Last checked at 23 Nov 2011 07:30
THE LINDSELL TRAIN INVESTMENT TRUST PLC
Report for the Half Year ended 30 September 2011
Highlights for the Half Year
Performance comparisons 1 April 2011 - 30 September 2011 | |
Mid-market share price per Ordinary Share # | +3.5% |
Net asset value per Ordinary Shareˆ | +1.7% |
Benchmark * | +2.3% |
MSCI World Index (Sterling) | -13.8% |
UK RPI Inflation (all items) | +2.3% |
# | Calculated on a total return basis |
* | The index of the annual average yield on the UK 2.5% Consolidated Loan Stock between the relevant dates |
ˆ | The net asset value at 30 September 2011 has been adjusted to include the dividend of £3.65 per Ordinary Share paid on 29 July 2011. |
Objective of the Company
The objective of the Company is to maximise long-term total returns with a minimum objective to maintain the real purchasing power of Sterling capital as measured by the annual average yield on the UK 2.5% Consolidated Loan Stock. |
Investment Policy
The Investment Policy of the Company is to invest:
• in a wide range of financial assets including equities, unquoted equities, bonds, funds, cash and other financial investments globally with no limitations on the markets and sectors in which investment may be made, although there may be a bias towards Sterling assets consistent with a Sterling-denominated investment objective. The Directors expect that the flexibility implicit in these powers will assist in the achievement of the absolute returns that the investment objective requires;
• in Lindsell Train managed fund products, subject to Board approval, up to 25% of its gross assets;
• to retain a holding, currently 25%, in Lindsell Train Limited in order to benefit from the growth of the business of the Company's Investment Manager.
Diversification
The Company expects to invest in a concentrated portfolio of securities with the number of equity investments averaging fifteen companies. The Company will not make investments for the purpose of exercising control or management and will not invest in securities of or lend to any one company (or other members of its group) more than 15% by value of its assets (before deducting borrowings). The Company will not invest more than 15% of gross assets in other closed-ended investment funds.
Gearing
The Directors' policy is to permit borrowings up to 50% of the net asset value of the Company in order to enhance returns where and to the extent that this is considered appropriate.
Dividends
The Directors' policy is to pay annual dividends consistent with retaining the maximum permitted earnings in accordance with investment trust regulations.
Chairman's Statement
The Company's net asset value ended the first six months of the financial year up 1.7% (including the dividend paid in July). Although performance was held back by weak world stock markets (the MSCI World Index in Sterling declined by 13.8%), it was pleasing to see that the return ended up in positive territory as the company's benchmark and inflation (RPI index) continued their inexorable progress upwards (both up 2.3% over the half- year). This outcome mirrors previous periods of market weakness, with the Company registering better performance than markets, which hopefully provides a platform for growth in the future. Exactly when that growth will emerge is particularly difficult to forecast given the not inconsiderable headwinds that face the world's over-indebted economies today. As Lindsell Train does not claim to have any competitive advantage in the area of economic predictions, we, and I hope you as fellow shareholders, take comfort that the world's consumers will continue to buy basic necessities, lighten life's travails with the odd drink and continue to inform and entertain themselves as they have done in the past. If they do then the bulk of our investments will continue to flourish whatever happens to the general economy or riskier areas of the wider investment universe.
Certainly the last six months give us some confidence that our companies can buck any malign trend. Unilever, Diageo and Kraft were all up c.5% and most other positions fell only marginally. But there were two notable exceptions: Heineken's expected 2011 profits fell short of expectations - and its price fell by a quarter from its recent high in response; and Nintendo continues to disappoint - its price decline reflecting the fall in its profitability as it progresses with the changeover to new alternatives to the highly successful Nintendo DS and Wii consoles. The Manager's confidence in both stocks remains unwavering and indeed resulted in some additions to the position in Nintendo, taking advantage of the extraordinary 46% fall in its price since the end of March.
Falling markets can offer new opportunities. The Company is fully invested, with 87% exposure to equities. It retains a position in undated gilts and has hedged 45% of its position in the Lindsell Train Japanese Equity Fund with a short futures contract. Its quoted equities yield on average 3.3% - only 0.7% below the undated gilt yield, which has narrowed considerably following the recent rally in bond prices . It is not inconceivable that equity yields could exceed long-term bond yields in the near future, as they have done for many years in Japan . This brings nearer the prospect of us matching or exceeding the benchmark from yield alone - a particularly unusual opportunity and one that might deserve a full, 100%, allocation to equities given the value to shareholders that such a yield on real assets would represent. Rarely in our investment experience has it been possible to protect the real value of capital by the income from real assets alone.
Lindsell Train Limited ('LTL') continued to grow its funds under management ('FUM') in the face of declining markets, thanks in the main to continued inflows into its UK Equity mandates, together with the steady growth in assets of the Lindsell Train Global Equity Fund, launched in March. FUM over the 6 month period were up 7% to £1,445m. As a result LTL's valuation continued to grow, by 18% over the half year, and the holding now represents more than 13% of net assets. Shareholders should be aware that if fluctuations in markets become even more accentuated, the impact on LTL's valuation (formulaically linked to its FUM and earnings), and therefore the Company's valuation, may become more pronounced subject to LTL's business growth.
We are glad to report that, at this stage at least, the new investments the Company made in to Lindsell Train products (the long only Japanese Equity Fund and the new Global Equity Fund) have, in keeping with our other portfolios, held up as well as the directly held equities and in both cases have outperformed their respective benchmarks since these were made in early April. As previously noted, the ability of these new funds to attract third party investors is becoming established.
With other asset classes, whether bonds, cash, commodities or property, offering so little in yield we believe that the sound prudently managed companies that we own represent an increasingly alluring alternative - especially when combined with the inflation protection they offer in what remains uncertain times.
D Adamson Chairman 22 November 2011
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Investment Manager's Report
Old people get bearish. And it is undeniable that as I hurtle through middle-age I find myself having to work harder to see the glass half full and to keep walking on the sunny side of the street. But our asset allocation today (85% in equities) says we are moderately bullish and moderately bullish is how we feel, despite the prevailing macro-economic despondency. In this report I will put a three-pronged Equity bull case, not so much in an attempt to persuade shareholders that we are indubitably right - because who really knows? But to help explain why the portfolio is positioned as it is.
First, between 31 October 2007 and 9 March 2009 the MSCI World Equity Index fell from 1682 to 688, a decline of nearly 60%. This was a major bear market by all historic standards and signified, especially in hindsight, unsustainable banking and governmental practices around the world. The negative ramifications of the required changes to bank and government behaviour - essentially cutting back reliance on debt - still reverberate. Nonetheless, a 60% fall in the value of the world's quoted Equity must compensate for a mighty lot of bad news and prices have recovered since that nadir, to 1190 as this report is written. What is more, with each passing month from that low, capital market activity edges back toward normality. According to Bloomberg, over the 9 months to end September 2011 there have been 20,500 corporate deals announced worldwide, with an aggregate value of c$1.8 trillion. Those totals are, respectively, 7% and 20% higher than over the comparable period in 2010 and much more so again than from the still shell-shocked 2009. Meanwhile, again according to Bloomberg, there have been 1,881 Initial Public Offerings (IPOs) around the world in 2011 to date, up 26% on last year. Equity investors invest in companies, not currencies or bonds. My point is that, despite the macro-economic turmoil, which is indeed threatening the value of government bonds and paper currencies, despite this, the corporate sector is getting on with the task of improving its strategic prospects. It is doing so by taking advantage of what everyone acknowledges is its still robust profitability and balance sheets. Companies are ambitious to get deals done, often by accessing cheap stock market assets. This capital market cycle is unfolding in the way that all such cycles unfold and we see no reason why this upswing in the volume of deals and IPOs shouldn't be higher again in 2012.
Next, I highlight just three of 2011's 20,500 transactions. LVMH buys Bulgari, for the highest valuation anyone has ever seen for a luxury goods company. Unilever sells its Sanex brand to Colgate, for a rating double that of its own. SAB Miller pays 3.0x annual sales for Fosters, by now a regional beer brand. These are strategic deals, conducted by rational, profit seeking allocators of corporate capital (in other words, not the actions of flighty hedge fund momentum traders). And what we deduce from them is two things. First, that brands, particularly globally resonant brands, are extremely valuable - in these instances far more valuable than institutional investors had assumed. The economies of scale to be garnered from the establishment of genuinely global brands are material and not fully reflected in stock market valuations. Second, any such brands that offer a credible entrée into Emerging Economies are extraordinarily valuable.
Of course, Emerging Markets will be cyclical and volatile, but M. Arnault, CEO of LVMH, is no fool. He judges the cachet of Bulgari will bring LVMH growing Asian profits not just for this economic cycle, but decades to come. I liked the following statistics, courtesy of a Unilever shareholder presentation. In the Netherlands and UK: the average citizen spends €44 a year on Unilever products. In Indonesia, where 95% of the population use Unilever brands, the average spend is nonetheless only €7 per head. In India it is €2, in Nigeria €1. Unilever has 90% of the Nigerian oral care market. This Emerging Market story is still only just starting and it has the power to drive profits and share prices for many major global corporations.
Finally, and I recognise the theatricality of this assertion, in our opinion the most important news for financial markets in the second half of 2011 was nothing to do with the Euro. It was Amazon's announcement of its new tablet, Kindle Fire. This device is likely to further extend the reach of the Internet into people's work practices and day-to-day lives. News, information, entertainment, plus all manner of shopping/transactions will be more freely available and in greater profusion than ever before. In corroboration, we were staggered to learn that in the month of July 2011 alone 6.9 billion online videos were downloaded in the US - a record and an astonishing indication of how quickly people are adapting to new technology, but a record we are sure will soon be exceeded.
It is clear that many heavily-capitalised sectors of the world's equity markets are impacted, for both good and ill, by the spread of tablets and all other related devices - for example, fixed-line and mobile telephony, tech hardware, software, Internet, media, retail and leisure. On balance, we think the devices are a force for good, tending to improve the productivity of those economies where they have become networked and to stimulate creativity amongst owners or developers of Intellectual Property (IP). In particular, consumption of software, very broadly defined, is likely to explode as more and more "analogue" activities go online. Our bet is that the Amazon announcement will be looked back on in five years time as way more significant for its impact on long term equity values, than the eventual denouement of the Greek tragedy.
A number of franchises we hold within your Company should be beneficiaries - Financial Times, Penguin, Pearson Education, Economist, Elsevier, Lexis-Nexis, eBay, Paypal, LSE, (for its data services), Pokemon and many others via the two Lindsell Train funds. Technology is helping to make these products more valuable to their users, with much lower costs. It is no coincidence, we think, that many of our Media/Technology investments have proven resilient through 2011, demonstrating, at least, their shares are no longer in a primary bear market. Indeed, we expect our IP investments to be at the vanguard of any new bull market. We find it hard to conceive this eventual bull market being driven by anything other than Technology, or technology-exploiting corporations.
N Train Lindsell Train Limited - Investment Manager 22 November 2011
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Income Statement
Six months ended | Six months ended | Year ended | |||||||
30 September 2011 | 30 September 2010 | 31 March 2011 | |||||||
Unaudited | Unaudited | Audited | |||||||
Revenue | Capital | Total | Revenue | Capital | Total | Revenue | Capital | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
(Losses)/gains on investments | - | (46) | (46) | - | 1,257 | 1,257 | - | 3,408 | 3,408 |
Exchange gains on currency balances | - | 145 | 145 | - | 10 | 10 | - | 1 | 1 |
Gains/(losses) on forward currency contracts | - | 94 | 94 | - | (145) | (145) | - | (235) | (235) |
Gains/(losses) on futures contracts | - | 46 | 46 | - | - | - | - | (24) | (24) |
Income (note 5) | 752 | - | 752 | 631 | - | 631 | 1,287 | - | 1,287 |
Investment management fees (note 6) | (123) | - | (123) | (235) | - | (235) | (250) | (469) | (719) |
Other expenses (note 7) | (131) | (1) | (132) | (119) | (2) | (121) | (245) | (2) | (247) |
Net return before finance costs and tax | 498 | 238 | 736 | 277 | 1,120 | 1,397 | 792 | 2,679 | 3,471 |
Interest payable and similar charges | (3) | - | (3) | (1) | - | (1) | (3) | - | (3) |
Return on ordinary activities before tax | 495 | 238 | 733 | 276 | 1,120 | 1,396 | 789 | 2,679 | 3,468 |
Tax on ordinary activities | (15) | - | (15) | (16) | - | (16) | (29) | - | (29) |
Return on ordinary activities after tax for the period | 480 | 238 | 718 | 260 | 1,120 | 1,380 | 760 | 2,679 | 3,439 |
Return per Ordinary Share | £2.40 | £1.19 | £3.59 | £1.30 | £5.60 | £6.90 | £3.80 | £13.40 | £17.20 |
All revenue and capital items in the above statement derive from continuing operations. | ||||||
The total columns of this statement represent the profit and loss accounts of the Company. The revenue and capital columns are supplementary to this and are prepared under the guidance published by the Association of Investment Companies.
A statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.
No operations were acquired or discontinued during the period. | ||||||
Reconciliation of Movements in Shareholders' Funds |
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Share capital £'000 | Special reserve £'000 | Capital reserve £'000 | Revenue reserve £'000 |
Total £'000 |
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For the six months ended 30 September 2011 |
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At 31 March 2011 | 150 | 19,850 | 20,926 | 1,657 | 42,583 |
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Return on ordinary activities after tax for the financial period | - | - | 238 | 480 | 718 |
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Dividends paid | - | - | - | (730) | (730) |
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At 30 September 2011 | 150 | 19,850 | 21,164 | 1,407 | 42,571 |
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For the six months ended 30 September 2010 |
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At 31 March 2010 | 150 | 19,850 | 18,247 | 897 | 39,144 |
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Return on ordinary activities after tax for the financial period | - | - | 1,120 | 260 | 1,380 |
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At 30 September 2010 | 150 | 19,850 | 19,367 | 1,157 | 40,524 |
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For the year ended 31 March 2011 |
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At 31 March 2010 | 150 | 19,850 | 18,247 | 897 | 39,144 |
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Return on ordinary activities after tax for the financial period | - | - | 2,679 | 760 | 3,439 |
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At 31 March 2011 | 150 | 19,850 | 20,926 | 1,657 | 42,583 |
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Balance Sheet
30 September | 30 September | 31 March | |
2011 | 2010 | 2011 | |
Unaudited | Unaudited | Audited | |
£'000 | £'000 | £'000 | |
Fixed assets | |||
Investments held at fair value through profit or loss | 42,451 | 39,420 | 42,176 |
Current assets | |||
Forward currency contracts held at fair value through profit or loss | 4,026 | 4,007 | 3,922 |
Debtors | 196 | 375 | 194 |
Cash at bank | 392 | 1,247 | 1,076 |
4,614 | 5,629 | 5,192 | |
Current liabilities | |||
Forward currency contracts held at fair value through profit or loss | (3,904) | (4,013) | (3,871) |
Futures held at fair value through profit or loss | (15) | - | (24) |
Bank overdraft | (538) | (176) | (321) |
Other payables | (37) | (336) | (569) |
Net current assets | 120 | 1,104 | 407 |
Net assets | 42,571 | 40,524 | 42,583 |
Capital and reserves | |||
Called up share capital | 150 | 150 | 150 |
Special reserve | 19,850 | 19,850 | 19,850 |
20,000 | 20,000 | 20,000 | |
Capital reserve | 21,164 | 19,367 | 20,926 |
Revenue reserve | 1,407 | 1,157 | 1,657 |
Equity shareholders' funds | 42,571 | 40,524 | 42,583 |
Net asset value per Ordinary Share | £212.86 | £202.62 | £212.92 |
Cash Flow Statement
Six months ended | Six months ended | Year ended | |
30 September | 30 September | 31 March | |
2011 | 2010 | 2011 | |
Unaudited | Unaudited | Audited | |
£'000 | £'000 | £'000 | |
Net cash inflow from operating activities | 26 | 13 | 217 |
Servicing of finance | (3) | (1) | (3) |
Taxation | (19) | (20) | (30) |
Financial investment | (320) | 281 | (218) |
Net cash (outflow)/inflow before financing | (316) | 273 | (34) |
Equity dividends paid | (730) | - | - |
(Decrease)/increase in cash in the period | (1,046) | 273 | (34) |
Reconciliation of net cash flow to movement in net (debt)/funds | |||
(Decrease)/increase in cash in the period | (1,046) | 273 | (34) |
Exchange movements | 145 | 10 | 1 |
Opening net funds | 755 | 788 | 788 |
Closing net (debt)/funds | (146) | 1,071 | 755 |
Represented by | |||
Cash at bank | 392 | 1,247 | 1,076 |
Overdrafts | (538) | (176) | (321) |
(146) | 1,071 | 755 | |
Reconciliation of operating profit to net cash inflow from operating activities | |||
Net return before finance costs and taxation | 736 | 1,397 | 3,471 |
Losses/(gains) on investments held at fair value | 46 | (1,257) | (3,408) |
Movements in derivative contracts held | (9) | - | 24 |
Gains on exchange movements | (145) | (10) | (1) |
(Increase)/decrease in other debtors | (122) | 138 | 240 |
Decrease in accrued income | 19 | 36 | 12 |
Decrease in creditors | (499) | (291) | (121) |
Net cash inflow from operating activities | 26 | 13 | 217 |
Notes to the accounts
1. The financial information for the year ended 31 March 2011 included in this half-year report has been based upon the Company's full accounts for the year to 31 March 2011, which carried an unqualified audit report and did not include statements under Sections 498(2) or 498(3) of the Companies Act 2006. Those accounts have been filed with the Registrar of Companies.
2. The Financial Statements for the six months ended 30 September 2011 have been prepared on a basis consistent with the accounting policies adopted by the Company in its statutory accounts for the year ended 31 March 2011.
3. The Income Statement for the six months ended 30 September 2011, six months ended 30 September 2010 and year ended 31 March 2011 have been prepared in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies" issued by The Association of Investment Companies in January 2009, which has been adopted by the Company.
4. The Income Statement includes the results of the Company and together with the Reconciliation of Movements in Shareholders' Funds, Balance Sheet and Cash Flow Statement at 30 September 2011 are unaudited and do not constitute full statutory accounts within the meaning of Section 435 of the Companies Act 2006. |
5. Income | |||
Six months ended 30 September 2011 | Six months ended 30 September 2010 | Year ended 31 March 2011 | |
Unaudited | Unaudited | Audited | |
£'000 | £'000 | £'000 | |
Overseas dividends | 109 | 90 | 179 |
Overseas stock dividends | - | 56 | 115 |
UK dividends | 559 | 402 | 825 |
UK fixed interest | 84 | 83 | 167 |
Deposit interest | - | - | 1 |
752 | 631 | 1,287 | |
6. Investment management fees | |||
Six months ended 30 September 2011 | Six months ended 30 September 2010 | Year ended 31 March 2011 | |
Unaudited | Unaudited | Audited | |
£'000 | £'000 | £'000 | |
Investment management fee | 151 | 125 | 270 |
Manager's performance fee | - | 119 | 469 |
Rebate of investment management fee | (28) | (9) | (20) |
123 | 235 | 719 | |
7. Other expenses | |||
Six months ended 30 September 2011 | Six months ended 30 September 2010 | Year ended 31 March 2011 | |
Unaudited | Unaudited | Audited | |
£'000 | £'000 | £'000 | |
Administration fee | 35 | 35 | 70 |
Directors' fees | 28 | 28 | 80 |
Auditor's remuneration for: | |||
- audit of the financial statements of the Company | 11 | 10 | 22 |
- other services relating to taxation | - | - | 4 |
Legal and professional fees | 4 | - | 4 |
Provision for VAT written off | 19 | 17 | 22 |
Other* | 34 | 29 | 43 |
131 | 119 | 245 | |
Capital charges | 1 | 2 | 2 |
132 | 121 | 247 | |
* Includes registrar's fees, printing fees, London Stock Exchange/ FSA fees and Directors' & Officers' liability insurance | |||
8. Effective rate of tax
The effective rate of tax reported in the revenue column of the income statement for the six months ended 30 September 2011 is 3.03% (year ended 31 March 2011: 3.68% and six months ended 30 September 2010: 5.80%) based on revenue return before tax of £495,000 (year ended 31 March 2011: £789,000 and six months ended 30 September 2010: £276,000). This differs from the standard rate of tax, 26% (year ended 31 March 2011 and six months ended 30 September 2010: 28%) as a result of income not taxable for Corporation Tax purposes.
9. Net asset value per Ordinary Share
10. Return per Ordinary Share
The total return per Ordinary Share detailed above can be further analysed between revenue and capital, as below:
11. The investment in Lindsell Train Limited (LTL), representing 25% of the Investment Manager, is held as part of the investment portfolio and is accounted for and disclosed in the same way as other investments in the portfolio. The Directors of the Company review the fair value of the investment in LTL at the end of each quarter using the simple average of:
(a) 1.5% of LTL's most recent funds under management ignoring any differences between types of asset class and fee structure; and
(b) LTL's net earnings (adjusted for a notional increase in total staff costs at 45% of revenues excluding performance fees*) divided by the annual average yield on 2.5% Consolidated Loan Stock plus an equity risk premium of 4.5%.
The Board reserves the right to vary the valuation methodology at its discretion.
* The Board judged it necessary to adjust for the comparatively low level of staff costs, a function of the salary and bonus cap agreed between LTL and LTIT at inception.
12. It is the intention of the Directors to conduct the affairs of the Company so that the Company satisfies the conditions for approval as an Investment Trust Company set out in Sections 1158/1159 of the Corporation Tax Act 2010.
13. During the period the exchange of shares in the Lindsell Train Japan Fund LP and the Lindsell Train Global Media Fund LP for shares of the Lindsell Train Japanese Equity Fund and the Lindsell Train Global Equity Fund respectively was completed.
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Interim Management Report
The Directors are required to provide an Interim Management Report in accordance with the UK Listing Authority's Disclosure and Transparency Rules and consider that the Chairman's Statement, the Investment Manager's Report, the statement below on related party transactions and the Directors' Responsibility Statement below together constitute the Interim Management Report for the Company for the six months ended 30 September 2011.
The Directors confirm that, except as stated above, no related party transactions were undertaken by the Company in the first six months of the current financial year, and there have been no changes to the related party disclosures set out in the Annual Report of the Company for the year ended 31 March 2011.
The Half Year Report has not been reviewed by the Company's auditor, Grant Thornton UK LLP.
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Directors' Responsibility Statement
The non-executive Directors of the Company (Mr Donald Adamson (Chairman), Mr Dominic Caldecott, Mr Rory Landman, Mr Michael Lindsell and Mr Michael Mackenzie) confirm that to the best of their knowledge:
(a) | the condensed set of Financial Statements, which has been prepared in accordance with the Accounting Standards Board's pronouncements on interim reporting, give a true and fair view of the assets, liabilities, financial position and profit of the Company; |
(b) | the Interim Management Report includes a fair review, as required by Disclosure and Transparency Rule 4.2.7 R, of the important events that have occurred during the first six months of the financial year, their impact on the condensed set of Financial Statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and |
(c) | the Interim Management Report includes a fair review of the information concerning related party transactions as required by DTR 4.2.8 R. |
The Half Year Report was approved by the Board of Directors on 22 November 2011, and the Responsibility Statement signed on its behalf by Mr D Adamson, Chairman.
Copies of the Half Year Report will be sent to shareholders shortly and may be obtained from the Company's Registered Office: c/o Phoenix Administration Services Limited, Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW. (T) +44 (0) 1245 398950 (E) pfsinfo@phoenixfundservices.com
A PDF version of the printed Half Year Report can be found by following the links on the following website *:
http://www.lindselltrain.com/p/fLTIT1.htm
By order of the Board
Phoenix Administration Services Limited
Secretary
22 November 2011
* Except for the above announcement, the content of the Company's web-pages and the content of any website giving access to the Company's web-pages or which may be accessed through hyperlinks on the Company's web-pages are not incorporated into or form part of the above announcement.