Dunedin Inc. Regulatory News (DIG)

DUNEDIN INCOME GROWTH INVESTMENT TRUST PLC

HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 31 JULY 2018

Legal Entity Identifier (LEI): 549300PPXLZPR5JTL763

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.

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.

HIGHLIGHTS

For further information, please contact:-

Scott Anderson

Aberdeen Asset Managers Limited 0131 528 4000

HALF YEARLY BOARD REPORT - CHAIRMAN'S STATEMENT

Review of the Period

The Company continued to deliver solid absolute and relative returns for the six month period ended 31 July 2018. The net asset value ("NAV") increased by 5.6% on a total return basis, outperforming its benchmark, the FTSE All-Share Index, which produced a total return of 5.0%. The share price total return for the period was 3.9%, reflecting a widening of the discount at which the Company's shares trade to the NAV. The discount at the end of the period (on an ex-income basis with borrowings stated at fair value) was 9.7%, compared to 8.1% at the beginning of the period.

Although equity markets ended the period higher, there was a significant increase in volatility over the six months with the FTSE All-Share Index falling sharply during February and March as investors became concerned about the timings of future interest rate rises. However, as economic indicators, particularly in the US, remained strong, markets regained their confidence, with the FTSE All Share Index, further boosted by a sharp decline in Sterling, reaching a new all-time high in May.

The Investment Manager has continued to implement our strategy of reducing the dependence on higher yielding, lower growth companies, and increasing the exposure to lower yielding high quality businesses with good long-term growth prospects. As we have stated in previous reports, this strategy should enhance the Company's longer term potential for both faster dividend growth and better capital performance. Our distribution policy remains to grow the dividend faster than inflation over the medium term and, with the Company's increasingly robust revenue reserves and the healthy underlying dividend growth of the companies within the portfolio, that policy remains well supported.

The Board is encouraged by the progress made so far by the Investment Manager in executing the strategy. This reduces income in the short term but lays the potential for a higher underlying rate of income growth from the portfolio in the longer term. As a result of the changes over the last two years the Company's portfolio now has much stronger quality characteristics, including higher returns on equity, higher margins and lower levels of financial indebtedness. Income considered at risk has continued to decline while the underlying rate of dividend growth for the companies held within the portfolio has increased. The portfolio's positioning has also become more distinct, with mid and small cap companies now making up approximately 30% of the portfolio and its active share is now almost 68% compared with just over 60% two years ago.

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

Earnings and Dividends

Revenue earnings per share increased by 6.9% during the period to 8.39p per share (2017: 7.85p), due to an increase in income generated from option writing as the Investment Manager took advantage of increased volatility in markets, and the receipt of several special dividends. The underlying level of dividend income earned during the period was also generally ahead of the Investment Manager's expectations.

A first interim dividend in respect of the year ending 31 January 2019, of 3.0p per share (2018: 2.575p), was paid on 24 August 2018 and the Board has declared a second interim dividend of 3.0p per share (2018: 2.575p), which will be paid on 23 November 2018 to shareholders on the register on 2 November 2018.

The rate of first and second interim dividends have been increased this year, having last been increased in August 2013. The Board has been mindful that the increases in the overall annual rate of dividend since 2013 have caused the final dividend to become a growing percentage of the total annual payment. The Board therefore decided (and announced this intention on 2 July 2018) to increase the rate of each interim dividend this year to 3.0p per share so as to create a more even balance between the rates of the interim and final dividends. The 16.5% increase in the rate of interim dividends therefore represents a rebalancing of dividend payments.

As a result of this rebalancing, the final dividend is expected to be lower than last year but it remains the Board's intention to continue a policy of growing total annual dividends in real terms.

Gearing

The Company currently employs three sources of gearing. The £28.6 million debenture maturing in April 2019, the £30 million loan notes maturing in 2045, and a new three year £15 million multi-currency revolving credit facility that was taken out in July 2018. The revolving credit facility replaced the previous £25 million facility that expired at that time. Under the terms of the facility the Company has the option to increase the level of the commitment from £15 million to £30 million at any time, subject to the lender's credit approval. A Sterling equivalent of £11.7 million was drawn down under the facility at the end of the period.

The proceeds of the loan note issuance are invested in a portfolio of investment grade bonds which, taking into account the call features or prepayment options on several of the bonds, broadly matches the duration of the 2019 debenture and the income from which largely offsets the interest cost of the issue. The Company's equity gearing is therefore very much lower than the headline gearing figure would suggest. With debt valued at par, the Company's net gearing decreased from 14.4% to 13.8% during the period and, on a pure equity basis, after netting off cash and bonds, gearing decreased from 7.8% to 7.2%. The Board believes this remains a relatively conservative level of equity gearing and, with the option to increase the commitment under the revolving credit facility, provides the Company with financial flexibility should opportunities to deploy additional capital arise.

Following the repayment of the debenture in April 2019 the Company's overall capital structure will be simpler, with a lower level of absolute borrowings and a portfolio that is entirely invested in equities.

Discount

As stated above, the discount at the end of the period (on an ex-income basis with borrowings stated at fair value) was 9.7%, compared to 8.1% at the beginning of the period.

The Board and Manager monitor the discount level carefully and, during the period, the Company continued to buy back shares, buying back 894,789 shares to hold in treasury at a cost of £2.3 million. The Company has continued to buy back shares since the period end.

Based on last year's annual dividend of 12.1p per share, the dividend yield on the Company's shares was 4.6% at the end of the period. This is one of the highest 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.

The Board will continue to monitor the level of discount carefully and make further use of the Company's share buy back powers to address any imbalance of supply and demand in the Company's shares. The Board believes that this action, together with the recent improvement in performance, ongoing changes to the portfolio, simplification of the balance sheet in 2019, rebalancing of the dividend and our commitment to grow the dividend faster than inflation over the medium term should all help narrow the Company's discount relative to its peers.

Board Composition

As previously reported, following a formal recruitment process with independent search, Howard Williams was appointed as an independent non-executive Director on 1 April 2018. Howard has over 35 years' of fund management experience and was, until October 2017, Chief Investment Officer and Head of the Global Equity Team at JPMorgan Asset Management.

Outlook

Equity markets remain relatively buoyant although there are a number of headwinds developing, particularly around global trade and the increase in protectionism which could have an impact on global growth, especially at a time of generally tighter monetary policy. In the UK, as Brexit negotiations enter their final phase there is still a great deal of uncertainty regarding the outcome. This, combined with a relatively fluid domestic political situation and an economy that continues to exhibit only modest growth, makes it important to be particularly selective towards the Company's exposure to domestically focused companies.

Following the recent recovery in equity markets your Investment Manager retains a relatively cautious outlook and sees little reason to shift from a conservative focus on higher quality businesses, consistent with delivering your Company's strategy.

David Barron

Chairman

27 September 2018

HALF YEARLY BOARD REPORT - OTHER MATTERS

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 2018 and comprise the following risk categories:

- Investment objectives

- Investment strategies

- Investment performance

- Income/dividends

- Financial/market

- Gearing

- Regulatory

- Operational

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 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 Company's £28.6 million 7 7/8% Debenture Stock matures on 30 April 2019 and it is the Board's current intention that this will be funded from the realisation of the Company's portfolio of fixed income investments. 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 Board

David Barron

Chairman

27 September 2018

INVESTMENT MANAGER'S REVIEW

It has been a particularly busy period for portfolio activity as we continue to progress with our strategic shift away from higher yielding, lower growth investments into companies we believe can drive medium term capital and income growth for the Company. As part of this we have been striving to improve the overall quality of holdings while maintaining appropriate diversity and balancing the near term requirements of the relatively high yield. We would stress that as long term, buy and hold investors we do not expect to be making this number of changes on an ongoing basis, however we are eager to position the Company in the best way to deliver the desired outcome for the long term. With market volatility and new investment ideas coming to the fore in the past six months it has proved an opportune time for us to take action.

We initiated nine new positions that fit into two broad categories. The first category is companies with a below average dividend yield but where we see superior prospects for sustainable growth; the second category is high yielding companies that add diversity to the mix of income with sound business models and well underpinned dividends.

Six of the new entrants fit into the first category: Abcam, Dechra Pharmaceuticals, Genus, Just Eat, Kone and London Stock Exchange. It can be seen from the descriptions below that these are a diverse range of businesses, but what they have in common are sustainable competitive advantages that should allow them to maintain their growth rates, which in turn should translate into strong growth in cash flows and dividends. The majority of these companies are mid-caps where businesses tend to be earlier in their lifecycle and thereby have more scope for expansion.

Abcam specialises in the manufacture and distribution of antibodies used in scientific research. End markets are growing as investment into diagnostics and life sciences expands whilst barriers to entry are high allowing them to make robust margins and returns. At present the dividend yield is low but we are confident that the company can generate double digit dividend growth into the medium term and believe the shares will continue to outperform.

Dechra Pharmaceuticals is a veterinary pharmaceutical company which has exposure to the attractive companion animal market. It has multiple avenues of growth into the medium term including taking market share in the large US market, developing new assets from its pipeline and expanding geographic reach through sensible acquisitions.

Genus is a global leader in the provision of sexing technology primarily for the rearing of pigs and cows. It is well positioned to benefit from increasing global demand for protein from limited resources. Being at the forefront of rapidly advancing genomic technology that selects the best breeding animals, it is well placed to help producers make improvements in herd genetics.

Just Eat operates in the online takeaway market in the UK and in a number of international markets such as Brazil. It benefits from structural growth in the takeaway market as consumers increasingly prioritise convenience with a tailwind from the ongoing shift to online ordering. While the company is not currently paying a dividend we anticipate that the capital light model and strong cash generation should support a healthy pay out to investors within the next few years and one that should increase at good rates over the longer term.

Kone is a Finnish listed elevator and escalator manufacturer which derives the majority of its revenues from its services and spares business which offers high resilience to its earnings, while providing a significant barrier to entry for what is already a reasonably consolidated industry. It is well positioned for growth in emerging markets over the medium term and it keeps a strong balance sheet giving it the option to participate in further industry consolidation should the opportunity arise.

London Stock Exchange has successfully transitioned away from the traditional exchange operations which are now only one third of profits, towards derivative clearing and market data services. This provides the company with a stable income stream and we believe with these exposures it can continue its impressive growth trajectory, earning high and improving returns over time.

Falling into the second category of higher yielding initiations are Rio Tinto, Telecom Plus and Direct Line Insurance.

Rio Tinto owns the highest quality iron ore mining assets in the world giving it sustainable cost advantages over other players in the industry. The company now has a strong culture of capital discipline and, with emphasis on streamlining its areas of focus through asset disposals, this further strengthens its balance sheet and enables it to distribute much of the free cash flow it generates to shareholders as dividends.

Telecom Plus sits at the smaller end of the market cap range and offers household services in the UK such as telecoms and utilities through a network of agents. The company regularly comes top in customer satisfaction surveys and the likely changes to the standard variable tariff for utilities should further improve its competitive position. The yield is attractive and is supported by a strong balance sheet.

Direct Line Insurance is a more mature and cash generative proposition than other names that we have been introducing, however it has a robust competitive position, is prudently capitalised and is committed to returning surplus cash to shareholders. This offers further diversification to the other high yielding companies within the portfolio.

We selectively added to some of the existing positions where we remain confident in the investment theses, for example Aveva, Tecan, Amadeus and Experian. We added to British American Tobacco and Vodafone on relative price weakness as well as participating in an equity raise for Weir Group.

To fund these purchases we exited a number of holdings. These fall into various different categories. We exited some positions that are higher yielding but where total return opportunity is lower than we can find elsewhere, examples here being BP, Imperial Brands, Inchcape and Zurich Insurance. There were some holdings with average to low yields where we believe likely dividend progression is insufficient to warrant a position such as Nestlé, Roche, Rolls Royce and RPC.

We also exited a few holdings where we see the quality of the franchise deteriorating below the high bar that we set ourselves. For example Essentra was sold given concerns over potential operational and cyclical risks within the business, as well as Wood Group following the purchase of Amec Foster Wheeler where we had uncertainty over liabilities taken on and its high level of debt. We exited Sage noting that the company appears to be finding the transition of its products to the cloud challenging coupled with fears that employees are not easily adjusting to the high performance culture that management advocate. In addition Inmarsat was sold following the approach by EchoStar, with the issues around weakness in the maritime division, delays to aviation revenues and the debt burden compromising the quality characteristics of the company. Finally, we exited Temenos on valuation grounds following spectacular share price performance during our holding period.

We have been closely monitoring the impact of these changes on the portfolio and are pleased to see that metrics are moving in line with what we are trying to achieve. For example the percentage of the portfolio invested in companies with dividends growing at over 5% per annum has more than doubled from 21% at the start of 2016 to 44%. The amount invested in companies where we judge there to be heightened risk of a dividend cut has fallen and the active share (a measure of deviation from the benchmark) has risen from just over 60% to almost 68%. In addition, the percentage we have invested in small and mid-cap companies has increased from 15% to around 30%. This process is not complete, but we have made meaningful changes that we firmly believe will drive future capital performance and income growth, whilst keeping the dividend secure.

Performance has been sound in the first half. Some of the relatively recent European holdings have had a positive influence, with French food voucher company Edenred, Italian hearing aid retailer Amplifon and Swiss life sciences equipment manufacturer Tecan performing particularly well. In addition, Aveva shares were strong as the market continued to warm to the corporate combination with Schneider Software and recognise the potential synergy benefits from the transaction.

Partially offsetting this was the underweight to the Oil and Gas sector which was strong amidst a rising oil price, as well as not holding Shire and Sky that both received take out bids.

Income generation has also been robust. The dividend season generally ran ahead of our expectations with companies such as Compass and Brunello Cucinelli beating our forecasts, partially offset by Inmarsat's reduction which we had anticipated. Higher levels of volatility and a desire to implement more strategic changes have continued to present opportunities to generate option premium resulting in above average income during the period. Despite selling down some of the higher yielding names we continue to generate a healthy amount of income and the Company's dividend is well underpinned.

Following the merger of Aberdeen Asset Management with Standard Life the equity teams are now fully integrated. The Company management, investment philosophy and strategy remain unchanged, however we now have significantly greater resource as a combined group that we believe can enhance our ability to find the best investment ideas.

Looking ahead, the global economic environment continues to be relatively benign, however there are indications that underlying growth momentum may be gently slowing and regional divergence increasing. We are conscious that a rise in protectionism could have a significant impact on growth with the potential to also increase inflationary pressures. Closer to home, the outcome of negotiations between the UK and the European Union remains unclear and until we gain more clarity this uncertainty is likely to act as a brake on growth. With equities rebounding following their dip at the start of the 2018, valuations remain relatively full so we are still cautious on this front. However, we are firm in our stance that in the long run the underlying strength of our holdings will prevail whatever comes of the broader economic picture.

Ben Ritchie & Louise Kernohan

Aberdeen Asset Managers Limited

27 September 2018

INDEPENDENT REVIEW REPORT TO DUNEDIN INCOME GROWTH INVESTMENT TRUST PLC

We have been engaged by the Company to review the condensed set of financial statements in the Half Yearly Financial Report for the six months ended 31 July 2018 which comprises the Condensed Statement of Comprehensive Income, Condensed Statement of Financial Position, Condensed Statement of Changes in Equity, the Condensed Statement of Cash Flows and the related explanatory notes 1 to 13. We have read the other information contained in the Half Yearly Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The Half Yearly Financial Report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half Yearly Financial Report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Company are prepared in accordance with United Kingdom Generally Accepted Accounting Practice (including Financial Reporting Standard 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'). The condensed set of financial statements included in this Half Yearly Financial Report has been prepared in accordance with Financial Reporting Standard 104 'Interim Financial Reporting'.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the Half Yearly Financial Report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of half yearly financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Half Yearly Financial Report for the six months ended 31 July 2018 is not prepared, in all material respects, in accordance with Financial Reporting Standard 104 and Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Statutory Auditor

Edinburgh

UK

27 September 2018

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

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

FOR THE SIX MONTHS ENDED 31 JULY 2018

By order of the Board

Aberdeen Asset Management PLC

Company Secretary

27 September 2018

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