Company Announcements

JANUS HENDERSON FUND MANAGEMENT UK LIMITED

LOWLAND INVESTMENT COMPANY PLC

Legal Entity Identifier: 2138008RHG5363FEHV19

19 May 2023

LOWLAND INVESTMENT COMPANY PLC

               Unaudited results for the half-year ended 31 March 2023

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 2023

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

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

¹ Using mid-market closing price

² 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 2023

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 28 April 2023 and second interim dividend of 1.525p per ordinary share that will be paid on 31 July 2023.

* Figures for 2013 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's Net Asset Value ('NAV') rose by 16.1% over the six months ended 31 March, outperforming the FTSE All-Share Index, which increased by 12.3%. This is a tentative recovery in the Company's performance, which has been disappointing since the Brexit vote. Returns over relatively short periods can be volatile. This is demonstrated by the fact that the three year return, which was slightly negative at the year end and lagged the benchmark, is now 61.2%, some way above the benchmark's 47.4% return. Performance over five years still lags the benchmark, increasing by 8.1% compared with 27.9%.               

Dividends

The recovery in income during the half year continued with Earnings per Share rising to 2.13p against a comparable 1.72p. This is still a little below the 2019 pre-pandemic level of 2.22p. There have not been any special dividends in the period, while there were in the comparable period last year.

The Board has maintained its progressive quarterly dividend policy. We have today declared our second interim of 1.525p, bringing the total so far to 3.05p, the same as last year.

Gearing

Gearing was again fairly steady during the half year, in the range of 12.1% to 14.9%, and now stands at 13.4%. We believe that the ability to employ gearing is an advantage offered by investment trusts. The Company was a modest net investor over the period, to the tune of £9.4m, with most of the disposals coming from take-over bids.

Share Price and Discount

During the period the share price increased by 18.9% to 124.3p and the discount at which the shares trade reduced from 11.5% to 5.8%. After careful consideration of the issue the Board continues to believe that a discount control mechanism is not in shareholders' interests. The current share price is 122.0p and discount 9.5%.     

Board 

In line with my statement in the Annual Report, the process of recruiting a new director has begun, and an announcement will be made in due course.     

Outlook

Generating a reasonable level of growth, while getting inflation under control, is a challenge faced by most economies. We tend to the view that this challenge is fully recognised in UK market valuations, as considered more fully in the Fund Managers' Report. We are therefore looking for growth, particularly from the lower section of the market cap spectrum, to which we would expect Lowland's weighting to increase.

Robert Robertson

Chairman

Equity allocation

¹ FTSE All-Share Index

¹ FTSE All-Share Index

¹ FTSE All-Share Index

FUND MANAGERS' REPORT

Performance Review

Lowland achieved an increase in NAV of 16.1% which is satisfactory in absolute terms, and in relative terms against the benchmark, which returned 12.3%. As mentioned in the last Annual Report, our performance had been hampered by our bias towards medium and small companies, which are more UK focused than the very large companies which had been the main outperformers in the market. The table below shows that, over the half-year, the main UK indices for large and medium sized companies registered returns in the region of 12%. The smaller companies and AIM indices again underperformed in relative terms. Lowland outperformed the indices relative to each of the market cap groups, with a modest exception in AIM. This enabled Lowland to outperform its benchmark, despite it having a much greater exposure to the smaller end of the market. The outperformance is due mainly to stock selection and takeovers, as mentioned below. 

There are signs that investors may be beginning to see value in the UK market, which is at a marked discount to its international peers. Factors behind this include normalisation after the pandemic, and the fact that Government is no longer in a state of chaos. Furthermore, some of the Brexit issues are finally being put behind us, the Windsor Framework on Northern Ireland being a case in point. We would expect medium and smaller companies, including AIM companies, to outperform in terms of income and growth, as economic recovery materialises.

Portfolio performance and weightings

Source: Janus Henderson Investors, six months to 31 March 2023

It has been a very busy period for news perceived to be relevant to the stock market.  The Autumn Budget of 2022 brought about the end of the Truss government and its central premise of growth at any cost was abandoned. In April this year we nearly experienced a new banking crisis emanating from Silicon Valley Bank, but investors have largely shrugged the news off and the market has made reasonable forward progress.

The reason for the advance in stock prices when investor sentiment is so poor is that valuations are very low. The evidence for this view is not just borne out by long-term valuation charts but also the increasing level of corporate activity. There were three takeovers of stocks in the portfolio during the period, with bids received for very different sorts of business.  The most notable was K3 Capital, a regional corporate adviser. The quoted market was simply not valuing the shares highly enough. Devro, the sausage skin maker, and Appreciate Group, a corporate gift operator, were also taken over. These stocks received cash offers that existing shareholders accepted.  Whilst these offers were at reasonable premia to the pre-bid price, they are likely to prove good purchases for the acquirers.  It is unlikely that takeover activity will abate unless investors attribute a fair value to UK quoted companies.  Similarly, there was no overriding theme to other portfolio companies which contributed to, or detracted from, performance.  The chart below shows the value of UK earnings is at a low point.

UK Equity Market is cheap relative to the Global Market

Please click here to review the chart.

http://www.rns-pdf.londonstockexchange.com/rns/9505Z_1-2023-5-18.pdf 

Source: JPMorgan/Janus Henderson Investors as at 31 December 2022

P/E = price/earnings per share

Five Highest Contributors

We show the absolute stock contributions in the tables below as these are what drive the NAV.    It is important to note however, that in comparing index performance against your Company's, what we do not own is also relevant. For instance, not having a holding in British American Tobacco aided relative performance. It was the agreed takeover of K3 that was the biggest absolute contributor to Lowland's return, while Serica, the North Sea gas company, was the biggest detractor due to the imposition by the British government of a windfall tax.

·              K3 Capital Group was subject to a successful takeover during the period.

·              BP benefitted from high energy prices.

·              FBD Holdings is an Irish insurer which benefits from pricing power in its sector.

·           Morgan Advanced Materials has a strong market position, and is well-placed to benefit from infrastructure spending.

·            Rolls-Royce has challenging plans for restructuring the business and we expect it to benefit as air travel increases.

Five largest detractors

Serica Energy suffered from the UK Government windfall tax on energy companies, whilst poor underwriting and adverse weather conditions caused Direct Line to suffer losses, and to cut its dividend.  The other largest detractors had no straightforward identifying factors for their performance other than continued market weakness in valuations.

The UK Economy

In the fourth quarter of last year economists were chasing one another down with their economic forecasts for the current year. They took them too low and they are now quietly upgrading their growth targets. The resilience of the economy has been underestimated by the forecasters. There are economic issues to be faced in the UK, the most pressing of which are the low level of productivity growth and persistent inflation. The solution lies in a vibrant corporate sector that is investing in the future.  A UK stock market with long-term investors providing capital will be a major part of this recovery.  

Activity

During the period £35.1m was invested into UK stocks with disposals of £27.3m being made.  The disposals predominantly came via the cash takeovers, with K3 being the largest. The holding in Direct Line was reduced as a result of a reassessment of the company's underwriting performance which has been disappointing. The purchases were a diverse range of companies. The holdings in Financials which are trading satisfactorily, but with strengths not reflected in their valuations, were increased; these include M&G, Legal and General, Vanquis, Numis and Brooks Macdonald. The Industrial sector remains a major part of the portfolio and the holding in the paper and packaging company DS Smith was increased. The Building Materials sector has seen marked share price weakness as investors are concerned that the higher mortgage rates will lead to severe house price falls and a large slowdown in activity. This is not being borne out by current trading which, although subdued, is not markedly weak. There is, therefore, an opportunity to increase exposure to the strongest companies in the area. The holdings in Marshalls, Bellway, Springfield Properties, and Epwin were increased.  Certain of the Retailers we hold have used several years of difficult trading to reduce their cost base and focus their business in preparation for more normal times. Examples of this can be found at M&S and Halfords where holdings were built up.  Purchases were also made in Cranswick, the meat processor, H&T, the pawn broker, and Hipgnosis, a investment trust which provides pure play exposure to song rights. The thing these companies have in common is that they are all excellent at what they do. They bring a diverse blend of end market exposures, while individually we believe they have some control over their own destiny.     

Outlook

GDP forecasts are being upgraded for 2023 by economic forecasters, and the inflation rate is falling, but slowly.  The stickiness in inflation partially reflects many companies preserving operating margins.  This suggests that, to protect the real value of capital in an inflationary period, a good hedge is a well-diversified portfolio of excellent companies which have pricing power through operational strengths and product excellence.  If inflation falls faster than expected, interest rates may peak sooner and should fall faster, benefitting company valuations. In the meantime, we anticipate that dividend growth from the underlying portfolio should improve, backed by the predicted progression in earnings.             

James Henderson and Laura Foll

Fund Managers

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:

Market, geopolitical, macroeconomic or environmental;

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 2022. The Board has completed a thorough review of the principal risks, and the uncertainties facing the Company.  As a result of this review, the Board considers that the principal risks and uncertainties remain largely unchanged and that they 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 2023 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

INVESTMENT PORTFOLIO

As at 31 March 2023

¹ AIM Stocks

² Unlisted Investments

Source: Janus Henderson

CONDENSED INCOME STATEMENT

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 statements.