Aberdeen Smaller Companies Income Trust (ASCI) offers investors a chance to access the growth potential of UK smaller companies, whilst enjoying a diversified source of income. After Aberdeen Asset Management and Standard Life merged, the trust was overhauled by the former Standard Life UK smaller companies team in 2018. Abby Glennie took over the portfolio, incorporating the proprietary screening system (known as the Matrix) developed within Standard Life Investments prior to the merger. As Abby only took over the portfolio in September 2018, we think it is still early to fairly judge performance. However, signs so far are promising, and the process is based on the approach tried and tested over the long term by Standard Life Smaller Companies Trust (SLS). SLS is run by the renowned manager Harry Nimmo, who also supports Abby with ASCI’s portfolio. Alongside capital growth, a key focus for the ASCI team is generating an income for investors, and the yield is currently 3.9%. The most recent full-year dividend was increased by 12.2% from the prior year, and was fully covered by reserves. The discount narrowed over 2019, likely due to the strong performance relative to peers and continued attractive levels of income. However, the coronavirus pandemic has seen the discount slip to 25.2%.
Companies: Aberdeen Asian Smaller Companies
Aberdeen Standard Asia Focus (AAS) aims to identify market leading businesses in Asia with high and sustainable earnings when they are trading on attractive valuations and invest in them for the long term. In 2018 the trust implemented a number of changes intended to improve long-term performance, after which it has become more concentrated, increased its weighting to technology companies and reorganised the investment team to be more ruthless with stocks that don’t match up to expectation. Hugh Young has taken more personal control and responsibility for the trust’s portfolio, although he has worked on the team since AAS was launched in 1995, and heads up Asia at Aberdeen Standard. Over the long term, AAS’s performance has been outstanding. Over ten years, it has more than doubled the average annual NAV total return from the MSCI AC Asia Pacific ex Japan Small Cap Index. However, the trust did underperform in the 2016 and 2017 rally in China and tech-related names. Performance has improved since these changes were made to the process, helped by a change in market dynamics (as we discuss in the Performance section). Since the changes, which were accompanied by a change of name from Aberdeen Asian Smaller Companies, the discount has been significantly tighter on average, although it is still wide at 11.5%. This is in line with its closest small-cap peer, but wider than the average of the all-cap AIC Asia Pacific sector, which is 7.8%. Dividend growth has been strong in recent years, and the board does aim to maintain or grow the dividend. However, the yield is relatively low at 1.8%.
One of the attractions of investment trusts is the potential to pick up discounted bargains, which can supercharge NAV returns if correctly anticipated. As we have remarked before, closed-ended funds have historically delivered superior NAV returns. But buying shares on a substantial discount can significantly enhance those NAV returns should the discount narrow on a sustained basis. The reasons for investment companies long run NAV outperformance of equivalent open-ended funds, lies with their structural advantages, as we discussed in detail last year. Firstly, they have the ability to make the best use of less liquid assets and managers can manage those assets without having to worry about inflows and outflows. Secondly, they can employ gearing, which should be accretive to returns over the long run even if timing isn’t attempted, assuming equity markets continue to rise over the course of each cycle. While we tend to focus on the trusts with long-term potential, here we are considering those trusts currently sitting on discounts that have caught our eye. These trusts are trading on unusually wide discounts (at least 10% in absolute terms), but most importantly, have the potential to produce attractive NAV returns (in relative or absolute terms) as well.
Companies: BEE AAS RMMC MHN OCI TFG
Aberdeen Standard Asia Focus, formerly Aberdeen Asian Smaller Companies, aims to generate long-term capital growth by investing in Asian smaller companies with quality growth characteristics and holding these for the long run. The trust returned to form last year with strong relative returns, as its focus on quality was rewarded in rough markets. In 2017 the trust had lagged as lower-quality, more speculative companies were bid up and China, a long-term underweight, outperformed. The manager, Hugh Young, believes that the current environment of rising global interest rates and the rolling back of QE is well-suited to his style. Hugh, one of the most experienced fund managers in the market, was named lead manager in November as a part of an overhaul requested by the board. The number of holdings is being cut and the concentration in the highest-conviction names raised – the name change is intended to highlight this. Hugh is focused on improving the speed of decision making and sharpening the focus on the strategy, which has served the company well over the long run. The basic strategy has not changed at all, with a focus on quality growth companies which are bought at attractive valuations and held for the long run, and a strong focus on corporate governance (the main reason for the low weighting to mainland China). The discount has responded to the overhaul and the improving performance, almost halving from its wide point of 17.5% in October to the current level of 9.5%. However, it is worth pointing out that this is still twice as wide as the 4.8% sector average. The trust yields 1.3%, and while this is not high the track record of dividend growth is strong, with 6.8% compound growth per annum over the past five years. In fact, the trust has managed to grow or maintain its dividend in each year since launch in 1995, except 1997 and 1998, and investors at launch would now be earning a 17p dividend on their initial investment.
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Trading in the royalty partner portfolio over Q1/21 shows a material rebound from May, which has been sustained to date, as the portfolio as a whole returns to more normalised trading. Consequently, Duke's cash receipts, while down 20% YoY currently, are set to step up in H2/21 as forbearance measures largely expire and deferred royalties realised. This bodes well for a rebound in earnings and a return to cash paid dividends. A share price down over 55% since Feb 20, standing at p/book of 0.56x H1/20A's NAV p/s thus appears overdone. We await further clarity on the portfolio before reissuing forecasts, thus leave our recommendation U/R.
Companies: Duke Royalty
L&G reported an operating profit from continuing divisions (excluding Mature Savings and General Insurance businesses) of £1,128m, -2.2% yoy. The COVID-19-related cost was £129m. LGR posted a growing operating profit to £721m. Net profit amounted to £290m vs. £874m a year before, being affected by the reduced discount rate used to calculate LGI reserves. The Solvency II ratio stood at 173%. The Board recommended an interim dividend of 4.93p/share, stable relative to H1 19.
What’s new: Purplebricks Group results for the year to 30 April 2020, show the Australian and US units as discontinued; but include the Canadian unit sold for C$60.5m (i.e. £35m) in July. Investors will focus on the UK unit which revealed:
11% fall in UK revenue to £80.5m (FY19: £90.1m), as the number of instructions fell 23% (impacted by early Covid uncertainty and lockdown), but the average revenue per instruction “ARPI” rose 12% to £1,394;
UK gross profit margin improved to 64.1% (FY19: 63.0%);
UK marketing costs to revenue improved to 25.6% (FY19: 29.6%);
Spend on Digital capacity pushed UK operating costs 32% to £26.2m (FY19: £19.9m), as new management team pursued initiatives which are being “delivered at pace with significant opportunity for further innovation.”
UK adjusted EBITDA fell 53% to £4.8m (FY19: £10.2m).
Companies: Purplebricks Group Plc
For this Monthly, we are delighted that Rooney Nimmo and 24Haymarket have allowed us to reproduce a recent report they jointly published, entitled An analysis of UK exits (2015-2019), which provides a granular analysis by sector of the activity in our dynamic private companies world. We hope you find the insights of interest.
Companies: AVO AGY ARBB ARIX CLIG ICGT NSF PCA PIN PXC PHP RECI SCE TRX SHED VTA
H1 20 operating profit declined by 12% to £1,225m and the COVID-19 claims impact was £165m. Cash remittances from business units to the group was only £150m. The insurer said that it will focus on the UK, Ireland and Canada, which means an exit from other European and Asian markets. The Board has declared a second interim dividend in respect of the 2019 financial year of 6p/share and will inform shareholders about the 2019 final dividend in Q4 20.
Companies: Aviva Plc
Since the restrictions were lifted in mid-May, Belvoir has seen a surge in activity due to pent-up demand, resulting in June being a record breaking month for the group’s Newton Fallowell estate agency network in terms of instructions and sales and the financial Services division in terms of written income. Management have stated that with the positive impact of the stamp duty reductions still to take effect they are confident that the Group is well positioned to capitalise on the current market upturn and to take advantage of the opportunities arising from more challenging conditions. We have upgraded our PBT forecasts for FY 2020 to the level we forecast pre-COVID. We have also upgraded our target price from 169p to 233p and highlight that H1 2020 has demonstrated the resilience of the group, management’s ability to navigate difficult market conditions and the power of the franchise-led strategy.
Companies: Belvoir Group Plc
Today's update highlights that despite the Covid-19 outbreak and UK/IRE lockdown, which has affected trading, Duke has continued to collect cash royalties from most of its royalty partners. Short-term alternative payment terms have been agreed with those partners hardest hit, to support them to periods where royalties can be fully recouped. Therefore the 61% fall in p/b from 1.3 (at 20 Feb) to 0.5 today, appears overdone.
The group’s earnings surprise was driven by goodwill impairments. On the negative side, management upgraded, albeit slightly, its full-year loan impairments guidance and warns about revenue and CET1 pressure. It also reckoned that the tensions between the US and China will impact the group.
Companies: HSBC Holdings Plc
The Law Debenture Corporation (LWDB) has reported another strong set of results for its independent professional services (IPS) business in H120, with EPS growth remaining in the target mid- to high single-digit range despite a more challenging economic backdrop. With the trust’s largely UK investment portfolio having been hit by the widespread stock market sell-off in February and March, IPS has provided a larger than average contribution to revenue returns. This means fund managers James Henderson and Laura Foll can continue to search for attractive total return opportunities in a broad range of sectors, while maintaining LWDB’s focus on both capital appreciation and above-inflation dividend growth.
Companies: Law Debenture Corporation
We believe now is an interesting time to invest in Northgate, with a new executive board and a capable management team in place who have already delivered progress on an ongoing turnaround as we await a full strategic review. The group now has a clear and well communicated capital allocation strategy in place and improved earnings quality, in our view. We believe that the growth opportunity in the UK, the value of the Spanish business and the progress made to date with the turnaround are not being reflected in the share price, which is currently 15.9% below book value (414p per share in FY19A rising to 468p in FY22E). We use a variety of valuation methods including P/B, SOTP, DDM and DCF modelling and arrive at an average implied share price of 450p, 29.0% above the current share price.
Companies: Redde Northgate Plc
As expected, the quarter saw a sharp increase in loan impairments. However, one can wonder if the increase was not capped by the group’s willingness to keep its results afloat. Management’s downbeat guidance in terms of revenue recovery potential and cost reduction does not bode well as regards the group’s future credit loss absorption capacity.
Companies: Lloyds Banking Group Plc
Vacancy strongly increased in Q2 20. LTV surpassed the 50% mark on 30 June 2020 due to strong value destruction in H1 20. Hammerson announced a £550m cash capital increase coupled with a disposal of £270m. Its ex-post pro forma net debt should be £2.2bn, i.e. LTV of 42% on a proportionate basis. Too high?
Companies: Hammerson Plc
Despite challenging market conditions, Picton’s Q121 DPS was well-covered by EPRA earnings and robust portfolio capital values. Combined with low gearing, NAV per share was just 1.3% lower versus Q420 and including DPS paid, the NAV total return was -0.6%. With encouraging rent collection data continuing and the lockdown easing, we have reinstated our estimates and look for the quarterly DPS run-rate to increase in H221.
Companies: Picton Property Income Ltd.
The scaling of Duke's royalty portfolio was progressing as expected up to March 2020, with record cash receipts that month. Due to Covid-19 and the UK's economic shutdown, macro conditions have worsened and become highly uncertain. This is likely to see some royalty partners' future cash royalties decline, which in turn, will negatively impact FV's in the FY20E results. Duke's high margin and cash generative nature ensures it is well placed to trade through these challenges. Given the degree of uncertainty in outlook, we remove forecasts and put our recommendation Under Review and await further clarity on the portfolio.
Raven’s positive trading update was reassuringly robust, despite ongoing uncertainty regarding the long-term impact of Covid-19 on the Russian market. We believe that kind of performance deserves attention, although we plan to reinstate detailed forecasts post (a) the General Meeting scheduled for 31 July, which will decide upon proposals designed to create a simplified capital structure (outlined below) and (b) the interim results due in August.
Companies: Raven Property Group Ltd.