REG - Merchants Trust. - Half-year Report
27/09/2024 07:00
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RNS Number : 8978F Merchants Trust PLC 27 September 2024
LEI: 5299008VJFXCUD2EG312
THE MERCHANTS TRUST PLC
Half-Yearly Financial Report
For the six months ended 31 July 2024
Interim management report
Backdrop - optimism returns
I am pleased to report a positive first half to our current financial year,
both in terms of sentiment driving the stock market and the performance of
Merchants.
Since the Brexit vote in 2016, instability and uncertainty have characterised
the UK economic and political scene and made investors wary. With five
conservative Prime Ministers during this period and a Labour alternative led
by Jeremy Corbyn, many domestic and overseas investors regarded other markets
more predictable and secure for their long term savings, even though UK
valuations looked attractive throughout. In recent years the Labour party
under Sir Keir Starmer moved towards the political centre ground and Labour
secured a long anticipated election victory towards the end of the period
under review. These developments have reassured some and have de-risked the UK
in the eyes of many investors. Accordingly thus far the new government has
been greeted with an element of optimism in markets. The devil will
undoubtedly be in the detail, however, and we will watch Labour's management
of the economy and other developments with interest over the coming months and
years.
In terms of other positive drivers over the period, it is important to note
and welcome to see headline inflation return to the Bank of England's target
of 2% as well as positive indicators of a recovery in economic growth.
An improved political picture cannot be claimed for all regions however. A
record number of countries either have, or will have, elections in 2024 and
many of the possible resulting outcomes are far from benign. The whole world
is watching developments in the US as they lead up to the Presidential
election in November. There has been no shortage of drama already in that race
and it is a battle that still has a long way to run. Sadly the conflicts in
Ukraine and the Middle East continue to cause loss of life and distress, and
of course have an economic impact. Whilst companies in the defence sector are
benefiting from increasing national defence budgets around the world, the cost
to humanity and general sensibility is high.
As I have written many times before, while our investment manager and your
board look with interest at macroeconomic and geopolitical developments and
how they may impact our portfolio companies, they are not factors which drive
wholesale portfolio or sector decisions. Rather, the resulting exposure to
particular sectors are generally a by-product of the stocks which are chosen
on their individual merit.
Performance
I am pleased to report that over the six-month review period Merchants
outperformed the FTSE All-Share Index, the broad measure of the UK stock
market, as well as being the company's performance benchmark.
The more upbeat backdrop over the period was supportive both of the UK market
in general, which returned 12.3%, and of our portfolio of stocks specifically,
which ended the period up 13.5%, comfortably ahead of the market. Counting in
the effects of gearing, Merchants returned a Net Asset Value (NAV) total
return of 14.5% for the period. Portfolio manager Simon Gergel provides an
in-depth analysis of the drivers of the period's positive performance within
the Investment Manager's Review starting on page 9 of the half-yearly report.
UK market valuation
Our portfolio manager continues to see significant value available in the UK
market and we regularly discuss possible catalysts for a larger-scale market
re-rating. Over the period, we have seen substantial buying back of shares by
companies themselves, as well as an increased number of bids from other
businesses or private equity consortiums. Each of these suggest that some
investors believe current valuations are 'low', but even with the calmer
political backdrop mentioned above, none of this has been the catalyst for a
more significant re-rating. The UK market therefore continues to trade at
suppressed multiples, in the main.
There are other positive indicators for the UK economy. Demand drivers such as
possible government policy changes to stimulate more investment in the UK
stock market, may also prove influential. Whether any measure in isolation or
all these factors taken together will prompt a sea change remains to be seen,
but it is at least a positive that policy makers are increasingly making it
clear that they understand the importance of a healthy domestic UK stock
market.
Market demand
Demand for our strategy continued to be strong over the period. This is best
illustrated by the trust trading at one of the narrowest discounts in the peer
group during the period, including on occasions, trading at a small premium to
Net Asset Value. Not only do we see this as a positive when compared with our
investment trust peers, but it is even more pleasing compared to UK Equity
Income open-ended funds, which have continued to suffer net outflows over the
period - albeit the pace of that outflow has slowed recently.
During the period there was no share issuance as our premium criteria for
issuance was not met sustainably at any point. We had issued shares in January
of this year, prior to the period under review starting, and have recently
issued shares after the period end. Since the end of the period up to the
publication of this report, 100,000 new shares were issued at an aggregate
value of £578,800. Merchants is therefore one of very few investment trusts
to have issued shares so far during 2024. Shares are always issued at a
premium to the prevailing Net Asset Value, to make the process accretive to
existing shareholders. After issuing new shares, all shareholders benefit from
increased scale with the company's fixed costs spread over a wider base.
Our strong and consistent long-term performance and our income generation,
illustrated by our 42-year Dividend Hero status as defined by the Association
of Investment Companies (AIC), are in our view the key factors behind ongoing
shareholder and investor demand for Merchants' shares.
Costs disclosure update
The investment trust industry, led by the Association of Investment Companies
(AIC), has been tireless in lobbying for investment trusts, which are
closed-ended investment vehicles, not to be disadvantaged by cost disclosure
rules that have been built specifically around open-ended investment vehicles.
Many of the disputed regulations and requirements come from European
investment regulation and the industry has argued for some time that the
disclosures required as a result can actually be misleading for investors when
comparing against open-ended funds. In particular, the way costs are currently
mandated to be disclosed gives the appearance of an additional investor
charge, which is not the case, and the crux of the industry's argument has
been that the costs of running a closed-ended investment company are already
in theory accounted for within the share price, which is the trade price for
an investor. The board was therefore pleased to hear about the planned
legislative reforms to UK retail disclosure requirements. This should
hopefully enable investors to be better informed before making decisions. The
interim exemption for investment trusts from the much-criticised costs
disclosure regime is welcomed as the Government plans for a consultation and
new Consumer Composite Investments legislation in the first half of next year.
In terms of our own disclosures, we intend to take a conservative approach and
continue with current disclosures until additional guidance or industry
consensus is available.
Earnings
We continued to see solid corporate earnings from the companies we invest in
over the period. Whilst it was not a completely positive picture across all
sectors, in aggregate the trusts' earnings generated a total income of
£28.1m. This was 1.1% above the £27.8m generated for the first half of the
previous fiscal year. In terms of earnings per share (EPS), issuance of new
shares over the equivalent period last year meant that the EPS reduced by 1.7%
to 17.1p (2023: 17.4p). More details on the specifics of income earned by the
investment portfolio can be found on page 15 of the half-yearly report.
Dividends
The positive earnings picture noted above has given the board confidence to
announce an increased Merchants dividend whilst allowing us to continue
rebuilding revenue reserves that were partially utilised during the pandemic.
As a reminder, at the start of this financial year, revenue reserves per share
stood at 18.1p. Not all trusts can or will provide such income support and
smoothing, which is why Merchants is one of a handful of companies to be
awarded the AIC's coveted Dividend Hero status from a universe of well over
400 listed companies.
With the final dividend of the 2024 financial year approved by shareholders at
the AGM, Merchants has raised its dividend for 42 consecutive years and, with
the increased dividend noted in this report, we remain well positioned for the
future.
The board has declared a second quarterly dividend for the current financial
year of 7.3p per ordinary share, payable on 15 November 2024 to shareholders
on the register at close of business on 11 October 2024. A Dividend
Reinvestment Plan ('DRIP') is available for this dividend for which the
relevant Election Date is 25 October 2024 and the ex-dividend date is 10
October 2024. This means that for the first half of the financial year ending
January 2025, the aggregated dividend will be 14.5p compared with 14.2p for
the same period last year, a 2.1% year-on-year rise.
Shareholder contact
It was a pleasure for the Board to be able to once again host a sizeable
number of shareholders at the AGM in May 2024. The Board was pleased to see
the event so well supported and there were many interesting questions which
the board and the manager did their best to answer. I would like to thank
those shareholders who managed to attend, but for those who didn't, I should
remind them that a video of my introduction and portfolio manager, Simon
Gergel's investment update is available on Merchants' website under the
'Videos, Podcasts & Reading' tab.
As you will hopefully be aware we spend considerable effort ensuring our
reporting is informative and interesting for shareholders. It was a pleasure
therefore to once again be shortlisted in the 'Best Report and Accounts,
Generalist' award at the Association of Investment Companies' recent
shareholder communication awards.
We continued to have positive press coverage during the period, including in
publications such as Investors' Chronicle, The Times, The Telegraph, Citywire,
The Daily Mail, Shares Magazine and Trustnet.
We continue to try to bring the Merchants' strategy alive for both
shareholders and potential investors through regular podcasts, videos and
articles - many of these can be found on our website.
Outlook
It has been pleasing to see a reduction of political uncertainty in the UK,
generally improving economic data and the easing of inflation which is leading
to lower interest rates. However, the potential for shocks to the economic,
financial and geopolitical system still feels real and it would seem unwise to
assume we are facing a future of plain sailing.
In terms of the domestic market, it is positive to see the external factors
such as politics that have turned in its favour and we can only hope that
similar positive drivers persist. It would be good to see a greater level of
recognition of the potential of the businesses in the UK market, and some
subsequent re-rating from such low valuations. How much of this can be
stimulated by policy and changing regulation remains to be seen, but hopefully
a realisation of the value available will see additional buying interest and a
return of the market to greater favour.
In the interim and as we have pointed out before, investor avoidance of the UK
market does provide a greater opportunity for keen stock pickers - where great
companies trading on attractive valuations are being overlooked simply because
of their listing location. This remains an opportunity for Merchants'
value-based investment thesis - and our manager continues to buy companies
that have solid long-term potential for making money for shareholders, and
which for whatever reason currently have their prospects undervalued by the
market. On that basis we continue to see an optimistic future for your
Company. Thank you, as always for your support.
Colin Clark
Chairman
199 Bishopsgate, London EC2M 3TY
26 September 2024
Principal Risks and Uncertainties
As identified in the Annual Report, the principal risks are now considered to
be emerging risks, followed by the risks of market decline.
The principal risks and uncertainties facing the company, together with the
board's controls and mitigation, are those described in the Annual Report for
the year ended 31 January 2024 published in April 2024 and are listed below:
· Emerging risks, such as significant geopolitical risks and
climate change risks.
· Investment strategy, for example, asset allocation or the level
of gearing may lead to a failure to meet the company's objectives, such as
income generation and dividend growth.
· Investment performance for example, poor stock selection for the
portfolio leads to decline in the rating and attraction of the company.
The board's approach to mitigating these risks and uncertainties is set out in
the explanation with the Risk Map in the Annual Report. In the board's view
these will remain the principal risks and uncertainties for the six months to
31 January 2025.
Going Concern
The directors have considered the company's investment objective and capital
structure both in general terms and in the context of the current
macro-economic background. Having noted that the portfolio is liquid as it
consists mainly of securities which are readily realisable, and through
continuous assessment of the company's financial covenants, the directors have
concluded that the company has adequate resources to continue in operational
existence for the foreseeable future. The directors have also considered the
continuing risks and consequences of macroeconomic and unanticipated shocks on
the operational aspects of the company and have concluded that the company has
the ability to continue in operation and meet its objectives in the
foreseeable future. For this reason, the directors continue to adopt the going
concern basis in preparing the financial statements.
Responsibility Statements
The directors confirm to the best of their knowledge that:
· The condensed set of financial statements contained within the
half-yearly financial report has been prepared in accordance with FRS102 and
FRS104, as set out in Note 2, the Accounting Standards Board's Statement
'Half-Yearly Financial Reports'; and
· The interim management report includes a fair review of the
information required by The Financial Conduct Authority's ('FCA') Disclosure
Guidance and Transparency Rule 4.2.7 R of important events that have occurred
during the first six months of the financial year and their impact on the
condensed set of financial statements, and a description of the principal
risks and uncertainties for the remaining six months of the financial year;
and
· The interim management report includes a fair review of the
information concerning related parties transactions as required by the
Disclosure Guidance and Transparency Rule 4.2.8 R.
Colin Clark
Chairman
26 September 2024
Enquiries:
For further information, please contact:
Allianz Global Investors UK Limited
Stephanie Carbonneil
Head of Investment Trusts
Tel: 020 3246 7256
Portfolio Managers' Review
Economic & market background
The UK stock market has had a strong six months. Many of the issues that had
previously concerned investors have faded away. Economic growth picked up,
from near stagnation in late 2023, whilst inflation returned to the Bank of
England's 2% target, after the shock of the last few years. This allowed the
Bank to follow the European Central Bank and cut interest rates for the first
time this cycle, on 1(st) August. This was later than had been anticipated,
but expectations of falling borrowing costs have supported markets, due to the
beneficial impact on companies, consumers and the broader economy.
There was also resolution to the political uncertainty, that has been a
feature of the UK ever since the Brexit referendum in 2016. Prime Minister
Rishi Sunak called a general election for 4(th) July and Sir Keir Starmer's
Labour party won a large majority of the seats, with a fairly centrist
manifesto. A return to greater political stability in the UK stood in sharp
contrast to events elsewhere. European Union election results showed a swing
to more populist parties, prompting President Macron of France to call a
surprise election to try to stem the rise of the far-right National Rally
party. In the US, the electorate is polarised. Under enormous pressure, the
Democrat president Joe Biden agreed to stand aside in November's presidential
election, to allow his Vice President Kamala Harris to take on Republican
Donald Trump.
The stock market made steady progress during the period, with a total return
of 12.3%, supported by a large number of company share buy-backs, and a
resurgence in takeover activity. According to Peel Hunt, there were 17
takeover bids launched for companies in the FTSE 350 index of leading
companies in the first 6 months of 2024, compared to only 2 in the whole of
2023.
International equity markets were also generally strong, but with significant
divergence between sectors. The continuing excitement about Generative
Artificial Intelligence drove the influential US stock market, with stand-out
performance from chip maker Nvidia, along with other giant technology stocks
in the so-called "Magnificent 7". These large stocks dominated the US stock
market until the last month or so when there was a rotation back towards some
of the smaller companies.
Although the UK stock market does not contain many technology companies, there
was still a high level of volatility between different sectors. Medium sized
companies lagged their larger peers for much of the period, until a strong
rally in July left them slightly ahead overall. Some of the best performing
sectors were cyclical and financial sectors, that should benefit from a
recovering economy. Banks performed well, as higher profitability on the back
of benign credit conditions and higher interest rates, led to substantial cash
returns to shareholders. The construction & materials sector also rallied,
from depressed levels, on hopes for an improvement in the building industry as
the effects of interest rate cuts come through. The aerospace & defence
sector benefited from a sharp recovery at Rolls Royce and strong defence
spending. Amongst more defensive areas, the tobacco sector was strong, with
some favourable regulatory developments in the large US market.
The weakest sectors were quite diverse. Beverages underperformed, as spirits
manufacturer Diageo warned of difficult trading conditions. Travel &
leisure was weak, on waning enthusiasm when set against the strong conditions
a year ago, as travel had picked up in the wake of the Covid pandemic. This
was exacerbated by weak results from several leisure companies. The life
insurance sector was also weak, with Prudential falling back on concern about
the Chinese economy which drives much of its business.
Performance
The total return on the investment portfolio of 13.5% was ahead of the return
on the FTSE All-Share Index benchmark of 12.3%. Sector selection was generally
a positive factor, although in our investment process, sector allocation is
usually a consequence of stock selection decisions rather than primarily a
specific view on a sector. A large exposure to the construction &
materials sector was particularly helpful, as was having no exposure to the
weak beverages sector. The top ten positive and negative individual
contributors to the outperformance are shown in the table.
The largest positive contributor was Keller, which rallied by 75%. Keller is a
good example of the type of investment we like to make. Keller has a strong
market position in providing geotechnical engineering services in the USA and
many other countries. The shares had been heavily discounted, due to difficult
trading conditions and some operational issues, which led to them offering
excellent value to investors. The management team have now significantly
strengthened the commercial execution and operational processes in the
business. This has coincided with a strong recovery in the key US market,
leading to a substantial increase in profitability and a strong re-rating of
the shares.
Another company with exposure to the US building industry is the housing
products business Tyman, which received a takeover bid from its US peer
Quanex. Tyman was one of three portfolio companies bid for during the period.
The others were housebuilder Redrow, which agreed a merger proposal with
larger rival Barratt Developments, and power supply manufacturer XP Power,
where the board rejected an opportunistic bid, in the wake of recent profits
warnings.
Elsewhere, two banks, Barclays and Lloyds were among the top ten performers,
in a strong sector, although the benefit was partly offset by not owning HSBC
and Nat West. Several mid-caps performed well, with total returns of over 25%.
Inchcape benefited from solid trading performance, and the announced sale of
its remaining car retailing businesses in the UK, to focus exclusively on its
attractive car distribution franchises around the world. IG Group re-rated
from a low valuation, with the shares receiving a boost from the appointment
of a new Chief Executive with a good reputation. Drax shares responded well to
resilient trading and improved market understanding of the breadth and quality
of the company's asset base. Finally, Morgan Advanced Materials outperformed,
as investors started to appreciate the improving profitability of the company
and its gradual refocusing into faster growing markets like semiconductors and
renewable power equipment.
Relative performance also benefited from not owning a few large companies that
underperformed and held back the benchmark return. The largest was Diageo, the
spirits company, which has encountered challenging trading conditions, most
notably in the North America and Latin America regions. Reckitt Benckiser
shares also fell heavily, after a large award was made against a subsidiary in
a lawsuit in America, concerning the use of their infant formula for premature
babies.
Looking at the largest negative performance contributors, apart from not
owning certain banks, as discussed above, there were no over-riding themes. PZ
Cussons, the manufacturer of Carex soaps, shower gels and other brands, warned
about the impact of a further devaluation of the Nigerian currency, after an
initial devaluation and some other trading issues last year. Nigeria is an
important region for the business, and this additional pressure prompted the
company to cut its dividend. Whilst further trading difficulties are
disappointing, the business has some strong market positions in the UK,
Australia and elsewhere. We have had several meetings with board and
management representatives to keep a close eye on the situation. The
distribution business DCC shares were weak, but there was little major news in
the period. The business continues to make good progress building out its
services platform to help customers deal with the energy transition away from
fossil fuels. The gambling company Entain, which owns the Ladbrokes and Coral
brands in the UK as well as an online joint venture with MGM Resorts in the
USA, also underperformed. The business has had disappointing trading results
in the US, UK and some other markets, partly on the back of tightening
regulations. The company has recently appointed a new chief executive and has
adopted a strategy to improve its operational execution.
Elsewhere, the French reinsurance company SCOR had a profits warning, based
upon technical longevity assumptions in its US life insurance business. This
was disappointing, as it came against a generally positive trading environment
for reinsurance, which has benefited the other portfolio holdings in the
subsector. The last two portfolio stocks in the list of top underperformers
were WPP and GSK, which both moved broadly sideways over the period, causing
relative underperformance. The media services company WPP was held back by
weak trading, particularly among their US technology clients. The
biopharmaceutical business GSK generally performed well as a business, but
there were investor concerns about the growth prospects for a couple of their
vaccines and some ongoing litigation.
In addition, relative performance was also impacted by strong performance from
AstraZeneca and Rolls Royce, which are not owned in the portfolio but helped
to lift the index return.
Contribution to Investment Performance relative to the FTSE All-Share Index
Positive Performance Negative Performance
Stocks
Stocks
Impact % Impact %
Overweight
(holding larger than index weight)
Keller 0.9 PZ Cussons -0.5
Barclays 0.8 DCC -0.4
IG Group 0.6 Entain -0.4
Inchcape 0.5 SCOR -0.4
Lloyds 0.4 WPP -0.3
Drax 0.4 GSK -0.3
Morgan Advanced Materials 0.3
Tyman 0.3
Underweight
(zero holding or weight
lower than index weight)
Diageo 0.8 HSBC -0.5
Reckitt Benckiser 0.7 AstraZeneca -0.5
Rolls Royce -0.4
NatWest -0.3
Portfolio Changes
The combination of a modestly valued UK stock market, a wide dispersion of
valuations and considerable swings in sentiment towards different sectors,
provided many opportunities to make new investments or add to existing
positions at attractive levels. These were funded by reducing or selling other
positions, typically after outperformance had taken shares closer to fair
value.
There were four new investments and two compete sales. One of the purchases is
listed overseas: Bank of Ireland. We had been gradually building exposure to
the banks sector as the industry has been completely restructured since the
Global Financial Crisis and is operating under much tighter leverage
restrictions. The industry is also benefiting from interest rates recovering
from near zero levels, allowing banks to earn higher interest margins. Bank of
Ireland operates in a particularly consolidated Irish banking market, with
only two major banks. It adds some diversification away from the UK economy
into Ireland. Bank of Ireland was attractively priced compared to the return
on capital it generates, with a dividend yield of over 7%.
We bought Dowlais, a supplier of components and powdered metals for the
automotive industry, working with around 95% of global manufacturers. Dowlais
is world leader in sideshafts and propshafts that help provide power to the
wheels of vehicles, as well as making many other products. Concerns about the
transition from internal combustion engines to electric vehicles have
depressed the shares of Dowlais, but we believe these concerns are overdone.
This provided an opportunity to buy shares at an exceptionally low valuation,
which does not reflect the long-term prospects for Dowlais.
We also bought shares in Unite Group, the largest owner and operator of
student accommodation in the UK. Unite and its joint venture partners own and
rent out about 70,000 rooms, and it has long term relationships with many of
the UK's leading universities. Unite has a development pipeline of new rooms,
whilst the shortage of accommodation in the UK provides a favourable
environment. Like many real estate companies, rising interest rates have
impacted property values. This brought the shares down to a level which, in
our view, does not reflect the company's growth opportunities, its income
generation and a rising dividend yield.
The final new addition to the portfolio, was Burberry, a British luxury goods
business older than The Merchants Trust. Burberry is best known for trench
coats, scarves and certain check patterned fabrics, operating from over 400
stores worldwide. Whilst the company has some notable strengths, the business
has struggled in recent years. It had a poorly executed move into highly
priced accessories and higher fashion ranges. This coincided with a slowdown
in luxury sales globally. The company had several profits warnings and the
shares had lost about two thirds of their value in just over a year. Despite
difficult trading, the company has no debt, other than leases, and we believe
it has strong potential. The fall in the share price created an opportunity
for us to make a modest investment. Subsequently, the company had another weak
trading update, and announced an immediate change in leadership, a reversal of
its strategy and a suspension of dividends. Whilst we did not expect an
immediate dividend cut, it was a possibility we had considered before
investing. We are prepared to hold strong business franchises through a
restructuring period, where we can see significant value.
There were two complete sales from the portfolio. The building materials
company CRH represents a good example of our sell discipline. We bought CRH
(for the second time) in 2022, since when the share price has doubled. The
company has delivered strong operational performance, but the shares were
significantly re-rated as well. The valuation was further helped by moving
CRH's listing to the USA (where most of its activities are based) from the
more lowly priced UK stock market. However, we believe the share price fully
reflected the high quality and good prospects of the business, so we sold it
to finance other investments where we have higher conviction.
We also sold Admiral, the car and home insurer. The shares had performed very
well since our purchases in late 2022 and early 2023, as strong insurance
price increases had started to feed through to a recovery in profitability.
Having reached our assessment of fair value, we decided to sell the shares to
reinvest into other portfolio stocks. Whilst we invest in shares on a medium
term view, typically 3-5 years, we will sometimes sell out much sooner than
that, if the valuation moves up quickly to what we believe to be a fair level.
Apart from these new investments and complete sales, there were a large number
of additions to existing holdings where we saw particularly good value. The
largest transactions included adding to real estate company Assura, the media
services business WPP, the miner Rio Tinto, supporting the rights issue at
National Grid, and switching money from Imperial Brands to its industry peer
British American Tobacco. We also reduced several positions. In most cases
this reflected profit taking after strong performance as positions had become
too large compared to our level of conviction. These included Drax, Next,
Tesco, Keller, Barclays and several others.
Income
Income generation has been resilient during the period. The total income of
£28.1m was slightly above the £27.8m generated last year. However, with the
increased share count, the revenue earnings per share reduced to 17.1p
(17.4p).
Most companies paid flat or rising dividends. Many of the major income
producers like the large banks and energy companies delivered solid dividend
growth. But there were dividend cuts in the housebuilders, reflecting the
cyclical downturn in profitability as interest rates have risen. There were
also a small number of dividend cuts for company specific reasons. These
included PZ Cussons, mentioned above, the specialist bank Close Brothers,
which is facing a potential uncertain liability on legacy commission payments,
and US gas producer Diversified Energy, where falling gas prices put pressure
on the financial position.
The outlook for income generation in the second half continues to look solid
and the directors have declared an increase in the first two interim
dividends, as set out in the chairman's statement.
Outlook
The UK stock market has had a positive six months, but there are still reasons
to be optimistic about the future outlook. As we discussed above, the UK
should now be in a period of political stability, inflation has returned close
to the Bank of England's target, economic growth has picked up, even if it is
not strong, and interest rates have started to come down. This will moderate
mortgage bills and corporate debt costs in due course. The UK stock market
remains lowly priced, especially compared to other leading markets and we are
seeing a large number of share buybacks from companies, as well as a high
level of takeover activity.
The one area that has been stubbornly negative has been investor flows into UK
equities, although even here there are some encouraging signs. The government
(both Conservative and Labour) and financial regulators have started to talk
about the importance of a thriving domestic stock market. The FCA has
introduced changes to the UK listing rules to attract more companies to list,
and the government is looking at ways to encourage UK pension funds to
allocate more money to domestic equities, such as mandating disclosure of
their current exposure. Even a small change in allocation from the large UK
pension funds could make a meaningful difference to the demand-supply balance
in the market. There have also been tentative signs of returning retail
investor interest, although these flows can be fickle.
Of course, the UK does not exist in a vacuum. There are many uncertainties in
the world, not least conflicts in Eastern Europe and the Middle East, that
could escalate at any moment. Politics is deeply polarised in much of Europe
and the USA, raising uncertainty over the direction of future policy. Global
economic growth is muted, with China, which has been the engine of growth for
many years, notably weak. It is important to remember that UK listed companies
derive the majority of their sales and profits from overseas, so the global
economic outlook is as influential as the UK's. Likewise, many stock market
trends are driven by overseas markets, especially by what is happening in the
USA.
Our focus, as always, remains on identifying attractive individual companies
to own in the portfolio. Whilst it is important to consider macro-economic
risks, it is critical to maintain a longer-term focus. We want to own
companies that we believe can deliver a high income yield and strong total
returns for investors, over the next three to five years. We continue to find
many compelling opportunities. Not only is the overall UK stock market lowly
valued, but the dispersion between individual company valuations remains high.
This environment has provided new opportunities, like Dowlais, Burberry and
Unite, mentioned above, but we also see material further upside in most of the
existing holdings in the portfolio.
In summary, given the favourable UK economic and market background described
above, and the large number of attractive investment opportunities we can see,
we remain optimistic about the medium-term outlook for income and capital
growth in Merchants' portfolio.
THE MERCHANTS TRUST PLC
Portfolio Breakdown as at 31 July 2024
Value % of Benchmark
Name £'000s Holdings Weightings Sector
British American Tobacco 44,743 4.5 2.2 Tobacco
GSK 43,758 4.4 2.5 Pharmaceuticals & Biotechnology
Shell 41,436 4.2 7.4 Oil, Gas & Coal
Barclays 33,755 3.5 1.4 Banks
IG Group 32,355 3.3 0.1 Investment Banking & Brokerage
Inchcape 31,022 3.1 0.1 Retailers
SSE 30,738 3.1 0.8 Electricity
Lloyds Banking Group 30,505 3.1 1.5 Banks
BP 28,540 2.9 3.2 Oil, Gas & Coal
WPP 28,373 2.9 0.3 Media
Rio Tinto 28,140 2.9 2.2 Industrial Metals & Mining
Tate & Lyle 27,486 2.8 0.1 Food Producers
DCC 25,145 2.6 0.2 Industrial Support Services
Redrow 25,028 2.6 0.1 Household Goods & Home Construction
Unilever 24,830 2.5 4.8 Personal Care, Drug & Grocery Stores
National Grid 24,559 2.5 1.9 Gas, Water & Multiutilities
Drax Group 23,087 2.4 0.1 Electricity
Pets At Home Group 20,765 2.1 0.1 Retailers
Morgan Advanced Materials 20,462 2.1 0.0 Electronic & Electrical Equipment
Imperial Brands 20,154 2.1 0.8 Tobacco
Grafton Group 19,364 2.0 0.1 Industrial Support Services
Energean 19,222 2.0 0.1 Oil, Gas & Coal
Legal & General 19,046 1.9 0.6 Life Insurance
LandSec 16,981 1.7 0.2 Real Estate Investment Trusts
Keller 15,582 1.6 0.0 Construction & Materials
Man Group 15,500 1.6 0.1 Investment Banking & Brokerage
Lancashire Holdings 15,432 1.6 0.1 Non-Life Insurance
Tyman 14,998 1.5 0.0 Construction & Materials
Assura 14,758 1.5 0.0 Real Estate Investment Trusts
Tesco 14,586 1.5 0.9 Personal Care, Drug & Grocery Stores
Marshalls 14,464 1.5 0.0 Construction & Materials
Bellway 13,661 1.4 0.1 Household Goods & Home Construction
OSB Group 13,642 1.4 0.1 Finance & Credit Services
Haleon 13,460 1.4 1.0 Pharmaceuticals & Biotechnology
SThree 13,351 1.4 0.0 Industrial Support Services
Conduit Holdings 13,336 1.4 0.0 Non-Life Insurance
Dowlais Group 13,217 1.3 0.0 Automobiles And Parts
Unite Group 12,569 1.3 0.2 Real Estate Investment Trusts
Bank of Ireland Group 12,343 1.3 0.0 Banks
PZ Cussons 11,334 1.2 0.0 Personal Care, Drug & Grocery Stores
Aena 10,326 1.1 0.0 Industrial Transportation
Burberry Group 10,307 1.1 0.1 Personal Goods
Close Brothers Group 9,317 1.0 0.0 Banks
Atalaya Mining 9,181 0.9 0.0 Precious Metals & Mining
Next 8,161 0.8 0.4 Retailers
Norcros 7,148 0.7 0.0 Construction & Materials
DFS Furniture 6,648 0.7 0.0 Retailers
CLS Holdings 6,610 0.7 0.0 Real Estate Investment & Services
Diversified Energy Company 6,541 0.7 0.0 Oil, Gas & Coal
SCOR 6,505 0.7 0.0 Non-Life Insurance
Entain 5,620 0.6 0.1 Travel & Leisure
XP Power 5,139 0.5 0.0 Electronic & Electrical Equipment
Duke Royalty 3,928 0.4 0.0 Finance And Credit Services
977,158 100.0 % of invested funds
Portfolio Analysis as at 31 July 2024
Sector % Held* Benchmark weighting
Financials 22.4 18.7
Consumer Discretionary 17.1 11.0
Industrials 15.4 12.0
Consumer Staples 15.1 13.9
Energy 10.1 10.8
Utilities 8.3 3.8
Health Care 6.0 11.8
Real Estate 4.7 2.7
Basic Materials 3.9 6.6
Net current liabilities (3.0)
100.0
* Total Assets include current liabilities
THE MERCHANTS TRUST PLC
Summary of Unaudited Results
INCOME STATEMENT
For the six months ended 31 July 2024
Revenue Capital Total Return
£'000s £'000s £'000s
(Note 1)
Gains (losses) on investments held at fair value through profit or loss - 93,057 93,057
Losses on foreign currencies - (17) (17)
Income from investments 27,523 - 27,523
Other income 597 - 597
Investment management fee (574) (1,067) (1,641)
Administrative expenses (549) (1) (550)
Profit before finance costs and taxation 26,997 91,972 118,969
Finance costs: interest payable and similar charges (1,008) (1,833) (2,841)
Profit on ordinary activities before taxation 25,989 90,139 116,128
Taxation (578) - (578)
Profit after taxation attributable to ordinary shareholders 25,411 90,139 115,550
Earnings per ordinary share (Note 4)
(basic and diluted) 17.13p 60.77p 77.90p
BALANCE SHEET £'000s
As at 31 July 2024
Fixed Assets
Investments held at fair value through profit or loss 977,158
Net current liabilities (28,250)
Total assets less current liabilities 948,908
Creditors: amounts falling due after more than one year (66,898)
Total net assets 882,010
Called up share capital 37,081
Share premium account 228,174
Capital redemption reserve 293
Capital reserve 585,294
Revenue reserve 31,168
Equity shareholders' funds 882,010
Net asset value per ordinary share 594.6p
The net asset value as at 31 July 2024 is based on 148,324,887 ordinary
shares.
THE MERCHANTS TRUST PLC
Summary of Unaudited Results
INCOME STATEMENT
For the six months ended 31 July 2023
Revenue Capital Total Return
£'000s £'000s £'000s
(Note 1)
Losses on investments held at fair value through profit or loss - (45,784) (45,784)
Losses on foreign currencies - (15) (15)
Income from investments 27,147 - 27,147
Other income 655 - 655
Investment management fee (556) (1,033) (1,589)
Administrative expenses (603) (2) (605)
Profit (loss) before finance costs and taxation 26,643 (46,834) (20,191)
Finance costs: interest payable and similar charges (937) (1,700) (2,637)
Profit (loss) on ordinary activities before taxation 25,706 (48,534) (22,828)
Taxation (679) - (679)
Profit (loss) after taxation attributable to ordinary shareholders 25,027 (48,534) (23,507)
Earnings (loss) per ordinary share (Note 4)
(basic and diluted) 17.36p (33.67p) (16.31p)
BALANCE SHEET £'000s
As at 31 July 2023
Fixed Assets
Investments held at fair value through profit or loss 893,161
Net current liabilities (19,293)
Total assets less current liabilities 873,868
Creditors: amounts falling due after more than one year (66,838)
Total net assets 807,030
Called up share capital 36,699
Share premium account 220,520
Capital redemption reserve 293
Capital reserve 521,378
Revenue reserve 28,140
Equity shareholders' funds 807,030
Net asset value per ordinary share 549.8p
The net asset value as at 31 July 2023 is based on 146,794,887 ordinary
shares.
BALANCE SHEET £'000s
As at 31 January 2024
Fixed Assets
Investments at fair value through profit or loss 874,668
Net current liabilities (20,280)
Total assets less current liabilities 854,388
Creditors: amounts falling due after more than one year (66,866)
Total net assets 787,522
Called up share capital 37,081
Share premium account 228,174
Capital redemption reserve 293
Capital reserve 495,155
Revenue reserve 26,819
Equity shareholders' funds 787,522
Net asset value per ordinary share 530.9p
The net asset value as at 31 January 2024 is based on 148,324,887 ordinary
shares.
THE MERCHANTS TRUST PLC
STATEMENT OF CHANGES IN EQUITY
Called Up Share Premium Capital Redemption Reserve
Share Account £'000s Capital Revenue Reserve
Capital £'000s Reserve £'000s Total
£'000s £'000s £'000s
Six months ended 31 July 2024
Net assets at 1 February 2024 37,081 228,174 293 495,155 26,819 787,522
Revenue profit - - - - 25,411 25,411
Dividends on ordinary shares (Note 3) - - - - (21,062) (21,062)
Capital profit - - - 90,139 - 90,139
Net assets at 31 July 2024 37,081 228,174 293 585,294 31,168 882,010
Six months ended 31 July 2023
Net assets at 1 February 2023 35,034 184,239 293 569,912 22,897 812,375
Revenue profit - - - - 25,027 25,027
Dividends on ordinary shares (Note 3) - - - - (19,784) (19,784)
Capital loss - - - (48,534) - (48,534)
Shares issued during the period 1,665 36,281 - - - 37,946
Net assets at 31 July 2023 36,699 220,520 293 521,378 28,140 807,030
THE MERCHANTS TRUST PLC
CASH FLOW STATEMENT
Six Months Six Months
ended 31 July 2024 ended 31 July 2023
£'000s £'000s
Operating activities
Profit (loss) before finance costs and taxation 118,969 (20,191)
Less (Add): (Gains) losses on investments held at fair value (93,956) 45,020
Add: Losses on derivatives 328 109
Add: Losses on foreign currency 17 15
Purchase of fixed asset investments held at fair value through profit or loss (101,113) (132,771)
Sales of fixed asset investments held at fair value through profit or loss 93,956 107,145
Transaction costs (571) (655)
Increase in other receivables (839) (2,473)
Increase (decrease) in other payables 188 (116)
Less: Overseas tax suffered (578) (679)
Net cash inflow (outflow) from operating activities 16,401 (4,596)
Financing activities
Interest paid (2,794) (2,475)
Dividends paid on cumulative preference stock (21) (21)
Dividends paid on ordinary shares (21,062) (19,784)
Share issue proceeds - 37,946
Net cash (outflow) inflow from financing activities (23,877) 15,666
(Decrease) increase in cash and cash equivalents (7,476) 11,070
Cash and cash equivalents at the start of the period 22,886 11,465
Effect of foreign exchange rates (17) (15)
Cash and cash equivalents at the end of the period 15,393 22,520
Comprising:
Cash at bank and in hand 15,393 22,520
THE MERCHANTS TRUST PLC
Notes to the Financial Statements
Note 1 - Financial Statements
The half-yearly financial report has been neither audited nor reviewed by the
company's auditors. The financial information for the year ended 31 January
2024 has been extracted from the statutory financial statements which have
been delivered to the Registrar of Companies. The auditors' report on those
financial statements was unqualified and did not contain a statement under
section 498 of the Companies Act 2006.
The total return column of the Income Statement is the profit and loss account
of the company.
All revenue and capital items derive from continuing operations. No operations
were acquired or discontinued in the period.
Allianz Global Investors UK Ltd acts as Investment Manager to the company.
Details of the services and fee arrangements are given in the latest annual
report of the company, which is available on the company's website at
www.merchantstrust.co.uk.
Note 2 - Accounting Policies
The Company presents its results and positions under 'The Financial Reporting
Standard applicable in the UK and Republic of Ireland' (FRS 102), which forms
part of the Generally Accepted Accounting Practice ('UK GAAP') issued by the
Financial Reporting Council.
The condensed set of financial statements has been prepared on a going concern
basis in accordance with FRS 102 and FRS 104, 'Interim Financial Reporting',
The Companies Act 2006 and the Statement of Recommended Practice - 'Financial
Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP')
issued by the Association of Investment Companies in July 2022. The context of
the current macro-economic background has been thoroughly considered and the
directors have concluded that there are no material uncertainties related to
going concern. They have also been prepared on the assumption that approval as
an investment trust will continue to be granted.
The accounting policies applied in preparation of the condensed set of
financial statements with regard to measurement and classification have not
changed from those set out in the Company's annual report for the year ended
31 January 2024.
Note 3 - Dividends on Ordinary Shares
Dividends paid on ordinary shares in respect of earnings for each period are
as follows:
Six months Six months
ended ended
31 July 2024 31 July 2023
£'000s £'000s
Third interim dividend 7.1p paid 14 March 2024 (2023 - 6.9p) 10,531 9,669
Final dividend 7.1p paid 22 May 2024 (2023 - 7.0p) 10,531 10,115
21,062 19,784
In accordance with FRS 102 section 32 'Events After the End of the Reporting
Period', dividends payable at the period end have not been recognised as a
liability. Details of these dividends are set out below.
Six months Six months
ended ended
31 July 2024 31 July 2023
£'000s £'000s
First interim dividend 7.2p paid 22 August 2024 (2023 - 7.1p) 10,679 10,412
Second interim dividend 7.3p payable 15 November 2024 (2023 - 7.1p) 10,828 10,422
21,507 20,834
The dividends above are based on the number of shares in issue at the period
end. However, the dividend payable will be based upon the number of shares in
issue on the record date and will reflect any purchase or cancellation of
shares by the company settled subsequent to the period
end.
Note 4 - Earnings per Ordinary Share
The earnings per ordinary share is based on a weighted number of ordinary
shares 148,324,887 (31 July 2023 - 144,134,526) in issue.
Note 5 - Fair Value Hierarchy
Investments and derivative financial instruments are designated as held at
fair value through profit or loss in accordance with FRS 102 sections 11 and
12.
FRS 102 sets out three fair value levels.
Level 1: The unadjusted quoted price in an active market for identical assets
or liabilities that the entity can access at the measurement date.
Level 2: Inputs other than quoted prices included within Level 1 that are
observable (i.e., developed using market data) for the asset or liability,
either directly or indirectly.
Level 3: Inputs are unobservable (i.e., for which market data is unavailable)
for the asset or liability.
With the exception of those financial liabilities measured at amortised cost,
all other financial assets and financial liabilities are either carried at
their fair value or the balance sheet amount is a reasonable approximation of
their fair value.
As at 31 July 2024, the financial assets at fair value through profit and loss
of £976,724,000 (31 July 2023: £893,086,000; 31 January 2024: £874,611,000)
are categorised as
follows:
Level 1 Level 2 Level 3 Total
£'000s £'000s £'000s £'000s
Financial assets at fair value through profit or loss at 31 July 2024
Equity investments 977,158 - - 977,158
Derivative financial instruments - written call options - (434) - (434)
977,158 (434) - 976,724
Financial assets at fair value through profit or loss at 31 July 2023
Equity investments 893,161 - - 893,161
Derivative financial instruments - written call options - (75) - (75)
893,161 (75) - 893,086
Financial assets at fair value through profit or loss at 31 January 2024
Equity investments 874,668 - - 874,668
Derivative financial instruments - written call options - (57) - (57)
874,668 (57) - 874,611
For exchange listed equity investments the quoted price is either the bid
price or the last traded price depending on the convention of the relevant
exchange. For written options the value of the option is marked to market
based on traded prices. Financial instruments valued using valuation
techniques level 3 have, in the absence of relevant trading prices or market
data, been valued based on the directors' best estimate.
Note 6 - Status of the Company
The company applied for and was accepted as an approved investment trust for
accounting periods commencing on or after 1 February 2013, subject to it
continuing to meet eligibility conditions at section 1158 Corporation Taxes
Act 2010 and the on-going requirements for approved companies in Chapter 3
Part 2 Investment Trust (Approved Company) (Tax) Regulations 2011 (Statutory
Instrument 2011/2999).
Note 7 - Transactions with the Investment Manager and related parties
As disclosed in the annual report, the existence of an independent board of
directors demonstrates that the company is free to pursue its own financial
and operating policies and therefore, under FRS 8: Related Party Disclosures,
the investment manager is not considered to be a related party. The company's
related parties are its directors.
There are no other identifiable related parties as at 31 July 2024, 31 July
2023 and 31 January 2024.
The half-yearly financial report will be sent to shareholders at the end of
September 2024 and will be available to members of the public from the
company's registered office at 199 Bishopsgate, London EC2M 3TY or by calling
the Investor Services Helpline on 0800 389 4696.
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