Results analysis from Kepler Trust Intelligence

Schroder UK Mid Cap Fund PLC

28 June 2024

 

Schroder UK Mid Cap (SCP)

28/06/2024

Results analysis from Kepler Trust Intelligence

Schroder UK Mid Cap (SCP) has released its interim results for the period ending 31/03/2024. Over the period, the trust delivered a 9.3% NAV total return, versus its benchmark which returned 11.4%. The trust's peer group returned an average of 11.7%.

Relative returns were affected by areas that would benefit from lower interest rates. The managers' focus on quality factors meant they were underweight these areas. However, more cyclical holdings such as Just Group were beneficiaries of the improved economic outlook and contributed positively.

Long-term returns remain strong, with the managers significantly ahead over one, five and 10 years.

The discount widened to 15.2% at the end of the period, a trend seen across the peer group. We note that the discount has narrowed post period end as the trust has outperformed.

The board has declared an interim dividend of 6p per share, an increase of 9.1%. This was more than covered by first-half revenue. Based on this dividend, and the previous year's final dividend, SCP offers a yield of 3.4%. However, we note the final dividend has been regularly increased.

Net gearing increased to 8.2% as at the end of the period. Gearing was a net benefit to performance as a result of the rising market.

Chairman Robert Talbut discussed the valuation opportunity stating: "the UK stock market represents one of the cheapest regional equity markets in the world, with the UK mid-cap sector looking particularly attractive".

Kepler View

The managers of Schroder UK Mid Cap (SCP), Jean Roche and Andy Brough, look to build a concentrated portfolio of the best ideas from the FTSE 250. Both managers have extensive experience to support their stock selection approach, which should drive outperformance of the benchmark.

In the interim period covered by the results, the trust returned 9.3% on a NAV total return basis. Whilst this was a strong return in absolute terms, the managers underperformed the benchmark. However, the trust outperformed in the period post results to cement long-term outperformance.

The managers believe that M&A could be a feature going forward, due to depressed valuations. When combined with the potential for an improved political and regulatory backdrop, there is significant support for a long-term recovery in UK equities.

The board announced an increase to the interim dividend in the period to 6p per share which was 1.1x covered by revenue. The dividend is one of the standout features of SCP in our opinion. The increase in the 2023 dividend marked a 'ten-bagger' (or 10x) rise from its first annual dividend (2004). As the dividend remains well supported, we believe it continues to add to SCP's investment case.

The discount widened in the period though the board did not buy back any shares. Post results, the discount has come in slightly though remains wide, despite the strong performance and improved outlook. As such, we believe the current discount could be an attractive entry point for long term investors.

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