Half Yearly Report

RNS Number : 9195L

Schroder Income Growth Fund PLC

30 April 2015

 



Half Year Report

Schroder Income Growth Fund plc (the "Company") hereby submits its Half Year Report for the period ended 28 February 2015 as required by the UK Listing Authority's Disclosure 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 www.schroderincomegrowthfund.com. Please click on the following link to view the document:

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: [phone]

30 April 2015

Half Year Report for the Six Months Ended 28 February 2015

Interim Management Report

Chairman's Statement

Investment performance

Over the six months to 28 February 2015, the period of this review, your Company outperformed the FTSE All-Share Index, achieving a net asset value total return of 7.9% versus the 4.1% recorded by the Index. At the same time, the Company's share price produced a total return of 6.0%, with the price reaching an all-time high towards the end of the period.

However, the Company's revenue return of 2.67 pence per share was 5.3% lower than the equivalent figure in 2014, though it is worth noting that only a minority of the full year's revenue arises in the first half of the Company's financial year.

More detailed comment on the performance of your Company is to be found in the Manager's Review.

Discount management

The share price discount to net asset value widened during the six months under review, from 3.1% at the start of the period, to 4.8% at 28 February 2015. While the Board continued to monitor the Company's share price relative to net asset value it noted that the widening discount trend was consistent with that experienced by a number of comparable investment trusts and was attributable, at least in part, to the advance in the net asset value of your Company's shares. As a result no shares were bought back during the period.

Dividends

The Company paid a first interim dividend for the year ending 31 August 2015 of 2.00 pence per share (2014: 2.00 pence per share) on 31 January 2015. The Board has since declared the payment of a second interim dividend for the current financial year of 2.00 pence per share (2014: 2.00 pence per share), which will be paid on 30 April 2015 to shareholders on the register at the close of business on 27 March 2015.

Gearing

The Company has in place a £20 million term loan and a £10 million revolving credit facility, with the latter remaining undrawn at 28 February 2015. Gearing stood at 9.5% at the period end, broadly unchanged since the start of the period. The ability to deploy gearing is one of the key differentiating factors that investment trusts have over other investment products and the Board has established parameters with the Manager governing its level and use, which it keeps under regular review.

Outlook

The first half of the Company's financial year could be seen as a microcosm of the challenge facing many investors at the moment - good for capital appreciation, harder work for growth of income. There was little underlying growth in dividends from listed UK companies last year, and while they are now being helped by the strong dollar, company profits in total are also being impacted by a weak Europe, as well as depressed earnings from the oil sector. Despite these and other political and economic uncertainties, the UK stock market continues to be at or near an all-time high.

This dislocation between the short term performance of capital values and that of income generation may continue; it is of course one consequence of government monetary easing at a time of slow economic growth. The challenge for your Manager is in maintaining the correct balance between the two, so that your Company can continue to increase dividends without sacrificing the potential for capital gains.

Ian Barby

Chairman

30 April 2015

Manager's Review

In the six months to the end of February 2015 the Company's net asset value had a total return of 7.9%. This compares to a 4.1% total return from the FTSE All-Share Index.

Market Background

The UK stock market fell at the start of the period, but then recovered almost 15% from lows in October and December to finish 4% higher over the six months. Earlier doubts about economic growth were outweighed by the positive implications of falling energy prices and Eurozone monetary stimulus, despite some investors' concern about the UK's forthcoming general election. The stock market has continued to rise after the end of February, setting new all-time highs.

The Company's outperformance over the period came from being underweight in oil and gas producers and positive stock selection, in particular from the financial sector holdings. Interdealer broker ICAP benefited from improving revenue trends as central bank moves underpinned significantly increased activity in foreign currency markets. Additionally, the Company has continued to benefit from a shift towards higher-margin post trade and electronic broking activities, whilst implementing a cost-saving programme in its more cyclical broking division.

In the life insurance sector, our holding in Friends Life responded well to news of its acquisition by life insurer Aviva, which is also held in the portfolio; we believe that the deal will create significant cost savings, cashflow and capital synergies. The holding in Legal & General was also beneficial for returns. Among other holdings, the steady outlook and appealing dividend prospects helped the holdings in Imperial Tobacco and Pearson. The disappointments were largely resources-based businesses as prices fell, both in hard commodities (Glencore) and energy (Centrica, Amec Foster Wheeler).

Portfolio transactions included both new positions (such as infrastructure developer and operator John Laing Group after it launched its IPO, and Nordea Bank), and restructuring the resources holdings in reaction to the lower commodity price environment. We switched the position in Statoil into BP and Royal Dutch Shell, which we believe have better supported dividends; switched Glencore into Rio Tinto, which has a stronger balance sheet; and sold the holding in Total to add to Centrica, where there is a new management team with a turnaround strategy in place. We have also continued to reduce the position within consumer cyclicals following strength, selling out of Intercontinental Hotels and Inchcape. We also added to the position in BT Group following confirmation that it will acquire EE, the leading UK mobile network operator, which we anticipate will lead to significant operating and capital investment efficiencies.

Outlook

The European Central Bank's quantitative easing plans, which involve the purchase of €1 trillion in bonds, has underpinned the gains in the UK and European equity markets so far in 2015. We anticipate greater volatility for the remainder of the year as markets come to terms with a potential rise in US interest rates. Market sentiment has shifted significantly from the pessimism felt at the end of last year and this makes us somewhat more cautious about the months ahead. The timing of the US interest rate rise is likely to affect the UK market as in the past equities have typically been weak around the time of the first US rate rise. That said, there then tends to be a recovery as long as the economic backdrop supports improved earnings growth.

Following the March meeting of the Federal Open Market Committee, the timing of the first US interest rate hike remains difficult to call. On the one hand, the labour market will probably continue to tighten - we expect unemployment to drop further as activity picks up again after the recent soft patch. On the other, there have been concerns about low headline inflation and the risk of contagion to emerging markets from higher US rates. However, low headline inflation is a consequence of low energy prices, which we see as positive for the economy, while contagion risks are always present and will continue to build even if rates never rise. The US dollar has strengthened significantly, which has put downward pressure on US economic activity but boosted UK corporate profits derived from US operations.

Geopolitical concerns - including the conflict in Syria and tensions between the West and Russia relating to Ukraine - continue to weigh on sentiment, albeit to a lesser degree than last year. Meanwhile, at home, commentators are expecting May's general election to be the closest in the UK since 1973. Regardless of the result, the focus will be on reducing the budget deficit, either through further austerity measures or tax rises. We expect the UK economic recovery to moderate as a result.

Investment Policy

With still no sign of profits growth, share valuations sit a little above long-term averages on profits-based measures. The stock market has ascribed high valuations to companies with perceived secure and dependable profit streams and, more recently, has re-rated companies with cyclical exposure following the ECB's stimulatory moves. We remain underweight the more highly-rated stable growth companies and have continued to look for attractive opportunities elsewhere. The search has focused on companies that have been long-term underperformers, but where there is potential for turnaround and improvement under new management.

The absence of earnings growth also means that the short-term prospect for dividend growth relies largely on the US dollar holding onto its recent gains. Some of this will be offset by the weak Euro, but there is a direct translation impact from the large number of UK companies with US dollar profits. In the absence of call writing premia, reflecting the continued low levels of option premia, the Company's income is also benefiting from a full year of the higher level of gearing, which at the end of February stood at 9.5%.

For Schroder Investment Management Limited

30 April 2015

The securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

Principal risks and uncertainties

The principal risks and uncertainties associated with the Company's business fall into the following categories: investment activity and performance; financial risk; strategic risk; and accounting, legal and regulatory risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 10 and 11 of the Company's published Annual Report and Accounts for the year ended 31 August 2014. These risks and uncertainties have not materially changed during the six months ended 28 February 2015.

Going concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, the nature of the portfolio and expenditure projections, 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 there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

Related party transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.

No Director of the Company served as a director of Schroder Unit Trusts Limited, or any member of the Schroders plc group, at any time during the six months ended 28 February 2015.

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 United Kingdom Generally Accepted Accounting Practice (UK GAAP) and with the Statement of Recommended Practice: Financial Statements of Investment Companies and Venture Capital Trusts (SORP) issued in January 2009 and the Interim Management Report as set out above includes a fair review of the information required by 4.2.7R and 4.2.8R of the Financial Conduct Authority's Disclosure and Transparency Rules.

Income Statement

	(Unaudited) for the six months			(Unaudited) for the six months			(Audited) for the year
	ended 28 February 2015			ended 28 February 2014			ended 31 August 2014
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value through profit or loss	-	13,177	13,177	-	20,059	20,059	-	16,999	16,999
Net foreign currency (losses)/gains	-	(22)	(22)	-	6	6	-	19	19
Income from investments	2,550	-	2,550	2,470	77	2,547	8,599	612	9,211
Other interest receivable and similar income	7	-	7	3	-	3	4	-	4
Gross return	2,557	13,155	15,712	2,473	20,142	22,615	8,603	17,630	26,233
Investment management fee	(389)	(389)	(778)	(342)	(342)	(684)	(711)	(711)	(1,422)
Performance fee	-	-	-	-	(85)	(85)	-	(174)	(174)
Administrative expenses	(192)	-	(192)	(148)	-	(148)	(292)	-	(292)
Net return before finance costs and taxation	1,976	12,766	14,742	1,983	19,715	21,698	7,600	16,745	24,345
Finance costs	(135)	(135)	(270)	(40)	(40)	(80)	(121)	(121)	(242)
Net return on ordinary activities before taxation	1,841	12,631	14,472	1,943	19,675	21,618	7,479	16,624	24,103
Taxation (note 4)	(10)	-	(10)	(9)	-	(9)	(51)	-	(51)
Net return on ordinary activities after taxation	1,831	12,631	14,462	1,934	19,675	21,609	7,428	16,624	24,052
Return per share (note 5)	2.67p	18.39p	21.06p	2.82p	28.64p	31.46p	10.82p	24.20p	35.02p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no recognised gains and losses other than those included in the results above and therefore no separate statement of total recognised gains and losses has been presented.

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

Reconciliation of Movements in Shareholders' Funds

for the six months ended 28 February 2015 (unaudited)

	Called-up		Capital	Share	Warrant
	share	Share	redemption	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2014	6,869	7,404	2,011	34,936	1,596	129,716	6,404	188,936
Net return on ordinary activities	-	-	-	-	-	12,631	1,831	14,462
Dividends paid in the period	-	-	-	-	-	-	(4,190)	(4,190)
At 28 February 2015	6,869	7,404	2,011	34,936	1,596	142,347	4,045	199,208

for the six months ended 28 February 2014 (unaudited)

	Called-up		Capital	Share	Warrant
	share	Share	redemption	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2013	6,869	7,404	2,011	34,936	1,596	113,092	5,708	171,616
Net return on ordinary activities	-	-	-	-	-	19,675	1,934	21,609
Dividends paid in the period	-	-	-	-	-	-	(3,984)	(3,984)
At 28 February 2014	6,869	7,404	2,011	34,936	1,596	132,767	3,658	189,241

for the year ended 31 August 2014 (audited)

	Called-up		Capital	Share	Warrant
	share	Share	redemption	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2013	6,869	7,404	2,011	34,936	1,596	113,092	5,708	171,616
Net return on ordinary activities	-	-	-	-	-	16,624	7,428	24,052
Dividends paid in the year	-	-	-	-	-	-	(6,732)	(6,732)
At 31 August 2014	6,869	7,404	2,011	34,936	1,596	129,716	6,404	188,936

Balance Sheet

	(Unaudited) 28 February 2015 £'000	(Unaudited) 28 February 2014 £'000	(Audited) At 31 August 2014 £'000
Fixed assets
Investments held at fair value through profit or loss	217,797	200,474	206,332
Current assets
Debtors	892	2,328	1,871
Cash at bank and in hand	1,079	3,503	1,791
	1,971	5,831	3,662
Current liabilities
Creditors: amounts falling due within one year	(560)	(17,064)	(1,058)
Net current assets/(liabilities)	1,411	(11,233)	2,604
Total assets less current liabilities	219,208	189,241	208,936
Creditors amounts falling due after more than one year	(20,000)	-	(20,000)
Net assets	199,208	189,241	188,936
Capital and reserves
Called-up share capital	6,869	6,869	6,869
Share premium	7,404	7,404	7,404
Capital redemption reserve	2,011	2,011	2,011
Share purchase reserve	34,936	34,936	34,936
Warrant exercise reserve	1,596	1,596	1,596
Capital reserves	142,347	132,767	129,716
Revenue reserve	4,045	3,658	6,404
Total equity shareholders' funds	199,208	189,241	188,936
Net asset value per share (note 6)	290.02p	275.51p	275.06p

Cash Flow Statement

	(Unaudited) For the six months ended 28 February 2015 £'000	(Unaudited) For the six months ended 28 February 2014 £'000	(Audited) For the year ended 31 August 2014 £'000
Net cash inflow from operating activities (note 7)	2,036	1,933	6,603
Net cash outflow from servicing of finance	(274)	(88)	(161)
Taxation paid	(2)	(6)	(73)
Net cash inflow/(outflow) from investment activities	1,740	(3,731)	(12,238)
Dividends paid	(4,190)	(3,984)	(6,732)
Net cash inflow from financing	-	8,300	13,300
Net cash (outflow)/inflow in the period	(690)	2,424	699
Reconciliation of net cash flow to movement in net debt
Net cash (outflow)/inflow in the period	(690)	2,424	699
Exchange movements	(22)	6	19
Loan drawn down	-	(8,300)	(13,300)
Changes in net debt arising from cash flows	(712)	(5,870)	(12,582)
Net debt at the beginning of the period	(18,209)	(5,627)	(5,627)
Net debt at the end of the period	(18,921)	(11,497)	(18,209)
Represented by:
Cash at bank and in hand	1,079	3,503	1,791
Bank loan	(20,000)	(15,000)	(20,000)
Net debt	(18,921)	(11,497)	(18,209)

Notes to the Accounts

1. Financial statements

The information contained within the accounts in this Half Year Report has not been audited or reviewed by the Company's Auditor.

The figures and financial information for the year ended 31 August 2014 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the Auditor which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2. Accounting policies

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in January 2009.

All of the Company's operations are of a continuing nature.

The accounting policies applied to these interim accounts are consistent with those applied in the accounts for the year ended 31 August 2014.

3. Dividends

	(Unaudited) For the six months ended 28 February 2015 £'000	(Unaudited) For the six months ended 28 February 2014 £'000	(Audited) For the year ended 31 August 2014 £'000
2014 fourth interim dividend of 4.1p (2013: 3.8p)	2,816	2,610	2,610
First interim dividend of 2.0p (2014: 2.0p)	1,374	1,374	1,374
Second interim dividend of 2.0p	-	-	1,374
Third interim dividend of 2.0p	-	-	1,374
	4,190	3,984	6,732

A second interim dividend of 2.0p (2014: 2.0p) per share, amounting to £1,374,000 (2014: £1,374,000) has been declared payable in respect of the year ending 31 August 2015.

4. Taxation

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. The tax charge comprises irrecoverable overseas withholding tax deducted from dividends receivable.

5. Return per share

	(Unaudited) For the six months ended 28 February 2015	(Unaudited) For the six months ended 28 February 2014	(Audited) For the year ended 31 August 2014
Revenue return (£'000)	1,831	1,934	7,428
Capital return (£'000)	12,631	19,675	16,624
Total return (£'000)	14,462	21,609	24,052
Weighted average number of Ordinary shares in issue during the period	68,688,343	68,688,343	68,688,343
Revenue return per share	2.67p	2.82p	10.82p
Capital return per share	18.39p	28.64p	24.20p
Total return per share	21.06p	31.46p	35.02p

6. Net asset value per share

Net asset value per share is calculated by dividing total equity shareholders' funds by the number of shares in issue at 28 February 2015 of 68,688,343 (28 February 2014 and 31 August 2014: same).

7. Reconciliation of total return on ordinary activities before finance costs and taxation to net cash inflow from operating activities

	(Unaudited) For the six months ended 28 February 2015 £'000	(Unaudited) For the six months ended 28 February 2014 £'000	(Audited) For the year ended 31 August 2014 £'000
Total return on ordinary activities before finance costs and taxation	14,742	21,698	24,345
Less capital return on ordinary activities before finance costs and taxation	(12,766)	(19,715)	(16,745)
Decrease/(increase) in accrued dividends and interest receivable	972	427	(523)
(Increase)/decrease in other debtors	(1)	2	3
Management fee and performance fee allocated to capital	(389)	(427)	(885)
Scrip dividends received as income	(29)	(19)	(62)
(Decrease)/increase in accrued expenses	(493)	(33)	470
Net cash inflow from operating activities	2,036	1,933	6,603

 

END

 

 

IR MMGFDVGZGKZM