Half-year Report

RNS Number : 7395P
Schroder Oriental Income Fund Ltd
31 May 2018
 

 

 

31 May 2018

 

Half Year Report

 

Schroder Oriental Income Fund Limited (the "Company") hereby submits its Half Year Report for the six months ended 28 February 2018 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.2. 

 

The Half Year Report is also being published in hard copy format and an electronic copy of that document will shortly be available to download from the Company's website http://www.schroders.co.uk/orientalincome. Please click on the following link to view the document:

 

http://www.rns-pdf.londonstockexchange.com/rns/7395P_-2018-5-30.pdf

 

The Company has submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

 

Enquiries:

 

Louise Richard

Schroder Investment Management Limited                                           

Tel: 020 7658 6501

 

 

Interim Management Report

 

Chairman's Statement

 

Performance

 

While the Company's returns benefited from the depreciation of sterling against other currencies after the

Brexit referendum, this was partly reversed during the first half of this year, resulting in a more modest net asset value total return of 0.9%. The share price itself produced a total return of 0.3%, reflecting a fall in the price over the period.

 

Sterling's rise against dollar-based currencies also contributed to a decline of 9.0% in revenue earnings per share over the period, which has had a material drag on income in sterling terms, more than offsetting rises in local currency terms. However, the first half of the Company's financial year tends to provide a minority proportion of the full year's income, so we wait to see how future exchange rate movements affect the full year's outcome.

 

Further details of investment performance, as well as portfolio activity, policy and outlook, may be found in the Manager's Review.

 

Dividends

 

During the period, the Company paid two interim dividends for the year ending 31 August 2018, amounting to 3.40 pence per share (2017: 3.30 pence per share).

 

Share capital

 

Demand for the Company's shares has remained strong and your Board has continued to actively issue shares. During the period under review, the Company issued 4,905,000 ordinary shares at a small premium to the prevailing net asset value in order to provide liquidity to the market. At the period end, the Company's share capital comprised 250,608,024 ordinary shares. No shares were held in treasury. 3,265,000 further shares have been issued since the period end.

 

Gearing

 

The Company has in place a multi-currency revolving credit facility of £100 million equivalent, which was drawn in US dollars during the period. This is an increase from the previous facility size of £75 million to enable gearing to remain at a similar level to prior periods, given the growth in the Company's assets. Gearing stood at 2.0% at the beginning of the period and had increased to 6.6% as at 28 February 2018. Average gearing during the period was 4.9%. The level of gearing continues to be monitored closely by the Board, in conjunction with the Manager.

 

Board refreshment

 

Your Board continues to review its composition and its plans for succession and refreshment.

 

As I noted in my previous Chairman's Statement, Fergus Dunlop retired from the Board at the last Annual General Meeting, which was held during the period.

 

I am pleased to welcome Alexa Coates to the Board following her appointment as a Director on 9 February 2018. Alexa is a qualified accountant who brings significant financial experience and expertise to the Board and will succeed Peter Rigg as Chairman of the Audit and Risk Committee with effect from 1 June 2018. Peter will remain a member of the Board and Chairman of the Management Engagement Committee.

 

Having had the privilege of serving as Chairman of the Board since the Company's launch in 2005, I intend to retire by this year's Annual General Meeting and expect to be succeeded by one of my fellow Board members.

 

In light of the above changes, a process will commence later in the year, led by the Nomination Committee, to recruit an additional Director.

 

Change in independent auditor

 

As announced on 14 February 2018, following a competitive tender process, the Board approved the appointment of PricewaterhouseCoopers CI LLP as the Company's Recognised Auditors for the current financial year, ending 31 August 2018. The appointment of PricewaterhouseCoopers as auditor for the next financial year, ending 31 August 2019, will be subject to approval by shareholders at the Company's next Annual General Meeting, to be held in December 2018.

 

The Board would like to thank Ernst & Young LLP, which formally ceased to hold office as the Company's auditor on 25 May 2018, for services provided to the Company during its tenure in office. In accordance with legislative requirements, a copy of Ernst & Young's resignation letter, including a statement of its reasons for ceasing to hold office, is being circulated to all shareholders.

 

Outlook

 

I mentioned earlier the effect currency movements have had on the Company's earnings, with sterling having reversed some of the falls seen after the EU referendum. Both periods emphasise how sensitive the Company's income is in the short-term to movements in sterling.

 

The reassuring consistency through both periods, however, is that, overall, the companies in our portfolio

have, in local currency terms, continued to increase their dividends. That is one of the key measures for us: we believe that we have the investment strategy - and the income reserve - to meet our goals provided the portfolio companies continue to do this. And whilst acknowledging that there will always be macro-economic uncertainties, I believe the economies of the Asian region continue to provide a dynamic environment which is supportive of the Company's objectives. I look forward with confidence to the second half of the financial year.

 

Robert Sinclair

Chairman

30 May 2018

 

Manager's Review

 

The net asset value per share of the Company recorded a total return of 0.9% over the six months to end February 2018, lagging the reference index total return of 2.8%.

 

Although regional markets managed approximately a 10% return in US dollar terms, this was translated to a 2.8% return for UK-based investors by the strength of sterling, particularly in the wake of the interim agreement on the Brexit process announced in early December.

 

Local returns were supported in the final months of 2017 by the continuation of the benign conditions seen for the whole of the year. Global leading indicators remained robust, Asian exports grew in both volume and value terms, and profits continued to be revised upwards, particularly in the information technology sector. Although there were indications of a tightening bias among developed world central banks (and rises in the Fed funds interest rate) these did not appear to unduly concern markets.

 

The tone changed quite markedly in the New Year. Benign conditions of consistently strong markets and low volatility were rudely interrupted. A degree of complacency doubtless set the scene for subsequent volatility as global leading indicators began to roll over, trade friction started to take centre stage, and the profits season (while strong) did not materially exceed what had become slightly ambitious expectations.

 

Relative performance between countries has been more determined by sector specifics rather than macroeconomic cycles; arguably the one exception has been the Philippines where a rising current account deficit threatens to call time on what has been a multi-year upcycle. Strength in Thailand reflected heavy weightings in energy, Singapore banks led the way on hopes of better loan growth, lower credit costs and higher interest rates, and performance in China reflected strength in the giant internet names and the health care sector.

 

Positioning and performance

 

As noted above, the modest, but positive, total return in the Company's net asset value was behind that of the reference index. Continued outperformance by highly priced (and low yielding) sectors such as health care and the internet names has remained a headwind, but to a much lesser degree than last year. Telecoms continued to underperform, but the Company's stocks did relatively well, while good performance from stocks held among banks and the consumer discretionary sector offset shortfalls and overweighting in real estate. Selection among materials was disappointing.

 

Hong Kong, Australia, Taiwan and Singapore remain significant exposures in the Company's portfolio,

although it is interesting to note that China has joined them with exposure rising above 10% in the first half. Although it remains a small exposure in absolute terms, we added to Japan along with one holding in India. Although the paucity of yield warrants continued underweighting in information technology, it is second only to financials in terms of aggregate portfolio exposure.

 

Investment outlook

 

The second half of the financial year has continued in a similar vein to the close of the first six months. Geopolitical concerns feature largely; while US-China trade tensions take centre stage, with political uncertainty in Europe (Italy, UK EU negotiations), Russian sanctions and the fate of the Iran nuclear deal are all adding to risk aversion.

 

Perhaps more fundamental are the signs of tightening dollar liquidity. Concern over the direction of Federal Reserve policy has been exacerbated by the recent US fiscal package which implies significant loosening of policy at a time when the economy is already growing strongly. Meanwhile, economic indicators elsewhere (notably Europe) appear to have softened, giving a less co-ordinated pattern of global expansion.

 

The final piece in the jigsaw is the recent reversal in dollar weakness. In the short-term, this has been supportive to the Company's net asset value in sterling terms, but may presage downward pressures on Asian stock markets. We have already seen a degree of currency and bond weakness in the more vulnerable markets; these are mainly outside Asia such as Brazil and South Africa, but signs of it spreading to less resilient Asian markets such as Indonesia, Thailand and India need to be monitored.

 

While not wishing to sound complacent, we are not unduly pessimistic for the balance of the year. Although some countries are more vulnerable to a tightening of global liquidity than others, overall the external balances across Asia are reasonably strong, partly thanks to the degree of effective tightening in policy that followed the "Taper Tantrum" of Spring 2013.

 

This financial strength is (with inevitable exceptions) also true of the general state of Asian corporate balance sheets, not least the companies to which the Company's portfolio is primarily exposed. This should provide some resilience in the face of interest rate rises, but also provides some re-assurance as to the sustainability of dividends, even as viewed by the characteristically conservative eyes of Asian management and major shareholders.

 

Furthermore, if rising interest rates are a function of stronger global activity, then Asian economies and

companies remain well placed to benefit given currently disciplined capital spending and competitive capacity. This of course pre-supposes that the era of generally free and open trade is not nearing an inglorious and painful end. Resolution will require pragmatism and compromise from the US and China; should it, as we believe, result in more accessible Chinese domestic markets, that is a win-win

for all concerned, not least entrepreneurial regional companies.

 

More broadly, the fortunes of China weigh heavily on regional sentiment. It is clear that the Beijing authorities are keen to dampen credit growth in aggregate, and make what growth there is less dependent on the opaque and poorly regulated "alternative" funding sources outside the banking system. The multiple of credit growth to nominal growth in China has been lower for the longest period since the credit explosion in the wake of the Global Financial Crisis. Should they succeed in engineering a relatively soft landing, we would view this as very positive for the region as a whole. There are risks, which cause us to continue avoiding sectors and companies very geared into the "old" commodity and investment- heavy growth model.

 

Schroder Unit Trusts Limited

30 May 2018

 

Principal risks and uncertainties

 

The principal risks and uncertainties with the Company's business fall into the following categories: strategy and competitiveness risk; investment management risk; financial and currency risks; accounting, legal and regulatory risk; custodian and depositary risk; and service provider risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 14 and 15 of the Company's published Annual Report and Accounts for the year ended 31 August 2017. These risks and uncertainties have not materially changed during the six months ended 28 February 2018.

 

Going concern

 

The Directors believe, having considered the Company's investment objective, risk management policies, capital management policies and procedures, expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. For these reasons, they consider that there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

 

Related party transactions

 

There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 28 February 2018.

 

Directors' responsibility statement

 

The Directors confirm that, to the best of their knowledge, this set of condensed financial statements

has been prepared in accordance with the Companies (Guernsey) Law, 2008 and with International Financial Reporting Standards and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

 

Statement of Comprehensive Income

 

 

 

 

Revenue

Capital

Total

Revenue

Capital

Total

Revenue

Capital

Total

 

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

(Losses)/gains on investments at fair value through profit or loss

-

(2,951)

(2,951)

-

58,359

58,359

-

94,537

94,537

Net foreign currency gains/(losses)

-

2,314

2,314

-

(2,177)

(2,177)

-

(963)

(963)

Income from investments

10,084

16

10,100

10,521

404

10,925

28,197

446

28,643

Other income

-

-

-

2

-

2

11

-

11

Total income/(loss)

10,084

(621)

9,463

10,523

56,586

67,109

28,208

94,020

122,228

Management fee

(670)

(1,563)

(2,233)

(599)

(1,398)

(1,997)

(1,258)

(2,935)

(4,193)

Performance fee

-

-

-

-

(3,953)

(3,953)

-

(6,355)

(6,355)

Other administrative expenses

(421)

(2)

(423)

(372)

(2)

(374)

(775)

(5)

(780)

Profit/(loss) before finance costs and taxation

8,993

(2,186)

6,807

9,552

51,233

60,785

26,175

84,725

110,900

Finance costs

(135)

(312)

(447)

(115)

(269)

(384)

(223)

(518)

(741)

Profit/(loss) before taxation

8,858

(2,498)

6,360

9,437

50,964

60,401

25,952

84,207

110,159

Taxation (note 4)

(581)

8

(573)

(704)

-

(704)

(2,013)

(36)

(2,049)

Net profit/(loss) and total comprehensive income

8,277

(2,490)

5,787

8,733

50,964

59,697

23,939

84,171

108,110

Earnings/(loss) per share (note 5)

3.33p

(1.00)p

2.33p

3.66p

21.37p

25.03p

9.94p

34.97p

44.91p

 

 

The "Total" column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by the Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net profit/(loss) for the period is also the total comprehensive income for the period.

 

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

 

Statement of Changes in Equity

 

For the six months ended 28 February 2018 (unaudited)

 

 

 

Share

capital

£'000

Capital redemption reserve

£'000

Special reserve

£'000

Capital reserves

£'000

Revenue reserve

£'000

Total

£'000

At 31 August 2017

 

170,076

39

150,374

288,008

26,969

635,466

Issue of shares

 

12,655

-

-

-

-

12,655

Net (loss)/profit

 

-

-

-

(2,490)

8,277

5,787

Dividends paid in the period (note 6)

 

-

-

-

-

(14,731)

(14,731)

At 28 February 2018

 

182,731

39

150,374

285,518

20,515

639,177

 

For the six months ended 28 February 2017 (unaudited)

 

 

 

Share

capital

£'000

Capital redemption reserve

£'000

Special reserve

£'000

Capital reserves

£'000

Revenue reserve

£'000

Total

£'000

At 31 August 2016

 

150,251

39

150,374

203,837

24,161

528,662

Issue of shares

 

4,909

-

-

-

-

4,909

Net profit

 

-

-

-

50,964

8,733

59,697

Dividends paid in the period (note 6)

 

-

-

-

-

(12,886)

(12,886)

At 28 February 2017

 

155,160

39

150,374

254,801

20,008

580,382

 

For the year ended 31 August 2017 (audited)

 

 

 

Share

capital

£'000

Capital redemption reserve

£'000

Special reserve

£'000

Capital reserves

£'000

Revenue reserve

£'000

Total

£'000

At 31 August 2016

 

150,251

39

150,374

203,837

24,161

528,662

Issue of shares

 

19,825

-

-

-

-

19,825

Net profit

 

-

-

-

84,171

23,939

108,110

Dividends paid in the year
(note 6)

 

-

-

-

-

(21,131)

(21,131)

At 31 August 2017

 

170,076

39

150,374

288,008

26,969

635,466

 

 

Balance Sheet

at 28 February 2018 (unaudited)

 

 

(Unaudited) 28 February

2018

£'000

(Unaudited) 28 February

2017

£'000

(Audited)
31 August

2017

£'000

Non current assets

 

 

 

Investments at fair value through profit or loss

676,529

603,131

654,213

Current assets

 

 

 

Receivables

6,120

5,594

2,908

Cash and cash equivalents

11,977

4,623

29,881

 

18,097

10,217

32,789

Total assets

694,626

613,348

687,002

Current liabilities

 

 

 

Bank loans

(54,182)

(27,848)

(42,416)

Payables

(1,267)

(5,118)

(9,120)

 

(55,449)

(32,966)

(51,536)

Net assets

639,177

580,382

635,466

Equity attributable to equity holders

 

 

 

Share capital (note 7)

182,731

155,160

170,076

Capital redemption reserve

39

39

39

Special reserve

150,374

150,374

150,374

Capital reserves

285,518

254,801

288,008

Revenue reserve

20,515

20,008

26,969

Total equity shareholders' funds

639,177

580,382

635,466

Net asset value per share (note 8)

255.05p

242.21p

258.63p

                          

Cash Flow Statement

 

 

(Unaudited)

For the six months
ended

28 February

2018

£'000

(Unaudited)

For the six months
ended

 28 February

2017

£'000

(Audited)

For the year

ended
31 August

2017

£'000

Operating activities

 

 

 

Profit before finance costs and taxation

6,807

60,785

110,900

Deduct/add back net foreign currency gains/losses

(2,314)

2,177

963

Add back/deduct losses/gains on investments at fair value through profit or loss

2,951

(58,359)

(94,537)

Net purchases of investments at fair value through profit or loss

(29,418)

(13,350)

(25,219)

Less amortisation of discount on fixed interest securities

-

(16)

-

Decrease in receivables

499

129

296

(Decrease)/increase in payables

(7,484)

(1,292)

2,341

Overseas taxation paid

(497)

(563)

(2,074)

Net cash outflow from operating activities before interest

(29,456)

(10,489)

(7,330)

Interest paid

(452)

(386)

(739)

Net cash outflow from operating activities

(29,908)

(10,875)

(8,069)

Bank loans drawn down

14,593

27,794

44,254

Bank loans repaid

-

(38,133)

(38,192)

Issue of shares

12,655

4,909

19,825

Dividends paid

(14,731)

(12,886)

(21,131)

Net cash inflow/(outflow) from financing activities

12,517

(18,316)

4,756

Decrease in cash and cash equivalents

(17,391)

(29,191)

(3,313)

Cash and cash equivalents at the start of the period

29,881

33,859

33,859

Effect of foreign exchange rate changes on cash and cash equivalents

(513)

(45)

(665)

Cash and cash equivalents at the end of the period

11,977

4,623

29,881

 

Dividends received during the period amounted to £10,477,000 (period ended 28 February 2017: £9,998,000 and year ended 31 August 2017: £27,608,000) and bond and deposit interest receipts amounted to £106,000 (period ended 28 February 2017: £399,000 and year ended 31 August 2017: £1,005,000).

 

Notes to the Accounts

 

1. Principal activity

 

The Company carries on business as a Guernsey closed-ended investment company.

 

2. Financial statements

 

The financial information for the six months ended 28 February 2018 and 28 February 2017 has not been audited or reviewed by the Company's Recognised Auditors. These financial statements do not include all of the information required to be included in annual financial statements and should be read in conjunction with the financial statements of the Company for the year ended 31 August 2017.

 

3. Accounting policies

 

The accounts have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" and the accounting policies set out in the statutory accounts of the Company for the year ended 31 August 2017. Where presentational guidance set out in the Statement of Recommended Practice (the "SORP") for investment trusts issued by the Association of Investment Companies in November 2014 and updated in February 2018, is consistent with the requirements of International Financial Reporting Standards, the accounts have been prepared on a basis compliant with the recommendations of the SORP.

 

4. Taxation

 

The Company has been granted an exemption from Guernsey taxation, under the Income Tax (Exempt Bodies) Guernsey Ordinance for which it is charged an annual exemption fee of £1,200 (2017: same). Taxation comprises irrecoverable overseas withholding tax deducted from dividends receivable.

 

5. Earnings per share

 

 

(Unaudited)

Six months ended

28 February
2018

(Unaudited)

Six months ended

28 February 2017

(Audited)

Year ended

31 August
2017

Net revenue profit (£'000)

8,277

8,733

23,939

Net capital (loss)/profit (£'000)

(2,490)

50,964

84,171

Net total profit

5,787

59,697

108,110

Weighted average number of shares in issue during the period

248,734,488

238,513,520

240,721,945

Revenue earnings per share

3.33p

3.66p

9.94p

Capital (loss)/earnings per share

(1.00)p

21.37p

34.97p

Total earnings per share

2.33p

25.03p

44.91p

 

6. Dividends paid

 

 

(Unaudited)

Six months ended

28 February 2018

£'000

(Unaudited)

Six months ended

28 February
2017

£'000

(Audited)

Year ended

31 August 2017

£'000

2017 fourth interim dividend of 4.20p
(2016: 3.80p)

10,477

9,068

9,068

First interim dividend of 1.70p (2017: 1.60p)

4,254

3,818

3,818

Second interim dividend of 1.70p

-

-

4,074

Third interim dividend of 1.70p

-

-

4,171

 

14,731

12,886

21,131

 

 

A second interim dividend of 1.70p (2017: 1.70p) per share, amounting to £4,260,000 (2017: £4,074,000) has been declared payable in respect of the year ending 31 August 2018.

 

7. Share capital

 

Changes in the number of shares in issue during the period were as follows:

 

 

(Unaudited)

Six months

ended
28 February

2018

(Unaudited)

Six months

ended
28 February

2017

(Audited)

Year ended
31 August

2017

Ordinary shares of 1p each, allotted, called-up and fully paid

 

 

 

Opening balance of shares in issue

245,703,024

237,541,574

237,541,574

Issue of shares

4,905,000

2,081,450

8,161,450

Closing balance of shares in issue

250,608,024

239,623,024

245,703,024

 

8. Net asset value per share

 

 

(Unaudited)

28 February
2018

(Unaudited)

28 February
2017

(Audited)

31 August
2017

Net assets attributable to shareholders (£'000)

639,177

580,382

635,466

Shares in issue at the period end

250,608,024

239,623,024

245,703,024

Net asset value per share

255.05p

242.21p

258.63p

 

9.         Disclosures regarding financial instruments measured at fair value

 

The Company's portfolio of investments, comprising investments in companies and government bonds and any derivatives, are carried in the balance sheet at fair value. Other financial instruments held by the Company comprise amounts due to or from brokers, dividends and interest receivable, accruals, cash and drawings on the credit facility. For these instruments, the balance sheet amount is a reasonable approximation of fair value. The recognition and measurement policies for financial instruments measured at fair value have not changed from those set out in the statutory accounts of the Company for the year ended 31 August 2017.

 

At 28 February 2018, all investments in the Company's portfolio were categorised as Level 1 in accordance with the criteria set out in IFRS 13. That is, they are all valued using unadjusted quoted prices in active markets for identical assets (28 February 2017 and 31 August 2017: same).

 

10. Events after the interim period that have not been reflected in the financial statements for the interim period

 

The Directors have evaluated the period since the interim date and have not noted any significant events which have not been reflected in the financial statements.


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