Scottish Oriental - Final Results
14/11/2024 07:00
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RNS Number : 1389M Scottish Oriental Smlr Co Tst PLC 14 November 2024
THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC
Annual Financial Report for the year ended 31 August 2024
· During the year, the net asset value total return increased by
18.6 per cent, comparing favourably to the MSCI AC Asia ex Japan Small Cap
Index return of 13.5 per cent and the MSCI AC Asia ex Japan Index return of
12.0 per cent.
· The Board is proposing a final dividend of 14.0p per share (2023:
13.0p per share), a year-on-year increase of 7.7 per cent and an additional
special dividend of 8.0p per share.
· The Board is proposing a five for one share split to improve
liquidity and marketability of the Company's shares.
Financial Highlights
Total Return Performance for the year ended 31 August 2024
Net Asset Value 18.6% MSCI AC Asia ex Japan Small Cap Index (£) 13.5%
Share Price 16.5% MSCI AC Asia ex Japan Index (£) 12.0%
Final dividend increased to 14p per share, with an additional special dividend FTSE All-Share Index (£) 17.0%
of 8p per share
Summary Data at 31 August 2024
Shares in issue 23,577,766 Shareholders' Funds £403.1m
Net Asset Value per share 1,709.5p Market Capitalisation £346.6m
Share Price 1,470.0p Share Price Discount to Net Asset Value 14.0%
Ongoing Charges Ratio* 0.98% Active Share (MSCI AC Asia ex Japan Small Cap Index) 97.6%
Ongoing Charges Ratio (excluding performance fee) 0.95%
*A performance fee of £98,000 is payable relating to the year ending 31
August 2024 (2023: £2,247,000)
Chairman's Statement
I am pleased to present the Annual Report of the Company for the year ended 31
August 2024, my third as Chairman.
Investment Performance
During the period under review the Company's Net Asset Value ('NAV') Total
Return increased by 18.6 per cent. This compared favourably against the MSCI
AC Asia ex Japan Small Cap Index, the MSCI AC Asia ex Japan Index, and the
FTSE All-Share Index which returned 13.5 per cent, 12.0 per cent and 17.0 per
cent respectively during the same period. The NAV Total Return also
outperformed the Company's peers in the Association of Investment Companies
('AIC') Asia Pacific Smaller Companies Sector peer group. The Company's share
price increased by 15.3 per cent during the period under review, which,
including the dividend, produced a Share Price Total Return of 16.5 per cent.
I would encourage shareholders to keep up to date on the performance of the
portfolio through the Company's website at www.scottishoriental.com
In their report below, the Portfolio Managers provide a short handbook for the
Scottish Oriental investor. Having invested across Asia for the past thirty
years the Investment Manager is well versed in understanding the nature of
Asian companies and the nuances of the Asian stock markets. The handbook
highlights how the Portfolio Managers deploy your capital in companies with
high quality management teams, sustainable earnings growth, using a long-term
investment horizon with a focus on capital preservation. At the same time, the
handbook describes the methods of avoiding some of the traps that lie in wait
for the inexperienced investor. Amongst other traits, they are not prepared to
invest in poor quality companies and managers; franchises with low returns on
capital employed; value traps, box ticking ESG exercises or benchmark
shadowing.
Many of you will have held your shares in Scottish Oriental over a number of
years and will be familiar with this process. So it is pleasing to report that
it has been successful. On a total return basis, over the last five years the
Company's NAV has increased by 55.1 per cent and over the last ten years it
has increased by 112.3 per cent.
Development of the Company
It is the Board's aim to broaden the shareholder base by increasing awareness
of the Company, and to ensure a clear investment proposition is presented to
the market. To achieve this we have planned the following actions:
Appointment of a Corporate Broker
Following a detailed review, the Board has appointed Investec Bank plc
('Investec') as the Company's Corporate Broker. Investec brings a wealth of
experience in the investment trust sector and has strong relationships with
retail shareholder platforms and wealth managers.
Marketing
We have developed a fresh marketing strategy with the Investment Manager. This
involves an increased profile in leading financial publications and enhanced
content on our website. The aim is to provide both current and prospective
shareholders with a deeper understanding of the portfolio and the Investment
Manager's process and enable them to learn more about the people behind the
investment decisions.
Share Split
Due to the Company's strong investment returns over recent years, the existing
ordinary shares of 25p have risen to 1,470.00p (at 31 August 2024). To assist
monthly savers and those who reinvest their dividends or are looking to invest
smaller amounts, at the Annual General Meeting, the Board is proposing that
shareholders approve a five for one share split. This should improve the
liquidity in and marketability of the Company's shares, which will benefit all
shareholders.
Discount Management
Given the strong investment performance of the Company during the year, it is
somewhat disappointing to report that the share price discount to NAV
marginally increased to 14.0 per cent as at 31 August 2024 (31 August 2023:
12.4 per cent). Although of little comfort, there has been a general widening
of discounts in the investment trust sector due to weak investor sentiment.
During the year, the Company bought back 782,085 ordinary shares (3.2 per cent
of the shares in issue as at 31 August 2023). The Company's average discount
during the period was 14.5 per cent (2023: 13.0 per cent). Whilst the Board
continues to have no formal discount control mechanism in place, discretion
will continue to be used to purchase shares in the market when deemed
appropriate to do so.
Performance Fee
Following the change in performance fee comparator index, a new calculation
methodology has been agreed. The key terms of the new methodology are;
· The hurdle rate has been reduced from ten per cent to
two per cent.
· Periods of under-performance are now accumulated and
applied against potential future performance fees.
· A high watermark provision has been introduced, whereby
a performance fee will only be paid when the Company's share price exceeds the
level where a performance fee was previously paid.
· If the total fee payable (base fee plus performance
fee) in a year would be in excess of the cap of one and a half per cent of
total assets, such excess will be carried forward and may be paid in future
periods of positive performance where a performance fee is otherwise payable.
We believe that this new calculation methodology fairly remunerates the
Investment Manager in periods of strong performance and offers some protection
to shareholders in periods of weak performance. Please refer to pages 28 and
58 of the Annual Report for further details.
Revenue and Dividends
In last year's Annual Report, I reported a decrease in the Company's revenue
earnings per share from 16.66p to 14.19p. As at 31 August 2024, revenue
earnings per share have risen to 27.74p. This increase is primarily due to an
increase in dividend receipts from the Company's underlying investment
portfolio, enhanced by a number of special dividends.
The Board is proposing a final dividend of 14.0p per share (2023: 13.0p per
share), a year-on-year increase of 7.7 per cent and an additional special
dividend of 8.0p per share. The final and special dividends will be paid on 7
February 2025 to shareholders on the register as at 10 January 2025.
Board Composition
As previously detailed in my 2023 Chairman's Statement, Uma Bhugtiar was
appointed as a non-executive Director of the Company on 19 October 2023. Karen
Roydon was also appointed as a non-executive Director on 8 December 2023. Both
Uma and Karen have already made significant contributions to the Board since
their appointments. Uma and Karen's biographies can be found on page 23 of the
Annual Report.
We continue to review Board composition and Directors' succession planning on
a regular basis to ensure that we have a Board with a mix of tenures and one
which provides diversity of perspective together with the range of appropriate
skills and experience for your Company.
Annual General Meeting
The Annual General Meeting ('AGM') of the shareholders of the Company will be
held on Wednesday, 29 January 2025 at the offices of First Sentier Investors,
Finsbury Circus House, 15 Finsbury Circus, London. The Board looks forward to
meeting with you in person.
As always, the Board welcomes communication from shareholders throughout the
year, and I can be contacted directly through the Company Secretary at
cosec@junipartners.com.
Jeremy Whitley
Chairman
13 November 2024
Portfolio Managers' Report
In this report, we address the following topics -
1. Company Performance
2. A Handbook for the Scottish Oriental Investor
3. Recent Portfolio Activity
4. Ten Largest Investments as at 31 August 2024
5. Sector & Geographic Analysis
6. Portfolio Positioning & Outlook
1. Company Performance
Scottish Oriental's performance was strong over the last 12 months. Its net
asset value rose by 18.6 per cent for the year ended 31 August 2024, compared
to a gain of 13.5 per cent for the MSCI AC Asia ex Japan Small Cap Index and
12.0 per cent for the MSCI AC Asia ex Japan Index. The largest contributors to
performance were the holdings in India and Philippines. The biggest detractors
from performance were the holdings in Indonesia and Hong Kong.
Top Five Contributors
Company Country Sector Absolute Return (Sterling) % Contribution Performance %
Colgate Palmolive (India) India Consumer Staples 82.3 4.8
Blue Star India Industrials 125.4 3.9
Philippine Seven Philippines Consumer Staples 73.6 2.4
JNBY Design China Consumer Discretionary 81.8 2.4
Godrej Industries India Materials 78.9 2.2
Colgate Palmolive (India) reported strong sales and profit growth, as several
of the initiatives introduced by its new Chief Executive Officer, Prabha
Narasimhan, delivered results. The company has increased investments in
brand-building, enhanced its focus on faster growing distribution channels and
introduced new product variants across its portfolio. Colgate's strong pricing
power has also helped the company improve its profitability levels.
Blue Star is a leading air-conditioner manufacturer in India, serving the
consumer and projects segments. The company delivered strong growth in
revenues and higher profitability levels during the year. The company
benefited from rapid growth in demand for air-conditioners in India, while it
continued to gain market share through optimising its product portfolio and
expanding its distribution. Its projects business also benefited from strong
demand in infrastructure development, in areas such as metro rail projects and
data centres.
Philippine Seven is the exclusive franchise operator for 7-Eleven stores in
the Philippines. It continued its recovery after the disruption caused by the
pandemic. Footfalls rose across their store network, and the changes made to
the store footprint, store assortment and increased digitisation during the
pandemic led to strong same store sales growth for the company. These changes
also led to a significant improvement in the company's profitability during
the year, as it benefited from operating leverage.
JNBY Design is a leading designer apparel brand in China. The company reported
strong growth in its revenues and profits, as it benefited from the removal of
movement restrictions in China. In recent years, the company has refurbished
its store network and strengthened its digital initiatives, focused on its
membership program. These loyal members have driven strong growth for the
brand, despite the relatively weak consumer environment in China.
Godrej Industries is a leading Indian conglomerate, which controls the group's
key businesses in consumer products, real estate development, agriculture and
financial services. Its consumer products, real estate and agriculture
businesses reported strong performance during the year. The company has also
been investing to scale-up its financial services operations, which are
growing rapidly from its currently low base.
Top Five Detractors
Absolute Return (Sterling) % Contribution Performance %
Company Country Sector
Hero Supermarket Indonesia Consumer Staples (51.6) (1.0)
Vitasoy International Hong Kong Consumer Staples (47.7) (0.9)
Mitra Adiperkasa Indonesia Consumer Discretionary (26.1) (0.8)
Sarimelati Kencana Indonesia Consumer Discretionary (51.2) (0.7)
Nissin Foods Hong Kong Consumer Staples (30.3) (0.7)
Hero Supermarket is a leading retailer in Indonesia, with operations across
pharmacies, supermarkets and the franchise to operate IKEA stores in the
country. During the year, the company reported a loss from operations due to
weakening profitability at its IKEA stores and the intense competitive
environment in the supermarket industry. The company expects the profitability
of IKEA stores to improve as the brand's recognition develops further in
Indonesia, while benefiting from the optimisation of its supermarket store
network.
Vitasoy International is the market leader in soy-based beverages and lemon
tea with operations in Hong Kong, China, as well as a number of other
countries in Asia-Pacific. The company's operations in China have struggled
since a political issue in Hong Kong led to a boycott of its products in
China. It has also faced disruptions to its business in Australia, which led
to a decline in its profitability.
Mitra Adiperkasa is the exclusive franchise operator for several leading
global brands including Zara, Starbucks, Domino's and Sephora in Indonesia.
The company's operations were affected by the negative consumer sentiment for
some of its global brands, related to the conflict in the Middle East. The
management has taken several steps to engage with various local stakeholders
and increased brand building investments to mitigate this impact.
Sarimelati Kencana is the exclusive franchise operator for Pizza Hut in
Indonesia. Its performance has been disappointing, with a net loss from
operations recorded for 2023. The company expanded its store network
substantially in previous years, with some of these stores performing below
management's expectations. It was also negatively impacted by the consumer
sentiment towards multinational brands during the year. The management is
taking initiatives including rationalising its store footprint, introducing
more innovative products in its menu and investing in brand-building to
improve its operating performance.
Nissin Foods operates a leading instant noodle brand with operations mainly in
Hong Kong and China. The company has suffered due to the poor consumer
sentiment in both its key markets. Consumers have shifted towards lower priced
products, which has affected Nissin due to its strong position in the premium
segment. Migration of blue-collar workers from Southern China towards inland
areas has also hurt its growth, as Nissin has a stronger presence in the
Southern regions. Its management is launching more variants in the mid-priced
segment and expanding its distribution presence to address these challenges.
2. A Handbook for the Scottish Oriental Investor
Our investment approach is aimed at preserving capital and growing it
sensibly. This approach has remained steadfast since the Company was
established in 1995. In the fast-growing Asian region, there are several
exciting stories or popular themes prevailing at any point of time, which
promise attractive returns. These themes rarely stand the test of time -
ranging from the mania for Telecom, Media and Technology (TMT) companies
around the turn of the century, to real estate and infrastructure businesses
before the global financial crisis, or "new-age" companies without clearly
established business models in recent years. Investing behind such
opportunities comes with the risk of permanent loss of capital. Therefore, our
investment process starts by eliminating all those companies which we believe
are not suited to meet our goal of capital preservation - simply put, we start
by determining what we will not do. We do not believe that there is a price
for every business - there are some companies in which we will not invest,
irrespective of their growth opportunity or valuations. By eliminating such
ideas, we can focus our research on a group of high-quality businesses which
comprise our investable watchlist and the Company's portfolio.
Our investment process is predicated upon avoiding the following -
1. Investing in companies controlled by poor quality owners and managers.
2. Backing weak franchises with low returns on capital employed (ROCE).
3. Investing in businesses with poor growth prospects, available at "cheap"
valuations.
4. Employing a box-ticking approach to environmental, social and governance
(ESG) issues.
5. Trying to predict macro-economic variables and using those predictions to
pick winners or losers.
6. Building a portfolio based on the composition of an index.
Investing in companies controlled by poor quality owners and managers
Our assessment of any business starts with the quality of its majority-owners
and management team. We believe that those owners and managers which have a
track record of treating other stakeholders poorly, ranging from their
workers, suppliers or the communities in which they operate, will eventually
compromise the interests of minority shareholders as well.
We prefer to invest behind family-owned companies, as families typically take
a long-term view of building their businesses and are able to make
counter-cyclical investments. In most cases, we don't find ourselves to be
aligned with state-owned enterprises (SOEs) which typically need to shoulder
national service obligations which may not be in the interests of minority
shareholders. However, assessing which families are worth backing and which we
should avoid is key. After three decades of investing in Asia, we have built
strong networks across countries in the region which help us determine the
local reputation of management teams. Our meetings with companies on the
ground are supplemented by comprehensive checks with their suppliers,
customers, distributors and competitors. In our experience, feedback from a
supplier which indicates that a company habitually delays payments, or from a
distributor that its management asks them to push sales aggressively just
before the end of a quarter, tells us much more about the quality of a
company's financials than spreadsheets. We pay close attention to changes in
the ownership and management of companies, as those are often pivotal points
of change in the direction of travel for the business.
One such example is United Breweries, the dominant beer company in India with
54 per cent market share in the industry, led by its Kingfisher brand. For
several decades, the business was majority-owned by the Mallya family. While
United Breweries had built a market leading position under their leadership,
we had several concerns. The company's board was poor quality, with several of
the chairman's friends and associates appointed as independent directors. This
board permitted substantial related party transactions. We were also sceptical
of our alignment with the promoter family, as the chairman had empire-building
ambitions, having established a commercial airline, acquired a Formula-One
franchise as well as a franchise in India's domestic cricket league (Indian
Premier League). The listed company contributed to some of these endeavours,
through its large brand-building budget. Due to these governance concerns, we
were not invested in the business despite an appreciation for its strong
franchise and growth potential. A gradual change in ownership was initiated
because the promoter family had taken on high levels of personal debt to fund
its ventures. They used the sale of their shareholding in the listed company
to repay some of this debt, which led to Heineken building its stake in United
Breweries starting in 2008. Our meetings with Heineken's representatives
suggested that they were gradually appointing key management members to
critical functions such as the chief financial officer, strengthening the
quality of the board and terminating the related party transactions as they
gained control. This improvement in the quality of ownership and management
gave us conviction to establish a position in the company in 2014. Since then,
the company has grown consistently while strengthening its dominant position
in India's beer industry. We remain excited about its prospects.
Backing weak business franchises with low returns on capital employed (ROCE)
We avoid businesses which are price takers, have marginal positions in their
category or are at the mercy of much larger customers or suppliers, with
limited bargaining power. The low returns on capital such businesses earn
forces them to rely on external funding sources to invest in future growth,
leading to a leveraged balance sheet or dilution for shareholders. We like to
own simple, predictable businesses which have market leading positions in
under-penetrated categories. Our assessment is based on their ability to
navigate changes in consumer preferences, competitive intensity and business
cycles over their history. Their market leadership in their respective
categories affords them strong bargaining power with their customers,
suppliers and channel partners. This results in a sustainably high return on
capital employed, which in our view is the best reflection of the quality of a
business franchise.
Colgate Palmolive (India) has been present in India since 1937. A consistent
focus on brand building, combined with a strong distribution advantage, has
cemented its dominant position of more than 50 per cent market share - almost
3 times as much as its nearest competitor. This dominant market position
allows it to command high levels of profitability, which it re-invests into
continued brand building efforts. It has strong pricing power, which gives it
the ability to pass on changes in raw material costs or currency fluctuations
to its consumers without much impact on its market shares or profitability.
The company's strong market position and strong brand also affords it
attractive terms of trade with its distributors and advertising partners,
resulting in a large working capital float which is used to fund its growth.
These attributes have led to Colgate Palmolive (India) earning high ROCE,
averaging more than 100 per cent in recent years. As its CEO, Prabha
Narasimhan, has focused on increasing its investments in brand building and
introducing several new products across its portfolio, its lead over its
competitors is only likely to grow further in the coming periods, reinforcing
this virtuous cycle.
Businesses with poor growth prospects available at "cheap" valuations
We often observe that as a business matures, its owners or management may lose
their desire to continue driving growth. They are happy to collect their
annual dividends, which can be invested in other ventures. The earnings growth
as well as return on capital of these companies decline over time. We noticed
such trends in several companies with operations in economies such as
Singapore, Malaysia or Hong Kong a decade ago. These businesses had performed
well in previous decades when the countries in which they operated were
benefiting from strong growth. As their categories matured, their promoter
families began to use the cash flows from dividends they received to fund
other interests, with limited focus on the listed entity. Their earnings per
share were declining and ROCE was deteriorating. These risks were justified by
their "cheap" valuations, which were substantially lower than past levels. We
avoid such value-traps. Businesses with declining earnings power only become
more expensive over time. Comparisons to historical valuation levels hold
little merit, given the lower ROCE and growth prospects. Management teams can
also make poor capital allocation decisions such as expensive mergers and
acquisitions during such periods, to mitigate this lack of growth.
Our focus is to own smaller companies which have the potential to emerge as
much larger businesses in future. These operate in under-penetrated categories
in large markets, which offer a long runway for growth. As these categories
grow with steadily rising per-capita income levels, these businesses are
likely to be the large businesses of the future. For example, Philippine Seven
is the exclusive franchise operator for 7-Eleven stores in the Philippines.
The company is majority owned by President Chain Stores, which has
successfully built the 7-Eleven convenience format into a large retail network
in Taiwan. Its management is led by Jose Victor Paterno, who comes from the
founding family of the business in the Philippines. Under his leadership,
Philippine Seven has built a dominant position in convenience stores, with
over 4,000 stores across the country and 58 per cent market share, which is
over twice as large as its nearest competitor. The management has also
broadened its product offering to serve the evolving needs of consumers, such
as fresh coffee and meal options as well as basic financial services. Despite
the strong growth, convenience store penetration is still below 10 per cent of
total modern retail sales in Philippines, compared to 30 per cent to 70 per
cent in other regional markets such as Thailand, Taiwan and Indonesia. As
per-capita incomes grow and customers prioritise convenience, this penetration
of convenience stores is expected to rise consistently. With its clear market
leadership which its management is strengthening further, Philippine Seven has
the potential to emerge as a much larger business in the coming years.
Predicting macro-economic variables to identify potential winners and losers
Our investment process is bottom-up - instead of trying to predict the
direction of interest rates or currencies, we try to find high quality
businesses operated by competent management teams which have an established
track record of performing well across these changes in the business
environment. Asian countries have witnessed a range of disruptions since
Scottish Oriental was established in 1995, ranging from the Asian Financial
Crisis and the Global Financial Crisis to pandemics such as SARS and Covid-19.
In our experience, well run businesses used each of these disruptions to
emerge with a stronger market position in their respective categories. We
assess the track records of companies to observe attributes such as their
pricing power, market shares and returns on capital employed during difficult
periods, to find resilient businesses which are likely to succeed over the
long run.
Selamat Sempurna is the largest manufacturer of filters and radiators in
Indonesia, predominantly used in the automotive and off-highway industries.
Its leading market position and focus on the after-market segment rather than
on selling to original equipment manufacturers (OEMs) who dictate pricing
terms, has led to a consistent track record over decades. Since 1992, the
company's sales have grown at 19 per cent and net profit has grown at 29 per
cent annually. Despite facing several disruptions over this period, its net
profit has declined in only 3 of the last 30 years. The filter and radiator
industry is highly fragmented, dominated by small, informal players. Selamat
Sempurna has used its net cash balance sheet to consolidate the industry by
acquiring smaller competitors and in some cases, its channel partners to
control its distribution more effectively. Its returns on capital employed has
increased consistently, from 13 per cent to 18 per cent in the 1990s to 35 per
cent currently, as it has improved its profitability through operating
leverage from increased scale. Through its association with Donaldson
Corporation of the United States of America, the company's management has also
gained exposure to global best practices towards shareholder returns. Selamat
Sempurna has grown its dividend per share in each of the last 19 years and was
among the first companies in Indonesia to start paying quarterly dividends.
Its conservative management team is focused on sustaining this track record in
the coming periods as well.
A box-ticking approach towards environmental, social and governance issues
Our approach to assessing environmental, social and governance (ESG) issues is
integrated into our analysis of businesses. In our view, if a business does
not earn and sustain its social license to operate, derived from treating all
stakeholders well, it will be reflected in lower growth and returns on capital
over time. We don't pay heed to glossy ESG reports or rankings in
sustainability indices, which we often find to have little correlation with
the underlying sustainability practices of a business. An example of this are
tobacco businesses, which produce ESG reports going into hundreds of pages and
have consistently found a place in global sustainability indices. Instead, we
consistently engage with the management teams of Scottish Oriental's holdings
on a range of issues and actively vote on company resolutions. Through our
engagement, we gain conviction in the quality of the management teams, view
feedback from shareholders and other stakeholders constructively, are
proactive about learning best practices and admit mistakes.
Many smaller companies may have the right intent towards ESG issues but lack
the exposure to global best practices or sophisticated communication. Our
approach starts by identifying those companies which employ strong governance
standards. In our experience, the management teams which exhibit strong
governance also learn and employ strong environmental and social practices
over time. Century Pacific Food in the Philippines is one such company, which
is a leading branded food manufacturer across categories such as tuna, meat,
dairy and pet foods. We have admired the management's approach of leading
their industry on a range of issues, such as being among the first consumer
companies in the Philippines to adopt a formal sustainability strategy focused
on "Protein, Planet and People." It launched new products such as milk
products fortified with immunity boosters and plant-based meat alternatives
following the adoption of this strategy. It was also among the first
corporates in the country to achieve plastic neutrality. We have engaged with
the company on issues ranging from the professionalisation of its management
team to an acquisition of a business owned by its majority shareholder.
Following our engagement, the management agreed to inject the business into
the listed company at an attractive valuation of 1x Price / Book. In recent
periods, we have increasingly engaged with the management on modern slavery
risks in the fisheries industry, to which Century Pacific is exposed. The
company has been receptive to our letters on this issue, and we have
introduced the management to relevant domain experts. Since our first
investment in 2017, we have observed that Century Pacific's management has
upheld strong governance standards as well as making efforts to improve the
company's environmental and social footprint. This has increased our
conviction in the management's ability to address the challenges and
opportunities the company will face over the long-term.
Building a portfolio based on the composition of an index
Our focus is on generating strong absolute returns and accordingly, we view
risk as the permanent loss of capital, rather than underperforming a
benchmark. Our country weightings bear no relationship to regional stock
market indices. Regardless of index significance, we do not consider ourselves
obliged to hold investments in any individual market.
We are often asked about our exposure to sectors such as information
technology or to countries such as Taiwan and Korea, which comprise a large
share of the benchmark. On a bottom-up basis, we have found few businesses in
these markets which offer high standards of governance, a dominant business
franchise and predictable growth. Several companies in the technology hardware
supply chain in these countries operate as contract manufacturers for their
customers. This gives them limited bargaining power, with their customers
demanding annual reductions in their selling prices and long payment terms.
This results in low returns on capital and these companies raise capital
frequently, diluting shareholders. We are also cognisant of risks emanating
from technology adoption cycles and disruptions, which makes their earnings
unpredictable. An example is the recent excitement around artificial
intelligence, which has led to a significant re-rating of the valuations of
these companies. In our experience of previous such technology cycles,
predicting the winners from the adoption of new technologies is difficult.
Instead, we continue to find new investment opportunities in leading
businesses operating in large addressable markets in India, China, Indonesia
and Philippines. With growing per-capita incomes, the penetration levels of
their categories is growing and these companies are acquiring a larger share
of their respective profit pools. They comprise over 82 per cent of the
Company's portfolio. The Company's sector and country allocations are entirely
a residual of our bottom-up stock selection process, and we don't expect this
allocation to necessarily bear any resemblance to our benchmark index.
Having detailed what we will not do, the investment approach and outcomes
which Scottish Oriental's investors should expect are briefly described below.
1. Investing in a portfolio of high-quality smaller companies. Scottish
Oriental's portfolio comprises businesses which are simple and predictable,
run by people who have a track record of treating all stakeholders fairly,
with strong returns on capital and attractive growth prospects over the long
term. Over time, the portfolio has been consolidated in favour of our highest
conviction smaller companies. Since 2017, the share of the portfolio's top ten
holdings has risen from 25 per cent to 42 per cent currently, and that of the
top twenty holdings has risen from 44 per cent to 66 per cent of the portfolio
over the same period. The quality of the portfolio is reflected in its high
returns on equity, with the portfolio's median return on equity improving from
13.6 per cent to 19.0 per cent currently.
2. A long-term investment horizon. Our investment horizon extends beyond
five years, and many of Scottish Oriental's portfolio holdings have been held
for over a decade. Seven of Scottish Oriental's ten largest holdings have been
held in the Company's portfolio for over five years. This allows us to be
viewed by the owners and management teams of these companies as a long-term
stakeholder. Our engagement with them on issues ranging from the composition
of their board of directors to their capital allocation strategy or
environmental and social issues is viewed constructively and allows us to
contribute to the development of the businesses in which we are invested.
3. Companies which can grow their earnings sustainably. We are focused on
owning smaller companies which have the potential to become significantly
larger businesses in future. Their growth comes from rising penetration levels
of the categories in which they operate, along with strengthening market
positions. We expect that in periods of disruption, such as Covid-19, these
companies gain market share from their smaller competitors and emerge with a
larger share of their respective profit pools as the economy recovers. The
portfolio's estimated earnings per share growth over two years has also risen
from 14.2 per cent to 17.4 per cent, alongside the improvement in the
portfolio's median return on equity (ROE).
4. A focus on achieving strong absolute returns led by capital
preservation. The chart on page 13 of the Annual Report reflects the
performance of the portfolio against that of the comparator index since
inception. In strong periods (months where the comparator index has risen),
the Company's portfolio may not always keep pace with the market's returns.
However, the Company has performed better than its comparator index in almost
80 per cent of weak periods (months where the comparator index has fallen).
This ability to preserve capital during difficult times has driven Scottish
Oriental's superior performance against the comparator index across the
majority of market periods.
With an investment approach that is consistent since the inception of the
Company, we expect these portfolio outcomes to sustain in the coming periods
as well.
3. Recent Portfolio Activity
New Holdings
The team has had an active programme of research visits to all Asian countries
over the last year, leading to a number of attractive bottom-up opportunities
emerging. These include new holdings in China, where some smaller companies
have shown the ability to grow consistently despite the weak economic
environment by gaining market share and are available at attractive
valuations. The team continues to find several new investment opportunities in
India. The first holding of the Company in New Zealand was also established
during the period. We purchased six new holdings during the year.
DPC Dash is the exclusive franchise operator of Domino's Pizza in China. While
Domino's has been present in China since 1997, a group of entrepreneurs led by
the current chairman acquired the franchise in 2010 and began expanding the
business. Its principal, Domino's Pizza, has also purchased a strategic stake
in the company. The business has grown rapidly in recent years and now has
over 1,000 stores in more than 30 cities. Domino's has built strong brand
equity in China through its focus on the pizza category, menu innovations and
strong delivery capabilities. Its expansion into smaller cities has received a
strongly positive consumer response. With scale, operating leverage should
drive a significant improvement in the company's profitability and returns on
capital. The business has the potential to be dominant in the pizza category
and eventually become several times its current size.
Cloud Music is the second largest online music platform in China with over 200
million active monthly users. It is majority-owned by Netease, with a distinct
corporate culture. By contrast with many other Chinese internet businesses,
the company's management takes a long term view and is willing to invest
counter-cyclically. Instead of aggressive M&A, its focus is on organic
growth and earning high returns on capital. The online music industry in China
is an attractive duopoly along with Tencent Music, the market leader. The
supply of content is fragmented in China. This provides the online music
platforms with strong bargaining power. The company also has strong pricing
power due to the duopoly industry structure and its loyal user base. In recent
years, the company has focused on expanding the share of paying users. Cloud
Music has the potential to grow steadily and earn substantially higher levels
of profitability over time.
Mainfreight is a leading global logistics provider and freight forwarder,
headquartered in New Zealand. The company was established by a family and is
led by its long-standing, professional CEO. The leadership has inculcated a
culture of decentralised management, which drives high levels of
accountability for growth and profitability to the local operations. The
profit-sharing schemes offered to employees also creates a strong sense of
ownership. The global logistics and freight forwarding industry is highly
fragmented. Mainfreight has a dominant position in the Australia and New
Zealand markets. By deploying the steady cash flows from its presence here, it
has gradually expanded internationally. The company has been gaining market
share from new entrants who had emerged during the upcycle amidst the Covid-19
disruption but are currently sustaining losses. The company has the potential
to grow consistently for several years, given the fragmented industry
structure and its entry into the large US market.
Mahindra & Mahindra Financial Services ('MMFS') is a leading Indian
non-bank finance company, majority-owned by the reputed Mahindra group. Given
its position as one of the group's largest businesses, the parent company's
management has increased its focus on strengthening MMFS' returns on equity
and accelerating its growth. Under a new CEO, Raul Rebello, MMFS has
strengthened its senior leadership team, made changes to its underwriting
systems and processes, reduced exposure to riskier lending segments and is
diversifying its loan book beyond its core automotive and tractor financing
businesses. These changes should result in a substantial improvement in the
company's returns on equity in the coming years and drive consistent growth.
RHI Magnesita India is the leading Indian refractory manufacturer,
majority-owned by RHI Magnesita NV, the global market leader. The position of
refractories as a critical but low-cost consumable in the steel manufacturing
process gives RHI sticky customer relationships and pricing power. It has over
30 per cent market share in India, which is twice as large as its largest
competitor. With significant capacity addition in the Indian steel industry
over the next five years, there is potential for consistent volume growth.
Following recent acquisitions, the company's margins declined due to lower
utilisation rates at the acquired entities. The management is focused on
ramping up these utilisation levels which should improve the company's
profitability and returns on capital. It also provides the company an entry
into adjacent segments such as cement and non-ferrous metals. These segments
offer an attractive growth opportunity over the medium-term.
Honasa Consumer operates leading personal care brands in India, including
MamaEarth, their flagship brand with a focus on safe and toxin-free products.
The founders have built a high-quality board and hired several experienced
senior management team members. Honasa initially built its brands as a
direct-to-consumer online offering with an innovative positioning around
toxin-free products which were not easily available in India. Subsequently,
they have scaled MamaEarth by adding several SKUs, while also building other
brands. The company successfully expanded into the large offline distribution
network which has helped to scale up its operations substantially. There is a
large growth opportunity offered by the severely under-penetrated personal
care category in India. Honasa earns high gross margins. As its new brands
also gain scale, the business' profitability is likely to be significantly
higher as well.
Sales
We sold 13 holdings during the year. Several Indian holdings including Castrol
India, Mahindra Lifespace, 360 One, Biocon, HeidelbergCement India and
Delhivery were sold after their valuations became expensive following strong
share price appreciation. We had purchased Tisco Financial in Thailand during
the Covid-19 disruption, which had led to significant concerns about the
credit losses in its vehicle finance portfolio. With the management's
conservative approach towards its loan portfolio, Tisco benefited from a
strong recovery and its valuations rose to more expensive levels. As its
long-term growth opportunities are limited, we sold the holding. Indus Motor
Company in Pakistan and Delta Brac in Bangladesh were also disposed of during
the year. Both companies have suffered from the weak economic environment in
their respective countries, as well as regulatory changes such as interest
rate caps in Bangladesh which constrain their ability to maintain their high
profitability levels. We also sold a few smaller holdings, including NHN KCP,
Beijing Capital Airport, Vitasoy International and Luk Fook Holdings which
faced difficult business outlooks, to consolidate the portfolio among higher
conviction positions.
Bought and Subsequently sold
Haitian International is the global leader in the plastic injection moulding
machine industry. It had suffered from the economic downturn in China, which
led to attractive valuations. Its management was incubating new businesses in
the export market, which offered steady growth potential. After our purchase,
its strong performance led to a sharp increase in its valuations. We sold the
holding as its valuations rose to more expensive levels. We had purchased
small positions in LG Household & Healthcare (a Korean cosmetics company
with significant operations in China) and Centre Testing (a leading testing
service provider in China) as their valuations had declined to attractive
levels due to the weak economic environment in their key operating markets.
Both companies continued to suffer from intense competition while customer
demand remained weak. We sold the small positions to consolidate the portfolio
among higher conviction holdings.
4. Ten Largest Investments as at 31 August 2024
Name of Holding Country Sector % of Shareholders' Funds
Colgate-Palmolive (India) India Consumer Staples 6.9
Colgate-Palmolive (India) is the market leader in the oral care segment in
India, with about 50% market share in the toothpaste category. It also has
potential to build a larger presence in segments such as personal care.
DPC Dash China Consumer Discretionary 5.1
DPC Dash is the exclusive franchise operator for Domino's Pizza stores in
China. It is leading the development of the pizza category in China.
Uni-President China China Consumer Staples 5.1
The company operates leading instant noodle and beverage brands in China. Its
management is focused on launching premium products which earn higher margins,
while strengthening the company's distribution in emerging channels.
Philippine Seven Philippines Consumer Staples 5.0
It is the leading convenience store operator in the Philippines, with the
exclusive right to use the 7-Eleven brand in the country. Philippine Seven is
expected to lead the development of the convenience store industry in the
country, as penetration is still at low levels.
JNBY Design China Consumer Discretionary 4.2
JNBY Design is a leading designer apparel brand in China. The company has
built a strong network of loyal members which has driven its growth
consistently.
Century Pacific Food Philippines Consumer Staples 4.1
Century Pacific Food is the largest canned food producer in the Philippines.
The company is gaining traction in emerging categories such as milk and pet
food products which should drive steady growth over the medium term.
Selamat Sempurna Indonesia Consumer Discretionary 3.5
Selamat Sempurna is the leading manufacturer of filters and radiators in
Indonesia. Through its joint venture with Donaldson (based in the United
States of America), it also exports products to global markets. Selamat has
the potential to consolidate the fragmented domestic industry and enter new
segments such as air and water filters, which have a large addressable market.
Blue Star India Materials 3.0
Blue Star operates one of the leading air-conditioner brands in India, which
has been gaining market share consistently. The company executes engineering,
procurement and construction (EPC) projects as well which are expected to grow
with industrial and infrastructure development.
Kansai Nerolac Paints India Industrials 3.0
Kansai Nerolac Paints is a leading paint company with a dominant market share
in automotive paints in India. Under a new CEO, the company has also taken
several initiatives to improve its market position in decorative paints, by
launching several new products, engaging with channel partners and expanding
its distribution.
Metropolis Healthcare India Healthcare 2.9
Metropolis Healthcare is a leading diagnostics testing service provider in
India. The company is leading the consolidation of the highly fragmented
Indian diagnostics industry, as consumers shift towards accredited brands.
5. Sector & Geographical Analysis
Sector Allocation at 31 August 2024
Sector % Shareholder's Funds
2024 2023
Consumer Staples 29.3 29.5
Consumer Discretionary 23.6 22.2
Materials 11.3 16.4
Technology 10.0 5.1
Industrials 8.4 9.3
Healthcare 6.9 5.8
Financials 6.1 10.1
Utilities 2.9 2.2
Real Estate 1.7 4.2
Logistics 1.5 0.3
Net Current Assets 7.9 4.4
Non-Current Liabilities (9.6) (9.5)
Country Allocation at 31 August 2024 (based on geographical area of activity)
Country/Region Scottish Oriental Scottish Oriental MSCI Small Cap¹ MSCI²
2024 2023 2024 2024
% % % %
China 19.3 11.7 8.9 27.9
Hong Kong 2.0 5.1 3.4 4.6
Taiwan 9.1 4.8 25.2 21.5
Greater China 30.4 21.6 37.5 54.0
Indonesia 11.8 17.7 2.0 2.0
Malaysia - - 3.0 1.8
Philippines 10.4 9.6 0.9 0.7
Singapore 1.5 2.6 5.5 3.6
Thailand - 1.6 3.4 1.7
Vietnam 2.3 1.8 - -
South East Asia 26.0 33.3 14.8 9.8
Bangladesh - 0.9 - -
India 40.9 45.2 34.4 22.8
Pakistan - 0.3 - -
Indian Subcontinent 40.9 46.4 34.4 22.8
New Zealand 1.5 - - -
South Korea 2.9 3.8 13.3 13.4
Net Current Assets 7.9 4.4 - -
Non-Current Liabilities (9.6) (9.5) - -
Net Assets 100.0 100.0 100.0 100.0
¹ Morgan Stanley Capital International AC Asia ex Japan Small Cap Index
² Morgan Stanley Capital International AC Asia ex Japan Index
6. Portfolio Positioning & Outlook
Our research efforts have been focused on visiting Scottish Oriental's
portfolio holdings and our broader investable universe across Asian countries.
These visits inform our outlook for the region and form the primary source of
new idea generation. We have observed diverging trends across the various
economies. India, Indonesia and Philippines have steadily recovered since the
disruption of the pandemic. The business outlook here remains positive. In
some instances, this is also reflected in the valuations of some companies in
India being re-rated to expensive levels, which we have used to reduce our
exposure. In China, companies have been weighed down by numerous challenges,
including the impact of the pandemic on consumer sentiment, the decline in the
large property sector, and regulatory interventions across industries ranging
from e-commerce to healthcare. However, these challenges have also provided
opportunities for well-run companies to gain market share. In the instances in
which we find that valuations have declined to attractive levels, we have
selectively used this to add to our holdings as well as initiate new
positions. Taiwan and Korea have witnessed increased investor enthusiasm about
the opportunity provided by artificial intelligence, reflected in the increase
in valuations across several parts of the investment universe. These
opportunities are yet to be seen in the performance of businesses. Our
experience suggests that periods of technological disruption such as this
usually come with low levels of predictability about the eventual winners. We
typically avoid investing behind "themes", as detailed previously. These
challenges have led to fewer investment opportunities for us on a bottom-up
basis in Taiwan and Korea.
The outlook for Scottish Oriental's portfolio is exciting. The portfolio has
been further consolidated among our highest conviction holdings, with the top
20 now comprising 65.7 per cent weight. The median return on equity remains
high at 19 per cent and reflects the strong earnings quality of the holdings.
At a median level, the portfolio's holdings maintain a net cash balance sheet,
which makes them resilient. The portfolio's forecasted growth has moderated
from the high base of recent years, which was due to the reopening of
economies after the pandemic. On a normalised base, the portfolio's holdings
continue to offer attractive growth in the years ahead. The valuations, in the
context of the attractive growth potential and high returns on equity, are at
reasonable levels.
As at 31 August 2017 2018 2019 2020 2021 2022 2023 2024
Weight of top 10 holdings % 25.1% 29.2% 29.6% 31.6% 31.8% 39.2% 38.2% 42.8%
Weight of top 20 holdings % 44.0% 50.8% 50.4% 52.4% 54.8% 63.1% 60.4% 65.7%
Median current year return on equity 13.6% 15.0% 16.3% 15.9% 15.3% 18.8% 19.2% 19.0%
Median 2-year forecast annualised earnings per share growth 14.2% 7.3% 1.5% 8.6% 34.1% 21.2% 17.6% 17.4%
Median forward price to earnings ratio 20.5x 26.8x 15.0x 24.9x 23.0x 17.4x 18.3x 18.9x
FSSA Investment Managers
13 November 2024
Income Statement for the year ended 31 August
2024
2024
2023
Revenue Capital Total* Revenue Capital Total*
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 67,406 67,406 - 22,540 22,540
Income from investments 12,382 - 12,382 8,411 - 8,411
Other income 80 - 80 42 - 42
Investment management fee (2,802) - (2,802) (2,549) - (2,549)
Performance fee - (98) (98) - (2,247) (2,247)
Currency losses - (357) (357) - (713) (713)
Other administrative expenses (777) - (777) (697) - (697)
Net return on ordinary activities before finance costs and taxation 8,883 66,951 75,834 19,580 24,787
5,207
Finance costs (835) - (835) (835) - (835)
Net return on ordinary activities before taxation 8,048 66,951 74,999 19,580 23,952
4,372
Tax on ordinary activities (1,403) (11,440) (12,843) (876) (2,677) (3,553)
Net return attributable to equity 6,645 55,511 62,156 20,399
shareholders 3,496 16,903
Net return per ordinary share 27.74p 231.73p 259.47p 14.19p 68.60p 82.79p
* The total column of this statement is the Profit & Loss Account of the
Company. The revenue and capital columns are supplementary to this and are
prepared under guidance published by the Association of Investment Companies.
There are no items of other comprehensive income, therefore this statement is
the single statement of comprehensive income of the Company.
The Board is proposing a final dividend of 14.0p per share for the year ended
31 August 2024 (2023: 13.0p per share) and a special dividend of 8.0p per
share (2023: nil) which if approved, will be payable on 7 February 2025 to
shareholders recorded on the Company's shareholder register on 10 January
2025.
All revenue and capital items derive from continuing operations.
Summary Statement of Financial Position as at 31 August 2024
2024 2023
£'000 £'000 £'000 £'000
Investments held at fair value through profit or loss 409,758 372,660
Current Assets
Debtors 2,834 1,052
Cash and deposits 37,972 18,089
40,806 19,141
Current Liabilities
Creditors (8,948) (3,572)
(8,948) (3,572)
Net Current Assets 31,858 15,569
Non-Current Liabilities
Deferred tax liabilities on Indian capital gains (8,706) (3,820)
Loan notes (29,842) (29,832)
(38,548) (33,652)
Total Assets less Liabilities 403,068 354,577
Capital and reserves
Ordinary share capital 7,853 7,853
Share premium account 34,259 34,259
Capital redemption reserve 58 58
Capital reserves 349,645 304,661
Revenue reserve 11,253 7,746
Total equity shareholders' Funds 403,068 354,577
Net asset value per share 1709.53p 1,455.58p
Cash Flow Statement for the year ended 31 August 2024
2024 2023
£'000 £'000
(5,751) (3,254)
Net cash outflow from operations before dividends, interest, purchases and
sales of investments
Dividends received from investments 8,894 8,894
Interest received from deposits 80 42
Cash inflow from operations 6,884 5,682
Taxation (1,396) (971)
Net cash inflow from operating activities 5,468 4,711
Investing activities
Purchases of investments (123,398) (124,575)
Sales of investments 159,114 142,938
Capital gains tax paid on the sale of investments (6,554) (2,041)
Net cash inflow from investing activities 29,162 16,322
Financing activities
Interest paid (825) (825)
Equity dividend(s) paid (3,138) (3,457)
Buyback of ordinary shares (10,427) (5,439)
Net cash outflow from financing activities (14,390) (9,721)
Increase in cash and cash equivalents 20,240 11,312
Cash and cash equivalents at the start of the year 18,089 7,490
Effect of currency losses (357) (713)
Cash and cash equivalents at the end of the year* 37,972 18,089
*Cash and cash equivalents represents cash at bank.
Total tax paid for the year ended 31 August 2024 was £7,950,000 (2023:
£3,011,000).
Statement of Changes in Equity
For the year ended 31 August 2024
Ordinary Share premium account Capital
share capital redemption Capital reserves Revenue
reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 August 2023
7,853 34,259 58 304,661 7,746 354,577
Total comprehensive income:
Return for the year - - - 55,511 6,645 62,156
Transactions with owners recognised directly in equity:
Dividend paid in year
- - - - (3,138) (3,138)
Buyback of Ordinary shares
- - - (10,527) - (10,527)
Balance at 31 August 2024
7,853 34,259 58 349,645 11,253 403,068
Statement of Changes in Equity
For the year ended 31 August 2023
Ordinary Share premium account Capital
share capital redemption Capital reserves Revenue
reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 August 2022
7,853 34,259 58 293,325 7,707 343,202
Total comprehensive income:
Return for the year - - - 16,903 3,496 20,399
Transactions with owners recognised directly in equity:
Dividends paid in year
- - - - (3,457) (3,457)
Buyback of Ordinary shares
- - - (5,567) - (5,567)
Balance at 31 August 2023
7,853 34,259 58 304,661 7,746 354,577
Principal Risks and Uncertainties
The Board has carried out a thorough assessment of risks faced by the Company.
Below the Board has set out the principal and emerging risks identified from
the consideration. The Company faces emerging risks from climate change and
global political events. The impact of these on the principal risks is
detailed below, together with a summary of the mitigating action taken to
manage these risks.
Emerging Risks
Risk Mitigation
Environmental, Social and Governance ("ESG")
There is increased awareness of the challenges posed by ESG and climate The investment process is focused on ESG issues and, as set out on page 21 of
change. The increasing volume, short implementation deadlines and lack of the Annual Report, puts a great deal of emphasis on good Governance. Overall
commonality of new ESG regulations issued by multiple regulators, accompanied the specific potential effects of climate change are difficult, if not
by increased regulatory focus and labeling and marketing of investment impossible to predict. The Board and Investment Manager continue to monitor
products as having ESG characteristics increase the perceived risk of material physical and transition risks and opportunities as part of the
greenwashing. investment process.
Social and political events
Economic and political events continue to impact global equity markets. Although not possible to predict the scale of unknown events, the Investment
Particularly relevant for the Company is the poor economic relationship Manager invests in a portfolio of high quality companies which are resilient
between the United States and China. Investment flows have been significantly to market downturns.
impacted; this has the potential to impact supply chains and may affect other
countries in Asia.
The Board and the Investment Manager discuss the resiliency of the portfolio
as part of regular meetings. Please refer to the Investment Managers' report
above for further details
Principal Risks
Risk Mitigation
Investment objective and strategy
An inappropriate or unattractive objective and strategy may have an adverse The Company's investment objective and strategy is monitored by the Board to
effect on Shareholder returns or cause a reduction in demand for the Company's ensure it continues to remain appropriate.
shares, both of which could lead to a widening discount.
The Board conducts annual strategy reviews and considers investment
performance, shareholder views and developments in the marketplace as well as
emerging risks which could impact the Company regularly throughout the year.
The Board reviews changes to the shareholder register at quarterly Board
meetings and engages the Administrator to continually monitor the discount at
which the Company's shares trade, reporting regularly to the Board and buying
back shares when appropriate.
No change to this risk
Investment performance
Poor investment performance may have an adverse effect on Shareholder returns. The Board reviews investment performance at each quarterly Board meeting. The
Investment Manager reports on the Company's performance, transaction activity,
individual holdings, portfolio characteristics and outlook.
In extreme circumstances, poor investment performance could lead to the
Company breaching loan covenants.
The Investment Manager is formally appraised at least annually by the
Management Engagement Committee.
The Board reviews compliance with the Company's loan covenants on a quarterly
basis.
No change to this risk
Financial and Economic
The Company's investments are impacted by financial and economic factors The Board regularly reviews and agrees policies for managing market price
including market prices, interest rates, foreign exchange rates, liquidity and risk, interest rate risk, foreign currency risk, liquidity risk and credit
credit which could cause losses to the investment portfolio. risk. These are explained in detail in note 16 to the financial statements on
pages 64 to 68 of the Annual Report.
No change to this risk
Share price discount/premium to net asset value
A significant share price discount or premium to the Company's net asset value
per share, or related volatility, could lead to high levels of uncertainty or
speculation and the potential to reduce investor confidence. The Board has established share issuance and share buyback processes to assist
in the moderation of share price premium and discount to net asset value.
Shareholders are kept informed of developments as far as practicable and are
encouraged to attend briefings, such as the Company's Annual General Meeting,
No change to this risk to understand the implementation of the investment policy to achieve the
Company's objectives.
Operational
The Company is reliant on third party service providers including FSSA The Audit Committee formally reviews each service provider at least annually,
Investment Managers as Investment Manager, Juniper Partners as Company considering their reports on internal controls.
Secretary and Administrator, J P Morgan as Depositary and Custodian and
Computershare as Registrar. Failure of the internal control systems of these
third parties could result in inaccurate information being reported or risk to
the Company's assets. Further details of the Company's internal control and risk management system
is provided on page 36 and 37 of the Annual Report.
No change to this risk
Regulatory
The Company operates in a regulatory environment. Failure to comply with s1158 Compliance with relevant regulations is monitored on an ongoing basis by the
of the Corporation Tax Act 2010 could result in the Company losing investment Company Secretary and Investment Manager who report regularly to the Board.
trust status and being subject to tax on capital gains. Failure to comply with
other regulations could result in financial penalties or the suspension of the
Company's listing on the London Stock Exchange.
The Board monitors changes in the regulatory environment and receives
regulatory updates from the Company Secretary, Lawyers and Auditors as
relevant.
No change to this risk
Statement of Directors' Responsibilities in Respect of the Annual Financial
Report
In accordance with the Disclosure Guidance and Transparency Rules, we confirm
that to the best of our knowledge:
· the Financial Statements, prepared in accordance
with applicable United Kingdom accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the
Company; and
· the Strategic Report and the Directors' Report
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 and
emerging risks and uncertainties that the Company faces.
In addition, each of the Directors considers 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 performance, position,
business model and strategy.
Going Concern
In assessing the Company's ability to continue as a going concern the
Directors have considered the Company's investment objective detailed on page
24 of the Annual Report, risk management policies detailed above, the nature
of its portfolio and expenditure projections and believe that the Company has
adequate resources, an appropriate financial structure and suitable management
arrangements in place to continue in operational existence for the foreseeable
future and for at least 12 months from the date of the Annual Report. In
addition, the Board has had regard to the Company's investment performance
(see above), the price at which the Company's shares trade relative to their
NAV (see above) and ongoing investor interest in the continuation of the
Company (including feedback from meetings and conversations with
Shareholders).
The Directors performed an assessment of the Company's ability to meet its
liabilities as they fall due. In performing this assessment, the Directors
took into consideration the following factors:
· cash and cash equivalents balances and the portfolio of readily
realisable securities which can be used to meet short-term funding
commitments;
· the ability of the Company to meet all of its liabilities and
ongoing expenses from its assets;
· revenue, operating and finance cost forecasts for the forthcoming
year;
· continued adherence to the loan covenants;
· the ability of third-party service providers to continue to
provide services; and
· three potential downside scenarios including stress testing the
Company's portfolio for a 30% fall in the value of the investment portfolio; a
50% fall in dividend income; and a similar level of share buybacks to the
current year. The cumulative impact of these three downside scenarios would
leave the Company with a positive net cash position.
Based on this assessment, the Directors are confident that the Company will
have sufficient funds to continue to meet its liabilities as they fall due for
at least 12 months from the date of approval of the financial statements, and
therefore have prepared the financial statements on a going concern basis.
Related Party Transactions
The Directors' fees for the year are detailed in the Directors' Remuneration
Report on pages 39 to 40 of the Annual Report. An amount of £28,500 was
outstanding to the Directors at the year end (2023: £20,800). No Director has
a contract of service with the Company. During the year no Director had any
related party transactions requiring disclosure under section 412 of the
Companies Act 2006.
The management and performance fees for the year are detailed in note 2 to the
Financial Statements and amounts payable to the Investment Manager at year end
are detailed in note 10 to the Financial Statements. The Investment Management
team's individual shareholdings in the Company are set out on page 5 of the
Annual Report.
Alternative Investment Fund Managers Directive (unaudited)
Under the Alternative Investment Fund Managers Directive the Company is
required to publish maximum exposure levels for leverage on a 'Gross' and
'Commitment' basis. The process for calculating exposure under each method is
largely the same, except that, where certain conditions are met, the
Commitment method allows instruments to be netted off to reflect 'netting' or
'hedging' arrangements and the Company's leverage exposure would then be
reduced. The AIFM set maximum leverage levels of 3.0 and 1.7 times the
Company's net asset value under the 'Gross' and 'Commitment' methods
respectively. At the Company's year end the levels were respectively 1.04 and
1.11 times the Company's net asset value.
The Alternative Investment Fund Managers Directive requires the AIFM to make
available certain remuneration disclosures to investors. This information is
available from the AIFM on request.
Notes:
1. The Scottish Oriental Smaller Companies Trust plc is a public company
limited by shares, incorporated and domiciled in Scotland, and carries on
business as an investment trust.
These Financial Statements have been prepared under the historical cost
convention (modified to include the revaluation of fixed asset investments
which are recorded at fair value) and in accordance with the Companies Act
2006, UK Generally Accepted Accounting Practice ('UK GAAP'), including FRS
102, and the Statement of Recommended Practice "Financial Statements of
Investment Trust Companies and Venture Capital Trusts" issued in July 2022
(the 'SORP'). These Financial Statements are prepared on a going concern
basis.
All of the Company's operations are of a continuing nature.
Estimates and judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.
There are two areas of significant judgement -
· The Directors use their judgement in selecting the appropriate
rate of capital gains tax to apply to unrealised gains on Indian investments.
The Directors have chosen to apply the long-term capital gains tax rate on
unrealised gains on Indian investments. Please refer to note 5 (a) on page 59
of the Annual Report for further details.
· The Directors use their judgement in recognising and classifying
special dividends received as either revenue or capital in nature. All special
dividends received in the year have been treated as revenue income.
The accounts have also been prepared on the assumption that approval as an
investment trust will continue to be granted.
The functional and reporting currency of the Company is pounds sterling as
this is the currency of the Company's share capital and the currency in which
most of its shareholders operate.
2. Fair Value Hierarchy
Investments in securities are financial assets designated at fair value
through profit or loss on initial recognition. In accordance with FRS102,
these investments are analysed using the fair value hierarchy described below.
Short term balances are excluded as their carrying value at the reporting date
approximates their fair value.
The levels are determined by the lowest level of input that is significant to
the fair value measurement for the individual investment in its entirety as
follows:
Level 1 - investments with prices quoted in an active market;
Level 2 - investments whose fair value is based directly on observable current
market prices or is indirectly being derived from market prices; and
Level 3 - investments whose fair value is determined using a valuation
technique based on assumptions that are not supported by observable current
market data.
The Company held the following categories of financial instruments as at 31
August 2024:
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Listed equities 385,316 24,442 - 409,758
Total 385,316 24,442 - 409,758
The Company held the following categories of financial instruments as at 31
August 2023:
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Listed equities 313,937 58,723 - 372,660
Total 313,937 58,723 - 372,660
The above table provides an analysis of financial assets and financial
liabilities based on the fair value hierarchy described below. Short term
balances are excluded from the table as their carrying value at the reporting
date approximates to their fair value.
3. Cashflow reconciliation
2024 2023
Reconciliation of net return on ordinary activities before finance costs and £'000 £'000
taxation to net cash outflow from operations before dividends, interest,
purchases and sales
Net return on activities before finance costs and taxation 75,834 24,787
Net gains on investments (67,406) (22,540)
Currency losses 357 713
Dividend income (12,382) (8,411)
Interest income (80) (42)
(Decrease)/increase in creditors (2,070) 2,300
Increase in debtors (4) (61)
Net cash outflow from operations before dividends, interest, purchases and (5,751) (3,254)
sales
4. These are not statutory accounts in terms of Section 434 of the Companies
Act 2006. Full audited accounts for the year to 31 August 2024 will be sent to
shareholders in November 2024 and and copies will be available from the
Company's website www.scottishoriental.com (http://www.scottishoriental.com)
and the Company Secretary's office at 28 Walker Street, Edinburgh, EH3 7HR.
The audited accounts for the year ended 31 August 2024 will be lodged with the
Registrar of Companies.
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