M&G Income Investment Company Limited
Sixth Interim Results Announcement
24th June 2008
Chairman's Statement and Interim Management Report
Performance during the period
The Company's revenue earnings per Package Unit were 1.62p. In respect of the
review period, the Company declared six interim dividends of 0.18p per
Ordinary Share (0.36p per Package Unit), bringing the total to 1.08p per
Ordinary Share (2.16p per Package unit). This represents an increase of 5.9%
compared with the equivalent period last year. This is comfortably ahead of
the latest inflation rate of 4.2% as measured by the Retail Prices Index
(RPI). As at the period end, the yield on the Company's Package Units was
6.2%, compared with the yield of 3.6% on the FTSE All-Share index.
On a net asset value (NAV) basis, each Package Unit produced a negative total
return of 14.9% over the six months to 30 April 2008. This was below negative
returns of 8.5% and 11.2% respectively on the FTSE All-Share Index and the
FTSE 350 Higher Yield Index over the same period.
It is disappointing to report that the Company's NAV continued to under
perform the FTSE All-Share Index by a considerable margin. The explanation
provided in my Chairman's Statement six months ago largely applied during the
review period. The low yielding mining sector continued to make outstanding
gains, whilst most high yielding sectors, particularly banks, suffered further
weakness. Shares in medium-sized companies lagged behind those in large
companies, as represented in the FTSE 100 Index. Corporate bonds, especially
high yield categories, also lost ground, reflecting the persistence of credit
market losses.
Three-quarters of the shortfall in performance against the FTSE All-Share
Index derived from gearing in the portfolio, both through financial gearing
and through the structure of the Package Units. The remaining one-quarter of
the shortfall came from stock and bond performance. Although the underlying
stock performance was better than the FTSE High Yield Index, the weakness of
high yield and midcap stocks as mentioned above meant that the Company's
overall performance lagged that of the FTSE All-Share Index.
The market price discount to NAV narrowed slightly over the period from 8.5%
to 7.3%, the mid-market price at the year end being 97.0p and the NAV 104.62p.
On a mid-market price basis there was a negative total return on the Company's
Package units of 13.6%. The Company's gearing at the period end was 12.7% of
total assets less current liabilities, and, in line with the policy stated in
the prospectus, there was no investment in other split capital investment
companies.
Long term performance
The Company continues to meet its core income objectives. Six monthly
dividends were declared in respect of the period, providing shareholders with
a level of income well above that offered by the FTSE All-Share Index and
dividend growth above the rate of inflation. The Company sustained its record
of increasing dividends every year since its launch in November 2002. However,
the disappointing capital performance of the Company's NAV during the review
period adversely affected its long-term performance. Over two years, three
years, five years and since inception the return on the Company's NAV has been
below that on both the FTSE All-Share and FTSE Higher Yield indices. This
shortfall can largely be explained by the underperformance of the Company's
corporate bond portfolio against its all equity benchmark
(the FTSE All-Share Index).
Outlook
Pessimism about the outlook for the UK economy in 2008 seems to be deepening
by the day. The UK faces a combination of below trend growth and above target
inflation. Moreover, the Governor of the Bank of England has indicated that
continuing inflation pressures are likely to limit the scope for the Bank to
counter weakness by following the example of the US Federal Reserve in
aggressively cutting interest rates. Therefore, it seems there is a
considerable risk that the recent broadly based economic deterioration will
continue.
Consumer and business confidence is likely to remain subdued, although the
fortunes of companies trading with fast growing emerging countries should be
sustained. Many commentators expect house prices to fall by as much as 10% in
2008. In addition, there is every likelihood that consumers will continue to
take a cautious view, preferring to add to their (depleted) savings rather
than spend. In any case, with inflation outpacing earnings growth, the level
of disposable incomes will be limited. Finally, weakness in sterling may well
continue. Whilst this would help the competitive position of UK exports, it
will make the task of controlling inflation more difficult.
Opinion is divided over the outlook for the UK stockmarket in 2008. With the
prominent exception of natural resource sectors, businesses are facing
increasing cost pressures which could well see lower margins and downgrades to
profits forecasts. Company finances remain generally robust, although areas of
weakness are multiplying. There has been a dramatic increase in rights issues
in recent weeks (including over �16 billion from the banking sector), together
with a number of dividend cuts, trends which are set to continue. On the
optimistic tack, investors have plenty of cash available for investment and
stockmarket valuations remain modest, both in absolute terms and relative to
government bonds. It is widely argued that such low valuations are pricing in
considerable uncertainty about the outlook, implying that share prices could
move ahead sharply on any signs of a resolution of current problems. This
applies particularly to financial and consumer sectors which have been under
severe pressure over the past six months. Many of these shares offer
substantial yields.
The outlook for government bonds during the second half of the year remains
clouded by continuing uncertainty over inflation and by concern over the
rising level of public debt. This implies that returns from gilts in the
second half of the year are likely to be below that achieved at the interim
stage. Prospects for corporate bonds, at least for top quality investment
grade stocks, are rather better. They yield more than gilts and stand to
benefit from any restoration in confidence in credit markets. There were
encouraging signs of this in April. Sentiment towards high yield corporate
bonds, which are issued by companies with less robust financial positions,
could take longer to recover.
Despite pressures on dividends we are optimistic that the Company should be
able to maintain its record for increasing distributions. The Company's
dividend was increased to 0.20p per ordinary share for May and we anticipate
the Company should be able to increase its distribution for the full year
compared with the same period last year.
Loan repayment
The Company has recently announced its decision to repay the balance of its
loan facility with the Royal Bank of Scotland International Limited (`the
Loan') in full, being the sum of �25m, with effect from 7th July 2008. This
decision reflects the fact that in view of recent market conditions, the
Manager has reduced the Company's exposure to The M&G High Yield Corporate
Bond Fund by �16.3m (70.2 %) in favour of cash and short dated gilts and given
the Company's impending winding up on 31 October 2008, the directors, on the
advice of the Manager, consider the repayment of the Loan to be in the
interests of the Company's shareholders as a whole. The related interest rate
swap will be closed on 4 July 2008.
Winding-up Proposals
The Board has approved the following announcement to the London and Channel
Islands Stock Exchanges:
Proposed reconstruction
The Board of M&G Income Investment Company Limited (the `Company') is
proposing to put forward proposals to coincide with its wind up date of 31
October 2008.
Under the proposals, the Company will be wound up and its shareholders will be
offered the choice of the following:
- A tax and cost efficient rollover into new shares to be issued by M&G High
Income Investment Trust plc (`HIT);
- A full cash exit (at liquidation value); and
- At least one open-ended investment company managed by M&G, the Company's
investment manager.
HIT is listed in London, managed by the same investment team at M&G as the
Company and has both a similar investment objective and structure (being
closed-ended and split capital). The Company currently has gross assets of
�206 million whilst HIT has gross assets of �69 million and has a wind-up date
of 17 March 2017.
As part of the proposals, M&G will make a significant contribution to the
costs of the proposals, calculated with reference to the level of monies which
rollover into HIT.
Further, precise details of the scheme will be announced in late summer.
To the best of my knowledge and belief this statement includes a fair review
of the information required by the FSA handbook (DTR 4-2-7R and DTR 4-3-8R).
C N K Parkinson
Chairman
Income Statement (unaudited)
2008 2007
Revenue Capital Total Revenue Capital Total
for the three months ended 30 April �'000 �'000 �'000 �'000 �'000 �'000
Net gains on investments - 1,449 1,449 - 8,364 8,364
Income 3,747 - 3,747 3,459 - 3,459
Investment management fee (269) (180) (449) (330) (219) (549)
Other expenses (65) - (65) (71) - (71)
Profit before finance costs and taxation 3,413 1,269 4,682 3,058 8,145 11,203
Finance costs: Appropriations - (2,336) (2,336) - (2,155) (2,155)
Finance costs: Dividends (1,473) - (1,473) (1,404) - (1,404)
Interest payable and similar charges (226) (149) (375) (217) (145) (362)
Profit / (loss) on ordinary activities before taxation 1,714 (1,216) 498 1,437 5,845 7,282
Taxation - - - - - -
Profit / (loss) for the period 1,714 (1,216) 498 1,437 5,845 7,282
Return per Zero Dividend Share - 0.99p 0.99p - 0.91p 0.91p
Earnings / return per Ordinary Share 1.17p (0.45)p 0.72p 1.03p 2.12p 3.15p
Earnings / return per Package Unit 2.34p 0.09p 2.43p 2.06p 5.15p 7.21p
2008 2007
Revenue Capital Total Revenue Capital Total
for the six months ended 30 April �'000 �'000 �'000 �'000 �'000 �'000
Net (losses) / gains on investments - (27,301) (27,301) - 12,579 12,579
Income 5,582 - 5,582 5,480 - 5,480
Investment management fee (559) (373) (932) (668) (445) (1,113)
Other expenses (165) - (165) (143) - (143)
Profit / (loss) before finance costs and taxation 4,858 (27,674) (22,816) 4,669 12,134 16,803
Finance costs: Appropriations - (4,680) (4,680) - (4,342) (4,342)
Finance costs: Dividends (5,376) - (5,376) (5,231) - (5,231)
Interest payable and similar charges (438) (290) (728) (437) (291) (728)
(Loss) / profit on ordinary activities before taxation (956) (32,644) (33,600) (999) 7,501 6,502
Taxation - - - - - -
(Loss) / Profit for the period (956) (32,644) (33,600) (999) 7,501 6,502
Return per Zero Dividend Share - 1.99p 1.99p - 1.83p 1.83p
Earnings / return per Ordinary Share 1.62p (11.96)p (10.34)p 1.54p 2.72p 4.26p
Earnings / return per Package Unit 3.24p (21.93)p (18.69)p 3.08p 7.27p 10.35p
The total column of this statement is the profit and loss account of the
Company, prepared in accordance with IFRS. The supplementary revenue and
capital columns are both prepared under guidance from the Association of
Investment Companies.
All items in the above statement derive from continuing operations. No
operations were acquired or discontinued during the period.
Each class of the Company's shares meets the definition of a liability and
therefore the Company has no equity shares. The profit / (loss) for the period
is attributable to the Ordinary Shareholders. There are no minority interests.
Statement Of Movements In Net Assets Attributable To Shareholders (unaudited)
2008 2007
for the six months ended 30 April �'000 �'000
(Loss) / profit for the period (33,600) 6,502
Add finance costs: Appropriations 4,680 4,342
Net movement in fair value of swap (125) 199
Repurchase of Package Units (including related costs) (231) (239)
Net movement in net assets attributable to shareholders (29,276) 10,804
Opening net assets attributable to shareholders (all non-equity) 225,869 218,353
Closing net assets attributable to shareholders (all non-equity) 196,593 229,157
Balance Sheet (unaudited)
30.04.2008 30.04.2007 31.10.2007
as at �'000 �'000 �'000
Non-current assets
Portfolio of investments 209,532 250,529 247,473
Current assets
Debtors 3,486 3,577 2,941
Cash at bank and short-term deposits 9,448 920 1,465
12,934 4,497 4,406
Total assets 222,466 255,026 251,879
Current liabilities (25,873) (1,137) (26,010)
Total assets less current liabilities 196,593 253,889 225,869
Non-current liabilities - (24,732) -
Net assets attributable to shareholders (all non-equity) 196,593 229,157 225,869
Net Assets Attributable To Shareholders (unaudited)
30.04.2008 30.04.2007 31.10.2007
as at �'000 �'000 �'000
Zero Dividend Shareholders 128,348 119,747 123,789
Ordinary Shareholders 68,245 109,410 102,080
Net assets attributable to shareholders (all non-equity) 196,593 229,157 225,869
Net Asset Values Applicable to Each Class of Shareholding
(unaudited)
as at 30 April 2008 2007
Net asset value per Zero Dividend Shareholders 54.52p 50.60p
Net asset value per Ordinary Shareholders 25.05p 39.80p
Net asset value per Package Unit 104.62p 130.20p
Cash Flow Statement (unaudited)
2008 2007
for the six months ended 30 April �'000 �'000
Operating activities
(Loss) / profit before taxation (33,600) 6,502
Adjustments for:
Finance costs: Appropriations 4,680 4,342
Finance costs: Dividends 5,376 5,231
Interest payable and similar charges 728 728
Effective interest adjustments 66 83
Stock dividends (152) (293)
Investments held at fair value through profit or loss:
Net gains / (losses) on investments 27,301 (12,579)
Capital distributions 410 185
Purchases of investments (33,414) (29,930)
Sales of investments 44,565 32,402
Increase in other receivables (1,296) (1,284)
Increase / (decrease) in other payables 48 (36)
Net cash inflow from operating activities before servicing
of finance 14,712 5,351
Dividends paid (non-equity) (5,775) (5,286)
Repurchase of package units (231) (239)
Bank Interest paid (2) -
Interest paid on bank loan (721) (728)
Net cash used in financing activities (6,729) (6,253)
Net increase / (decrease) in cash and cash equivalents 7,983 (902)
Cash and cash equivalents at the start of the period 1,465 1,822
Cash and cash equivalents at the end of the period 9,448 920
Basis of accounting: These financial statements have been prepared in
accordance with International Financial Reporting Standards (IFRS), comprising
standards and interpretations approved by the International Accounting
Standards Board (IASB) and interpretations issued by the International
Financial Reporting Interpretations Committee (IFRIC) of the IASB. The
financial statements are presented in pounds sterling and have been prepared
on a going concern basis under the historical cost convention except for the
measurement of investments at fair value.
The FSA Handbook has been amended to implement the Transparency Obligations
Directive (Disclosure and Transparency Rules) Instrument 2006 and as a result
the Company is now required to prepare its financial statements under IFRS.
Previously the financial statements were prepared in accordance with United
Kingdom Generally Accepted Accounting Practice (UK GAAP) including the
Statement of Recommended Practice: 'Financial Statements of Investment Trust
Companies' (SORP) issued by the Association of Investment Companies in
December 2005.
First time adoption of IFRS: These are the first financial statements of the
Company to be prepared in accordance with IFRS. The date of transition to IFRS
for the Company is 1 November 2007. The adoption of IFRS and the retrospective
application of the IFRS accounting polices to the opening balance sheet as at
1 November 2007 and all subsequent periods has not resulted in any changes to
the opening or closing balance sheet or income statement. Presentational
changes have been made to the cash flow statement to reanalyse Dividends paid
to Ordinary Shareholders and Bank interest paid as financing activities; and
capital distributions, purchases of investments and sales of investments as
operating activities.
A copy of the interim report will be posted to all Shareholders on 7th July
2008. It will not be advertised in the press, but copies are available from
the registered office of the Company, Dorey Court, Admiral Park, St Peter
Port, Guernsey, GY1 3BG.
Kleinwort Benson (Channel Islands) Fund Services Limited
Company Secretary
23 June 2008
END
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