Perpetual Income and Growth Investment Trust plc Half-Yearly Financial Report 30 September 2007 KEY FACTS Perpetual Income and Growth Investment Trust plc is a UK investment trust company listed on The London Stock Exchange. Objective of the Company The objective of Perpetual Income and Growth Investment Trust plc is to generate capital growth with a higher than average income from investment in the UK equity market. It is intended that the Company will provide real dividend growth over the medium term. The Company invests mainly in above average yielding UK equities. However, a portion of the portfolio may be invested in equities with a lower initial yield which are considered to have good potential for income growth. In addition, up to 10% of the portfolio may be invested in bonds. Performance Statistics AT AT 30 SEPTEMBER 31 MARCH % 2007 2007 CHANGE Assets Shareholders funds ( 000) 580,538 576,695 +0.7 Diluted net asset value per share: after charging first interim dividend (capital NAV) 272.2p 270.4p +0.7 per Balance Sheet 275.3p 274.0p +0.5 with net income reinvested +1.6 FTSE All-Share Index capital return +1.0 total return +2.7 Mid-market price: ordinary shares 250.5p 251.0p 0.2 subscription shares 66.5p 69.0p 3.6 Discount per ordinary share 8.0% 7.2% Actual gearing 116 121 Asset gearing 116 122 SIX MONTHS ENDED 30 SEPTEMBER 30 SEPTEMBER 2007 2006 Revenue Diluted revenue return per share 4.65p 3.67p +26.7 Dividends per share 3.10p 2.75p +12.7 INTERIM MANAGEMENT REPORT INCORPORATING CHAIRMAN S STATEMENT Chairman s Statement Performance During the six months to 30 September 2007, the total return for the period (comprising the movement in the net asset value ( NAV ) plus net income reinvested) was 1.6% compared to the 2.7% return from the FTSE All-Share Index. The mid-market price per share fell by 0.2% to 250.5p and the discount to NAV per ordinary share widened from 7.2% to 8.0%. Dividend The Board has declared an interim dividend of 3.1p per share in respect of the six months to 30 September 2007. This dividend is payable on 28 December 2007 to shareholders registered at the close of business on 14 December 2007. This increase in dividend of 12.7% continues the Board s policy of sustained real increases in dividend. Subscription Share Exercise and Issued Share Capital During the period under review, subscription shareholders had their second opportunity to exercise their right to subscribe for one ordinary share of the Company at a price of 218.94p. The subscription period ended on 31 August 2007. As a result, 369,344 ordinary shares were allotted in mid-september 2007. Subscription shareholders will have further opportunities to convert their holdings in each of the years 2008 to 2013. As a result of the second subscription share exercise, the issued share capital of your Company at the time of writing is 207,229,981 ordinary shares of 10p each and 17,767,023 subscription shares. VAT on Management Fees In November this year, HMRC accepted the European Court of Justice ruling in a test case that investment trusts should not be charged VAT on management fees. This paves the way for the start of the process to recover VAT paid in the past on your Company s management fees. Your Board will continue to monitor the situation and advise Shareholders as the position develops. With immediate effect, no VAT will be charged on management fees. William Alexander Chairman Investment Management Report Market Review The FTSE All-Share started the period robustly, reaching new all-time highs in June, but the market was hit by a serious bout of risk aversion in the summer. This was caused by problems emanating from the US sub-prime mortgage markets which severely undermined investor confidence. The potential for rising defaults on these assets was growing in the first half of 2007 but events this summer highlighted that the problems were much wider than the market had previously anticipated. Liquidity in credit markets dried up overnight, as investors quickly reappraised the risks of sub-prime loans and banks became reluctant to lend to each other. This, so-called, credit crunch was a very serious financial event, which ultimately led to the well-publicised downfall of Northern Rock. Unsurprisingly, the UK equity market suffered significant losses in July and August. Concerns that the financial crisis would spread to the wider economy prompted action from the Federal Reserve and European Central Bank, both of whom injected large amounts of money into the financial system. A further lifeline was thrown to the markets in mid-september in the form of a 0.5% cut in US interest rates from the Federal Reserve. Since that time, global equity markets have remained volatile. Portfolio Strategy and Review The under-performance of the portfolio compared to the market can be attributed largely to the defensive bias of the portfolio and a lack of exposure to emerging market growth and in particular, the mining sector. The mining sector was by far the strongest individual sector over the six month period, and the performance of mining stocks accounts for almost all the gains achieved in the overall market. The most important evolution to the strategy adopted for the portfolio over the last 18 months, has been a gradual move up the market cap scale to take advantage of opportunities amongst the very largest UK companies. Several years of under-performance have left many of these mega-cap stocks trading at very attractive valuations. During the period, I commenced a new position in AstraZeneca and added to existing holdings such as BP, GlaxoSmithKline and Royal Dutch Shell. Encouragingly, we have seen in the last few months, the first signs of a reversal of recent trends in that large caps have enjoyed a spell of relative outperformance for the first time in many years. The portfolio s increased exposure to this part of the market was particularly rewarding during the summer volatility. Vodafone performed especially well, helped by better-thanexpected financial results and the continued reshuffling of its portfolio of assets to gain greater exposure to the world s faster growing regions. Meanwhile, the oil majors. Royal Dutch Shell and BP, also contributed a more robust performance, buoyed by the oil price moving back towards all-time highs as the period progressed.
In terms of share price performance, the oil majors have not participated fully in the oil price rises we have seen in recent years. Both BP and Royal Dutch Shell have experienced operational issues in recent years, which has weighed on sentiment, but both companies have also been overlooked by many investors simply because of their size. They are too big to benefit from M&A speculation and have therefore been easy for investors to ignore, or even to short sell, whilst in pursuit of the next bid target. Both companies have looked increasingly attractive on valuation grounds, and I am confident that both stocks will contribute well to the portfolio. Another area that has been broadly out of favour with the market for several years is the Pharmaceuticals sector. I have held GlaxoSmithKline in the portfolio for some time and it continues to look significantly undervalued in my view. AstraZeneca is a new holding for the portfolio. Its share price has fallen substantially in recent months on concern about the company s lack of new drug candidates in the pipeline and the risk of patent expiries on key drugs. The recent acquisition of MedImmune in the US has not helped sentiment, being viewed by the market as over-priced. However, I believe there is very sound long-term strategic sense in the MedImmune acquisition, which expands the product pipeline and enhances future growth prospects. As with GlaxoSmithKline, the shares look significantly undervalued, with a considerably lower valuation now than at any stage in the company s history. The Company benefited from ongoing merger and acquisition activity during the period, with two stocks receiving bid approaches. IT services company Xansa was acquired by French company Groupe Steria, and ICI is in the process of being bought by Akzo Nobel. It is interesting to note that both of these bids were from corporate buyers, as has tended to be the case in many recently announced deals. This suggests that the higher cost of borrowing that has resulted from the summer s credit crunch is making it difficult for private equity investors to finance deals as effectively as they have done in the past. Outlook My view of the economic outlook continues to be cautious. I have felt for some time that the rate of consumer spending growth in the UK would have to moderate as a result of a very highly leveraged household balance sheet, and as the negative impact of higher interest rates filtered through to consumers disposable income. The events of this summer in the credit markets are likely to leave a lasting impression in the form of higher borrowing costs and a more prudent approach from the banking sector towards risk across all forms of lending. This can only serve to exacerbate the slowdown in consumer activity. There are similar dynamics in the US, where ongoing problems in the US subprime mortgage market have already had a substantial impact on activity in the housing market, and caused the overall economy to slow. The situation in the UK differs in one important respect. The Bank of England will not cut interest rates until it has more confidence that medium-term inflation is under control. My prognosis for the UK economy is therefore bleak. But the market as a whole is aware of the challenges that the economy faces, and they are largely reflected in valuations. Some parts of the market, however, are much more vulnerable to the consumer slowdown, and I continue to be wary of cyclical sectors such as banks, retailers, and house-builders. Related Parties ( IAML ), a wholly owned subsidiary of Invesco Plc (formerly AMVESCAP PLC), acts as Manager and Company Secretary to the Company. Details of IAML s services and fees arrangements are given in the latest Annual Report and Accounts, which is available on the Company s website. Principal Risks and Uncertainties The principal risks and uncertainties that could affect the Company s business can be divided into various areas: Investment Objective and Policy; Ordinary Shares; Gearing; Market Movements and Portfolio Performance; and Regulatory. A detailed explanation of these principal risks and uncertainties can be found on pages 17 and 18 of the latest Annual Report and Accounts, which is available on the Company s website. In the view of the Board, these principal risks and uncertainties are equally applicable to the remaining six months of the financial year as they were to the six months under review. DIRECTORS RESPONSIBILITY STATEMENT In respect of the preparation of the half-yearly financial report The Directors are responsible for preparing the half-yearly financial report using accounting policies consistent with applicable law and UK Accounting Standards. The Directors confirm that to the best of their knowledge: the condensed set of financial statements contained within the half-yearly financial report have been prepared in accordance with the Accounting Standards Board s Statement Half-Yearly Financial Report ; the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8 of the FSA s Disclosure and Transparency Rules; and the interim management report includes a fair review of the information required on related party transactions. Signed on behalf of the Board of Directors. William Alexander Chairman Instead, I continue to focus on companies that I believe will be able to carry on growing earnings and dividends, even in the more challenging economic environment. In valuation terms, the UK mega-caps look more attractive now than they have done for a long time, and now form an important part of the portfolio. These are financially strong, highly liquid, globally diversified businesses, which offer further defensive characteristics. I believe these characteristics are currently under-valued by the market as a whole, and should stand the Company in good stead. Mark Barnett Investment Manager 2
INVESTMENT PORTFOLIO STATEMENT AT 30 SEPTEMBER 2007 UK Ordinary shares unless stated otherwise MARKET VALUE % OF COMPANY SECTOR 000 PORTFOLIO Royal Dutch Shell Oil & gas producers 36,896 5.5 British American Tobacco Tobacco 35,250 5.3 Reynolds American (US Common Stock) Tobacco 34,732 5.2 BP Oil & gas producers 33,693 5.0 GlaxoSmithKline biotechnology 33,596 5.0 Vodafone Mobile telecommunications 31,623 4.7 BT Fixed line communications 31,204 4.6 Imperial Tobacco Tobacco 31,032 4.6 Tesco Food and drug retailers 24,867 3.7 National Grid Gas, water and multiutilities 23,133 3.4 Top ten holdings 316,026 47.0 Drax Electricity 18,432 2.7 British Energy Electricity 18,303 2.7 BAE Systems Aerospace and defence 16,535 2.5 Rexam Support services 16,090 2.4 Rolls Royce Aerospace and defence 15,541 2.3 Scottish & Southern Energy Electricity 15,093 2.2 Capita Support services 14,687 2.2 Bunzl Support services 14,153 2.1 Sage Technology software 12,722 1.9 Associated British Foods Food producers 12,172 1.8 Top twenty holdings 469,754 69.8 Hiscox Insurance 11,956 1.8 Tate & Lyle Food producers 11,385 1.7 Tui Travel Travel and leisure 10,963 1.6 Imperial Chemical Industries Chemicals 10,853 1.6 British Airways Travel and leisure 10,771 1.6 Balfour Beatty Construction and materials 10,417 1.6 Astrazeneca biotechnology 9,488 1.4 Reed Elsevier Media 9,453 1.4 Carnival Industrial transportation 9,134 1.4 Informa Media 7,963 1.2 Top thirty holdings 572,137 85.1 MARKET VALUE % OF COMPANY SECTOR 000 PORTFOLIO Protherics biotechnology 7,116 1.1 Pennon Gas, water and multiutilities 6,884 1.0 Marks & Spencer General retailers 6,867 1.0 Helphire Financial 6,576 1.0 Impax Environmental Equity investment instruments 6,487 1.0 Climate Exchange Equity investment instruments 6,116 0.9 Renovo Phamaceuticals and biotechnology 6,080 0.9 Trading Emissions Equity Investment Instruments 5,461 0.8 Arm Technology hardware 4,397 0.7 Gyrus Healthcare 4,125 0.6 Top forty holdings 632,246 94.1 XL Techgroup Financial 3,800 0.6 Homeserve Support services 3,649 0.5 William Hill General retailers 3,335 0.5 Puricore Personal goods 3,086 0.5 Biofusion biotechnology 3,077 0.5 Xcounter AB Healthcare 2,939 0.4 Napo Pharmaceutical biotechnology 2,739 0.4 Vectura biotechnology 2,642 0.4 Macau Property Property 2,433 0.4 Spacelabs Healthcare Healthcare 1,823 0.3 Top fifty holdings 661,769 98.6 BTG Support services 1,711 0.3 Phoqus Pharmaceutical Pharnaceuticals and biotechnology 1,339 0.2 Ecofin Water & Power Equity investment instruments 1,190 0.2 Lombard Medical Healthcare 1,178 0.2 Idmos Healthcare 963 0.1 Yoomedia Media 923 0.1 XTL Biopharmaceutical biotechnology 873 0.1 Local Radio Media 685 0.1 Agcert Support services 636 0.1 Synigence Media 1 0.0 Total holdings 671,268 100.0 CONDENSED INCOME STATEMENT YEAR TO SIX MONTHS TO SIX MONTHS TO 31 MARCH 30 SEPTEMBER 2007 30 SEPTEMBER 2006 2007 (UNAUDITED) (UNAUDITED) (AUDITED) REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL TOTAL 000 000 000 000 000 000 000 Gains on investments at fair value through profit and loss 4,023 4,023 15,647 15,647 57,517 Foreign exchange gains 1,234 1,234 3,432 3,432 5,646 Income UK dividends 11,920 11,920 9,181 9,181 17,590 Overseas dividends 962 962 1,102 1,102 2,138 Underwriting commission 1 1 1 Gross return 12,883 5,257 18,140 10,283 19,079 29,362 82,892 Investment management fee (920) (2,146) (3,066) (810) (3,409) (4,219) (8,190) Other expenses (232) (232) (215) (215) (453) Net return before finance costs and taxation 11,731 3,111 14,842 9,258 15,670 24,928 74,249 Interest payable and similar charges (1,110) (2,589) (3,699) (827) (1,929) (2,756) (6,016) Return on ordinary activities before taxation 10,621 522 11,143 8,431 13,741 22,172 68,233 Tax on ordinary activities (144) (144) (163) (163) (321) Return on ordinary activities after taxation for the financial year 10,477 522 10,999 8,268 13,741 22,009 67,912 Return per ordinary share: Basic 5.0p 0.3p 5.3p 4.3p 7.1p 11.4p 33.9p Diluted 4.7p 0.2p 4.9p 3.7p 6.1p 9.8p 30.2p The total column of this statement represents the Company s profit and loss account prepared in accordance with UK Accounting Standards. The supplementary revenue and capital columns are presented for information purposes as recommended by the guidance note issued by the Association of Investment Companies. All items in the above statement derive from continuing operations and the Company has no other gains or losses and therefore no statement of total recognised gains or losses is presented. No operations were acquired or discontinued in the year. 3
CONDENSED BALANCE SHEET AT AT AT 30 SEPTEMBER 31 MARCH 30 SEPTEMBER 2007 2007 2006 (UNAUDITED) (AUDITED) (UNAUDITED) 000 000 000 Fixed assets Investments held at fair value through profit or loss 671,268 702,434 645,025 Current assets Amounts due from brokers 4,344 507 6,109 Tax recoverable 81 7 9 Unrealised profit on forward currency contracts 53 Prepayments and accrued income 2,147 2,674 2,041 6,572 3,241 8,159 Creditors: amounts falling due within one year Bank overdraft (62,375) (91,690) (73,057) Amounts due to brokers (2,973) (2,800) (9,369) Accruals and deferred income (2,270) (4,825) (2,168) Unrealised loss on forward currency contracts (943) (67,618) (99,315) (85,537) Net current liabilities (61,046) (96,074) (77,378) Total assets less current liabilities 610,222 606,360 567,647 Creditors: amounts falling due after one year RPI 5.06% Debenture Stock (29,684) (29,665) (29,646) Provision Performance fee (1,520) Net assets 580,538 576,695 536,481 Capital and reserves Called-up share capital 20,723 20,686 20,686 Share premium account 180,560 179,789 179,789 Other reserves Capital reserve realised 266,708 230,698 188,356 Capital reserve unrealised 94,682 130,170 133,784 Revenue reserve 17,865 15,352 13,866 Total Shareholders funds 580,538 576,695 536,481 Net asset value per Ordinary Share Basic 280.1p 278.8p 259.3p Diluted 275.3p 274.0p 256.1p CONDENSED CASH FLOW STATEMENT SIX MONTHS SIX MONTHS TO YEAR TO TO 30 SEPTEMBER 31 MARCH 30 SEPTEMBER 2007 2007 2006 (UNAUDITED) (AUDITED) (UNAUDITED) 000 000 000 Net return before finance costs and taxation 14,842 74,249 24,928 Losses/(gains) on investments (4,022) (57,517) (15,647) Foreign exchange (gains)/losses (1,232) (5,646) (3,432) Decrease in debtors 485 68 726 Decrease in creditors (2,403) (946) (1,968) Tax on unfranked investment income (144) (321) (163) Net cash flow from operating activities 7,526 9,887 4,444 Servicing of finance (3,807) (5,796) (2,694) Taxation (1) (1) Capital expenditure and financial investment Purchase of investments (129,198) (301,750) (136,179) Sale of investments 160,725 260,373 111,306 Equity dividends paid (7,964) (12,618) (6,929) Net cash inflow/(outflow) before management of liquid resources and financing 27,281 (49,904) (30,053) Financing Exercise of warrants 13,620 13,620 Exercise of Subscription shares 808 1,662 1,662 Increase/(decrease) in cash in the year 28,089 (34,622) (14,771) Exchange movements 1,226 4,611 3,393 Debenture stock non-cash movement (19) (38) (19) Movement in net debt in the period 29,296 (30,049) (11,397) Net debt at beginning of period (121,355) (91,306) (91,306) Net debt at end of period (92,059) (121,355) (102,703) Analysis of changes in net debt: Brought forward: Overdraft (91,690) (61,679) (61,679) Debt due after 5 years (29,665) (29,627) (29,627) Net debt brought forward (121,355) (91,306) (91,306) Movements in the period: Cash inflow/(outflow) from bank 28,089 (34,622) (14,771) Exchange movements 1,226 4,611 3,393 Debenture non-cash movement (19) (38) (19) Net debt at end of period (92,059) (121,355) (102,703) CONDENSED RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS FUNDS CAPITAL CAPITAL SHARE SHARE RESERVE RESERVE RETAINED CAPITAL PREMIUM REALISED UNREALISED RESERVES TOTAL 000 000 000 000 000 000 For the six months ended 30 September 2006 (Unaudited) Shareholder s funds at 1 April 2006 19,248 165,945 161,780 146,619 12,527 506,119 Return for the period from ordinary activities 26,576 (12,835) 8,268 22,009 Second interim dividend for 2006 (6,929) (6,929) Warrants exercised 1,362 12,258 13,620 Subscription shares exercised 76 1,586 1,662 At 30 September 2006 20,686 179,789 188,356 133,784 13,866 536,481 For the year ended 31 March 2007 (Audited) Shareholder s funds at 1 April 2006 19,248 165,945 161,780 146,619 12,527 506,119 Return for the year from ordinary activities 68,918 (16,449) 15,443 67,912 Second interim dividend for 2006 and first interim for 2007 (12,618) (12,618) Warrants exercised 1,362 12,258 13,620 Subscription shares exercised 76 1,586 1,662 At 31 March 2007 20,686 179,789 230,698 130,170 15,352 576,695 For the six months ended 30 September 2007 (Unaudited) Shareholder s funds at 1 April 2007 20,686 179,789 230,698 130,170 15,352 576,695 Return for the period from ordinary activities 36,010 (35,488) 10,477 10,999 Second interim dividend for 2007 (7,964) (7,964) Subscription shares conversion 37 771 808 At 30 September 2007 20,723 180,560 266,708 94,682 17,865 580,538 4
NOTES TO THE CONDENSED FINANCIAL STATEMENTS 1. The condensed financial statements have been using the same accounting policies as those adopted in the annual report and accounts for 31 March 2007, which have been prepared under the historical cost convention and are consistent with applicable UK Accounting Standards and with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies. 2. Management Fees and Finance Costs Investment management fees and interest payable on borrowings are allocated 70% to capital and 30% to revenue. As at 30 September 2007, 1,471,000 (30 September 2006: 1,401,000: 31 March 2007: 1,496,000) was payable to IAML. 3. The tax effect of expenditure is allocated between capital and revenue on the same basis as the particular item to which it relates, using the Company s effective rate of tax for the accounting period. 4. Basis of Returns and Net Asset Value per Ordinary Share Returns: SIX MONTHS TO SIX MONTHS TO YEAR TO 30 SEPTEMBER 30 SEPTEMBER 31 MARCH 2007 2006 2007 Returns after tax: Revenue 10,477,000 8,268,000 15,443,000 Capital 522,000 13,741,000 52,469,000 Total 10,999,000 22,009,000 67,912,000 Weighted average number of ordinary shares in issue during the period: basic 206,896,966 193,895,886 200,360,502 diluted 224,997,004 224,997,004 224,997,004 Net Asset Value: Shareholders funds 580,538,000 536,481,000 576,695,000 Ordinary shares in issue at period end: basic 207,229,981 206,860,637 206,860,637 diluted 224,997,004 224,997,004 224,997,004 5. Movements in Share Capital SIX MONTHS TO SIX MONTHS TO YEAR TO 30 SEPTEMBER 30 SEPTEMBER 31 MARCH 2007 2006 2007 Number of 10p ordinary shares: Brought forward 206,860,637 192,481,550 192,481,550 Subscription shares exercised 369,344 758,886 758,886 Warrants exercised 13,620,201 13,620,201 In issue at period end 207,229,981 206,860,637 206,860,637 Subscription Shares The subscription shares carry the right to subscribe for one ordinary share at a price of 218.94p on 31 August in each of the years 2007 to 2013. During the period 369,344 were exercised and 17,767,023 subscription shares remain at the period end. 6. Dividend The Directors have declared an interim dividend of 3.10p (2006: 2.75p) per ordinary share in respect of the year ending 31 March 2008 payable on 28 December 2007 to shareholders registered on 14 December 2007. 7. In November 2007, HMRC announced that investment management services supplied to investment trusts are exempt from VAT. The Board is in negotiations with the Manager of the Company in order to recover VAT suffered by the Company. These negotiations are ongoing and as the amounts involved are uncertain no asset has been recognised in the financial statements. 8. It is the intention of the Directors to conduct the affairs of the Company so that it satisfies the conditions for approval as an investment trust company set out in section 842 of the Income and Corporation Taxes Act 1988. 9. The financial information contained in this interim report which has not been reviewed or audited, does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The financial information for the half years ended 30 September 2007 and 30 September 2006 has not been audited. The figures and financial information for the year ended 31 March 2007 are extracted and abridged from the latest published accounts and do not constitute the statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors, which was unqualified and did not include a statement under either section 237(2) or 237(3) of the Companies Act 1985. By order of the Board Company Secretary DIRECTORS, INVESTMENT MANAGER AND ADMINISTRATION Directors William Alexander, Chairman Sir Martyn Arbib James D Albiac Vivian Bazalgette Antony Hardy Edward Burke Manager, Company Secretary and Registered Office 30 Finsbury Square London EC2A 1AG Company Secretarial contact: Karina Bryant Registered in England and Wales: No. 3156676 Registrars Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield West Yorkshire HD8 0LA 0870 162 3100 Invesco Perpetual Investor Services Invesco Perpetual has an Investor Services Team (available from 8.30 a.m. to 6.30 p.m. every working day) to help you. Please feel free to take advantage of this expertise. 0800 085 8677 www.invescoperpetual.co.uk/investmenttrusts 30 Finsbury Square London EC2A 1AG 020 7065 4000 is a member of Invesco Plc and is authorised and regulated by the Financial Services Authority 5