Scottish Oriental Smlr Co Tst PLC Half Year Report

TIDMSST

Scottish Oriental Smlr Co Tst PLC

01 April 2019

THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

Interim results for the six months to 28 February 2019

(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 2019.

Financial Highlights

 
 Total Return Performance for the six months to 28 February 
  2019 (Unaudited) 
 
 Net Asset Value (capital 
  return with dividends                   MSCI AC Asia ex Japan 
  reinvested)                    (3.8)%    Index (GBP)                 (3.5)% 
 
                                          MSCI AC Asia ex Japan 
 Share Price                     (3.7)%    Small Cap Index (GBP)       (8.6)% 
 
                                          FTSE All-Share Index 
                                           (GBP)                       (3.7)% 
 
 Summary Data at 28 February 2019 (Unaudited) 
 
 Shares in issue             29,873,784   Shareholders' Funds      GBP325.77m 
 
 Net Asset Value per          1,090.49p   Market Capitalisation    GBP289.78m 
  share 
 
                                          Share Price Discount 
 Share Price                    970.00p    to Net Asset Value           11.1% 
--------------------------  -----------  -----------------------  ----------- 
 

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$3,000m, 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, which was amended following shareholder approval at the Annual General Meeting on 18 December 2018. A full statement of Scottish Oriental's amended investment policy can be found on page 66 of the Annual Report and Accounts* for the year ending 31 August 2018 ("the Annual Report and Accounts").

*The Company's Annual Report and Accounts for the year ending 31 August 2018 can be found on the Company's website at: www.scottishoriental.com.

Interim Management Report

Investment performance

Over the six months ending 28 February 2019, Scottish Oriental's net asset value ("NAV") per share decreased by 3.8 per cent in total return terms, while the MSCI AC Asia ex Japan Index recorded a sterling adjusted decrease of 3.5 per cent and the MSCI AC Asia ex Japan Small Cap Index a decrease of 8.6 per cent on the same basis. The Company's share price fell by 3.7 per cent in total return terms over the period. The Company performed in line with the FTSE All-Share Index, which fell by 3.7 per cent in total return terms over the six month period.

The biggest detractor from investment performance was Scottish Oriental's large exposure to Indian companies. Poor returns from the Company's investments in the Philippines and Sri Lanka also hurt performance. Scottish Oriental benefited from its holdings in Hong Kong and Indonesia.

The Company's shares traded at a discount ranging from 8.1 per cent to 16.5 per cent during the period, reflecting the volatility in Asian markets and continued investor caution, and stood at a discount to NAV of 11.1 per cent on 28 February 2019.

The Company's cash level was GBP23.8 million at the end of the period, representing 7.3 per cent of net assets. We will seek to invest this money gradually once suitable long term investment opportunities have been identified.

Dividend

A dividend of 11.5p per share was paid on 18 January 2019 for the year ending 31 August 2018 (31 August 2017: 11.5p per share). It is too early to make a forecast of the distribution for the current financial year.

Review

Asian stock markets fell over the six months ending 28 February 2019. Investor sentiment was initially negative caused by US-China trade tensions, rising interest rates, a strong US dollar and evidence of weakening growth in China. However, as the period progressed, concerns eased as both the US and China became more conciliatory, a number of central banks adopted more dovish stances and China announced supportive economic and monetary policies.

The Pakistani stock market performed worst over the period reflecting the country's ongoing economic issues. The Indian stock market was weak with a liquidity crisis amongst some of its non-banking financial corporations impacting market sentiment. Taiwan also fell sharply with its large technology sector hurt by a lack of demand for smartphones. South East Asian stock markets outperformed with the Indonesian market the strongest. The Hong Kong market also rose albeit driven by its large capitalisation financial sector.

Asian smaller companies underperformed their larger counterparts. Returns were considerably worse for smaller companies in Hong Kong, India, Indonesia and Sri Lanka.

During the period the number of portfolio holdings increased from 57 to 59 stocks. Diagnostic and testing service provider Dr Lal Pathlabs and industrial gas producer Linde India were sold because of high valuations. Cement producer Lafarge Malaysia, utility Manila Water, cosmetics company AmorePacific Group and courier company Blue Dart Express were sold as earnings prospects deteriorated.

Eight new positions were initiated. Market weakness allowed us to buy apparel brands JNBY Design and Li Ning in China and Great Eastern Shipping in India. India's PVR, an operator of multiplex cinemas, and consumer goods company Colgate-Palmolive and Pizza Hut franchisee Sarimelati Kencana of Indonesia should benefit from continued consumption growth in these countries. Zensar Technologies has many of the characteristics that we saw in Mphasis, a fellow information technology outsourcing company, when we originally purchased it. Oberoi Realty is in a strong position to benefit from the increased regulation in India's real estate sector.

As a result of this, Scottish Oriental's exposure to China rose and Malaysia, South Korea and Taiwan fell. The Company's Indian weighting fell despite funds being deployed into this market. At the sector level, exposure to Consumer Discretionary, Information Technology and Real Estate rose whereas Consumer Staples, Healthcare and Materials fell. However, the changes made to the Company's portfolio were not significant overall as we are happy with its focus on companies which, we believe, have the potential to deliver multi-year growth and emerge as winners in their respective industries.

For further detail on Scottish Oriental's investments, please refer to the Company's website, www.scottishoriental.com, for the latest Client Update.

Outlook

The last six months have echoed other recent periods for Asian stock markets - a sell-off caused by concerns about falling growth and rising interest rates has been mitigated by governments and central bankers making soothing noises. What did become apparent throughout 2018 is that normalisation of interest rates and withdrawal of the excess liquidity that was injected into the system by the world's central bankers over the last decade will not be straightforward. We believe that the current economic climate offers a backdrop of considerable risk for investors and increasingly less flexibility for policymakers. Interest rates are probably too low and the levels of liquidity remaining from printing money are too high.

We try to avoid cyclical companies when investing apart from taking advantage, in moderation, of weakness in quality cyclical stocks when markets do turn. Therefore, Scottish Oriental's portfolio remains heavily tilted towards the domestically focused stock markets of India, Indonesia and the Philippines. The companies Scottish Oriental owns in these markets are more expensive than we would prefer but we can, at least, see long term prospects for growth. Some of our favourite companies could be much larger holdings for Scottish Oriental but not at current valuations. We will remain patient in investing the Company's cash balance.

In conclusion, we are nervous about economies and stock markets, but are optimistic about the long term prospects for the Company's portfolio holdings. Scottish Oriental's companies are growing, and we believe that they will become larger businesses in the years to come.

Audit Committee

The Company announced on 16 January 2019 that Jeremy Whitley had been appointed as Chairman of the Audit Committee.

Income Statement for the six months to 28 February 2019

 
 
 
                                             Six months to                              Six months to 
                                            28 February 2019                           28 February 2018 
                                               (unaudited)                               (unaudited) 
                                   Revenue       Capital       Total*       Revenue       Capital       Total* 
                                   GBP'000        GBP'000      GBP'000       GBP'000       GBP'000      GBP'000 
                               --------------  -----------  -----------  -------------  -----------  ----------- 
 
 Losses on investments                      -     (15,317)     (15,317)              -      (8,076)      (8,076) 
 Income from investments                1,454            -        1,454          1,740            -        1,740 
 Other income                              33            -           33             10            -           10 
 Investment management 
  fee                                 (1,231)            -      (1,231)        (1,375)            -      (1,375) 
 Currency losses                            -        (659)        (659)              -      (1,497)      (1,497) 
 Other administrative 
  expenses                              (376)            -        (376)          (490)            -        (490) 

                               --------------  -----------  -----------  -------------  -----------  ----------- 
 
 Net return on ordinary 
  activities before taxation            (120)     (15,976)     (16,096)          (115)      (9,573)      (9,688) 
 Tax on ordinary activities              (59)         (39)         (98)          (121)        (758)        (879) 
                               --------------  -----------  -----------  -------------  -----------  ----------- 
 
 Net return attributable 
  to equity 
  shareholders                          (179)     (16,015)     (16,194)          (236)     (10,331)     (10,567) 
                               --------------  -----------  -----------  -------------  -----------  ----------- 
 
 Net return per ordinary 
  share                               (0.60p)     (53.61p)     (54.21p)        (0.76p)     (33.38p)     (34.14p) 
 

* 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 2019

 
                                             At 28          At 31 
                                            February      August 2018 
                                              2019 
                                             GBP'000        GBP'000 
                                           (unaudited)     (audited) 
 FIXED ASSETS - EQUITY INVESTMENTS 
  Bangladesh                                     6,274          6,003 
  China                                         31,004         29,892 
 Hong Kong                                      19,371         20,752 
  India                                         90,208        100,283 
  Indonesia                                     31,237         26,268 
  Malaysia                                       3,505          7,138 
  Pakistan                                       5,511          5,811 
  Philippines                                   30,537         32,032 
  Singapore                                     18,976         19,371 
  South Korea                                    3,114          6,619 
  Sri Lanka                                     12,130         14,915 
  Taiwan                                        33,469         41,064 
  Thailand                                       9,578          9,083 
 Vietnam                                         6,080          6,497 
 Total Equities                                300,994         24,777 
 
 Net Current Assets                             24,777         19,672 
                                         -------------  ------------- 
 Total Assets less Current Liabilities         325,771        345,400 
 
 
    CAPITAL AND RESERVES 
  Ordinary share capital                         7,853          7,853 
  Share premium account                         34,259         34,259 
  Capital redemption reserve                        58             58 
  Capital reserve                              279,374        295,389 
  Revenue reserve                                4,227          7,841 
                                         -------------  ------------- 
  Equity Shareholders' Funds                   325,771        345,400 
                                         =============  ============= 
 
  Net asset value per share                  1,090.49p      1,156.20p 
 

Cash Flow Statement for the six months to 28 February 2019

 
                                                        Six months       Six months 
                                                            to               to 
                                                       28 February      28 February 
                                                           2019             2018 
                                                         GBP'000          GBP'000 
                                                       (unaudited)      (unaudited) 
                                               Note 
 Net cash outflow from operations 
  before dividends, interest, purchases 
  and sales                                            8     (1,743)          (1,810) 
    Dividends received from investments                        1,758            2,156 
    Interest received from deposits                               33               10 
    Purchases of investments                                (39,962)         (75,320) 
    Sales of investments                                      48,914           80,093 
                                                          ----------       ---------- 
    Cash from operations                                       9,000            5,129 
    Taxation                                                   (134)            (892) 
                                                          ----------       ---------- 
 Net cash inflow from operating activities                     8,866            4,237 
 Financing activities 
    Equity dividend paid                                     (3,435)          (3,559) 
     Buyback of ordinary shares                                  (1)            (123) 
                                                          ----------       ---------- 
 Net cash outflow from financing activities                  (3,436)          (3,682) 
 Increase in cash and cash equivalents                         5,430              555 
  Cash and cash equivalents at the 
   start of the period                                        19,046           32,816 
  Effect of currency losses                                    (659)          (1,497) 
  Cash and cash equivalents at the 
   end of the period* 
                                                              23,817           31,874 
                                                          ----------       ---------- 
 

*Cash and cash equivalents represents cash at bank

Statement of Changes in Equity

 
 
 For the six months ended 28 February 
  2019 
 
                                           Share       Capital 
                                Share    Premium    Redemption      Capital     Revenue 
                              Capital    Account       Reserve     Reserves     Reserve        Total 
                              GBP'000    GBP'000       GBP'000      GBP'000     GBP'000      GBP'000 
-------------------------  ----------  ---------  ------------  -----------  ----------  ----------- 
 Balance at 31 August 
  2018                          7,853     34,259            58      295,389       7,841      345,400 
-------------------------  ----------  ---------  ------------  -----------  ----------  ----------- 
 Total comprehensive 
  income: 
 
   Return for the 
   period                           -          -             -     (16,015)       (179)     (16,194) 
 Transactions with 
  owners recognised 
  directly in equity: 
 Dividend paid in 
  the period                        -          -             -            -     (3,435)      (3,435) 
 Balance at 28 February 
 2019                           7,853     34,259            58      279,374       4,227      325,771 
-------------------------  ----------  ---------  ------------  -----------  ----------  ----------- 
 
 
 
 For the six months ended 28 February 
  2018 
 
                                            Share       Capital 
                                 Share    Premium    Redemption      Capital     Revenue 
                               Capital    Account       Reserve     Reserves     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 
--------------------------  ----------  ---------  ------------  -----------  ----------  ----------- 
 
 

Notes to Accounts

(1) The condensed Financial Statements for the six months to 28 February 2019 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 February 2018 with consequential amendments.

(2) The position as at 31 August 2018 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 2018.

(3) The return per ordinary share figure is based on the net loss for the six months ended 28 February 2019 of GBP16,194,000 (six months ended 28 February 2018: net loss of GBP10,567,000) and on 29,873,784 (six months ended 28 February 2018: 30,954,196) ordinary shares, being the weighted average number of ordinary shares in issue during the respective periods.

(4) At 28 February 2019 there were 29,873,784 ordinary shares in issue and 1,539,879 ordinary shares held in Treasury (31 August 2018: 29,873,784 in issue and 1,539,879 held in Treasury).

(5) Dividends

 
                                                       At             At 
                                              28 February    28 February 
                                                     2019           2018 
                                                  GBP'000        GBP'000 
 Amounts recognised as distributions 
  in the period: 
 
   Dividend for the year ending 31 August 
   2018 of 11.5p (2017 - 11.5p), paid 18 
   January 2019                                     3,435          3,559 
                                            -------------  ------------- 
 

(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 51 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 2019, the estimated performance fee for the year ending 31 August 2019 would amount to GBPnil. No performance fee has been accrued in the six months to 28 February 2019.

(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 2019.

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

 
                                             Six months       Six months 
                                                     to   to 28 February 
                                            28 February             2018 
                                                   2019 
                                                GBP'000          GBP'000 
Net return on activities before taxation       (16,096)          (9,688) 
Net losses on investments                        15,317            8,076 
Currency losses                                     659            1,497 
Dividend income                                 (1,454)          (1,740) 
Interest income                                    (33)             (10) 
Decrease in creditors                             (125)              (3) 
(Increase)/decrease in debtors                     (11)               58 
                                           ------------  --------------- 
Net cash outflow from operations before 
 dividends, 
interest, purchases and sales                   (1,743)          (1,810) 
 

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 56 to 59 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.

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 2019 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 2019 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

29 March 2019

-- The terms of the interim report and this announcement were approved by the Board on 29 March 2019.

-- 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]

1 April 2019

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