TIDMLWI
RNS Number : 4133Z
Lowland Investment Co PLC
14 December 2017
LOWLAND INVESTMENT COMPANY PLC
Annual Financial Report for the year ended 30 September 2017
This announcement contains regulated information
Key Data as at 30 September 2017
-- Net Asset Value Total Return(1) 17.0 %
-- Benchmark Total Return(2) 11.9%
-- Growth in Dividend 8.9%
-- Dividend for the Year(3) 49.0p
Year ended Year ended
30 September 30 September
2017 2016
------------------------------------------ -------------- --------------
NAV per share at year end 1,628p 1,432p
Share Price at year end(4) 1,504p 1,337p
Market Capitalisation GBP406m GBP361m
Dividend per share 49.0p(3) 45.0p
Ongoing Charge including the Performance
Fee 0.68% 0.63%
Ongoing Charge excluding the Performance
Fee 0.58% 0.63%
Dividend Yield(5) 3.3% 3.4%
Gearing at year end 6.3% 6.2%
Discount at year end(6) 7.6% 6.6%
(1) Net asset value per share total return (including dividends
reinvested) in the prior year was 12.2%
(2) FTSE All-Share Index. The amount includes dividends
reinvested
(3) Includes the final dividend of 13.0p per ordinary share for
the year ended 30 September 2017 that will be put to
shareholders for approval at the Annual General Meeting on
Monday 29 January 2018
(4) Mid-market closing price
(5) Based on dividends paid in respect of the previous twelve
months and the share price at year end
(6) Calculated using year end audited NAVs including current
year revenue
Sources: Morningstar for the AIC, Janus Henderson,
Datastream
Historical Performance
Net revenue Net asset
Dividend Total return/(loss) return per value per
per ordinary per ordinary ordinary Total net ordinary
Year ended share in share in share in assets in share in
30 September pence pence pence GBP'000 pence
--------------- -------------- -------------------- ------------ ----------- -----------
2007 23.5 138.7 27.9 275,868 1,044.3
--------------- -------------- -------------------- ------------ ----------- -----------
2008 26.5 (344.4) 33.0 178,411 675.4
--------------- -------------- -------------------- ------------ ----------- -----------
2009 26.5 8.4 22.7 173,633 657.3
--------------- -------------- -------------------- ------------ ----------- -----------
2010 27.0 139.5 22.5 203,484 770.3
--------------- -------------- -------------------- ------------ ----------- -----------
2011 28.0 68.3 28.8 214,251 811.0
--------------- -------------- -------------------- ------------ ----------- -----------
2012 30.5 229.9 31.1 266,401 1,008.4
--------------- -------------- -------------------- ------------ ----------- -----------
2013 34.0 330.1 36.7 347,202 1,306.9
--------------- -------------- -------------------- ------------ ----------- -----------
2014 37.0 73.3 39.4 361,856 1,345.6
--------------- -------------- -------------------- ------------ ----------- -----------
2015 41.0 11.8 46.4 354,563 1,318.4
--------------- -------------- -------------------- ------------ ----------- -----------
2016 45.0 156.4 47.7 386,910 1,432.0
--------------- -------------- -------------------- ------------ ----------- -----------
2017 49.0(1) 243.2 49.1 439,896 1,628.1
--------------- -------------- -------------------- ------------ ----------- -----------
(1) Includes the final dividend of 13.0p per ordinary share for
the year ended 30 September 2017 that will be put to the
shareholders for approval at the Annual General Meeting on Monday
29 January 2018
CHAIRMAN'S STATEMENT
Performance
The year was satisfactory in furthering your Company's objective
of giving shareholders above average returns in terms of capital
and income. Our Net Asset Value ('NAV') total return was 17.0%,
compared with the Benchmark FTSE All-Share Index return of 11.9%.
Our perspective is long-term, and the long-term trend for small and
medium-sized companies to outperform demonstrated itself again,
rewarding our overweight positions in these areas. This was
reflected in the FTSE Small-Cap Index increasing by 17.8% against
the FTSE 100 Index increase of 11.2%.
Dividends
Revenue earnings per share excluding special dividends increased
by 10.3% to 46.7p. Special dividends were lower than in recent
years; the increase in total revenue earnings per share was 2.9% to
49.1p. Three interim dividends of 12.0p have been paid and a final
dividend of 13.0p is proposed. Subject to shareholders' approval of
the final dividend, total dividends for the year will amount to
49.0p, an increase of 8.9%. It is pleasing that Lowland has
succeeded in providing a steady and growing income stream to
shareholders, the dividend having grown at a compound rate of 10%
over the past five years. This is clearly well in excess of the
rate of inflation, and, as the chart in the Annual Report shows,
the rate of increase over the last ten years substantially exceeds
that of both the Company's benchmark and its peer group,
represented by the AIC UK Equity Income sector.
Investment Review and Gearing
Lowland's performance was achieved in favourable equity markets
and low interest rates. The decline in the value of sterling has
helped dividend growth as companies in which we are invested have
substantial overseas sales and earnings. It is however contributing
to real pressure on both wages and the margins of domestically
focussed companies in the UK. Retailers, for example, struggle to
pass on higher input costs to their customers.
Overall equity valuations do not look excessive; however there
is polarity between lowly valued out-of-favour stocks and those
perceived to be high quality whose valuations look increasingly
stretched. The Fund Managers act on a bottom-up basis and have been
reducing positions where valuations look high. This has resulted in
the gearing declining from 12.6% at the half year to 6.3% at the
year end. Since then the gearing has risen to around 11% as the
Fund Managers selectively buy lower-valued stocks which, although
currently out-of-favour, they believe are sound long-term
businesses.
Lowland took out GBP30m twenty year senior unsecured loan notes
in January 2017, at a coupon of 3.15%, taking the view that locking
in rates at this stage of the cycle would be a good hedge against
inflation. The fair value of the senior unsecured note is
calculated using a discount rate which reflects the yield on a UK
Gilt of similar maturity plus a suitable credit spread. It is
calculated on a monthly basis, based on its estimated market value.
At the year end the fair value was GBP31m, resulting in a reduction
in NAV at fair value of 4.6p per ordinary share. This is
supplemented by revolving credit facilities of up to GBP60m. We
believe these facilities are appropriate to provide access to
gearing which will be beneficial to long-term performance, within
prudent limits.
Shareholders will be aware of MiFID II, a fundamental review of
regulation of financial services in Europe. Inter alia, this
requires investment managers to pay directly for investment
research, rather than its costs being included in dealing charges.
I am happy to report that Janus Henderson have agreed to bear the
costs of external research and are committed to continuing to use
it to complement their own internal research activity.
Ongoing Charge
The Ongoing Charge was 0.58% excluding the performance fee and
0.68% including it. The performance fee was GBP416,000.
As previously announced, the Investment Management Agreement was
amended to the effect that, from 1 July 2017, the management fee on
net chargeable assets in excess of GBP375m will be 0.4% compared
with 0.5% below that level. The Performance Fee is capped at 0.25%
of Net Chargeable Assets. The Company began to benefit from the
reduced rate in the last quarter of the financial year and will
continue to do so at current valuations. The Board and Janus
Henderson are keenly aware of the need for a competitive cost base,
as witnessed by this arrangement and Janus Henderson's agreement to
bear external research costs directly.
Annual General Meeting
The AGM of the Company will be held at the offices of Janus
Henderson on Monday 29 January 2018 at 12.30 pm. Full details of
the business to be conducted at the meeting are set out in the
Notice of Meeting which can be found on the website:
www.lowlandinvestment.com
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 in person, you will be able to log
on to watch as it happens, by visiting
www.janushenderson.com/trustslive.
Outlook
The Fund Managers look at company opportunities on the basis of
their individual merits, rather than being guided by macro-economic
factors. Recently they have, as stated in their report, found that
the merits of some high-quality companies have been fully valued in
share prices. Consequently we look to a cautious approach,
concentrating on companies which are prepared for more difficult
times, and are not overvalued. The Company's investment approach
has served shareholders well over the long term, and we believe it
will continue to do so.
Robert Robertson
Chairman
14 December 2017
FUND MANAGER'S REPORT
Investment Approach
The notable features of the Company's investment approach
are:
1. The portfolio is always a blend of large, medium and small
companies. The medium and small companies have often produced
better investment returns given their greater capacity for sales
and earnings growth. Small- and medium-sized companies also have
the advantage of being covered by fewer analysts and therefore
offer greater potential to find opportunities that have been
overlooked or misunderstood by the market. The large companies
reduce the volatility and aid consistency of performance.
2. The Company is invested 'predominantly' in UK equities. Given
the focus on the UK, the Company aims to invest in areas where the
UK has globally competitive, world-leading companies. These
companies will tend to have high barriers to entry as their
products tend to be specialist and so have been fine-tuned over
many years. This allows them to generate reasonable operating
margins, meaning they are well placed to generate cash that can be
returned to shareholders over time.
3. A focus on recovery situations, but only where a clear path
can be seen to returning to sales and earnings growth. In practice
this often means investing at the point of capitulation where
companies look internally at what they can change, whether this is
a period of sustained cost-cutting, changing the management team
and/or cutting the dividend. While this is a mildly contrarian
approach, the Company seeks to invest in companies that do not have
long-term structural problems in order to avoid 'value traps'. In
our experience value traps often arise where a company may appear
cheap on valuation multiples, but operates in an industry with low
barriers to entry and/or is in structural decline.
4. We prefer capital and income growth rather than absolute
dividend yield. This has resulted in a high historic level of
dividend growth. In the Company's view it is crucial for long-term
performance to focus on companies with the capacity to grow sales
and earnings, and therefore dividends, rather than companies paying
a high absolute yield (with a high pay-out ratio) but with little
potential for earnings growth. Companies rarely 'stand still' and a
company that is forecast to stay static in terms of sales and
earnings will often decline faster than analysts are anticipating.
In order to avoid 'value traps' the focus should be on the
potential for earnings growth which should ultimately drive capital
and income growth for shareholders.
5. A long list of holdings, historically 80-120. Position sizes
start small, new holdings tend to be initiated at approximately
30bps and increased as confidence is gained in the management team
and the potential for earnings growth. The reason for the long list
is twofold. Firstly, it provides diversification so that the
Company is not overly exposed to any one cycle. For example, the
overweight position in industrials - which follow the economic
cycle - is offset by the overweight position in insurers, which
follow the underwriting cycle. Secondly, the Company invests in
recovery situations where the potential returns are high but so are
the risks. Therefore it is sensible to invest in a spread of
different situations. The Company also sells slowly when shares
approach fair value, which naturally lends itself to a relatively
long list of holdings.
6. The Company has a low turnover rate and long holding period
(typically 20% turnover rate p.a. resulting in an approximately 5
year holding period). Historically the best returns have often
derived from recovery situations that have taken a number of years
to reach fruition (for example it may take time for a company to
reduce gearing in a situation of balance sheet stress). Therefore
given the Company's investment style a long holding period is
necessary for the merits of a company's investment case to become
fully appreciated by the market.
Investment Background
It has been a good year for relative and absolute performance.
The economy has continued to grow albeit slowly. This has helped
domestic smaller companies which had been weak during the summer of
2016 on concerns around Brexit. Inflation has picked up but this
can be explained as a result of currency depreciation and it is
expected to fall back as that works its way through. Therefore for
investment markets it has been more of the same. The perceived
better companies have gone onto higher ratings, while those that
disappoint or show limited progress remain friendless despite low
valuations.
The level of dividends paid by the UK Index (FTSE All-Share) has
continued to grow with the fall of sterling helping the value of
overseas income in sterling terms, and the return of the miners to
the dividend list after a strong recovery. However, it is predicted
that income from special dividends is likely to fall and for us
special dividend income for the year fell from GBP1.46m to
GBP0.63m. This is in spite of earnings growth and muted capital
spend. The reason is that corporates are keen to pay down debt
despite very low interest rates. This prudence from corporates
might seem frustrating for those that want to see stronger GDP
growth but for individual companies it makes sense. There is a
general caution about the future strength of the UK economy.
Certain parts of it, such as motor and furniture retailing, are
already experiencing recessionary conditions. Some are blaming the
uncertainty over Brexit but this may be being over-played. In motor
retailing the concerns over diesel cars and the strength of new car
sales in recent years could suggest that a slowdown was inevitable.
However, the prospect of ending free movement of people, and
tariffs, is a negative for growth prospects. This is being factored
into valuations, with the UK underperforming other major global
markets.
Performance Attribution
Performance during the year was not driven by any individual
theme or sector. The top five active contributors to performance
operate across different industries and geographies. What links
them is a strong management team and uniqueness of product (or
service). We are pleased to see this variety among the top
performers as we are not managing the portfolio on the basis of any
top-down allocation but rather picking a long, diverse list of
stocks which have good capacity to grow earnings (and therefore
dividends) over time.
The top five active contributors to performance (relative to the
benchmark) that we own, were:
1. Conviviality (described below)
2. Scapa (specialist healthcare and industrial tape)
3. Stobart (conglomerate which owns Southend airport, logistics
and biomass facilities)
4. Irish Continental Group (ferries, predominantly between
Holyhead and Dublin)
5. Marshalls (paving products)
The largest active positive contributor to performance was
Conviviality, an alcohol distributor and off-licence operator
('Bargain Booze'). This was originally purchased at IPO in 2013. At
the time it was solely an off-licence operator and came to the
market with an attractive valuation and high dividend yield.
The reason for the original purchase was that we were impressed
with the management team, who were dramatically improving standards
among store franchises. This management team have gone on to lead
the company through two distributor acquisitions, both of which
have materially changed the scale of the company, such that they
are now the second biggest wine buyer in the UK (after Tesco). As a
result of successfully integrating the acquisitions, the shares
have re-rated and we have now (reluctantly) begun reducing the
holding on valuation grounds.
The top five active detractors from performance (relative to the
benchmark) that we own were:
1. Carillion (described below)
2. Interserve (support services provider and contractor)
3. 4D Pharma (early-stage pharmaceutical company)
4. Provident Financial (door to-door-lender and credit card
provider)
5. Quarto (book publisher)
The largest active detractor from performance was Carillion, a
contractor (building infrastructure projects, hospitals, schools
etc.) and support services provider. This was a relatively recent
purchase for Lowland (2016) as it had been our view that the
strengths of the support services business were being
overlooked.
The purchase was a mistake. The management team, in order to
grow the top line, were not doing enough due diligence on
construction projects. This resulted in several loss-making
contracts for which they have had to take a material provision.
They were also running the business with too much debt.
Having met the interim management team we have maintained the
(small) remaining position. The holding has been a reminder to us
to be wary of contractors who are targeting growing sales (rather
than maintaining discipline in writing contracts) and that the
appropriate debt level for construction companies is low, given
their tendency to have one-off hits from contracts.
Portfolio Positioning
The portfolio continues to hold a sizeable weighting in
small-and medium-sized companies relative to the benchmark. A
number of the best performers in the portfolio have come from those
with less than GBP100m market cap. These are often illiquid but our
closed-end structure allows illiquid positions to be held.
At the sector level, the two largest sector weightings are
financials (largely insurance rather than banks) and industrials.
These two sectors provide good diversification against each other
as they follow very different cycles - broadly the industrials
follow the economic cycle (although they will each have their own
distinct end markets) while the insurers follow the underwriting
cycle.
Investment Activity
While smaller and medium-sized companies often garner the
majority of attention in the portfolio, the FTSE 100 currently
makes up 36% of net assets, and is both a good source of income and
an area we strive to add value in. The FTSE 100 is well researched,
so stocks within it can hardly be described as 'unknown'. Sentiment
does, however, often swing in quite an extreme (and sometimes
unjustified) manner. This presents opportunities for those with a
long time horizon who are willing to invest when a company is
temporarily out of favour.
New larger company purchases during the year included Royal Mail
and AstraZeneca. We sold Royal Mail shortly after the EU referendum
vote as a result of concerns about the level of exposure it has to
the domestic UK market, in a business with high fixed costs and
therefore the potential for large swings in earnings. Following
poor share price performance, however, we bought the position back
in January 2017. By this point the shares had materially de-rated
and we felt that the positives of the business (excellent
management team, market leader in parcels, good scope for margin
improvements over the long term) were not being appreciated. In the
case of AstraZeneca we had an existing (small) position to which we
added on the day of a trial failure that caused the shares to fall
approximately 15%. This share price movement was too extreme given
the breadth of their portfolio.
Where new smaller company holdings were added during the year it
was often to take advantage of attractive income opportunities. New
positions included Randall & Quilter (which buys closed books
of non-life insurance), Redde (services for motor insurers) and Ten
Entertainment (bowling alleys). All of these new holdings yield
over 5% and have good scope to grow the dividend over time. This
yield would be difficult to replicate from large cap income stocks
that in a low yield environment are increasingly trawled over. A
yield of over 5% in a FTSE 100 company often signals that there are
questions regarding the sustainability of the dividend, whereas
this is not the case in small cap.
Last year we wrote about Standard Chartered, as the new CEO Bill
Winters was doing a good job of returning the business to growth.
During the course of this year, Standard Chartered re-rated to
nearer book level and therefore we reduced the position for
portfolio balance reasons. We also reduced another of our larger
recovery buys from the previous year, owner of British Airways,
IAG. This had strong earnings upgrades as ticket pricing held up
better than expected (particularly in the transatlantic route which
is important for BA), and as a result the shares performed well.
Given the lack of visibility surrounding airline earnings we took
the opportunity to reduce the position.
Additional sales during the year were primarily in good quality
companies that had re-rated and in our view were approaching fair
value. An example of this would be Scapa. During the financial year
Scapa's share price moved ahead of earnings growth and by the time
of the final sale, Scapa was approaching a price/earnings multiple
of 30x. While Scapa has an excellent management team and scope to
grow margins, we were surprised to see it approach this rating and
thought it prudent to sell the position. Other examples of
companies reduced on valuation grounds (but where we still like the
business fundamentals) include Hill & Smith, Elementis and
Hiscox.
There were two takeover approaches during the year, one for
energy services provider Cape, and one for insurer Novae. In both
cases they received cash offers at material premiums from
international buyers.
Outlook
The tightening of global monetary conditions has begun, led by
the US. It is likely that interest rates in the UK will rise in the
short term and the very accommodating monetary policy in Europe
will slowly be tightened. The question for investors to struggle
with is how far and fast rates will be increased. The UK has above
target inflation but the consensus view is that this is very much a
product of sterling deprecation and it is certainly less of a
problem in strong currency countries. However, the full effect of
sterling's fall will take time to be fully reflected. Increased
costs of imported items are being partly absorbed by companies and
slowly fed through in order not to lose market share. At the same
time wages will not grow at a lower rate than inflation
indefinitely, despite the low level of unemployment. These factors
may result in inflation staying higher for longer than currently
forecast and result in interest rates rising further than expected.
This is one of the reasons Lowland took out GBP30m twenty year
senior unsecured loan notes last year at a low rate by historical
standards of 3.15%.
Lowland is an equity fund and its focus is on holding stock in
companies that have an excellence in their product or service which
will allow management to take the business through a more difficult
economic environment. Companies held have been preparing themselves
for a more challenging time. The balance of the portfolio has been
marginally altered in preparation. The gearing has been reduced and
domestically orientated companies without defensive qualities have
been sold. We need to be open to new investment opportunities that
may emerge but after eight years of economic growth and share price
appreciation it is important to remember to stick with investment
disciplines.
James Henderson and Laura Foll
Fund Managers
14 December 2017
Twenty Largest Holdings as at 30 September 2017
The stocks in the portfolio are a diverse mix of businesses
operating in a wide range of end markets.
Rank Company % of Approximate Valuation
2017 portfolio Market 2017
(2016) Capitalisation GBP'000
-------- --------------------------------------------- ----------- ---------------- ----------
Royal Dutch Shell
The company explores, produces and
refines oil; it produces fuels, chemicals
and lubricants as well as operating
filling stations worldwide. They have
attacked their cost base and have very
high class assets, which positions
1 (1) them well for the future. 5.5 GBP200bn 25,583
-------- --------------------------------------------- ----------- ---------------- ----------
HSBC
The global bank provides international
banking and financial services. The
diversity of the countries it operates
in as well as its exposure to faster
2 (2) growing economies make it well placed. 3.4 GBP150bn 15,884
-------- --------------------------------------------- ----------- ---------------- ----------
3 (5) Phoenix
The company operates primarily in the
UK and specialises in taking over and
managing closed life and pension funds. 3.0 GBP3bn 14,341
-------- --------------------------------------------- ----------- ---------------- ----------
4 (3) Hiscox
The international insurance company
manages underwriting syndicates and
underwrites a range of personal and
commercial insurance. They are very
disciplined and have over the long-term
achieved a high return on capital. 3.0 GBP4bn 13,970
-------- --------------------------------------------- ----------- ---------------- ----------
5 (4) Senior
The company manufactures specialist
engineering products for the automotive
and aerospace sectors. Having come
under margin pressure in recent years,
we think they are well positioned to
grow margins as end markets recover
and new aerospace programs ramp up
production. 3.0 GBP1.2bn 13,795
-------- --------------------------------------------- ----------- ---------------- ----------
Prudential
The company provides an assortment
of insurance and investment products
around the world. The business in the
Far East has grown impressively in
6 (8) recent years. 2.5 GBP50bn 11,612
-------- --------------------------------------------- ----------- ---------------- ----------
7 (12) Irish Continental(1)
The group markets holiday packages
and provides passenger transport, roll-on
and roll-off freight transport and
container services between Ireland,
the United Kingdom and Continental
Europe. It is a very cash generative
well-run company. 2.1 GBP940m 10,011
-------- --------------------------------------------- ----------- ---------------- ----------
8 (6) Standard Chartered
The international banking group operates
principally in Asia, Africa and the
Middle East. The new management team
has focussed the bank back to areas
of relative strength in its growing
markets. 1.9 GBP25bn 9,113
-------- --------------------------------------------- ----------- ---------------- ----------
9 (9) GKN
The manufacturer produces automotive
components and aerospace parts. Similar
to Senior, operating margins have come
under pressure recently but we think
they have good scope to grow in the
future. 1.9 GBP5.5bn 8,788
-------- --------------------------------------------- ----------- ---------------- ----------
10 * Aviva
This company provides a wide range
of insurance and financial services.
The management team have done a good
job of simplifying the business, exiting
peripheral and low return areas. They
pay an attractive yield that has good
scope to grow. 1.7 GBP21bn 7,975
-------- --------------------------------------------- ----------- ---------------- ----------
11 * Low & Bonar
A specialist polymer producer across
a wide range of markets (products include
carpet tiles, truck tarpaulins, roofing
products). Shares have been weak recently
as they have struggled to fully pass
onto customers higher raw material
costs. The new management team have,
however, simplified the business and
we think they have good scope to grow
margins over time. 1.7 GBP220m 7,909
-------- --------------------------------------------- ----------- ---------------- ----------
12 * Standard Life Aberdeen
Following the acquisition of Aberdeen,
the company is predominantly an asset
manager. The acquisition diversifies
Standard Life away from what were primarily
absolute return products. 1.7 GBP13bn 7,882
-------- --------------------------------------------- ----------- ---------------- ----------
13 (16) Johnson Service(2)
A textile rental company that provides
linens for use across workwear, hotels
and restaurants. In recent years the
management team has successfully de-geared
the balance sheet and grown operating
margins. 1.6 GBP540m 7,440
-------- --------------------------------------------- ----------- ---------------- ----------
Relx
The company publishes information for
the scientific, medical, legal and
business sectors, serving customers
worldwide. It is a consistent, high
14 (15) quality growth business. 1.6 GBP36bn 7,366
-------- --------------------------------------------- ----------- ---------------- ----------
15 (19) Rolls-Royce
The company designs and manufactures
engines as well as providing aftermarket
services for use across aerospace and
industry. They have successfully won
market share across many of the large
new civil aerospace programmes and
under a new management team have a
renewed focus on removing duplicate
costs. 1.6 GBP18bn 7,318
-------- --------------------------------------------- ----------- ---------------- ----------
16 * Direct Line
A UK provider of car and home insurance.
Their well-known brands allow them
to grow policies well while maintaining
underwriting discipline. A strong balance
sheet allows them to pay an attractive
dividend yield to shareholders. 1.5 GBP5bn 7,272
-------- --------------------------------------------- ----------- ---------------- ----------
17 (17) BP
A producer and refiner of oil. Following
the fall in the oil price they have
successfully focused on cost reduction. 1.5 GBP100bn 6,921
-------- --------------------------------------------- ----------- ---------------- ----------
DS Smith
A cardboard packaging manufacturer.
Management have done an excellent
job in recent years of successfully
integrating acquisitions and growing
18 * operating margins. 1.4 GBP5.5bn 6,654
-------- ------------------------------------------ ---- --------- ------
International Personal Finance
The company provides unsecured cash
loans in markets such as Mexico and
Poland. Potential changes to regulation
in Poland (one of their largest markets)
has meant the shares have been weak.
While regulation is uncertain, the
geographies they operate in should
mean there is good potential for growth
19 * and it is a high returning business. 1.4 GBP450m 6,644
-------- ------------------------------------------ ---- --------- ------
Headlam
The company distributes floor tiles
and carpeting. They are increasing
the price of their products and their
national coverage positions them well
20 (13) to continue growing. 1.4 GBP500m 6,638
-------- ------------------------------------------ ---- --------- ------
At 30 September 2017 these investments totalled GBP203,116,000
or 43.4% of the portfolio.
* Not in the top 20 largest investments last year
1 Overseas listed stocks (Ireland)
2 AIM stocks
PRINCIPAL RISKS AND UNCERTAINTIES
The Board, with the assistance of the Manager, has carried out a
robust assessment of the principal risks and uncertainties facing
the Company that would threaten its business model, future
performance, solvency and liquidity. A matrix of these risks has
been drawn up and steps taken to mitigate these. The principal
risks and mitigating actions are as follows:
Investment Activity and Strategy Risk
An inappropriate investment strategy or poor execution, for
example, in terms of asset allocation or level of gearing, may
result in underperformance against the Company's benchmark index
and the companies in its peer group, and also in the Company's
shares trading on a wider discount to the net asset value per
share.
The Board manages these risks by ensuring a diversification of
investments and a regular review of the extent of borrowings. Janus
Henderson operates in accordance with investment limits and
restrictions and policy determined by the Board, which includes
limits on the extent to which borrowings may be employed.
The Board reviews the investment limits and restrictions on a
regular basis and the Manager confirms adherence to them every
month. Janus Henderson provides the Board with management
information, including performance data and reports and shareholder
analyses.
The Board monitor the implementation and results of the
investment process with the Fund Managers at each Board meeting and
monitor risk factors in respect of the portfolio.
Investment strategy is reviewed at each meeting.
Portfolio and Market Price Risk
Market risk arises from uncertainty about the future prices of
the Company's investments. Although the Company invests almost
entirely in securities that are listed on recognised markets, share
prices may move rapidly. The companies in which investments are
made may operate unsuccessfully, or fail entirely.
The Fund Managers seek to maintain a diversified portfolio to
mitigate against this risk. The Board regularly reviews the
portfolio, activities and performance.
Financial Risk
The financial risks faced by the Company include market price
risk, interest rate risk, liquidity risk, currency risk and credit
and counterparty risk.
The Company minimises the risk of a counterparty failing to
deliver securities or cash by dealing through organisations that
have undergone rigorous due diligence by Janus Henderson. The
Company holds its liquid funds almost entirely in interest bearing
bank accounts in the UK or on short-term deposit. This, together
with a diversified portfolio which comprises mainly investments in
large and medium-sized companies mitigates the Company's exposure
to liquidity risk. Currency risk is mitigated by the low exposure
to overseas stocks.
Gearing Risk
At the point of drawing down debt, gearing will never exceed
29.99% of the portfolio valuation. In the event of a significant or
prolonged fall in equity markets gearing would exacerbate the
effect of the falling market on the Company's NAV per share and,
consequently its share price.
The Company minimises the risk by the regular monitoring of the
levels of the Company's borrowings in accordance with the agreed
limits. The Company confirms adherence to the covenants of the loan
facilities on a monthly basis.
Operational Risk
Disruption to, or the failure of, Janus Henderson's accounting,
dealing or payment systems or the custodian's records could prevent
the accurate reporting or monitoring of the Company's financial
position.
Janus Henderson contracts some of the operational functions
(principally those relating to trade processing, investment
administration and accounting), to BNP Paribas Securities
Services.
Accounting, Legal and Regulatory Risk
In order to qualify as an investment trust, the Company must
comply with Section 1158 of the Corporation Tax Act 2010 ('Section
1158'). A breach of Section 1158 could result in the Company losing
investment trust status and, as a consequence, capital gains
realised within the Company's portfolio would be subject to
Corporation Tax.
Compliance with the requirements of Section 1158 is monitored by
Janus Henderson and the results are reported at each Board meeting.
The Company must comply with the provisions of the Companies Act
2006 and, since its shares are listed on the London Stock Exchange,
the UKLA's Listing and Disclosure Guidance and Transparency Rules
and the Prospectus Rules ('UKLA Rules').
A breach of the Companies Act 2006 could result in the Company
and/or the Directors being fined or the subject of criminal
proceedings. A breach of the Listing Rules could result in the
suspension of the Company's shares; which in turn would breach
Section 1158.
The Board relies on its Company Secretary and its professional
advisers to ensure compliance with the Companies Act 2006 and
Listing Rules.
The Board receives internal control reports produced by Janus
Henderson on a quarterly basis, which confirm regulatory
compliance.
The Board considers these risks to have remained unchanged
throughout the year under review.
VIABILITY STATEMENT
The Company is a long-term investor; the Board believes it is
appropriate to assess the Company's viability over a five-year
period in recognition of our long-term horizon and what we believe
to be investors' horizons, taking account of the Company's current
position and the potential impact of the principal risks and
uncertainties as documented above.
The assessment has considered the impact of the likelihood of
the principal risks and uncertainties facing the Company, in
particular investment strategy and performance against benchmark,
whether from asset allocation or the level of gearing, and market
risk, materialising in severe but plausible scenarios, and the
effectiveness of any mitigating controls in place.
The Board has taken into account the liquidity of the portfolio
and the gearing in place when considering the viability of the
Company over the next five years and its ability to meet
liabilities as they fall due. This included consideration of the
duration of the Company's loan facilities and how a breach of the
loan facility covenants could impact on the Company's liquidity,
net asset value and share price.
The Board does not expect there to be any significant change in
the current principal risks and adequacy of the mitigating controls
in place. The Directors do not envisage any change in strategy or
objectives or any events that would prevent the Company from
continuing to operate over that period as the Company's assets are
liquid, its commitments are limited and the Company intends to
continue to operate as an investment trust. Only a substantial
financial crisis affecting the global economy could have an impact
on this assessment.
Based on this assessment, the Directors have a reasonable
expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due over the next five-year
period.
RELATED PARTY TRANSACTIONS
The Company's current related parties are its Directors and the
Janus Henderson. There have been no material transactions between
the Company and its Directors during the year and the only amounts
paid to them were in respect of expenses and remuneration for which
there were no outstanding amounts payable at the year end.
Directors' shareholdings are disclosed in the Annual Report.
In relation to the provision of services by the Manager, other
than fees payable by the Company in the ordinary course of business
and the provision of sales and marketing services, there have been
no material transactions with the Manager affecting the financial
position of the Company during the year under review. More details
on transactions with the Manager, including amounts outstanding at
the year end, are given in the Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
In accordance with Disclosure Guidance and Transparency Rule
4.1.12, each of the Directors confirms that, to the best of his or
her knowledge:
-- the Company's financial statements, which have been prepared
in accordance with UK Accounting Standards and applicable law give
a true and fair view of the assets, liabilities, financial position
and profit of the Company; and
-- the Strategic Report, Report of the Directors and financial
statements include a fair review of the development and performance
of the business and the position of the Company, together with a
description of the principal risks and uncertainties that it
faces.
The Directors consider that the Annual Report, taken as a whole,
is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's position and
performance, business model and strategy.
For and on behalf of the Board
Robert Robertson
Chairman
14 December 2017
INCOME STATEMENT
Year ended 30 September Year ended 30 September
2017 2016
Revenue Capital Revenue Capital
return return Total return return Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- -------- -------- --------- --------- --------- ---------
Gains on investments held
at fair value through
profit or loss - 52,847 52,847 - 29,331 29,331
Income from investments
(note 2) 16,871 - 16,871 15,944 - 15,944
Other interest receivable
and similar income (note
4) 50 - 50 108 - 108
--------- --------- ---------
Gross revenue and capital
gains 16,921 52,847 69,768 16,052 29,331 45,383
Management fee (1,920) - (1,920) (1,806) - (1,806)
Performance fee - (416) (416) - - -
Other expenses (553) - (553) (472) - (472)
--------- --------- ---------
Net return on ordinary
activities before finance
costs and taxation 14,448 52,431 66,879 13,774 29,331 43,105
Finance costs (1,009) - (1,009) (764) - (764)
--------- --------- ---------
Net return on ordinary
activities before taxation 13,439 52,431 65,870 13,010 29,331 42,341
Taxation on net return
on ordinary activities (186) - (186) (117) - (117)
--------- --------- ---------
Net return on ordinary
activities after taxation 13,253 52,431 65,684 12,893 29,331 42,224
===== ===== =====
Return per ordinary share
- basic and diluted (note
5) 49.1p 194.1p 243.2p 47.7p 108.7p 156.4p
===== ===== =====
The total columns of this statement represent the Profit and
Loss Account of the Company. The revenue return and capital return
columns are supplementary to this and are prepared under guidance
published by the Association of Investment Companies. All revenue
and capital items in the above statement derive from continuing
operations. The Company had no other comprehensive income other
than those disclosed in the Income Statement. The net return is
both the profit for the year and the total comprehensive
income.
STATEMENT OF CHANGES IN EQUITY
Called Share Capital Other
up share premium redemption capital Revenue
Year ended capital account reserve reserves reserve Total
30 September 2017 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- ---------- ----------- ------------ ------------ ----------- ------------
At 1 October 2016 6,755 61,619 1,007 304,599 12,930 386,910
Net return on ordinary activities
after taxation - - - 52,431 13,253 65,684
Third interim dividend (11.0p)
for the year ended 30 September
2016 paid 30 October 2016 - - - - (2,972) (2,972)
Final dividend (12.0p) for
the year ended
30 September 2016 paid 31
January 2017 - - - - (3,242) (3,242)
First interim dividend (12.0p)
for the year ended 30 September
2017 paid 28 April 2017 - - - - (3,242) (3,242)
Second interim dividend
(12.0p) for the year ended
30 September 2017 paid 28
July 2017 - - - - (3,242) (3,242)
--------- ---------- ---------- ----------- ---------- -----------
At 30 September 2017 6,755 61,619 1,007 357,030 13,485 439,896
===== ===== ===== ====== ===== ======
Called Share Capital Other
up share premium redemption capital Revenue
Year ended capital account reserve reserves reserve Total
30 September 2016 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ ---------- ----------- ------------ ------------ ----------- ------------
At 1 October 2015 6,723 59,923 1,007 275,268 11,642 354,563
Net return on ordinary activities
after taxation - - - 29,331 12,893 42,224
Ordinary shares issued 32 1,696 - - - 1,728
Third interim dividend (10.0p)
for the year ended 30 September
2015 paid 30 October 2015 - - - - (2,689) (2,689)
Final dividend (11.0p) for
the year ended
30 September 2015 paid 29 January
2016 - - - - (2,972) (2,972)
First interim dividend (11.0p)
for the year ended 30 September
2016 paid 29 April 2016 - - - - (2,972) (2,972)
Second interim dividend (11.0p)
for the year ended 30 September
2016 paid 29 July 2016 - - - - (2,972) (2,972)
--------- ---------- ---------- ----------- ---------- -----------
At 30 September 2016 6,755 61,619 1,007 304,599 12,930 386,910
===== ===== ===== ====== ===== ======
STATEMENT OF FINANCIAL POSITION
As at 30 As at 30
September September
2017 2016
GBP'000 GBP'000
----------------------------------------------- ------------ ------------
Investments held at fair value through profit
or loss
Listed at market value in the United Kingdom 365,646 326,129
Listed at market value on AIM 74,881 58,403
Listed at market value overseas 24,743 24,384
Unlisted 2,218 2,101
----------- -----------
467,488 411,017
----------- -----------
Current assets
Debtors 2,061 2,129
Cash at bank 11,362 2,178
----------- -----------
13,423 4,307
----------- -----------
Creditors: amounts falling due within one
year (11,260) (28,414)
----------- -----------
Net current assets/(liabilities) 2,163 (24,107)
----------- -----------
Total assets less current liabilities 469,651 386,910
Creditors: amounts falling due after one year (29,755) -
----------- -----------
Net assets 439,896 386,910
======= =======
Capital and reserves
Called up share capital 6,755 6,755
Share premium account 61,619 61,619
Capital redemption reserve 1,007 1,007
Other capital reserves 357,030 304,599
Revenue reserve 13,485 12,930
----------- -----------
Total shareholders' funds 439,896 386,910
======= =======
Net asset value per ordinary share - basic
and diluted 1,628.1p 1,432.0p
======= =======
STATEMENT OF CASH FLOWS
Year ended Year ended
30 September 30 September
2017 2016
GBP'000 GBP'000
-------------------------------------------- -------------- --------------
Cash flows from operating activities
Net return on ordinary activities before
taxation 65,870 42,341
Add back: finance costs 1,009 764
Less: gains on investments held at fair
value through profit or loss (52,847) (29,331)
Withholding tax on dividends deducted
at source (211) (136)
Decrease/(increase) in debtors 93 (374)
Increase/(decrease) in creditors 423 (827)
----------- -----------
Net cash inflow from operating activities 14,337 12,437
Cash flows from investing activities
Purchase of investments (72,559) (67,620)
Sale of investments 68,038 102,719
----------- -----------
Net cash (outflow)/inflow from investing
activities (4,521) 35,099
Cash flows from financing activities
Equity dividends paid (net of refund
of unclaimed distributions and reclaimed
distributions) (12,698) (11,605)
Proceeds from issue of ordinary shares - 1,728
Net loans repaid (16,897) (35,418)
Senior unsecured loan notes 29,755 -
Interest paid (789) (832)
----------- -----------
Net cash outflow from financing activities (629) (46,127)
Net increase in cash and cash equivalents 9,187 1,409
Cash and cash equivalents at start of
year 2,178 669
Effect of foreign exchange rates (3) 100
----------- -----------
Cash and cash equivalents at end of year 11,362 2,178
======= =======
Comprising:
Cash at bank 11,362 2,178
----------- -----------
11,362 2,178
======= =======
Cash inflow from dividends net of taxation was GBP16,755,000 (2016:
GBP15,483,000)
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
a) Basis of Preparation
The Company is a registered investment company as defined in section
833 of the Companies Act 2006 and is incorporated in the United
Kingdom. It operates in the United Kingdom and is registered at
201 Bishopsgate, London, EC2M 3AE.
The financial statements have been prepared in accordance with the
Companies Act 2006, FRS 102 - The Financial Reporting Standard applicable
in the UK and Republic of Ireland and with the Statement of Recommended
Practice: Financial Statements of Investment Trust Companies and
Venture Capital Trusts (the 'SORP') issued in November 2014 and
updated in January 2017 with consequential amendments.
The Company has early adopted the amendments to FRS 102 in respect
to the fair value hierarchy disclosures as published in March 2016.
The principal accounting policies applied in the presentation of
these financial statements are set out below. These policies have
been consistently applied to all the years presented.
The financial statements have been prepared under the historical
cost basis except for the measurement of fair value of investments.
In applying FRS 102, financial instruments have been accounted for
in accordance with Sections 11 and 12 of the standard. All of the
Company's operations are of a continuing nature.
b) Going Concern
The assets of the Company consist of securities that are readily
realisable and, accordingly, the Directors believe that the Company
has adequate resources to continue in operational existence for
at least twelve months from the date of approval of the financial
statements. Having assessed these factors, the principal risks and
other matters discussed in connection with the viability statement,
the Directors considered it appropriate to adopt the going concern
basis of accounting in preparing the financial statements.
Gains on Investments held at Fair Value through 2017 2016
2. Profit or Loss GBP'000 GBP'000
---- ------------------------------------------------------- ------------ ------------
Gains on the sale of investments based on historical
cost 27,440 23,452
Less: revaluation gains recognised in previous
years (14,713) (14,374)
----------- -----------
Gains on investments sold in the year based on
carrying value at previous Statement of Financial
Position date 12,727 9,078
Revaluation gains on investments held at 30 September 40,123 20,153
Exchange (losses)/gains (3) 100
---------- ----------
52,847 29,331
====== =====
2017 2016
3. Income from Investments GBP'000 GBP'000
---- --------------------------- ---------- ----------
UK dividends:
Listed investments 13,025 12,767
Unlisted 49 48
Property income dividends 148 228
--------- ---------
13,222 13,043
--------- ---------
Non UK dividends:
Overseas dividend income 3,649 2,901
--------- ---------
3,649 2,901
--------- ---------
16,871 15,944
===== =====
2017 2016
4. Other Interest Receivable and Similar Income GBP'000 GBP'000
------ ------------------------------------------------------ ----------- -----------
Stock lending commission 16 44
Income from underwriting 34 64
--------- ---------
50 108
===== =====
At 30 September 2017 the total value of securities on loan by the
Company for stock lending purposes was GBP1,000 (2016: GBP2,830,000).
The maximum aggregate value of securities on loan at any time during
the year ended 30 September 2017 was GBP20,418,000 (2016: GBP25,560,000).
The Company's agent holds collateral comprising FTSE 100 stocks with
a collateral value of GBP1,000 (2016: GBP2,979,000) amounting to
a minimum of 105% (2016: minimum 105%) of the market value of any
securities on loan. Stock lending commission has been shown net of
brokerage fees of GBP4,000 (2016: GBP11,000).
5. Return per Ordinary Share - Basic and Diluted
The return per ordinary share is based on the net return attributable
to the ordinary shares of GBP65,684,000 (2016: GBP42,224,000) and
on 27,018,565 ordinary shares (2016: 26,992,028) being the weighted
average number of ordinary shares in issue during the year. The return
per ordinary share can be further analysed between revenue and capital,
as below.
2017 2016
GBP'000 GBP'000
---- -------------------------------------------------- --------------- -------------------------------------
Net revenue return 13,253 12,893
Net capital return 52,431 29,331
--------- ---------
Net total return 65,684 42,224
===== =====
Weighted average number of ordinary shares
in issue during the year 27,018,565 26,992,028
2017 2016
Pence Pence
Revenue return per ordinary share 49.1 47.7
Capital return per ordinary share 194.1 108.7
---------- -----------
Total return per ordinary share 243.2 156.4
====== ======
The Company does not have any dilutive securities; therefore the
basic and diluted returns per share are the same.
6. Dividends Paid and Payable on the Ordinary Shares
2017 2016
Dividends on ordinary shares Record date Payment date GBP'000 GBP'000
------------------------------- ---------------- ---------------- ---------- -----------------------
Third interim dividend (10.0p)
for the year ended 30
September 9 October 30 October
2015 2015 2015 - 2,689
Final dividend (11.0p) for the
year ended 8 January 29 January
30 September 2015 2016 2016 - 2,972
First interim dividend (11.0p)
for the year ended 30
September 8 April 29 April
2016 2016 2016 - 2,972
Second interim dividend
(11.0p)
for the year ended 30
September
2016 1 July 2016 29 July 2016 - 2,972
Third interim dividend (11.0p)
for the year ended 30
September 7 October 31 October
2016 2016 2016 2,972 -
Final dividend (12.0p) for the
year ended 6 January 31 January
30 September 2016 2017 2017 3,242 -
First interim dividend (12.0p)
for the year ended 30
September 7 April 28 April
2017 2017 2017 3,242 -
Second interim dividend
(12.0p) 3,242 -
for the year ended 30
September 30 June
2017 2017 28 July 2017
--------- ---------
12,698 11,605
===== =====
The third interim dividend and the final dividend for the year ended 30
September 2017 have not been included as a liability in these financial
statements. The total dividends payable in respect of the financial year,
which form the basis of the retention test under Section 1158 of the Corporation
Tax Act 2010, are set out below.
2017
GBP'000
------------------------------------------------------------------------------- -----------
Revenue available for distribution by way of dividend for
the year 13,253
First interim dividend (12.0p) for the year ended 30 September
2017 (3,242)
Second interim dividend (12.0p) for the year ended 30 September
2017 (3,242)
Third interim dividend (12.0p) for the year ended 30 September
2017 (3,242)
Proposed final dividend (13.0p) for the year ended 30 September
2017 (based on 27,018,565 ordinary shares in issue at 12 December
2017) (3,512)
---------
Revenue surplus 15
=====
For Section 1158 purposes the Company's undistributed revenue represents
0.1% of the income from investments.
7. Called up Share Capital
Number of Nominal value
shares entitled Total number of shares
to dividend of shares GBP'000
------------------------- ------------------ ------------- --------------
At 30 September 2016 27,018,565 27,018,565 6,755
----------- ----------- -----------
At 30 September 2017 27,018,565 27,018,565 6,755
During the year, the Company issued no ordinary shares (2016: 126,138
shares for proceeds of GBP1,728,000).
8. Net Asset Value per Ordinary Share
The net asset value per ordinary share of 1,628.1p (2016: 1,432.0p)
is based on the net assets attributable to the ordinary shares of
GBP439,896,000 (2016: GBP386,910,000) and on 27,018,565 (2016: 27,018,565)
shares in issue on 30 September 2017.
The movements during the year of the assets attributable to the ordinary
shares were as follows:
2017 2016
GBP'000 GBP'000
---- ---------------------------------------------------- ------------- ------------
Total net assets at 1 October 386,910 354,563
Total net return on ordinary activities after
taxation 65,684 42,224
Share issue proceeds - 1,728
Net dividends paid in the year:
Ordinary shares (12,698) (11,605)
----------- -----------
Net assets attributable to the ordinary shares
at 30 September 439,896 386,910
====== ======
9. 2017 Financial Information
The figures and financial information for the year ended 30 September
2017 are extracted from the Company's annual financial statements
for that period and do not constitute statutory accounts. The Company's
annual financial statements for the year to 30 September 2017 have
been audited but have not yet been delivered to the Registrar of Companies.
The Independent Auditors' Report on the 2017 annual financial statements
was unqualified, did not include a reference to any matter to which
the Auditors drew attention without qualifying the report, and did
not contain any statements under sections 498(2) or 498(3) of the
Companies Act 2006.
10. 2016 Financial Information
The figures and financial information for the year ended 30 September
2016 are compiled from an extract of the published financial statements
for that year and do not constitute statutory accounts. Those financial
statements have been delivered to the Registrar of Companies and included
the report of the Auditor which was unqualified, did not include a
reference to any matter to which the Auditor drew attention without
qualifying the report, and did not contain any statements under sections
498(2) or 498(3) of the Companies Act 2006.
11. Dividend
The final dividend, if approved by the shareholders at the Annual
General Meeting, of 13.0p per ordinary share will be paid on 31 January
2018 to shareholders on the register of members at the close of business
on 5 January 2018. This will take the total dividends for the year
to 49.0p (2016: 45.0p). The Company's shares will be traded ex-dividend
on 4 January 2018.
12. Annual Report
The Annual Report will be posted to shareholders in December 2017
and will be available on the Company's website (www.lowlandinvestment.com)
or in hard copy format from the Company's Registered Office, 201 Bishopsgate,
London, EC2M 3AE.
13. Annual General Meeting
The Annual General Meeting will be held on Monday, 29 January 2018
at 12.30 pm at 201 Bishopsgate, London, EC2M 3AE. The Notice of Meeting
will be sent to shareholders with the Annual Report.
For further information please
contact:
James Henderson Laura Foll
Fund Manager Fund Manager
Lowland Investment Company plc Lowland Investment Company plc
Telephone: 020 7818 4370 Telephone: 020 7818 6364
Sarah Gibbons-Cook James de Sausmarez
Investor Relations and PR Manager Head of Investment Trusts
Janus Henderson Investors Janus Henderson Investors
Telephone: 020 7818 3198 Telephone: 020 7818 3349
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into, or forms part of, this
announcement.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR EASALFFLXFFF
(END) Dow Jones Newswires
December 14, 2017 10:16 ET (15:16 GMT)
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