Company Announcements

JANUS HENDERSON FUND MANAGEMENT UK LIMITED

LOWLAND INVESTMENT COMPANY PLC

Legal Entity Identifier: 2138008RHG5363FEHV19

18 May 2022

          Unaudited results for the half-year ended 31 March 2022

This announcement contains regulated information.

Investment objective

The Company aims to give shareholders a higher than average return with growth of both capital and income over the medium to long-term, by investing in a broad spread of predominantly UK companies. The Company measures its performance against the FTSE All-Share Index Total Return.

Investment policy

Asset Allocation

The Company will invest in a combination of large, medium and smaller companies listed in the UK.  We are not constrained by the weightings of any index; we focus instead on controlling absolute risk by diversifying on the basis of underlying company characteristics such as size, industry, economic sensitivity, clients and management.  In normal circumstances up to half the portfolio will be invested in FTSE 100 companies; the remainder will be divided between small- and medium-sized companies.  On occasions the Manager will buy shares listed overseas. The Manager may also invest a maximum of 15% in other listed trusts.

Dividend

The Company aims to provide shareholders with better-than-average dividend growth.

Gearing

The Board believes that debt in a closed-end fund is a valuable source of long-term outperformance, and therefore the Company will usually be geared.  At the point of drawing down debt, gearing will never exceed 29.99% of the portfolio valuation. Borrowing will be a mixture of short and long-dated debt, depending on relative attractiveness of rates.

Key data for the six months to 31 March 2022

¹ FTSE All-Share Index

Financial highlights

¹ NAV with debt at par value

² Using mid-market closing price

³ Based on dividends paid and declared in respect of the previous twelve month period

* Current period and prior period figures have been restated due to the sub-division of each ordinary share of 25p into ten ordinary shares of 2.5p each on 7 February 2022.

Total return performance (including dividends reinvested and excluding transaction costs)¹

¹ All performance periods are to period ending 31 March 2022 and reflect the market volatility at the onset of the COVID-19 pandemic

² Using mid-market closing price

³ FTSE All-Share Index

Sources: Morningstar Direct, Funddata, Refinitiv Datastream and Janus Henderson

Historical record - Year to 30 September

¹ Net revenue and net dividends paid are for the six month period ended 31 March 2022

² Attributable to ordinary shares

³ NAV per ordinary share with debt at par value

⁴ First interim dividend of 1.525p per ordinary share paid on 29 April 2022 and second interim dividend of 1.525p per ordinary share that will be paid on 29 July 2022.

* Figures for 2012 to 2021 have been restated due to the sub-division of each ordinary share of 25p into ten ordinary shares of 2.5p each on 7 February 2022.

INTERIM MANAGEMENT REPORT

CHAIRMAN'S STATEMENT

Overview

Lowland recorded a 0.7% decline in Net Asset Value ('NAV') over the six months ended 31 March, compared with an increase of 4.7% in the FTSE All-Share index, which is the Company's benchmark. This performance is very substantially due to the portfolio being much more weighted to medium and small companies than is the index. The Fund Managers go into further detail on performance by sector, commodities and defensive stocks being the engine of growth of the FTSE 100 Index.

Investors are clearly aware of the multi-cap approach which Lowland has always held. Smaller and medium sized companies generally have more scope for growth, and out-perform over time. However, in periods of profound uncertainty, such as the present, the smaller end of the scale is invariably hit hardest. We hardly need reminding of these uncertainties, but the worrying rise in inflation and the dreadful war in Ukraine have been unwelcome additions to the remaining worries over COVID-19.

Following approval at the AGM, our shares underwent a ten for one share split. We hope that investors will find this more convenient, particularly those who invest relatively small amounts on a regular basis. Our share price, adjusting for the split, increased by 3.5% during the period.

Dividends

Recovery in income continued during the half year with Earnings per Share rising to 1.72p, against a comparable 1.28p. This is still below the 2019 pre-pandemic level of 2.22p. Several companies have declared special dividends and others have resumed dividends for the first time since the pandemic.

The Board decided when the pandemic hit that it would seek to stick by the progressive quarterly dividend policy, dipping into revenue reserves, and in a limited fashion, capital reserves. We have today declared our second interim dividend of 1.525p, bringing the total for the year so far to 3.05p, compared with 3.00p last year adjusting for the split.

Gearing

The Board and Fund Managers have vigilantly watched the level of gearing in the volatile markets which have prevailed. The Company has been a modest net seller over the period and gearing has marginally decreased from 13.8% to 13.1%.

Share Price Discount

The discount on the Company's share price narrowed from 9.1% to 5.7%.

Outlook

The three worries to which I have referred have not gone away. COVID-19 is likely to cause economic as well as human problems for some time to come, the most evident current manifestation being the consequences of the Chinese Government's COVID-19 policies on their economic growth. Russia's behaviour will remain a worry, potentially on a massive scale, but most certainly in its effect on inflation, which was a concern before the Putin Government's brutality came to the fore. Stagflation - an unhappy combination of high inflation and low growth - is a real threat to the recovery of earnings and dividends.

We tend to the view that these difficult circumstances are well understood by the market, and largely 'priced in'. The forward Price to Earnings ratio on our portfolio is around 10x, which is very cheap compared with historical measures. We are confident that the right UK companies will show resilience and reward the patient investor.

Robert Robertson

Chairman

18 May 2022

Equity allocation

¹ FTSE All-Share Index

¹ FTSE All-Share Index

¹ FTSE All-Share Index

FUND MANAGERS' REPORT

Performance review

The six months to the end of March saw a disappointing 0.7% fall in Lowland's NAV. This compares to the FTSE All-Share benchmark which rose 4.7%, in a period in which small and medium sized companies materially underperformed large companies. After the strong economic recovery in 2021 (a year in which the UK economy grew over 7% in real terms), rising inflation towards the end of that year and into early 2022 began to suppress household real disposable incomes. This led to concerns that 2022 may see slower than expected economic growth as consumers seek to curtail discretionary spending. The awful war in Ukraine will put further strain on UK household budgets, as it is likely to result in some commodity prices remaining higher for longer (impacting household fuel and energy bills), while also increasing the cost of food.

Against this backdrop, it is understandable that the shape of the UK equity market reflected greater uncertainty about the prospects for economic growth. The best performing sectors were either directly positively exposed to rising commodity prices (basic materials and energy) or sectors perceived to be defensive such as utilities and health care. In contrast the worst performing sector was consumer discretionary as the market sought to 'price in' earnings pressure in sectors such as retail.

This pattern of sector performance also influenced what size of company performed well. During the six months the FTSE 100 Index, as a result of its relatively high weighting in commodities and defensive sectors such as utilities, performed well (index performance can be seen in the far right column of the table below). In sharp contrast the more domestic and on average more cyclical FTSE 250 and AIM indices fell materially.

The table below illustrates the weighting by size of Lowland's portfolio compared with the benchmark, and its effect on returns. The proportion of the portfolio invested in the FTSE 100 Index was 47.4% compared with the benchmark's 81.5%. At the other end of the scale, the Company had 15.7% invested in AIM companies, and AIM does not form part of the benchmark.

Lowland has always invested across all sizes of UK business, with normally not more than half of the portfolio held in the largest 100 UK companies. It is our view that over the long term these smaller companies have greater potential for sales and earnings growth, as they are at an earlier stage of their life cycle with a longer pathway of growth ahead of them. At times of nervousness about the economic outlook, however, smaller and (on average) more cyclical businesses tend to underperform and the last six months have been no exception.

What the table above demonstrates is that the Company's underperformance relative to the FTSE All-Share Index over the last six months has in large part been driven by the above benchmark position in smaller companies. The Company's FTSE 100 and AIM holdings, for example, outperformed their relevant indices while it was only the FTSE Small-Cap holdings (where a number of the most domestic and cyclical holdings sit) that materially underperformed. We go into more detail on the stock specific drivers of performance below.

The five best performers (on an absolute basis) during the six months are listed below:

Examining these in turn:

• Anglo American, Shell and Serica Energy all directly benefit from rising commodity prices. 
• HSBC should be well placed to benefit from rising interest rates.
• National Grid should have earnings that are relatively well insulated from an economic downturn.

The largest five (absolute) detractors from performance were:

Examining each in turn:

• Online value retailer Studio Retail was written down to zero. This was a very disappointing outcome and followed a year in which the business generated substantial profits. Supply chain issues have been a recurring problem across retailers since the pandemic began and in this case they led to a dislocation between inventory arriving and the peak Christmas selling season. This led to working capital issues that ultimately proved unresolvable as the company failed to secure additional funding from its banks.  
• Reach, K3 Capital and Senior had all performed well in the six months prior to this period (with share prices rising 66%, 24% and 56% respectively), therefore the falls in this period reflect a reversal of sentiment with economic growth expectations being revised downwards. 
• IP Group has had a number of portfolio successes in recent months including the UK IPO of gene sequencer Oxford Nanopore. The share price fall, however, was likely due to read across from falling valuations of high growth (often NASDAQ listed) peer companies.

Earnings per share during the first half were 1.72p, compared to 1.28p during the previous year (and 2.22p in 2019 to provide a pre-pandemic comparison). Dividends have come in at the upper end of our expectations, with several companies (such as flooring distributor Headlam) announcing special dividends as well as some companies returning to dividend payments for the first time since the pandemic began (including baked goods producer Finsbury Food and Irish insurer FBD).

Alongside better than expected dividends there has also been a trend for companies announcing share buybacks. It has been our view for a number of years that UK equities are undervalued relative to overseas peers and company boards have in some cases reached the same conclusion, choosing to use some of their surplus cash to buy back shares.

Activity

We were modest net sellers during the period, selling £28.8m in total and buying £19.8m. The largest individual sale was exiting the position in housebuilder Bellway in January. This was sold due to concerns around housing affordability relative to average earnings, particularly at a time of rising interest rates. In contrast a small new position was purchased in Scottish housebuilder Springfield Properties. Scotland has not experienced the same level of house price growth as has much of England, therefore affordability looks less stretched. Springfield also has a sizeable land bank that should give it a pathway to volume growth ahead of many listed peers.

Within larger companies new positions were established in Kingfisher (owner of brands including Screwfix and B&Q) and consumer goods company Reckitt Benckiser. Both companies had, to an extent, seen an earnings benefit from the pandemic - Kingfisher benefitted from people spending more time at home and therefore increasing their spending on home improvements while Reckitt Benckiser's cleaning products saw higher demand. In both cases, however, the earnings boost from the pandemic has masked more structural improvements. Kingfisher has steadily improved its French business and continued to roll out Screwfix stores, while Reckitt's has invested in sales, marketing and product development in order to improve its organic growth. In our view these self-help measures will become more evident as consumer demand normalises following the pandemic.

Outlook

Investors have plenty of concerns at a macro level. Stagflation, where inflation is high and economic growth is low, is being talked about. However, it is because it is being talked about that expectations for future returns from equities are low. Share prices are already reflecting to a large degree the very real problems. Valuations for many companies are at reduced levels using a historic perspective, yet many of the companies in the portfolio are well managed with strong balance sheets and good operating margins.

Lowland's portfolio is not a proxy for the UK economy, it is a collection of individual company holdings that to a degree control their own destiny. The management teams will react to the circumstances they find and if their product or service is good enough they will in time prosper. Many of the management teams we regularly meet are upbeat about their business prospects. The earnings outlook for many of the companies held is reasonably robust; cost increases are being pushed through and margins defended. Cash generation is underpinning the recovery in dividends. It will be dividend increases inspired by the earnings growth that reawaken interest in UK equities despite the concerns around the global backdrop.  The well chronicled problems facing the economy are currently the focus of investor attention - the surprise may be how well many UK companies cope with these challenges.

James Henderson and Laura Foll

Fund Managers

18 May 2022

Related party transactions

The Company's current related parties are its Directors and Janus Henderson. There have been no material transactions between the Company and its Directors during the year and the only amounts paid to them were in respect of Directors' remuneration and expenses incurred on the Company's business, for which there were no outstanding amounts payable at the period end.

In relation to the provision of services by Janus Henderson, other than fees payable by the Company in the ordinary course of business and the provision of sales and marketing services, there have been no material transactions with Janus Henderson affecting the financial position of the Company during the year under review.

Principal risks and uncertainties

The principal risks and uncertainties associated with the Company's business can be divided into various areas:

Geopolitical risks;

Global pandemic;

Investment activity and strategy;

Portfolio and market price;

Dividend income;

Financial;

Gearing;

Tax and regulatory; and

Operational.

Information on these risks and how they are managed is given in the Annual Report for the year ended 30 September 2021. The Board has completed a thorough review of the principal risks, and the uncertainties facing the Company.  As a result of this, they have been updated and include geopolitical risks due to the Russian invasion of Ukraine which has increased the volatility in European markets; other risks remain largely unchanged.  The Board anticipates that these risks are as applicable to the remaining six months of the financial year as they were to the six months under review.

Statement of Directors' Responsibilities

The Directors confirm that, to the best of their knowledge:

(a)        the set of financial statements for the half-year to 31 March 2022 has been prepared in accordance with "FRS 104 Interim Financial Reporting";

(b)        the Interim Management Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c)        the Interim Management Report includes a fair review of the information required by the Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of related party transactions and changes therein).

On behalf of the Board

Robert Robertson

Chairman

18 May 2022

INVESTMENT PORTFOLIO

As at 31 March 2022

¹ AIM Stocks

² Unlisted Investments

Source: Janus Henderson

CONDENSED INCOME STATEMENT

* Comparative figures for the periods ended 31 March 2021 and 30 September 2021 have been restated due to the sub-division of each ordinary share of 25p into ten ordinary shares of 2.5p each on 7 February 2022.

The total columns of this statement represent the Income Statement of the Company, prepared in accordance with FRS 104. The revenue and capital columns are supplementary to this and are published under guidance from the Association of Investment Companies.

The Company has no recognised gains or losses other than those disclosed in the Income Statement and Statement of Changes in Equity.

All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period.

The accompanying notes are an integral part of the condensed financial statement

CONDENSED STATEMENT OF CHANGES IN EQUITY

* Dividends rates have been restated due to the sub-division of each ordinary share of 25p into ten ordinary shares of 2.5p each on 7 February 2022.

The accompanying notes form an integral part of these condensed financial statements.

CONDENSED STATEMENT OF FINANCIAL POSITION

* Comparative figures for the periods ended 31 March 2021 and 30 September 2021 have been restated due to the sub-division of each ordinary share of 25p into ten ordinary shares of 2.5p each on 7 February 2022.

The accompanying notes form an integral part of these condensed financial statements.

CONDENSED STATEMENT OF CASH FLOWS

The accompanying notes are an integral part of these condensed financial statements.

NOTES TO THE FINANCIAL STATEMENTS

The half-year financial statements cover the period from 1 October 2021 to 31 March 2022 and have not been audited or reviewed by the Company's auditors.

For further information, please contact:

James Henderson / Laura Foll

Fund Managers

Lowland Investment Company plc

Tel: 020 7818 4370 / 020 7818 6364

James de Sausmarez

Director and Head of Investment Trusts

Janus Henderson Investors

Tel: 020 7818 3349

Harriet Hall

PR Manager, Investment Trusts

Janus Henderson Investors

Telephone: 020 7818 2919

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.