Final Results

RNS Number : 7519R

Lowland Investment Co PLC

13 December 2016

 

LOWLAND INVESTMENT COMPANY PLC

Annual Report for the year ended 30 September 2016

This announcement contains regulated information

·     Net Asset Value Total Return 12.2%¹

·     Benchmark Total Return 16.8%

·     Growth in Dividend 9.8%

·     Dividend for the year 45.0p

Key Data	Year ended 30 September 2016	Year ended 30 September 2015
NAV per share at year end	1,432p	1,318p
Share Price at year end	1,337p	1,287p
Market Capitalisation	£361m	£346m
Dividend per share	45.0p	41.0p
Ongoing Charge     - including the performance fee	0.63%	0.85%
- excluding the performance fee	0.63%	0.60%
Dividend Yield 2	3.4%	3.2%
Gearing at year end	6.2%	16.8%
Discount at year end3	(6.6)%	(2.4)%

¹  Net asset value per share total return (including dividends reinvested)

²  Based on the dividends paid in respect of the previous twelve months

³ Calculated using year end audited NAVs including current year revenue

Sources: Morningstar for the AIC, Henderson, Datastream

MANAGEMENT  REPORT  

Commenting on the results Chairman, Peter Troughton, said:

Performance

The net asset value ('NAV') total return for the year was +12.2%, while the FTSE All-Share Index delivered a total return of +16.8%. It was year of handsome absolute returns, but our performance was clearly disappointing relative to the index. The main cause of this underperformance is Lowland's exposure to medium and smaller companies in the index. They underperformed large companies as they benefited less from Sterling depreciation.

Total return for the financial year	%
FTSE 100	18.4
FTSE 250	10.2
Numis Smaller Companies	8.6

Whilst 2016 was not the best year for medium and smaller companies, it is our exposure to these that has been an important driver of the Company's longer-term outperformance of the benchmark.

Total return to September 2016	5 years %	10 years %	25 years %
NAV	105.6	115.8	1367.9
Share Price	104.9	109.5	1319.9
FTSE All-Share Index	68.9	75.6	605.2

Dividends

The revenue earnings per share for the year are 47.7p, against 46.4p last year. This understates the underlying growth in dividends from the portfolio, because last year we received a materially higher level of special dividends. If we ignore these special dividends, the earnings grew 4.6% which compares favourably with dividend growth from the benchmark of 3.6% over the period. This has allowed us to pay an increased dividend to shareholders. Subject to shareholders approving the final dividend, the total dividend for the year will be 45p, which as an increase of 9.8% over last year's 41p. We will also be transferring £735,000 to the revenue reserve. Over the past five years dividends have grown at a compound rate of 10%. Over the last ten years, Lowland's dividend growth has substantially outperformed the FTSE All-Share Index dividend growth.

Review

We had thought interest rates might rise at the start of the year. In fact they fell from 0.5% to 0.25% in the aftermath of the UK's referendum on the European Union ('EU') in June. The Manager believed that the outcome of the referendum would usher in a period of uncertainty while Britain's new relationship with the EU is established, so we reduced the gearing from 16% to 6%. This was a decision to reduce portfolio risk, to protect shareholders' capital and to have more firepower ready to invest when new opportunities arise.

As it happens, we acted too soon. The market has performed well in the immediate aftermath of the Brexit vote. The economy has beaten expectations. But the prospect of leaving the EU has focused attention on the UK's large current account deficit. The pound's depreciation will assist the necessary correction, but this will inevitably require a period of lower growth in domestic consumption. The valuation of companies totally exposed to the UK has fallen, despite the overall rally in the market. Once the level of disruption to the economy can be gauged, there may be recovery situations in the UK which will be worth investing in.

Gearing

As a Board we have in the past refrained from fixing our borrowings with long-term debt, though it has been a recurring subject of Board discussions during recent years. We have been right to prefer the flexibility of short-term bank borrowing: this has been to the advantage of shareholders while rates have stayed low. However, rates on long-term debt have now fallen to attractive levels; and the combined prospect of higher inflation in the UK and a shift towards fiscal expansion in the US suggests that rates are now turning. We have therefore issued a 20 year long loan note with a coupon of 3.15% for £30m.

Share Issuance

We will issue shares if it helps produce an orderly market in the stock and it enhances the NAV. During the year 126,138 shares were issued at a premium of 3.9%. There were no share buybacks.

Ongoing Charge

The ongoing charge to the Company for the year ended 30 September 2016 as calculated in accordance with the Association of Investment Companies (the 'AIC') methodology is 0.63% (2015: 0.60% excluding the performance fee and 0.85% including the performance fee). There was no performance fee payable this year.

The Board

I am very pleased that Gaynor Coley has agreed to join the Board. She is a qualified Chartered Accountant and chairs the Institute of Chartered Accountants in England and Wales Corporate Responsibility Advisory Group. Gaynor was most recently the Director of Public Programmes for The Royal Botanic Gardens at Kew. Following a successful career in industry both as an internal auditor at Bank of Nova Scotia and also as Finance Director at Horizon Farms and Plymouth University, Gaynor joined The Eden Project in its early days in 1997, taking it to the UK Visitor Attraction of the Year for three successive years. She therefore brings broad, relevant and unusual experience to the Board. She will succeed Robbie Robertson as Chairman of the Audit Committee following the AGM in 2017.

As announced with the half-year results, I will be standing down at the Annual General Meeting having served on the Board for 26 years. During this period the dividend has grown from 7.75p in 1990 to 45p this year, an increase of 5.8 times; while the NAV per share has risen from 165p to 1,432p an increase of 8.7 times. I have every confidence that my successor, Robbie Robertson, who has chaired the Audit Committee admirably, will enjoy the same stimulating and supportive relationship with the Manager, which it has been my privilege to have had all these years.

Portfolio Management

James Henderson has been the manager since 1990. He has for the last three years been working with Laura Foll on the portfolio. The Board is delighted that with effect from 1 November 2016 Laura has been formally appointed as Joint Fund Manager. James and Laura will continue to share investment decisions. The investment approach will not be changed but it will be refreshed by Laura's added responsibility for the performance.

Annual General Meeting ('AGM')

The AGM of the Company will be held at the offices of Henderson on Tuesday 24 January 2017 at 12.30 pm. Full details of the business to be conducted at the meeting are set out in the Notice of Meeting which has been sent to shareholders with the Annual Report. As usual our Fund Managers will be making a presentation.

Outlook

Next year, inflation may rise as the lower level of Sterling pushes up the cost of imported goods. If higher inflation becomes established and fiscal policy is loosened, then short-term interest rates will need to rise. After thirty years of falling interest rates, and nearly ten years of 'emergency' rates, stock markets may react badly to a higher rate environment. We certainly expect a period of volatility for all stock markets, exacerbated in the UK by the inevitable drip of Brexit negotiation stories.

The Fund Managers will continue to judge each investment prospect on its own specific merits rather than taking a macroeconomic view. The successful companies will be those that have unique strengths in the quality of their products or the excellence of the service they give. Companies with a competitive advantage will ultimately prosper regardless of the economic backdrop. These will be the companies that are able to grow their dividends in coming years and perform during a period of marked economic uncertainty.

Peter Troughton CBE

Chairman

13 December 2016

Principal Risks and Uncertainties and Viability Statement

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks facing the Company including those that would threaten its business model, future performance, solvency or liquidity. In carrying out this assessment, the Board has considered the

market uncertainty arising from the result of the UK referendum to leave the European Union. The Board has drawn up a matrix of risks facing the Company and has put in place a schedule of investment limits and restrictions, appropriate to the Company's investment objective and policy, in order to mitigate these risks as far as practicable. The principal risks which have been identified, and the steps taken by the Board to mitigate these as far as possible, and whether the Board considers the impact of such risks has changed over the past year, are as follows:

Risk	Controls and Mitigation
Investment Activity and Strategy Risk An inappropriate investment strategy or poor execution, for example, in terms of asset allocation or level of gearing, may result in underperformance against the Company's benchmark index and the companies in its peer group, and also in the Company's shares trading on a wider discount to the net asset value per share.	The Board manages these risks by ensuring a diversification of investments and a regular review of the extent of borrowings. Henderson operates in accordance with investment limits and restrictions and policy determined by the Board, which includes limits on the extent to which borrowings may be employed. The Board reviews the investment limits and restrictions on a regular basis and Henderson confirms adherence to them every month. Henderson provides the Board with management information, including performance data and reports and shareholder analyses. The Directors monitor the implementation and results of the investment process with the Fund Managers at each Board meeting and monitor risk factors in respect of the portfolio. Investment strategy is reviewed at each meeting.
Portfolio and Market Price Risk Market risk arises from uncertainty about the future prices of the Company's investments. Although the Company invests almost entirely in securities that are listed on recognised markets, share prices may move rapidly. The companies in which investments are made may operate unsuccessfully, or fail entirely.	The Fund Managers seek to maintain a diversified portfolio to mitigate against this risk. The Board regularly reviews the portfolio, activities and performance. An analysis of the Company's portfolio is shown in the Annual Report.
Financial Risk The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk, currency risk and credit and counterparty risk.	The Company minimises the risk of a counterparty failing to deliver securities or cash by dealing through organisations that have undergone rigorous due diligence by Henderson. The Company holds its liquid funds almost entirely in interest bearing bank accounts in the UK or on short-term deposit. This, together with a diversified portfolio which comprises mainly investments in large and medium-sized companies mitigates the Company's exposure to liquidity risk. Currency risk is mitigated by the low exposure to overseas stocks.

 

Risk	Controls and Mitigation
Gearing Risk The Company has the ability under existing covenants to gear up to 29.99% of the equity shareholder's funds other than in exceptional circumstances. In the event of a significant or prolonged fall in equity markets gearing would exacerbate the effect of the falling market on the Company's NAV per share and, consequently its share price.	The Company minimises the risk by the regular monitoring of the levels of the Company's borrowings in accordance with the agreed limits. The Company confirms adherence to the covenants of the loan facilities on a monthly basis.
Operational Risk Disruption to, or the failure of, Henderson's accounting, dealing or payment systems or the Custodian's records could prevent the accurate reporting or monitoring of the Company's financial position. Henderson contracts some of the operational functions (principally those relating to trade processing, investment administration and accounting), to BNP Paribas Securities Services.	Details of how the Board monitors the services provided by Henderson and its other suppliers, and the key elements designed to provide effective internal control, are explained further in the Internal Controls section of the Annual Report.
Accounting, Legal and Regulatory Risk In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010. A breach of Section 1158 could result in the Company losing investment trust status and, as a consequence, capital gains realised within the Company's portfolio would be subject to Corporation Tax. Compliance with the requirements of Section 1158 are monitored by Henderson and the results are reported at each Board meeting. The Company must comply with the provisions of the Companies Act 2006 and, since its shares are listed on the London Stock Exchange, the UKLA's Listing and Disclosure Guidance and Transparency Rules and the Prospectus Rules ('UKLA Rules'). A breach of the Companies Act 2006 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. A breach of the UKLA Rules could result in the suspension of the Company's shares; which in turn would breach Section 1158.	The Board relies on its Company Secretary and its professional advisers to ensure compliance with the Companies Act 2006 and UKLA Rules. The Board receives internal control reports produced by Henderson on a quarterly basis, which confirm regulatory compliance.

The Board considers these risks to have remained unchanged throughout the year under review.

Viability Statement

The Company is a long-term investor; the Board believe it is appropriate to assess the Company's viability over a five year period in recognition of our long-term horizon and what we believe to be investors' horizons, taking account of the Company's current position and the potential impact of the principal risks and uncertainties as documented above.

The assessment has considered the impact of the likelihood of the principal risks and uncertainties facing the Company, in particular investment strategy and performance against benchmark, whether from asset allocation or the level of gearing, and market risk, in severe but plausible scenarios, and the effectiveness of any mitigating controls in place.

The Board has taken into account the liquidity of the portfolio and the gearing in place when considering the viability of the Company over the next five years and its ability to meet liabilities as they fall due. This included consideration of the duration of the Company's loan facilities and how a breach of the loan facility covenants could impact on the Company's liquidity, net asset value and share price.

The Board does not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place.

Also the Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period as the Company's assets are liquid, its commitments are limited and the Company intends to continue to operate as an investment trust. Only a substantial financial crisis affecting the global economy could have an impact on this assessment.

Where there is current uncertainty in the markets following the UK referendum results to leave the European Union, the Board does not believe that this will have a long-term impact on the viability of the Company and its ability to continue in operation.

Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five year period.

Statement under Disclosure Guidance and Transparency Rule 4.1.12

Each of the Directors confirms that, to the best of his/her knowledge:

• the Company's financial statements, which have been prepared in accordance with UK Accounting Standards and applicable law give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

• the Strategic Report, Report of the Directors and financial statements include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Peter Troughton CBE

Chairman

13 December 2016

Fund Managers' Report

Investment Background

The Central Banks in the major economies, have created a real dilemma for investors. Their policy has driven down the return on 'risk free assets'. For the policy to work capital needs to flow to riskier assets attracted by their relative return and therefore stimulate activity. However, to use the long gilt yield as a valuation metric would be using an artificially manipulated gauge. The yield on long-dated government bonds probably does not give any insight into the likely levels of future inflation. Therefore companies should not reduce the return hurdles they apply before making long-term investments in the real economy. Too often this year promoters of deals have claimed that an acquisition is good because it will boost a company's earnings as the cost of money is so low. This is dangerous ground. An acquisition by a company needs to make operational sense and the financial disciplines around what is a desirable deal, such as the required return on capital, should not be altered. The longer interest rates stay at very low levels the more investment discipline will become lax. Valuations on UK equities moved into more expensive territory during the year. We have reduced gearing as a result of this increased risk.

Performance Attribution

The largest positive contributor to performance this year was Hill & Smith, a galvaniser and manufacturer of crash barriers. It has been a long-held position for the Company, initially purchased for £1.01 per share in 2004. In recent years it has been an excellent performer, benefitting from a good management team. They have successfully expanded their presence in the US and maintained a strong balance sheet. In particular they have been a beneficiary of the 'Road Investment Strategy' in the UK which spans to the early 2020s, increasing demand for their crash barriers and road signs. For the overall balance of the portfolio we have sold part of the holding with the intention of reinvesting in good value growing smaller companies.

At the sector level the Company benefited during the year from its relatively low weighting in the banking sector. We continue to be sceptical of the ability of domestic retail banks such as Lloyds to grow earnings. Due to their high cost base and desire to protect margins they are steadily losing market share to challenger banks in key areas such as mortgages. Over time this downward pressure on earnings will constrain their ability to pay high dividends and therefore we currently hold no position. Within financials our preference continues to be for insurers (such as Hiscox) which generate strong returns across the underwriting cycle and provide diversification for our high weight in the industrials sector.

The largest individual detractor from performance was industrial chain manufacturer Renold, which has seen earnings come under pressure as a result of difficult end markets in agriculture and energy. What we find encouraging (and why we have added to the shares on weakness) is that management have made real progress in taking costs out of the business. This meant that despite the tough environment margins grew year on year. We remain confident that in a more buoyant sales environment they can achieve their target of mid-teens margins which would leave the shares looking attractive at this level.

We sold British American Tobacco too early. Our investment process is valuation driven and we were concerned by the high valuation.

Investment Activity

A substantial part of the investment process has historically been recovery investing, where we feel the market has become overly negative on a particular company or sector. In the Annual Report last year we wrote about commodity companies. This year our recovery plan included Standard Chartered and Rolls-Royce. Both were existing positions that we added to following the appointment of new management teams that are rigorously addressing legacy problems. In the case of Standard Chartered, Bill Winters, the Chief Executive Officer addressed questions over their balance sheet via a rights issue and a dividend cut, and is now focused on returning the business to revenue growth across emerging markets. After recent meetings with management, we are confident they can return the business to a strong growth path that will also lead to substantial dividend payments. In the case of Rolls-Royce it has been profitability rather than sales that have been problematic. The technology and skills in the company already make it one of the world leaders in large aerospace engines, but it has historically been overly complex. The new Chief Executive Officer, Warren East, has instilled a focus on cost and transparency.

In the smaller companies area we have added a new position, Numis, a corporate broker and equity research firm. Numis' focus on the UK, specifically small and medium sized companies means it is winning share off larger competitors for both corporate brokerships as well as fund raisings such as IPOs. This leaves it well placed to deliver substantial earnings growth while already paying an attractive dividend yield to shareholders.

For a number of years we have been selectively investing in early-stage companies. These remain a small portion of the overall Company (4% net assets), but provide an attractive level of diversification and have so far added value. A new addition this year was Atlantis Resources. Atlantis is aiming to commercialise tidal power, with its first project in offshore Scotland. Tidal power has advantages versus existing renewable energy because it is both predictable and, as the turbines are below the water, not unsightly. Given its early stage of commercial development it is also currently subject to favourable environmental subsidies.

The largest sales during the year were the holdings in miners Anglo American and Glencore. We aim to be mildly contrarian in style and we had added to these positions when they were trading at substantial discounts to book value in late 2015. While we have a long time horizon in these cases the share prices moved further and faster than we anticipated and we felt that market expectations were beginning to look stretched. The investment style means that we have a tendency to buy shares early on share price falls and sell shares early when sentiment towards stocks changes. In hindsight we sold our positions in miners too early, and we will continue to review our position. For the time being we feel market expectations are not reflecting the risks that remain.

Additional sales during the year were primarily where we saw companies approaching fair value. Examples of this include tape manufacturer Scapa, semiconductor manufacturer Infineon and packaging producer DS Smith. In many cases we have held these positions for a number of years and have seen them transition from low rated recovery positions towards growth companies. Scapa, for example, was originally purchased in 2001 for 66p per share. At the time it was an industrial tape manufacturer that had legacy asbestos and pension issues. It is now a well-managed health care tape company making excellent margins. We are reducing the holding at around £3 per share. Scapa illustrates well the importance in smaller and medium sized company investing, of both being patient and investing, behind excellent management teams.

The Board

Peter Troughton is retiring from the Board after 26 years. I know it is considered best practice for directors to serve shorter terms. Peter's contribution, however, demonstrates that there is benefit in continuity. That Peter had already served during two periods of real market weakness was of great benefit to the Manager in helping position the portfolio for the recovery after the 2008 crash. We are grateful to him.

Portfolio Management

From 1 November 2016 we have been managing the portfolio as joint managers. We do not intend the investment approach to alter but it will allow us to follow more deeply UK companies. We both know what we are looking for in the individual companies and are mindful of the blend of the overall portfolio.

Outlook

Next year it is likely inflation will rise and output growth will slow. There may be long term benefits from Brexit for the UK economy. For companies the near term brings planning uncertainty and higher costs of imported goods at a time of slowing economic growth. Either company margins will come under pressure or inflation will rise faster than expected. The benefits to exporters of currency depreciation are not as large as in the past. The companies held in the portfolio are further up the value chain than they were twenty years ago. They sell on service and product superiority rather than just price. This allows them to achieve higher margins but it also means that the depreciation of Sterling is less important. Inflation will become a medium-term problem if wages rise to compensate for inflation and the reduced purchasing power of Sterling outside the UK.

We will be on the lookout for companies whose valuation does not reflect their ability to grow. Some of these will be recovery situations where a business has faced up to its problems and reinvented itself by focusing on its core strengths. Others will be younger companies that are moving forwards into larger markets for the first time. The success or failure of these companies will not be determined by the economic background but rather by the quality of their product and by the management's ability to capitalise on it. There will be disappointments but the diversity of the list does offer some protection. We are not investing on the basis of an investment theme, but rather in individual businesses that have some unique strengths. These businesses can be found in many different areas. The successful portfolio blends different end market exposures with choosing the successful operators in these areas. This can be done by paying attention to what the companies are saying and reporting.

James Henderson and Laura Foll

Fund Managers

13 December 2016

Twenty Largest Holdings

Rank 2016 (2015)	Company	% of portfolio	Approximate Market Capitalisation	Valuation 2016 £'000
1(3)	Royal Dutch Shell The company explores produces and refines oil; it produces fuels, chemical and lubricants as well as operating filling stations worldwide. They have attacked their cost base and have very high class assets which positions them well for the future.	4.9	£170bn	20,137
2(6)	HSBC The global bank provides international banking and financial services. The diversity of the countries it operates in as well as its exposure to faster growing economies make it well placed.	3.0	£120bn	12,471
3 (2)	Hiscox The international insurance company manages underwriting syndicates and underwrites a range of personal and commercial insurance. They are very disciplined and have over the long term have achieved a high return on capital.	3.0	£3bn	12,414
4(1)	Senior The company manufactures specialist engineering products for the automotive and aerospace sectors. The share price has recently been weak but the civil aerospace business is set to return to high single digit growth for the foreseeable future with good margins.	2.8	£800m	11,455
5(5)	Phoenix The company is a UK based specialist closed life and pension fund consolidator. The dividend and asset value are growing and the equity yields over 6%.	2.6	£2bn	10,537
6*	Standard Chartered The international banking group operates principally in Asia, Africa and the Middle East. The new management team has focused the bank back to areas of relative strength in its growing markets.	2.4	£20bn	9,920
7(8)	Scapa1 The company manufactures and supplies technical tape and adhesive film to various markets worldwide including the medical, automotive, construction and sports industries. It has been a very successful small company investment growing its sales and margins over many years	2.2	£400m	9,020
8*	Prudential The company provides an assortment of insurance and investment products around the world. The business in the Far East has grown impressively in recent years.	2.1	£35bn	8,882
9(13)	GKN The manufacturer produces automotive components and aerospace parts. The operating margins have improved during a testing period for end markets and further progress is expected.	2.0	£5bn	8,136
10(14)	Rio Tinto The miner has interests in aluminium, coal, copper, gold, iron ore, uranium, zinc and diamonds. It operates good quality assets from a relatively low cost base which puts it in a strong position.	1.9	£52bn	7,723
11 (7)	Hill & Smith The manufacturer produces products for the infrastructure, galvanizing, building and construction industries. The products include traffic barriers, fencing, lighting columns, storage tanks and variable message signs. It has been a successful small company investment over many years.	1.9	£800m	7,671
12(10)	Irish Continental2 The group markets holiday packages and provides passenger transport, roll-on and roll-off freight transport and container services between Ireland, the United Kingdom and continental Europe. It is a very cash generative well-run company.	1.8	£600m	7,526
13*	Headlam The company distributes floor titles and carpeting. The price of their products is being increased their national coverage positions them well to continue growing.	1.7	£400m	7,039
14(20)	Croda The company produces a diverse range of products to go into personal care, pharmaceuticals, plastics, nutrition, fire prevention and engineering. The value added nature of their work means strong margins are achieved.	1.6	£4bn	6,728
15*	Relx The company publishes information for the scientific, medical, legal and business sectors serving customers worldwide. It is consistent high quality growth business.	1.6	£30bn	6,583
16(16)	Johnson Service¹ A textile rental company that provides linens for use across workwear, hotels and restaurants. In recent years the management team have successfully de-geared the balance sheet and grown operating margins.	1.6	£400m	6,533
17(9)	BP A producer and refiner of oil. Following the fall in the oil price they have successfully focussed on cost reduction in order to bring down their breakeven cost per barrel of oil produced.	1.6	£86bn	6,525
18*	GlaxoSmithKline Among the world's largest healthcare companies that operates across pharmaceuticals, vaccines and consumer health. Following several years of earnings pressure from drugs going off patent they have now returned to earnings growth driven by success in areas such as HIV.	1.5	£74bn	6,161
19*	Rolls-Royce The company designs and manufactures engines as well as providing aftermarket services for use across aerospace and industry. They have successfully won market share across many of the large new civil aerospace programmes and under a new management team have a renewed focus on removing duplicate costs.	1.5	£12bn	5,940
20*	Novae The company is a Lloyd's underwriter, writing insurance in areas such as aviation and property. In recent years they have hired specialist underwriters across a range of areas and have successfully grown their premiums while remaining disciplined.	1.4	£500m	5,911
		43.1		177,312

At 30 September 2016 these investments totalled £177,312,000 or 43.1% of the portfolio.

* Not in the top 20 largest investments last year

1 AIM stocks

2 Overseas listed stocks (Canada, France, Germany, Ireland and USA)

Audited Income Statement

	Year ended 30 September 2016			Year ended 30 September 2015
	Revenue return £'000	Capital return £'000	Total £'000	Revenue return £'000	Capital return £'000	Total £'000
Gains/(losses) on investments held at fair value through profit or loss	-	29,331	29,331	-	(8,387)	(8,387)
Income from investments (note 2)	15,944	-	15,944	15,542	-	15,542
Other interest receivable and similar income (note 4)	108	-	108	105	-	105
	---------	---------	---------	---------	---------	---------
Gross revenue and capital gains/(losses)	16,052	29,331	45,383	15,647	(8,387)	7,260
Management fee	(1,806)	-	(1,806)	(1,819)	-	(1,819)
Performance fee	-	-	-	-	(908)	(908)
Other expenses	(472)	-	(472)	(484)	-	(484)
	---------	---------	---------	---------	---------	---------
Net return/(loss) on ordinary activities before finance costs  and taxation	13,774	29,331	43,105	13,344	(9,295)	4,049
Finance costs	(764)	-	(764)	(806)	-	(806)
	---------	---------	---------	---------	---------	---------
Net return/(loss) on ordinary activities before taxation	13,010	29,331	42,341	12,538	(9,295)	3,243
Taxation on net return on ordinary activities	(117)	-	(117)	(48)	-	(48)
	---------	---------	---------	---------	---------	---------
Net return/(loss) on ordinary activities after taxation	12,893	29,331	42,224	12,490	(9,295)	3,195
	=====	=====	=====	=====	=====	=====
Return/(loss) per ordinary share  -  basic and diluted (note 5)	47.7p	108.7p	156.4p	46.4p	(34.6)p	11.8p
	=====	=====	=====	=====	=====	=====

The total columns of this statement represent the Profit and Loss Account of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. The Company had no recognised gains or losses other than those disclosed in the Income Statement.

Audited Statement of Changes in Equity

Year ended 30 September 2016	Called up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Other capital reserves £'000	Revenue reserve £'000	Total £'000
At 1 October 2015	6,723	59,923	1,007	275,268	11,642	354,563
Net return on ordinary activities after taxation	-	-	-	29,331	12,893	42,224
Ordinary shares issued	32	1,696	-	-	-	1,728
Third interim dividend (10.0p) for the year ended 30 September 2015 paid 30 October 2015	-	-	-	-	(2,689)	(2,689)
Final dividend (11.0p) for the year ended 30 September 2015 paid 29 January 2016	-	-	-	-	(2,972)	(2,972)
First interim dividend (11.0p) for the year ended 30 September 2015 paid 29 April 2016	-	-	-	-	(2,972)	(2,972)
Second interim dividend (11.0p) for the year ended 30 September 2016 paid 29 July 2016	-	-	-	-	(2,972)	(2,972)
	---------	----------	----------	-----------	----------	-----------
At 30 September 2016	6,755	61,619	1,007	304,599	12,930	386,910
	=====	=====	=====	======	=====	======
Year ended 30 September 2015	Called up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Other capital reserves £'000	Revenue reserve £'000	Total £'000
At 1 October 2014	6,723	59,923	1,007	284,563	9,640	361,856
Net (loss)/return on ordinary activities after taxation	-	-	-	(9,295)	12,490	3,195
Third interim dividend (9.0p) for the year ended 30 September 2014 paid 31 October 2014	-	-	-	-	(2,421)	(2,421)
Final dividend (10.0p) for the year ended 30 September 2014 paid 30 January 2015	-	-	-	-	(2,689)	(2,689)
First interim dividend (10.0p) for the year ended 30 September 2015 paid 30 April 2015	-	-	-	-	(2,689)	(2,689)
Second interim dividend (10.0p) for the year ended 30 September 2015 paid 31 July 2015	-	-	-	-	(2,689)	(2,689)
	---------	----------	----------	-----------	----------	-----------
At 30 September 2015	6,723	59,923	1,007	275,268	11,642	354,563
	=====	=====	=====	======	=====	======

Audited Statement of Financial Position

	As at 30 September 2016 £'000	As at 30 September 2015 £'000
Investments held at fair value through profit or loss
Listed at market value in the United Kingdom	326,129	328,949
Listed at market value on AIM	58,403	56,011
Listed at market value overseas	24,384	26,993
Unlisted	2,101	2,179
	-----------	-----------
	411,017	414,132
	-----------	-----------
Current assets
Debtors	2,129	3,589
Cash at bank	2,178	669
	-----------	-----------
	4,307	4,258
	-----------	-----------
Creditors: amounts falling due within one year	(28,414)	(63,827)
	-----------	-----------
Net current liabilities	(24,107)	(59,569)
	-----------	-----------
Total assets less current liabilities	386,910	354,563
	-----------	-----------
Net assets	386,910	354,563
	=======	=======
Capital and reserves
Called up share capital	6,755	6,723
Share premium account	61,619	59,923
Capital redemption reserve	1,007	1,007
Other capital reserves	304,599	275,268
Revenue reserve	12,930	11,642
	-----------	-----------
Total shareholders' funds	386,910	354,563
	=======	=======
Net asset value per ordinary share - basic and diluted (note 8)	1,432.0p	1,318.4p
	=======	=======

Audited Statement of Cash Flows

	Year ended 30 September 2016 £'000	Year ended 30 September 2015* £'000
Cash flows from operating activities
Net return on ordinary activities before taxation	42,341	3,243
Add back: finance costs	764	806
(Less)/add: (gains)/losses on investments held at fair value through profit or loss	(29,331)	8,387
Withholding tax on dividends deducted at source	(136)	(44)
(Increase)/decrease in debtors	(374)	99
Decrease in creditors	(827)	(160)
	-----------	-----------
Net cash inflow from operating activities	12,437	12,331
Cash flows from investing activities
Purchase of investments	(67,620)	(68,100)
Sale of investments	102,719	53,569
	-----------	-----------
Net cash inflow/(outflow) from investing activities	35,099	(14,531)
Cash flows from financing activities
Equity dividends paid (net of refund of unclaimed distributions and reclaimed distributions)	(11,605)	(10,488)
Proceeds from issue of ordinary shares	1,728	-
Net loans (repaid)/drawndown	(35,418)	12,408
Interest paid	(832)	(809)
	-----------	-----------
Net cash (outflow)/inflow from financing activities	(46,127)	1,111
Net increase/(decrease) in cash and cash equivalents	1,409	(1,089)
Cash and cash equivalents at start of year	669	1,756
Effect of foreign exchange rates	100	2
	-----------	-----------
Cash and cash equivalents at end of year	2,178	669
	=======	=======
Comprising:
Cash at bank	2,178	669
	-----------	-----------
	2,178	669
	=======	=======
* Restated see note 1a)

Notes to the Financial Statements:

1.

Accounting policies

a) Basis of preparation The company is a registered investment company as defined in section 833 of the Companies Act 2006 and is incorporated in the United Kingdom. It operates in the United Kingdom and is registered at 201 Bishopsgate, London EC2M 3AE. The Financial Statements have been prepared in accordance with the Companies Act 2006, FRS 102 - The Financial Reporting Standard applicable in the UK and Republic of Ireland (which is effective for periods commencing on or after 1 January 2015) and with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts ("the SORP") issued in November 2014. The date of transition to FRS 102 was 1 October 2014. The Company has early adopted the amendments to FRS 102 in respect of fair value hierarchy disclosures as published in March 2016. The principal accounting policies applied in the presentation of these Financial Statements are set out below. These policies have been consistently applied to all the years presented. Following the application of the revised reporting standards there have been no significant changes to the accounting policies compared to those set out in the Company's Annual Report for the year ended 30 September 2015. There has been no impact on the Company's Income Statement, Statement of Financial Position (previously called the Balance Sheet) or Statement of Changes in Equity (previously called the Reconciliation of Movements in Shareholders' Funds) for periods previously reported. The Cash Flow Statement previously reported has been restated to comply with the new disclosure requirements of the revised reporting standard. The Financial Statements have been prepared under the historical cost basis except for the measurement of fair value of investments. In applying FRS 102, financial instruments have been accounted for in accordance with Section 11 and 12 of the standard. All of the Company's operations are of a continuing nature. b) Going concern The assets of the Company consist of securities that are readily realisable and, accordingly, the Directors believe that the Company has adequate resources to continue in operational existence for at least twelve months from the date of approval of the financial statements. Having assessed these factors, the principal risks and other matters discussed in connections with the viability statement, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements.

2.	Gains/(losses) on investments held at fair value through profit or loss	2016 £'000	2015 £'000
	Gains on the sale of investments based on historical cost	23,452	16,617
	Less: revaluation gains recognised in previous years	(14,374)	(12,912)
		-----------	-----------
	Gains on investments sold in the year based on carrying value at previous Statement of Financial Position date	9,078	3,705
	Revaluation gains/(losses) on investments held at 30 September	20,153	(12,094)
	Exchange gains	100	2
		----------	---------
		29,331	(8,387)
		=====	=====

3	Income from investments	2016 £'000	2015 £'000
	UK dividends:
	Listed investments	12,767	11,814
	Unlisted	48	53
	Property income dividends	228	210
		---------	---------
		13,043	12,077
		---------	---------
	Non UK dividends:
	Overseas dividend income	2,901	3,465
		---------	---------
		2,901	3,465
		---------	---------
		15,944	15,542
		=====	=====

4.	Other interest receivable and similar income	2016 £'000	2015 £'000
	Stock lending commission	44	61
	Income from underwriting	64	44
		---------	---------
		108	105
		=====	=====

At 30 September 2016 the total value of securities on loan by the Company for stock lending purposes was £2,830,000 (2015: £5,024,000). The maximum aggregate value of securities on loan at any time during the year ended 30 September 2016 was £25,560,000 (2015: £20,742,000). The Company's agent holds collateral comprising FTSE 100 stocks, Gilts and a French government bond with a collateral value of £2,979,000 (2015: £5,821,000) amounting to a minimum of 105% (2015: minimum 116%) of the market value of any securities on loan. Stock lending commission has been shown net of brokerage fees of £37,000 (2015: £66,000).

5.	Return per ordinary share - basic and diluted
	The return per ordinary share is based on the net return attributable to the ordinary shares of £42,224,000 (2015: £3,195,000) and on 26,992,028 ordinary shares (2015: 26,892,427) being the weighted average number of ordinary shares in issue during the year. The return per ordinary share can be further analysed between revenue and capital, as below.
		2016 £'000	2015 £'000
	Net revenue return	12,893	12,490
	Net capital return/(loss)	29,331	(9,295)
		---------	---------
	Net total return	42,224	3,195
		=====	=====
	Weighted average number of ordinary shares in issue during the year	26,992,028	26,892,427
	Revenue return per ordinary share	47.7p	46.4p
	Capital return/(loss) per ordinary share	108.7p	(34.6)p
		-----------	-----------
	Total return per ordinary share	156.4p	11.8p
		======	======
	The Company does not have any dilutive securities; therefore the basic and diluted returns per share are the same.

6.	Dividends paid and payable on the ordinary shares
	Dividends on ordinary shares	Record date	Payment date	2016 £'000	2015 £'000
	Third interim dividend (9.0p) for the year ended 30 September 2014	10 October 2014	31 October 2014	-	2,421
	Final dividend (10.0p) for the year ended 30 September 2014	9 January 2015	30 January 2015	-	2,689
	First interim dividend (10.0p) for the year ended 30 September 2015	7 April 2015	30 April 2015	-	2,689
	Second interim dividend (10.0p) for the year ended  30 September 2015	3 July 2015	31 July 2015	-	2,689
	Third interim dividend (10.0p) for the year ended 30 September 2015	9 October 2015	30 October 2015	2,689	-
	Final dividend (11.0p) for the year ended 30 September 2015	8 January 2016	29 January 2016	2,972	-
	First interim dividend (11.0p) for the year ended 30 September 2016	8 April 2016	29 April 2016	2,972	-
	Second interim dividend (11.0p) for the year ended 30 September 2016	1 July 2016	29 July 2016	2,972	-
				----------	---------
				11,605	10,488
				=====	=====

The third interim dividend and the final dividend for the year ended 30 September 2016 have not been included as a liability in these financial statements. The total dividends payable in respect of the financial year, which form the basis of the retention test under Section 1158 of the Corporation Tax Act 2010, are set out below.
			2016 £'000
	Revenue available for distribution by way of dividend for the year		12,893
	First interim dividend (11.0p) for the year ended 30 September 2016		(2,972)
	Second interim dividend (11.0p) for the year ended 30 September 2016		(2,972)
	Third interim dividend (11.0p) for the year ended 30 September 2016		(2,972)
	Final dividend (12.0p) for the year ended 30 September 2016 (based on 27,018,565 ordinary shares in issue at 13 December 2016)		(3,242)
			----------
	Revenue surplus		735
			=====
		For section 1158 purposes the Company's undistributed revenue represents 4.6% of the income from investments.

7	Called up share capital
			Number of shares entitled  to dividend	Total number          of shares	Nominal value of shares £'000
	At 30 September 2015		26,892,427	26,892,427	6,723
	Shares issued in the year		126,138	126,138	32
			-----------	-----------	-----------
	At 30 September 2016		27,018,565	27,018,565	6,755
During the year, the Company issued 126,138 ordinary shares for total proceeds of £1,728,000 (2015: £nil).

8.	Net asset value per ordinary share
	The net asset value per ordinary share of 1,432.0p (2015: 1,318.4p) is based on the net assets attributable to the ordinary shares of £386,910,000 (2015: £354,563,000) and on 27,018,565 (2015: 26,892,427) shares in issue on 30 September 2016. The movements during the year of the assets attributable to the ordinary shares were as follows:

		2016 £'000	2015 £'000
	Total net assets at 1 October	354,563	361,856
	Total net return on ordinary activities after taxation	42,224	3,195
	Share issue proceeds	1,728	-
	Net dividends paid in the year:
	Ordinary shares	(11,605)	(10,488)
		------------	------------
	Net assets attributable to the ordinary shares at 30 September	386,910	354,563
		======	======

9.

2015 Financial Information

The figures and financial information for the year ended 30 September 2015 are compiled from an extract of the published financial statements for that year and do not constitute statutory accounts. Those financial statements have been delivered to the Registrar of Companies and included the report of the Auditors which was unqualified, did not include a reference to any matter to which the auditors drew attention without qualifying the report, and did not contain any statements under sections 498(2) or 498(3) of the Companies Act 2006.

10.	Dividend
	The final dividend, if approved by the shareholders at the Annual General Meeting, of 12.0p per ordinary share will be paid on 31 January 2017 to shareholders on the register of members at the close of business on 6 January 2017. This will take the total dividends for the year to 45.0p (2015: 41.0p). The Company's shares will be traded ex-dividend on 5 January 2017.

11.	Annual Report
	The Annual Report will be posted to shareholders in December 2016 and will be available on the Company's website (www.lowlandinvestment.com) or in hard copy format from the Company's Registered Office, 201 Bishopsgate, London, EC2M 3AE.

12.	Annual General Meeting
	The Annual General Meeting will be held on Wednesday, 24 January 2017 at 12.30 pm at 201 Bishopsgate, London, EC2M 3AE. The Notice of Meeting will be sent to shareholders with the Annual Report.

For further information please contact:
James H Henderson	Laura Foll
Fund Manager	Fund Manager
Lowland Investment Company plc	Lowland Investment Company plc
Telephone: [phone]	Telephone: [phone]
Sarah Gibbons-Cook	James de Sausmarez
Investor Relations and PR Manager	Head of Investment Trusts
Henderson Global Investors Limited	Henderson Investment Funds Limited
Telephone: [phone]	Telephone: [phone]

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.

_______________________

 

END

 

 

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