Investment Company Plc – Half-year Report

THE INVESTMENT COMPANY PLC

Half-Yearly Financial Report (Unaudited) for the six months ended 31 December 2019

INVESTMENT OBJECTIVE

The Company's investment objective is to provide shareholders with an attractive level of dividends coupled with capital growth over the long term through investment in a portfolio of equities, preference shares, loan stocks, debentures and convertibles.

FINANCIAL CALENDAR

CHAIRMAN'S STATEMENT

Half-Year to 31 December 2019

During the period under review the FTSE All-Share Index increased by 3.44%. The Company's NAV was up by 26.51p, an increase of 7.61 %, which can be analysed as follows:

The Investment Manager has continued to make sound progress in recovering value from the legacy portfolio. In particular, I draw shareholders attention to the Manager's successful endeavours in securing an offer for our Liberty 6% & 9.5% preference shares, a welcome offer for our Aggregated Micro Power Holdings PLC equity holding, and the redemption of our Newcastle Building Society 3.886% Subordinated Notes. Cash proceeds from these sales have been recycled into higher yielding fixed interest and equity holdings. The Investment Managers' Report is set out on pages 4 and 5.

Current income projections anticipate that after covering the costs of running the Company, sufficient income will be available, such that it is likely we will be able to cover the cost of the dividends. This has been a key objective since July 2018, and I am delighted that the Investment Manager has managed the affairs of the Company such that it is likely this objective will be met in this prevailing year.

Your Board believes individuals' capital is scarce, and as such should be respected for its irreplaceability. We have seen savers in recent times suffer at the hands of hubris and unaccountability. We as a Board are conscious that the Company is still too small relative to its relatively fixed cost base, but we will only seek out opportunities that are likely to attract like-minded shareholders, and capital that has a long-term time horizon.

I. R. Dighé – Chairman

10 February 2020

INVESTMENT MANAGER'S REPORT

Performance

During the six month period to 31 December 2019 the NAV increased by 7.61% whilst the share price rose by 16.11%, which was ahead of major UK indices.

The period under review was dominated by two factors. Firstly concerns continued to build over the outlook for US/China trade tariffs and the impact they were having on the global economy. As a result the Federal Reserve took decisive action and cut interest rates three times during the period in order to shield the US economy from the impact of trade wars and the global economic slowdown. Towards the end of the period, following 18 months of fraught trade war negotiations, the US and Chinese administrations have agreed a preliminary phase one trade agreement. This was a major boost for the global economy and investor confidence.

Secondly, in the UK Brexit has dominated the agenda and the debate has pivoted around the potential of a satisfactory 'withdrawal agreement' being passed by Parliament. As the period progressed investor expectation grew of a potential withdrawal agreement being passed through Parliament and as a result Sterling strengthened against the US Dollar & Euro. The decisive general election result saw the government returned to power with a healthy majority which should ensure a resolution to the Brexit saga and a more market friendly agenda. Sterling initially surged on the result but has since drifted back. As we have mentioned in previous reports the general election outcome provides the much sought after clarity that international and UK investors were seeking as they assess the relatively attractive valuations of some UK assets. The FTSE 250, which is dominated by domestic equities such as – housebuilders, utilities and financials – performed strongly in December.

Portfolio

Towards the end of the period we received a takeover bid in cash for Aggregated Micro Power Holdings PLC which is a good outcome for the Company. Firstly we were having difficulty selling the shares in the market and secondly they were not paying a dividend. We have deployed this c.£500,000 of capital into existing portfolio holdings which will generate in excess of £30,000 of income per annum.

In August, we received a cash bid for Greene King from CK Asset Holdings Limited in Hong Kong at a significant premium to our purchase price. As a result, we sold the position at an attractive profit and have reinvested the proceeds into existing holdings such as Vistry (formerly Bovis), Polar Capital, Phoenix Group and New River REIT.

We also had a satisfactory resolution to the two preference share holdings in Liberty Limited and Liberty Retail Limited. These Liberty preference share issues have not been paying interest for a number of years and as a result they were a drag on the Company. More importantly, we have been able to deploy the capital received into existing fixed interest and equity holdings which will provide a significant boost towards covering the administration costs and paying the dividend.

During the period we also increased our exposure to housebuilders – Bellway, Persimmon and Vistry due to the increasingly favourable operating environment which was further enhanced by the well-received general election result and Brexit resolution. The housebuilders are currently paying generous and well covered dividends – both ordinary and specials – and are attractively valued.

We took the opportunity to take some profits in Restaurant Group as the price rise from our initial purchase made the yield less attractive and the company is still in the midst of restructuring itself in order to attract customers in the increasingly competitive casual dining market. We also took the opportunity to add to existing holdings in New River REIT, Phoenix Group and Standard Life Aberdeen. We were fully invested ahead of the general election due to the widely anticipated Conservative majority and this has been a boost for the portfolio.

In the fixed interest part of the portfolio we sold the EI Group 7.5% March 2024 at an attractive level following a strong performance over the last year. EI Group has been acquired by the Stonegate Pub Company. The bond is callable in September 2020 at a level below our sale price.

The Newcastle Building Society 3.886% December 2019 Subordinated Notes were redeemed by the company as planned. The yield was relatively low and the redemption has allowed us to re-allocate the returned capital into existing holdings within the portfolio that offer higher yields. These include additions to Lloyds Bank 7.625% Perpetual, Premier Oil 6.5% 2021 and Ecclesiastical Insurance 8.625% Preference shares.

Future Prospects

Fears of a global recession have eased somewhat with better economic data from the UK and US. In response, bond yields have backed off from their lows. Notwithstanding geo-political risks, the backdrop is generally supportive for equity markets although investors have become more discriminating in their evaluation of growth company ratings. This has led to a better period of performance for more value oriented stocks.

With the UK General Election now decided, the political uncertainty has been largely removed. However, the finer details of Brexit still need to be negotiated and there will undoubtedly be continuing concerns about the UK's long-term relationship with Europe and the progress made in agreeing trade deals with the rest of the world. With the Conservatives having such a large working majority, the major risk to the UK economy would appear to be a hard or no deal Brexit. This will no doubt be reflected in how Sterling moves against other currencies over the coming year.