LOWLAND INVESTMENT COMPANY PLC
ANNUAL FINANCIAL RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2021
This announcement contains regulated information.
INVESTMENT OBJECTIVE
The Company aims to give shareholders a higher than average return with growth of both capital and income over the medium to long-term, by investing in a broad spread of predominantly UK Companies. The Company measures its performance against the FTSE All-Share Index Total Return.
INVESTMENT POLICY
Asset Allocation
The Company will invest in a combination of large, medium and smaller companies listed in the UK. We are not constrained by the weightings of any index; we focus instead on controlling absolute risk by diversifying on the basis of underlying company characteristics such as size, industry, economic sensitivity, clients and management. In normal circumstances up to half the portfolio will be invested in FTSE 100 companies; the remainder will be divided between small and medium-sized companies. On occasions the Manager will buy shares listed overseas. The Manager may also invest a maximum of 15% in other listed trusts.
Dividend
The Company aims to provide shareholders with better-than-average dividend growth.
Gearing
The Board believes that debt in a closed-end fund is a valuable source of long-term outperformance, and therefore the Company will usually be geared. At the point of drawing down debt, gearing will never exceed 29.99% of the portfolio valuation. Borrowing will be a mixture of short and long-dated debt, depending on relative attractiveness of rates.
Key Data as at 30 September 2021
- Net Asset Value ('NAV') Total Return1of 51.0%
- Benchmark Total Return2of 27.9%
- Dividend growth of 0.4%
- Dividend for the Year3of 60.25p
|
|
Year ended 30 September 2021 |
Year ended 30 September 2020 |
|
NAV per share at year end (debt at par) 4 |
1,459p |
1,031p |
|
NAV per share at year end (debt at fair value) 4 |
1,446p |
1,006p |
|
Share price at year end 5 |
1,315p |
914p |
|
Market capitalisation |
£355m |
£247m |
|
Dividend per share |
60.25p 3 |
60.0p |
|
Ongoing charge including Performance Fee 6 |
n/a |
0.7% |
|
Ongoing charge excluding Performance Fee |
0.6% |
0.7% |
|
Dividend yield 7 |
4.6% |
6.6% |
|
Gearing at year end |
13.8% |
15.0% |
|
Discount at year end 8 |
9.1% |
9.2% |
|
AIC UK Equity Income Sector Average Discount |
3.9% |
5.7% |
1 NAV per share total return (including dividends reinvested) with debt at fair value
2 FTSE All-Share Index (including dividends reinvested)
3 Includes the final dividend of 15.25p per ordinary share for the year ended 30 September 2021 that will be put to shareholders for approval at the Annual General Meeting on Wednesday 26 January 2022
4 NAV per share for both figures is before deduction of the third interim dividend paid in October of each year.
5 Mid-market closing price
6 The performance fee was removed from the management agreement with effect from 1 October 2020
7 Based on dividends paid and payable in respect of the financial year and the share price at the year end
8 Calculated using year end fair value NAVs including current year revenue
Sources: Morningstar for the AIC, Janus Henderson, Refinitiv Datastream
Historical Performance
|
|
1 year |
3 years |
5 years |
10 years |
25 years |
|
Net asset value |
51.0 |
2.6 |
23.6 |
154.5 |
883.4 |
|
Share price |
53.3 |
1.8 |
23.4 |
153.2 |
912.0 |
|
FTSE All-Share |
27.9 |
9.5 |
29.8 |
119.2 |
379.0 |
|
Year ended 30 September |
Dividend per ordinary share (pence) |
Total return/(loss) per ordinary share (pence) |
Net revenue return per ordinary share (pence) |
Total net assets (£'000) |
Net asset value per ordinary share (pence) |
Share price per ordinary share (pence) |
|
2011 |
28.00 |
68.3 |
28.8 |
214,251 |
811.0 |
762.5 |
|
2012 |
30.50 |
229.9 |
31.1 |
266,401 |
1,008.4 |
991.5 |
|
2013 |
34.00 |
330.1 |
36.7 |
347,202 |
1,306.9 |
1,325.0 |
|
2014 |
37.00 |
73.3 |
39.4 |
361,856 |
1,345.6 |
1,355.0 |
|
2015 |
41.00 |
11.8 |
46.4 |
354,563 |
1,318.4 |
1,287.0 |
|
2016 |
45.00 |
156.4 |
47.7 |
386,910 |
1,432.0 |
1,336.5 |
|
2017 |
49.00 |
243.2 |
49.1 |
439,896 |
1,628.1 |
1,504.0 |
|
2018 |
54.00 |
47.4 |
58.6 |
438,934 |
1,624.6 |
1,515.0 |
|
2019 |
59.50 |
(138.7) |
68.0 |
385,904 |
1,428.3 |
1,280.0 |
|
2020 |
60.00 |
(336.9) |
33.8 |
278,653 |
1,031.3 |
914.0 |
|
2021 |
60.25 1 |
487.9 |
42.7 |
394,285 |
1,459.3 |
1,315.0 |
1 Includes the final dividend of 15.25p per ordinary share for the year ended 30 September 2021 that will be put to the shareholders for approval at the Annual General Meeting on Wednesday 26 January 2022
CHAIRMAN'S STATEMENT
Performance
I am delighted to report that Lowland's performance in the year was very satisfactory, both in absolute terms and compared to the FTSE All-Share index, which is our benchmark. Net Asset Value rose by 51.0% against a rise of 27.9% in the index. The share price outstripped both these increases, rising 53.3%, all on a total return basis.
The previous year had started well but our portfolio was particularly exposed to the effects of COVID-19, a number of holdings in the industrials and financials sectors being severely punished. The rapid economic recovery which stemmed from the successful vaccination programme resulted in exposure to precisely these cyclical sectors being rewarded. Taking the two years together our NAV increased by 13.5%, almost exactly double the 6.7% increase in the index again, both on a total return basis. To borrow a sporting expression, I think we would have 'taken' such an outcome, had it been offered early in the pandemic. It vindicates the Fund Managers' calm response to the crisis, and belief that there remained value within the market.
Two themes are worthy of comment. Firstly, one year's detractors were in many cases the following year's top contributors. Senior, heavily exposed to the aviation sector, is an example of a company widely but prematurely written off. The unexpected speed of recovery of demand has led many companies to recover sales and earnings to near pre-pandemic levels, and return to paying dividends. Secondly, the level of interest from foreign investors has given rise to some exit opportunities, but also underlines the lowly valuation of the UK market, described by one senior observer as approaching pariah status.
Dividends
Earnings per share rose by 26% to 42.7p, although still well below the 68.0p recorded in 2019. This recovery reflects the performance of portfolio companies, as mentioned above, and to a degree the fact that Lowland has been a net investor over the year. The Fund Managers explain in their report their expectation that, barring unforeseen shocks, investment income will continue to rise towards the levels pertaining pre-pandemic.
Since the start of the pandemic, we have cautiously maintained that we would seek to stick by our quarterly progressive dividend policy, always with a weather eye as to whether dividends would recover to their previous level in a reasonable time frame. The Board is proposing a final dividend of 15.25p, compared with 15.00p last year. If approved, this will give rise to total dividends for the year of 60.25p, a very slight increase on last year's 60.00p. In proposing this course of action, the Board is convinced that it can be pursued without prejudice to the investment policy, especially avoiding chasing income at the expense of total return. We are also cognisant that Revenue Reserves amounted to £6.7m at the year-end, which is less than the amount of the third interim and final dividend, totalling £8.2m, payable after 30 September. This will result in the use of £1.5m from Capital Reserves, which amounted to £271.2m at the year-end.
We recognise that one of the many advantages an investment trust presents, compared with alternative investment vehicles, is that it can provide investors with a progressive flow of income. Our large number of retail investors value this characteristic, which is in considerable contrast with the experience of investing in the UK equity income open-ended fund sector, which on average reduced pay-outs by over 25% in 2020. We therefore will aspire to maintain our progressive quarterly dividend policy, which may require further limited drawings on our Capital Reserves.
Investment review and gearing
A further advantage of an investment trust is that it may use borrowing to finance the portfolio. During the year we increased net borrowings from £42.6m to £54.9m, although with asset values rising, gearing reduced in percentage terms, from 15% to 13.8%. Lowland has available medium-term facilities of £40m (with an option to borrow a further £20m) and £30m 3.15% Loan Notes due in 2037. This long-term debt has been more expensive than short-term debt, since it was raised in 2017, but we value a balance of short- and long-term borrowings, the latter offering protection against a potential rise in rates.
Lowland has always invested in small, medium and large companies. Added to the balance which this gives the portfolio, the Fund Managers are now also classifying investments by 'bucket', each bucket being characterised by factors such as income, growth, recovery and so on. We hope that their report will help shareholders understand the underlying nature of the portfolio, and also see how it is structured with a mind to providing a combination of income and growth.
I draw your attention to the section in the Investment Managers' report which illustrates the part ESG plays in the investment process, as well as the new Environmental, Social and Governance section in the Strategic Report. At its simplest the importance of environmental, social and governance issues to risk management is blindingly obvious, even if the manner in which it is sometimes reported does not always so suggest. There is nothing fundamentally new in terms of the banana skins companies face if they don't get it right. An environmental disaster from a mining company, exploitative practices in a clothing company, or a governance lapse in any company are straightforward examples of own goals which face the unwary. Something which is relatively new, and becoming more important, is the opportunity to invest in companies which will benefit from the increased focus on environmental and societal considerations in the world at large.
Ongoing charge
The ongoing charge was 0.6% relative to the previous year's 0.7%. The main element of costs is the Management Fee which was renegotiated with effect from the beginning of the 2021 financial year. It amounts to 0.5% on Net Chargeable assets up to £325m and 0.4% thereafter. We believe this is competitive and will result in the ongoing charge ratio declining as the portfolio grows.
Share price discount
During the year the discount to cum income, fair value NAV fluctuated between 0.5% and 10.0%, ending the year at 9.1%. The policy on discount is set out in the Annual Report.
The Board
I mentioned last year that Karl Sternberg planned to step down from the Board, which he has now done. I shall not repeat my sincere and profound thanks to Karl for his contribution.
In my Interim Statement I mentioned Helena Vinnicombe's appointment to the Board, and I am glad to report that she has now attended her first physical meeting, as well as several virtual meetings! I do hope we are able to introduce her in person at the AGM, rules permitting.
I would mention that your Board has been more than usually active during the pandemic, meeting frequently on an ad hoc basis as the crisis unfolded. The Fund Managers claim that they found the rigour of active discussion of strategy helpful at these challenging times.
The Board's robust approach to its own governance issues, such as ensuring that its own members are independent, that there is a balance of continuity and refreshment, and that Directors have adequate time to devote to the Company's affairs, is set out in the Annual Report.
Contact with Shareholders
We are always keen to hear shareholders' views and so I would invite anyone who wishes to contact me to do so at: itsecretariat@janushenderson.com
Proposed share split
We are always keen to receive feedback from our shareholders and a recurring suggestion in recent years has been undertaking a share split, given the optically high share price. We are cognisant, for example, that many of our shareholders use dividend reinvestment plans, and a lower share price would mean less surplus cash at the point of dividend reinvestment. We are therefore proposing a resolution at the AGM to approve sub-dividing each ordinary share of 25p into 10 ordinary shares of 2.5p each. The Board believe this to be in the best interests of shareholders. Further details can be found in the circular convening this year's AGM.
Annual General Meeting ('AGM')
We are pleased, subject to further guidance, to be able to return to an 'in person' AGM this year. The AGM will be held at the offices of Janus Henderson on 26 January 2022 at 12.30 pm. Full details of the business to be conducted at the meeting are set out in the Notice of Meeting which has been sent to shareholders with this report.
As usual our Fund Managers will be making a presentation. This is an important opportunity for shareholders to meet the Board and Fund Managers and to ask them questions. We would encourage as many shareholders as possible to attend; we welcome your questions and observations. The AGM will be broadcast live on the internet, so if you are unable to attend the AGM in person you will be able to log on to watch as it happens, by visiting www.janushenderson.com/en-gb/investor/investment-trusts-live/
Outlook
The question posed at the end of last year's report, of how long inflation might lie fallow, has been answered, with the Retail Price Index (RPI) rising by 4.9% for the year ending 30 September. Questions now are how much, how long; how will authorities react and what will be the influence on our investment universe. Against this background, and the renewed uncertainties caused by the Omicron variant, the recent stall in the performance of the Company's NAV, and the market in general, is not surprising. Since the year-end there has been no material movement in the company's NAV, share price or discount, or in the benchmark.
Portfolio companies face conflicting influences. On the one hand demand for their products and services is broadly strong. On the other, there are material supply chain and cost pressures as the economy re-opens. As ever Lowland's portfolio is managed on a stock by stock basis, and for the most part companies in which we are invested are market leaders or among the market leaders, with the pricing power to pass on the effects of higher costs. These have historically been the best hedge against higher inflation environments.
We believe that there is value in much of the UK market, certainly by comparison with almost all other markets. We think there continues to be value in our portfolio, and opportunity to invest further.
Robert Robertson
Chairman
8 December 2021