Asia Dragon Trust (DGN), formerly Edinburgh Dragon Trust, aims to identify well-managed, world-class businesses in Asia and buy them when they are on attractive valuations. The management team at Aberdeen Standard Investments, headed by Adrian Lim and Pruksa Iamthongthong, take a long-term approach to investing. They aim to be an active, engaged shareholder, encouraging good corporate governance and alignment with other ESG goals. The trust performed strongly following implementation of a number of changes to the process in 2017 and 2018, which saw it increase exposure to IT and China, as discussed in the Performance section. However, in 2020 it has lagged the index slightly in the recovery from the pandemic, thanks largely to its exposure to countries which have struggled to control it. In the aftermath of the coronavirus crash, Adrian and Pruksa have taken the opportunity to buy high-quality companies they had previously coveted but found too expensive. This has increased their weighting to information technology and e-commerce, and the portfolio has some large single stock positions in Tencent, TSMC and Samsung (together 28.3% of the portfolio). However, the portfolio retains balancing exposures with the bottom-up process leading the managers to a diverse set of companies from across the region (as discussed under Portfolio). The managers tell us they are wary about the immediate future for the Asian economies, because of the impact of the lockdowns and a possible resurgence of the virus. However, they think their focus on quality and resilient earnings could prove a relative advantage. DGN’s shares are trading on a discount of 13.4% to NAV, wider than the five-year average and the sector average.
Companies: Asia Dragon Trust Plc
The coronavirus outbreak in China has developed from a humanitarian catastrophe to a stock market panic. While the short-term economic impact of the virus could well be severe, there are still fundamental reasons to be invested in developing Asia for long-term investors. Historically one reason investors have been encouraged to invest in emerging Asian markets is to benefit from the region’s greater GDP growth. The OECD forecasts that UK real GDP, that is adjusted for inflation, will grow by 2.2% a year between 2020 and 2060, and the USA by 1.9%, whereas China is projected to grow by 2.4% and India by as much as 4.5%.1 Thanks to the power of compounding, this increase amounts to growing 1.1 and 1.3 times larger in the case of the US and UK, 1.5 times in the case of China and 4.5 times in the case of India. Economic theory posits that the long-run return from a stock market should be equal to the long-run growth in corporate earnings, which is determined by long-run GDP growth. On that basis China and India should see much greater stock market gains. This theory has a poor record in practice, and it is now common knowledge that GDP growth and stock market returns are generally not correlated. Indeed, it is possible that the correlation is weakening over time, given the propensity for companies to list in countries outside of their main areas of business. This doesn’t mean that GDP growth potential in emerging markets is irrelevant, however. We would argue that the underlying drivers of GDP growth are very relevant to the earnings potential in individual companies, which means that GDP growth can be valuable information for a stock-picking manager. In fact, we would argue that understanding the reasons behind GDP growth gives a better comprehension of how to invest in developing countries – such as those in Asia – and the advantages they really have. We consider why you might add to your Asia exposure in your ISA this year, despite the short-term issues, and look at some stock-picking trusts set up to generate alpha from the region’s advantages.
Companies: SST AIE ANII DGN
Asia Dragon (DGN), formerly known as Edinburgh Dragon, aims to identify well-managed, world-class businesses in Asia and buy them when they are on attractive valuations. The management team at Aberdeen Standard Investments, headed by Adrian Lim and Pruksa Iamthongthong, take a long-term approach to investing. They aim to be an active, engaged shareholder, encouraging good corporate governance and alignment with other ESG goals. The trust has performed strongly since implementing a number of changes to the process in 2017 and 2018, bringing to an end a period of underperformance. The essentials of the process remain the same: identifying companies with low leverage, sustainable earnings and strong competitive positions. Following a period of poor performance in 2015, the analyst team has been reorganised, a greater emphasis placed on examining the downside risks for stocks and the weighting to technology stocks and to China has been steadily increased. The process is bottom-up, and so companies are picked on their own merits rather than to gain access to a theme, country or industry. Nevertheless, consumption growth, urban development and technology are areas the team find particularly exciting. DGN is one of the largest Asia-focussed trusts with total assets of £627m. The management team is locally based, with the two managers based in Singapore, and contains over 50 investment professionals, some with extensive experience. The trust has consistently traded on a double-digit discount in recent years, despite the recent recovery in performance. High-growth strategies have tended to be favoured by the market, while DGN has quality and value exposures which have been less in favour. The trust has a total return objective, and so the board does not commit to maintain or grow the dividend. Although the payout has grown steadily in recent years thanks to growth in earnings, the board does not explicitly target a growing dividend and the yield is just 1.2%.
Quality as an investing style has outperformed significantly in recent years, and over the past 12 months especially so. After this kind of outperformance, it is natural to ask whether a trend is over-done and profits should be taken – and that is what we have done. When analysing the typical quality benchmarks, it quickly becomes apparent that these indices have significant industry and sector exposures, which could affect how they perform in the future and put them at risk of a down period. But the picture is also complicated by the fact “quality” is a hard factor to define, making it crucial to understand the investment process of a manager thoroughly. In our view, there are good reasons to think that quality, properly defined, could continue to do well. In particular, we think that the strong performance of quality in down markets could appeal given the weakening sentiment towards equity markets this summer. However, the issues of index composition and the shifting definition of “quality” means that an active approach is preferable to a passive we argue. In this article, we take an in-depth look at the outlook for quality, and consider a selection of trusts taking varied approaches to achieving a strong quality tilt.
Companies: FGT FEET JUSC SST ANII DGN
Edinburgh Dragon (EFM) aims to generate long-term capital returns by investing in Asia Pacific ex-Japan equities, with a focus on quality growth characteristics and a secondary focus on starting valuations. The management team, headed by Adrian Lim, aims to select world-class Asian companies with strong balance sheets that are transforming their sector and setting governance standards. The trust’s net asset value of £583m is the second largest in the AIC Asia Pacific peer group and makes it one of only two trusts over £500m. Aberdeen Standard’s 50 fund managers based in the region give it a broad research base and good access to companies. The trust has performed very strongly over the past year following a series of refinements to the process and portfolio. NAV total returns of 12.9% compare to just 7.1% from the average trust in the Morningstar IT Asia Pacific ex-Japan sector and 3.8% from the MSCI AC Asia ex-Japan index. This is the second-best return in the 13-trust sector over the period, narrowly behind its stablemate Aberdeen New Dawn. The refinements to the process have centred on making the team quicker to spot problems in portfolio companies, but the intention is to continue to be long-term in outlook and Morningstar data show a turnover consistent with a five-year holding period. The trust has increased its weighting to technology, however, and narrowed its underweight to China. It maintains strong overweights to India and Indonesia, and a focus on quality characteristics that served it well in the 2018 global sell-off. Despite the improved recent performance, the portfolio continues to trade on a wider discount than the sector average: 10.8% compared to the 6.1% peer group average. A tender offer in January was oversubscribed and the board continues to be active in employing buybacks. Dividends have grown steadily over the past five years, with compound growth of 16%. The dividends are fully covered and reserves are over three times the payout, although the focus is on total returns and so the yield is only 1%
Emerging markets remain a highly attractive place to invest for the longer term, despite the difficult period for the region this year. We do not believe that the current travails amount to a broad-based crisis in the region. In fact, many of the recent headlines surrounding emerging markets are irrelevant to long-term investor as they are focused on small and insignificant markets. We believe the index has done poorly mainly thanks to specific issues with individual countries and regions rather thanks to global dynamics besetting the region, with the important exception of the confrontation between Trump and the Chinese on trade. In our view, investors in emerging markets need to hold their nerve rather than trying to wait and time the bottom before reinvesting.
Companies: JAGI DGN SDP EMF BEE
Edinburgh Dragon owns a portfolio of Asia Pacific ex Japan stocks selected on a bottom-up basis for their quality characteristics, with an expected long-term holding period. The trust has seen something of a transformation in recent years as the managers have sought to increase its exposure to ‘quality’ companies, and there has been greater exposure to technology and China. Following periods of poor performance in 2013 and 2015, the portfolio trades on a discount wider than the sector average, although supported by a buyback programme. Dividends have grown steadily over the past five years, although the focus is on total returns and the portfolio tends to yield less than the market thanks to its quality tilts.
Q3 saw the market adapt to life post the UK’s EU referendum. Sterling continued to fall but most stock markets stabilised and discounts narrowed across most sectors. While the US election is dominating headlines, it does not seem to be having much impact on markets so far.
Companies: IGC DRIP DGN HRI PGIT SLPE SIGT
Edinburgh Dragon Trust (EFM) is the largest and one of the most liquid investment companies focused on the Asia ex Japan region. Its strong focus on quality has served it well over the long term. EFM’s manager says that an environment of very low interest rates has distorted markets, with the result that EFM’s focus on quality has not been rewarded. The manager believes that China is stabilising and that the outlook for Asia appears to be improving. In recent months, there has been a noticeable improvement in EFM’s net asset value (NAV) performance relative to its peers and its benchmark. Over six months to the end of July, EFM was 1.6% ahead of its peers and 2.7% ahead of its benchmark. However, in the short term, the share price has not kept pace and EFM’s discount has widened.
Edinburgh Dragon Trust (EFM) is the largest and one of the most easily tradeable investment companies in the AIC’s Asia ex Japan sector. The fund manager aims to buy high-quality companies at attractive valuations – an approach that has been applied consistently for many years. The manager believes that the policies of central banks and governments have created an artificial environment where market valuations are no longer based on reality and that EFM’s performance, relative to market indices, has suffered as a result. They believe however that this situation is transient and, as things return to normal, EFM’s portfolio will benefit and its performance will see a return to form.
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Cenkos’s first half results demonstrated the benefits of its flexible operating model and strength of its client relationships. While challenges related to COVID-19 are set to continue, Cenkos’s focus is on growth companies and its fund-raising year-to-date has had a greater emphasis on corporates financing M&A and growth opportunities rather than for defensive purposes. This should prove more sustainable although, as always, the timing of transactions in the encouraging pipeline reported remains uncertain.
Companies: Cenkos Securities plc
Avation is a lessor of 46 commercial aircraft to a diversified airline client base. This morning, the group has released results for the 12-months to 30 June 2020, which illustrate the challenges faced by its customer base as a result of Covid-19, as well as the corrective actions taken by the Board that have resulted in profitability being maintained in the year as a whole. Loan repayment deferrals of c.$24.4m were obtained in the period, in comparison to $13.1m short-term rent deferrals being granted to airline customers and thus emphasising management's focus on liquidity during an unprecedented period for global airlines. Avation again reports that it is currently reviewing alternatives in relation to the 6.5% senior notes due in May 2021. Whilst at this point our forecasts remain under review, and near term challenges remain across the industry, we believe that demand for aircraft from lessors such as Avation will increase in time as a result of airlines being even more reliant upon aircraft leasing firms due to the retirement of older aircraft during 2020 in combination with much weaker balance sheets that are unable to support direct aircraft purchases.
Companies: Avation PLC
Record’s Q221 trading update confirmed that its new $8bn dynamic hedging mandate has started and that, prior to this, assets under management equivalent (AUME) expanded by 4% in the quarter. The group continues to work on developing new products and is deploying technology to enhance its ability to deliver these and existing products cost effectively.
Companies: Record plc
Primary Health Properties (LON:PHP) is a real estate investment trust (REIT) that holds a portfolio of 510 primary health facilities in the UK (92% of the portfolio by value) and Ireland (8%). The business model is to manage the properties for rental income and to grow the portfolio over time. The
Companies: PHP PP51 PHPRF
In another upbeat update, GHT has confirmed that the business is tracking in line, in turn being driven by strong traction with key customer, ANZ. Here, new sales have driven a 20% increase in contracted customer revenue to >£11m in FY21. As a strategic partner (deeply involved with GHT in bringing new Clareti banking services to market) this extra investment is very encouraging, as it’s indicative of these services‘ strong future potential. Also announced today – GHT state that its transition to a recurring subscription model (commenced just two years ago) is now complete and that ARR now stands at £11.9m, ~+16% annualised organic growth since FY20 y/e. In a tough new business environment, we view this as a highly credible performance. It’s also worth noting that management reference remaining pipeline opportunities, these would further benefit strong forwards visibility – already £22.4m for FY21. Given this – and also as sign of confidence – today we reinstate FY21 forecasts. We look for a reacceleration in top-line growth: +16% y/y to £28.7m at a Group level, in turn driven by c.+24% organic growth in Clareti, to £20m. For valuation – with Clareti still in its relative infancy – we continue to view a sales multiple as most appropriate. Here, we note that peers typically trade in a 5-7x range vs. GHT at 4x our FY21 estimate. This suggests 25-75% upside to fair value for this disruptive company, with a multi-year growth opportunity still ahead.
Companies: Gresham House
As expected following the US banks’ releases, Barclays’ third quarter results saw a sharp reduction in provisions build-up while the emergence of delinquencies has been delayed by the State’s supporting measures. Management continues to expect a reduction in the cost of risk next year. It remains to be seen if this guidance is capable of withstanding new lockdowns or a no-deal Brexit.
Companies: Barclays PLC
ANGLE plc (AGL.L): Acceptance of FDA submission | Feedback plc (FDBK.L*): Partnership agreement | Open Orphan (ORPH.L): Human Challenge Study Model contract with UK Government
Companies: AGL FDBK ORPH
Following on quickly from its impressive full year results, these interim results confirm that our confidence for growth in the Program Management business was not misplaced.Contracted Premium increased 95% YoY (and 12% ahead of December 2019) to $925m –a stone's throw away from the $1bn 2020 guidance set in 2018. At the same time, Gross Written Premium (GWP) grew 42.6% to £247.2m, resulting in Economic EBITDA turning positive, at £0.8m compared to a loss of £0.3m in 1H19
Companies: Randall & Quilter Investment Holdings Ltd.
Tatton has reported an in-line H1 financial performance: revenue totalled £11.0m (vs N+1Se £10.9m) and £5.0m adj. EBIT (50% N+1S FY21e). AuM grew by 3.4% to £7.8bn as net inflows continued throughout H1 (+£328m) – a positive performance given the backdrop. Paradigm, particularly in Mortgages, has been resilient post-lockdown. Having delivered 50% of our earnings forecast for FY21e, there is potential for upside. However, we leave our forecasts unchanged and a margin for safety as we remain alive to potential external risks/volatility.
Companies: Tatton Asset Management Plc
The interims confirmed that Covid-19 was minimally disruptive operationally in H1 20 and, ironically, may have improved both of R&Q’s divisions’ mediumterm trading outlooks. As the pandemic and other industry events have generated significant losses for insurers, they have created the current ‘hardening’ market driving demand for Legacy and Program Management.
Agronomics has announced it has conditionally raised £10.0m gross from an equity issue at a price of 6.0p, which represents a 6.8% premium to the most recently reported NAV per share of 5.62p. Assuming the company's post-raise cash balance is £8.15m, after repaying a £1.9m bridging facility, we estimate the new NAV per share to be c5.7p. We see significant potential in the cultivated meat sector and believe Agronomics is well positioned to support this developing sector and generate strong returns from these investments. We see upside in Agronomics' portfolio and have today initiated coverage with a Buy recommendation.
Companies: Agronomics Limited
Secure Trust Bank’s (STB) Q3 trading update disclosed that Q3 was stronger than expected and FY20 earnings are likely to be well ahead of consensus forecasts. Loan repayment holidays in its Motor Finance and Retail Finance divisions were down remarkably and credit quality is not deteriorating. Loan demand is strengthening after the lockdown. Capital and liquidity remain good. The bank remains cautious due to continued COVID-19 and Brexit uncertainty and is still not providing formal guidance. We are upping our earnings forecasts and fair value from 1,704p to 1,756p. In our view, the valuation remains depressed compared to fundamentals with banking stocks still out of favour. STB trades on an FY20 P/BV of 0.53x, yet it has a strong track record of value creating returns (ROE above COE), a good capital base and liquidity. The Q3 good news reinforces our view that we are unlikely to see book value deterioration during this downturn to justify any NAV discount.
Companies: Secure Trust Bank Plc
There was an eclectic mix of property companies to feature in the top price movers for September. Top of the tree was private rented sector and residential development specialist Sigma Capital Group, with a 34.2% rise. The group launched a £1bn joint venture with EQT Real Estate, the real estate platform of global investment firm EQT, to deliver 3,000 private rental homes in Greater London. Micro-cap investor Panther Securities also hit double-digit gains, while Macau Property Opportunities saw an uplift in its share price after announcing debt refinancing and a disposal. CLS Holdings, the investor in offices in Germany, France and the UK, continued to see a recovery in its share price – which has risen 15.1% in the last three months. Off the back of solid results, Berlin residential landlord Phoenix Spree Deutschland saw its share price gain 7.2%. Schroder REIT’s share price rose 6.6% in the month as it embarked on a share buyback programme, while Irish commercial property investor Yew Grove REIT also saw positive shareholder reaction to amending its investment strategy to increase its target loan to value ratio to 40%.
Companies: SUPR DIGS CRC PSDL ASEI TPON RLE UKCM BREI BCPT RGL SIR SLI TOWN CAL
Agronomics is an investment company building a portfolio of investments in the developing alternative protein sector. The company is focused on early stage investments, offering attractive valuations and significant upside potential. Importantly, we believe Agronomics represents an opportunity for public investors to gain access to early stage private companies, which might not otherwise be available. We expect the cultivated meat sector to be driven by a number of global mega trends that will increase public awareness of the issues the sector is aiming to overcome. We see strong upside in Agronomics' existing portfolio and initiate coverage with a Buy recommendation.
With a new CEO, Amanda Blanc, Aviva’s shareholders could dream of a possible change in the group’s strategy, with a more focused insurance business. The new Chief has an opportunity to take painful decisions in a year where no one will require a high operating performance.
Companies: Aviva plc