enables our investment
managers to build a more flexible Portfolio that includes both income and
growth-focused stocks, rather than having to 'chase yield'.
In a year where many businesses faced a challenging trading backdrop, it is
pleasing to see IPS continue to show robust overall growth. Some of our
businesses benefit from a degree of counter-cyclicality, which is in part, why
IPS had another year of creditable profit growth. This is underpinned by our
specialist knowledge and record of providing excellent client service.
Pensions recorded the highest revenue growth rate in 2023 but there is good
momentum and grounds for optimism in a number of other areas. The Board is
pleased to see continued good employee engagement and satisfaction scores and
we remain focused on strengthening our processes and management information
systems. With this ongoing investment in talent and technology, the Board is
confident IPS has the potential to sustain mid to high single digit growth
over the medium term.
Environmental, Social and Governance (ESG)
Our Executive Leadership team has continued their work to create a working
culture that encompasses our four values: Make Change Happen; Better Together;
Believe It's Possible and Never Stop Learning.
In 2023, we were ranked 1(st) in the Financial Services and 2(nd) overall
amongst the FTSE 250 in the FTSE Women Leaders Review for the second
consecutive year - an achievement that we are extremely proud of. We
understand that gender balance needs to be treated as a business issue, not an
HR issue or one for a dedicated DE&I team to manage alone.
We were pleased to host an expert panel in December alongside FTSE Women
Leaders Review and INSEAD Alumni Balance in Business Initiative. Our panel
chair, Avivah Wittenberg-Cox, and speakers, Fiona Cannon, OBE, Sarah Findlater
and our CEO, Denis Jackson, shared practical guidance around how they have
made change within their organisations, what has worked, and what hasn't.
Our IPS business is built upon the provision of independent governance
services. A central tenet of this work is our commitment to diversity, and we
are delighted that we have established a balanced gender pay gap position and
have strong female representation both at Board and senior executive level,
with women making up 56% of the senior leadership team.
As an organisation, we believe that long-term growth is underpinned by
sustainability. This presents opportunities for investment in the IPS
business. It has a relatively small carbon-footprint compared to other FTSE
250 groups but, over the years, we have taken steps to further reduce this,
most notably with our choice of office space.
Further, as part of our commitment to the ESG agenda, Law Debenture has
continued to make voluntary disclosures in relation to Task Force on
Climate-Related Financial Disclosures ('TCFD'). This can be found on page 51
of the Annual Report.
Our investment managers remain committed to investing in businesses that have
a sustainable business model and carefully take ESG into consideration when
making investment decisions. For more details please see page 49 of the Annual
Report.
The Board
Tim Bond will retire from the Board at the close of the 2024 AGM having served
nine years. We thank him for his invaluable contributions over the years and
wish him the best for the future. At the same time, we welcome Maarten
Slendebroek who has extensive experience in financial services, including as
CEO of Jupiter Fund Management for five years from 2014 until 2019, having
joined the firm as Strategy and Distribution Director in 2012. His key skills
and experience include fund management and investment, strategy, corporate
finance, ESG matters and distribution to investors.
Looking forward
The end of 2023 brought some tentative optimism from investors that inflation
and the cost-of-living crisis will be at less elevated levels going forward.
This improved equity market backdrop still has, however, to contend with
interest rates that look likely to stay at significantly higher levels than
those experienced for the majority of the period post the global financial
crisis of 2008/09.
The majority of the Portfolio is invested in UK equities, although many of the
earnings are derived from outside the UK. James and Laura continue to believe
that UK market valuations remain low in both absolute and relative terms and
offer some attractive longer-term growth opportunities with a lot of bad news
already priced in. Many UK companies are leveraging their robust balance
sheets and good cash flow to consider share buy-backs. In addition, many
overseas corporates and private equity firms continue to see ongoing
attractions in UK company valuations. Companies with robust business models
and supportive long-term trends are now frequently overlooked by investors who
cannot see past a gloomy UK economic environment. Law Debenture is well
positioned with a long-term focus and a clear emphasis on the value provided
by the companies we invest in.
The Board and our investment managers therefore remain confident in our future
medium-term performance, due to the diversified and resilient nature of our
Portfolio and the good growth potential for IPS. Its services are generally
well sought after, its brand reputation is good and the market share
opportunities remain significant. During these uncertain macroeconomic times,
our consistent delivery has only been possible due to the good work of our
investment managers and our skilled workforce. On behalf of the Board, I would
like to thank them all, as well as our shareholders, for their continuing
support.
Robert Hingley
Chair of the Board
26 February 2024
Chief Executive Officer's review
Introduction
2023 has been an encouraging year overall for Law Debenture, despite continued
macroeconomic uncertainty. Elevated levels of inflation and interest rates
proved to be challenging for many consumers and businesses alike. Despite
this, Law Debenture's overall performance reflected well on the Group's
ability to adapt to a changeable economic climate and navigate short-term
headwinds. We delivered on our two main objectives, producing NAV growth and
continuing to increase income for shareholders. Our total share price
performance and NAV modestly outperformed the index again, we are proud to
have had our 45(th) year of maintaining or increasing dividends.
In this context, James Henderson and Laura Foll have continued to perform
well. The Group takes great pride in our long-term record over one, three,
five and ten years, with consistent outperformance of the benchmark, the FTSE
Actuaries All Share Index and compared to our key sector peers. We see this as
continuing validation of our consistent strategy. Law Debenture offers a
cost-effective way to access an active and expertly managed portfolio and
provides good liquidity to investors given the size of our market
capitalisation.
James and Laura have a consistent and proven valuation-driven process which
aims to identify market-leading, high-quality companies that are undervalued
at the point of purchase. It is a testament to the continued outperformance
and the investment team that Law Debenture has won another two prestigious
investment trust awards this year - the UK Income category at the Investment
Company of the Year Awards 2023, for the third year running, and the Active
Income category at the AJ Bell Investment Awards.
Our IPS business has delivered its sixth consecutive year of middle to high
single digit revenue and profit growth. The economic backdrop over this
extended period has been volatile and generally uncertain, which makes IPS's
performance all the more noteworthy. The Group takes considerable pride in
IPS's strong and consistent record with a five-year CAGR in PBT of c.8.7%.
IPS business net revenues (gross revenue less direct costs incurred) for 2023
rose by 11.8% to £50.5m (2022: £45.2m) and profit before tax was up 10.5%.
The diversification of our income streams again served us well, with Pensions
an especially strong performer. We continue to invest to ensure our IT
infrastructure and wider operating model are fit for purpose as we seek to
further scale and sustain our medium-term growth ambitions, whilst also
working hard to ensure our profit margins are sustainable.
We have placed significant focus on cash and debtor management within our IPS
business. The benefit of this has been magnified as a result of the change in
the interest rate environment, meaning that the cash we hold in IPS has
generated a good return for our shareholders. Overall, we continue to target
mid to high single digit growth in profit going forward.
For 135 years, we have stuck to our principles of independence, trust and
excellence. Our investment for growth over the last six years has positioned
us well for the future. I am encouraged by the new business wins in 2023 and
by our strong client relationships, which means that approximately two-thirds
of our business is repeated year on year. As we continue to face a relatively
uncertain macroeconomic environment in 2024, our aim is that IPS should
continue to provide an element of structural growth and counter-cyclical
revenue that will support our overall performance. High-quality governance
services should remain core to our clients, regardless of the economic cycle.
We are proud to have delivered a 113% increase in dividend over the last ten
years. This record has been supported by the diversified nature and
consistently strong performance of IPS, which makes Law Debenture a unique
investment trust. The flow of income from IPS has funded around 34% of
dividends over that period. This gives James and Laura the flexibility to
invest in a broader and higher-growth portfolio than many sector peers,
helping to position the Portfolio for future longer-term growth.
DIVISION Net revenue Net revenue Net revenue Net revenue Net revenue Growth
2019 2020 2021 2022 2023 2022/2023
£000 £000 £000 £000 £000 %
Corporate trust 9,024 10,789 9,771 10,620 12,473 17.4%
Pensions 10,598 11,479 13,060 14,343 17,396 21.3%
Corporate services 12,167 12,226 18,755 20,206 20,640 2.1%
Total 31,789 34,494 41,586 45,169 50,509* 11.8%
*Total net revenue is calculated by reducing segment income of £58,543k by
cost of sales of £8,034k. Please refer to the IPS segmental analysis
disclosed later in this announcement.
Corporate services: 2021 includes additional revenue arising from the
acquisition of the CSS business from Eversheds Sutherland (International) LLP.
Corporate trust
Law Debenture was incorporated to act as a bond trustee in 1889. The role of a
bond trustee is to act as a bridge between the issuer of a bond and the
individual bondholders. Our responsibilities as bond trustee can vary
materially whether servicing performing or defaulted bond issues.
Normal obligations for the bond trustee to support performing issues could
include communication to the bond holders of financial or security data,
together with the distribution of covenant information. For this work, we are
typically paid an annual fee throughout the lifetime of the bond. This fee is
inflation linked for the majority of our existing book of business. When an
amendment to bond documentation is required, we can also earn additional
revenues to complete the necessary changes.
When bonds default, the work flow, risk and revenue profiles of our role can
change significantly. 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 often requires incremental work that, given a favourable outcome,
can lead to significant additional income for us. That said, defaults often
take years to play out and the results are uncertain. Given this long-dated
and fluctuating backdrop, our revenues for this work in any specific calendar
year can be somewhat lumpy. However, such post-issuance work has strong
economic countercyclicality and has produced sound returns for our
shareholders over time.
Market dynamics
Following two very challenging years, deal volumes in primary debt markets
remained patchy in 2023. Primary debt issuance in Europe recovered modestly by
11% (source: Dealogic) off a low base. However, Primary Debt Issuance volumes
in Asia (excluding Japan) were down by 18% (source: Dealogic) and overall
issuance levels remain significantly below those experienced in 2019 to 2021
(source: Dealogic). Perhaps unsurprisingly, given the tough primary market
conditions, major banks, brokers and other participants in this market
continue to reduce capacity in this area.
Our post-issuance work increased modestly during the year. Bankruptcies
continued to rise from historically low levels across our main market in the
UK (source: ONS). The combined effects of the withdrawal of stimulus packages
provided during the Covid pandemic, inflation levels that in some cases hit
40-year highs in major developed economies (source: ONS) and higher interest
rates has exposed many businesses to challenges of which they have limited
institutional memory. We do not wish distress on any of our client base, but
it would not be a surprise if demand for our post-issuance services were to
increase as we move further through this economic cycle.
Highlights
Following a solid 8.7% growth in net revenues in 2022, we are pleased to
report net revenue growth of 17.4% in 2023 despite the difficult market
environment.
As we noted last year, the majority of the capital markets transactions that
sit on our books have been built up over many decades, and have contractual
inflation-linked fee increases for our services. These fee increases are
applied on the transaction anniversary.
Consequently, as higher levels of inflation have filtered through since late
2021, associated inflation-linked increases have fed through to our book of
business.
Despite challenging primary market conditions, there were notable new
transactions that we completed during the year which included acting as both
security agent and facility agent on the inaugural debt raise (£175m credit
facility) by Pulse Clean Energy. The proceeds of this issue will be used to
support the development of multiple new energy storage and grid stability
facilities across the UK, as well as the acquisition of 30MW of battery assets
in Manchester, which will come online next year. We also supported Yondr Group
in their project to develop a 40MW data centre in Bischofsheim, Frankfurt.
Again, Law Debenture acted as both security agent and facility agent on this
complex project financing for the construction and development of the data
centre.
Our expertise in Japanese Convertible Bonds is well known and we were
delighted to be involved with issuances for long-established names such as
Tokyo Corporation, Kobe Steel Ltd and OSG Corporation. Closer to home, we also
closed new deals for household names that included Metrobank, GSK and National
Grid.
Our escrow business continues to grow steadily. During 2023, we were appointed
to a well-diversified range of transactions that included mergers and
acquisitions, litigation, commercial real estate, source code, sporting events
and global trade in commodities.
Outlook for our corporate trust business
As we have mentioned many times, on a year-to-year basis, levels of both
primary market activity and post-issuance work are hard to predict. We do know
that post-issuance work has a strong economic counter-cyclicality and that we
have a long-established, well-diversified book of business. This underpins a
high-quality element of recurring revenue, built on enduring client
relationships. At the time of writing, it appears that inflation levels are
dropping quite rapidly. Over the last two years, we have benefitted from
elevated inflation due to the large element of contractual inflation linkage
in our engagements. Correspondingly, we will face downward pressure on the
growth rate of our revenues as inflation decreases.
Eliot Solarz was appointed to head our Corporate Trust business at the
beginning of 2018. Over the past six years, he has reinvigorated a business
that celebrates its 135(th) anniversary this year. We have added to our
product mix, broadened our range of technical knowledge and significantly
raised our external profile. At the same time, our commitment to the pillars
on which the business was built, namely trust and independence, domain
expertise, and an ability to move fast, have been reinforced.
We are confident that, over time, we can continue to grow this business within
our stated target range of mid to high single digits annually.
Pensions
Under the leadership of Vicky Paramour, we are the longest-serving, and one of
the largest, independent providers of Pension Trustees in the UK with over 200
appointments. In 2023, we continued to support our existing clients as well as
bring new clients into our Portfolio.
Our Pegasus offering of outsourced pensions executive solutions, led by Sankar
Mahalingham, continues to be a leading provider in a competitive market. It
also continues to develop new services that further support our clients and
demonstrate our investment and commitment to the industry.
Market dynamics
Coming into 2023 after the LDI crisis of September 2022, many UK pension
schemes were still getting to grips with changes in their funding position. A
large number of schemes were finding that their aspiration of reaching
self-sufficiency or being in a position to insure their pension liabilities
through buy-in appeared achievable over a relatively short time horizon.
However, the Mansion House reforms in July and then the changes announced in
the Autumn Budget statement highlighted the Government's desire to encourage
pensions schemes to consider running on and investing in UK corporations.
These developments have led to pension schemes re-examining their long-term
strategies. Some schemes are looking to accelerate their journey to buy-in
with others re-structuring their funding and investment strategies for run-on.
This was reflected in an increasing demand for professional trustees with both
buy-in and continuation expertise, as well as broader governance support.
The UK Pensions Regulator's General Code was announced in January 2024 and the
Defined Benefit Funding Code is also expected to come into effect during 2024.
We have continued to support our clients in enhancing and improving their
governance arrangements and preparing for the introduction of these changes.
2023 was an interesting year for the Pensions Trustee market with further
consolidation amongst providers. Although this has increased competition, we
have continued to see a steady flow of new opportunities and we believe we
remain well positioned for the longer term.
Highlights
2023 was another strong year for our Pensions and Pegasus business, with
growth in net revenues of 21.3% Over the past five years, compound net revenue
growth is a healthy 13%. In our core Trustee business, we were delighted to
add incremental appointments that included names such as Aviva MasterTrust,
ArvinMeritor, Lafarge UK Pension Plan, Aggregate Industries Pension Plan and
SLB. A notable 2023 appointment for our Jersey office included The RBS
International Pension Trust. Ireland continued to grow its book of business
with some strong wins. The Manchester-based Pensions team is also growing and
they have firmly put Law Debenture on the map for opportunities in the North
of England.
In the last twelve months, we have helped deliver over 15 large buy-in
transactions for our clients. This includes the largest single transaction to
date between the Boots Pension Scheme and Legal & General (see case study
in the Annual Report) and the first ever super fund transaction between Clara
Pensions and the Sears Retail Pension Scheme.
We continued to evolve our approach to providing Corporate Sole Trustee
services, with a particular focus on new offerings specifically designed for
smaller schemes looking for holistic cost-effective governance solutions. The
Pegasus business continues to broaden its range of services to meet the needs
of our clients. We are seeing increasing demand for Guaranteed Minimum Pension
equalisation projects - projects to remove historical gender inequalities in
pension provision. Support for de-risking projects has also increased, as
schemes work to deliver their chosen endgame strategy.
We also provide outsourced pension executive services and interim support for
in-house teams that have resource issues. We now cover the full range of
responsibilities, including administration and investment oversight, as well
as more traditional governance duties.
We welcomed 10 new members of staff into the Pensions team in 2023, including
senior additions Scott Pinder as Head of Corporate Sole Trustee Services, Ian
McKinlay as Director of Investment Services for Pegasus and Lok Ma as an
investment specialist in our Trustee team.
Outlook for our Pensions business
2024 promises to be a year full of pension policy changes with new guidance
and legislation expected. This will cover new disclosure and governance
requirements, measures to ensure value for members in DC schemes as well as
proposals on consolidation. In addition, we continue to see increased interest
in mechanisms to avoid trapped surplus within pensions schemes. Our own escrow
business has worked with a number of schemes looking for solutions in this
area.
This constantly changing financial and regulatory environment underlines the
need for increased professionalisation of pension trusteeship and strong
governance. We are well placed to deliver on this challenge and believe that
demand for our expanding range of pension trustee and governance services will
continue to increase steadily over time.
Corporate services
Corporate Services comprises four constituents: Structured Finance Services,
our whistleblowing division, Safecall, Service of Process (SoP) and our
Corporate Secretarial Services business (CSS). The combined result of these
businesses in 2023 as revenues being approximately flat. This reflects strong
progress in our Safecall and small Structured Finance areas, a largely flat
revenue contribution from CSS, and a difficult year for our SoP business.
Service of Process (SoP)
SoP - Market dynamics
This is our business with the fewest recurring revenues and with the greatest
dependency on global macroeconomic factors and deal flow in capital markets.
Our long history in this market informs us that, from one year to the next,
revenues can vary significantly and market conditions can be quick to turn.
SoP - Highlights
The widely reported slowdowns reported in GDP growth, particularly in
developed markets (source: IMF), combined with the difficult market conditions
in primary markets (covered in the Corporate Trust section above) have,
unsurprisingly, made for a challenging year. We ended the year with revenues
marginally down.
Despite slowdowns, we have not been inert. We have increased investment in
training for our staff and in our referral partner relationships. We have much
improved systems which is enabling a more proactive approach to business
development. We are confident that SoP will remain a material contributor to
our profits over financial market and economic cycles.
Critical to SoP's long-term success has been the leadership of Anne Hills,
soon to celebrate her 39(th) anniversary with the Company. A recent visit to
Hong Kong reminded me first hand of both her and our Company's excellent
global brand for this service.
Corporate Secretarial Services (CSS)
CSS - Market dynamics
Law makers and regulators worldwide continue to raise the bar for Corporate
Governance standards, which underpin demand for our services. Our current
focus includes solutions that will support companies in navigating the new UK
Corporate Governance Code requirements and the fundamental changes to the way
in which companies will interact with Companies House as a result of the
Economic Crime and Corporate Transparency Act.
We have been solving client challenges in this sector for over twenty years
and operate in three main products areas:
Managed services: Global Entity Management services (GEMS) provide a single
outsourced point of contact to multinational corporations to ensure that their
legal entities are kept in good standing. Client appointments vary in scale
and coverage, ranging from a single legal entity in one country at its
simplest to over 300 subsidiaries in 50 countries at its most complex. We are
paid a fixed annual fee for annual compliance and corporate records
maintenance. We may also earn incremental revenues from additional projects
such as incorporations and dissolutions, the co-ordination of global corporate
change projects and entity validation work. Effective workflow management and
use of technology are critical to compete effectively and we continue to
invest heavily here. We have teams based in our Manchester, Hong Kong and
Dublin offices, as well as a dedicated, UK-focused entity management team in
London.
Corporate governance services: We offer a complete range of board and
committee support, from full outsourced company secretarial support to
attending and minuting meetings, board evaluations and governance reviews. We
also have expertise in providing practical company secretarial support to
companies preparing for an IPO transaction. Our clients range from major Main
Market and AIM listed companies, including investment trusts, to leading UK
operating subsidiaries of top global brands. Our fees are often fixed annual
fees for specifically scoped mandates but can also be time or project based.
Demand here is often for skilled professionals with prior experience in a
particular industry and/or governance framework who can seamlessly transition
work from an in-house setting to an outsourced provider. This team in based in
London.
Interim resourcing: We can provide immediate access to qualified governance
professionals, whether on-site or remote, full time or part time, as required
by the client. Typically, we are paid on a time-spent basis, but also complete
some work on a fixed-fee basis. This team is based in London.
CSS - Highlights
We continue to invest in and restructure CSS. We have increased our headcount
in this business by over 50% since its acquisition from Eversheds Sutherland
(International) LLP just under three years ago. The progress that we have made
in our operational infrastructure and improved client delivery in our CSS
offerings during 2023 did not filter through to our revenues which were
broadly flat. However, we remain confident that the significant investments
that we have made in new people, skills, technologies and operational
workflows will underpin sustainable growth over time.
During 2023, we invested in a dedicated business development resource and, as
a result, our sales pipelines are improving. I am delighted that a number of
multinationals joined our GEMS client roster on multi-year deals with effect
from January 2024. The project nature that is naturally embedded in a
significant element of the CSS revenue stream demands constant replenishment.
It is pleasing that there have been a number of wins during 2023 with both
existing and new FTSE 250 and AIM listed clients on the corporate governance
services side.
We remain confident of our ability to increase our market share over time in a
growing market driven by increased regulatory demands.
I would like to thank Trish Houston who, in addition to her COO
responsibilities, has led this business for the past 16 months after returning
from maternity leave. From 1 January 2024, Trish will focus fully on her role
as COO and the much-improved CSS platform and its leadership now reports
directly to me.
Structured Finance Services
Structured finance services - Market dynamics
Demand for our special purpose vehicle (SPV) management and accounting
services fluctuates directly with the demand for raising funds via secured
bond issuances. The market remains very competitive and is driven by the cost
of raising finance by this method, compared with other means.
Loan agency services are dependent on the appetite for outsourcing
administration work on syndicated loans and we have seen an increase in
enquiries from financial institutions for this role.
Whilst our paying agency services are dependent upon the market fluctuations
in mergers & acquisitions work, we are seeing increase demand as law firms
are stepping away from providing this role.
We operate in three main product areas:
Management of Special Purpose Vehicles ('SPVs') and other similar corporate
structures: We provide directors, accounting and day-to-day corporate
administrative services to entities set up to help financial institutions,
including challenger banks and boutique asset managers (private equity and
hedge funds) seeking to diversify their funding using securitisation
techniques. The SPVs are established to raise funds in the bond/loan markets
which are then used to acquire distinct pools of assets (including mortgages,
receivables, credit card debt, aircraft, whole businesses etc.) against which
the funds are secured. The funding is non-recourse, meaning that the funds
raised only have recourse to the pool of assets on which they are secured and
to no other party.
Accounting services: We provide management and statutory accounting services
to corporate entities who wish to outsource this area or where they do not
have local accounting knowledge. We do not provide audit services to clients.
Facility and Paying Agency services: We manage and provide outsourced
administration for corporate loans and facilities by acting as a conduit
between multiple lenders and a single borrower. Our paying agency services
relate primarily to managing the payments for law firms involved in M&A
transactions. Unlike facility agent work, which provides recurring fees,
paying agent services generally incur one-off transaction fees.
The competitive landscape in each of these three areas is dominated by larger
providers with long-established relationships. We are a small player in the
sector, which is dominated by private equity-backed competitors. Thanks to
Mark Filer and his team, we continue to receive consistent praise from our
clients and are growing our market presence steadily.
Structured finance services - Highlights
Despite capital markets new issuance levels being challenged during 2023, we
were delighted to receive repeat appointments from a number of leading names
operating in the sector, including Atom Bank and LendInvest. Our facility and
paying agent business also grew steadily during the year. Gratifying too was
to see rewards from our business development efforts, with an increasing
number of professional firms around the country referring business to us.
Quotations for new business and wins were both at new high levels, which
resulted in pleasing revenue growth.
We have a sound product and good momentum. Our challenge is to raise our
profile with a broader universe of clients and referral partners in order to
accelerate our growth.
Whistleblowing: Safecall
Safecall - Market dynamics
Regulatory frameworks and standards continue to be strengthened across the
developed world. News headlines are increasingly underpinned by some sort of
whistleblowing activity. Early adopters were often larger entities, but
smaller and mid-sized employers are increasingly seeing the value of an
independent and trusted partner to deliver this service. Investors are
increasingly demanding a robust, independent whistleblowing structure to be in
place prior to allocating capital.
All enquiries are dealt with by our highly-trained staff that continues to
consist largely of former police officers. The quality of the work they do for
our clients receives high praise. A number of competitors in the sector run
business models based off low-cost call centres. We have every intention of
remaining a premium provider of high-quality product.
Safecall - Highlights
We provided a record number of reports to our clients in 2023, up 15% on 2022.
Towards year end, digital channels (as opposed to voice) accounted for over
70% of issues raised. We delivered increased client functionality via our
portal in 2023 and client feedback is encouraging. We rebranded our offering
and launched a new website in Q4. We have more to deliver here in 2024 but are
increasingly confident in our ability to compete effectively for larger
mandates as they come up for renewal.
Under the successful leadership of Joanna Lewis, we have expanded our training
and investigations offerings and have made solid progress, doubling revenues
in this service in 2023.
Once again, we experienced strong year-on-year revenue growth, with a
significant number of new relationship wins. Among the 132 new clients we
onboarded in 2023 were Whitbread, Balfour Beatty and Imperial College London.
As well as the investment in our technology platform, we will add further
capacity and expertise to the operations team, managed by Tim Smith. Moreover,
we will continue to add further resource to our sales, account management and
marketing initiatives in order to accelerate our growth.
It is a really exciting time to be a provider of solutions in this
fast-growing sector.
Central Functions
A refreshed five-year plan for the IPS business as a whole by the Senior
Leadership Team was a key piece of work undertaken during the year.
The larger and more consistent the earnings growth within IPS, the more
optionality it creates for the Managers of the Portfolio to deliver on our
objective of long-term capital gains and steadily increasing income.
In order to grow our earnings and dividends, we need to focus on growing our
capital and we have approximately doubled the revenues and profits for the IPS
business over the past six years. The aim is to approximately double these
again over the next five years. We expect our growth to be largely organic,
but we continue to be open to opportunities presented by acquisitions where we
believe this could add value to our clients and shareholders.
Our business development teams, overseen centrally by Suzy Walls, are
increasingly joined up and ambitious. We have a structured programme to deepen
and broaden our referral partner relationships. We are strengthening our ties
with industry bodies and continue to optimise our output using digital
channels to raise our profile. Our calendar of industry events is anchored
around the Law Debenture Debate for Pensions in May (now in its 21(st) year)
and our Lens Photo competition in January (now in its 7(th) year). We also
continue to build momentum around our Law Firm Reception in early September
(now in its 4(th) year).
In October, we held a well-attended Golden Jubilee party for our business in
Hong Kong as the city emerged from a particularly difficult period during
extensive Covid lockdowns.
Our improved business pipelines are a function of thousands of individual
touch points and increased commitment to our firm-wide business development
initiatives is helping to build positive momentum.
As we have noted in past annual reports, we are making a significant
investment in modernising our central support functions. With oversight from
our CFO, Hester Scotton, we have made substantial improvements, including
changing our general ledger accounting system and establishing our shared
service centre in Manchester. During the second half of 2023, we started the
process of onboarding a new PSA (Professional Services Automation) operating
system. As we look to double the size of our IPS business over the next five
years, it is critical that we do this in a controlled and sustainable manner.
To enable this, we are moving towards a new Target Operating Model that we
will embed across the IPS business during 2024. We have also added capacity to
our Legal team, overseen by Kelly Stobbs, our General Counsel.
We have invested further in our HR team to support our headcount globally,
which is now nearing 300. We have much increased rigour around appraisals
process and career frameworks. We held our third annual culture week in July
and have a number of clubs that have gathered good support from within the
employee base. Our charity community group also raised its ambitions with two
volunteering days at the Whitechapel Mission towards the end of the year.
During 2024, we will continue to build on our cultural vision.
Information Technology
Our IT strategy is centred around being flexible users of third-party software
applications. We want our businesses to be easy to find, easy to engage with
and easy to use. We had a number of successes in this regard under our Chief
Technology Officer's, David Williams, leadership in 2023.
Safecall added several new modules to its client portal, including deliveries
that help to support expanding investigation efforts. In CSS Global Entity
Management, we delivered a new client interface that enables clients to view
legal entity work status. In both cases, our employees and our clients are
viewing outputs in real time. We will continue to build on our technological
capabilities.
It is important that we receive third party certification of our technology
standards to give confidence to all our stakeholders. I am pleased that
Safecall are well on their way to achieving ISO 27001 certification, the
leading international standard focused on information security, by mid-2024.
Towards the year end, we rolled out a digital workplace project across the UK
offices. This consists of improved system access, new laptops, headsets,
meeting room technology and network infrastructure. In addition to the ability
to work more effectively when on the move, it improves our ability to work
collaboratively with our clients. This roll-out required significant
investment in new hardware, moving us on to a modern platform built around
hybrid/mobile working. In addition, we added resource focussed solely on IT
security.
From January 2024, David Williams will report to our COO, Trish Houston, to
ensure that all of our operational improvements are as effectively joined up
as possible.
Prospects
Law Debenture is well diversified and resilient by design. The combination of
IPS with the Portfolio is a well-proven model and I am cautiously optimistic
about the Group's progress in 2024 and beyond, despite an external environment
which is expected to remain challenging. I am confident that IPS is well
positioned for medium-term growth, in line with our mid to high single
percentage target. 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.
On behalf of the Board, I want to thank my colleagues for their excellent
dedication to developing Law Debenture's client service. I am also very
grateful for the continued support of shareholders.
We are cognisant that 2024 will likely present its own set of challenges but,
given the modest current valuation of the UK equity market, we are optimistic
about the investment opportunities we can see. We believe James and Laura have
constructed a well-diversified portfolio of strong and well-managed businesses
on relatively low valuation multiples, capable of delivering attractive
capital returns, and further increases in dividends, over the medium term.
Denis Jackson
Chief Executive Officer
26 February 2024
IPS net revenue and PBT - 5 year performance
Department 2019 2020 2021 2022 2023 5yr Revenue Variance 5yr Revenue Variance
£000 £000 £000 £000 £000 £000 %
Pensions 10,598 11,479 13,060 14,343 17,396 6,798 64.1%
Corporate trust 9,024 10,789 9,771 10,620 12,473 3,449 38.2%
Corporate services 12,167 12,226 18,755 (1) 20,206 20,640 8,473 69.6%
IPS net revenue 31,789 34,494 41,586 45,169 50,509 (2) 18,720 58.9%
% Net Revenue growth 7.5% 8.5% 20.1% 8.6% 11.8%
Profit before tax 11,465 12,227 13,340 14,422 15,936 4,471 39.0%
% PBT growth 9.4% 6.6% 9.1% 8.1% 10.5%
1 Includes revenue from the acquisition of the Company Secretarial Services
business from Eversheds Sutherland (International) LLP.
2 This figure is included in the income statement by subtracting cost of sales
of £8.0m from gross revenue of £58.5m.
IPS Valuation
31.12.2018 31.12.2019 31.12.2020 31.12.2021 31.12.2022 31.12.2023 5yr growth
£000 £000 £000 £000 £000 £000 %
EBITDA 10,424 11,515 13,335 15,369 16,588 17,625 69.1%
Multiple 8.4 9.2 9.4 10.8 10.5 10.5 25.0%
IPS fair value (excluding net assets) 87,562 105,938 125,349 165,985 174,174 185,063 111.4%
NAV adjustment: total value less net assets already included 78,439 91,860 112,407 135,885 148,376 160,836 105.0%
See below for commentary on the IPS valuation.
Investment managers' review
Our investment strategy
The investment approach adopted has not changed for many years, but it has
hopefully been improved with lessons learnt. There is a relatively long list
of stocks which allows for a blend of large, medium and small companies. There
are overseas holdings where a similar company cannot be found in the UK market
or the overseas company is cheaper. Over 80% of the Portfolio is in UK quoted
companies at present, as this is where we are finding superior value despite
concerns about the UK economy. The belief behind portfolio construction is
that genuine diversity in the holdings is how capital is preserved in the long
term. We employ different approaches to how we look at potential investments.
Around 50% of the Portfolio is in FTSE100 companies. These are, we believe,
sound long-term investments and they are often well-known companies that
feature in other portfolios with similar objectives. However, it is what you
do differently to others that makes you perform differently. The structure of
a cash-generative operating company and a Portfolio gives the opportunity to
have a wider range of investments and still produce an attractive level of
earnings. Therefore, unusually for an income growth trust, there are
investments that do not pay a dividend. Early-stage small companies and
operationally challenged large companies feature. The small companies that
succeed will give substantial returns, while large companies that have a
recovery plan that they implement with determination will in time return to
paying dividends at a considerably higher share price. The different elements
of the Portfolio, when blended together, provide real diversification of
underlying operating activities. It does mean there are usually around 150
holdings and we do not go over 175. The absolute stock-specific risk is
relatively low compared to the index and the exposure to small and
medium-sized companies has contributed, in the long term, to the better
performance of your Company.
Economic and market backdrop
The central economic debate in 2023 was the balance between bringing down
inflation while avoiding recession. Consensus opinion for economic growth
ultimately proved too pessimistic. At the time of writing, real GDP growth in
2023 looks likely to be closer to 0.5% growth. The chart in the Annual Report
shows how UK real GDP expectations progressed over the course of the calendar
year:
The swing factor in the economy was always likely to be the UK consumer and
whether they were willing to draw down on their pandemic savings to smooth
cost-of-living pressures. This has proven to be the case, with more resilient
retail sales than expected, benefitting some of this Portfolio's largest
holdings such as Marks & Spencer. From an inflation perspective, while
there was some persistence to UK inflation during the summer months (largely
caused by nuances surrounding the energy price cap), over the course of the
year inflation fell from over 10% to below 4%. This meant that, by the end of
the year, the UK consumer was again receiving real wage growth.
As we look ahead to 2024, we see that a similar dynamic has the potential to
occur again. Consensus currently expects modest 0.4% real GDP growth. However,
household cash flows (after all essential expenses such as energy and food
bills) have the potential to grow mid- to high-single digit, aided by good
levels of nominal wage growth. We therefore see the potential for a better UK
economic backdrop than is widely forecast.
Alternative Performance Measures 1 year 3 years 5 years 10 years
% % % %
NAV total return (with IPS at fair value and debt at par)(1) 8.9 22.7 51.8 101.4
NAV total return (with debt and IPS at fair value)(2) 9.4 35.1 62.4 111.9
FTSE Actuaries All-Share Index total return(2) 7.9 28.1 37.7 68.2
(1) NAV is calculated in accordance with AIC methodology, based on performance
data held by Law Debenture including fair value of IPS business. NAV total
return with debt at par excludes the fair value of long-term borrowings,
whereas NAV total return with debt at fair value includes the fair value
adjustment.
(2) Source: Refinitiv Datastream, all references to 'FTSE All-Share' and
'benchmark' in this review refer to the FTSE Actuaries All-Share Index total
return.
Performance
Our aim as portfolio managers is to outperform the FTSE Actuaries All-Share
benchmark over both the short- and long-term. It is our view that our
structure of the Company provides a favourable backdrop for this, as it
broadens the investible universe beyond higher dividend-paying shares. When we
come on to look in more detail at stock attribution, in a similar pattern to
recent years, it is often the lowest dividend-paying shares that have been
among the best performers.
Top five gains
Top five absolute contributors to performance:
Stock £ Appreciation % Appreciation
Rolls Royce 25,243,022 287.0%
Marks & Spencer 11,603,227 134.4%
HSBC 5,195,260 23.2%
Hill & Smith 4,898,816 62.8%
Senior 4,436,460 41.5%
In 2023, the Portfolio performed approximately in line with the FTSE Actuaries
All-Share benchmark. Unlike in 2022, when good performance in the UK equity
market was heavily dominated by large companies in the FTSE 100, this year
share price performance was more balanced across different sizes of company.
Performance drivers were therefore more esoteric, driven by individual stock
performance. While 'recovery' holdings such as Marks & Spencer and
Rolls-Royce performed very well, these were balanced by some poor performers,
predominantly within the natural resources and financials sectors. We will now
examine the stock-specific performance drivers in more detail.
Rolls-Royce and Marks & Spencer, while clearly very different businesses,
arguably have similar reasons for their strong performance this year. Both
have long had potential for successful turnarounds - Rolls-Royce has won
considerable market share in supplying engines for the next generation of
wide-bodied planes, while M&S has long had a successful food business
while clothing and home profitability had dwindled. Both have seen recent
management change that have proven the catalyst for an earnings (and share
price) recovery. It is important to note that, in both cases, the dividend
yield is low (or indeed zero in the case of Rolls-Royce). When companies are
in the midst of recovery, it is often right to pause dividend payments, as
companies may be in a cash consumptive phase that often comes with substantial
restructuring costs. These positions would therefore be challenging to hold,
in size, within a traditional income fund structure. Our Group structure is
therefore an advantage in being able to hold, in scale, these 'recovery'
holdings.
In the case of M&S, it was the new Chairman (Archie Norman) in 2017 that
spurred the change. It was at this point that the business recognised the need
for a fundamental re-set - closing legacy stores, lowering prices on both
sides of the business to become more affordable and reducing (in clothing) the
sometimes overwhelming amount of items on offer (instead becoming more
focussed, with buying in greater depth that allowed better buying terms, as
well as better availability). These changes, put in place over a number of
years, have become gradually more apparent, but it was only this year that we
began to see a series of material earnings upgrades following market share
gains in both categories.
In the case of Rolls-Royce, their technical expertise had long been apparent.
However, the shares had struggled for external reasons (namely Covid, with the
long-haul market, served by wide-bodied planes, being particularly slow to
recover) and company-specific reasons, in particular a frustration that market
share success had not translated into substantial cash generation. These
historical frustrations have been (at least) partially resolved this year,
with passenger demand for travel continuing to recover and, under a new CEO,
the company announcing material cost savings and ambitious free cash flow
targets. The ongoing aerospace market recovery also aided another of the best
performers this year, Senior, which makes aerospace components.
HSBC performed well, aided by rising interest rates, although, relative to the
benchmark, it was a detractor (as the position is comparatively smaller than
that of the benchmark). Hill & Smith, an industrial conglomerate with
significant exposure to the US infrastructure market, also performed well on
structural growth in many of its end markets.
While in 2023 Rolls-Royce saw favourable end markets combined with 'self
help', Anglo American in effect saw the opposite. There were undoubtedly
challenging operating conditions, for example cyclical demand weakness in
diamonds (where they own De Beers) and power and transport outages in one of
their key geographies, South Africa. These external factors combined with
self-inflicted issues, such as a material downgrade to production guidance for
copper, which is seen as one of the key sources of future earnings growth for
the shares. We continue to hold the shares on the grounds that, relative to,
for example, copper-focussed peers, they present good value with the prospect
for earnings recovery, but undoubtedly this year's operating performance has
been disappointing.
Ceres Power has made progress operationally, but investors are disappointed
that there has been no large licensing deal signed with China and more
generally the uptake in hydrogen fuel cells is slower than was initially
hoped. Due to substantial profits taken in the shares at a higher share price,
Ceres remains the top contributor to Portfolio performance over the last five
years.
Commodity prices such as natural gas spiked in the immediate aftermath of the
war in Ukraine. However, this year there was a degree of normalisation, which
impacted commodity producers such as i3 Energy and Indus Gas.
Within financials, Natwest was a poor performer, both in absolute terms and
also relative to its key UK peer, Lloyds (also held in this Portfolio). While,
at the start of the year, Natwest looked more attractive from a valuation
perspective and therefore was a bigger position in this Portfolio, the banking
sector has a remarkable ability to snatch defeat from the jaws of victory. A
steep rise in interest rates should be a positive for bank margins, but shares
have often performed poorly despite this. In this case it was Nigel Farage
being 'debanked' and the subsequent departure of the CEO that led to poor
performance.
Top five losses
Top five absolute detractors from performance:
Stock £ Depreciation % Depreciation
Anglo American (5,879,700) (40.4%)
Ceres Power (5,577,078) (70.2%)
i3 Energy (4,133,490) (53.7%)
NatWest (2,983,500) (17.3%)
Indus Gas (2,951,570) (71.1%)
Portfolio income
During the year dividend income totalled £33.5m, down modestly from last
year's £34.4m. The key difference between the two years was a lower level of
special dividends in 2023, in particular from the mining and banks sectors. As
we look ahead to 2024, in our view the backdrop for UK dividends is
encouraging as the dividend payout ratio has been reset to more sustainable
levels following Covid.
Portfolio activity
During the year we were modest net investors, investing £37m. This net
investment was largely matched by a rise in the Trust's net asset value and
some share issuance, meaning gearing at calendar year end rose only modestly,
reaching 12.7% at year-end, compared to 12% at the beginning of the year.
The approach is to take a long-term view about the holdings we will buy as our
confidence grows and valuations remain undemanding and sell when these factors
are going in the opposite direction. We are always looking for opportunities
to refresh the Portfolio in an opportunistic way. The property sector has had
the perfect storm in recent years with interest going up and changes in
behaviour such as the move to online from physical stores in retail, while in
the office area the move to working from home has altered property
requirements. These problems have meant the share prices for quoted property
stocks have been very weak in recent years. They are trading at substantial
discounts to the recent asset values. This is an opportunity for good
operators in property to show their worth. Purchases were made in Shaftesbury,
which has an iconic London portfolio of properties, and Workspace which
repurposes properties to uses the economy of today needs. These companies add
value to their properties under management and, when interest rates stabilise,
their strengths should come to be recognised by investors. It is important to
focus on companies that genuinely add value in their activities rather than
just hope they will be helped by a change in the economic conditions. Holdings
were also built up in Johnson Matthey and Air Products, both well-managed
companies that will benefit from the move towards alternative forms of energy.
There were also a number of positions built up in smaller companies in order
to refresh the Portfolio for the future.
On sales, two of the largest were taking profits in US companies that have
operated well but where the valuation is now relatively high given the
macroeconomic headwinds, namely Caterpillar and Applied Materials.
Outlook
There is a long list of investor concerns. They range from major global
conflicts to the seemingly low productivity of the UK economy. However, we do
not own shares in an economy but rather dynamic companies with management
teams that will deal with the circumstances they find. It is usually the
general worries that have led individual company share prices to fall to
historically low levels. These low valuation levels are apparent at both the
UK market level (see chart on page 20 of the Annual Report) and the Portfolio
level.
The prospective Price Earnings Ratio for the Portfolio, at sub 10 times, is
substantially lower than its historical average. The Portfolio yield has
looked this high before but that was before dividends were going to be cut in
the banking crisis. This time, the dividend cover is relatively high and there
is little hopeful thinking in the projections. For all the confidence at a
stock level, it will probably need some lift of the gloom about the macro
picture for share prices to appreciate. The most obvious event will be when
interest rates are cut, especially if it is from a position in which there is
no actual recession being experienced. In the meantime, we will focus on
companies that are managing themselves in a way that positions them for
long-term growth, through providing excellent product and services to their
clients. This is the best way to face economic uncertainty.
James Henderson and Laura Foll
Investment managers
26 February 2024
Portfolio by sector and value
Portfolio by sector
2023 2022
Oil and gas 10.3% Oil and gas 10.9%
Basic materials 6.0% Basic materials 8.7%
Industrials 25.6% Industrials 21.7%
Consumer goods 7.8% Consumer goods 7.7%
Health care 6.0% Health care 8.1%
Consumer services 10.4% Consumer services 9.0%
Telecommunications 1.9% Telecommunications 2.0%
Utilities 3.1% Utilities 3.2%
Financials 27.4% Financials 27.4%
Technology 1.5% Technology 1.3%
Geographical distribution of Portfolio by value
2023 2022
United Kingdom 88.2% United Kingdom 83.2%
North America 3.2% North America 5.1%
Europe 7.4% Europe 10.6%
Japan 1.2% Japan 1.1%
Fifteen largest holdings: investment rationale
as at 31 December 2023
Rank 2023 Company % of Portfolio Approx Market Cap. Valuation Purchases (Sales) Appreciation/ (Depreciation) Valuation
2022 £000 £000 £000 2023
£000
1. Rolls Royce 3.85 £69.76bn 8,797 3,223 - 25,243 37,263
2. Shell 3.32 £105.76bn 29,075 - - 3,044 32,119
3. HSBC 2.85 £124.56bn 22,360 - - 5,195 27,555
4. BP 2.74 £85.18bn 27,069 - - (498) 26,571
5. Rio Tinto 2.26 £46.67bn 21,743 - - 165 21,908
6. Marks & Spencer 2.25 £3.67bn 8,631 1,558 - 11,603 21,792
7. Flutter Entertainment 2.23 £11.32bn 17,492 - - 4,084 21,576
8. GlaxoSmithKline 2.08 £69.91bn 19,983 - - 175 20,158
9. Barclays 1.96 £15.63bn 19,498 - - (583) 18,915
10. Senior 1.57 £0.79bn 10,682 - - 4,436 15,118
11. Tesco 1.52 £16.47bn 11,888 - (619) 3,404 14,673
12. BAE Systems 1.50 £13.94bn 11,128 - - 3,309 14,437
13. Lloyds Banking Group 1.48 £32.41bn 13,623 - - 689 14,312
14. NatWest 1.48 £22.15bn 17,238 - - (2,983) 14,255
15. National Grid 1.43 £28.19bn 13,058 - - 793 13,851
Changes in geographical distribution
Valuation 31 December Purchases Costs of acquisition Sales proceeds Appreciation/ (Depreciation)* Valuation 31 December %
2022 2023
United Kingdom 743,255 85,814 308 (18,405) 41,409 852,381 88.16
North America 45,482 7,581 - (17,324) (4,632) 31,107 3.24
Europe 92,842 5,855 8 (26,364) (2,481) 69,860 7.37
Japan 9,426 - - - 2,452 11,878 1.23
891,005 99,250 316 (62,093) 36,748 965,226 100
*Please refer to note 2 on page 127 of the Annual Report.
Extracts from the Strategic report
Who we are
From its origins in 1889, Law Debenture has diversified to become a Group
which provides our shareholders, clients and people a unique combination of a
Portfolio and an Independent Professional Services (IPS) business.
Our purpose and objective
Our purpose is to deliver peace of mind for our shareholders, clients and
people. This is central to our strategy, both at the Portfolio and IPS levels,
and underpins the way we think and behave every day.
Our objective as an investment trust is to achieve long-term capital growth in
real terms and steadily increasing income. The aim is to achieve a higher rate
of total return than the FTSE Actuaries All-Share Index through investing in a
diversified portfolio of stocks and ownership of the IPS business.
To our IPS clients we are trusted, independent experts who have 135 years of
experience to call on in delivering vital aspects of their business cycle.
Our purpose and objective are underpinned by our corporate values of:
· We believe it's possible
· We make change happen
· We are better together
· We never stop learning
Our strategy - implementation
Our strategy is centred around the unique combination of the Portfolio and our
IPS business. Whilst overseen by the Board, the IPS business operates
independently from the Portfolio.
The IPS business provides a reliable source of revenue to the investment
trust. This supports the dividend and ensures our investment managers are not
constrained to choosing stocks solely based on yield. Instead, the investment
managers benefit from increased flexibility in stock selection supporting the
delivery of long-term capital growth.
Our unique structure is also tax efficient as some tax relief, arising from
excess costs and interest payments which would otherwise be unutilised, can be
passed from the Portfolio to the IPS business reducing the tax liability for
the Group and increasing shareholder returns.
The way in which we implemented the investment strategy during 2023 is
described in more detail in the investment managers' review above.
Annual performance is set out on pages 2 to 29 of the Annual Report, which
contain tables, charts and data to explain performance both during the year
under review and over the long-term. Performance against KPIs is discussed on
page 34 of the Annual Report.
Our business model
Our business model is designed to position the Company for optimal performance
in the AIC UK Equity Income investment trust sector.
Law Debenture's shares are intended for private investors in the UK (retail
investors), professionally advised private clients and institutional
investors. When choosing an equity focussed investment trust, shareholders
typically accept the risk of exposure to equities but hope that the pooled
nature of an investment trust portfolio will give some protection from the
volatility in share price movements that can affect individual equities.
TOTAL SHAREHOLDER RETURN
PORTFOLIO INDEPENDENT PROFESSIONAL SERVICES
(c.80% of NAV - including IPS (c.20% of NAV - including IPS
and long-term borrowings at fair value) and long-term borrowings at fair value)
· Invests in a diverse equity portfolio · Trusted provider of independent governance services, generating
recurring revenue.
· Earns capital returns and dividends · Profits provide the investment trust with a steadily increasing
revenue stream.
· Low ongoing charges · Tax efficient
PORTFOLIO
· The Portfolio will typically contain over 70 and up to 175
stocks, the maximum permitted.
· The Portfolio is diversified in order to spread investment risk
with no obligation to hold shares in any particular type of company or
industry.
· The IPS business does not form part of the Portfolio.
Whilst performance is measured against the FTSE Actuaries All-Share Index, the
composition of the index does not influence the construction of the Portfolio.
As a consequence, it is expected that the Portfolio and performance will
deviate from the comparator index.
INDEPENDENT PROFESSIONAL SERVICES
Operating through a number of wholly owned subsidiary companies (see note 13
to the accounts), we provide pension trustee executives, outsourced pension
services, corporate trust services and corporate services to companies,
agencies, organisations and individuals throughout the world. The services are
provided through offices in the UK, Dublin, New York, Delaware, Hong Kong and
the Channel Islands.
Group employees are employed by L.D.C. Trust Management Limited (LDCTM) and
Safecall Limited (in the UK) or a locally incorporated entity (in the overseas
jurisdictions). As part of their duties, a number of the employees provide
services to the investment trust and their time is charged to the trust,
forming part of the ongoing charges.
More details about the performance of the IPS business in 2023 are given in
the Chief Executive Officer's review above.
Our strategy - guidelines
The Board sets the investment strategy and actively monitors both the
investment managers' and Executive Leadership team's adherence through a
series of guidelines and parameters in each scheduled Board meeting. The
strategy is reviewed periodically to ensure we deliver on our objective.
Investments Permitted types of investments are: Restrictions:
· Equity Shares · Trading is not permitted in suspended shares or short positions
· Cash/Liquid Assets · No more than 15% of gross assets will be invested in other UK
listed investment trusts
· No more than 175 stocks
· No investment may be made which raises the aggregate value of the
largest 20 holdings, excluding holdings in collective investment vehicles that
give exposure to Japan, Asia/Pacific or emerging market regions, to more than
40% of the Portfolio, including gilts and cash
· The value of a new acquisition in any one holding may not exceed
5% of the total Portfolio value (including cash) at the time the investment is
made
· Further additions shall not cause a single holding to exceed 5%,
and Executive approval must be sought (to be reported at the next Board
meeting), to retain a holding should its value increase above the 5% limit
· No investment in any investment vehicle managed or advised by
Janus Henderson shall be made without prior Board approval
· No investment other than in equity shares quoted on a major
international Stock Exchange (including AIM for the avoidance of doubt) or
instruments convertible into the same may be made without prior Executive
approval
· The Company may not make investments in unlimited liability
companies
The current regional parameters are:
Minimum Maximum
% %
United Kingdom 55 100
North America 0 20
Continental Europe 0 20
Japan 0 10
Asia/Pacific 0 10
Other (including South America) 0 10
Derivatives May be used with prior authorisation of the Board
Hedging Currency hedges may be put in place with Board approval to protect against
foreign exchange movements on the capital and income accounts
Stock-lending Up to 30% of the market value of the Portfolio may be lent
Gearing A ceiling on net gearing of 50% is applied. Typically net gearing, (i.e.
gearing net of cash), is between 10% and 20% of the total Trust value. The
Board retains the ability to reduce equity exposure so that net cash is above
10% if deemed appropriate. Refer to page 156 of the Annual Report for
calculation of gearing
Daily dealing limit Net purchases in any dealing day are to be limited to £30 million unless
prior Executive approval is obtained
Underwriting Permitted capital at risk up to 5% of the value of the Portfolio
Corporate approval Where indicated, the investment manager must obtain prior approval to exceed
permitted limits either through Board or Executive approval. Executive
approval shall be the approval of either the Board Chair or the Chief
Executive Officer. The Board may make non-material adjustments or changes to
the investment policy from time to time. Any changes to the investment policy,
which the Board deem to be material, require prior shareholder approval
Agreement with the investment managers
Appointed investment managers: James Henderson and Laura Foll, Janus Henderson
Investors.
On a fully discretionary basis, our investment managers are responsible for
implementing the Company's investment strategy. The contract is terminable by
either side on six months' notice.
The agreement with Janus Henderson does not cover custody, which is the
responsibility of the depository (see section on regulatory compliance in the
Directors' Report, page 61 of the Annual Report). It also does not cover the
preparation of data associated with investment performance or record keeping,
both of which remain the responsibility of the Company.
Fee structure and ongoing charges
Investment trusts are required to publish their ongoing charges ratio. This is
the cost of operating the trust and includes the investment management fee,
depository and custody fees, investment performance data, accounting, company
secretary and back office administration.
The Group continues to have one of the more competitive fee structures in the
UK Equity Income Sector with investment management fees of 0.30% p.a. of the
value of net assets of the Group (excluding the net assets of IPS), calculated
on the basis adopted in the audited financial statements, and total ongoing
charges of 0.49%.
No performance fee is paid to the investment manager.
Reappointment of the investment managers
On an annual basis, at a minimum, the Board assesses whether the investment
managers should be reappointed. The key criterion for assessment is the
long-term performance of the Portfolio.
Given Janus Henderson's proven record of performance, and the competitive fee
arrangements in place, the Board has concluded that the continued appointment
of our existing investment manager remains in the interests of our
shareholders.
Gearing and long-term borrowing
Investment trusts have the benefit of being able to 'gear' their portfolios
according to market conditions. This means that they can raise debt (either
short or long-term) to generate funds for further investment. These funds can
be used to increase the size of the Portfolio. Alternatively, assets from
within the Portfolio can be sold to reduce debt and the Portfolio can even be
'negatively geared'. This means selling assets to hold cash so that less than
100% of the Company's assets are invested in equities. At 31 December 2023,
our gearing was 13% (2022: 12%).
The Group has four debentures (long dated sterling denominated financing)
details of which are on page 144 of the Annual Report. The weighted average
interest payable on the debentures is 3.96% (2022: 3.96%).
The fair value of long-term borrowings held by the Group is disclosed in note
20 to the accounts. The fair value calculation of all long-term borrowings
benchmarks the Group debt against A-rated UK corporate bond yields.
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 on page 113. A segmental analysis is provided
in note 6 (pages 129 and 130 of the Annual Report) which shows a detailed
breakdown of the split between the Portfolio and the IPS business.
Consolidating the value of the IPS business in this way does not fully
recognise the value created for the shareholder by the IPS business in the
NAV. To address this, from December 2015, the NAV we have published for the
Group has included a fair value for the standalone IPS business.(1)
The current fair value of the IPS business is calculated based upon
maintainable earnings before interest, taxation, depreciation and amortisation
(EBITDA) for 2023, with an appropriate multiple applied. The EBITDA for the
IPS business for 2023 was £17.6m. This number is reached by taking the
return, including profit before interest and tax of £15.1m from note 6 on
page 129 of the Annual Report and adding back the depreciation charge for
property, plant and equipment and right-of-use assets of £1.3m, the
amortisation of intangible assets of £0.9m, and net interest expense shown in
note 6 on page 129 of the Annual Report.
The calculation of the IPS valuation and methodology used are included at note
13 on page 136 of the Annual Report. In determining a calculated basis for the
fair valuation of the IPS business, the Board has taken appropriate external
professional advice. The multiple applied in valuing the IPS business is based
on comparable companies sourced from market data, with appropriate adjustments
to reflect the difference between the comparable companies and IPS business in
respect of size, liquidity, margin and growth. A range of multiples is then
provided by the professional valuation firm, from which the Board selects an
appropriate multiple to apply.
There is no one single comparator who's business is an accurate proxy for the
unique collection of businesses that make up IPS. Whilst the group of
companies presented in the table have some likeness to the IPS business,
further work has been required in producing a multiple reflective of the fair
value to attribute to the IPS business. Given this, as a cross-check, we have
validated the valuation using a discounted cash flow with an externally
advised WACC and are satisfied it is in range.
(1)Note the daily NAV is refreshed six monthly to reflect the IPS business at
fair value and therefore the daily NAV has the most recent annual and interim
IPS FV valuation.
The multiple of 10.5x has been applied to value the business. The uplift
reflects that the IPS business now has six years of revenue and profit growth.
The multiple selected has remained the same as the prior year.
The comparable companies used, and their recent performance, are presented in
the table below:
Company Revenue LTM(2) LTM EV/ EBITDA Net revenue CAGR 2019-2023
(£m) 31 December EBITDA
2023 margin LTM
Law Deb IPS 51 10.5x 12.0% 32.0%
SEI Investments Company 1,550 14.4x 5.6% 24.9%
SS&C Technologies Holding, Inc 4,449 10.4x 6.2% 33.2%
EQT Holdings Limited 74 12.6x 9.7% 25.1%
Perpetual Limited 542 10.9x 17.2% 20.5%
Begbies Traynor Group plc 122 7.6x 19.3% 18.8%
Christie Group plc 69 21.9x (3.1%) 3.3%
JTC plc 229 16.3x 26.9% 26.0%
Link Administration Holdings Limited 500 7.8x (10.3%) 20.1%
2 LTM refers to the trailing 12 months 'results' which are publicly available.
Source: Capital IQ.
Valuation guidelines require that the fair value of the IPS business be
established on a stand-alone basis. Therefore, the valuation does not reflect
the value of Group tax relief applied from the investment trust to the IPS
business.
It is hoped that our continued initiatives to achieve 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 percentage
growth in 2024. The total valuation (including surplus net assets) of the
business has increased by £119m/132% since the first valuation of the
business as at 31 December 2015.
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 on page
37 of the Annual Report.
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 relate to the IPS business have been removed (£50.0m) and
substituted with the calculation of the fair value and surplus net assets of
the business £210.8m. An adjustment of £33.2m is then made to show the
Group's debt at fair value, rather than the amortised cost that is included in
the NAV per the Group statement of financial position. This calculation shows
a NAV fair value for the Group as at 31 December 2023 of £1,048.3m or 802.67
pence per share.
31 December 2023 31 December 2022
£000 Pence per share £000 Pence per share
Net asset value (NAV) per Group statement of financial position 854,229 654.07 799,067 625.81
Fair valuation of IPS: EBITDA at a multiple of 10.5x (2022: 10.5x) 185,063 141.70 174,174 136.41
IPS net assets attributable to IPS valuation 25,729 19.70 27,566 21.59
Fair value of IPS business 210,792 161.40 201,740 158.00
Removal of IPS net assets included in Group net assets (49,956) (38.25) (53,364) (41.79)
Fair value uplift for IPS business 160,836 123.15 148,376 116.20
Debt fair value adjustment 33,239 25.45 25,123 19.68
NAV at fair value 1,048,304 802.67 972,566 761.69
NAV attributable to IPS 210,792 20% 201,740 21%
See commentary for the breakdown of the assets already included in the NAV per
the financial statements.
The 'results' NAV at fair value calculated above differs to the 'published'
NAV at fair value for 29 December 2023 (year end NAV released by RNS on 2
January 2024). As such, please see below for a reconciliation:
31 December 2023
Reconciliation of published NAV to results NAV: Value £000 Pence per share
Published NAV cum income with debt at fair value 1,042,279 798.06
Reconciliation of shareholders' funds to net assets:
Published NAV (855,259) (654.86)
Results NAV 854,229 654.07
Revised IPS valuation uplift:
Published NAV (valuation per 30 June 2023) (153,381) (117.44)
Results NAV 160,836 123.15
Revised Fair Value of Debentures:
Published NAV (33,639) (25.76)
Results NAV 33,239 25.45
Total NAV at fair value per results 1,048,304 802.67
Our approach to risk
The Group's risk management and internal control framework is embedded in
everyday operations and subject to regular enhancements. The diagram below
summarises our risk reporting and governance, with risks effectively managed
and monitored in a continuous risk management process. Top-down Board-level
oversight for the Portfolio and IPS business is provided by the Audit and Risk
Committee (ARC).
In discharging its oversight responsibilities in relation to the Portfolio,
the Board considers risk matters during the year by meeting periodically with
the investment managers and receives a wide range of reports about the
Portfolio including investment review, risk reporting, governance reporting
and comparative peer reporting.
Thematic discussions are held with the investment manager at two out of six of
the scheduled Board meetings each year to address market trends and insights.
The ARC supports the Board in reviewing the internal control environment of
the investment managers.
The Executive Risk Committee has responsibility for the oversight of overall
risk management within the IPS business. Detailed, bottom-up risk
identification and management is owned by either individual business lines
where they are specific to that business function, or centrally where it
relates to the Shared Services Centre or other central function. Risk
identification and management is analysed by the Group Risk Manager.
The ARC reviews the principal risks to the Group and the adequacy of the
controls in place to appropriately manage those risks as part of our ongoing
risk management. Consideration is also given to emerging risks to ensure that
the risk management framework is updated to protect the business.
The ARC recognises that there are certain risks which are inherent in the
Group's activities, such as taking market risk with respect to its Portfolio,
and the controls to manage such risks are paramount to the delivery of our
objectives.
The risk assessment process evaluates the probability of the risk
materialising and the financial, strategic or reputational impact of the risk
using a scoring system approved by the ARC. There may be uncertainty in
measuring certain risks, but the aim is to inform and guide decisions and
pinpoint areas which may require more attention.
Those risks which have a higher probability and significant impact on
strategy, reputation or financial impact under the risk scoring system are
identified as principal risks below.
Governance
The Group's risk management and internal control framework is governed via the
"parties involved" section of the diagram above and overseen by the ARC. IPS
business risks are managed through business unit risk committees and
management meetings. The outputs of these are fed through to the Executive
Risk Committee and then the ARC for review and to the Board for approval as
appropriate.
Group risk summary and mitigating actions
PRINCIPAL GROUP RISKS CHANGES TO RISK IN 2023 MITIGATING FACTORS
1. Investment Performance and Market Risk
The risk of the Portfolio failing to deliver and/or failing to consider and UNCHANGED · Market risk is an accepted risk given the nature of the
react to market conditions to deliver the strategic objectives to:
Portfolio. To manage this inherent risk the Board regularly reviews the
The risk level remains high as geopolitical tensions and global economic investment managers' report including risk indicators, MI, and other financial
pressures continue to have an unfavourable impact on global markets and information and has open dialogue, robust discussion and challenge to the
therefore the Portfolio. High global inflation in the year undermines the investment managers on their approach and performance, seeking explanations
value of investment returns. from the investment managers where performance is not in line with our
objectives.
· Achieve long-term capital growth. · The investment trust is closed ended therefore does not have to
sell investments to provide liquidity to shareholders who wish to sell. This
enables our investment managers to invest for the long-term.
· Deliver steadily increasing income. · To mitigate leverage risk, all borrowings require the prior
approval of the Board and gearing levels are kept under close review by the
Board. We have substantial headroom on all of our existing borrowings.
· Achieve a rate of return greater than the FTSE Actuaries
All-Share Index, our benchmark.
The principal risk is a material decline in the value of the NAV and
under-performance against the benchmark. Investment performance and market
risk are the largest risks to which the Group is exposed.
Our investment risk includes market risk, gearing risk, credit risk and
liquidity risk.
2. Cyber, Technology and Systems Risk
We rely on a set of critical IT systems which are fundamental to the INCREASED RISK · The Group is Cyber Essentials Plus certified, the highest level
day-to-day running of the business, as in any technology-enabled business. The
of certification offered under the Government-backed, industry-supported Cyber
threat of unauthorised or malicious attacks on our IT systems is an ongoing The cyber threat landscape is rapidly changing, with cyber-attacks growing Essentials scheme which helps organisations protect themselves against common
risk. ever more sophisticated and their increasing frequency and scale is well online security threats. Cyber insurance is also in place.
publicised. Industry data suggests that "bad actors" are becoming increasingly
well-financed, with cyber experts warning of a rising use of commercial
hacking tools.
Failures in these systems could lead to reduced revenue, increased costs, · We place focus on training our staff about cyber security risks
liability claims, or harm to our reputation or competitive position. This including phishing training and testing.
includes the systems of Janus Henderson, our investment manager.
· We adopt a continuous improvement approach to IT security and
work closely with our supply chain and industry recognised best in class
security providers.
· The ARC is alert to the threat and risks of cyber security and
receives regular updates on the strategic improvements to IT.
· Janus Henderson are subject to an independent annual controls
review to ensure there are no material deficiencies. During the year we
conducted an on-site assessment of Janus Henderson's information system and
business continuity/disaster recovery plans and consider them to be acceptable
for our purposes. We also reviewed Janus Henderson's internal controls reports
and ISAE 3402 report with a particular focus on IT, and no major issues were
highlighted.
3. IPS Concentration Risk
The unique setup of the Group as a Portfolio with the unquoted IPS business, UNCHANGED · The IPS business comprises a diversified range of services with
which represents 20% of NAV and accounted for 33% of revenue return per share
little client concentration risk.
in 2023, creates an illiquid concentration risk. The IPS business includes some counter-cyclical services which may help to
counteract any adverse market conditions for other business lines.
Failure to deliver on the IPS strategy could result in a significant reduction · The CEO and COO are accountable for the day-to-day running and
in valuation of the Group's largest asset thereby putting pressure on our operation of the IPS business with independent oversight and challenge from
ability to meet our stated objective of long-term capital growth, and steadily the Non-Executive Directors. The performance of the IPS business is reviewed
increasing income. at all regular Board meetings.
IPS Concentration risk also includes aggregation of litigation, compliance, · The annual IPS budget is subject to review and approval by the
regulatory and internal control failures and people risk. Board which provides robust scrutiny and challenge on IPS strategic plans.
· Any significant IPS investment requires Board approval. This
reduces the risk of unplanned concentration risk.
· Valuation of the IPS business takes into account the illiquid
nature of the holding.
· The ARC has oversight of internal control findings from
second/third line and external audit; and review and approval of the IPS
valuation to ensure it appropriately reflects the risk of the IPS business.
Emerging risks and mitigating actions
EMERGING RISKS CHANGES TO RISK IN 2023 MITIGATING FACTORS
1.ESG Considerations
As ESG becomes an area of increased focus and regulation, we must consider the UNCHANGED · ESG is considered by our investment managers when selecting
impact of ESG factors adversely affecting the Group's reputation and
investments. ESG ratings and events in relation to our Portfolio holdings are
performance both directly and indirectly. The level of risk has been broadly in line with last year. We observe regularly reviewed by the Board and challenged where necessary.
continued stakeholder recognition on the prominence of ESG risks. Challenges
around the consistency and reliability of ESG ratings data remain.
The ESG regulatory landscape continues to change, therefore we must ensure · The investment managers regularly meet with the management of the
that we do not fall behind in meeting these requirements including climate and companies that they hold in the Portfolio, which allows informed discussion
ESG-related targets, as well as ESG-related disclosure requirements. around ESG-related issues.
There is also the risk of ESG issues in the companies that we invest in. We · Janus Henderson's research team continues to monitor regulations
run the risk that one or a number of investee companies lose value, due to that impact our Portfolio.
either not adapting to the ESG agenda, or from specific ESG incidents,
resulting in a loss of value.
· We continue to engage and monitor with stakeholders on ESG, in
order to identify trends, patterns and areas of key concern.
Viability statement
The Board has considered the Group's current financial position and the
potential impact of its principal risks and uncertainties, and has a
reasonable expectation that the Group will be able to continue in operation
and meet its liabilities as they fall due for a period of five years from the
date of this report. The Board have increased the assessment period from three
to five years, consistent with market peers and long-term nature of the
investment trust.
In assessing the viability of the Group over the review period, the Board has
considered a number of key factors, including:
Our business model and strategy
· The Board seeks to ensure that the Group delivers long-term
performance. The closed ended nature of the investment trust creates a stable
capital basis which enables our investment managers to take a longer term view
in their construction and management of the Portfolio. This partially
mitigates the risk to the Group of potential liquidity issues should
shareholders wish to sell their shares, potentially avoiding any untimely
requirements to sell down the Portfolio.
· As an investment trust, we benefit from the unique structure of a
predominately UK-based equity Portfolio with a diversified revenue stream
arising from the IPS business. As demonstrated by our long-term performance,
the combination of the Portfolio and the IPS revenue streams provide
protection to the long-term viability of the Group. Over a five year period,
the share-price total return is 85.3%. The NAV total return with debt at FV is
62.4% compared to the FTSE Actuaries All-Index Total Return of 37.7%.
· One of the principal group risks relates to investment performance
and market risk. Part of the risk to the Group is that a breach of our debt
covenants results in a requirement for the Group to repay the debentures at
short notice, potentially requiring the sale of assets during a market
downturn. Whilst the Board acknowledges this risk, the uncertainty arising due
to Covid and more recently the macroeconomic environment demonstrates the
Group's ability to navigate these challenges. At the height of market decline
on 23 March 2020, the Group maintained significant headroom on all covenants.
· The IPS business currently holds enough working capital to meet any
short term requirements of the group and our book of clients provides a
steady, largely reoccurring, flow of income. There has been a concerted focus
on debtor management which has enhanced the IPS business's cashflow over the
past year and improved our working capital cycle.
· Furthermore, the majority of the Portfolio is invested in UK listed
securities which are traded on major stock exchanges, providing the Group with
the ability to quickly liquidate assets, should the need arise.
· The investment trust has an ongoing charge of 2023: 0.49% (2022:
0.49%). This is the third lowest OCR in the UK Equity Income sector*.
* Source: The AIC Compare investment companies; The AIC
Our business operations
· The investment trust retains ownership of all assets held by the
Custodian under the terms of formal agreements with the Custodian and
Depositary. This supports our ability to meet our Legal and Regulatory
requirements and acts as a control to both verify the existence of our assets
and further safeguard the interests of our shareholders.
· The Group's cash is all held with banks approved by the Board. The
Company's cash balance, including money market funds, as at 31 December 2023
amounted to £12.4m (31 December 2022: £29.8m), with IPS holding a further
£19.0m. Cash is treated as a fungible across the Group and it is deployed on
a basis of need with periodic clear down of inter-company balances via an
intra-group net-off agreement.
· There is long term borrowing in place comprising four debentures;
Maturity date PAR Value Interest
2034 £40m 6.125%
2041 £20m 2.54%
2045 £75m 3.77%
2050 £30m 2.53%
The weighted average cost of borrowing is 3.96%. Each debenture is subject to
a formal agreement, including financial covenants which the Company has
complied with in full during the year. As at the end of December, net gearing
was 12.6%, which is well within the typical operating range of 10%-20%.
· During January 2021, the Company also made arrangements to put in
place a £50m unsecured overdraft facility with HSBC. Whilst available, this
facility is currently not in use but provides further mitigation of any
liquidity risk.
· The Board reviews the Portfolio performance including revenue
forecasts, along with other key metrics such as gearing at each Board Meeting
and receives monthly financial reporting to monitor and manage the principal
risk relating to investment performance.
In addition to this, the Board carries out an assessment of our principal
risks and uncertainties which could threaten the Group's business model. This
assessment has been shared separately and is presented as part of the annual
report. As part of this exercise, the Board has assessed the emerging risks
which may impact the operations of the Group and will continue to actively
review the likely impact of these potential risks. This is set out below.
The ongoing conflicts from Russia-Ukraine and Israel-Hamas, combined with
geopolitical uncertainty from the US presidential election and likely UK
general election in 2024 continue to influence the global and UK economy. The
Board does not consider this will have an impact on the longer term viability
of the Group, given the headroom identified in the risk sensitivities from the
far more extreme scenarios.
In light of the current conditions, the Board has considered the Group's
current financial position and the potential impact of its principal risks and
uncertainties, and has a reasonable expectation that the Company will be able
to continue in operation and meet its liabilities as they fall due for a
period of five years from the date of this report.
Balance sheet resilience
As at the 31 December 2023, Law Debenture Corporation held total investments,
including cash and the IPS business of £1.21bn (31 December 2022: £1.14bn).
With the exception of the IPS business, the majority of these assets are
liquid and could be sold down within a short period of time, i.e. less than 10
working days.
The Board and the Executive Leadership team have actively monitored the cash
position across the Group throughout the year, mindful of our commitment to
pay quarterly dividends to shareholders. As of 31 December 2023, the Group
holds cash of £31.4m (31 December 2022: £49.6m). In addition to this, the
Company has an overdraft facility of £50m to protect against any significant
fall of cash inflows.
Repurchase and issue of shares
At the 2023 AGM, the Directors were given power to buy back up to 19,274,822
ordinary shares or, if less, the number of shares equal to 14.99% of the
Company's issued share capital at that date. During the year, the Company did
not repurchase any of its shares for cancellation. This authority will expire
at the 2024 AGM. The Company intends to seek shareholder approval to renew its
powers to repurchase shares for cancellation up to 14.99% of the Company's
issued share capital if circumstances are appropriate, at the 2024 AGM.
The Directors were also given power to allot up to 12,858,454 ordinary shares
at the 2023 AGM. From the 2023 AGM to the 26 February 2024 the Company issued
a total of 8.3m ordinary shares under its share issuance programme and our
SAYE scheme. The authority will expire at the 2024 AGM at which the Company
intends to seek shareholder approval to renew its powers to issue shares up to
10% of the Company's share capital in issue at 26 February 2024.
Share capital and significant shareholdings
The Company's share capital is made up of ordinary shares with a nominal value
of 5p each. The voting rights of the shares on a poll are one vote for every
share held. There are no restrictions on the transfer of the Company's
ordinary shares or voting rights and no shares which carry specific rights
with regard to the control of the Company. There are no other classes of share
capital and none of the Company's issued shares are held in treasury. As at 31
December 2023, there were 131,191,892 ordinary shares in issue with
131,191,892 voting rights. Note 17 includes details of share capital changes
in the year.
As at 31 December 2023, there were no shareholders that had notified the
Company of a beneficial interest of 3% or more of the issued share capital.
Additionally, no such disclosures had been made to the Company as at 26
February 2024. Share information as required by section 992 of the Companies
Act 2006 appears at pages 62 and 139 of the Annual Report.
Significant financial issues relating to the 2023 accounts
The UK Corporate Governance Code requires the Committee to describe any
significant issues considered in relation to the 2023 financial statements and
how those issues were addressed.
The significant issues and judgements considered by the Committee include the
valuation of IPS, oversight of the Corporate Secretarial Services impairment
review, the existence and valuation of investments, discussions around the
control environment and the accounting for the Pension Defined Benefit Scheme.
No new significant issues arose during the course of the external audit. There
continued to be a focus on embedding the improved Finance operations and we
have continued to make investments in this area to support the strategy for
long term growth. We are pleased with the progress made and the improved
control environment.
The Committee is satisfied that the judgements made by management are
reasonable and that appropriate disclosures have been included in the
accounts. Taken in its entirety, the Committee was able to conclude and report
to the Board that the financial statements themselves and the Annual Report as
a whole are fair, balanced and understandable and provide the necessary
information for shareholders to assess the Company and Group's position and
performance, business model and strategy.
Directors' responsibility statement pursuant to DTR4
The Directors confirm to the best of their knowledge that:
· the financial statements have been prepared in accordance with
international financial reporting standards adopted pursuant to Regulation
(EC) No 1606/2002 as it applies in the European Union and give a true and fair
view of the assets, liabilities, financial position and profit and loss of the
Group; and
· the Annual Report includes a fair review of the development and
performance of the business and the financial position of the Group, together
with a description of the principal risks and uncertainties that they face.
This report was approved by the Board of Directors on 26 February 2024.
Consolidated statement of profit or loss
For the year ended 31 December 2023
2023 2022
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
UK dividends 29,834 - 29,834 29,837 - 29,837
UK special dividends - 1,368 1,368 1,176 3,442 4,618
Overseas dividends 3,670 - 3,670 3,451 - 3,451
Total dividend income 33,504 1,368 34,872 34,464 3,442 37,906
Interest income 1,197 - 1,197 266 - 266
Independent professional services fees 58,543 - 58,543 53,452 - 53,452
Other income 1,369 - 1,369 847 - 847
Total income 94,613 1,368 95,981 89,029 3,442 92,471
Net gain/(loss) on investments held at fair value through profit or loss - 37,379 37,379 - (126,234) (126,234)
Total income and capital gains/(losses) 94,613 38,747 133,360 89,029 (122,792) (33,763)
Cost of sales (8,255) - (8,255) (8,408) - (8,408)
Administrative expenses (39,708) (2,075) (41,783) (34,332) (1,908) (36,240)
Operating profit/(loss) 46,650 36,672 83,322 46,289 (124,700) (78,411)
Finance costs
Interest payable (1,635) (4,908) (6,543) (1,636) (4,908) (6,544)
Profit/(loss) before taxation 45,015 31,764 76,779 44,653 (129,608) (84,955)
Taxation (1,626) - (1,626) (1,392) - (1,392)
Profit/(loss) for the year 43,389 31,764 75,153 43,261 (129,608) (86,347)
Return per ordinary share (pence) 33.43 24.47 57.90 34.44 (103.17) (68.73)
Diluted return per ordinary share (pence) 33.41 24.47 57.88 34.42 (103.14) (68.72)
Consolidated statement of comprehensive income
For the year ended 31 December 2023
2023 2022
GROUP Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
Profit/(loss) for the year 43,389 31,764 75,153 43,261 (129,608) (86,347)
Foreign exchange on translation of foreign operations (602) - (602) - 199 199
Pension actuarial (losses)/gains (1,400) - (1,400) (300) - (300)
Taxation on pension - - - 57 - 57
Other comprehensive (loss)/income for year (2,002) - (2,002) (243) 199 44
Total comprehensive income for the year 41,387 31,764 73,151 43,018 (129,409) (86,391)
All items stated in the statement of comprehensive income will be subsequently
classified to profit or loss when specific conditions are met.
Statement of financial position
as at 31 December 2023
Assets GROUP COMPANY
2023 2022 2023 2022
£000 £000 £000 £000
Non-current assets
Goodwill 19,006 19,036 - -
Property, plant and equipment 2,267 1,796 - -
Right-of-use assets 4,131 5,040 - -
Other intangible assets 3,034 3,417 16 16
Investments held at fair value through profit or loss 965,226 891,005 965,126 890,905
Investments in subsidiary undertakings - - 61,368 61,368
Retirement benefit asset 7,440 7,400 - -
Total non-current assets 1,001,104 927,694 1,026,510 952,289
Current assets
Trade and other receivables 21,496 21,443 3,014 1,284
Contract assets 8,604 5,436 - -
Cash and cash equivalents 31,439 49,559 12,382 29,825
Total current assets 61,539 76,438 15,396 31,109
Total assets 1,062,643 1,004,132 1,041,906 983,398
Current liabilities
Amounts owed to subsidiary undertakings - - 18,558 19,603
Trade and other payables 22,553 19,815 11,023 10,046
Lease liabilities 1,025 991 - -
Corporation tax payable 2,198 1,256 - -
Other taxation including social security 1,842 2,892 839 1,860
Contract liabilities 8,000 5,223 8 7
Total current liabilities 35,618 30,177 30,428 31,516
Non-current liabilities
Long-term borrowings 163,889 163,909 124,343 124,389
Contract liabilities 2,403 3,976 - 125
Deferred tax liabilities 1,788 1,344 - -
Lease liabilities 4,716 5,659 - -
Total non-current liabilities 172,796 174,888 124,343 124,514
Total net assets 854,229 799,067 887,135 827,368
Equity
Called up share capital 6,557 6,407 6,557 6,407
Share premium account 107,110 83,022 107,110 83,022
Own shares (3,926) (3,128) - -
Capital redemption 8 8 8 8
Foreign exchange translation reserve 2,659 2,855 - -
Capital reserves 694,276 662,512 740,146 708,382
Retained earnings 47,545 47,391 33,315 29,549
Total equity 854,229 799,067 887,135 827,368
Total equity pence per share 651.13 625.81
As permitted by Section 408 of the Companies Act 2006, the Company has not
presented its own income statement, however its profit for the year was
£76,763,000 (2022: loss £89,312,000). The financial statements were approved
by the Board of Directors and authorised for issue on 26 February 2024. They
were signed on its behalf by:
R. Hingley, Board Chair | D. Jackson, Chief Executive Officer
The Law Debenture Corporation p.l.c. registered number 00030397
Consolidated statement of changes in equity
As at 31 December 2023
GROUP
Share capital Share premium account Own shares Capital redemption Foreign exchange translation reserve Capital reserves Retained earnings Total equity
£000 £000 £000 £000 £000 £000 £000 £000
Balance at 1 January 2023 6,407 83,022 (3,128) 8 2,855 662,512 47,391 799,067
Profit/(loss) for the year - - - - - 31,764 43,389 75,153
Foreign exchange - - - - (196) - (602) (798)
Actuarial (loss)/gain on pension scheme (net of tax) - - - - - - (1,400) (1,400)
Total comprehensive profit/(loss) for the year - - - - (196) 31,764 41,387 72,955
Issue of shares 150 24,088 (798) - - - - 23,439
Dividend relating to 2022 - - - - - - (11,276) (11,276)
Dividend relating to 2023 - - - - - - (29,957) (29,957)
Balance at 31 December 2023 6,557 107,110 (3,926) 8 2,659 694,276 47,545 854,229
GROUP
Share capital Share premium account Own shares Capital redemption Foreign exchange translation reserve Capital reserves Retained earnings Total equity
£000 £000 £000 £000 £000 £000 £000 £000
Balance at 1 January 2022 6,145 41,865 (3,215) 8 2,656 789,423 41,955 878,837
(Loss)/profit for the year - - - - - (129,608) 43,261 (86,347)
Foreign exchange - - - - 199 2,697 426 3,322
Actuarial (loss)/gain on pension scheme (net of tax) - - - - - - (243) (243)
Total comprehensive profit/(loss) for the year - - - - 199 (126,911) 43,444 (83,268)
Issue of shares 262 41,157 87 - - - - 41,506
Dividend relating to 2021 - - - - - - (10,396) (10,396)
Dividend relating to 2022 - - - - - - (27,612) (27,612)
Balance at 31 December 2022 6,407 83,022 (3,128) 8 2,855 662,512 47,391 799,067
Capital reserves comprises realised and unrealised gains on investments held
at fair value through profit or loss. Please refer to note 18 in the notes to
the Accounts in the Annual Report, for details of dividends paid.
Statement of changes in equity
As at 31 December 2023
COMPANY
Share capital Share premium Capital redemption Capital reserves Retained earnings Total
£000 £000 £000 £000 £000 £000
Balance at 1 January 2023 6,407 83,022 8 708,382 29,549 827,368
Profit/(loss) for the year - - - 31,764 44,999 76,763
Total comprehensive profit for the year - - - 31,764 44,999 76,763
Issue of shares 150 24,088 - - - 24,238
Dividend relating to 2022 - - - - (11,276) (11,276)
Dividend relating to 2023 - - - - (29,957) (29,957)
Total equity at 31 December 2023 6,557 107,110 8 740,146 33,315 887,135
COMPANY
Share capital Share premium Capital redemption Capital reserves Retained earnings Total
£000 £000 £000 £000 £000 £000
Balance at 1 January 2022 6,145 41,865 8 835,293 27,364 910,675
(Loss)/profit for the year - - - (129,608) 40,296 (89,312)
Foreign exchange - - - 2,697 (103) 2,594
Total comprehensive loss for the year - - - (126,911) 40,193 (86,718)
Issue of shares 262 41,157 - - - 41,419
Dividend relating to 2021 - - - - (10,396) (10,396)
Dividend relating to 2022 - - - - (27,612) (27,612)
Total equity at 31 December 2022 6,407 83,022 8 708,382 29,549 827,368
Capital reserves comprises realised and unrealised gains on investments held
at fair value through profit or loss. Please refer to note 18 in the notes to
the Accounts in the Annual Report, for details of dividends paid.
Cash Flow Statement
For the year ended 31 December 2023
GROUP COMPANY
2023 2022 2023 2022
£000 £000 £000 £000
Cash flows from operating activities (before dividends received) and taxation 11,268 1,983 (5,780) (6,361)
paid
Cash dividends received 32,964 37,498 48,964 47,136
Taxation paid - (700) - -
Cash generated from operating activities 44,232 38,781 43,184 40,775
Investing activities
Acquisition of property, plant and equipment (874) (151) - -
Acquisition of right of use assets - (428) - -
Expenditure on intangible assets (54) (639) - -
Purchase of investments (less cost of acquisition) (98,934) (170,653) (98,934) (170,653)
Sale of investments 62,093 145,892 62,093 145,892
Interest received 1,197 266 323 204
Cash flow from investing activities (36,572) (25,713) (36,518) (24,557)
Financing activities
Interest paid (6,544) (6,544) (6,653) (6,653)
Dividends paid (40,518) (37,167) (40,518) (37,167)
Payment of lease liabilities (1,272) (505) - -
Proceeds of increase in share capital 24,237 41,419 24,237 41,419
Purchase of own shares (798) 87 - -
Amounts receivable from intercompany - - (18,037) (23,207)
Intercompany funding - - 16,994 11,114
Net cash flow from financing activities (24,895) (2,710) (23,977) (14,494)
Net (decrease)/increase in cash and cash equivalents (17,235) 10,358 (17,311) 1,724
Cash and cash equivalents at beginning of year 49,559 35,880 29,825 25,507
Foreign exchange (losses)/gains on cash and cash equivalents (886) 3,321 (132) 2,594
Cash and cash equivalents at end of year 31,439 49,559 12,382 29,825
Extracts from the Notes to the Accounts
Going concern
The financial statements of The Law Debenture Corporation p.l.c. and the Group
have been prepared in accordance with United Kingdom adopted international
accounting standards and with International Financial Reporting Standards as
issued by the IASB.
The accounts have been prepared under the historical cost basis of accounting,
modified to include the revaluation of investment at fair value at the end of
each reporting period as explained in the accounting policies below.
The Directors have considered the impact of the current economic uncertainty,
across the Group, including cash flow forecasting, balance sheet review at
entity level, a review of covenant compliance including the headroom above the
covenants and an assessment of the liquidity of the Portfolio. Whilst the
debentures held are subject to covenants, the Directors are comfortable that
the risk of breach is minimal, and the current economic environment does not
create material uncertainty for the Group.
The assets of the Group consist largely of securities that are readily
realisable, and it will be able to meet its financial obligations, including
the repayment of the debenture interest, as they fall due for a period of at
least twelve months from the date of approval of the financial statements.
Accordingly, the Directors believe that the Group has adequate resources to
continue in operational existence for at least twelve months from the date of
approval of the financial statements.
Having assessed these factors and the principal risks, the Directors are not
aware of any other material uncertainties that cast significant doubt on the
Group's ability to continue as a going concern.
Segment analysis
Investment Portfolio Independent Professional Services Total
31 December 31 December 31 31 31 December 31 December
2023 2022 December December 2023 2022
£000 £000 2023 2022 £000 £000
£000 £000
Revenue
Dividend income 33,504 34,464 - - 33,504 34,464
IPS revenue:
Corporate Services - - 25,041 25,792 25,041 25,792
Corporate Trust - - 16,043 13,292 16,043 13,292
Pensions - - 17,459 14,368 17,459 14,368
Segment revenue 33,504 34,464 58,543 53,452 92,047 87,916
Other income 1,369 847 - - 1,369 847
Cost of sales (221) (125) (8,034) (8,283) (8,255) (8,408)
Administration costs (4,271) (3,522) (35,437) (30,810) (39,708) (34,332)
Profit before interest and tax 30,381 31,664 15,072 14,359 45,453 46,023
Interest payable (net) (note 5) (1,302) (1,432) 864 62 (438) (1,370)
Profit before tax 29,079 30,232 15,936 14,421 45,015 44,653
Income tax - - (1,626) (1,392) (1,626) (1,392)
Profit for the year 29,079 30,232 14,310 13,029 43,389 43,261
Revenue return per ordinary share (pence) 22.41 24.06 11.02 10.38 33.43 34.44
Assets 980,587 922,080 82,056 84,640 1,062,643 1,006,720
Liabilities (176,314) (176,377) (32,100) (31,276) (208,414) (207,653)
Total net assets 804,273 745,703 49,956 53,364 854,229 799,067
The table below shows the Group's revenue from contracts with customers by
business:
Gross Revenue Cost of sales Net Revenue
31 December 31 December 31 December 31 December 31 December 31 December
2023 2022 2023 2022 2023 2022
£000 £000 £000 £000 £000 £000
Pensions 17,459 14,368 (63) (25) 17,396 14,343
Corporate Trust 16,043 13,292 (3,570) (2,672) 12,473 10,620
Corporate Services 25,041 25,792 (4,401) (5,586) 20,640 20,206
Total IPS revenue 58,543 53,452 (8,034) (8,283) 50,509 45,169
For the purposes of reporting segmental performance, the table above presents
a split of the revenue column between the Portfolio, the IPS business and
Group charges. Group dividends are paid from the Portfolio segment of revenue
reserves.
Geographic location of revenue: 90% of revenue is based in the UK. Geographic
location is based on the jurisdiction in which the contracting legal entity is
based.
Major customers: Due to the diverse nature of the IPS revenue streams, there
is no single customer or concentration of customers that represents more than
3% of gross revenue streams.
Capital element: The capital element of the income statement is wholly gains
and losses relating to investments held at fair value through profit and loss
(2023: profit of £37,379k; 2022: loss of £126,234k), administrative expenses
(2023: £2,075k; 2022: £1,908k), interest payable (2023: £4,908k; 2022:
£4,908k) and a capital dividend received of 2023: £1,368k; 2022: £3,442k,
which corresponds to amounts classified as capital in nature in accordance
with the SORP are shown in the capital column of the income statement above.
Financial instruments
The principal risks facing the Group in respect of its financial instruments
remain unchanged from 2022 and are:
Market risk
Price risk, arising from uncertainty in the future value of financial
instruments. The Board maintains strategy guidelines whereby risk is spread
over a range of investments, the number of holdings normally being between 70
and 175. In addition, the stock selections and transactions are actively
monitored throughout the year by the investment manager, who reports to the
Board on a regular basis to review past performance and develop future
strategy. The Portfolio is exposed to market price fluctuation: if the
valuation at 31 December 2023 fell or rose by 10%, the impact on the Group's
total capital reserves for the year would have been £96.5m (2022: £89.1m).
Corresponding 10% changes in the valuation of the Portfolio on the Company's
total capital reserves for the year would have been £96.5m (2022: £89.1m).
10% has been used based on historic trends, however we will continue to
revisit this on a periodic basis.
Foreign currency risk, arising from movements in currency rates applicable to
the Group's investment in equities and fixed interest securities and the net
assets of the Group's overseas subsidiaries denominated in currencies other
than sterling. The Group's financial assets denominated in currencies other
than sterling were:
GROUP
2023 2022
Investments Net monetary assets Total currency exposure Investments Net monetary assets Total currency exposure
£000 £000 £000 £000 £000 £000
US Dollar 24,062 1,766 25,828 35,552 7,681 43,233
Canadian Dollar 5,564 - 5,564 6,700 - 6,700
Euro 56,492 2,829 59,321 64,452 3,508 67,960
Danish Krone 3,147 - 3,147 2,405 - 2,405
Swedish Krona - - - - - -
Swiss Franc 8,376 - 8,376 7,237 - 7,237
Hong Kong Dollar - 1,455 1,455 - 976 976
Japanese Yen 11,877 - 11,877 9,426 - 9,426
Total 109,518 6,050 115,568 125,772 12,165 137,937
The Group US dollar net monetary assets is that held by the US operations of
£1.4m (2022: £1.3m) together with £0.4m (2022: £6.4m) held by non-US
operations.
COMPANY
2023 2022
Investments Net monetary assets Total currency exposure Investments Net monetary assets Total currency exposure
£000 £000 £000 £000 £000 £000
US Dollar 24,062 - 24,062 35,552 - 35,552
Canadian Dollar 5,564 - 5,564 6,700 - 6,700
Euro 56,492 - 56,492 64,452 - 64,452
Danish Krone 3,147 - 3,147 2,405 - 2,405
Swedish Krona - - - - - -
Swiss Franc 8,376 - 8,376 7,237 - 7,237
Japanese Yen 11,877 - 11,877 9,426 - 9,426
Total 109,518 - 109,518 125,772 - 125,772
The holding in Scottish Oriental Smaller Companies Trust is denominated in
sterling but has underlying assets in foreign currencies equivalent to £8.2m
(2022: £7.3m). Investments made in the UK and overseas have underlying assets
and income streams in foreign currencies which cannot easily be determined and
have not been included in the sensitivity analysis. If the value of all other
currencies At 31 December 2023 rose or fell by 10% against sterling, the
impact on the Group's total profit or loss for the year would have been
£12.2m and £10.0m respectively (2022: £14.0m and £11.4m). Corresponding
10% changes in currency values on the Company's total profit or loss for the
year would have been the same. The calculations are based on the Portfolio at
the respective year end dates and are not representative of the year as a
whole.
Interest rate risk, arising from movements in interest rates on borrowing,
deposits and short-term investments. The Board reviews the mix of fixed and
floating rate exposures and ensures that gearing levels are appropriate to the
current and anticipated market environment. The Group's interest rate profile
was:
2023
GROUP COM
PAN
Y
Sterling HK Dollars US Dollars Euro Sterling US Dollars Euro
£000 £000 £000 £000 £000 £000 £000
Floating rate assets 25,740 1,455 1,766 2,829 12,425 - -
2022
GROUP COM
PAN
Y
Sterling HK Dollars US Dollars Euro Sterling US Dollars Euro
£000 £000 £000 £000 £000 £000 £000
Floating rate assets 37,351 976 7,681 3,508 14,357 5,780 2,662
The Group holds cash and cash equivalents on short-term bank deposits and
money market funds. Interest rates tend to vary with bank base rates. The
Portfolio is not directly exposed to interest rate risk.
GROUP COMPANY
2023 2022 2023 2022
Sterling Sterling Sterling Sterling
£000 £000 £000 £000
Fixed rate liabilities 163,892 163,909 124,343 124,389
Weighted average fixed rate for the year 3.962% 3.961% 3.274% 3.276%
If interest rates during the year were 1.0% higher the impact on the Group's
total profit or loss for the year would have been £311,000 credit (2022:
£346,000 credit). It is assumed that interest rates are unlikely to fall
below the current level.
The Company holds cash and cash equivalents on short-term bank deposits and
money market funds, it also has short-term borrowings. Amounts owed to
subsidiary undertakings include £40m at a fixed rate. Interest rates on cash
and cash equivalents and amounts due to subsidiary undertakings at floating
rates tend to vary with bank base rates. A 1.0% increase in interest rates
would have affected the Company's profit or loss for the year by £161,000
credit (2022: £224,000 credit). The calculations are based on the balances at
the respective year end dates and are not representative of the year as a
whole.
Liquidity risk
Is the risk arising from any difficulty in realising assets or raising funds
to meet commitments associated with any of the above financial instruments. To
minimise this risk, the Board's strategy largely limits investments to
equities and fixed interest securities quoted in major financial markets. In
addition, cash balances are maintained commensurate with likely future
settlements. The maturity of the Group's existing borrowings is set out in
note 20. The interest on borrowings is paid bi-annually on March and September
for the 2045 secured senior notes, April and October for the 2034 secured
bonds and May and November for the 2041 and 2050 senior secured notes.
Credit risk
Is the risk arising from the failure of another party to perform according to
the terms of their contract. Cash and cash equivalents are held with banks
which are rated "A-" or higher by Standard & Poor's Rating Services.
The credit risk on liquid funds and borrowings is limited because the
counter-parties are banks with high credit-ratings assigned by international
credit rating agencies.
The Group's maximum exposure to credit risk arising from financial assets is
£48.8m (2022: £69.3m). The Company's maximum exposure to credit risk arising
from financial assets is £12.8m (2022: £30.3m).
Outstanding customer receivables are continuously monitored and followed up
where required. Specific provisions incremental to ECL are made when there is
evidence that the Group will not be able to collect the debts from the
customer. This evidence can include indications that the customer is
experiencing financial difficulty, problems contacting the customer or
disputes with a customer. The ageing of trade receivables and the expected
credit loss at the reporting date are disclosed on page 145 of the Annual
Report.
Stock lending
Stock lending agreements are transactions in which the Group lends securities
for a fee and receives cash as collateral. The Group continues to recognise
the securities in their entirety in the statement of financial position
because it retains substantially all of the risks and rewards of ownership.
Because as part of the lending arrangement the Group sells the contractual
rights to the cash flows of the securities, it does not have the ability to
use the transferred assets during the term of the arrangement.
Stock lending transactions are carried out with a number of approved
counterparties. Details of the value of securities on loan at the year end can
be found in note 27. In summary, the Group only transacts with counterparties
that it considers to be credit worthy.
Trade and other receivables
The ageing profile of the carrying value of trade receivables past due is as
follows:
GROUP COMPANY
2023 2022 2023 2022
£000 £000 £000 £000
Between 31 and 60 days 1,965 2,162 - -
Between 61 and 90 days 1,375 1,367 - -
More than 91 days 6,192 11,640 21 15
Total 9,532 15,169 21 15
IFRS 9 credit loss rates
The Group applies the IFRS 9 simplified approach to measuring expected credit
losses using a lifetime expected credit loss provision for trade receivables
and contract assets. To measure expected credit losses trade receivables are
grouped based on similar risk characteristics including business area and
business geography and ageing.
The expected loss rates are estimated using the Group's historical credit
losses experienced over a three-year period prior to the year end. The
historical loss rates are adjusted for current and forward-looking information
on macroeconomic factors affecting the Group's customers. The Group has
identified gross domestic product (GDP) and unemployment trends act as key
economic indicators which may impact our customers' future ability to pay
debt.
The below table displays the gross carrying amount against the expected credit
loss provision and specific provisions. Specific provisions relate to certain
balances 91+ days overdue and the Group writes off a trade receivable when
there is information indicating that the debtor is in severe financial
difficulty and there is no realistic prospect of recovery.
The total specific and credit loss provision at 31 December 2023 is
£2,143,000 (2022: £3,953,000).
The loss allowance as at 31 December 2023 was determined as follows:
Trade receivables - days past due
31 December 2023
Current 1 - 30 days overdue 31 - 60 days overdue 61 - 90 days overdue 91+ days overdue Total
£000 £000 £000 £000 £000 £000
Expected loss rate 0.80% 2.08% 2.85% 5.38% 5.86% 3.31%
Gross carrying amount 5,902 2,409 1,965 1,375 6,192 17,843
Expected credit loss provision (47) (50) (56) (74) (363) (590)
Specific provision - - - - (1,553) (1,553)
Net carrying amount 5,855 2,359 1,909 1,301 4,276 15,700
The loss allowance as at 31 December 2022 was determined as follows:
Trade receivables - days past due
31 December 2022
Current 1 - 30 days overdue 31 - 60 days overdue 61 - 90 days overdue 91+ days overdue Total
£000 £000 £000 £000 £000 £000
Expected loss rate 1.71% 5.64% 3.75% 4.68% 3.59% 3.79%
Gross carrying amount 2,634 3,562 2,162 1,367 11,640 21,365
Expected credit loss provision (45) (201) (81) (64) (418) (809)
Specific provision - - - - (3,144) (3,144)
Net carrying amount 2,589 3,361 2,081 1,303 8,078 17,412
Trade and other payables
GROUP COMPANY
2023 2022 2023 2022
£000 £000 £000 £000
Due in less than one month 22,553 19,815 11,023 10,046
Due in more than one month and less than three months - - - -
Total 22,553 19,815 11,023 10,046
Fair value
The Directors are of the opinion that the fair value of financial assets and
liabilities of the Group are not materially different to their carrying
values, with the exception of the long-term borrowings (see note 20). The
Group's basis of fair value calculation on these long-term borrowings uses
quoted prices (unadjusted) in active markets for identical liabilities that
the entity can access at the measurement date. The Group does not make
adjustments to quoted prices, only under specific circumstances, for example
when a quoted price does not represent the fair value (i.e. when a significant
event takes place between the measurement date and market closing date).
Related party transactions
GROUP
Transactions between the Company and its subsidiaries, which are related
parties, have been eliminated on consolidation.
COMPANY
The related party transactions between the Company and its wholly owned
subsidiary undertakings are summarised as follows:
2023 2022
£000 £000
Dividends from subsidiaries 16,000 9,638
Interest on intercompany balances charged by subsidiaries 721 2,559
Management charges from subsidiaries 850 850
The ultimate parent entity is The Law Debenture Corporation p.l.c.
Intercompany balances represent intercompany loans which are unsecured,
interest-free and repayable on demand.
Fair value
The key management personnel are the Directors of the Company and are those
persons having authority and responsibility for planning, directing and
controlling the activities of the entity. Details of their compensation are
included in note 4 to the accounts on page 128 and in Part 2 3 and 4 of the
Remuneration Report on pages 82 to 98. Key management personnel costs
inclusive of employers national insurance are £1,558k (2022: £1,573k).
Annual General Meeting (AGM)
The 134(th) AGM will be held in-person at the offices of The Law Debenture
Corporation p.l.c., 8th Floor, 100 Bishopsgate, London, EC2N 4AG. Further
details are included in the Notice of AGM included in the full annual report
and accounts.
Access to the Annual Report
On 4 March 2024, the annual report and accounts will be available for download
from the National Storage Mechanism
at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) .
CORPORATE INFORMATION
Company advisers and information
Directors Investment portfolio manager
Robert Hingley(*+) Janus Henderson Global Investors
Tim Bond 201 Bishopsgate, London EC2M 3AE
Pars Purewal(#)
Claire Finn(~) Investment managers
Clare Askem James Henderson and Laura Foll are joint managers. They also manage Lowland
Investment Company plc, Henderson Opportunities Trust plc and the Henderson UK
Maarten Slendebroek Equity Income & Growth Fund.
Denis Jackson
Trish Houston James joined Henderson Global Investors (now Janus Henderson Investors) in
1983 and has been an investment trust portfolio manager since 1990. He first
became involved in the management of Law Debenture's portfolio in 1994 and
took over lead responsibility for management of the portfolio in June 2003.
(*)Chairman of the Board
(+)Chairman of the Nomination Committee
Laura joined Janus Henderson Investors in 2009 and has held the position of
(~) Chairman of the Remuneration Committee portfolio manager on the Global Equity Income team since 2014. She first
became involved with Law Debenture's portfolio in September 2011 and became
(#)Chairman of the Audit and Risk Committee joint portfolio manager in 2019.
Website
https://www.lawdebenture.com (https://www.lawdebenture.com/)
Registrar
Computershare Investor Services PLC
The Pavilions, Bridgwater Road, Bristol BS99 6ZZ
T: 0370 707 1129
Auditors
Deloitte LLP, 110 Queen Street, Glasgow, G1 3BX
Alternative Investment Fund Manager
The Law Debenture Corporation p.l.c.
Global custodian
HSBC Bank plc (under delegation by the depositary)
8 Canada Square, London E14 5HQ
Joint Brokers
J.P. Morgan Cazenove Limited
25 Bank Street, London E14 5JP
Peel Hunt LLP
100 Liverpool Street, London, EC2M 2AT
Depositary
NatWest Trustee and Depositary Services Limited
250 Bishopsgate, London EC2M 4AA
The Law Debenture Corporation p.l.c. is registered in England, company
registration number 30397. LEI number - 2138006E39QX7XV6PP21
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