Scottish American Investment Company (SAINTS) aims to offer investors real dividend growth through increasing income and capital over the long term. The portfolio is predominantly comprised of equities, but the manager also has the capacity to invest in bonds, property and other asset classes. James Dow and Toby Ross manage the portfolio, searching for companies with a dependable yield and good growth prospects. They believe that companies which are committed to paying out dividends are generally managed better and utilise their capital more appropriately. Since the shift in strategy in 2015, when the managers moved from focussing purely on income to dividend growth, the trust has consistently outperformed the benchmark and its peer group. As can be seen in the Performance section, over the five years to 18 March 2020 the trust has generated NAV total returns of 60.7%, in comparison to 24.9% from the AIC Global Equity Income sector and 41.4% from the FTSE All-World. In fact, the trust has only underperformed the benchmark in one of the past five calendar years, and this was by just 0.2% in 2016. As we discuss in the Dividend section, SAINTS’s record for dividend growth is as impressive as its history for capital appreciation. The trust has grown its dividend every year for the last 40 years, and has done so at a rate equivalent to 2.5% per annum over the last five. Currently the trust is yielding 3.8%, the lowest in the sector; however, this is perhaps inevitable given the trust also focusses on capital appreciation. SAINTS has consistently traded on a premium over the past three years, trading in a range between a premium of about 6% and a discount of around the same level. However, at the time of writing the recent uncertainty has seen the trust slip to a discount of more than 7%.
Companies: The Scottish American Investment Co
As the end of the financial year approaches, we enter ‘ISA season’. In the first of several articles on generating income for an ISA investment, we look at the advantages of investing in equity income trusts. We explain why investment trusts can be useful for long-term, income-hungry investors, and the myriad benefits that the closed ended structure offers. We also identify trusts that best exploit the tools that investment trusts have to offer to achieve their income objectives, and illustrate how they may provide investors with a more dependable income stream for many years into the future.
Companies: MAJE PLI ASCI CTY BEE SAIN STS IPU IVI IBT
Scottish American Investment Company (SAINTS) is a differentiated equity income trust, aiming to deliver real dividend growth by increasing capital and growing income. Distinctively, the trust invests globally in equities, but it also has the flexibility to invest in other areas such as bonds and directly held commercial property. 2015 saw a shift in strategy– moving from a strategy that targeted solely high income – to a portfolio targeting income growth. So far, this has had a transformative effect on total returns relative to peers and the benchmark, and at the time of writing SAINTS is the best performer in the Global Equity Income investment trust sector over one, three and five years. Since the change in strategy, the trust has delivered NAV total returns of 63.8%, ahead of the average trust in the Morningstar IT Global Equity Income sector (42.9%), the IA Global Equity Income sector (35%), not to mention the benchmark – the FTSE All World index (50.3%) over the same period. SAINTS has grown its dividend every year for the last 38 years and done so at a rate equivalent to 2.9% per annum over the last five. Having paid an uncovered dividend in 2015 and 2016, 2017 was marked by a covered dividend having been paid. Currently only three of the four dividends have been declared for FY18, but the trust is currently yielding 3.2%. The trust is structurally geared via a somewhat expensive fixed-rate debenture that expires in 2022. Relative to the majority of its peers - which on average have gearing of around 11% - the gearing level of around 17% is fairly aggressive. Much of the gearing has been invested in property and fixed interest, which helps to offset some of the extra volatility that this level of gearing might otherwise be expected to engender. SAINTS has consistently traded on a premium over the past few years, trading in a range between a premium of about 6% and a discount of around the same level. However, over the past year or so, the trust’s premium rating has been relatively consistent. The current premium of c.2.5% compares to the average of the last year of 4.4% and is in line with the current sector average (-2.4%).
We have highlighted, on many occasions, the high level of concentration among UK equity income funds – in particular, the fact that many managers in the AIC UK Equity Income and IA UK Equity Income sectors rely on a small handful of mega-cap FTSE stocks for their dividends. This isn’t necessarily an issue in itself, but the fact many of these companies are fundamentally challenged due to low levels of dividend cover compounds the potential problems going forward. For example, in a piece of research we wrote in November , we showed that 10.6% of all income generation in the closed-ended AIC UK Equity Income sector comes from Royal Dutch Shell and BP – and, at the time of writing, both had dividend cover of less than 1x (suggesting that the companies are taking from last year's profits to pay this year's dividend, which isn’t sustainable). Given it is a very similar story in the open-ended IA UK Equity Income sector (whereby the five most popularly-held stocks, which have a dividend over of less than 1x, account for 20% of the total dividends paid in the peer group), many investors have been looking elsewhere to try and find a more reliable income stream. A popular destination for those investors has been the global equity income peer group, where managers literally have the whole world to choose from for income-producing opportunities. Indeed, many funds and trusts in the space market themselves as the natural home for UK income investors seeking diversification. However, as we will highlight in this report, many closed and open-ended funds in the Global Equity Income sectors also have a significant proportion of their assets and income reliant on UK dividend-paying stocks.
Companies: MYI SAIN HINT BRFI FCSS BEEP
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AFH interim results have shown resilience in a tough period. Revenues grew by 5% yoy and Adj. EPS is up 8% yoy. We reduce our FY20 EPS forecast by 8% to reflect the wider market falls and slower new business due to the lockdown. This reduction in earnings is significantly less than peers, highlighting the defensive nature of the business and the prudent temporary cost measures being introduced in FY20. The improved FCF of the business should lead to a re-rating, particularly as AFH now trades on 9.3x CY20 P/E, a significant discount to peers. Our reduced target price of 524p implies 81% upside. Re-iterate BUY.
Companies: AFH Financial Group
Much has been written about the effects of the virus on the world and on the stock market. Here is one analyst’s take on some of the likely impacts on the way we should look at companies. This article was originally produced as a blog, “10 Changes Post Virus”, which was published a few weeks ago.
Companies: AGY ARBB ARIX DNL GDR NSF PCA PIN PHNX PHP RE/ RECI STX SCE SIXH TRX SHED VTA
Aside from its FY 19 earnings presentation, British Land has adopted a more cautious anticipation about Offices in the City of London. We share this pessimism and have been surprised by the recent share’s bump. The latter is the opportunity to turn negative, again, and update our divestment case.
Companies: British Land Company
Hipgnosis Songs Fund (SONG LN) has today announced a trading update for the full year ending 31 March 2020. The unaudited NAV has risen 13% YoY to 116.7p, up 14.3% since the last published NAV of 102.2p as at 10 January 2020. This represents a like for like valuation uplift of 11.4%. All equity has been fully deployed and shareholder approval has been sought to increase net debt from 20% to 30%. Revenue is strong with £64.7m generating an EPS of 10.7p (more than 2x the annual 5p dividend target). NAV growth has been driven by revenue statements which were up 2%, and an increase in streaming growth rate assumptions by the independent valuers. The portfolio comprises 54 catalogues, with 13,291 individual songs, now valued at £757m which was acquired at purchase price of £697m on an acquisition multiple of 13.9x – now valued on 15.0x historical earnings.
Companies: Hipgnosis Songs Fund
Ramsdens has reported a strong set of trading results in the last twelve months to March 2020. COVID lockdown has led to store closures, which will lead to weaker trading over the following months. However, Ramsdens has a very solid balance sheet, is diversified and is well positioned to re-open stores and continue its growth. We use an 8x multiple on last 12 months to March 2020 earnings as a reflection of a normalised earnings base which reduces our target price to 162p from 180p. At this target price Ramsdens would trade on a CY20 P/B of 1.5x. This target price offers 15% upside and we re-iterate BUY.
ULR’s finals were in line with on EPRA NAV and earnings a little better than expected. Valuations remain stable and full rent collection has been achieved for the current quarter. We see fundamental quality and resilience in the (now expanded) portfolio – ULR has already invested nearly £100m in the first two months of the new year following the £136m equity raise. We make no material changes to forecasts. Current valuation points to an 7%+ annualised return, with upside remaining from deployment of funding headroom, active management and potential for valuations to improve.
Companies: Urban Logistics REIT
TCS has confirmed it will pay the previously announced interim dividend of 3.25p. A number of mitigating actions to preserve cash ensures that this is affordable. We estimate the £1.7m payment is less than 10% of cash and available facilities, which should be little changed from the April update. Rent collection levels of 75%, or 86% including deferrals, is resilient under the circumstances. There are also optimistic signs from Europe that people will be shopping in material numbers from 15 June. TCS will have all locations safely open from that date. We lower our NAV forecasts c.2%, mostly for the dividend payment, but also for a tougher outlook for CitiPark. Official guidance understandably remains withdrawn. The shares currently price in a c. 30% decline in underlying property values, which we think is excessive. On this basis, we see upside to the share price, setting it at 235p, still a c. 25% discount to NAV while short-term visibility is low. BUY
Companies: Town Centre Securities
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
Companies: AEWU CREI CSH BOOT INL HLCL THRL SUPR RESI RGL DIGS GR1T SOHO PHP BOXE ASLI UTG AGR UAI BLND UANC CAL SHED CWD WHR EPIC WKP GRI YEW HMSO PCA INTU NRR
Today’s FY update reports that the decisive action taken at the outset of the COVID crisis has protected returns. Revenues held up through to the May year end. Aided by cost savings, adj. EBITDA is expected to be 20% ahead. We expect a more modest final dividend to protect the capital surplus. Additional savings have been outlined, which we overlay on a conservative “flat market/fewer new clients” scenario for FY21e – where we hope outperformance is possible. Updating EPS forecasts: FY20e +25%, FY21e -10% and FY22e -7%; also incorporating the Hurley Partners acquisition (+8%). We consider MW a high quality core holding with long term potential.
Companies: Mattioli Woods
Tetragon Financial Group (TFG, Tetragon) achieved a 13.6% NAV/share total return and a 13.4% ROE in FY19, in line with its long-term target of 10–15%. The main driver of Tetragon’s performance was its asset management business (TFG Asset Management), which comprises managers with a total AUM attributable to Tetragon of US$27.4bn and generated an EBITDA of US$59.5m in FY19 (up 51% y-o-y). The late-2019 investment activity left Tetragon with a relatively low net cash position (4.1% of NAV at end-April). The shares trade at a three-year average discount to NAV of 44% (currently at 62.7%), which is relatively wide compared to peers given the company’s track record of delivering a 16% NAV TR pa over the last 10 years. The recent market sell-off has so far resulted in a 5.1% decrease in NAV (ytd to end-April 2020).
Companies: Tetragon Financial Group
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Companies: AGR CSH ESP DIGS IHR LXI PHP RESI SIR SUPR THRL SOHO BBOX SHED WHR
MJ Hudson has confirmed that it expects to achieve profits in line with expectations for FY20E. This is a good result linked to new client wins during the COVID-19 disruption and timely cost management. Whilst much of the group's activities are proving resilient, uncertainty remains and in line with most of the peer group, MJ Hudson is withdrawing guidance for FY21E. We similarly withdraw our FY21E forecasts until visibility improves, moving our rating to Under Review. Meanwhile, the shares are now down 30% since their pre-COVID-19 highs, which is beyond that seen at outsourcing peers (Sanne, JTC). Whilst COVID-19 is presenting challenges for many businesses, we believe that: 1) the structural growth drivers in alternatives that underpin MJ Hudson's growth will continue to remain highly relevant, and 2) its strong balance sheet gives it a relative advantage.
Companies: MJ Hudson Group
Today's update confirms Equals delivered another quarter of significant revenue growth YoY, delivered by organic and acquisitive means. Performance across the product range has varied unsurprisingly and we expect these trends to continue over Q2/20E. Given the great uncertainty over the duration and severity of COVID-19's impact on the group, we withdraw FY20-21E forecasts and place our recommendation Under review, awaiting further clarity. Equals is supported by a strong, debt-free, balance sheet and is undertaking measures to further conserve cash.
Companies: Equals Group
In the past month the group has made significant progress in pivoting its business away from its traditional face-to-face model. Although lending levels remain appropriately subdued, it has achieved an impressive collections performance, with its largest business running at about 90% of pre-lockdown levels. This, combined with the group’s high risk-adjusted margins has enabled it to generate £3m of FCF in the first three weeks of April, taking its net cash position to £38.7m as of 21 April. This strong financial position, combined with the group’s innovative approach to product development puts it in an extremely strong position to serve its clients and win share when the current government restrictions are eventually lifted. Reflecting this positive outlook we reiterate our BUY rating.
Companies: Non-Standard Finance
Seneca Global Income & Growth Trust (SIGT) is managed by a four-strong team at Seneca Investment Managers, seeking undervalued securities across multiple asset classes in order to diversify the trust’s risk and return drivers. Its UK equity portfolio was particularly negatively affected by the coronavirus-led market sell-off in March, given its focus on domestic, mid-cap value stocks, which performed relatively poorly. However, these holdings could stand SIGT in good stead during an economic recovery. The trust’s board has committed to continue paying quarterly dividends, using reserves where necessary if income falls short, which seems likely given the number of dividend cuts announced by corporates in response to the global pandemic.
Companies: Seneca Global Income & Growth Trust