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15 May 2020 07:00
15 May 2020
Half Year Report
Schroder Income Growth Fund plc (the "Company") hereby submits its half year report for the period ended 29 February 2020 as required by the UK Listing Authority's Disclosure Guidance 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.schroders.co.uk/incomegrowth. Please click on the following link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/9720M_1-2020-5-14.pdf
The Company has submitted a pdf of the hard copy format of its half year report to the National Storage Mechanism. It will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
Enquiries:
Benjamin Hanley
Schroder Investment Management Limited
Tel: 020 7658 3847
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Half Year Report and Accounts for the six months ended 29 February 2020
Interim Management Report - Chairman's Statement
This is my first report to shareholders as Chairman, following Ian Barby's retirement at the Annual General Meeting ("AGM") on 17 December 2019.
In the Chairman's Statement in the 2019 Annual Report and Accounts, Ian reflected on the Company's track record and questioned whether we were moving into a more challenging period of lower returns on many asset classes. This caution proved well placed, as markets are now reacting to the impact of the COVID-19 pandemic.
Performance
During the six-month period to 29 February 2020, shortly before the global lockdown started, the Company's net asset value total return ("NAV") returned a negative -4.9%, compared to the -5.5% delivered by the FTSE All-Share Index.
The share price fared better, showing a total return of -0.3% as the discount narrowed from 8.3% at the start of the period to 4.0% at its close.
Since the close of the reporting period ended 29 February 2020, due to the sharp drop in markets caused by COVID-19, the Company's published NAV has dropped to 237.90p per share (as at 11 May 2020) and the Company's share price has dropped to 236.0p per share (as at 11 May 2020).
More detailed comment on the performance of your Company may be found in the Manager's review.
Revenue and dividends
The net revenue return per share for the six months ending 29 February 2020 continued its growth, albeit more modestly than in previous periods, increasing by 3.25%.
During the period, the Company paid two interim dividends for the year ending 31 August 2020 amounting to 5.00 pence per share (2019: 4.80 pence per share). The increase against last year's interim dividends was to partly rebalance the difference between the first three interim dividends and the last interim dividend during the year.
The board is receiving regular information from the Manager on the portfolio, and the income that it is expected to generate, over the next few quarters. The Company takes comfort from the fact that the revenue reserves are close to the level of the last full years' total dividend payments.
Gearing
The Company has in place a £35 million revolving credit facility with Sumitomo Mitsui Banking Corporation Europe Limited ("SMBC"), expiring on 23 August 2020. Average gearing during the period was 14.0% and the gearing is currently 13.3% (as at 11 May 2020). We support the Manager's view that with interest rates at current levels, the gearing has the attraction of increasing the investment income. Additionally, it could provide capital appreciation, provided valuations of portfolio holdings rise by more than the cost of the gearing.
Amendment to investment policy
At the 2019 AGM, shareholders approved the removal of the words "above average yielding" (preceding "UK Equities") from the Company's investment policy. We believe that this change will allow the Manager greater flexibility to focus on dividend stability and growth, as well as continuing to identify high-yielding stocks. This change supports the Company's objective of increasing its dividend over time. The full amended text is set out on the inside front cover of the 2020 half year report.
Board composition and succession planning
Fraser McIntyre was elected by shareholders at the AGM, as an additional non-executive director. Fraser has extensive experience as a chief operating officer and a chief financial officer in the investment management sector and is a qualified accountant. The board has already benefited from Fraser's relevant and recent financial and operations experience.
As previously described in the 2019 Annual Report and Accounts, David Causer who chairs your Audit and Risk Committee intends to retire at the Company's 2020 AGM. It is intended that Fraser will succeed David as Audit and Risk Committee chair.
Outlook
The unique structure of a closed ended fund, where revenue reserves accumulated during good times can support payments to shareholders in less favourable market conditions is an advantage today. Your board appreciates this and the importance of reliable income for shareholders. We are also very aware that the status of your Company as a "dividend hero" relies on the sustainability of its dividend payout. We will be taking these points into account when considering future dividend policy.
Your board goes into this period with much the same attitude as it did in 2008-09, the last time investment income fell sharply. We treasure the Company's record of increasing its dividend every year since its launch, and want to extend that record if possible. We know that, as in 2008-09, the Manager is concentrating the portfolio in companies believed to be strongly managed and with sound finances. We also know, however, how novel the challenge of the COVID-19 lockdown is and that as I write many UK companies have come to a temporary standstill. We are mindful that companies taking UK government support funds may be constrained in their ability to pay dividends to their shareholders in the near future.
There may be greater clarity on the outlook when the board sets the next two dividends later this year. In the meantime, we want the portfolio to continue to be focused on companies that will come out of these difficulties with renewed dividend-paying capabilities.
Bridget Guerin
Chairman
14 May 2020
Interim Management Report - Manager's Review
The Company's net asset value total return in the six months to 29 February 2020 was -4.9%. This compares to -5.5% from the FTSE All-Share Index.
Total income for the Company - a period unscathed by the impact of COVID-19 - rose 4.2%. Income excluding special dividends rose 3.5%.
The portfolio benefited from significant increases in dividends from a range of holdings, including miner BHP, Portuguese oil producer Galp, Tesco, leisure company Hollywood Bowl and alternative asset manager Intermediate Capital. Offsetting this were partial sales of some of the higher-yielding holdings, including Royal Dutch Shell, Micro Focus and HSBC, and from selling the holdings in Vodafone, Centrica and Halfords. Whilst the proceeds were reinvested across a number of existing holdings (BAE Systems, Tesco, TP ICAP, GlaxoSmithKline and G4S) as well as two new positions (house builder Crest Nicholson and student accommodation provider Empiric Student Properties), the income generated was expected to be somewhat lower.
Market background
In the six months under review UK equities fell partly due to concerns around the spread of COVID-19, but clearly the real correction came immediately after the end of February.
Prior to this, domestic politics had dominated the narrative around UK assets. The UK election brought a surprisingly strong victory for the Conservative Party, which used its large majority to take the UK out of the EU on 31 January. Domestically-focused areas outperformed as they responded to the reduction in near-term political uncertainty. These trends were further reflected in the recovery in sterling from the lows last summer.
Performance
The Company's outperformance of the FTSE All-Share Index was driven by stock selection, despite the gearing proving a headwind during a falling market.
Stock selection in financials was a positive, with Legal & General, Intermediate Capital and interdealer broker TP ICAP outperforming. Shares in Legal & General, one of the portfolio's highest conviction domestically-focused stocks, saw a particularly strong rise. Stock-picking in consumer goods was also a driver, with shares in housebuilders Crest Nicholson and Taylor Wimpey performing well as domestic uncertainties abated. The portfolio also avoided some losses compared to the index by having a smaller holding in Royal Dutch Shell compared to the index, which underperformed in response to a weakening oil price.
The table on page 5 of the 2020 half year report shows the biggest impact on portfolio performance, either positive or negative, from stocks either held or not held.
On the negative side, the underweight to utilities, the top performing sector, detracted from the portfolio's outperformance relative to the index. Utilities responded positively to the Conservative election win which reduced political risk, and were subsequently buoyed by their defensive attractions amidst the COVID-19 developments.
Portfolio activity
Leading up to the UK election, we further increased exposure to domestically-focused companies, adding retailer Next and Royal Bank of Scotland to the portfolio. Later we increased exposure to stable growth stocks such as Unilever and British American Tobacco, while initiating a position in National Grid at what we believed to be attractive prices, dividend yields and levels of dividend growth potential. These purchases were funded through sales of BT, HSBC and the small holding in Euromoney (received as a demerger from the holding in Daily Mail), and reductions in holdings of BP and Royal Dutch Shell.
Other activity included an increase in the holding in G4S, as the stock appeared undervalued having fallen after disappointing results, but where our investment thesis still held firm. We also added to bookmaker William Hill, as we believed progress was being made to augment its position in the de-regulating US. These purchases were funded by the sale of Aviva and taking some profits in speciality property companies Assura and Unite following strong performance.
Outlook
COVID-19's impact on the corporate sector worldwide is severe. Our Economics team expect 2020 to be the worst year for global economic growth since the 1930s, and very few holdings will be immune. Governments and central banks are providing unprecedented levels of fiscal and monetary support, but the portfolio net asset value is currently 13.8% lower than at the end of February. The investment thesis for some holdings has also been disrupted. Since the half year end we have sold out of four holdings (ITV, Next, Taylor Wimpey and RBS) where the investment case predominantly rested on an improved UK economic backdrop, and Micro Focus, where the operational turnaround will likely prove harder. In all these companies the dividends appeared vulnerable to being, or had already been, cancelled. Proceeds were in part invested in companies which we have a high degree of confidence will continue to pay dividends, such as British American Tobacco and Prudential, which has a strong Asian franchise. We established a new position in UK life assurance and fund management company M&G, where the share price had fallen to extremely low levels and where the dividend yield in our view is affordable and likely to be paid.
The sheer pace of developments and the uncertainty about how long the lockdowns will last mean that the timing and shape of the recovery is unclear. In this context it is hard to be precise on the outlook for the portfolio's likely investment income this year and next. In the last global crisis, in 2008/09, dividends for the whole UK market fell c.20% peak to trough. Given the response from corporates so far, the outcome this year is likely to be significantly worse. Many of the management teams of the companies in the portfolio are still reacting to the situation, prioritising the safely of employees, preserving liquidity and focusing on their balance sheets whilst assessing whether to access government support schemes. We have already seen some holdings (for example BAE) suspend dividend payments until there is more clarity around their operating environment, while others taking government support (for example Whitbread, William Hill, G4S, Hollywood Bowl, Unite Group and Lloyds Bank) have cancelled their dividends.
The portfolio went into the crisis with a concentration on companies with strong cashflow and balance sheets and robust business models, but with so much activity stopped by the global lockdowns, few are immune. Areas hardest hit are in travel and leisure (Whitbread, Hollywood Bowl, William Hill), construction and building (Crest Nicholson), whilst retail, advertising, banks (Lloyds) and business services companies (G4S) are also heavily impacted. Fortunately some areas of the portfolio are likely to be immune such as pharmaceuticals (GlaxoSmithKline, Astra), healthcare property (Assura) and tobacco (British American Tobacco). Some areas of the portfolio are also likely to be less impacted such as consumer staples (Unilever), essential retailers (Tesco, Pets at Home), utilities (National Grid), professional services (RELX and Pearson), life assurance (L&G, Prudential, M&G), and speciality financial companies (TP ICAP). We expect these to continue to pay dividends.
The market has fallen sharply and many good businesses have seen significant share price declines. Our work has reassured us about the attractive absolute and relative value in the portfolio. We remain positive on the prospects of attractive returns over the longer term and believe that retaining gearing in the portfolio at the current low levels of markets is appropriate for two reasons. Firstly, given the low costs of borrowing, the extra dividends generated from this additional investment benefit portfolio income at a time dividends are under pressure. Secondly, investors will be rewarded over the longer term by the boost to capital returns of any market rise from the current low levels.
Investment policy
We are sticking to the disciplined investment process that has served us well for over 20 years, and look to take advantage of opportunities in market-leading, cash generative, well-managed business that have been unduly sold off. We continue to work closely with our in-house analysts to help identify attractive investment candidates and to monitor the validity of the case for existing holdings.
We seek to add to those of the existing holdings which we believe can survive and thrive over the longer term while such opportunities are not reflected in today's share prices (for example, British American Tobacco). We are also looking at where the turmoil may accelerate trends in the way we live and do business. The drive to spend more on healthcare can only intensify (we have built up the position in Prudential and supported the capital raising for Assura to fund additional opportunities to invest in GP practices). We are researching potential new investments in stocks which have fallen but which are well-capitalised market leaders, as these could emerge competitively stronger after this crisis. We maintain a number of these companies on our watchlist whilst assessing both attractive entry points and funding sources.
Schroder Investment Management Ltd
14 May 2020
Interim Management Report
Principal risks and uncertainties
The principal risks and uncertainties with the Company's business fall into the following risk categories: strategic; investment management; financial and currency; custody; gearing and leverage; accounting, legal and regulatory; and service provider. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 13 and 14 of the Company's published annual report and accounts for the year ended 31 August 2019. The board has reviewed the risks related to the COVID-19 pandemic and considers it to be a major event with an ongoing impact on the likelihood and severity of the Company's principal risks. COVID-19 will continue to affect the value of the Company's investments due to the disruption of supply chains and demand for products and services, increased costs and cash flow problems, and changed legal and regulatory requirements for companies. The pandemic has triggered a sharp fall in global stock markets and created uncertainty around future dividend income. The fall in the Company's NAV per share and share price after the balance sheet date has been highlighted as a post balance sheet event in Note 9 to the Accounts on page 14 of the 2020 half year report. The board notes the Manager's investment process is unaffected by the COVID-19 pandemic and they continue to focus on long-term company fundamentals and detailed analysis of current and future investments. COVID-19 also affected the Company's service providers, who have implemented business continuity plans and are working almost entirely remotely. The board continues to receive regular reporting on operations from the Company's major service providers and does not anticipate a fall in the level of service.
Going concern
Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on page 15 of the published annual report and accounts for the year ended 31 August 2019, as well as considering the additional risks related to COVID-19, and where appropriate, action taken by the Company's service providers in relation to those risks, detailed above, the directors consider it appropriate to adopt the going concern basis in preparing the accounts.
Related party transactions
There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 29 February 2020.
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 and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued in November 2014 and updated in October 2019 and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.
Income Statement
For the six months ended 29 February 2020 (unaudited)
| (Unaudited) For the six months ended 29 February 2020 | (Unaudited) For the six months ended 28 February 2019 | (Audited) For the year ended 31 August 2019 | ||||||
| Revenue £'000 | Capital £'000 | Total £'000 | Revenue £'000 | Capital £'000 | Total £'000 | Revenue £'000 | Capital £'000 | Total £'000 |
Losses on investments held at fair value through profit or loss | - | (12,332) | (12,332) | - | (12,285) | (12,285) | - | (13,721) | (13,721) |
Net foreign currency gains | - | - | - | - | 11 | 11 | - | 23 | 23 |
Income from investments | 3,919 | - | 3,919 | 3,763 | 352 | 4,115 | 11,023 | 673 | 11,696 |
Other interest receivable and similar income | 3 | - | 3 | 2 | - | 2 | 6 | - | 6 |
Gross return/(loss) | 3,922 | (12,332) | (8,410) | 3,765 | (11,922) | (8,157) | 11,029 | (13,025) | (1,996) |
Investment management fee | (361) | (361) | (722) | (343) | (343) | (686) | (713) | (713) | (1,426) |
Administrative expenses | (163) | - | (163) | (160) | - | (160) | (350) | - | (350) |
Net return/(loss) before finance costs and taxation | 3,398 | (12,693) | (9,295) | 3,262 | (12,265) | (9,003) | 9,966 | (13,738) | (3,772) |
Finance costs | (106) | (106) | (212) | (70) | (70) | (140) | (181) | (181) | (362) |
Net return/(loss) on ordinary activities before taxation | 3,292 | (12,799) | (9,507) | 3,192 | (12,335) | (9,143) | 9,785 | (13,919) | (4,134) |
Taxation on ordinary activities (note 3) | (18) | - | (18) | (18) | - | (18) | (41) | - | (41) |
Net return/(loss) on ordinary activities after taxation | 3,274 | (12,799) | (9,525) | 3,174 | (12,335) | (9,161) | 9,744 | (13,919) | (4,175) |
Return/(loss) per share (note 4) | 4.77p | (18.63)p | (13.86)p | 4.62p | (17.96)p | (13.34)p | 14.19p | (20.26)p | (6.07)p |
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 other items of other comprehensive income, and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the period.
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.
Statement of Changes in Equity
For the six months ended 29 February 2020 (unaudited)
| Called-up share capital £'000 | Share premium £'000 | Capital redemption reserve £'000 | Warrant exercise reserve £'000 | Share purchase reserve £'000 | Capital reserves £'000 | Revenue reserve £'000 | Total £'000 |
At 31 August 2019 | 6,869 | 7,404 | 2,011 | 1,596 | 34,936 | 139,482 | 12,160 | 204,458 |
Net (loss)/return on ordinary activities | - | - | - | - | - | (12,799) | 3,274 | (9,525) |
Dividends paid in the period (note 5) | - | - | - | - | - | - | (5,289) | (5,289) |
At 29 February 2020 | 6,869 | 7,404 | 2,011 | 1,596 | 34,936 | 126,683 | 10,145 | 189,644 |
For the six months ended 28 February 2019 (unaudited)
| Called-up share capital £'000 | Share premium £'000 | Capital redemption reserve £'000 | Warrant exercise reserve £'000 | Share purchase reserve £'000 | Capital reserves £'000 | Revenue reserve £'000 | Total £'000 |
At 31 August 2018 | 6,869 | 7,404 | 2,011 | 1,596 | 34,936 | 153,401 | 10,523 | 216,740 |
Net (loss)/return on ordinary activities | - | - | - | - | - | (12,335) | 3,174 | (9,161) |
Dividends paid in the period (note 5) | - | - | - | - | - | - | (4,809) | (4,809) |
At 28 February 2019 | 6,869 | 7,404 | 2,011 | 1,596 | 34,936 | 141,066 | 8,888 | 202,770 |
For the year ended 31 August 2019 (audited)
| Called-up share capital £'000 | Share premium £'000 | Capital redemption reserve £'000 | Warrant exercise reserve £'000 | Share purchase reserve £'000 | Capital reserves £'000 | Revenue reserve £'000 | Total £'000 |
At 31 August 2018 | 6,869 | 7,404 | 2,011 | 1,596 | 34,936 | 153,401 | 10,523 | 216,740 |
Net (loss)/return on ordinary activities | - | - | - | - | - | (13,919) | 9,744 | (4,175) |
Dividends paid in the year (note 5) | - | - | - | - | - | - | (8,107) | (8,107) |
At 31 August 2019 | 6,869 | 7,404 | 2,011 | 1,596 | 34,936 | 139,482 | 12,160 | 204,458 |
Statement of Financial Position
at 29 February 2020 (unaudited)
| (Unaudited) 29 February 2020 £'000 | (Unaudited) 28 February 2019 £'000 | (Audited) 31 August 2019 £'000 |
Fixed assets |
|
|
|
Investments held at fair value through profit or loss | 215,361 | 219,145 | 234,862 |
Current assets |
|
|
|
Debtors | 865 | 1,208 | 2,009 |
Cash at bank and in hand | 7,467 | 2,872 | 347 |
| 8,332 | 4,080 | 2,356 |
Current liabilities |
|
|
|
Creditors: amounts falling due within one year | (34,049) | (20,455) | (32,760) |
Net current liabilities | (25,717) | (16,375) | (30,404) |
Total assets less current liabilities | 189,644 | 202,770 | 204,458 |
Net assets | 189,644 | 202,770 | 204,458 |
Capital and reserves |
|
|
|
Called-up share capital (note 6) | 6,869 | 6,869 | 6,869 |
Share premium | 7,404 | 7,404 | 7,404 |
Capital redemption reserve | 2,011 | 2,011 | 2,011 |
Warrant exercise reserve | 1,596 | 1,596 | 1,596 |
Share purchase reserve | 34,936 | 34,936 | 34,936 |
Capital reserves | 126,683 | 141,066 | 139,482 |
Revenue reserve | 10,145 | 8,888 | 12,160 |
Total equity shareholders' funds | 189,644 | 202,770 | 204,458 |
Net asset value per share (note 7) | 276.09p | 295.20p | 297.66p |
Registered in England and Wales
Company registration number: 03008494
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 2019 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
Basis of accounting
The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommend Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies in October 2019.
All of the Company's operations are of a continuing nature.
The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 August 2019.
3. Taxation on ordinary activities
The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. Taxation on ordinary activities comprises irrecoverable overseas withholding tax.
4. Return/(loss) per share
| (Unaudited) Six months ended 29 February 2020 £'000 | (Unaudited) Six months ended 28 February 2019 £'000 | (Audited) Year ended 31 August 2019 £'000 |
Revenue return | 3,274 | 3,174 | 9,744 |
Capital loss | (12,799) | (12,335) | (13,919) |
Total loss | (9,525) | (9,161) | (4,175) |
Weighted average number of shares in issue during the period | 68,688,343 | 68,688,343 | 68,688,343 |
Revenue return per share | 4.77p | 4.62p | 14.19p |
Capital loss per share | (18.63)p | (17.96)p | (20.26)p |
Total loss per share | (13.86)p | (13.34)p | (6.07)p |
5. Dividends paid
| (Unaudited) Six months ended 29 February 2020 £'000 | (Unaudited) Six months ended 28 February 2019 £'000 | (Audited) Year ended 31 August 2019 £'000 |
2019 fourth interim dividend of 5.2p (2018: 4.6p) | 3,572 | 3,160 | 3,160 |
First interim dividend of 2.5p (2019: 2.4p) | 1,717 | 1,649 | 1,649 |
Second interim dividend of 2.4p | - | - | 1,649 |
Third interim dividend of 2.4p | - | - | 1,649 |
| 5,289 | 4,809 | 8,107 |
A second interim dividend of 2.5p (2019: 2.4p) per share, amounting to £1,717,000 (2019: £1,649,000) has been declared payable in respect of the year ending 31 August 2020.
6. Called-up share capital
| (Unaudited) Six months ended 29 February 2020 £'000 | (Unaudited) Six months ended 28 February 2019 £'000 | (Audited) Year ended 31 August 2019 £'000 |
Ordinary shares allotted, called up and fully paid: 68,688,343 (28 February 2019 and 31 August 2019: same) shares of 10p each | 6,869 | 6,869 | 6,869 |
7. Net asset value per share
Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue at 29 February 2020 of 68,688,343 (28 February 2019 and 31 August 2019: same).
8. Financial instruments measured at fair value
The Company's financial instruments that are held at fair value comprise its investment portfolio. At 29 February 2020, all investments in the Company's portfolio were categorised as Level 1 in accordance with the criteria set out in paragraph 34.22 (amended) of FRS 102. That is, they are all valued using unadjusted quoted prices in active markets for identical assets (28 February 2019 and 31 August 2019: same).
9. Events after the interim period that have not been reflected in the financial statements for the interim period
There have been further significant falls in global stock markets and ongoing volatility after the half year end date, due to the Coronavirus pandemic. At 11 May 2020, the latest practicable date, the Company's NAV per share had fallen to 237.90p, and the share price to 236.0p.
The directors have evaluated the period since the interim date and have not noted any other events which have not been reflected in the financial statements.