Scottish Oriental Smlr Co Tst PLC Half-year Report (5277L)

TIDMSST

RNS Number : 5277L

Scottish Oriental Smlr Co Tst PLC

20 April 2018

THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

Interim results for the six months to 28 February 2018

(Extracted from the Interim Report)

The Board of The Scottish Oriental Smaller Companies Trust plc is pleased to announce the results for the six months to 28 February 2018.

Financial Highlights

 
 Total Return Performance for the six months 
  to 28 February 2018 (Unaudited) 
 
 Net Asset Value 
  (capital return 
  with dividends                  MSCI AC Asia ex 
  reinvested)            (2.3)%    Japan Index (GBP)            3.4% 
 
                                  MSCI AC Asia ex 
                                   Japan Small Cap 
 Share Price             (7.1)%    Index (GBP)                  4.2% 
 
                                  FTSE All-Share 
                                   Index (GBP)                (0.9)% 
 
 Summary Data at 28 February 2018 (Unaudited) 
 
 Shares in issue     30,948,163   Shareholders'           GBP355.01m 
                                   Funds 
 
 Net Asset Value      1,147.10p   Market Capitalisation   GBP303.29m 
  per share 
 
                                  Share Price Discount 
 Share Price            980.00p    to Net Asset Value          14.6% 
------------------  -----------  ----------------------  ----------- 
 

Corporate Objective

The investment objective of The Scottish Oriental Smaller Companies Trust plc ("Scottish Oriental", "the Company" or "the Trust") is to achieve long-term capital growth by investing in mainly smaller Asian quoted companies with market capitalisations of below US$1,500m, or the equivalent thereof, at the time of investment. For investment purposes, this includes the Indian sub-continent but excludes Japan and Australasia.

This is an abridged version of Scottish Oriental's investment policy and objective. A full statement of Scottish Oriental's investment policy can be found on page 19 of the Annual Report and Accounts* for the year ending 31 August 2017 ("the Annual Report and Accounts").

Principal Risks and Uncertainties

Given the nature of its investment activities, the principal risks that Scottish Oriental faces from its financial instruments are market risk (comprising interest rate, currency and other price risks) and credit risk. The principal risks and uncertainties have not changed since the publication of the Annual Report and Accounts. A detailed explanation of these risks and how they are managed is set out in Note 15 on pages 54 to 58 of the Annual Report and Accounts. As Scottish Oriental's assets mainly comprise readily realisable securities, other than in exceptional circumstances there should be no significant liquidity risk. Scottish Oriental's investment portfolio is exposed to market price fluctuations and currency fluctuations which are monitored by the Investment Manager. The Company is also exposed to minimal interest rate risk on interest receivable from bank deposits and interest payable on bank overdraft positions.

Going Concern

After making inquiries, and bearing in mind the nature of the Company's business and assets, which are considered to be readily realisable if required, the Directors believe that there are no material uncertainties and that the Company has adequate resources to continue operating for at least twelve months from the date of approval of the condensed financial statements. For this reason, they continue to adopt the going concern basis in preparing the accounts.

*The Company's Annual Report and Accounts for the year ending 31 August 2017 can be found on the Company's website at: www.scottishoriental.com.

Directors' Responsibility Statement

The Directors are responsible for preparing the half-yearly financial report in accordance with applicable law and regulations. The Directors confirm that, to the best of their knowledge:

(a) the condensed set of financial statements within the half-yearly financial report, prepared in accordance with the Financial Reporting Standard 104 (Interim Financial Reporting), gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

(b) the Interim Management Report includes a fair review of the information required by 4.2.7R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules (important events that have occurred in the first six months of the Company's financial year, together with their effect on the half-yearly financial statements to 28 February 2018 and a description of the principal risks and uncertainties for the remaining six months of the financial year). Rule 4.2.8R requires information on related party transactions. No related party transactions have taken place during the first six months of the financial year that have materially affected the financial position of the Company during that period and there have been no changes in the related party transactions described in the last Annual Report and Accounts that could do so.

The half-yearly report for the six months to 28 February 2018 comprises the Interim Management Report, the Directors' Responsibility Statement and a condensed set of financial statements and has not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.

By order of the Board

James Ferguson

Chairman

19 April 2018

Interim Management Report

Investment performance

Over the six months ending 28 February 2018, Scottish Oriental's net asset value ("NAV") per share decreased by 2.3 per cent in total return terms, while the MSCI AC Asia ex Japan Index recorded a sterling adjusted increase of 3.4 per cent and the MSCI AC Asia ex Japan Small Cap Index a rise of 4.2 per cent on the same basis. The Trust's share price fell by 7.1 per cent in total return terms over the period. The Trust underperformed the FTSE All-Share Index, which fell by 0.9 per cent in total return terms over the six month period.

The biggest detractors from investment performance were Scottish Oriental's relatively low exposure to Chinese companies as well as poor returns from the Trust's investments in Indonesia and the Philippines. The Trust's relatively large cash holdings also detracted from investment performance.

The Trust's shares traded at a discount ranging from 7.5 per cent to 14.6 per cent during the period, reflecting the volatility in Asian markets and continued investor caution, and stood at a discount to NAV of 14.6 per cent on 28 February 2018. The Trust bought back 12,000 shares during the six months under review, at a discount to NAV of 13.8 per cent. These shares will be held in Treasury for future re-issue.

The Trust's cash level was GBP31.9 million at the end of the period, representing 9.0 per cent of net assets. We will seek to invest this money gradually once suitable long term investment opportunities have been identified.

Review

Asian stock markets rose over the six months ending 28 February 2018. Investor sentiment was positive with a number of markets producing double digit returns in local currency terms. However the pound strengthened notably against most Asian currencies over the period which resulted in more moderate returns when converted to sterling. The US raised interest rates in December continuing its policy of gradual increases. Expectations are for further increases in 2018. There have been few policy rate changes made by Asian central banks.

The Vietnamese stock market performed exceptionally strongly over the period with company results reflecting the strong economy. Thailand also performed very well with many of its companies benefiting from the rebound in the oil price. The three poorest performing markets were India, the Philippines and Sri Lanka. All produced positive local returns but suffered from weak currencies relative to sterling.

Asian smaller companies modestly outperformed their larger counterparts. Returns were considerably better for smaller companies in India, South Korea and Taiwan.

During the period the number of portfolio holdings was further reduced from 67 to 58 stocks. Companies were typically sold because their valuations became too high or because of a weak growth outlook. Examples of the former category are Godrej Properties, Jubilant Foodworks and Kansai Nerolac Paints in India; and the latter category being Hong Kong's Public Financial Holdings, Singapore's Delfi and Taiwan's Standard Foods. We initiated ten new investments in companies such as Pakistan's Pak Suzuki Motors, the Philippines' Century Pacific Food and Taiwan's Silergy which all have the potential to become much larger companies. We also added to some existing holdings including India's Blue Dart Express and Singapore's Raffles Medical Group where weakness in these companies' share prices saw valuations become more attractive.

As a result of portfolio activity, Scottish Oriental's exposure to the Philippines rose and Hong Kong and India fell. At a sector level, exposure to Industrials and Healthcare rose whereas Financials and Real Estate fell. But more importantly, the Trust portfolio is now concentrated on faster growing companies which, we believe, have the potential to deliver multi-year growth and emerge as winners in their respective industries.

Outlook

2017 saw a strong recovery in global growth and this has been reflected through strong share price performance by Asia's companies - particularly those in more cyclical sectors. Our concern remains that this improvement in growth has happened against a backdrop of rising debt levels at a time when interest rates are near all-time low levels. Although interest rates have started to rise, the pace of these increases has been modest. Inflation has remained benign and this, combined with a weakening US dollar, has given Asia's central bankers the luxury of not needing to follow the US Federal Reserve in raising policy rates. This has resulted in accommodative monetary conditions in most of Asia which has allowed Asia's stock markets to continue to perform well. Debt levels cannot continue to rise forever but this will perhaps not become obvious until interest rates normalise and the cost of servicing debt becomes more significant.

Until such normalisation occurs, we will continue to be cautious. We remain wary of highly leveraged companies and also countries where we believe recent growth has been borrowed from the future by increased borrowing by the government, corporations and consumers. A large portion of Scottish Oriental's funds are invested in India, Indonesia and the Philippines - countries where we have found the most companies recently that we believe have strong long term growth ahead of them. These three countries have relatively low levels of debt when compared to GDP with recent growth being fuelled by structural domestic factors rather than cheap, borrowed money. Our caution also means that the Trust still has relatively high levels of cash.

Whilst we are keen for the portfolio to be fully invested, valuations of quality Asian companies remain as high as we can remember. With this in mind we will look to deploy the Trust's cash reserves as and when we find companies that meet our investment criteria at valuations where we believe the likely returns over the medium term are reasonable.

Dividend

A dividend of 11.5p per share was paid on 19 January 2018 for the year ending 31 August 2017 (31 August 2016: 11.5p per share). It is too early to make a forecast of the distribution for the current financial year.

Income Statement for the six months to 28 February 2018

 
 
 
                                          Six months to                           Six months to 
                                         28 February 2018                        28 February 2017 
                                           (unaudited)                             (unaudited) 
                               Revenue        Capital       Total*      Revenue     Capital     Total* 
                                GBP'000        GBP'000      GBP'000      GBP'000     GBP'000    GBP'000 
                           ---------------  -----------  -----------  -----------  ---------  --------- 
 
 (Losses)/gains 
  on investments                         -      (8,076)      (8,076)            -     23,307     23,307 
 Income from investments             1,740            -        1,740        1,818          -      1,818 
 Other income                           10            -           10           26          -         26 
 Investment management 
  fee                              (1,375)            -      (1,375)      (1,254)          -    (1,254) 
 Currency (losses)/gains                 -      (1,497)      (1,497)            -      1,352      1,352 
 Other administrative 
  expenses                           (490)            -        (490)        (314)          -      (314) 
                           ---------------  -----------  -----------  -----------  ---------  --------- 
 
 Net return before 
  finance costs and 
  taxation                           (115)      (9,573)      (9,688)          276     24,659     24,935 
 Finance costs of 
  borrowing                              -            -            -        (311)          -      (311) 
                           ---------------  -----------  -----------  -----------  ---------  --------- 
 Net return on ordinary 
  activities before 
  taxation                           (115)      (9,573)      (9,688)         (35)     24,659     24,624 
 Tax on ordinary 
  activities                         (121)        (758)        (879)        (132)          -      (132) 
                           ---------------  -----------  -----------  -----------  ---------  --------- 
 
 Net return attributable 
  to equity 
  shareholders                       (236)     (10,331)     (10,567)        (167)     24,659     24,492 
                           ---------------  -----------  -----------  -----------  ---------  --------- 
 
 Net return per 
  ordinary share                   (0.76p)     (33.38p)     (34.14p)      (0.54p)     79.58p     79.04p 
 

* The total column of this statement is the Profit & Loss Account of the Company. The revenue and capital columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

There are no items of other comprehensive income, therefore this statement is the single statement of comprehensive income of the Company.

All revenue and capital items derive from continuing operations.

Statement of Financial Position as at 28 February 2018

 
                                             At 28          At 31 
                                            February      August 2017 
                                              2018 
                                             GBP'000        GBP'000 
                                           (unaudited)     (audited) 
 FIXED ASSETS - EQUITY INVESTMENTS 
  Bangladesh                                     5,234          5,127 
  China                                         39,042         35,237 
 Hong Kong                                      17,364         26,591 
  India                                         86,455         94,060 
  Indonesia                                     27,549         30,067 
  Malaysia                                       9,269         10,988 
  Pakistan                                       5,065          3,602 
  Philippines                                   35,227         27,679 
  Singapore                                     18,185         19,578 
  South Korea                                    7,590         12,302 
  Sri Lanka                                     17,030         17,980 
  Taiwan                                        41,035         41,976 
  Thailand                                       8,151          8,989 
 Vietnam                                         6,577          4,209 
 Total Equities                                323,773        338,385 
 
 Net Current Assets                             31,234         30,871 
                                         -------------  ------------- 
 Total Assets less Current Liabilities         355,007        369,256 
 
 
    CAPITAL AND RESERVES 
  Ordinary share capital                         7,853          7,853 
  Share premium account                         34,259         34,259 
  Capital redemption reserve                        58             58 
  Capital reserve                              308,057        318,511 
  Revenue reserve                                4,780          8,575 
                                         -------------  ------------- 
  Equity Shareholders' Funds                   355,007        369,256 
                                         =============  ============= 
 
  Net asset value per share                  1,147.10p      1,192.68p 
 

Cash Flow Statement for the six months to 28 February 2018

 
                                                   Six months      Six months 
                                                        to              to 
                                                   28 February     28 February 
                                                       2018            2017 
                                                     GBP'000         GBP'000 
                                                   (unaudited)     (unaudited) 
                                           Note 
 Net cash outflow from operations 
  before dividends, interest, 
  purchases and sales                          8        (1,810)         (1,213) 
    Dividends received from investments                   2,156           2,439 
    Interest received from deposits                          10              26 
    Purchases of investments                           (75,320)        (93,890) 
    Sales of investments                                 80,093         100,551 
                                                     ----------      ---------- 
    Cash from operations                                  5,129           7,913 
    Taxation                                              (892)           (167) 
                                                     ----------      ---------- 
 Net cash inflow from operating 
  activities                                              4,237           7,746 
 Financing activities 
    Interest paid on borrowings                               -           (314) 
     Equity dividend paid                               (3,559)         (3,560) 
     Buyback of ordinary shares                           (123)           (542) 
                                                     ----------      ---------- 
 Net cash outflow from financing 
  activities                                            (3,682)         (4,416) 
 Increase in cash and cash 
  equivalents                                               555           3,330 
  Cash and cash equivalents 
   at the start of the period                            32,816          47,352 
  Effect of currency (losses)/gains                     (1,497)           1,352 
  Cash and cash equivalents 
   at the end of the period* 
                                                         31,874          52,034 
                                                     ----------      ---------- 
 

*Cash and cash equivalents represents cash at bank

Statement of Changes in Equity

 
 
 For the six months ended 
  28 February 2018 
 
                                        Share       Capital 
                             Share    Premium    Redemption      Capital     Revenue 
                           Capital    Account       Reserve      Reserve     Reserve        Total 
                           GBP'000    GBP'000       GBP'000      GBP'000     GBP'000      GBP'000 
----------------------  ----------  ---------  ------------  -----------  ----------  ----------- 
 Balance at 
  31 August 2017             7,853     34,259            58      318,511       8,575      369,256 
----------------------  ----------  ---------  ------------  -----------  ----------  ----------- 
 Total comprehensive 
 income: 
 
   Return for 
   the period                    -          -             -     (10,331)       (236)     (10,567) 
 Transactions 
  with owners 
  recognised 
  directly in 
  equity: 
 Buyback of 
  ordinary shares                -          -             -        (123)           -        (123) 
 Dividend paid 
  in the period                  -          -             -            -     (3,559)      (3,559) 
 Balance at 
  28 February 
  2018                       7,853     34,259            58      308,057       4,780      355,007 
----------------------  ----------  ---------  ------------  -----------  ----------  ----------- 
 
 
 
 For the six months ended 
  28 February 2017 
 
                                         Share       Capital 
                              Share    Premium    Redemption     Capital     Revenue 
                            Capital    Account       Reserve     Reserve     Reserve       Total 
                            GBP'000    GBP'000       GBP'000     GBP'000     GBP'000     GBP'000 
-----------------------  ----------  ---------  ------------  ----------  ----------  ---------- 
 Balance at 31 
  August 2016                 7,853     34,259            58     272,611      10,038     324,819 
-----------------------  ----------  ---------  ------------  ----------  ----------  ---------- 
 Total comprehensive 
  income: 
 
   Return for the 
   period                         -          -             -      24,659       (167)      24,492 
 Transactions 
 with owners 
 recognised directly 
 in equity: 
 Buyback of ordinary 
  shares                          -          -             -       (542)           -       (542) 
 Dividend paid 
  in the period                   -          -             -           -     (3,560)     (3,560) 
 Balance at 28 
  February 2017               7,853     34,259            58     296,728       6,311     345,209 
-----------------------  ----------  ---------  ------------  ----------  ----------  ---------- 
 
 

Notes to Accounts

(1) The condensed Financial Statements for the six months to 28 February 2018 comprise the Income Statement, Statement of Financial Position, Cash Flow Statement and Statement of Changes in Equity, together with the notes set out below. They have been prepared in accordance with FRS 104 'Interim Financial Reporting' and the AIC's Statement of Recommended Practice issued in November 2014 and updated in January 2017 with consequential amendments.

(2) The position as at 31 August 2017 is an abridged version of that contained in the Annual Report and Accounts, which received an unqualified audit report and which have been filed with the Registrar of Companies. This Interim Report has been prepared under the same accounting policies adopted for the year to 31 August 2017.

(3) The return per ordinary share figure is based on the net loss for the six months ended 28 February 2018 of GBP10,567,000 (six months ended 28 February 2017: net profit of GBP24,492,000) and on 30,954,196 (six months ended 28 February 2017: 30,986,885) ordinary shares, being the weighted average number of ordinary shares in issue during the respective periods.

(4) At 28 February 2018 there were 30,948,163 ordinary shares in issue and 465,500 ordinary shares held in Treasury (31 August 2017: 30,960,163 in issue and 453,500 held in Treasury). During the six months ended 28 February 2018, the Company bought back 12,000 ordinary shares at a total cost of GBP123,000, all of which have been held in Treasury for future re-issue. Since the half-year end, the Company has bought back a further 37,000 ordinary shares to be held in Treasury at a cost of GBP352,000.

(5) Dividends

 
                                                  At             At 
                                         28 February    28 February 
                                                2018           2017 
                                             GBP'000        GBP'000 
 Amounts recognised as distributions 
  in the period: 
 
   Dividend for the year ending 
   31 August 2017 of 11.5p (2016 
   - 11.5p), paid 19 January 2018              3,559          3,560 
                                       -------------  ------------- 
 

(6) Under the terms of the Investment Management Agreement, an annual performance fee may be payable to the Investment Manager at the end of the year. A detailed explanation of the performance fee computation is set out on page 49 of the Annual Report and Accounts. The total fee payable to the Investment Manager is capped at 1.5% per annum of the Company's net assets.

Assuming no change in share price, MSCI AC Asia ex Japan Index Total Return and shares in issue between 28 February and 31 August 2018, the estimated performance fee for the year ending 31 August 2018 would amount to GBPnil. No performance fee has been accrued in the six months to 28 February 2018.

(7) Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with FRS 102 and FRS 104, these investments are analysed using the far value hierarchy described below. Short term balances are excluded as their carrying value at the reporting date approximates to their fair value.

The levels are determined by the lowest (that is, the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1 - Investments with prices quoted in an active market;

Level 2 - Investments whose fair value is based directly on observable current market prices or is indirectly being derived from market prices; and

Level 3 - Investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.

All of the Company's investments were categorised as Level 1 for the six month period to 28 February 2018.

(8) Reconciliation of total return on ordinary activities before finance costs and taxation to net cash outflow before dividends, interest, purchases and sales

 
                                          Six months to  Six months to 
                                            28 February    28 February 
                                                   2018           2017 
                                                GBP'000        GBP'000 
Net return on activities before finance 
 costs and taxation                             (9,688)         24,935 
Net losses/(gains) on investments                 8,076       (23,307) 
Currency losses/(gains)                           1,497        (1,352) 
Dividend income                                 (1,740)        (1,818) 
Interest income                                    (10)           (26) 
(Decrease)/increase in creditors                    (3)              5 
Decrease in debtors                                  58            350 
                                          -------------  ------------- 
Net cash outflow from operations before 
 dividends, 
interest, purchases and sales                   (1,810)        (1,213) 
 

-- The terms of the interim report and this announcement were approved by the Board on 19 April 2018.

-- Copies of the Interim Report will be posted to shareholders shortly and will be available thereafter on the Company's website: www.scottishoriental.com and from the Company Secretary's office at 21 Walker Street, Edinburgh EH3 7HX.

Enquiries:

PATAC Limited, Edinburgh, [phone]

19 April 2018

This information is provided by RNS

The company news service from the London Stock Exchange

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