Annual Financial Report

RNS Number : 5801K

Lowland Investment Co PLC

14 December 2018

 

Henderson Investment Funds Limited

LOWLAND INVESTMENT COMPANY PLC

Legal Entity Identifier: 2138008RHG5363FEHV19

Annual Financial Results for the year ended 30 September 2018

This announcement contains regulated information

Key Data as at 30 September 2018

·     Net Asset Value ('NAV') Total Return¹ 2.7 %

·     Benchmark Total Return² 5.9%

·     Growth in Dividend 10.2%

·     Dividend for the Year³ 54.0p

	Year ended 30 September 2018	Year ended 30 September 2017
NAV per share at year end	1,625p	1,628p
Share Price at year end4	1,515p	1,504p
Market Capitalisation	£409m	£406m
Dividend per share	54.0p3	49.0p
Ongoing Charge including the Performance Fee	0.57%	0.68%
Ongoing Charge excluding the Performance Fee	0.57%	0.58%
Dividend Yield5	3.6%	3.3%
Gearing at year end	12.2%	6.3%
Discount at year end6	6.8%	7.6%
AIC UK Equity Income Sector - Average Discount	1.4%	2.0%

¹   Net asset value per share total return (including dividends reinvested) in the prior year was 17.0%

²   FTSE All-Share Index. The amount includes dividends reinvested

³   Includes the final dividend of 14.0p per ordinary share for the year ended 30 September 2018 that will be put to

   shareholders for approval at the Annual General Meeting on Monday 28 January 2019

⁴   Mid-market closing price

⁵   Based on dividends paid in respect of the previous 12 months and the share price at the year-end

⁶   Calculated using year-end audited NAVs including current year revenue

Sources: Morningstar for the AIC, Janus Henderson, Datastream

Historical Performance

Year ended 30 September	Dividend per ordinary share in pence	Total return/(loss) per ordinary share in pence	Net revenue return per ordinary share in pence	Total net assets in £'000	Net asset value per ordinary share in pence	Share price per ordinary share in pence
2008	26.5	(344.4)	33.0	178,411	675.4	625.0
2009	26.5	8.4	22.7	173,633	657.3	610.0
2010	27.0	139.5	22.5	203,484	770.3	699.5
2011	28.0	68.3	28.8	214,251	811.0	762.5
2012	30.5	229.9	31.1	266,401	1,008.4	991.5
2013	34.0	330.1	36.7	347,202	1,306.9	1,325.0
2014	37.0	73.3	39.4	361,856	1,345.6	1,355.0
2015	41.0	11.8	46.4	354,563	1,318.4	1,287.0
2016	45.0	156.4	47.7	386,910	1,432.0	1,336.5
2017	49.0	243.2	49.1	439,896	1,628.1	1,504.0
2018	54.01	47.4	58.6	438,934	1,624.6	1,515.0

¹          Includes the final dividend of 14.0p per ordinary share for the year-ended 30 September 2018 that will be put to the shareholders for approval at the Annual General Meeting on Monday 28 January 2019

CHAIRMAN'S STATEMENT

Performance

The year saw a combination of modest capital growth and strong revenue growth. Our NAV total return was a positive 2.7%. This is disappointing measured against our long-term target - the FTSE All-Share Index - which returned 5.9%.

This NAV performance can be assessed in the light of two major factors. Firstly, the UK market dramatically underperformed the rest of the developed world, reflecting uncertainties about Brexit and the stability of the UK government. Secondly, Lowland's investment style, weighted in favour of stocks perceived to be undervalued, has fared less well than portfolios with a bias towards growth stocks. While the Fund Managers have positioned the portfolio a little more defensively than usual, the intention is to refocus on smaller companies and cyclical companies when the management team spot sufficiently attractive opportunities.  Our strategy has rewarded shareholders well over the long term. The Board sees no reason to waver.

Dividends

The fundamental health of our portfolio is demonstrated by the growing income it has generated. Earnings per share grew by 19.3% to 58.6p including special dividends, and by 18.6% to 55.4p excluding them. We have comfortably maintained our most recent practice of a quarterly progressive dividend. Since we started paying four dividends a year in 2013, each of the quarterly dividends has been equal to or greater than the previous quarter and each has been at least 1p above the corresponding dividend in the previous year. We have paid two interim dividends of 13.0p and a third of 14.0p. If shareholders agree the Board's recommended 14.0p final dividend, the total for the year will be 54.0p, 10.2% above last year. This will extend to six years the period in which our dividends have grown at a compound rate of 10%.

We aspire to maintain the quarterly progressive policy described above. In this regard we will have greater flexibility as a result of the previously announced decision to allocate 50% of expenses to the Capital Account and 50% to the Revenue Account. This policy, which reflects the anticipated derivation of total return, is in line with our competitors. The new policy was adopted with effect from 1 October 2018. We believe it will provide flexibility, not only for dividends, but also for investment policy. It has long been our belief that growing our capital will enable us to grow the income which derives from it; it is important that our Fund Managers have the freedom to invest for capital growth and are not pushed into 'chasing income' from stocks which may prove to be 'value traps'.

Investment Review and Gearing

We increased gearing during the year from around 6% to circa 12% in the second half. With the Board's support, the Fund Managers increased the borrowing to take advantage of a number of opportunities they perceived to be keenly valued. In doing so they have not greatly increased the risk profile, as they have mainly invested in higher-yielding large-cap companies. For instance, they increased the positions in Royal Dutch Shell, GlaxoSmithKline and National Grid. They established new positions in Severn Trent and Land Securities. At the year-end, FTSE-100 companies comprised 39% of the portfolio compared with 36% at the end of last year.

The Board issued £30m twenty year senior unsecured loan notes in January 2017 at a coupon of 3.15%. Long-term bond rates have not moved decisively since then, but we feel comfortable having an element of structural gearing locked in at what is an historically low rate.

Ongoing Charge

The Ongoing Charge Ratio ("OCR") was 0.57% compared with the previous year's 0.58% excluding performance fees. Including performance fees, the OCR was 0.68% last year. No performance fee was paid in respect of the year ended 30 September 2018.

Last year the Board negotiated lower fee arrangements. These were in place throughout the year. The management fee is paid at 0.5% of average net chargeable assets up to £375m and 0.4% in excess thereof. We believe this to be a competitive rate, and that it is satisfactory to have a performance fee arrangement (capped at 0.25%) that rewards the Investment Manager in periods of outperformance. Net Chargeable Assets amounted to £431.3m at the year-end.

Discount

During the year the discount fluctuated between 1.5% and 9.6%. It ended at 6.8% and stood at 7.6% as at 12 December 2018. The Board has regularly considered whether specific actions should be taken to address the discount. This year we decided to define our policy in this regard more clearly.

The Board does not believe that a discount control mechanism is in the interests of shareholders. It would negate some of the benefits of a closed-end fund. It might force the Company to purchase its own shares at a time when it does not have spare cash; when it may be inopportune to realise investments; or when there are good buying opportunities in the market. Furthermore it could shrink the size of the trust, reducing the audience of potential investors, increase the ongoing charges ratio, and reduce liquidity in the Company's shares. The Board may agree to purchase Lowland shares opportunistically if it believes that the benefits in terms of NAV enhancement are sufficient.

The Board believes that the best way of reducing or eliminating the discount is to continue to provide superior returns to shareholders, and to elucidate the attractions of investment in Lowland to as large and diverse an audience as possible.

The Board is prepared to issue shares at a premium, provided the transaction will enhance cum-income NAV after costs; and provided that a premium has prevailed for sufficient time for current shareholders to have had the opportunity to sell shares at a premium. The Board would see the advantages as including NAV enhancement, reducing the ongoing charges ratio, growing the Company, and increasing liquidity in its shares. The Board believes that each of these four factors will be in the interests of Lowland's shareholders.

Corporate Governance

There are two recent developments, under the Corporate Governance heading, on which my colleagues and I feel compelled to comment.  The Lowland Board takes the duty of governing the Company very seriously.  As such, while having regard to pronouncements on Corporate Governance, it must have one overriding priority: the Company's shareholders' interests.  The Financial Reporting Council ('FRC') and the voting agencies are focusing on two issues in a manner which ignores the circumstances of an investment trust; these are 'overboarding' and chairman's tenure.  Their actions are likely, if pursued, to be detrimental to the interests of shareholders of investment trusts.

Taking these in turn, 'overboarding' is a term used to describe the practice of serving on too many boards.  The question of how many directorships is too many is subjective, but its determination has to take account of the nature of the companies involved.  In exercising their judgement on the matter most voting agencies regard the directorship of an investment trust as involving the same time commitment as a major operating company, which is patently wrong.  It is likely that, if this attitude results in significant votes against directors of investment trusts, the number of high quality individuals prepared to stand will reduce.

Secondly, the FRC's latest guidance maintains that an individual serving as chairman of an investment trust should not serve on the board, in whichever capacity, for more than nine years.  This ruling was taken without consulting the AIC, which has since expressed a dissenting view.  Application of the ruling would clearly be detrimental to investment trusts.  While it is sometimes necessary to make an external appointment, the most generally successful practice is to appoint as chairman a director who has served on the board long enough to be well known and trusted by colleagues and other stakeholders; and to have a full understanding of the company.  The accumulated knowledge which comes with tenure will inure to the company's benefit in terms of getting the best from the relationship with the individual fund manager and the management house, as will the experience of getting through difficult times in the past.  Limiting tenure to a total of nine years will tend to preclude the appointment of the optimal chairman, who has had time to get to know the company, and still has adequate time to provide the benefit of that knowledge as chairman.  I would add that experience suggests that nine years on an investment trust board is unlikely to compromise a chairman's independence.

Lowland has long subscribed to a combination of continuity and renewal, which it believes to be in the best interests of shareholders.

Contact with Shareholders

We are always keen to hear shareholders' views and so I would invite anyone who wishes to contact me to do so at the Company Secretary's email address in the Annual Report.

Annual General Meeting

The Annual General Meeting ('AGM') of the Company will be held at the offices of Janus Henderson on Monday 28 January 2019 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 this report.

As usual, our Fund Managers will be making a presentation. This is an important opportunity for shareholders to meet the Board and Fund Managers and to ask them questions. We would encourage as many shareholders as possible to attend; we welcome your questions and observations. The Meeting will be broadcast live on the internet, so if you are unable to attend the AGM in person, you will be able to log on to watch the Meeting as it happens by visiting www.janushenderson.com/trustslive.

Board

Kevin Carter has indicated his desire to retire from the Board during the next year.  Kevin has been a first class Director since his appointment in 2009.  My colleagues and I would like to thank him wholeheartedly for his considerable contribution.  An announcement will be made with regard to his successor in due course. 

Outlook

A year ago we felt that valuations of UK stocks were not excessive. The passage of the year has not altered that view. There are always uncertainties in markets, and this year there is certainly no shortage of well-recognised risks. However, Lowland retains a portfolio which is well placed to weather most storms and, we believe, represents sound value, both to existing and new investors.

Robert Robertson

Chairman

14 December 2018

 

FUND MANAGER'S REPORT

Investment Background

It has been a disappointing year for us in terms of capital growth but it was the tenth consecutive year of positive absolute returns due to good dividend returns. The context for capital growth was challenging.

Whilst this has now been a nine-year bull market in equities, there has been little enthusiasm for UK equities from investors.

Within the UK market, those companies relying largely on the domestic economy for profits have been particularly out of favour. After an initial bounce after the financial crash ten years ago, these companies' shares have been de-rated.

Currently domestic companies are trading at an approximately 20% valuation discount to the broader market.

Some of this de-rating reflects the absence of a large tech exposure in the UK market; more recently, the decline has reflected uncertainties about Brexit and the impact of a possible change in government.

This is exciting to contrarian investors like us, and we are looking for opportunities in the general gloom. It is important in this search to realise that the weakness in many of the older-established businesses in the UK is not just the changing relationship with Europe, but also a response to real structural changes in the UK economy. For instance, the move to retailing online has meant many of the older 'brick and mortar' retail formats are under severe pressure. This is an area in which Lowland has little exposure.

Online shopping has grown more rapidly in the UK than in other developed countries and the growth is dramatic.

These trends are not just dramatically shifting the business model of retailers: the growth of online retail is also behind the large discounts in the property sector.

Notwithstanding the perceived background problems, Lowland has benefitted from robust real dividend growth, and as a result Lowland's earnings per share rose 19.3% (including special dividends). This is because overall cash generation in portfolio companies is strong, and on average continue to trade satisfactorily.

Lowland's approach has always been to hold a diverse, relatively long list of stocks that offer good value. This diversity should help to protect the capital if there is a difficult period for the economy.

Performance Attribution

In a continuation of a trend we have seen in recent years, high-quality companies with strong management teams and solid earnings growth continued to perform well and valuations rose; yet 'value' investing, focusing on cheap valuations rather than growth, did not work as a discipline.

This market bifurcation is reflected in the top five performers listed below, all of which are excellent quality companies with strong management teams; but we struggle to describe them as good value. Therefore, while we describe our investment style as 'mildly contrarian', we need to recognise that at the moment, recovery and value investing are  (broadly) not working, while quality is performing well. In this context, where we are reducing holdings, we are doing so in small size and we are being cautious with recovery purchases.

The top five active contributors to performance (relative to the benchmark) that we own were:

1.	Hiscox (Non-Life Insurance)
2.	K3 Capital (corporate broker for small and medium-sized companies)
3.	Randall & Quilter (insurance services)
4.	Croda (speciality chemicals)
5.	GKN (engineering)

The only common theme among the top performers is that they are all specialists, targeting niche areas of the market with real expertise. Hiscox is a good example of this. Its relatively small size in the Lloyd's of London market allows it to be nimble and exit lines of business where it does not expect to generate good returns. Another specialist in its area, Randall & Quilter, buys books of business that are in run-off in non-life insurance (often workers' compensation books). As they build up a history of successfully integrating legacy books, they are increasingly approached by other companies that wish to transfer their liabilities off balance sheet. This then becomes a virtuous circle and allows the business to grow as it attracts more willing sellers.

Another of the top performers was K3 Capital, a specialist corporate brokerage business targeting small and medium-sized companies that are looking for a buyer (which could be a trade buyer or private equity).  By focusing its efforts on smaller companies that have not traditionally been well served by incumbents, it has rapidly built up its market share.

The top five detractors from performance (relative to the benchmark) were:

1.	Conviviality (alcohol distribution and retailing)
2.	Low & Bonar (building materials)
3.	Centrica (UK and US energy supplier)
4.	Carclo (plastic moulding and lighting for 'supercars')
5.	Velocys (early-stage gas to liquids technology)

The largest detractor during the year was Conviviality, an alcohol distributor and owner of the 'Bargain Booze' retail franchise. A combination of poor trading and weak internal controls resulted in the company going into liquidation, and it was written down to zero. We discussed this in more detail in our half-year results: it was a sharp reminder that distributors should not be highly valued businesses, given their low margins.

Of the top five detractors, Low & Bonar and Carclo both suffered cost increases which put pressure on margins. In the case of Low & Bonar, which makes specialist building materials such as truck tarpaulins, it was raw material price rises which dented margins, while in Carclo's case it was labour shortages that led to wage rises. Both companies struggled to pass on cost pressures to the end consumer, demonstrating the commoditised nature of some of the products. However, both companies also have better-quality parts of the business where they produce something unique. For example, in the case of Carclo, their Wipac division makes lighting for 'supercars', where they are the market leader. In both cases we have maintained the positions as we see value in these better-quality parts of the business that is not, in our view, reflected in the current share price. 

Portfolio Positioning

The two largest sectors in the portfolio remain financials and industrials. It is worth noting that financials is somewhat of a 'catch all' sector, including other investment trusts (such as Herald) and property companies (such as Land Securities). Within financials the largest sector is insurance (15% of the portfolio), while banks have remained a small position (5% in total).

Within the insurance sector we continue to favour specialist underwriters - for example, this year a new position was added in Sabre, a motor insurer that targets a small 'non-standard' area of the UK motor market. They target individuals who cannot easily acquire motor insurance (for example students or those with particularly high-value cars). This focused approach has allowed Sabre to generate strong historic returns in what is traditionally a difficult market.

Within the industrials sector we aim to hold good-quality engineers, with the two largest holdings in the sector being engine designer and manufacturer Rolls-Royce and autos and aerospace components manufacturer Senior. These companies have genuine barriers to entry. In the case of Rolls-Royce, it has cost billions of pounds and considerable technological capacity to develop the Trent engine over 20 years. These barriers to entry should allow good margins to be generated over time as the next generation of engines enter high margin service agreements. The inherent value in this type of engineer was demonstrated this year with the takeover of one of the portfolio's top ten holdings, GKN, at a material premium.

Investment Activity

Over the long term, the approximate average position would be to have a third of the portfolio in small companies, a third in medium-sized companies and a third in large companies. Currently we have 39% in the FTSE 100, which is above the long-term average, as we have added to the holdings here over the year. This is reflected in the biggest buys below, the majority of which are in the FTSE 100.

The biggest buys over the year were:

1.	Severn Trent (water utility, new position)
2.	Land Securities (London offices and shopping centre real estate company, new position)
3.	Greene King (UK pubs, new position)

Other large purchases included adding to the positions in Royal Dutch Shell, GlaxoSmithKline and National Grid, and a new holding in Anexo (which provides legal services and replacement vehicles for those involved in motor accidents).

There are a few reasons why we have been gently rotating the portfolio towards larger companies. Broadly, these reasons are better liquidity, a shift towards more defensive companies and the attractive dividend yields on offer. In many cases we are also adding to what we see as good quality companies at an attractive valuation versus history. For example Land Securities, which is trading at an approximately 40% discount to its estimated net asset value, has a good quality portfolio of shopping centres and offices and this valuation looks to be an anomaly (likely driven by Brexit) relative to other global property companies.

The biggest sales over the year were:

1.	GKN (autos and aerospace components engineer, sold following Melrose takeover approach)
2.	Phoenix Group (closed book life insurer, reduced position for portfolio balance reasons)
3.	Croda (speciality chemicals, reduced position)

Unless we had structural concerns or there was a takeover approach, sales were broadly driven by valuation levels. For example, the holdings in Hiscox, Croda and Marshalls were reduced. All are good-quality businesses that are generating excellent returns but have re-rated substantially and we think it is prudent to take profits. We will hopefully be able to recycle these profits in better value opportunities on weakness.

Outlook

The outlook for the UK economy over the next year is difficult to predict. The economists who put forward estimates of GDP growth have a wide range of outcomes in their respective forecasts. Some predict reasonable growth, while others expect a recession. The result of Brexit negotiations and their implications are unclear, as is the damage a trade war between the US and China will create. However, the most likely outlook is for the global economy to keep on growing, albeit at a slow rate, as some of the issues are resolved. There is a possibility that the changes to trading arrangements brought about by Brexit for the domestic economy, and Trump more generally, may lead to a recession next year. As this is less likely than the first scenario, we remain fully committed to equities, but gearing is lower than its historic average. We have also reduced the smaller company and cyclical elements in the portfolio to provide some protection in the event of a recession.

We will keep paying full attention to smaller companies and cyclicals and on real weakness the exposure will be rebuilt. It is in this area that very good returns will be made when coming out of a slowdown. The core of the portfolio is in sound, growing companies that should increase their dividends. This should help underpin Lowland's earnings progression. It is dividend growth that makes equity investment worthwhile over the longer term. The portfolio is not a proxy for the economy but rather a balanced collection of companies that we believe are very well managed and will therefore come through any economic turbulence.

James Henderson and Laura Foll

Fund Managers

14 December 2018

Twenty Largest Holdings as at 30 September 2018

The stocks in the portfolio are a diverse mix of businesses operating in a wide range of end markets.

Rank 2018 (2017)	Company	% of portfolio	Approximate Market Capitalisation	Valuation 2018 £'000
1 (1)	Royal Dutch Shell The company explores, produces and refines oil; it produces fuels, chemicals and lubricants as well as operating filling stations worldwide. The company has  attacked their cost base and has very high class assets, which positions them well for the future.	7.2	£200bn	35,262
2 (5)	Senior The company manufactures specialist engineering products for the automotive and aerospace sectors. Having come under margin pressure in recent years, the company is well positioned to grow margins as end markets recover and new aerospace programs ramp up production.	3.2	£1.1bn	15,610
3 (4)	Hiscox The international insurance company manages underwriting syndicates and underwrites a range of personal and commercial insurance. The company is very disciplined and has over the long term achieved a high return on capital.	3.0	£4.6bn	15,074
4 (2)	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.	2.6	£130bn	12,759
5 (6)	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.	2.3	£42bn	11,437
6 (3)	Phoenix The company operates primarily in the UK and specialises in taking over and managing closed life and pension funds.	2.3	£4.4bn	11,305
7 (*)	GlaxoSmithKline A global pharmaceutical, vaccine and consumer healthcare company.  The consumer healthcare and vaccine businesses should be steady growers over time while the pharmaceutical division under a new leadership team could turnaround what has been a mixed R&D track record.	1.9	£78bn	9,605
8 (7)	Irish Continental1 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	£800m	8,676
9 (17)	BP A producer and refiner of oil. Following the fall in the oil price they have successfully focused on cost reduction.	1.7	£103bn	8,545
10 (15)	Rolls-Royce The company designs and manufactures engines as well as providing aftermarket services for use across aerospace and industry. The company has successfully won market share across many of the large new civil aerospace programmes and under a new management team has a renewed focus on removing duplicate costs.	1.7	£15bn	8,146
11 (8)	Standard Chartered The international banking group operates principally in Asia, Africa and the Middle East. The new management team has focussed the bank back to areas of relative strength in its growing markets.	1.6	£19bn	7,820
12 (10)	Aviva This company provides a wide range of insurance and financial services. The management team has done a good job of simplifying the business, exiting peripheral and low return areas. The company pays an attractive yield that has good scope to grow.	1.5	£17bn	7,587
13 (14)	Relx The company publishes information for the scientific, medical, legal and business sectors, serving customers worldwide. The company is a consistent, high quality growth business.	1.5	£31bn	7,272
14 (19)	International Personal Finance The company provides unsecured cash loans in markets such as Mexico and Poland. Potential changes to regulation in Poland (one of their largest markets) has meant the shares have been weak. While regulation is uncertain, the geographies they operate in should mean there is good potential for growth and it is a high returning business.	1.5	£440m	7,119
15 (*)	Randall & Quilter2 A company that specialises in buying and running down books that are in run-off in non-life insurance. The company is building up a good track record of integrating legacy books and this should enable good cash generation and an attractive dividend for shareholders.	1.4	£230m	6,998
16 (*)	Seven Trent A UK water utility. Due to concerns regarding possible renationalisation under Labour and an upcoming regulatory review shares have performed poorly and are trading at a lower discount to regulated asset base than in recent years.  There is also a good dividend yield with scope to grow.	1.4	£4.6bn	6,934
17 (13)	Johnson Service2 A textile rental company that provides linens for use across workwear, hotels and restaurants. In recent years the management team has successfully de-geared the balance sheet and grown operating margins.	1.4	£470m	6,809
18 (*)	Vodafone A global telecoms company.  The company has invested in their network quality and are now better placed to grow revenue per customer as people use more mobile data.	1.4	£42bn	6,692
19 (16)	Direct Line A UK provider of car and home insurance. The company has well-known brands which will allow them to grow policies well, while maintaining underwriting discipline. A strong balance sheet allows them to pay an attractive dividend yield to shareholders.	1.3	£4.5bn	6,640
20 (*)	Henderson Opportunities Trust A capital growth Trust focused on the UK with a heavy weighting (-60%) in AIM stocks.  Stock was bought at a material discount to net asset value.	1.3	£80m	6,540
				206,830

At 30 September 2018 these investments totalled £206,830,000 or 42.0% of the portfolio.

* Not in the top 20 largest investments last year

1 Overseas listed stocks (Ireland)

2 AIM stocks

PRINCIPAL RISKS AND UNCERTAINTIES

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks, and uncertainties, facing the Company that would threaten its business model, future performance, solvency and liquidity. A matrix of these risks has been drawn up and steps taken to mitigate these. The principal risks and mitigating actions are as follows:

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. Janus 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 the Manager confirms adherence to them every month. Janus Henderson provides the Board with management information, including performance data and reports and shareholder analyses.

The Board 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.

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 Janus 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.

Gearing Risk

At the point of drawing down debt, gearing will never exceed 29.99% of the portfolio valuation. 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, Janus 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.

Janus 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 Janus Henderson and its other suppliers, including cyber risk, and the key elements designed to provide effective internal control, are explained further in the Internal Controls section of the Corporate Governance Statement in the Annual Report.

Accounting, Legal and Regulatory Risk

In order to qualify as an investment trust, the Company must comply with Section 1158. 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 is monitored by Janus 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 Listing 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 Listing Rules.

The Board receives internal control reports produced by Janus 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 believes 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, materialising 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. 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.

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.

RELATED PARTY TRANSACTIONS

The Company's current related parties are its Directors and Janus Henderson. There have been no material transactions between the Company and its Directors during the year.  The fees and expenses paid to Directors are set in the Annual Report. There were no outstanding amounts payable at the year end.

In relation to the provision of services by the Manager, other than fees payable by the Company in the ordinary course of business and the provision of sales and marketing services, there have been no material transactions with Janus Henderson affecting the financial position of the Company during the year under review. More details on transactions with Janus Henderson, including amounts outstanding at the year end, are given in the Annual Report.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

In accordance with Disclosure Guidance and Transparency Rule 4.1.12, each of the Directors confirms that, to the best of his or 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.

The Directors consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

For and on behalf of the Board

Robert Robertson

Chairman

14 December 2018

 

INCOME STATEMENT

	Year ended 30 September 2018			Year ended 30 September 2017
	Revenue return £'000	Capital return £'000	Total £'000	Revenue return £'000	Capital return £'000	Total £'000
(Losses)/gains on investments held at fair value through profit or loss	-	(3,032)	(3,032)	-	52,847	52,847
Income from investments (note 2)	19,757	-	19,757	16,871	-	16,871
Other interest receivable and similar income (note 4)	190	-	190	50	-	50
Gross revenue and capital (losses)/gains	19,947	(3,032)	16,915	16,921	52,847	69,768
Management fee	(2,048)	-	(2,048)	(1,920)	-	(1,920)
Performance fee	-	-	-	-	(416)	(416)
Administration expenses	(520)	-	(520)	(553)	-	(553)
Net return/(loss) before finance costs and taxation	17,379	(3,032)	14,347	14,448	52,431	66,879
Finance costs	(1,347)	-	(1,347)	(1,009)	-	(1,009)
Net return/(loss) before taxation	16,032	(3,032)	13,000	13,439	52,431	65,870
Taxation on net return	(183)	-	(183)	(186)	-	(186)
Net return/(loss) after taxation	15,849	(3,032)	12,817	13,253	52,431	65,684
Return/(loss) per ordinary share  -  basic and diluted (note 5)	58.6p	(11.2p)	47.4p	49.1p	194.1p	243.2p
	=====	=====	=====	=====	=====	=====

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 other comprehensive income other than those disclosed in the Income Statement. The net return is both the profit for the year and the total comprehensive income.

 

STATEMENT OF CHANGES IN EQUITY

Year ended 30 September 2018	Called up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Other capital reserves £'000	Revenue reserve £'000	Total shareholders' funds £'000
At 1 October 2017	6,755	61,619	1,007	357,030	13,485	439,896
Net (loss)/return after taxation	-	-	-	(3,032)	15,849	12,817
Third interim dividend (12.0p) for the year ended 30 September 2017 paid 31 October 2017	-	-	-	-	(3,242)	(3,242)
Final dividend (13.0p) for the year ended 30 September 2017 paid 31 January 2018	-	-	-	-	(3,512)	(3,512)
First interim dividend (13.0p) for the year ended 30 September 2018 paid 30 April 2018	-	-	-	-	(3,512)	(3,512)
Second interim dividend (13.0p) for the year ended 30 September 2018 paid 31 July 2018	-	-	-	-	(3,513)	(3,513)
	---------	----------	----------	-----------	----------	-----------
At 30 September 2018	6,755	61,619	1,007	353,998	15,555	438,934
	=====	=====	=====	======	=====	======

Year ended 30 September 2017	Called up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Other capital reserves £'000	Revenue reserve £'000	Total shareholders' funds £'000
At 1 October 2016	6,755	61,619	1,007	304,599	12,930	386,910
Net return on ordinary activities after taxation	-	-	-	52,431	13,253	65,684
Third interim dividend (11.0p) for the year ended 30 September 2016 paid 31 October 2016	-	-	-	-	(2,972)	(2,972)
Final dividend (12.0p) for the year ended 30 September 2016 paid 31 January 2017	-	-	-	-	(3,242)	(3,242)
First interim dividend (12.0p) for the year ended 30 September 2017 paid 28 April 2017	-	-	-	-	(3,242)	(3,242)
Second interim dividend (12.0p) for the year ended 30 September 2017 paid 28 July 2017	-	-	-	-	(3,242)	(3,242)
	---------	----------	----------	-----------	----------	-----------
At 30 September 2017	6,755	61,619	1,007	357,030	13,485	439,896
	=====	=====	=====	======	=====	======

STATEMENT OF FINANCIAL POSITION

	As at 30 September 2018 £'000	As at 30 September 2017 £'000
Fixed assets
Investments held at fair value through profit or loss
Listed at market value in the United Kingdom	390,951	365,646
Listed at market value on AIM	73,811	74,881
Listed at market value overseas	25,641	24,743
Unlisted	2,256	2,218
	-----------	-----------
	492,659	467,488
	-----------	-----------
Current assets
Debtors	2,018	2,061
Cash at bank	1,445	11,362
	-----------	-----------
	3,463	13,423
	-----------	-----------
Creditors: amounts falling due within one year	(27,421)	(11,260)
	-----------	-----------
Net current (liabilities)/assets	(23,958)	2,163
	-----------	-----------
Total assets less current liabilities	468,701	469,651
Creditors: amounts falling due after one year	(29,767)	(29,755)
	-----------	-----------
Net assets	438,934	439,896
	=======	=======
Capital and reserves
Called up share capital	6,755	6,755
Share premium account	61,619	61,619
Capital redemption reserve	1,007	1,007
Other capital reserves	353,998	357,030
Revenue reserve	15,555	13,485
	-----------	-----------
Total shareholders' funds	438,934	439,896
	=======	=======
Net asset value per ordinary share - basic and diluted	1,624.6p	1,628.1p
	=======	=======

STATEMENT OF CASH FLOWS

	Year ended 30 September 2018 £'000	Year ended 30 September 2017 £'000
Cash flows from operating activities
Net return before taxation	13,000	65,870
Add back: finance costs	1,347	1,009
Add: losses/(gains) on investments held at fair value through profit or loss	3,032	(52,847)
Withholding tax on dividends deducted at source	(228)	(211)
Decrease in debtors	89	93
(Decrease)/increase in other creditors	(371)	423
	-----------	-----------
Net cash inflow from operating activities	16,869	14,337
Cash flows from investing activities
Purchase of investments	(76,383)	(72,559)
Sale of investments	48,182	68,038
	-----------	-----------
Net cash outflow from investing activities	(28,201)	(4,521)
Cash flows from financing activities
Equity dividends paid (net of refund of unclaimed distributions and reclaimed distributions)	(13,779)	(12,698)
Net loans drawn down/(repaid)	16,507	(16,897)
Senior unsecured loan notes	-	29,755
Interest paid	(1,310)	(789)
	-----------	-----------
Net cash inflow/(outflow) from financing activities	1,418	(629)
Net (decrease)/increase in cash and cash equivalents	(9,914)	9,187
Cash and cash equivalents at start of year	11,362	2,178
Effect of foreign exchange rates	(3)	(3)
	-----------	-----------
Cash and cash equivalents at end of year	1,445	11,362
	=======	=======
Comprising:
Cash at bank	1,445	11,362
	-----------	-----------
	1,445	11,362
	=======	=======
Cash inflow from dividends net of taxation was £19,665,000 (2017: £16,755,000).

 

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 and with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (the 'SORP') issued in November 2014 and updated in Febuary 2017 with consequential amendments. 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. 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 Sections 11 and 12 of the standard. All of the Company's operations are of a continuing nature. The preparation of the Company's financial statements on occasion requires the Directors to make judgements, estimates and assumptions that affect the reported amounts in the primary financial statements and the accompanying disclosures.  These assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in the current and future periods, depending on circumstances. The Directors do not believe that any accounting judgements or estimates have been applied to this set of financial statements that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year. 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 connection with the viability statement, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements.
2.	(Losses)/gains on Investments held at fair value through profit or loss	2018 £'000	2017 £'000
	Gains on the sale of investments based on historical cost	18,056	27,440
	Less: revaluation gains recognised in previous years	(16,524)	(14,713)
		-----------	-----------
	Gains on investments sold in the year based on carrying value at previous Statement of Financial Position date	1,532	12,727
	Revaluation (losses)/gains on investments held at 30 September	(4,561)	40,123
	Exchange losses	(3)	(3)
		----------	----------
		(3,032)	52,847
		======	=====

3.	Income from Investments	2018 £'000	2017 £'000
	UK dividends:
	Listed investments	15,205	13,025
	Unlisted	50	49
	Property income dividends	391	148
		---------	---------
		15,646	13,222
		---------	---------
	Non UK dividends:
	Overseas dividend income	4,111	3,649
		---------	---------
		4,111	3,649
		---------	---------
		19,757	16,871
		=====	=====

4.	Other Interest Receivable and Similar Income	2018 £'000	2017 £'000
	Stock lending commission	112	16
	Income from underwriting	76	34
	Bank interest	2	-
		---------	---------
		190	50
		=====	=====
	At 30 September 2018 the total value of securities on loan by the Company for stock lending purposes was £50,426,000 (2017: £1,000). The maximum aggregate value of securities on loan at any time during the year ended 30 September 2018 was £53,415,000 (2017: £20,418,000). The Company's agent holds collateral comprising FTSE 100 stocks, Gilts, overseas equities and overseas Government bonds with a collateral value of £54,285,000 (2017: £1,000) amounting to a minimum of 105% (2017: minimum 105%) of the market value of any securities on loan. Stock lending commission has been shown net of brokerage fees of £28,000 (2017: £4,000).

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 £12,817,000 (2017: £65,684,000) and on 27,018,565 ordinary shares (2017: 27,018,565) 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.
				2018 £'000		2017 £'000
	Net revenue return			15,849		13,253
	Net capital (loss)/ return			(3,032)		52,431
				---------		---------
	Net total return			12,817		65,684
				=====		=====
	Weighted average number of ordinary shares in issue during the year			27,018,565		27,018,565
				2018 Pence		2017 Pence
	Revenue return per ordinary share			58.6		49.1
	Capital (loss)/return per ordinary share			(11.2)		194.1
				----------		----------
	Total return per ordinary share			47.4		243.2
				======		======
	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		2018 £'000		2017 £'000
	Third interim dividend (11.0p) for the year ended 30 September 2016	7 October 2016	31 October 2016		-		2,972
	Final dividend (12.0p) for the year ended 30 September 2016	6 January 2017	31 January 2017		-		3,242
	First interim dividend (12.0p) for the year ended 30 September 2017	7 April 2017	28 April 2017		-		3,242
	Second interim dividend (12.0p) for the year ended 30 September 2017	30 June 2017	28 July 2017		-		3,242
	Third interim dividend (12.0p) for the year ended 30 September 2017	6 October 2017	31 October 2017		3,242		-
	Final dividend (13.0p) for the year ended 30 September 2017	5 January 2018	31 January 2018		3,512		-
	First interim dividend (13.0p) for the year ended 30 September 2018	6 April 2018	30 April 2018		3,512		-
	Second interim dividend (13.0p) for the year ended 30 September 2018	6 July 2018	31 July 2018		3,513		-
					---------		---------
					13,779 =====		12,698 =====

 

The third interim dividend and the final dividend for the year ended 30 September 2018 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.
		2018 £'000
	Revenue available for distribution by way of dividend for the year	15,849
	First interim dividend (13.0p) for the year ended 30 September 2018	(3,512)
	Second interim dividend (13.0p) for the year ended 30 September 2018	(3,513)
	Third interim dividend (14.0p) for the year ended 30 September 2018	(3,783)
	Final dividend (14.0p) for the year ended 30 September 2018 (based on 27,018,565 ordinary shares in issue at 12 December 2018)	(3,783)
		---------
	Revenue surplus	1,258
		=====
	For Section 1158 purposes the Company's undistributed revenue represents 6.4% 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 2017		27,018,565	27,018,565	6,755
			-----------	-----------	-----------
	At 30 September 2018		27,018,565	27,018,565	6,755
Company issued no ordinary shares during the year (2017: nil).

8.	Net Asset Value per Ordinary Share
	The net asset value per ordinary share of 1,624.6p (2017: 1,628.1p) is based on the net assets attributable to the ordinary shares of £438,934,000 (2017: £439,896,000) and on 27,018,565 (2017: 27,018,565) shares in issue on 30 September 2018. The movements during the year of the assets attributable to the ordinary shares were as follows:
		2018 £'000	2017 £'000
	Total net assets at 1 October	439,896	386,910
	Total net return after taxation	12,817	65,684
	Net dividends paid in the year:
	Ordinary shares	(13,779)	(12,698)
		-----------	-----------
	Net assets attributable to the ordinary shares at 30 September	438,934	439,896
		======	======

9.

2018 Financial Information

The figures and financial information for the year ended 30 September 2018 are extracted from the Company's annual financial statements for that period and do not constitute statutory accounts. The Company's annual financial statements for the year to 30 September 2018 have been audited but have not yet been delivered to the Registrar of Companies. The Independent Auditors' Report on the 2018 annual financial statements 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.	2017 Financial Information
	The figures and financial information for the year ended 30 September 2017 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 Auditor which was unqualified, did not include a reference to any matter to which the Auditor drew attention without qualifying the report, and did not contain any statements under sections 498(2) or 498(3) of the Companies Act 2006.
11.	Dividend
	The final dividend, if approved by the shareholders at the Annual General Meeting, of xx.0p per ordinary share will be paid on 31 January 2019 to shareholders on the register of members at the close of business on x January 2019. This will take the total dividends for the year to xx.0p (2017: 49.0p). The Company's shares will be traded ex-dividend on x January 2019.

12.	Annual Report
	The Annual Report will be posted to shareholders in December 2018 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.

13.	Annual General Meeting
	The Annual General Meeting will be held on Monday, 28 January 2019 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]
Laura Thomas	James de Sausmarez
Investment Trust PR Manager	Head of Investment Trusts
Janus Henderson Investors	Janus Henderson Investors
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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