Dunedin Inc. Regulatory News (DIG)

DUNEDIN INCOME GROWTH INVESTMENT TRUST PLC

HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 31 JULY 2023

Legal Entity Identifier (LEI):  549300PPXLZPR5JTL763

HIGHLIGHTS FOR THE PERIOD

- NAV total return of 5.5%, outperforming the total return of 0.8% from the FTSE All-Share Index.

- Against a flat market return, investment performance has been positive, aided by the Company's focus on higher quality areas of the market, coupled with good stock selection.

- Dividend yield of 4.6% at the period end.

INVESTMENT OBJECTIVE

The objective of Dunedin Income Growth Investment Trust PLC is to achieve growth of income and capital from a portfolio invested mainly in companies listed or quoted in the United Kingdom that meet the Company's sustainable and responsible investing criteria as set by the Board.

BENCHMARK

The Company's benchmark is the FTSE All-Share Index (total return). Performance is measured on a net asset value total return basis over the long-term.

Performance Highlights

Financial Calendar

Financial Highlights

For further information, please contact:

Stephanie Hocking

William Hemmings

abrdn Fund Managers Limited

0131 372 2200

Chairman's Statement

Review of the Period

Looking back over past the few years, our Half Yearly Report has often corresponded with significant geopolitical events such as the global pandemic in 2020 and the invasion of Ukraine in 2022. In contrast, the first six months of this financial year saw a return to more conventional points of focus: a UK economy struggling for growth amidst the steepest inflation in 40 years, trying to assess the extent of central bank interest rate increases, concerns over growth in China and speculation on the potential of new developments in Artificial Intelligence. Against that backdrop, the Company delivered a positive absolute return for the six month period ended 31 July 2023. The net asset value ("NAV") increased by 5.5% on a total return basis, exceeding that of its benchmark, the FTSE All-Share Index, which produced a total return of 0.8%. The share price total return for the period was -0.4%, reflecting a widening of the discount at which the Company's shares trade relative to the NAV. At the end of the period the shares traded on a discount of 8.4% (on a cum-income basis with borrowings stated at fair value), compared to a discount of 2.9% at the beginning of the financial year. 

Your Investment Manager has continued to execute our strategy of investing in businesses of higher quality that meet our sustainable and responsible investment criteria and balancing attention between both income and capital growth potential. The portfolio continues to exhibit strong quality characteristics, while retaining a premium yield to, and superior dividend growth to, the FTSE All-Share Index. At the same time, it exhibits a high level of active share and stock specific risk reflecting a very differentiated approach to the wider index and many investment trusts in the peer group with similar objectives.

Against a flat market return, investment performance has been positive, aided by the Company's focus on higher quality areas of the market, coupled with good stock selection. In particular, we have seen strong performance from a number of the portfolio's holdings alongside continued merger and acquisition activity.

A detailed review of portfolio activity during the period is contained in the Investment Manager's Review.

Earnings and Dividends

Revenue earnings per share fell by 3.4% during the period to 8.25p (2022: 8.54p) per share. Importantly, underlying dividend income increased by 1.5% reflecting good trading from a number of our holdings, although the level of option income generated was lower than the equivalent period last year.

A first interim dividend in respect of the year ending 31 January 2024, of 3.2p (2023: 3.0p) per share, was paid on 25 August 2023 and the Board has declared a second interim dividend of 3.2p (2023: 3.0p) per share, which will be paid on 24 November 2023 to shareholders on the register on 3 November 2023. The rate of interim dividend was last increased in August 2018. The Board had been mindful that the increases in the overall annual rate of dividend since 2018 had caused the final dividend to become a growing percentage of the total annual payment. The Board therefore decided, and announced on declaring the first interim dividend, to increase the rate of each of the three interim dividends from 3.0p to 3.2p per share so as to create a more even balance between the rates of the interim and final dividends. The 6.7% increase in the rate of interim dividends therefore represents a rebalancing of dividend payments.

Based on last year's annual dividend of 13.1p per share, the dividend yield on the Company's shares was 4.6% at the end of the period. This is one of the higher yields available from the AIC's UK Equity Sector and is approximately 20% higher than the yield available from the UK equity market as measured by the FTSE All-Share Index.

In the year ahead, the Board's intention is to maintain a progressive dividend, substantially covered by earnings, although given the high level of inflation it is unlikely to increase in real terms, so as to allow the Company to continue to appropriately balance its focus on both capital and income generation. Our distribution policy, though, remains to grow the dividend faster than inflation over the medium term and, with the Company's robust revenue reserves, modest level of gearing and the healthy underlying dividend growth of the companies within the portfolio, that policy remains well supported.

Sustainability

Your Company continues to exhibit strong evidence of its sustainable positioning, elements that we believe will enhance the portfolio's long-term risk adjusted returns. Its carbon footprint is significantly lower than the benchmark. MSCI has assigned the Company an AA ESG rating and it is considered top decile out of all investment funds globally. The Investment Manager has continued to actively engage with the companies invested in, having addressed ESG specific issues with management teams at companies representing 28 of the holdings in the portfolio. Voting policy also forms an important part of the corporate engagement approach and the Investment Manager voted against management recommendations at least once in 21% of company general meetings held during the period.

Gearing

The Company currently employs two sources of gearing. The £30 million loan notes maturing in 2045, and a recently renewed one year £30 million multi-currency revolving credit facility with Bank of Nova Scotia that matures in July 2024. Under the terms of the facility the Company has the option to increase the level of the commitment from £30 million to £40 million at any time, subject to the lender's credit approval. A sterling equivalent of £13.4 million was drawn down under the facility at the end of the period.

With debt valued at par, the Company's net gearing increased from 7.1% to 9.7% during the period, reflecting lower cash balances at the period end, despite an increase in net assets due to capital appreciation. The Board believes this remains a relatively conservative level of gearing and, with the option to increase the revolving credit facility, provides the Company with financial flexibility should further opportunities to deploy capital arise.

Discount

As stated above, at the end of the period your Company's shares traded at a discount of 8.4% (on a cum-income basis with borrowings stated at fair value), compared to a discount of 2.9% at the beginning of the financial year.

Widening discounts were evident across the investment trust sector during the period. As a result of this, and in order to address the imbalance of supply and demand for the Company's shares, we bought back 22,055 shares to be held in treasury. With the higher level of discount persisting, we have bought back a further 400,863 shares since the period end. The Board believes that this action, together with continued delivery of investment performance, our commitment to grow the dividend faster than inflation over the medium-term and clear communication of the investment strategy should all help to improve the Company's current rating. The Board will continue to monitor the rating of your Company's shares carefully and make further use of both the Company's share buyback and issuance powers to address any imbalance of supply and demand in the Company's shares.

abrdn Investment Trust Savings Plans

The Board is aware that over 20% of the Company's shares are held through the abrdn Investment Trust Savings Plans (the "Plans"). These types of share schemes were the original and only means by which the shares of investment trusts could be made available to private investors. The development of whole of market platform offerings means other options are now available. abrdn has written to their clients in the Plans explaining that they will be closing in December 2023 and that the Plans will be transferring to the interactive investor platform. The Board continues to monitor this change. We would stress this has no impact on those holders' ability to receive communications from the Company, to vote and attend general meetings in person or to re-invest dividends.

Amendment to Investment Policy (Overseas Exposure)

As explained in the recent Annual Report, during the previous year, the Board and Investment Manager reviewed the guidelines governing the management of the portfolio and determined that the part of the investment policy relating to the limit on the exposure to investments in companies listed or quoted overseas should be amended from its previous limit of 20% to a new limit of 25%. The change took effect on 1 May 2023 and this higher limit provides the Investment Manager with greater flexibility to invest in overseas companies but does not represent a change in the way that the portfolio is managed.

The change was not a material change to the investment policy that would have required shareholder approval.

Outlook

The economic challenges to global growth continue to build, following rapid and sustained interest rate increases from central banks across the world, coupled with a Chinese economy facing significant headwinds. Despite some signs of easing, inflationary pressures remain significant in most economies and supply constraints are placing upward pressure on many commodity prices. In the UK, inflation remains too high and growth too low, albeit there are indications that a trough has been reached and perhaps somewhat ahead of other major economies. For equity markets, there remain reasons to be cautious and the next 18 months are likely to be a tough period for corporate earnings development. It is that very unpredictability of world and economic events that makes us concentrate on the companies within the portfolio and their ability to navigate the environment ahead of them.

As such, the approach of the Investment Manager is to balance the portfolio to handle a range of potential scenarios. There is an emphasis on protecting the downside from investing in companies with enduring business models, pricing power, robust balance sheets and strong management of their environmental, social and governance risks. At the same time, the Investment Manager is making sure that those businesses have the potential to participate in any upside opportunities that emerge, particularly stemming from powerful long-term structural drivers, dynamics likely to be less sensitive to the ups and downs of the economic cycle.

Our objectives remain to meet investor needs for capital and income returns over the medium and long term. We have again made good progress in this period. Whilst the global outlook is far from propitious, we believe our strategy of focussing on a concentrated and actively managed portfolio of high quality companies from across the UK and European markets with leading sustainability characteristics sets us up well to navigate conditions ahead.

David BarronChairman21 September 2023

Interim Management Statement

Directors' Responsibility Statement

The Directors are responsible for preparing the Half Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

- The condensed set of financial statements has been prepared in accordance with Financial Reporting Standard 104 'Interim Financial Reporting';

- The Interim Board Report (constituting the interim management report) includes a fair review of the information required by DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

- The financial statements include a fair review of the information required by DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

Principal Risks and Uncertainties

The Board regularly reviews the principal risks and uncertainties faced by the Company together with the mitigating actions it has established to manage the risks. These are set out within the Strategic Report contained within the Annual Report for the year ended 31 January 2023 and comprise the following risk categories:

- Investment objectives

- Investment strategies

- Investment performance

- Income/dividends

- Financial/market

- Gearing

- Regulatory

- Operational

- Geo-political

The Company's principal risks and uncertainties have not changed materially since the date of the Annual Report and are not expected to change materially for the remaining six months of the Company's financial year.

Going Concern

The Company's assets consist mainly of equity shares in companies listed on the London Stock Exchange and in most circumstances are considered to be realisable within a short timescale. The Board has set limits for borrowing and derivative contract positions and regularly reviews actual exposures, cash flow projections and compliance with loan covenants. The Directors have considered the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary, and have taken into account the maturity of the £30 million multi-currency revolving credit facility in July 2024. The Directors have also performed stress testing on the portfolio and the loan financial covenants.

Having taken these matters into account, the Directors believe that the Company has adequate financial resources to continue in operational existence for the foreseeable future and for at least twelve months from the date of this Report. Accordingly, they continue to adopt the going concern basis of accounting in preparing the financial statements.

On behalf of the BoardDavid BarronChairman21 September 2023

Investment Manager's Review

Performance and Market Review

The UK market faced a number of headwinds in the first half of the Company's financial year; concerns about the financial stability of the banking sector, fears over persistent inflation and the continuing tightening of monetary policy. Despite this backdrop, the Company's net asset value ("NAV") appreciated during the six months to 31 July 2023 by 5.5% on a total return basis, outperforming the FTSE All-Share Index benchmark total return of 0.8%. Reassuringly, the rate of UK inflation looks to have passed its peak and is decelerating, driven by falling energy and food prices with positive implications for expected monetary policy. Overall, global economic data continues to be mixed, although ahead of where many expected going into the year. The exception is China, where activity levels have failed to rebound as much as anticipated following the post-Covid re-opening and there remain some worrying signs in both the shadow banking system and the real estate market. 

Outperformance in the portfolio was primarily driven by stock selection, consistent with our bottom up approach to portfolio construction. A number of the portfolio holdings reported positive results during the period. Games Workshop, the company behind the Warhammer game, delivered results ahead of expectations, alongside important new digital content developments. The European bottler Coca-Cola Hellenic Bottling Company continued to upgrade earnings expectations driven by strong demand and an attractive pricing environment. The accounting software provider Sage delivered an encouraging update that pointed to accelerating growth, driven by its US cloud native product Intacct. The portfolio also benefitted from its European holdings in Volvo, Edenred and Novo-Nordisk which continued to deliver good growth and solid results in the period. On the negative side, the holding in Asian insurer Prudential underperformed on concerns around the pace of China's recovery. In July, construction materials manufacturer Marshalls cut its guidance for the year on weaker end market demand, particularly from discretionary home improvements and new residential construction. However, the share price reaction was fairly muted suggesting that expectations had already adjusted and investors were starting to look through to end market recovery. We added to the position during the period given our assessment of the opportunity for attractive prospective returns when the cycle turns.

Pleasingly, dividend income delivery was ahead of our expectations over the period. Highlights included Games Workshop which nearly doubled its dividend from the prior year, Weir lifted its dividend by 37%, Sirius Real Estate increased its dividend by 30% and Nordea Bank grew its distribution by 16%. In contrast, only Marshalls announced a reduction in its dividend for the year. Given the timing of dividend declarations, our visibility over the income out-turn for this financial year is high. However, given the challenging outlook, we will continue to be watchful. It is worth noting that the Company's future dividend prospects are tied into businesses with exposure to structural as opposed to cyclical growth, stronger pricing power and, consequently, greater control over their own destiny. Ultimately, this will prove supportive if we enter into more economically challenging times.

We continued to generate income from option writing, though at a slower pace than the year before. We wrote puts over London Stock Exchange, Croda and Diageo where we were happy to add to the holdings and wrote calls over Nordea Bank, Coca Cola Hellenic Bottling Company and Pets at Home where we were comfortable to trim the holdings following strong performance. We anticipate that the second half of the year will yield more opportunities to generate additional option writing revenue.

During the period, we engaged with a number of companies in the portfolio in order to understand the key environmental, social and governance risks and opportunities facing them and share best practice. For example, we have been engaging with SSE as part of our Top 20 Financed Emitters project under our Net Zero framework. The company published a Net Zero Strategy earlier in the year in which it updated its targets and aligned to a 1.5 degrees Paris scenario certified by SBTi (Science Based Target Initiative). We are comfortable with the targets set given the nature of the utilities sector, although we continue to engage with the company on the potential to set short-team emissions targets and provide greater disclosure on Paris aligned capital expenditure. Weir is an ESG Improver held in the portfolio and as such we have set out a range of milestones for the company to monitor progress against. For example we have provided recommendations in relation to environmental impact disclosure, sustainable supply chain management and improving gender diversity. Being aware of these potential risks to companies' long-term strategies and looking to drive mitigation and create opportunities is a key part of our investment approach.

Portfolio Activity

We initiated a new position in Telecom Plus, a retailer of utility, telecom and insurance products, which operates in the UK under the Utility Warehouse brand. It has a capital-light business model that benefits from its low fixed cost base, network of sales agents and breadth of product offering. Its competitive positioning in the market has continued to improve and we see attractive opportunities for long term growth in customers, revenues and shareholder distributions alongside a strong balance sheet. We also introduced the UK's largest IT value added reseller Softcat to the portfolio. We believe Softcat has significant potential for long-term growth, coupled with a strong balance sheet and the optionality for enhanced shareholder cash returns. Alongside these purchases we also acquired a new position in German automotive manufacturer Mercedes-Benz which is repositioning its strategy towards the luxury end of the market and is well positioned from a technology perspective to meet the challenges of the electric vehicle transition and the gradual move to autonomous driving.

To fund these new ideas, we exited small holdings in lower conviction names Direct Line Insurance, Ashmore and Ubisoft. We also took the opportunity to exit Dechra Pharmaceuticals after it received an all-cash offer from private equity company EQT and the private equities investment department of Abu Dhabi Investment Authority.

Outlook

We retain the relatively cautious market outlook that we have had for some time. That said, we remain very positive on the potential long-term returns available from the portfolio. We also see selected value in a number of domestically focussed cyclical stocks. In addition, the Company benefits from diversification and the opportunity to invest a portion of assets outside the UK. Currently we have more opportunities to deploy capital than has been the case for a considerable period. Overall, we will continue to seek to keep a balance to our positioning, giving ourselves the potential to perform in a range of market environments. Our primary attention remains on seeking to protect capital, but we will continue to look to participate in opportunities where share prices in good companies with attractive long term prospects have been oversold and, at the same time, focus on those that meet our sustainable and responsible investing criteria.

Ben Ritchie and Rebecca Macleanabrdn Investments Limited21 September 2023

Investment Portfolio

Condensed Statement of Comprehensive Income (unaudited)

Condensed Statement of Financial Position (unaudited)

Condensed Statement of Changes in Equity (unaudited)

Condensed Statement of Cash Flows (unaudited)

Notes to the Financial Statements (unaudited)

Alternative Performance Measures ("APMs")

By order of the Board

abrdn Holdings Limited

Company Secretary

21 September 2023

Please note that past performance is not necessarily a guide to the future and the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested