Dunedin Inc.Growth - Half-year Report

DUNEDIN INCOME GROWTH INVESTMENT TRUST PLC

HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 31 JULY 2025

Legal Entity Identifier (LEI):  549300PPXLZPR5JTL763

Investment Objective

The Company's objective is to achieve growth of income and capital from a high quality portfolio invested mainly in companies listed or quoted in the United Kingdom or companies having significant operations and/or exposure to the United Kingdom that meet the Company's sustainable and responsible investing approach.

Benchmark

The Company's benchmark is the FTSE All-Share Index (total return). Performance is measured on a net asset value total return basis over the long-term.

Performance Highlights

For further information, please contact:

Ben Heatley

Head of Closed End Fund Sales

Aberdeen Group plc

ben.heatley@aberdeenplc.com

Financial Highlights and Calendar

Financial Highlights

Calendar

Chairman's Statement

Highlights

·      Increased total dividend of at least 19.10p per share for the year ending 31 January 2026, representing an increase of 34.5% compared to the previous year.

·      Notional dividend yield of 6.0% on NAV and a share price dividend yield of 6.6%.

·      Share price total return for the six months of 7.1%.

·      NAV total return for the period of 3.1%.

·      Narrowing of discount to 8.4% at the period end.

Review of the Period

A key development during the period was the announcement by the Board of a new dividend policy, providing an increase of 34.5% in the level of dividend and a share price dividend yield of 6.6%. Full details of the new policy are contained in the Dividend section below. The Board has made these changes in the expectation that they will lead, over time, to an increase in demand for the Company's shares.

The net asset value ("NAV") total return for the six months ended 31 July 2025 was 3.1%, underperforming the return of 7.5% from the benchmark, the FTSE All-Share Index. The share price total return for the period was 7.1%, closer to the benchmark return, reflecting a narrowing of the discount to 8.4% at the end of the period.

Despite a period of significant geopolitical events, most notably the imposition of trade tariffs by the US government, the UK equity market delivered a healthy return. It is disappointing to note, however, that the NAV total return generated by the Company fell short of this. The majority of this underperformance took place in the last month of the period when the portfolio struggled to match the strong return from the market, which returned nearly 4%. A significant factor in the underperformance overall was the Investment Manager's Quality investment style which remained out of favour with investors, particularly in the second half of the period.

A more detailed review of performance for the period is contained within the Investment Manager's Review.

Earnings

Revenue earnings per share for the period were 7.82p. This compares to 8.92p for the first half of last year, a reduction of 12.3%. This was mostly due to a lower level of option writing over this period compared to last year. In pence per share terms, option writing was lower by 0.64p compared to the first six months of last year. In addition, last year's income for the first half of the year was boosted by the timing of dividend payments. Dividend payments by the underlying portfolio companies have remained incrementally positive.

Dividend

As you may be aware, on 9 September, the Board announced that it will significantly increase dividend distributions to shareholders. For the year ending 31 January 2026, it is the Board's intention that the Company's dividend will be increased to a minimum of 6.0% of the NAV as at 31 July 2025 (being the most recent financial quarter end), offering an attractive yield compared to cash, the FTSE All-Share Index and peers in the UK Equity Income sector. This amounts to a total dividend for the year of at least 19.10p per share, an increase of 34.5% compared to the total dividend of 14.20p for the year ended 31 January 2025. Based on the share price of 288p as at 24 September 2025, this represents a notional dividend yield of 6.6%.

Furthermore, it is the Board's intention to continue with a progressive dividend policy with growth in absolute terms in future years from the increased level, and building on the successful long-term track record of dividend increases. The Company will fund the dividend cost from a combination of revenue and capital generation thus utilising one of the key benefits of the investment company structure.

The rationale for the change is that, over the long-term, income return through dividends has been a significant proportion of the total return generated by the Company, and the Board is very aware of the importance of regular and reliable dividends to shareholders.

The Board also has observed the significant change that has taken place in the distribution policy of the businesses in which the Company invests. This has seen companies increasingly favour share buy backs over dividend distributions. The net buy back yield alone on the FTSE All-Share Index at the end of 2024 was around 2%, having been close to zero in 2014. At the same time, the total Sterling amount of dividend payments expected to be made by UK companies in 2025 is only marginally higher than it was a decade earlier.

Alongside this, the Board notes the substantial increase in interest rates since late 2021 which has made holding cash a more attractive proposition than was the case for the period following the global financial crisis. Today, cash rates offer a premium yield comparable with the dividend yield available on the FTSE All-Share Index (3.4%).

The Board does not expect significant changes to the investment process as a result of the new dividend policy, with the Company continuing to focus on high-quality companies and long-term capital and income growth, supported by a disciplined investment approach, together with an integrated sustainability focus. It will, however, give the Company's portfolio managers additional flexibility to focus on delivering total returns.

A first interim dividend in respect of the year ending 31 January 2026, of 3.20p per share, was paid on 29 August 2025 and the Board has already declared a second interim dividend of 4.25p per share, payable on 28 November 2025 to shareholders on the register on 7 November 2025, with an ex-dividend date of 6 November 2025.

The remaining dividends for the financial year are expected to comprise a further interim dividend of 4.25p per share payable in February 2026, and a final dividend of at least 7.40p per share payable in May 2026. Formal dividend announcements will be made in advance of each of these payments. 

For future financial years, the Board anticipates three equal interim dividend payments followed by a balancing final dividend.

Gearing

The Board believes that the sensible use of modest financial gearing, whilst amplifying market movements in the short term, will enhance both capital and income returns for shareholders over the long term. We also recognise the benefit that having a reasonable proportion of long-term fixed rate funding provides to managing the Revenue Account, through greater certainty over financing costs.

The Company currently employs two sources of gearing, a £30 million loan note which matures in 2045, and a £30 million multi-currency credit facility of which £19.5 million was drawn at the period end.

With debt valued at par, the Company's net gearing decreased from 10.9% to 7.1% during the period, due to a higher level of cash balances being held at the period end.

The Board believes this remains a relatively conservative level of gearing and the undrawn part of the credit facility provides the Company with financial flexibility should opportunities to deploy additional capital arise.

Discount and Share Buy Backs

The share price total return for the period was 7.1%, higher than the 3.1% NAV total return, reflecting a narrowing of the discount from 11.6% as at 31 January 2025 to 8.4% at the end of the period (on a cum-income basis with borrowings stated at fair value).  The Company continued to buy back shares during the period, with 7.8 million shares bought back at a cost of £22.7 million and an average discount to NAV of 8.8%. This provided an estimated enhancement of 0.5% to the NAV per share with more than 70% of the buy back activity occurring in the first three months of the period. 

Board Succession

As stated in the Annual Report, we were pleased to announce the appointment of Arun Kumar Sarwal as an independent non-executive Director and Chair of the Audit Committee, with effect from the 1 February 2025. Both David Barron and Jasper Judd retired from the Board at the AGM in May, at which point I succeeded David as Chairman. We are therefore currently a Board of four Directors.

Outlook

The Board is aware that shareholders will have noted the Company's underperformance against the benchmark index for the period, which has extended an unwelcome recent run. However, the Directors recognise this has been against a market backdrop which has been severely unfavourable for the Investment Manager's distinct Quality/Growth investment style. Furthermore, although there have been challenges with a small number of the holdings in the portfolio, the majority are trading well and have delivered robust earnings and share price performances in line with the Investment Manager's expectations.

With a return to a more favourable market environment (perhaps driven by an economy struggling to grow and the need for further interest rate cuts), and combined with the new dividend policy, the Board expects that additional demand for the Company's shares, especially from retail investors, can reduce further the current discount to NAV.

Howard Williams
Chairman
24 September 2025

Interim Management Statement

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:

-     The condensed set of financial statements has been prepared in accordance with Financial Reporting Standard 104 'Interim Financial Reporting';

-     The Interim Board Report (constituting the interim management report) includes a fair review of the information required by DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

-     The financial statements include a fair review of the information required by DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

Principal Risks and Uncertainties

The Board regularly reviews the principal risks and uncertainties faced by the Company together with the mitigating actions it has established to manage the risks. These are set out within the Strategic Report contained within the Annual Report for the year ended 31 January 2025 and comprise the following risk categories:

-     Investment objectives

-     Investment strategies

-     Investment performance

-     Sustainable and responsible investing criteria

-     Income/dividends

-     Financial/market

-     Gearing

-     Regulatory

-     Operational (including cyber-crime)

-     Geo-political

The Company's principal risks and uncertainties have not changed materially since the date of the Annual Report and are not expected to change materially for the remaining six months of the Company's financial year.

In addition to those principal risks and uncertainties, the Board considers that the development of Artificial Intelligence ("AI") presents potential risks to businesses in almost every sector. The extent of the risk presented by AI is extremely hard to assess at this point but the Board considers that it is an emerging risk and, together with the Manager, will monitor developments in this area.

There are a number of other risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. These include a number of existing geo-political risks, including the impact on financial markets of US tariffs. The Board is also conscious of the effect of higher inflation on financial markets and the resultant implications for interest rates.  

Going Concern

The Company's assets consist mainly of equity shares in companies listed on the London Stock Exchange and in most circumstances are considered to be realisable within a short timescale. The Board has set limits for borrowing and derivative contract positions and regularly reviews actual exposures, cash flow projections and compliance with loan covenants. The Directors have considered the fact that Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary. The Directors have also performed stress testing on the portfolio and the loan financial covenants.

Having taken these matters into account, the Directors believe that the Company has adequate financial resources to continue in operational existence for the foreseeable future and for at least twelve months from the date of this Report. Accordingly, they continue to adopt the going concern basis of accounting in preparing the financial statements.

On behalf of the Board
Howard Williams
Chairman
24 September 2025

Investment Manager's Review

Performance and Market Review

Despite all of the geopolitical events in the first half of this financial year, it is somewhat surprising that the UK equity market was able to deliver a positive absolute return of 7.5%. Staging a strong recovery post the 'liberation day' decline, the market shrugged off a combination of highly volatile trade negotiations, a US/Israeli attack on Iran and a challenging domestic economic and political backdrop.

The Company's net asset value ("NAV") total return was 3.1% for the six months to the end of July 2025. After tracking the benchmark return over the first five months of the period, and outperforming during the market turmoil in April, the portfolio then struggled to match the sharp market rally in July. This led to the Company underperforming the benchmark by 4.4% for the period.

There were two main drivers of the underperformance. Firstly, and most significantly, was the 'style' leadership within the market itself. The FTSE All-Share Index return was heavily concentrated in a narrow selection of large-cap stocks with Banks, Tobacco and Aerospace & Defence accounting for over 70% of the benchmark return. Our focus on Quality and Sustainability means we are typically underweight in sectors such as Banks. In some cases, such as Tobacco and Aerospace & Defence, these criteria prevent us from investing in them altogether.  Rolls Royce, British American Tobacco and BAE Systems were particularly strong performers and make up large weightings in the index. Overall, Quality as a style lagged the market substantially, with the MSCI UK Quality Index rising just over 1% in the six month period, thus making it a challenging backdrop for relative performance for our strategy. The second element that held back returns were some stock specific underperformers. This included Novo-Nordisk which revised down its full year growth expectations for its obesity and diabetes treatments, and the chemical distributor Azelis which reported weaker revenue growth in its Americas business driven by softness in various end markets. Given plenty of alternative options offering better growth prospects, we chose to sell both holdings.

Despite the weaker returns relative to benchmark, at the company level there was much to be positive about. In particular, we saw five companies deliver very pleasing outcomes with material benefits accruing to their businesses and their share prices. Healthcare REIT Assura attracted significant attention following a takeover approach from both private equity and its listed peer, Primary Health Properties ("PHP"). Asian life insurer Prudential delivered strong financial results and accelerated new business growth, an important step in convincing investors it can both deliver on its targets and return significant amounts of capital. Asset manager and life insurer M&G announced a substantial step in developing a credible growth strategy for its investment management business with a distribution deal with Japanese insurer Dai-icihi Life that included an agreement to build a stake of 15% in the UK company.  Animal genetics leader Genus achieved a critical milestone that potentially creates a very significant future revenue source when it received approval from the FDA for the development of pigs genetically edited to be resistant to Porcine Reproductive and Respiratory Syndrome. Finally, closed life book consolidator Chesnara announced its largest ever deal, acquiring HSBC Life (UK) for £260 million, substantially extending the duration of its cash flows and underpinning the dividend distribution for the long-term.

Dividend Income and Gearing

On a headline basis, revenues declined in absolute terms during the period. This was driven by a lower level of option income, which was particularly first-half weighted in 2024, an equity base approximately 10% smaller due to the ongoing effect of share buybacks, and the timing of dividend receipts from overseas companies. On an adjusted basis, we estimate that investment income was flat to slightly up, reflecting modest underlying dividend growth from the companies in the portfolio.

The level of borrowings remained unchanged over the period. We believe the level of gearing remains appropriate given very attractive valuations for the underlying investments. Net gearing was lower at the period end, but this was due to the timing effect of several sales within the portfolio, temporarily elevating the amount of cash on hand, which has since been reinvested. 

Portfolio Activity

During the period, we initiated a position in Haleon, the leading pure-play consumer healthcare company. It has a strong portfolio of leading brands, such as Sensodyne and Advil across attractive segments including oral health, respiratory health, pain relief, and vitamins. This should enable it to deliver industry leading revenue growth whilst it has significant opportunities to enhance its margin profile and returns to investors. We also initiated a position in LondonMetric, a specialist real estate company focused on attractive sub-sectors including logistics, convenience retail, healthcare, and entertainment, and this supports a high and growing dividend distribution. To partially fund this purchase, we reduced the holding in Assura after it became evident that PHP would succeed in its bid for the company and further upside appeared limited.  In July, we also participated in the rights issue by Chesnara, the consolidator of closed life insurance assets, which was undertaken to finance the acquisition of HSBC Life (UK).

In terms of sales, we exited the position in the construction company Morgan Sindall. The business has performed extremely strongly in recent years, but the significant increase in the share price and the valuation multiple, meant we saw better opportunities elsewhere. Towards the end of the period, we also exited Novo-Nordisk and Azelis as noted above.

During the period, we topped up the holdings in Oxford Instruments and UK housebuilder Taylor Wimpey where, despite subdued current trading conditions, we see attractive valuations. In particular, the shares in Taylor Wimpey are at multiples only reached at recent previous crisis points, despite a strong balance sheet and secular demand for housing. We also added further to existing positions in specialist insurer Hiscox, M&G and NatWest as well as Diageo. To fund these purchases, we reduced the holdings in a number of companies including AstraZeneca and Unilever reflecting their large absolute size and fair valuations. We also trimmed positions on relative strength in Telecom Plus, Genus, and Games Workshop as they performed strongly and valuations become more stretched. 

Outlook

In recent years, market conditions have not been favourable for our investment approach and it has therefore been a frustrating period for relative performance. However, styles go in and out of favour, and Quality as a style has underperformed to the deepest extent and for the most extended period in the past quarter of a century. We remain convinced, though, that a high conviction approach focusing on quality, sustainable businesses with resilient income streams gives the Company the potential to outperform. Over the long-term, owning quality companies has been a winning trend, yet today the portfolio's valuation premium to the wider market has shrunk to the lowest level that we have seen, at just 7%, while ROE's and Operating Margins respectively remain 60% and 25% higher and balance sheets 20% less geared than the market. At the company level, our estimates of potential future returns suggest a weighted average return of 11.7% for the portfolio, a premium of 400bps ahead of that delivered by the benchmark index over the past 10 years. We see this as compelling evidence to stick with our strategy.

It is important to stress that we are not passively awaiting a shift in market conditions. Our research team and coverage of the UK equity market goes from strength to strength, and the pipeline of potential new investments is at all-time highs. The key question therefore is what needs to change to catalyse a return to quality outperformance? While timing is hard to call, we see a combination of macro dynamics and stock specifics resulting in that change of market leadership. Firstly, at the macro level we expect ongoing subdued economic conditions to both lead to declining real interest rates and low economic growth. This should support the valuation of higher quality companies and focus investor appetite on businesses with strong structural growth potential. Secondly, getting stock selection correct will be key, with companies delivering consistent growth in profits, cash flow and shareholder returns as the best way to drive share prices, The portfolio contains a significant number of highly attractive valuation opportunities with large latent performance potential, and we are excited about their prospects. We believe strongly that when market conditions change, we will be in a good position to return to outperformance.

Ben Ritchie and Rebecca Maclean
Aberdeen
24 September 2025

Investment Portfolio

Condensed Statement of Comprehensive Income (unaudited)

Condensed Statement of Financial Position (unaudited)

Condensed Statement of Changes in Equity (unaudited)

Condensed Statement of Cash Flows (unaudited)

Notes to the Financial Statements (unaudited)

For the six months ended 31 July 2025

Alternative Performance Measures ("APMs")

By order of the Board

abrdn Holdings Limited

Company Secretary

24 September 2025

Please note that past performance is not necessarily a guide to the future and the value of investments and the income from them may fall as well as rise.  Investors may not get back the amount they originally invested