SAINTS Preliminary Results

RNS Number : 3812W

Scottish American Investment Co PLC

09 February 2017

 

RNS Announcement: Preliminary Results

Scottish American Investment Company plc

 Results for the year to 31 December 2016

¾  Dividend - the full year dividend, including a recommended final dividend of 2.725p, is 10.825p per share. This is 1.2% ahead of the 2015 dividend, extending the Company's record of dividend increases to thirty seven consecutive years.

¾  Total return - Net Asset Value Total Return (capital and income) for the year was 29.9%, slightly ahead of the very strong total return from global equities of 29.6%. The share price total return was 28.7%. Positive returns were assisted by the strong operational performance of many of the companies in which SAINTS invests.

¾  The Company's property investments have delivered a healthy return of over 9%.

¾  Revenues - Investment income rose to £18.8m (2015 - £18.6m) and earnings per share were 10.54p (2015 - 10.47p).

¾  Outlook - Against an uncertain backdrop, the equity portfolio's prospects for growth and resilience are quite distinct from those of the market as a whole. The Board endorses the Manager's approach, which is built on investing globally in individual businesses which are operationally dependable and which produce and distribute strong and growing cash-flows.        

8 February 2017

SAINTS' objective is to deliver real dividend growth by increasing capital and growing income. Its policy is to invest mainly in equity markets, but other investments may be held from time to time including bonds, property and other asset classes.

The Company is managed by Baillie Gifford, the Edinburgh based fund management group with around £153 billion under management and advice as at 8 February 2017.

Past performance is not a guide to future performance. SAINTS is a listed UK company. As a result, the value of its shares and any income from those shares is not guaranteed and could go down as well as up. You may not get back the amount you invested. As SAINTS invests in overseas securities, changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up. You can find up to date performance information about SAINTS on the SAINTS page of the Managers' website www.saints-it.com. 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.

For further information please contact:

Dominic Neary, Manager, The Scottish American Investment Company P.L.C.

Tel: [phone]

James Budden, Baillie Gifford & Co  

Tel: [phone] or 07507 201208

Roland Cross, Director, Four Broadgate

Tel: [phone] or 07831 401309

The following is the unaudited Annual Financial Report for the year to 31 December 2016.

 

Chairman's Statement

The Company's objective is to deliver real dividend growth by increasing capital and growing income. An increased dividend of 10.825p (2015: 10.70p) will extend the Company's record of raising its dividend to thirty seven consecutive years.

Overview

To say that it has been an eventful year for investment markets is something of an understatement. Looking back over the year of the Brexit vote and of the Republican victory in the US presidential elections, it is striking not just that both of these events were largely unpredicted but also that even those who did predict them generally misjudged the short term impact on markets.

Since President Trump's victory, hopes for a significant boost to the US economy from infrastructure spending and tax cuts have, for the time being at least, outweighed any concerns about longer term debt problems, protectionism and the consequent risk of a decline in global trade.

Closer to home, while sterling was an early casualty of the Referendum result, markets generally stayed calm. But Brexit negotiations have yet to start, and are unlikely to conclude before late 2018. Uncertainty will have a cost, but it is too soon to be sure of the full economic consequences of leaving the EU.

Despite or even partly because of this tumultuous background markets have delivered very good returns over the year, especially for sterling investors who have benefitted from the currency appreciation of their overseas assets. Your Company's investments have benefitted accordingly, particularly equities which represent the majority of SAINTS' portfolio for their long-term income and capital growth potential. In addition it is pleasing to report that the Company's investments in property have again delivered a healthy return, in contrast to many segments of the UK commercial property sector.

Total Return Performance

The Company's net asset value total return (capital and income) for the year was 29.9% and the share price total return was 28.7%. The total return from the global equity market was 29.6%.  Whilst it is encouraging that returns have matched the very strong returns of equities generally over the year, it is a coincidence that they are so close, particularly as the Company's portfolio of investments differs markedly from the make up of the global equity index against which performance is often compared. This differentiated portfolio is necessary and appropriate in order for the Company to deliver a high and growing yield and service its borrowings. In addition, both the Managers and your Board have a long term perspective and so we do not believe that it is generally helpful to dwell on the comparison of performance against any equity index over short periods.

Nonetheless it is worth highlighting that, whilst on the one hand the operational performance of the Company's equity investments has been generally encouraging, currency movements have detracted from relative performance over the year. Given that the Company has greater exposure to sterling-denominated assets than their weighting in the comparative global index, sterling's weakness has been unhelpful in this regard. Overall, however, returns have been helped by the sound operational performance already mentioned and also by another good year for the Company's property investments. The principal contributors to and detractors from performance are explained in more detail in the Managers' Review.

Revenues

At the interim stage we intimated that earnings per share for 2016 were likely to be below the 10.47p per share reported for 2015. In the event earnings per share rose slightly to 10.54p per share, whilst investment income increased to £18.8m from £18.6m. Overseas equity income has been helped by currency movements, and bond income has also increased. Income from property was stable despite some adjustments to the portfolio, and over the course of the year the proportion of rental income which is linked to inflation was again increased. Both managers (Baillie Gifford and, for the Company's property investments, OLIM) continue at the Board's request to place increasing emphasis on supporting the dependability and the future growth of the Company's dividend in line with its objective.

Dividend and Inflation

A final dividend of 2.725p is recommended which will take the full year dividend to 10.825p per share, 1.2% higher than the 2015 dividend of 10.70p.

The recommended dividend is largely, but not fully, covered by this year's earnings. The Company has built up revenue reserves in the past with a view to facilitating the smooth progression of dividends. The Board has taken into account both these reserves (which will stand at 9.61p per share after the recommended final dividend) and the overall performance of and prospects for the Company's investments in recommending a dividend which reinforces its progressive dividend policy. In recent years the Company has effected a significant shift in its allocation away from fixed income investments and towards 'real assets' where income is expected to grow in the future. Your Board is confident that this growth will permit both further increases in the Company's dividend and a return to a fully covered dividend. In the meantime, in an environment where increases in interest rates are increasingly likely, the marked reduction in exposure to fixed income investments should be helpful to total returns.

This year's increase, whilst slightly below the annual rate of inflation of 1.6% as measured by CPI, extends the Company's record of annual dividend increases to thirty seven years. Over the last ten years the Company's dividends have increased at well over the rate of inflation, as will be illustrated on the first chart on page 1 of the Annual Report. Whilst a picture is normally worth a thousand words, it is perhaps an even more striking illustration of the power of compound growth that the 2016 dividend of 10.825p will be some 46% higher than the 2006 dividend of 7.4p.

Borrowings

SAINTS' borrowings take the form of a single £80m debenture which is due for repayment in April 2022.  During 2016, the borrowings mainly funded a range of higher yielding commercial property and, to a much lesser extent, some fixed income investments.

The book value of the debenture is £84.1m which, at the year end, was equivalent to approximately 19% of shareholders' funds.  The estimated market or fair value of the debenture was £103.2m, a decrease from the previous year's value of £103.6m.  Whilst the market value of the Company's borrowings will continue to be influenced by prevailing interest rates, over the coming years we continue to expect declines in both the debenture's book and market values, and a narrowing between those values, as it approaches its final redemption value of £80m.

Outlook

The longer-term implications of both Brexit and President Trump's victory will take a while to emerge. Inflation in the UK is likely to pick up this year as the fall in sterling causes imported goods to become more expensive, as last year's falls in the oil price drop out of the figures and as wages, housing costs and interest rates start to rise. In the US interest rate rises are also likely, and indeed the progression of the economic cycle does raise the question of whether significant fiscal stimulus is actually required. Assuming it gets Congressional approval later in the year, fiscal stimulus which turned out to be unnecessary might have the unfortunate effect of stoking wage inflation that is already evident. Markets have been strong and, whilst inflation often helps equities, it is fair to say both that starting valuations are not particularly low and that the market's earnings growth thus far has not been especially encouraging.

The Board and the Managers are alert to the potential challenges and opportunities arising from the UK electorate's vote to leave the European Union. It is worth emphasising the international nature of the Company's investments, including many of those listed in the UK. It is also important to note the supportive characteristics of the Company's property investments including healthy covenants, long lease lengths and, in many cases, inflation-linked rents. In this environment, your Board endorses the Managers' approach, which is built on investing globally in individual businesses which are operationally dependable and which produce and distribute strong and growing cash-flows. The equity portfolio's prospects for growth and resilience are quite distinct from the prospects for the market as a whole. The Company's investments in property and selected bonds provide additional sources of income and returns. The Board believes that the portfolio as a whole is well placed to support the continued growth of the Company's dividend over time and recent operational performance has largely supported our confidence in the prospects of the Company's portfolio.

The Board and the Managers

My fellow Board members and I would like to record our thanks for all Sir Brian Ivory's considerable efforts on behalf of the Company and its shareholders over many years as a Director and as Chairman, prior to his stepping down from the Board at last April's Annual General Meeting. I hope to carry forward the Chairmanship with similar energy and application.

We were also delighted to welcome Lord Macpherson of Earl's Court (formerly Sir Nicholas Macpherson GCB) to the Board in September. His considerable experience and knowledge will undoubtedly be a great benefit to the Company in the years ahead.

Lastly, I wanted to highlight the appointment of James Dow and Toby Ross as deputy managers of the Company, which was announced at the interim stage. The appointments reflect Baillie Gifford's team-based approach and the Board looks forward to a fruitful and productive working relationship with James, Toby and the manager Dominic Neary in the future.

AGM

The AGM will be held at 11am on Thursday 6 April at Baillie Gifford's offices at Calton Square, 1 Greenside Row, Edinburgh. The Managers will make a presentation on the investment portfolio and there will also be an opportunity to ask questions. The Directors and the Managers look forward to meeting you there.

Peter Moon

Chairman

8 February 2017

Income statement

The following is the unaudited preliminary statement for the year to 31 December 2016 which was approved by the Board on 8 February 2017. The Board of The Scottish American Investment Company P.L.C. is recommending to the Annual General Meeting of the Company to be held on 6 April 2017 the payment of a final dividend of 2.725p (2.70p last year) per ordinary share making a total of 10.825p (10.70p last year) paid and proposed for the year ended 31 December 2016.

	For the year ended 31 December 2016 (unaudited)			For the year ended 31 December 2015 (audited)
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net gains on investments - securities	-	87,566	87,566	-	7,038	7,038
Net gains on investments - property	-	1,265	1,265	-	1,643	1,643
Currency losses	-	(1,084)	(1,084)	-	(272)	(272)
Income (note 2)	18,789	-	18,789	18,626	-	18,626
Management fees	(775)	(1,440)	(2,215)	(690)	(1,282)	(1,972)
Other administrative expenses	(968)	-	(968)	(1,137)	-	(1,137)
Net return before finance costs and taxation	17,046	86,307	103,353	16,799	7,127	23,926
Finance costs of borrowings	(2,015)	(3,741)	(5,756)	(2,028)	(3,767)	(5,795)
Net return on ordinary activities before taxation	15,031	82,566	97,597	14,771	3,360	18,131
Tax on ordinary activities	(988)	325	(663)	(858)	226	(632)
Net return on ordinary activities after taxation	14,043	82,891	96,934	13,913	3,586	17,499
Net return per ordinary share (note 3)	10.54p	62.19p	72.73p	10.47p	2.70p	13.17p

The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in this statement derive from continuing operations.

 

Balance sheet

	At 31 December 2016 (unaudited)		At 31 December 2015 (audited)
	£'000	£'000	£'000	£'000
Fixed assets
Investments - securities	452,554		375,868
Investments - property	61,000		56,000
		513,554		431,868
Current assets
Debtors	1,252		1,115
Cash and cash equivalents	4,174		3,399
	5,426		4,514
Creditors
Amounts falling due within one year	(3,222)		(3,173)
Net current assets		2,204		1,341
Total assets less current liabilities		515,758		433,209
Creditors
Amounts falling due after more than one year		(84,112)		(84,756)
Net assets		431,646		348,453
Capital and reserves
Called up share capital		33,349		33,290
Share premium		2,131		1,534
Capital redemption reserve		22,781		22,781
Capital reserve		356,929		274,038
Revenue reserve		16,456		16,810
Shareholders' funds		431,646		348,453
Net asset value per ordinary share (debenture at fair value)		309.3p		247.5p
Net asset value per ordinary share (debenture at book value)		323.6p		261.7p
Ordinary shares in issue (note 6)		133,395,943		133,160,943

Statement of Changes in Equity

For the year ended 31 December 2016 (unaudited)

	Share capital £'000	Share Premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 January 2016	33,290	1,534	22,781	274,038	16,810	348,453
Shares issued	59	597	-	-	-	656
Net return on ordinary activities after taxation	-	-	-	82,891	14,043	96,934
Dividends paid in the year (note 4)	-	-	-	-	(14,397)	(14,397)
Shareholders' funds at 31 December 2016	33,349	2,131	22,781	356,929	16,456	431,646

For the year ended 31 December 2015 (audited)

	Share capital £'000	Share Premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 January 2015	33,169	357	22,781	270,452	17,047	343,806
Shares issued	121	1,177	-	-	-	1,298
Net return on ordinary activities after taxation	-	-	-	3,586	13,913	17,499
Dividends paid in the year (note 4)	-	-	-	-	(14,150)	(14,150)
Shareholders' funds at 31 December 2015	33,290	1,534	22,781	274,038	16,810	348,453

 

Cash flow statement

	Year Ended 31 December 2016 (unaudited)		Year Ended 31 December 2015 (audited)
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Net return on ordinary activities before taxation	97,597		18,131
Net gains on investments - securities	(87,566)		(7,038)
Net gains on investments - property	(1,265)		(1,643)
Currency gains	1,084		272
Finance costs of borrowings	5,756		5,795
Overseas withholding tax	(625)		(651)
Changes in debtors and creditors	74		(79)
Other non-cash changes	(65)		(93)
Cash from operations		14,990		14,694
Interest paid		(6,400)		(6,400)
Net cash inflow from operating activities		8,590		8,294
Cash flows from investing activities
Acquisitions of investments	(83,824)		(106,814)
Disposals of investments	91,034		104,757
Forward currency contracts	(1,691)		188
Net cash inflow/(outflow) from investing activities		5,519		(1,869)
Cash flows from financing activities
Equity dividends paid	(14,397)		(14,150)
Shares issued	656		1,298
Net cash outflow from financing activities		(13,741)		(12,852)
Increase/(decrease) in cash and cash equivalents		368		(6,427)
Exchange movements		407		(151)
Cash and cash equivalents at 1 January		3,399		9,977
Cash and cash equivalents at 31 December*		4,174		3,399

*      Cash and cash equivalents represent cash at bank and short term money market deposits repayable on demand.

 

Asset allocation

	At 31 December 2016 % (unaudited)		At 31 December 2015 % (audited)
Quoted equities	82.8		82.9
Bonds	5.0		3.9
Direct property	11.8		12.9
Net liquid assets	0.4		0.3
Total assets	100.0		100.0

Performance attribution

Portfolio Breakdown	Average allocation		Total return
	SAINTS %	Benchmark %	SAINTS %	Benchmark %
Global equities	100.3	100.0	26.7	29.6
Bonds	5.3		48.2
Direct property	15.1		9.3
Deposits	1.1		-
Debenture at book value	(21.8)		6.8
Portfolio total return (debenture at book value)			29.1	29.6
Other items*			(0.8)
Fund total return (debenture at book value)			28.3	29.6
Adjustment for change in fair value of debenture			1.6
Fund total return (debenture at fair value)			29.9	29.6

* Includes Baillie Gifford and OLIM management fees.

The above returns are calculated on a total return basis with net income reinvested.

Past performance is not a guide to future performance.

Source: Baillie Gifford

 

Thirty largest equity holdings (unaudited)

Name	Business	2016 Value £'000	2016 % of total assets	2015 Value £'000
Coca Cola	Beverage manufacturer	12,582	2.4	8,761
WPP	Advertising agency	10,951	2.1	9,914
Johnson and Johnson	Pharmaceuticals and healthcare products	10,414	2.0	5,919
Taiwan Semiconductor Manufacturing	Semiconductor manufacturer	10,307	2.0	7,806
Fastenal	Distribution and sales of industrial supplies	9,842	1.9	6,614
Procter & Gamble	Household product manufacturer	9,711	1.9	6,483
Total	Integrated oil company	9,616	1.9	6,521
Partners Group	Asset management	9,539	1.8	6,680
Reynolds American	Cigarette manufacturer	9,151	1.8	6,817
Prudential	Life insurer	8,990	1.7	3,748
United Parcel Service	Courier services	8,864	1.7	5,755
Scottish & Southern Energy	Electricity utility	8,633	1.7	5,274
Sonic Healthcare	Laboratory testing	8,557	1.7	5,693
Analog Devices	Integrated circuits	8,463	1.6	6,945
Anta Sports Products	Sportswear manufacturer and retailer	8,021	1.6	5,513
Pepsico	Snack and beverage manufacturer	7,861	1.5	6,774
AVI	Staple foods manufacturer	7,856	1.5	5,148
Deutsche Boerse	Securities exchange owner/operator	7,845	1.5	8,218
New York Community Bankcorp	Banking	7,461	1.4	5,822
China Mobile	Mobile telecommunication services	7,297	1.4	5,382
CH Robinson	Delivery and logistics	7,281	1.4	4,175
Atlas Copco	Engineering	7,232	1.4	4,453
Experian	Credit scoring and marketing services	7,034	1.4	4,888
Want Want	Snacks and milk-based products	6,974	1.4	5,566
Alphabet Class A and C	Online search engine	6,877	1.3	5,469
Kimberley-Clark de México	Paper-based household products	6,624	1.3	7,288
McDonald's	Fast food restaurant	6,516	1.3	6,742
Sumitomo Mitsui Trust Holdings	Trust bank and investment manager	6,499	1.3	3,939
Microsoft	Computer software	6,488	1.3	6,185
Admiral	Car insurance	6,478	1.3	6,591
		249,964	48.5	185,083

 

Notes (unaudited)

1.	The Financial Statements for the year to 31 December 2016 have been prepared in accordance with Financial Reporting Standard 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland and on the basis of the accounting policies set out in the Annual Report and Financial Statements for the year ending 31 December 2015. In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's principal risks are market related and include market risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 17 to the Financial Statements. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis. The Company has no short term borrowings and the redemption date for the Company's debenture is April 2022. Accordingly, the Financial Statements have been prepared on the going concern basis as it is the Directors' opinion, having assessed the principal risks and other matters set out in the Viability Statement in the Annual Report and Financial Statements, that the Company will continue in operational existence for a period of at least 12 months from the date of approval of these Financial Statements. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company and its investment manager, who are subject to the UK's regulatory environment, are also UK based.
2.	Income	2016 £'000	2015 £'000
	Income from investments
	UK dividend income	3,176	3,666
	UK interest	157	238
	Overseas dividends	10,475	10,017
	Overseas interest	873	660
		14,681	14,581
	Other income
	Deposit interest	64	17
	Rental income	4,021	4,004
	Other income	23	24
		4,108	4,045
	Total income	18,789	18,626
	Total income comprises
	Dividends from financial assets designated at fair value through profit or loss	13,651	13,683
	Interest from financial assets designated at fair value through profit or loss	1,030	898
	Interest from financial assets not at fair value through profit or loss	64	17
	Other income not from financial assets	4,044	4,028
		18,789	18,626

 

Notes (unaudited) (ctd)

3.	Returns per ordinary share	2016				2015
		Revenue	Capital		Total	Revenue		Capital	Total
	Net return per ordinary share	10.54p	62.19p		72.73p	10.47p		2.70p	13.17p
	Revenue return per ordinary share is based on the net revenue on ordinary activities after taxation of £14,043,000 (2015 - £13,913,000) and on 133,291,026 (2015 - 132,864,655) ordinary shares of 25p, being the weighted average number of ordinary shares in issue during the year. Capital return per ordinary share is based on the net capital gain for the financial year of £82,891,000 (2015 - net capital gain of £3,586,000), and on 133,291,026 (2015 - 132,864,655) ordinary shares of 25p, being the weighted average number of ordinary shares in issue during the year. There are no dilutive or potentially dilutive shares in issue.
4.	Ordinary Dividends			2016		2015		2016 £'000		2015 £'000
	Amounts recognised as distribution in the year:
	Previous year's final (paid 5 April 2016)			2.70p		2.65p		3,595		3,516
	First interim (paid 24 June 2016)			2.70p		2.65p		3,598		3,516
	Second interim (paid 23 September 2016)			2.70p		2.675p		3,602		3,559
	Third interim (paid 16 December 2016)			2.70p		2.675p		3,602		3,559
				10.80p		10.65p		14,397		14,150
	We also set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution out of current year profits by way of dividend for the year is £14,043,000 (2015 - £13,913,000).
				2016			2015	2016 £'000		2015 £'000
	Dividends paid and payable in respect of the year:
	First interim (paid 24 June 2016)			2.70p			2.65p	3,598		3,516
	Second interim (paid 23 September 2016)			2.70p			2.675p	3,602		3,559
	Third interim (paid 16 December 2016)			2.70p			2.675p	3,602		3,559
	Current year's proposed final dividend (payable 12 April 2017)			2.725p			2.70p	3,635		3,595
				10.825p			10.70p	14,437		14,229
	If approved the final dividend of 2.725p will be paid on 12 April 2017 to all shareholders on the register at the close of business on 10 March 2017. The ex-dividend date is 9 March 2017. The Company's Registrar offers a Dividend Reinvestment Plan and the final date for the receipt of elections for reinvestment of this dividend is 22 March 2017.
5.	The fair value of the 8% Debenture Stock 2022 at 31 December 2016 was £103.2m (2015 - £103.6m).
6.	During the year, 235,000 (2015 - 485,000) shares were issued at a premium to net asset value raising proceeds of £656,000 (2015 - £1,298,000). At 31 December 2016 the Company had authority to buy back 19,960,825 ordinary shares and to allot 13,081,092 ordinary shares without application of pre-emption rights in accordance with the authorities granted at the AGM in April 2016. No shares were bought back during the year.
7.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2016. The financial information for 2015 is derived from the statutory accounts for 2015 which have been delivered to the Registrar of Companies. The Auditors have reported on the 2015 accounts, their report was unqualified and did not contain a statement under section 495 to 497 of the Companies Act 2006. The statutory accounts for 2016 are unaudited and will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
8.	The Report and Accounts will be available on the SAINTS page of the Managers' website www.saints-it.com on or around 6 March 2017‡

‡    Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

Legal Entity Identifier code: 549300NF03XVC5IFB447

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