Scottish Oriental - Half-year Report
09/04/2024 07:00
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RNS Number : 7501J Scottish Oriental Smlr Co Tst PLC 09 April 2024
THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC
Interim results for the six months to 29 February 2024
(Extracted from the Interim Report)
The Board of The Scottish Oriental Smaller Companies Trust plc announces the
results for the six months to 29 February 2024.
Financial Highlights
Total Return Performance (Unaudited) for the six months to 29 February 2024
Net Asset Value per share 8.3% MSCI AC Asia ex Japan Small Cap 6.8%
Index (£)
Share Price 3.8% MSCI AC Asia ex Japan Index (£) 3.7%
FTSE All-Share Index (£) 3.9%
Summary Data (Unaudited) at 29 February 2024
Shares in Issue 23,962,351 Shareholders' Funds £371.34m
Net Asset Value per share 1,549.68p Market Capitalisation £313.91m
Share Price 1,310.00p Share Price Discount to 15.5%
Net Asset Value
Corporate Objective
The investment objective of The Scottish Oriental Smaller Companies Trust plc
(''Scottish Oriental'', ''the Company'' or ''the Trust'') is to achieve
long-term capital growth by investing in mainly smaller Asian quoted companies
with market capitalisations of below US$5,000m, or the equivalent thereof, at
the time of investment. For investment purposes, this includes Australasia,
the Indian sub-continent and Japan.
This is an abridged version of Scottish Oriental's investment policy and
objective. A full statement of Scottish Oriental's investment policy can be
found on page 25 of the Annual Report and Accounts* for the year ending 31
August 2023 (''the Annual Report and Accounts'').
*The Company's Annual Report and Accounts for the year ending 31 August 2023
can be found on the Company's website at www.scottishoriental.com.
Interim Management Report
Investment Performance
Over the six months ending 29 February 2024, Scottish Oriental's net asset
value ("NAV") per share increased by 8.3 per cent in total return terms,
while the MSCI AC Asia ex Japan Small Cap Index increased by 6.8 per cent on
the same basis. The Company's share price increased by 3.8 per cent in total
return terms. The biggest contributors to performance were Scottish Oriental's
holdings in India and Taiwan. The exposure to Indonesia and Hong Kong were the
biggest detractors from performance. The Company's shares traded at a discount
ranging from 8.6 per cent to 16.5 per cent, which reflects the cautious
sentiment of investors. The discount to NAV stood at 15.5 per cent on 29
February 2024.
Dividend
A final dividend of 13.0p was paid on 12 January 2024 for the year ended 31
August 2023 (31 August 2022: 14.0p per share (made up of a final dividend of
13.0p and a special dividend of 1.0p)). Based on the current forecast it is
likely that, barring any unforeseen circumstances, the final dividend will be
at least maintained for the year ended 31 August 2024.
Review
Asian stock markets, with the exception of China, were strong over the six
months ending 29 February 2024. The recent stabilisation in global inflation
rates and the continued resilience of the global economy despite interest rate
increases has led to optimism among investors. The possibility of interest
rate reductions by global central banks in the coming periods is being viewed
positively.
Five new positions were initiated during the period. The decline in valuations
in markets like China has led to some attractive bottom-up opportunities. This
includes Haitian International, which is the largest plastic injection
moulding machine manufacturer in China. The company serves a diversified group
of customers across industries. The strong growth in electric vehicle
manufacturing, as well as Haitian's expansion into markets outside China are
likely to drive an improvement in its growth prospects. Cloud Music is the
second largest music platform in China with over 200 million active monthly
users. The company operates in an attractive duopoly structure with a loyal
user base. It has the potential to increase its profitability levels
materially as it expands its share of paying users.
Mainfreight is a leading global freight forwarding and logistics service
provider, headquartered in New Zealand. The company has a dominant position in
the Australia and New Zealand markets, which provide strong cash flows to
expand its presence in Europe and the United States of America where it has
the opportunity to scale up its business substantially. Honasa Consumer
operates several personal care brands in India, including MamaEarth, its
flagship brand with a focus on safe and toxin-free products. The company
initially began building its brands as a direct to consumer online offering.
It has successfully expanded into the large offline distribution network and
has the potential to grow rapidly in the underpenetrated personal care
category in India.
We had also purchased a small position in LG Household & Healthcare ("LG
H&H"), a large cosmetics, beverage and household product company in South
Korea. The company has a large exposure to the Chinese cosmetics market. We
observed increasing levels of competitive intensity in China, which was likely
to impact LG H&H's market share and profitability over the medium-term. We
sold the small position due to these concerns.
Five holdings were sold after strong share price performance, which had led to
more expensive valuations. This included Biocon, a global pharmaceuticals
manufacturer headquartered in India, Delhivery, the largest third party
logistics service provider in India, HeidelbergCement India, a leading cement
manufacturer, Mahindra Lifespace, a real estate developer owned by the well
reputed Mahindra group and Hisense Home Appliances, the dominant central
air‑conditioning manufacturer in China.
We also sold Beijing Capital Airport and Indus Motor Company during the
period. These businesses were affected by regulatory changes as well as the
weak macro-economic environment prevailing in China and Pakistan,
respectively. These disposals were also aimed at consolidating the portfolio
among the highest conviction holdings.
Outlook
Over the last four years, Asian economies have faced several headwinds
including the impact of the Covid-19 pandemic as well as the rise in inflation
and interest rates. The recovery in economic sentiment is uneven across the
region. Countries such as India and Indonesia have recovered strongly since
the initial impact of the pandemic. However, the recovery in China and Hong
Kong has been subdued, due to extended lockdowns as well as geopolitical
tensions, regulatory interventions across a number of industries and a long
overdue property market downturn. During this period of disruption across
Asian countries, Scottish Oriental's holdings have gained market share from
their weaker competitors. They are likely to emerge with a larger share of
their respective categories' profit pools as the operating environment
improves. We are excited about the portfolio's prospects, given the solid
balance sheets of the portfolio's holdings, their strong growth potential and
attractive valuations.
Vinay Agarwal
Sreevardhan Agarwal
FSSA Investment Managers
8 April 2024
Sustainability and ESG Integration
As long-term investors, the FSSA team is focused on identifying companies that
are intelligently driving sustainable outcomes. A key part of its philosophy
is seeking founders and management teams with high governance standards and
whose interests are well-aligned with minority shareholders. These are
franchises with the ability to deliver sustainable and predictable returns
even in down markets, comfortably in excess of the cost of capital.
Every member of the FSSA investment team integrates ESG into their bottom-up
research as a fundamental part of an assessment of quality. This consideration
gives a strong indication as to whether management are truly good long-term
stewards. By evaluating ESG factors, it is possible to assess what might
improve or even destroy the investment case. The team closely engage and track
management's response to ESG concerns including analysing targets and
supporting KPIs.
Case Study: Beyond a Tick-Box Exercise
Kansai Nerolac Paints ("Kansai Nerolac") is a leading paints company in India,
75%-owned by Kansai Paints of Japan. Over the last two decades, it has been
dominant in automotive coatings with over 60% domestic market share. The
company is also one of the largest manufacturers of decorative wall paints
with the iconic Nerolac brand, which has been present in India since the
1950s.
FSSA have been shareholders for most of the last decade and hold the
management team in high regard for the way they have built the business over
time. We believe their track record of growing consistently and generating
significant operating cash flows is commendable - over the past 20 years, the
company has grown sales nearly eleven-fold while generating returns on capital
employed of 24% on average.
As part of our regular portfolio monitoring and reviews, we recently sought to
improve our understanding of Kansai Nerolac's sustainability challenges and
opportunities, as well as their approach to the subject. As we compared its
data on Scope 1 and 2 emissions intensity, water intensity and its share of
renewable energy versus some listed peers, we observed that it was lagging on
a few metrics. As the company has historically been a pioneer on
sustainability initiatives, including being the first company to produce
lead-free decorative paints in India, we decided to write a letter to the
management team to seek clarity on the current situation.
We received a prompt and proactive response from the company, which
highlighted the difference in Kansai Nerolac's business mix compared to peers.
In particular, a significant proportion of its business is industrial
automotive paints which by nature are more energy intensive. In that context,
the company's emissions intensity was only marginally higher than peers,
despite it not being a like-for-like comparison. Further, the management team
wanted to measure and validate its current environmental impact against global
frameworks. Although this undertaking would take longer, the result would be
more concrete plans towards its long-term decarbonisation goals. The company
has now undertaken several short-term and long-term decarbonisation
initiatives and is the only paints company in India to have targets verified
by the Science Based Targets initiative ("SBTi") across Scope 1, 2 and 3
emissions.
Overall, we were encouraged by the company's response. While its current
emissions intensity and renewable energy consumption metrics appear less
impressive than peers, the direction of travel is positive. Kansai Nerolac has
chosen to approach sustainability in a comprehensive, long-term manner rather
than simply ticking the boxes. We look forward to continuing our dialogue with
the management team in the coming years and tracking the progress of their
climate-related initiatives.
Income Statement for the Six Months to 29 February 2024
Six months to Six months to
29 February 2024 28 February 2023
(unaudited) (unaudited)
Revenue Capital Total* Revenue Capital Total*
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 29,007 29,007 - 6,850 6,850
Income from investments 2,930 - 2,930 2,257 - 2,257
Other income 46 - 46 8 - 8
Investment management fee (1,346) - (1,346) (1,251) - (1,251)
Performance fee (note 7) - - - - (1,993) (1,993)
Currency losses - (72) (72) - (362) (362)
Other administrative expenses (395) - (395) (356) - (356)
Net return on ordinary activities
before finance costs and taxation 1,235 28,935 30,170 658 4,495 5,153
Finance costs (406) - (406) (417) - (417)
Net return on ordinary activities before taxation 241
829 28,935 29,764 4,495 4,736
Tax on ordinary activities (note 3) (254) (4,412) (4,666) (16) 155 139
Net return attributable to equity
shareholders 575 24,523 25,098 225 4,650 4,875
Net return per ordinary share 2.38p 101.51p 103.89p 0.91p 18.82p 19.73p
* The total column of this statement is the Profit & Loss Account of the
Company. The revenue and capital columns are supplementary to this and are
prepared under guidance published by the Association of Investment Companies.
There are no items of other comprehensive income. This statement is,
therefore, the single statement of comprehensive income of the Company.
All revenue and capital items derive from continuing operations.
Statement of Financial Position as at 29 February 2024
At 29 At 31
February 2024 August 2023
(unaudited) (audited)
£'000 £'000
FIXED ASSET - EQUITY INVESTMENTS
Bangladesh 2,356 3,191
China 51,469 41,623
Hong Kong 17,204 17,958
India 160,154 160,435
Indonesia 55,717 62,642
New Zealand 2,446 -
Pakistan - 1,126
Philippines 33,591 34,008
Singapore 7,394 9,296
South Korea 15,596 13,413
Taiwan 26,787 16,762
Thailand 5,489 5,747
Vietnam 8,411 6,459
Total Equities 386,614 372,660
Net Current Assets 20,433 15,569
Non-Current Liabilities (note 3) (35,708) (33,652)
Total Assets less Liabilities 371,339 354,577
CAPITAL AND RESERVES
Ordinary share capital 7,853 7,853
Share premium account 34,259 34,259
Capital redemption reserve 58 58
Capital reserves 323,986 304,661
Revenue reserve 5,183 7,746
Shareholders' Funds 371,339 354,577
Net asset value per share 1,549.68p 1,455.58p
Cash Flow Statement for the Six Months to 29 February 2024
Six months to Six months to
29 February 28 February 2023
2024
(unaudited) (unaudited)
Note £'000 £'000
Net cash outflow from operations before dividends, interest, purchases and
sales of investments
9 (4,074) (1,730)
Dividends received from investments 3,340 3,187
Interest received from deposits 46 8
Cash (outflow)/inflow from operations (688) 1,465
Taxation (241) (131)
Net cash (outflow)/inflow from operating activities (929) 1,334
Investing activities
Purchases of investments (57,665) (45,827)
Sales of investments 70,661 56,905
Capital gains tax paid on the sale of investments (2,359) (922)
Net cash inflow from investing activities 10,637 10,156
Financing activities
Equity dividend paid (3,138) (3,457)
Buyback of Ordinary shares (5,159) (1,530)
Interest paid (415) (413)
Net cash outflow from financing activities (8,712) (5,400)
Increase in cash and cash equivalents 996 6,090
Cash and cash equivalents at the start of the period 18,089 7,490
Effect of currency losses (72) (362)
Cash and cash equivalents at the end of the period* 19,013 13,218
*Cash and cash equivalents represents cash at bank
Statement of Changes in Equity
For the six months ended 29 February 2024
Share Premium Capital
Share Capital Account Redemption Capital Revenue
Reserve Reserves 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 period - - - 24,523 575 25,098
Transactions with owners recognised directly in equity:
Dividend paid in the period (note 6) - - - - (3,138) (3,138)
Buyback of Ordinary shares - - - (5,198) - (5,198)
Balance at 29 February 2024
7,853 34,259 58 323,986 5,183 371,339
For the six months ended 28 February 2023
Share Premium Capital
Share Capital Account Redemption Capital Revenue
Reserve Reserves 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 period - - - 4,650 225 4,875
Transactions with owners recognised directly in equity:
Dividends paid in the period (note 6) - - - - (3,457) (3,457)
Buyback of Ordinary shares - - - (1,530) - (1,530)
Balance at 28 February 2023
7,853 34,259 58 296,445 4,475 343,090
Notes to Accounts
1. The condensed Financial Statements for the six months
to 29 February 2024 comprise the Income Statement, Statement of Financial
Position, Cash Flow Statement and Statement of Changes in Equity, together
with the notes set out below. They have been prepared in accordance with FRS
104 'Interim Financial Reporting', UK Generally Accepted Accounting Principles
("UK GAAP") and the AIC's Statement of Recommended Practice issued in July
2022.
2. The position as at 31 August 2023 on page 9 is an
abridged version of that contained in the Annual Report and Accounts, which
received an unqualified audit report and which have been filed with the
Registrar of Companies. This Interim Report has been prepared under the same
accounting policies adopted for the year to 31 August 2023.
3. The Company has incurred £2,359,000 of capital gains
tax on the sale of investments in the six months to 29 February 2024 (six
months to 28 February 2023: £946,000). The Company has recognised a deferred
tax liability of £5,873,000 (31 August 2023: £3,820,000) on capital gains
which may arise if Indian investments are sold.
4. The return per ordinary share figure is based on the
net profit for the six months to 29 February 2024 of £25,098,000 (six months
to 28 February 2023: net profit of £4,875,000) and on 24,148,104 (six months
to 28 February 2023: 24,709,483) Ordinary shares, being the weighted average
number of Ordinary shares in issue during the respective periods.
5. At 29 February 2024 there were 23,962,351 Ordinary
shares in issue and 7,451,312 Ordinary shares held in Treasury (31 August
2023: 24,359,851 in issue and 7,053,812 held in Treasury). During the six
months to 29 February 2024, the Company bought back 397,500 Ordinary shares
(year to 31 August 2023; the Company bought back 457,128 Ordinary shares).
6. Dividends
At At
29 February 28 February
2024 2023
£'000 £'000
Amounts recognised as distributions in the period:
Final dividend of 13.0p (2022 - 13.0p) 3,138 3,210
Special dividend nil (2022 - 1.0p) - 247
3,138 3,457
7. Under the terms of the Investment Management
Agreement, an annual performance fee may be payable to the Investment Manager
at the end of the year. The total fee payable to the Investment Manager is
capped at 1.5% per annum of the Company's net assets. As at 29 February 2024,
the estimated performance fee for the year ending 31 August 2024 is £nil.
8. Investments in securities are financial assets
designated at fair value through profit or loss on initial recognition. In
accordance with FRS 102 and FRS 104, these investments are analysed using the
fair value hierarchy described below. Short-term balances are excluded as
their carrying value at the reporting date approximates to their fair value.
The levels are determined by the lowest (that is, the least reliable or least
independently observable) level of input that is significant to the fair value
measurement for the individual investment in its entirety as follows:
Level 1 - Investments with prices quoted in an active market;
Level 2 - Investments whose fair value is based directly on observable current
market prices or is indirectly being derived from market prices; and
Level 3 - Investments whose fair value is determined using a valuation
technique based on assumptions that are not supported by observable current
market prices or are not based on observable market data.
Financial Assets at Fair Value Through Profit or Loss
29 February 2024 31 August 2023
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
£000 £000 £000 £000 £000 £000 £000 £000
Listed investments 347,220 39,394 - 386,614 313,937 58,723 - 372,660
Total 347,220 39,394 - 386,614 313,937 58,723 - 372,660
Listed investments included in fair value Level 1 are actively traded on
recognised stock exchanges and the fair value of these investments has been
determined by reference to their quoted prices at the reporting date.
Listed investments included in Level 2 are deemed to be illiquid. An
investment is categorised as illiquid when historic trading data indicates it
would take more than 250 days to liquidate. The fair value of these
investments has been determined by reference to their quoted prices at the
reporting date.
9. Reconciliation of total return on ordinary
activities before finance costs and tax to net cash outflow before dividends,
interest, purchases and sales
Six months to Six months to
29 February 28 February
2024 2023
£'000 £'000
Net return on activities before finance costs and taxation 30,170 5,153
Net gains on investments (29,007) (6,850)
Currency losses 72 362
Dividend income (2,930) (2,257)
Interest income (46) (8)
(Decrease)/increase in creditors (2,228) 1,989
Increase in debtors (105) (119)
Net cash outflow from operations before dividends,
interest, purchases and sales of investments (4,074) (1,730)
Principal Risks and Uncertainties
The principal and emerging risks faced by the Company are; investment
objective and strategy, investment performance, financial and economic, share
price discount/premium to net asset value, operational and regulatory. These
risks have not changed since the publication of the Annual Report and
Accounts. The principal and emerging risks and uncertainties facing the
Company, together with a summary of the mitigating action the Board takes to
manage these risks, are set out on pages 31 and 32 of the Annual Report and
Accounts. The Investment Manager monitors portfolio liquidity and manages this
to ensure the Company maintains sufficient levels of liquidity to operate
effectively. Scottish Oriental's investment portfolio is exposed to market
price fluctuations and currency fluctuations which are monitored by the
Investment Manager. The Company is also exposed to minimal interest rate risk
on interest receivable from bank deposits and interest payable on bank
overdraft positions.
Going Concern
After making enquiries and bearing in mind the nature of the Company's
business and assets, the Directors believe that the Company has adequate
resources to continue operating for at least twelve months from the date of
approval of the condensed financial statements. For this reason, they continue
to adopt the going concern basis in preparing the financial statements.
Directors' Responsibility Statement
The Directors are responsible for preparing the half-yearly financial report
in accordance with applicable law and regulations. The Directors confirm that,
to the best of their knowledge:
(a) the condensed set of financial statements within the half-yearly financial
report, prepared in accordance with Financial Reporting Standard 104 (Interim
Financial Reporting), gives a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
(b) the Interim Management Report includes a fair review of the information
required by 4.2.7R of the Financial Conduct Authority's Disclosure Guidance
and Transparency Rules (important events that have occurred in the first six
months of the Company's financial year, together with their effect on the
half-yearly financial statements to 29 February 2024 and a description of the
principal risks and uncertainties for the remaining six months of the
financial year). Rule 4.2.8R requires information on related party
transactions. No related party transactions have taken place during the first
six months of the financial year that have materially affected the financial
position of the Company during that period and there have been no changes in
the related party transactions described in the last Annual Report and
Accounts that could do so.
The half-yearly report for the six months to 29 February 2024 comprises the
Interim Management Report, the Directors' Responsibility Statement and a
condensed set of financial statements and has not been audited or reviewed by
auditors pursuant to the Auditing Practices Board guidance on Review of
Interim Financial Information.
By order of the Board
Jeremy Whitley
Chairman
8 April 2024
· The terms of the half-yearly financial report and this
announcement were approved by the Board on 8 April 2024.
· Copies of the half-yearly financial report will be posted to
shareholders shortly and will be available thereafter on the Company's
website: www.scottishoriental.com and from the Company Secretary's office at
28 Walker Street, Edinburgh EH3 7HR.
Enquiries:
Juniper Partners Limited, Edinburgh, +44 (0)131 378 0500
8 April 2024
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