The Scottish Oriental Smaller Companies Trust Plc
Interim results for the six months to 28 February 2022
(Extracted from the Interim Report)
The Board of The Scottish Oriental Smaller Companies Trust plc announces the results for the six months to 28 February 2022.
Financial Highlights
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Total Return Performance for the six months to 28 February 2022 (Unaudited) |
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Net Asset Value |
(2.8%) |
MSCI AC Asia ex Japan Small Cap Index (£) |
(4.5%) |
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Share Price |
1.2% |
MSCI AC Asia ex Japan Index (£) |
(8.1%) |
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FTSE All-Share Index (£) |
2.4% |
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Summary Data at 28 February 2022 (Unaudited) |
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Shares in issue |
26,132,510 |
Shareholders' Funds |
£316.05m |
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Net Asset Value per share |
1,209.40p |
Market Capitalisation |
£284.84m |
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Share Price |
1,090.00p |
Share Price Discount to Net Asset Value |
9.9% |
Corporate Objective
The investment objective of The Scottish Oriental Smaller Companies Trust plc (''Scottish Oriental'', ''the Company'' or ''the Trust'') is to achieve long-term capital growth by investing in mainly smaller Asian quoted companies with market capitalisations of below US$5,000m, or the equivalent thereof, at the time of investment. For investment purposes, this includes Australasia, the Indian sub-continent and Japan.
This is an abridged version of Scottish Oriental's investment policy and objective. A full statement of Scottish Oriental's investment policy can be found on page 23 of the Annual Report and Accounts* for the year ending 31 August 2021 (''the Annual Report and Accounts”).
*The Company's Annual Report and Accounts for the year ending 31 August 2021 can be found on the Company's website at: www.scottishoriental.com.
Director Update
Further to previous announcements, the Board confirms that James Ferguson will retire from the Board on 20 July 2022. Jeremy Whitley will succeed Mr Ferguson as the Company's Chairman from this date. In taking on the role of Chairman, Mr Whitley will step down as the Company's Audit Committee Chair, with Michelle Paisley taking on this role.
Interim Management Report
Investment Performance
Over the six months ending 28 February 2022, Scottish Oriental's net asset value (“NAV”) per share decreased by 2.8 per cent in total return terms, while the MSCI AC Asia ex Japan Small Cap Index declined by 4.5 per cent on the same basis. The Company's share price increased by 1.2 per cent in total return terms over the period.
The biggest contributor to performance was Scottish Oriental's exposure to Taiwanese companies. The Company's holdings in Thailand, Vietnam, Pakistan and Malaysia also contributed positively to performance. The key negative contributors to the Company's performance were its holdings in India and Indonesia. The Company's shares traded at a discount ranging from 6.8 per cent to 14.8 per cent, which reflects the cautious sentiment of investors. The discount to NAV stood at 9.9 per cent on 28 February 2022.
The Company's cash level was £4.4 million at the end of the period, representing 1.4 per cent of net assets. Strong performance of several holdings in India and Malaysia resulted in expensive valuations. The disposal of these holdings led to a rise in the cash level of the Company.
Dividend
A dividend of 11.5p per share was paid on 14 January 2022 for the year ending 31 August 2021 (31 August 2020: 11.5p per share). It is too early to make a forecast of the distribution for the current financial year.
Review
Asian stock markets were weak over the six months ending 28 February 2022. A sustained increase in inflation globally has led to concerns around the sustainability of corporate profits as well as a change in the accommodative monetary policies of global central banks which has supported market valuations for several years since the global financial crisis. A rise in Covid-19 infections also led to increasing movement restrictions and lockdowns in China and Hong Kong. This is expected to hurt the economic outlook in these regions.
Six new positions were initiated during the period. Sinoseal Holdings is a mechanical seal manufacturer which is gaining market share in the domestic Chinese market. Its position as a low cost but critical component across various industrial applications allows the company to earn attractive levels of profitability. Similarly, Autobio Diagnostics is a leading in-vitro diagnostics (IVD) reagent and machine manufacturer in China. It is also gaining market share in its existing categories from multinational competitors, while also entering new segments. Sporton International is the market leader in the niche electromagnetic testing and certification industry globally. The introduction of fifth generation broadband cellular technology (known as 5G) is leading to improved prospects for Sporton's revenue growth and profitability.
In India, we initiated positions in Computer Age Management Services (CAMS) and Radico Khaitan . CAMS is India's largest registrar and transfer agent of mutual funds with a dominant market share of 70%. The company has significant growth potential, as households increase their investments in financial assets while its management is building new businesses in adjacent categories. Radico Khaitan has built leading consumer brands in categories such as whisky, gin and vodka. Its management is focused on increasing the share of premium products in its portfolio, which is expected to drive a continuing improvement in the company's profitability. We also initiated a position in PT Avia Avian , the market leader in Indonesia's decorative paint industry. We expect Avian Paint to drive the industry's consolidation in the coming years.
Seven companies were sold, including several in India following strong share price performance which led to expensive valuations. This included information technology services provider Mphasis , diagnostics services company Metropolis Healthcare , bearings manufacturer SKF India and industrial machinery manufacturer Thermax India. Emami was also sold following strong share price performance and concerns related to the impact of rising raw material costs on its profitability. We had participated in the initial public offer (IPO) of two Malaysian companies, Mr. DIY and CTOS Digital . They became expensively valued after a period of strong performance, due to which these holdings were also sold.
Scottish Oriental's exposure to China, Indonesia and Thailand rose whereas exposure to India declined and the two disposals in Malaysia led to no remaining exposure to that market. At a sector level, exposure to Consumer Discretionary and Staples, Materials, and Financials rose, with a decline in exposure to Real Estate and Technology.
Outlook
After a prolonged period of disruption, most Asian economies are finally emerging from the impact of Covid-19, with the notable exception of China which is persevering with its zero-covid policy. The recovery is particularly evident in Indonesia and the Philippines, where consumer demand is gradually improving after a severe disruption over the last two years. Scottish Oriental has a large exposure to these countries, and its holdings here should benefit from a gradual recovery in consumer demand. Businesses across markets are now facing an increasing challenge from rising inflation. Historically, we have observed that such periods lead to industry consolidation among market leaders. We are confident about the performance of the Company's holdings during this period, due to their market leading positions, pricing power and strong balance sheets. Our holdings have witnessed several such periods in the past and have emerged successfully in each instance. We are excited by the prospects of the portfolio, with the expectation of a recovery in earnings, median debt to equity of 0% and attractive valuations. As the excesses observed in financial markets in recent years led by endless liquidity are showing signs of finally abating, we believe that our investment process with a focus on capital preservation will hold the Company in good stead in more challenging market conditions.
Income Statement for the six months to 28 February 2022
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Six months to 28 February 2022 (unaudited) |
Six months to 28 February 2021 (unaudited) |
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Revenue £'000 |
Capital £'000 |
Total* £'000 |
Revenue £'000 |
Capital £'000 |
Total* £'000 |
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(Losses)/gains on investments |
– |
(12,884) |
(12,884) |
– |
46,158 |
46,158 |
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Income from investments |
2,346 |
– |
2,346 |
1,820 |
– |
1,820 |
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Investment management fee |
(1,255) |
– |
(1,255) |
(1,158) |
– |
(1,158) |
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Currency losses |
– |
(81) |
(81) |
– |
(98) |
(98) |
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Other administrative expenses |
(337) |
– |
(337) |
(426) |
– |
(426) |
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Net return on ordinary activities |
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before finance costs and taxation |
754 |
(12,965) |
(12,211) |
236 |
46,060 |
46,296 |
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Finance costs |
(417) |
– |
(417) |
– |
– |
– |
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Net return on ordinary activities before taxation |
337 |
(12,965) |
(12,628) |
236 |
46,060 |
46,296 |
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Tax on ordinary activities (note 3) |
(272) |
287 |
15 |
(273) |
(3,770) |
(4,043) |
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Net return attributable to equity shareholders |
65 |
(12,678) |
(12,613) |
(37) |
42,290 |
42,253 |
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Net return per ordinary share |
0.24p |
(47.49p) |
(47.25p) |
(0.13p) |
147.56p |
147.43p |
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* The total column of this statement is the Profit & Loss Account of the Company. The revenue and capital columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.
There are no items of other comprehensive income. This statement is, therefore, the single statement of comprehensive income of the Company.
All revenue and capital items derive from continuing operations.
Statement of Financial Position as at 28 February 2022
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At 28 February 2022 |
At 31 August 2021 |
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£'000 |
£'000 |
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(unaudited) |
(audited) |
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FIXED ASSETS – EQUITY INVESTMENTS |
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Bangladesh |
4,412 |
4,869 |
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China |
44,169 |
31,115 |
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Hong Kong |
15,128 |
16,750 |
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India |
113,047 |
143,984 |
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Indonesia |
75,205 |
64,320 |
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Malaysia |
– |
7,094 |
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Pakistan |
4,708 |
4,523 |
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Philippines |
29,094 |
33,975 |
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Singapore |
9,865 |
10,303 |
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South Korea |
7,783 |
8,343 |
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Taiwan |
18,913 |
24,738 |
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Thailand |
7,200 |
5,273 |
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Vietnam |
8,531 |
8,213 |
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Total Equities |
338,055 |
363,500 |
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Net Current Assets |
9,614 |
16,323 |
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Non-Current Liabilities (note 3) |
(31,621) |
(34,337) |
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Total Assets less Liabilities |
316,048 |
345,486 |
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CAPITAL AND RESERVES |
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Ordinary share capital |
7,853 |
7,853 |
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Share premium account |
34,259 |
34,259 |
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Capital redemption reserve |
58 |
58 |
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Capital reserve |
270,458 |
296,908 |
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Revenue reserve |
3,420 |
6,408 |
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Equity Shareholders' Funds |
316,048 |
345,486 |
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Net asset value per share |
1,204.90p |
1,264.54p |
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Cash Flow Statement for the six months to 28 February 2022
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Six months to |
Six months to |
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28 February 2022 |
28 February 2021 |
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£'000 |
£'000 |
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(unaudited) |
(unaudited) |
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Note |
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Net cash outflow from operations before dividends, interest, purchases and sales of investments |
7 |
(1,712) |
(1,589) |
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Dividends received from investments |
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3,129 |
1,900 |
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Purchases of investments |
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(65,139) |
(83,169) |
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Sales of investments |
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70,363 |
85,028 |
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Cash inflow from operations |
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6,641 |
2,170 |
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Taxation |
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(2,768) |
(1,733) |
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Net cash inflow from operating activities |
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3,873 |
437 |
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Financing activities |
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Equity dividend paid |
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(3,053) |
(3,284) |
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Buyback of ordinary shares |
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(13,471) |
(9,720) |
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Interest paid |
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(413) |
– |
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Net cash outflow from financing activities |
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(16,937) |
(13,004) |
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Decrease in cash and cash equivalents |
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(13,064) |
(12,567) |
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Cash and cash equivalents at the start of the period |
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17,546 |
22,459 |
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Effect of currency losses |
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(81) |
(98) |
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Cash and cash equivalents at the end of the period* |
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4,401 |
9,794 |
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*Cash and cash equivalents represents cash at bank
Statement of Changes in Equity
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For the six months ended 28 February 2022 |
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Share Capital |
Share Premium Account |
Capital Redemption Reserve |
Capital Reserves |
Revenue Reserve |
Total |
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£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
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Balance at 31 August 2021 |
7,853 |
34,259 |
58 |
296,908 |
6,408 |
345,486 |
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Total comprehensive income: |
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Return for the period |
– |
– |
– |
(12,678) |
65 |
(12,613) |
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Transactions with owners recognised directly in equity: |
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Dividend paid in the period |
– |
– |
– |
– |
(3,053) |
(3,053) |
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Buyback of Ordinary shares |
– |
– |
– |
(13,772) |
– |
(13,772) |
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Balance at 28 February 2022 |
7,853 |
34,259 |
58 |
270,458 |
3,420 |
316,048 |
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For the six months ended 28 February 2021 |
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Share Capital |
Share Premium Account |
Capital Redemption Reserve |
Capital Reserves |
Revenue Reserve |
Total |
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£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
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Balance at 31 August 2020 |
7,853 |
34,259 |
58 |
240,134 |
7,144 |
289,448 |
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Total comprehensive income: |
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Return for the period |
– |
– |
– |
42,290 |
(37) |
42,253 |
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Transactions with owners recognised directly in equity: |
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Dividend paid in the period |
– |
– |
– |
– |
(3,284) |
(3,284) |
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Buyback of Ordinary shares |
– |
– |
– |
(9,624) |
– |
(9,624) |
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Balance at 28 February 2021 |
7,853 |
34,259 |
58 |
272,800 |
3,823 |
318,793 |
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Notes to Accounts
(1) The condensed Financial Statements for the six months to 28 February 2022 comprise the Income Statement, Statement of Financial Position, Cash Flow Statement and Statement of Changes in Equity, together with the notes set out below. They have been prepared in accordance with FRS 104 'Interim Financial Reporting', UK Generally Accepted Accounting Principles (“UK GAAP”) and the AIC's Statement of Recommended Practice issued in April 2021.
(2) The position as at 31 August 2021 above is an abridged version of that contained in the Annual Report and Accounts, which received an unqualified audit report and which have been filed with the Registrar of Companies. The Interim Report has been prepared under the same accounting policies adopted for the year to 31 August 2021.
(3) The Company has incurred £2,370,000 of capital gains tax on the sale of investments in the six months to 28 February 2022 (six months to 28 February 2021: £1,450,000).
The Company has recognised a deferred tax liability of £1,804,000 (31 August 2021: £4,526,000) on capital gains which may arise if Indian investments are sold.
(4) The return per ordinary share figure is based on the net loss for the six months ended
28 February 2022 of £12,613,000 (six months ended 28 February 2021: net profit of £42,253,000) and on 26,696,226 (six months ended 29 February 2021: 28,659,615) ordinary shares, being the weighted average number of ordinary shares in issue during the respective periods.
(5) At 28 February 2022 there were 26,132,510 ordinary shares in issue and 5,281,153 ordinary shares held in Treasury (31 August 2021: 27,321,159 in issue and 4,092,504 held in Treasury). During the six months ended 28 February 2022, the Company bought back 1,188,649 ordinary shares (year to 31 August 2021; the Company bought back 1,852,871 ordinary shares).
(6) Dividends
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At 28 February 2022 £'000 |
At 28 February 2021 £'000 |
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Amounts recognised as distributions in the period: |
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Dividend for the year ending 31 August 2021 of 11.5p (2020 – 11.5p), paid 14 January 2022 |
3,053 |
3,284 |
(7) Under the terms of the Investment Management Agreement, an annual performance fee may be payable to the Investment Manager at the end of the year. A detailed explanation of the performance fee computation is set out on page 54 of the Annual Report and Accounts. The total fee payable to the Investment Manager is capped at 1.5% per annum of the Company's net assets.
Assuming no change in share price, MSCI AC Asia ex Japan Index Total Return and shares in issue between 28 February 2022 and 31 August 2022, the estimated performance fee for the year ending 31 August 2022 would amount to £nil. No performance fee has been accrued in the six months to 28 February 2022.
(8) Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with FRS 102 and FRS 104, these investments are analysed using the far value hierarchy described below. Short-term balances are excluded as their carrying value at the reporting date approximates to their fair value.
The levels are determined by the lowest (that is, the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:
Level 1 – Investments with prices quoted in an active market;
Level 2 – Investments whose fair value is based directly on observable current market prices or is indirectly being derived from market prices; and
Level 3 – Investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.
All of the Company's investments were categorised as Level 1 for the six month period to 28 February 2022.
(9) Reconciliation of total return on ordinary activities before taxation to net cash outflow before dividends, interest, purchases and sales
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Six months to 28 February 2022 |
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Six months to 28 February 2021 |
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£'000 |
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£'000 |
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Net return on activities before taxation |
(12,211) |
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46,296 |
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Net losses/(gains) on investments |
12,884 |
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(46,158) |
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Currency losses |
81 |
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98 |
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Dividend income |
(2,346) |
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(1,820) |
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Decrease in creditors |
(106) |
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(1) |
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Increase in debtors |
(14) |
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(4) |
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Net cash outflow from operations before dividends, |
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interest, purchases and sales of investments |
(1,712) |
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(1,589) |
Principal Risks and Uncertainties
The principal and emerging risks faced by the Company are; investment objective and strategy, investment performance, financial and economic, operational and regulatory. These risks have not changed since the publication of the Annual Report and Accounts. The principal and emerging risks and uncertainties facing the Company, together with a summary of the mitigating action the Board takes to manage these risks, are set out on pages 25 and 26 of the Annual Report and Accounts. Investment Manager monitors portfolio liquidity and manages this to ensure the Company maintains sufficient levels of liquidity to operate effectively. Scottish Oriental's investment portfolio is exposed to market price fluctuations and currency fluctuations which are monitored by the Investment Manager. The Company is also exposed to minimal interest rate risk on interest receivable from bank deposits and interest payable on bank overdraft positions.
Going Concern
After making enquiries and bearing in mind the nature of the Company's business and assets, the Directors believe that the Company has adequate resources to continue operating for at least twelve months from the date of approval of the condensed financial statements. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
Directors' Responsibility Statement
The Directors are responsible for preparing the half-yearly financial report in accordance with applicable law and regulations. The Directors confirm that, to the best of their knowledge:
(a) the condensed set of financial statements within the half-yearly financial report, prepared in accordance with the Financial Reporting Standard 104 (Interim Financial Reporting), gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
(b) the Director Update and Interim Management Report includes a fair review of the information required by 4.2.7R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules (important events that have occurred in the first six months of the Company's financial year, together with their effect on the half-yearly financial statements to 28 February 2022 and a description of the principal risks and uncertainties for the remaining six months of the financial year). Rule 4.2.8R requires information on related party transactions. No related party transactions have taken place during the first six months of the financial year that have materially affected the financial position of the Company during that period and there have been no changes in the related party transactions described in the last Annual Report and Accounts that could do so.
The half-yearly report for the six months to 28 February 2022 comprises the Interim Management Report, the Directors' Responsibility Statement and a condensed set of financial statements and has not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.
By order of the Board
James Ferguson
Chairman
8 April 2022
- The terms of the half-yearly financial report and this announcement were approved by the Board on 8 April 2022.
- Copies of the half-yearly financial report will be posted to shareholders shortly and will be available thereafter on the Company's website: www.scottishoriental.com and from the Company Secretary's office at 28 Walker Street, Edinburgh EH3 7HR.