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RNS

Half-year Report

Released 09:53 21-Nov-2018

RNS Number : 0698I
Securities Trust of Scotland PLC
21 November 2018
 

Securities Trust of Scotland plc

Legal Entity Identifier: 549300UZ1Y7PPQYJGE19

 

 

Half-year financial report

Six months to 30 September 2018

 

A copy of the half-year financial report ended 30 September 2018 has been submitted to the National Storage Mechanism and will shortly be available for viewing at: http://www.morningstar.co.uk/uk/NSM.

 

A copy of the half-year report can shortly be downloaded at www.securitiestrust.com.

 

FINANCIAL HIGHLIGHTS

 

Total return‡^

(including reinvested dividends)

Six months ended

30 September 2018

%

Six months ended

30 September 2017

%

Net asset value per share*

11.1

1.4

Peer group†

10.7

0.8

Share price

8.9

1.2

 

 

Income

Six months ended

30 September 2018

Six months ended

30 September 2017

Revenue per share

3.91p

3.34p

Dividend per share

2.90p

2.90p

 

                                                                                                                                         

Ongoing charges^

(as a percentage of shareholders' funds)

Six months ended

30 September 2018

%

Six months ended

30 September 2017

%

Ongoing charges                                  

0.9

1.0

 

‡ The combined effect of any dividend paid, together with the rise or fall in the share price, net asset or peer group.

* The net asset value ('NAV') per share total return is calculated using cum-income NAV with dividends reinvested.

† Please see below for details on the company's peer group.

^ Please see below for definitions of Alternative Performance Measures.

 

 

INTERIM MANAGEMENT REPORT

 

Chairman's Statement

 

The six months under review produced very strong returns overall in global equities, with key components being the US equity market and a strong dollar, despite the escalating trade tensions between the US and China. An accelerating US economy produced strong corporate earnings upgrades and the US dollar appreciated in response to hardening expectations of further rises in US interest rates. Yields on US 10-year treasuries continued to rise over the period. European markets delivered good returns but were more measured in comparison as they digested decelerating growth, a new coalition government in Italy with fiscally expansive plans and an increased likelihood of a hard Brexit in the UK. The rising US dollar and slowing growth in emerging markets drove negative outturns in those equity markets.

 

Performance

I am pleased to report that the net asset value ('NAV') total return was 11.1% over the six-month period which compares with the open and closed ended peer group median* of 10.7%. The share price total return was less strong, at 8.9% as the discount to NAV widened.

 

Since May 2016, when Mark Whitehead was appointed as portfolio manager and the company moved to an unconstrained mandate, and until the end of September 2018, the NAV total return has delivered 40.4% and the share price total return 39.4%, in comparison with the peer group median of 37.0%.

 

Since 30 September, global equity markets have had setbacks, triggered by concerns over Italian government debt, withdrawal of global liquidity, and concerns over future rates of global growth. Since then** the company's NAV is down 5.44%, and the share price down 5.27% against the peer group median which fell 3.85%.

 

Discount and share buy backs

The discount widened over the period to 7.6% as at 30 September 2018 (31 March: 5.6%). The company bought back 4.39 million shares, representing 4.0% of shares in issue at an average discount of 7.4% (six months to 30 September 2017: 22,150 shares at an average discount of 7.3%). These buybacks at a discount to NAV contributed 0.32% to the increase in NAV over the period and helped to reduce the discount volatility and are also earnings enhancing.

 

Revenue return and dividend

The revenue return per share was 3.91p (six months to Sept 2017 3.34p) an increase of 17%. The increase in net income was £421k (9.6% increase) of which £167k was options income, as the manager capitalised on increased levels of volatility in markets. The reduction in the management fee was also a contributing factor. The board is pleased to declare a second interim dividend of 1.45p which will be paid on 18 January 2019 to shareholders on the register on 28 December 2018. The annualised dividend represents a yield of 3.5%†. This dividend is part of the company's progressive dividend policy which was announced in May 2015. The company aims to grow the dividend in real terms over a five-year period.

 

Marketing arrangements

The discount to NAV that the shares trade on is essentially an indication of the supply:demand balance in the company's shares. It is monitored on an ongoing basis by the board and is an area of focus at every board meeting. Buying shares back is one way of managing the discount and reducing discount volatility and the company will continue to buy shares in as necessary in order to absorb excess liquidity in the shares at wide discounts. However, the board believes that the best and most sustainable way to manage the discount is to increase the demand for the company's shares from new and existing shareholders.

 

With this in mind, and during the period, the board entered into discussions with Martin Currie, the manager, about the company's marketing arrangements. It was delighted to agree a material increase in the marketing budget provided by the manager for the purposes of promoting the company's shares as well as a refresh of the company's marketing strategy, particularly regarding promotional activities in the retail market, and in the quarters around the tax year end.

 

Board refreshment and committee chairmanships

Sarah Harvey joined the board as of 1 October 2018 as part of ongoing board refreshment. Sarah brings extensive experience in marketing, digital and corporate strategy, as well as business operations. I would like to welcome Sarah to the board. Following Sarah's appointment, the board has reviewed the chairmanship of its committees. With effect from 1 January 2019, Sarah will assume the role of chairman of the marketing and communications committee, and Angus Gordon Lennox will assume the role of chairman of the nominations committee. Angus will continue as senior independent director.

 

Outlook

Global equity markets, driven by the US, have been good to investors for nearly 10 years now, driven to a large extent by low interest rates. Whilst the US economy continues to surprise on the upside, the threat of overly aggressive monetary tightening by the US Federal Reserve or an escalation of China/US trade tensions should not be ignored. Valuations in Europe are lower, but the market is right to be concerned over the fiscal path to be taken by the new Italian government, and Brexit related risks cast a shadow over the prospects for the UK and to a lesser extent Europe. Heightened volatility, such as that experienced since the period end, is likely to be a feature for equity markets as a result.

 

Despite this uncertain backdrop, these market moves and this increased volatility present fertile territory for a globally unconstrained stock picker, such as your manager. The fall in markets and in your company's share price results in opportunities through more compelling valuations and a higher dividend yield.

 

Don't miss our updates

Please do as always get in touch if you have any questions or feedback on any of the company's activities. I can be contacted by email at STSChairman@martincurrie.com or through the Company Secretary at CompanySecretarialTeam@martincurrie.com. I would also like to encourage you to visit and to sign up for the company's monthly email bulletin on our website at www.securitiestrust.com. The website is kept constantly up to date with relevant news, performance information and video updates.

 

Rachel Beagles

Chairman

21 November 2018

 

*The peer group is made up of all relevant open and closed-ended peers (sourced from the Morningstar Global Equity Income Sector and Association of Investment Companies ('AIC') Global Equity Income Sector).

†As at 30th September 2018.

** To 19 November 2018

 

 

Manager's review

 

Political upheaval, the threat and implementation of tariffs and other macro and micro economic instability have driven meaningful dispersion in equity-market performance over the past six months. Against this backdrop, the portfolio produced a strong absolute gain with a NAV total return of 11.1%.

 

In highlighting some of the most significant influencing factors, it is important to recognise that the synchronised recovery in global growth, witnessed for much of 2017, seems to have broken down. The US remains the best performing G10 country today, with real GDP growth for the second quarter, accelerating to 4.2% (seasonally adjusted, year-on-year ('yoy')). Consensus forecasts predict the growth to remain robust well into 2019.

 

By contrast, the euro area has already been experiencing a deceleration in GDP growth, while pacific, emerging, and frontier markets have also struggled as growth has slipped. The strong US dollar, poor budgetary and liquidity conditions, large levels of US dollar-denominated debt and weakening commodities have all been highlighted as causes of the slowdown. The slowing growth, combined with higher inflation, has been most acutely felt in Argentina and Turkey. This has emboldened these central banks to raise interest rates aggressively as their economies head towards recession.

 

Meanwhile, China has been tightening monetary policy over the past couple of years to dampen exuberance and reduce debt levels in areas such as the property market. However, the shock of escalating trade tensions with the US threatens materially to slow GDP, before policy intervention undoubtedly is enacted. This has certainly affected sentiment towards Chinese equities over the period.

 

As such, the divergence in regional equity market performance has been quite pronounced, but has largely followed the narrative of the relative growth backdrop. North America has been the best regional market posting a near 20% absolute return in sterling terms. This robust performance reflects a very strong corporate earnings season for quarter two; where earnings surprised consensus by circa +5% growing at a lofty 26% annualised, topping the previous quarter of 23%. The performance of North American equities in the portfolio has been strong, driven largely by stock selection. Indeed, most of the top-ten positive absolute performers were North American and included information technology, energy and healthcare stocks.

 

By comparison, Europe was only able to produce a more modest return of 7.5% for the period. The region was hobbled in May by the decision of Italy's extreme left-wing and right-wing politicians to form a coalition government based on a new idea of historic compromise, that potentially may combine all the worst policies from both sides! Italy is big enough to destroy both the European Union and the euro and this risk has certainly risen and with it European risk asset aversion. Sentiment in Europe has been subdued further by the protracted dysfunction of the Brexit negotiations (which could easily culminate in a "no deal" exit) hanging like the Sword of Damocles over the heads of businesses and consumers on both sides of the Channel. Against this backdrop, the portfolio's European stocks struggled, largely driven by the more cyclical areas of the exposure, such as financials, industrials and materials where risk aversion has been prevalent.

 

Despite emerging markets posting a mild negative return over the period, the portfolio's exposure here held up well, proving to be somewhat defensive against the falls in the market. The Japanese market also lagged and we continue to hold a zero weighting to this market on yield and dividend sustainability grounds.

 

Because of the more turbulent backdrop, it is therefore not surprising that some subtle shifts in equity market leadership have developed recently. Defensives have begun to work better than the higher-risk, more cyclical areas of the market. Higher- yielding stocks have fared marginally better recently, reflecting the strength of more defensive areas of the market relative to some of the more cyclical areas. Some growth and momentum stocks continued to produce strong returns but they are waning a little with the 'FAANG' stocks starting to falter. Certainly, the factor return dispersion has picked up across most markets. We believe defensive style, particularly higher-yielding stocks should continue to perform more consistently over the short to medium term after years of meaningful underperformance, particularly as volatility is rising and as we near the end of the economic cycle.

 

Turning to sector performance, once again information technology has been the standout performer for the portfolio. Microsoft, now the largest position in the fund, produced the strongest absolute performance, with Apple coming in third. We continue to believe these stocks can drive superior long-term capital and dividend growth due to their product and services line ups. It has been interesting to see some of the FAANG stocks come under selling pressure, with Facebook, a zero-yielding stock we have avoided, in focus as it deals with issues surrounding data breaches. It also posted a poor set of results for the second quarter which led to a sharp decline of around 20% in the shares, wiping US$120 billion of value off the company; one of the biggest one-day losses in U.S. corporate history.

 

Healthcare, a more defensive sector, has also led the performance charts of late. Merck appeared second in the portfolio in terms of absolute return. We have been more cautious on this sector, preferring to own larger positions in those stocks we have high conviction in, such as Merck for its superior market positioning in immuno-oncology and other growth- orientated products. We have been cautious on the wider sector, due to the long-term pricing erosion we see for large drug companies and the likely ratcheting up of negative press ahead of the US mid-term elections, with reduction in drug prices being a key Trump administration policy target. We see the recent re-rating, despite accelerating earnings growth for the sector, as overdone and hold our weighting steady in the fund accordingly. Unfortunately, our small position in Shanghai Fosun Pharmaceutical has performed poorly, but we remain invested to build a position for the long-term structural growth opportunity available in Chinese healthcare penetration.

 

The financials sector was the worst performer over the period. ING Groep in Europe has come under continuing selling pressure as the market has become concerned its growth is waning and that it has yet to build sufficient capital provision to meet new regulations. As a result, questions have surfaced on its ability to operate a progressive dividend policy, a key part of our thesis and so we sold the position. The stock has gone on to perform poorly since. Other financials in the bottom absolute performers include, UOB and Banca Generali. As you will remember, we have had rather a volatile experience with the latter stock over the past couple of years. For a growing asset manager, it does seem to get buffeted by Italian sentiment more than most, which is perhaps a bit unfair. However, we do believe that the fantastic growth in acquiring assets could be about to stall, which is a thesis violation, and prompted us to sell this stock too.

 

Consumer discretionary and materials stocks in Europe have lagged, including for us Continental, Ibstock and Kingfisher. There has been a macro influence on these names, but some of the problems in the short term have been stock specific. For Continental, profits have fallen this year. Some of this has been due to slowing auto markets in China for example, but it has had some higher warranty payments to make on a few auto products too which is frustrating. But we still believe it is well positioned to harness longer-term structural growth trends, including those of advanced driver-assistance systems (ADAS) in cars, higher-spec car infotainment and electrification including hybrid 48-volt systems, so we retain conviction in the stock.

 

Kingfisher's share price performance has also been a frustration, as its restructuring is on track despite the mammoth task it is undertaking. However, consumer activity has been lacklustre in France and it has been losing market share to the competition (which we think is temporary) and of course Brexit serves as a massive headwind for its UK business B&Q, as demand for big ticket items such as kitchens and bathrooms remains sluggish.

 

Activity

Key purchases in the period included Air Products, Zurich Insurance and SSE. To fund these purchases we sold Banca Generali, Bank of Montreal, ING and Sonic Healthcare.

 

We recently bought Air Products, the industrial gas company, which has a focus on large projects with long-term contracts. Industrial gases are a low-cost, but vital component for a variety of end customers and so revenues should grow in line with industrial production in the developed world and faster in the emerging world. In addition, there are some structural growth drivers like cleaner energy demand, coal gasification and an increasing outsourcing by firms of their industrial gas operations. Air Products has exposure to all these drivers as well as a strong balance sheet that should allow it to participate in this attractive growth opportunity. Speaking to the company recently, it expects most of its future growth to come from such projects, particularly in emerging markets. We engaged with the company about how it ensures the credit worthiness (and thus sustainability) of the customers with whom it enters into such long-term contracts. The company assured us that it uses financial and credit reporting information and, more importantly, uses internal and external resources to understand the long- term viability of the specific facility or plant it will be supplying.

 

We believe Zurich Insurance to be a high-quality business. We expect premium growth in line with global premium inflation, while an increased focus on profitability (underwriting margins and expenses), in addition to rising investment yields, supports growth of around 5% at the bottom-line. Growth could surprise positively through Property & Casualty price hardening, rising interest rates, and traction in emerging markets. Zurich's prospective dividend yield is also very generous at 6.5%.

 

We increased our holding in SSE the UK utility, as we see the business transforming through the potential divestment of its downstream supply and services segment. This will leave us with a more stable high-yielding, mostly regulated network business, combined with a renewable and thermal generation segment. Unfortunately, the company has been through a very difficult period recently, issuing a profit warning as a result of being short of gas at a time of high gas prices when weather factors impacted both the supply of and demand for energy. We believe its energy infrastructure assets and its increasing renewables energy capacity remain attractive with hard-to-replicate assets; additionally, the dividend looks to be relatively safe.

 

We sold Banca Generali, the wealth manager based in Italy. Recently it has been impacted by the Italian political volatility. Weakness in Italian equities will generally directly affect sentiment, as client assets are exposed. The company has continued to grow its assets under management aggressively, mainly through acquisition of financial advisors combined with its books of assets. We therefore fear growth will begin to stall as it is simply impossible to continue to grow at the same pace. Amortization of recruitment costs will also reduce profitability in the coming years.

 

We owned ING due to the opportunity it has as a leading fintech bank in Europe. While it continues to execute on this digital strategy, we became concerned that net interest margin guidance has become more negative and that earnings growth may falter. Combine these factors with the requirement for the bank to raise further capital under new regulations (which could take until 2022 to build), and the pressure may mount on the progressive dividend policy and cause weakness in the stock over the medium term.

 

Canadian banks were the poster child of how banks should be manged during the global financial crisis and Bank of Montreal has indeed served the portfolio relatively well over a long period. We still like this company, but we have concerns that the Canadian residential housing market is in bubble territory which could be poor for sentiment once a correction ensues, even though the bank has been running a very disciplined mortgage book.

 

Sonic Healthcare is an Australian-based diagnostics, imaging and GP services business. Our original investment case was based on its participation in the global consolidation of this business and the leverage that profits, cashflow and the dividend should have to this growth. We exited the holding as the leverage we expected was unforthcoming as costs rose almost as much as revenues. This, combined with a lofty valuation that has been largely driven by the expectation of superior profits growth, led us to divest the position as the risk of downside has become elevated.

 

Outlook

Recent economic data points toward a reacceleration in US activity, while Europe and the rest of the world have decoupled to varying extents. The US purchasing managers' index (PMI), a gauge of the economic health of the manufacturing sector, rose to 55.6 at the end of September 2018, which denotes a fast pace of expansion and could lead to upgrades of GDP estimates for 2018/2019. Consumer spending in the US remains robust as the tax windfall drives activity. Corporate spending is still rising, led by investment in intellectual property products and equipment, with corporate capex for the S&P 500 growing by 20% yoy in the second quarter - this should bode well for future growth. Strong corporate sales and higher margins are fuelling strong earnings and although the rate of earnings growth may slow for the second half of 2018 and into 2019, it should still be decent. Added to this, the S&P 500 has de-rated over the past nine months, as earnings growth has been so strong, while the market has fallen since the peak in late January. With all this in mind, the set-up for late 2018 is positive for the US market, unless it is knocked off course by an external influence or shock.

 

We believe we will continue to see spikes in volatility and sharp sell-offs in equities. There is an expectation of further fiscal and monetary tightening well into 2019, which could well be enforced to slow the US economy down and keep inflation in check. This poses a major conundrum, as too much monetary tightening could choke off activity too quickly, plunging the economy into recession; while this is not our central forecast, it is a risk we remain acutely aware of.

 

US and China trade wars are not helping calm volatility either and the Chinese equity market has fallen sharply, also affecting other emerging market countries. Should tensions escalate further, it could precipitate a sharp devaluation of the Chinese currency, effectively exporting deflation westwards, causing western exports heading east to slow markedly. It is likely corporates would also look to pass on higher tariffs to consumers should this happen, effectively stalling growth, either due to a response from consumers by spending less, or from central bankers, as they act to raise interest rates to quell cost- push inflation.

 

The outlook for Europe is, of course, more troublesome. Economic activity is rebounding a little since the sharp falls earlier in the year, but business and consumer sentiment is unlikely to improve dramatically until the UK's exit from the EU is agreed and some sort of trade accord ratified. Here, the mood music has improved a little recently, but we should expect sentiment to oscillate. If an agreement is reached, it is reasonable to expect a rebound in European equities which have struggled over the recent months. Italy also continues to be a hotbed for political altercation, with frequent disruptions likely, as new fiscal budgets and key policies are debated, impacting asset prices through a gradual degradation of confidence.

 

As trade wars, geopolitical tensions and market volatility escalate, we remind ourselves that high-quality, structural dividend growth stocks should offer protection and opportunity as a style, during the last stages of expansion in the economic cycle. Dividend growth has been strong year to date and many out of favour stocks not only offer defensive attributes but also look better value than they did earlier in the year.

 

Mark Whitehead

21 November 2018

 

 

 

Risk and mitigation

The company's business model is longstanding and resilient to most of the short term uncertainties that it faces, which the board believes are effectively mitigated by its internal controls and the oversight of the investment manager, as described in the latest annual report. The principal risks and uncertainties are therefore largely longer term and driven by the inherent uncertainties of investing in global equity markets. The board believes that it is able to respond to these longer term risks and uncertainties with effective mitigation so that both the potential impact and the likelihood of these seriously affecting shareholders' interests are materially reduced.

 

Risks are regularly monitored at board meetings and the board's planned mitigation measures are described in the latest annual report. The board maintains a risk register and also carries out a risk workshop annually. The board has identified the following principal risks to the company:

 

·      Loss of s1158-9 status

·      Long-term investment underperformance

·      Market, financial and interest rate risk

·      Operational Risk

 

Further details of these risks and how the board manages them can be found in the 2018 annual report and on the company's website www.securitiestrust.com.

 

Directors' responsibility

In accordance with Chapter 4 of the Disclosure and Transparency Rules, and to the best of their knowledge, each director of the company confirms that the financial statements have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law) and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in November 2014. The directors are satisfied that the financial statements give a true and fair view of the assets, liabilities, financial position and profit of the company. Furthermore, each director certifies that the interim management statement includes an indication of important events that have occurred during the first six months of the financial year, and their impact on the financial statements, together with a description of the principal risks and uncertainties that the company faces. In addition, each director of the company confirms with the exception of management, secretarial fees, directors' fees and directors' shareholdings, that there have been no related party transactions during the six months to 30 September 2018.

 

Going concern status

The company's business activities, together with the factors likely to affect its future development, performance and position, are set out in the chairman's statement and manager's review. The financial position of the company as at 30 September 2018 is shown on the unaudited condensed statement of financial position. The unaudited condensed statement of cash flow of the company is set out below.

 

In accordance with the Financial Reporting Council's guidance on Risk Management, Internal Control and Related Financial and Business Reporting issued in September 2014 and C.1.3. of the 2016 UK Corporate Governance Code, the directors have undertaken a rigorous review of the company's ability to continue as a going concern. The company's assets consist primarily of a diverse portfolio of listed equity shares which, in most circumstances, are realisable within a very short timescale. The directors are mindful of the principal risks disclosed above and have reviewed revenue forecasts. They believe that the company has adequate financial resources to continue its operational existence for the foreseeable future and for at least one year from the date of signing of these financial statements. Accordingly, the directors continue to adopt the going concern basis in preparing these financial statements.

 

 

By order of the board

Rachel Beagles, Chairman

 

21 November 2018

 

 

 

Portfolio Summary

 

Portfolio distribution as at 30 September 2018

 

By region (excluding cash)

  As at 30 September 2018

As at 31 March 2018


%

%

North America

50.5

48.7

Developed Europe

40.6

40.8

Developed Asia Pacific ex Japan

8.9

10.5


100.0

100.0

 

 

By sector (excluding cash)

 As at 30 September 2018

As at 31 March 2018


%

%

Financials

22.0

27.5

Industrials

18.0

16.6

Consumer goods

15.2

17.2

Basic materials

11.0

8.0

Technology

9.5

7.2

Healthcare

9.2

7.3

Oil & gas

7.2

6.9

Utilities

4.0

3.1

Telecommunications

2.3

2.2

Consumer services

1.6

4.0


100.0

100.0

 

 




By asset class

(including cash and borrowings)

 

As at 30 September 2018

 

As at 31 March 2018


%

%

Equities

110.0

110.3

Options*

-

(0.3)

Cash

2.7

3.0

Less borrowings

(12.7)

(13.0)


100.0

100.0

 

*Options held as at 30 September 2018 were (0.04%).

 

Largest 10 holdings

30 September 2018

30 September 2018

31 March 2018

31 March 2018


Market value

% of total

Market value

% of total


£000

portfolio

£000

portfolio

Microsoft

10,220

4.7

6,438

3.1

Merck & Co

9,115

4.2

4,820

2.3

Sanofi

7,659

3.5

3,758

1.8

Zurich Insurance Group

6,230

2.8

-

-

Koninklijke DSM

6,204

2.8

5,394

2.6

WEC Energy Group

5,603

2.5

3,790

1.8

Airbus

5,580

2.5

4,762

2.3

Taiwan Semiconductor

5,466

2.5

5,036

2.4

Chevron

5,395

2.5

6,446

3.1

Air Products + Chemicals

5,298

2.4

-

-

 

Unaudited Condensed Statement of Comprehensive Income

 



(Unaudited) Six months to

30 September 2018

(Unaudited) Six months to

30 September 2017


Note

Revenue

£000

Capital

£000

Total

£000

Revenue

£000

Capital

£000

Total

£000

Net gains/(losses) on investments

5

-

17,061

17,061

-

(881)

(881)

Net currency (losses)/gains


55

(719)

(664)

(6)

627

621

Income

3

5,214

-

5,214

4,716

-

4,716

Investment management fee


(204)

(378)

(582)

(215)

(399)

(614)

Other expenses


(301)

-

(301)

(299)

-

(299)

Net return before finance costs and taxation


4,764

15,964

20,728

4,196

(653)

3,543

Finance costs


(100)

(173)

(273)

(96)

(157)

(253)

Net return on ordinary activities before taxation


4,664

15,791

20,455

4,100

(810)

3,290

Taxation on ordinary activities

4

(429)

-

(429)

(352)

-

(352)

Net returns attributable to ordinary redeemable shareholders


4,235

15,791

20,026

3,748

(810)

2,938

Net returns per ordinary redeemable share

2

3.91p

14.58p

18.49p

3.34p

(0.72p)

2.62p

 

 



(Audited)



Year to 31 March 2018



Revenue

Capital

Total


Note

£000

£000

£000

Net gains/(losses) on investments

5

-

(8,277)

(8,277)

Net currency (losses)/gains


(46)

906

860

Income

3

8,339

-

8,339

Investment management fee


(428)

(794)

(1,222)

Other expenses


(618)

-

(618)

Net return before finance costs and taxation


7,247

(8,165)

(918)

Finance costs


(187)

(314)

(501)

Net return on ordinary activities before taxation


7,060

(8,479)

(1,419)

Taxation on ordinary activities

4

(693)

-

(693)

Net returns attributable to ordinary redeemable shareholders


6,367

(8,479)

(2,112)

Net returns per ordinary redeemable share

2

5.69p

(7.58p)

(1.89p)

 

The total columns of this statement are the profit and loss accounts of the company.

The revenue and capital items are presented in accordance with the Association of Investment Companies ('AIC') Statement of Recommended Practice ('SORP 2014').

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the six months.

The notes below form part of these condensed financial statements.

 

 

 

Unaudited Condensed Statement of Financial Position

 



 (Unaudited)

As at

30 September 2018

(Unaudited)

As at

30 September 2017

(Audited)

year to

31 March 2018


Note

£000

£000

£000

£000

£000

£000

Fixed assets








Investments and derivatives at fair value through profit or loss

5


218,780


219,446


206,673









Current assets








Trade and other receivables*

6

416


440


674


Cash and cash equivalents*


5,379


4,492


7,092




5,795


4,932


7,766










Current liabilities








Trade payables - amounts falling due within one year

7

(10,841)


(10,466)


(10,519)


Dividend payable


-


-


(1,602)


Total current liabilities


(10,841)




(12,121)


Net current liabilities



(5,046)


(5,534)


(4,355)

Total assets less current liabilities



213,734


213,912


202,318

Trade payables - amounts falling due after more than one year

8


(15,285)


(14,968)


(14,534)

Net assets



198,449


198,944


187,784









Capital and reserves








Called up ordinary share capital



1,223


1,223


1,223

Capital redemption reserve



78


78


78

Share premium reserve



30,040


30,040


30,040

Special distributable reserve**



85,307


95,655


92,772

Capital reserve**



77,832


69,710


62,041

Revenue reserve**



3,969


2,238


1,630

Total shareholders' funds



198,449


198,944


187,784

Net asset value per ordinary redeemable share

2


187.11p


177.41p


170.02p

 

 

* Prior interim balance has been restated to include UBS collateral in the cash balance.

** These reserves are distributable.

The company is registered in Scotland no.283272.

The notes below form part of these condensed financial statements.

 

 

The financial statements were approved by the board of directors on 21 November 2018 signed on its behalf by Rachel Beagles, Chairman.

 

 

Unaudited Condensed Statement of Changes in Equity

 

For the period to 30 September 2018 (Unaudited)

Called up ordinary share capital

£000

Capital redemption reserve

£000

Share

premium

account

£000

Special distributable capital

reserve*

£000

 

 

Capital

reserve*

£000

 

 

Revenue

 reserve*

£000

 

 

 

Total

£000

As at 31 March 2018

1,223

78

30,040

92,772

62,041

1,630

187,784

Net return attributable to shareholders**

-

-

-

-

15,791

4,235

20,026

Ordinary shares bought back during the period

-

-

-

(7,465)

-

-

(7,465)

Dividends paid

-

-

-

-

-

(1,896)

(1,896)









Balance at 30 September 2018

1,223

78

30,040

85,307

77,832

3,969

198,449

 

For the period to 30 September 2017 (Unaudited)

Called up ordinary share capital

£000

Capital redemption reserve

£000

Share

premium

account

£000

Special distributable capital reserve*

£000

Capital

reserve*

£000

Revenue

 reserve*

£000

 

 

 

Total

£000

As at 31 March 2017

1,223

78

30,040

95,692

70,520

1,910

199,463

Net return attributable to shareholders**

-

-

-

-

(810)

3,748

2,938

Ordinary shares bought back during the period

-

-

-

(37)

-

-

(37)

Dividends paid

-

-

-

-

-

(3,420)

(3,420)

Balance at 30 September 2017

1,223

78

30,040

95,655

69,710

2,238

198,944

 

For the year to 31 March 2018 (Audited)

Called up ordinary share capital

Capital redemption reserve

Share

premium

account

Special distributable capital reserve*

Capital

reserve*

Total


£000

£000

£000

£000

£000

£000

£000

As at 31 March 2017

1,223

78

30,040

95,692

70,520

1,910

199,463

Net return attributable to shareholders**

-

-

-

-

(8,479)

(2,112)

Ordinary shares bought back during the year

-

-

-

(2,920)

-

(2,920)

Dividends paid

-

-

-

-

-

(6,647)









Balance at 31 March 2018

1,223

78

30,040

92,772

62,041

1,630

187,784

 

*These reserves are distributable.

**The company does not have any other income or expenses that are not included in the 'Net return attributable to ordinary redeemable shareholders' as disclosed in the Condensed Statement of Comprehensive Income above, and therefore this is also the 'Total comprehensive income' for the period.

The notes below form part of these condensed financial statements.

 

 

 

Unaudited Condensed Statement of Cash Flow

 



 

(Unaudited)

Six months to

 

(Unaudited)

Six months to

(Audited)

Year to 



30 September 2018

30 September 2017

31 March 2018


Note

£000

£000

£000

£000

£000

£000

Cashflows from operating activities








Profit/(loss) before tax



20,455


3,290


(1,419)

Adjustments for:








(Gains)/losses on investments

5

(17,061)


881


8,277


Capital distribution received*


-


-


27


Finance costs


273


253


501


Purchases of investments**

5

(41,522)


(30,108)


(93,620)


Sales of investments**

5

46,476


29,590


98,452


Dividend income

3

(4,740)


(4,413)


(7,418)


Other income

3

(1)


-


-


Stock lending income

3

(26)


(23)


(35)


Premium income - written options

3

(447)


(280)


(886)


Dividends received


5,002


4,642


7,335


Other income received


1


-


3


Stock lending income received


27


87


100


Premium income received - written

options


447


280


886


(Increase)/decrease in receivables


(5)


18


95


Decreases in payables


(14)


(32)


(30)


Overseas withholding tax suffered

4

(429)


(352)


(693)





(12,019)


543


12,991

Net cash flows from operating activities



8,436


3,833


11,572

Cash flows from financing activities








Repurchase of ordinary share capital


(7,129)


(37)


(2,871)


Exchange movement on bank borrowings


751


(577)


(1,011)


Equity dividends paid


(3,498)


(3,420)


(5,045)


Interest paid on borrowings


(273)


(257)


(503)


Net cash flows from financing activities



(10,149)


(4,291)


(9,430)

Net (decrease)/increase in cash and cash equivalents



(1,713)


(458)


2,142

Cash and cash equivalents at the start of the year



7,092


4,950


4,950

Cash and cash equivalents at the end of the period/year***

9


5,379


4,492


7,092

 

* This relates to the proceeds for the capital dividend from Singapore Communications.

** Receipts from the sale of, and payments to acquire investment securities, have been classified as components of cash flows from operating activities because they form part of the fund's dealing operations.

*** Prior interim balance has been restated to include UBS collateral in the cash balance.

The notes below form part of these condensed financial statements.

 

 

 

Notes to the Condensed Financial Statements

 

Note 1:  Accounting policies

For the period ending 30 September 2018 (and the year ending 31 March 2018), the company is applying Financial Reporting Standard 102 ('FRS 102') applicable in the UK and Republic of Ireland, which forms part of the Generally Accepted Accounting Practice ('UK GAAP') issued by the Financial Reporting Council ('FRC') in 2015.

 

These condensed financial statements have been prepared on a going concern basis in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, FRS 102 issued by the FRC in September 2015, FRS 104 Interim Financial Reporting issued by the FRC in March 2015 and the revised Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" ('SORP') issued by the AIC in November 2014 and updated in January 2017.

 

The accounting policies applied for the condensed set of financial statements are set out in the company's annual report for the year to 31 March 2018.

 

 

 

Note 2:  Returns and net asset value

 


(Unaudited)

Six months to

30 September 2018

(Unaudited)

Six months to

30 September 2017

(Audited)

Year to

31 March 2018

Revenue return




Revenue return attributable to ordinary redeemable shareholders

£4,235,000

£3,748,000

£6,367,000

Weighted average number of shares in issue during the period*

108,331,647

112,143,357

111,910,413

Revenue return per ordinary redeemable share (basic and diluted)

3.91p

3.34p

5.69p

Capital return




Capital return attributable to ordinary redeemable shareholders

£15,791,000

(£810,000)

(£8,479,000)

Weighted average number of shares in issue during the period*

108,331,647

112,143,357

111,910,413

Capital return per ordinary redeemable share

14.58p

(0.72p)

(7.58p)

Total return




Capital return per ordinary redeemable share (basic and diluted)

18.49p

2.62p

(1.89p)

Net asset value per share




Net assets attributable to shareholders

£198,449,000

£198,944,000

£187,784,000

Number of shares in issue at period end

106,061,396

112,140,218

110,446,792

Net asset value per share

187.11p

177.41p

170.02p

 

* Calculated excluding shares held in treasury.

During the six months to 30 September 2018 there were 4,385,396 shares bought back into treasury at a cost of £7,465,000. (Six months to 30 September 2017: 22,150 shares brought back into treasury at a cost of £37,000; twelve months to 31 March 2018: 1,715,576 shares brought back into treasury at a cost of £2,920,000). Between 1 October and 19 November 2018,883,922 ordinary shares of 1p each were bought back into treasury at a cost of £1,474,000. There have been no shares issued from treasury during the six months to 30 September 2018. (Six months to 30 September 2017: no shares were issued from treasury; twelve months to 31 March 2018: no shares were issued from treasury.) There have been no shares cancelled from treasury during the six months to 30 September 2018. (Six months to 30 September 2017: no shares were cancelled from treasury; twelve months ended 31 March 2018: no shares were cancelled from treasury). As at 30 September 2018 there were 16,237,752 shares in held in treasury.

 

Total return

The total return per share for the company is the combined effect of the rise and fall in the share price or NAV together with the reinvestment of the quarterly dividends paid.

 

The tables below provide the NAVs and share prices of the company on the dividend reinvestment dates for the six months ended 30 September 2018 and 30 September 2017.

 

2018

Dividend rate

NAV

Share price

31 March 2018

n/a

170.02

160.50

5 July 2018

1.75

180.61

168.00

30 September 2018

n/a

187.11

173.00

Total return


11.10%

8.9%

 

 

2017

Dividend rate

NAV

Share price

31 March 2017

n/a

177.83

166.00

15 June 2017

1.60

181.72

170.13

24 August 2017

1.45

181.51

169.50

30 September 2017

n/a

177.41

165.00

Total return


1.40%

1.20%

 

 

 

Note 3:  Income

 


(Unaudited)

Six months to

30 September 2018

£000

(Unaudited)

Six months to

30 September 2017

£000

(Audited)

Year to

31 March 2018

£000

From listed investments




UK - equities

787

753

1,347

Overseas - equities

3,953

3,660

6,071


4,740

4,413

7,418

Other revenue




Premium - written options

447

280

886

Stock lending

26

23

35

Other income

1

-

-


5,214

4,716

8,339

 

 

During the six months to 30 September 2018 the company did not receive any capital dividends. (Six months to 30 September 2017: £nil; year to 31 March 2018: £27,200).

 

During the six months to 30 September 2018 there were special dividends of £207,000 (30 September 2017: £59,000) which were received and treated as income.

 

 

Note 4: Taxation on ordinary activities

 


(Unaudited)

Six months to

30 September 2018

£000

(Unaudited)

Six months to

30 September 2017

£000

(Audited)

Year to

31 March 2018

£000

Foreign tax



429



352



693

 

 

Note 5:  Investments and derivatives at fair value through profit or loss

 

 

(Unaudited)

As at

30 September 2018

£000

(Unaudited)

As at

30 September 2017

£000

(Audited)

As at

31 March 2018

£000

UK listed investments held at fair value through profit or loss

30,724

29,383

31,614

Overseas listed investments held at fair value through profit or loss

188,138

190,146

175,534

Total value of financial asset investments

218,862

219,529

207,148

Derivative financial instruments - value of written option contracts

(82)

(83)

(475)

Valuation of investments and derivatives

218,780

219,446

206,673

Opening valuation

206,673

219,809

219,809

Opening unrealised gains

(18,231)

(47,059)

(47,059)

Opening cost

188,442

172,750

172,750

Acquisition at cost

41,522

30,108

93,620

Disposal proceeds

(46,476)

(29,590)

(98,452)

Gains on disposal of investments and derivatives

4,572

6,831

20,524

Disposals at cost

(41,904)

(22,759)

(77,928)

Closing cost

188,060

180,099

188,442

Add: unrealised gains

30,720

39,347

18,231

 

Closing valuation

218,780

219,446

206,673

Gains/(losses) on investments and derivatives




Net gains on disposal of investments and derivatives

4,572

6,831

20,524

Movement in unrealised gains/(losses) on disposal of investments and derivatives

12,489

(7,712)

(28,828)

Capital distributions

-

-

27


17,061

(881)

(8,277)

 

 

Transaction costs

During the period, expenses were incurred in acquiring or disposing of investments classified as fair value though profit or loss. These have been expensed through capital and are included within gains/(losses) on investments in the statement of comprehensive income. The total costs were as follows:

 

 


(Unaudited)

Six months to

30 September 2018

£000

(Unaudited)

Six months to

30 September 2017

£000

(Audited)

Year to

31 March 2018

£000

Acquisitions

65

57

168

Disposals

19

42

146


84

99

314

 

 

Note 6:  Trade and other receivables

 


(Unaudited)

As at

30 September 2018

£000

(Unaudited)

As at

30 September 2017

£000

(Audited)

As at

31 March 2018

£000

Dividends receivable

285

235

547

Tax recoverable

130

189

125

Prepayments and other debtors

-

13

-

Stock lending income receivable

1

3

2


416

440

674

 

None of the company's trade and other receivables are past due or impaired at any period end.

 

 

Note 7:  Trade payables - amounts falling due within one year

 


(Unaudited)

As at

30 September 2018

£000

(Unaudited)

As at

30 September 2017

£000

(Audited)

As at

31 March 2018

£000

Interest accrued

14

12

14

Sterling bank revolving loan

10,000

10,000

10,000

Amount due for Ordinary shares bought back

385

-

49

Other trade payables

442

454

456


10,841

10,466

10,519

 

The rate of interest for the revolving credit facility ('Facility D') is set at each roll-over date and is made up of a fixed margin of 0.5% plus LIBOR rate. Under this agreement £10,000,000 was drawn at 28 September 2018 at a rate of 1.4503% with a maturity date of 28 December 2018. The repayment date of the revolving facility is the last day of its interest period and the termination date is the 30 September 2020.

 

 

Note 8:  Trade payables - amounts falling due after one year

 


(Unaudited)

As at

30 September 2018

£000

(Unaudited)

As at

30 September 2017

£000

(Audited)

As at

31 March 2018

£000

Bank loan

15,285

14,968

14,534

 

The term loans carry an annual fixed rate interest of 2.1408%, 1.4175% and 3.1925% for Facility A, Facility B and Facility C respectively.

 

The repayment date of the term loans is the same as their termination date which is the 19 September 2023.

 

Under the loan agreements the company is to ensure that, at each month end, the aggregate principal amount outstanding in respect of monies borrowed does not exceed an amount equal to 25% of its net tangible assets and, unless otherwise agreed with the lender, net tangible assets are not less than £100,000,000. Also the company shall not enter into any obligations except with the prior consent of the Lender and not enter into any option writing programme which the value of its transactions, at any time, exceed 15% of its net tangible assets.

 

As at 30 September 2018 the company had drawn down the full amount of the loan and the balances as at that date were for Facility A £1,500,000, Facility B £4,008,000 (€4,500,000), Facility C £9,777,000 (US$12,750,000) and Facility D £10,000,000.

 

 

 

Note 9:  Analysis of net debt

 


(Audited)

As at

31 March 2018

£000

Cash flow

£000

Exchange movements

£000

(Unaudited)

As at

30 September 2018

£000

Cash at bank

7,092

(1,713)

-

5,379

Bank borrowings

(24,534)

-

(751)

(25,285)

Net debt

(17,442)

(1,713)

(751)

(19,906)

 

 

Note 10:  Stock lending

 

The Company has a Securities Lending Authorisation Agreement with State Street Bank & Trust Company.

 

As at 30 September 2018 £15,690,000 of investments were subject to stock lending agreements (six months ended 30 September 2017: £9,255,000, twelve months ended 31 March 2018: £13,226,000) and £16,791,000 was held in collateral (six months ended 30 September 2017: £9,953,000, twelve months ended 31 March 2018: £13,836,000). The collateral was held in the form of cash (in USD or EUR), government securities issued by any of the OECD countries or equity securities listed and/or traded on an exchange in the following countries: Australia, Canada, Hong Kong, Japan, New Zealand, Singapore, Switzerland and USA.

 

The gross earnings and the fees payable for the period are £35,000 (six months to 30 September 2017: £31,000; year to 31 March 2018: £47,000) and £9,000 (six months to 30 September 2017: £8,000; year to 31 March 2018 £12,000).

 

The maximum aggregate value or securities on loan at any time during the accounting period was £27,292,000.

 

Note 11:  Interim financial report

 

The financial information contained in this interim financial report does not constitute statutory accounts as defined in s434 - 436 of the Companies Act 2006. The financial information for the six months ended 30 September 2018 and 30 September 2017 have not been audited.

 

The information for the year to 31 March 2018 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditors on those accounts contained no qualification or statement under s498 (2), (3) or (4) of the Companies Act 2006.

 

Note 12:  Fair value hierarchy

 

Under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', an entity is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:

 

-     Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

-     Level 2: other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk, etc); or

-     Level 3: significant unobservable input (including the company's own assumptions in determining the fair value of investments).

 

The financial assets measured at fair value through profit and loss are grouped into the fair value hierarchy as follows:

 

 


As at 30 September 2018 (Unaudited)


Level 1

Level 2

Level 3

Total


£000

£000

£000

£000

Financial assets at fair value through profit or loss





Quoted equities and derivatives

218,780

-

-

218,780

Net fair value

218,780

-

-

218,780


As at 30 September 2017 (Unaudited)


Level 1

Level 2

Level 3

Total


£000

£000

£000

£000

Financial assets at fair value through profit or loss





Quoted equities and derivatives

219,446

-

-

219,446

Net fair value

219,446

-

-

219,446


As at 31 March 2018 (Audited)


Level 1

Level 2

Level 3

Total


£000

£000

£000

£000

Financial assets at fair value through profit or loss





Quoted equities and derivatives

206,673

-

-

206,673

Net fair value

206,673

-

-

206,673

 

Note 13:  Post balance sheet events

 

Since 1 October 2018 and 19 November 19, a further 883,922 ordinary shares of 1p each have been bought back into treasury at a cost of £1,474,305.


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
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