Final Results

RNS Number : 4133Z

Lowland Investment Co PLC

14 December 2017

 

LOWLAND INVESTMENT COMPANY PLC

Annual Financial Report for the year ended 30 September 2017

This announcement contains regulated information

Key Data as at 30 September 2017

·     Net Asset Value Total Return¹ 17.0 %

·     Benchmark Total Return² 11.9%

·     Growth in Dividend 8.9%

·     Dividend for the Year³ 49.0p

	Year ended 30 September 2017	Year ended 30 September 2016
NAV per share at year end	1,628p	1,432p
Share Price at year end4	1,504p	1,337p
Market Capitalisation	£406m	£361m
Dividend per share	49.0p3	45.0p
Ongoing Charge including the Performance Fee	0.68%	0.63%
Ongoing Charge excluding the Performance Fee	0.58%	0.63%
Dividend Yield5	3.3%	3.4%
Gearing at year end	6.3%	6.2%
Discount at year end6	7.6%	6.6%

¹   Net asset value per share total return (including dividends reinvested) in the prior year was 12.2%

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

³   Includes the final dividend of 13.0p per ordinary share for the year ended 30 September 2017 that will be put to

   shareholders for approval at the Annual General Meeting on Monday 29 January 2018

⁴   Mid-market closing price

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

⁶   Calculated using year end audited NAVs including current year revenue

Sources: Morningstar for the AIC, Janus Henderson, Datastream

Historical Performance

Year ended 30 September	Dividend per ordinary share in pence	Total return/(loss) per ordinary share in pence	Net revenue return per ordinary share in pence	Total net assets in £'000	Net asset value per ordinary share in pence
2007	23.5	138.7	27.9	275,868	1,044.3
2008	26.5	(344.4)	33.0	178,411	675.4
2009	26.5	8.4	22.7	173,633	657.3
2010	27.0	139.5	22.5	203,484	770.3
2011	28.0	68.3	28.8	214,251	811.0
2012	30.5	229.9	31.1	266,401	1,008.4
2013	34.0	330.1	36.7	347,202	1,306.9
2014	37.0	73.3	39.4	361,856	1,345.6
2015	41.0	11.8	46.4	354,563	1,318.4
2016	45.0	156.4	47.7	386,910	1,432.0
2017	49.01	243.2	49.1	439,896	1,628.1

¹          Includes the final dividend of 13.0p per ordinary share for the year ended 30 September 2017 that will be put to the shareholders for approval at the Annual General Meeting on Monday 29 January 2018

 

CHAIRMAN'S STATEMENT

Performance

The year was satisfactory in furthering your Company's objective of giving shareholders above average returns in terms of capital and income. Our Net Asset Value ('NAV') total return was 17.0%, compared with the Benchmark FTSE All-Share Index return of 11.9%. Our perspective is long-term, and the long-term trend for small and medium-sized companies to outperform demonstrated itself again, rewarding our overweight positions in these areas. This was reflected in the FTSE Small-Cap Index increasing by 17.8% against the FTSE 100 Index increase of 11.2%.

Dividends

Revenue earnings per share excluding special dividends increased by 10.3% to 46.7p. Special dividends were lower than in recent years; the increase in total revenue earnings per share was 2.9% to 49.1p. Three interim dividends of 12.0p have been paid and a final dividend of 13.0p is proposed. Subject to shareholders' approval of the final dividend, total dividends for the year will amount to 49.0p, an increase of 8.9%. It is pleasing that Lowland has succeeded in providing a steady and growing income stream to shareholders, the dividend having grown at a compound rate of 10% over the past five years. This is clearly well in excess of the rate of inflation, and, as the chart in the Annual Report shows, the rate of increase over the last ten years substantially exceeds that of both the Company's benchmark and its peer group, represented by the AIC UK Equity Income sector.

Investment Review and Gearing

Lowland's performance was achieved in favourable equity markets and low interest rates. The decline in the value of sterling has helped dividend growth as companies in which we are invested have substantial overseas sales and earnings. It is however contributing to real pressure on both wages and the margins of domestically focussed companies in the UK. Retailers, for example, struggle to pass on higher input costs to their customers.

Overall equity valuations do not look excessive; however there is polarity between lowly valued out-of-favour stocks and those perceived to be high quality whose valuations look increasingly stretched. The Fund Managers act on a bottom-up basis and have been reducing positions where valuations look high. This has resulted in the gearing declining from 12.6% at the half year to 6.3% at the year end. Since then the gearing has risen to around 11% as the Fund Managers selectively buy lower-valued stocks which, although currently out-of-favour, they believe are sound long-term businesses.

Lowland took out £30m twenty year senior unsecured loan notes in January 2017, at a coupon of 3.15%, taking the view that locking in rates at this stage of the cycle would be a good hedge against inflation. The fair value of the senior unsecured note is calculated using a discount rate which reflects the yield on a UK Gilt of similar maturity plus a suitable credit spread. It is calculated on a monthly basis, based on its estimated market value. At the year end the fair value was £31m, resulting in a reduction in NAV at fair value of 4.6p per ordinary share. This is supplemented by revolving credit facilities of up to £60m. We believe these facilities are appropriate to provide access to gearing which will be beneficial to long-term performance, within prudent limits.

Shareholders will be aware of MiFID II, a fundamental review of regulation of financial services in Europe. Inter alia, this requires investment managers to pay directly for investment research, rather than its costs being included in dealing charges. I am happy to report that Janus Henderson have agreed to bear the costs of external research and are committed to continuing to use it to complement their own internal research activity.

 

Ongoing Charge

The Ongoing Charge was 0.58% excluding the performance fee and 0.68% including it. The performance fee was £416,000.

As previously announced, the Investment Management Agreement was amended to the effect that, from 1 July 2017, the management fee on net chargeable assets in excess of £375m will be 0.4% compared with 0.5% below that level. The Performance Fee is capped at 0.25% of Net Chargeable Assets. The Company began to benefit from the reduced rate in the last quarter of the financial year and will continue to do so at current valuations. The Board and Janus Henderson are keenly aware of the need for a competitive cost base, as witnessed by this arrangement and Janus Henderson's agreement to bear external research costs directly.

Annual General Meeting

The AGM of the Company will be held at the offices of Janus Henderson on Monday 29 January 2018 at 12.30 pm. Full details of the business to be conducted at the meeting are set out in the Notice of Meeting which can be found on the website: www.lowlandinvestment.com 

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

Outlook

The Fund Managers look at company opportunities on the basis of their individual merits, rather than being guided by macro-economic factors. Recently they have, as stated in their report, found that the merits of some high-quality companies have been fully valued in share prices. Consequently we look to a cautious approach, concentrating on companies which are prepared for more difficult times, and are not overvalued. The Company's investment approach has served shareholders well over the long term, and we believe it will continue to do so.

Robert Robertson

Chairman

14 December 2017

 

FUND MANAGER'S REPORT

Investment Approach

The notable features of the Company's investment approach are:

1. The portfolio is always a blend of large, medium and small companies. The medium and small companies have often produced better investment returns given their greater capacity for sales and earnings growth. Small- and medium-sized companies also have the advantage of being covered by fewer analysts and therefore offer greater potential to find opportunities that have been overlooked or misunderstood by the market. The large companies reduce the volatility and aid consistency of performance.

2. The Company is invested 'predominantly' in UK equities. Given the focus on the UK, the Company aims to invest in areas where the UK has globally competitive, world-leading companies. These companies will tend to have high barriers to entry as their products tend to be specialist and so have been fine-tuned over many years. This allows them to generate reasonable operating margins, meaning they are well placed to generate cash that can be returned to shareholders over time.

3. A focus on recovery situations, but only where a clear path can be seen to returning to sales and earnings growth. In practice this often means investing at the point of capitulation where companies look internally at what they can change, whether this is a period of sustained cost-cutting, changing the management team and/or cutting the dividend. While this is a mildly contrarian approach, the Company seeks to invest in companies that do not have long-term structural problems in order to avoid 'value traps'. In our experience value traps often arise where a company may appear cheap on valuation multiples, but operates in an industry with low barriers to entry and/or is in structural decline.

4. We prefer capital and income growth rather than absolute dividend yield. This has resulted in a high historic level of dividend growth. In the Company's view it is crucial for long-term performance to focus on companies with the capacity to grow sales and earnings, and therefore dividends, rather than companies paying a high absolute yield (with a high pay-out ratio) but with little potential for earnings growth. Companies rarely 'stand still' and a company that is forecast to stay static in terms of sales and earnings will often decline faster than analysts are anticipating. In order to avoid 'value traps' the focus should be on the potential for earnings growth which should ultimately drive capital and income growth for shareholders.

5. A long list of holdings, historically 80-120. Position sizes start small, new holdings tend to be initiated at approximately 30bps and increased as confidence is gained in the management team and the potential for earnings growth. The reason for the long list is twofold. Firstly, it provides diversification so that the Company is not overly exposed to any one cycle. For example, the overweight position in industrials - which follow the economic cycle - is offset by the overweight position in insurers, which follow the underwriting cycle. Secondly, the Company invests in recovery situations where the potential returns are high but so are the risks. Therefore it is sensible to invest in a spread of different situations. The Company also sells slowly when shares approach fair value, which naturally lends itself to a relatively long list of holdings.

6. The Company has a low turnover rate and long holding period (typically 20% turnover rate p.a. resulting in an approximately 5 year holding period). Historically the best returns have often derived from recovery situations that have taken a number of years to reach fruition (for example it may take time for a company to reduce gearing in a situation of balance sheet stress). Therefore given the Company's investment style a long holding period is necessary for the merits of a company's investment case to become fully appreciated by the market.

 

Investment Background

It has been a good year for relative and absolute performance. The economy has continued to grow albeit slowly. This has helped domestic smaller companies which had been weak during the summer of 2016 on concerns around Brexit. Inflation has picked up but this can be explained as a result of currency depreciation and it is expected to fall back as that works its way through. Therefore for investment markets it has been more of the same. The perceived better companies have gone onto higher ratings, while those that disappoint or show limited progress remain friendless despite low valuations.

The level of dividends paid by the UK Index (FTSE All-Share) has continued to grow with the fall of sterling helping the value of overseas income in sterling terms, and the return of the miners to the dividend list after a strong recovery. However, it is predicted that income from special dividends is likely to fall and for us special dividend income for the year fell from £1.46m to £0.63m. This is in spite of earnings growth and muted capital spend. The reason is that corporates are keen to pay down debt despite very low interest rates. This prudence from corporates might seem frustrating for those that want to see stronger GDP growth but for individual companies it makes sense. There is a general caution about the future strength of the UK economy. Certain parts of it, such as motor and furniture retailing, are already experiencing recessionary conditions. Some are blaming the uncertainty over Brexit but this may be being over-played. In motor retailing the concerns over diesel cars and the strength of new car sales in recent years could suggest that a slowdown was inevitable. However, the prospect of ending free movement of people, and tariffs, is a negative for growth prospects. This is being factored into valuations, with the UK underperforming other major global markets.

Performance Attribution

Performance during the year was not driven by any individual theme or sector. The top five active contributors to performance operate across different industries and geographies. What links them is a strong management team and uniqueness of product (or service). We are pleased to see this variety among the top performers as we are not managing the portfolio on the basis of any top-down allocation but rather picking a long, diverse list of stocks which have good capacity to grow earnings (and therefore dividends) over time.

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

1. Conviviality (described below)

2. Scapa (specialist healthcare and industrial tape)

3. Stobart (conglomerate which owns Southend airport, logistics and biomass facilities)

4. Irish Continental Group (ferries, predominantly between Holyhead and Dublin)

5. Marshalls (paving products)

The largest active positive contributor to performance was Conviviality, an alcohol distributor and off-licence operator ('Bargain Booze'). This was originally purchased at IPO in 2013. At the time it was solely an off-licence operator and came to the market with an attractive valuation and high dividend yield.

The reason for the original purchase was that we were impressed with the management team, who were dramatically improving standards among store franchises. This management team have gone on to lead the company through two distributor acquisitions, both of which have materially changed the scale of the company, such that they are now the second biggest wine buyer in the UK (after Tesco). As a result of successfully integrating the acquisitions, the shares have re-rated and we have now (reluctantly) begun reducing the holding on valuation grounds.

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

1. Carillion (described below)

2. Interserve (support services provider and contractor)

3. 4D Pharma (early-stage pharmaceutical company)

4. Provident Financial (door to-door-lender and credit card provider)

5. Quarto (book publisher)

The largest active detractor from performance was Carillion, a contractor (building infrastructure projects, hospitals, schools etc.) and support services provider. This was a relatively recent purchase for Lowland (2016) as it had been our view that the strengths of the support services business were being overlooked.

The purchase was a mistake. The management team, in order to grow the top line, were not doing enough due diligence on construction projects. This resulted in several loss-making contracts for which they have had to take a material provision. They were also running the business with too much debt.

Having met the interim management team we have maintained the (small) remaining position. The holding has been a reminder to us to be wary of contractors who are targeting growing sales (rather than maintaining discipline in writing contracts) and that the appropriate debt level for construction companies is low, given their tendency to have one-off hits from contracts.

Portfolio Positioning

The portfolio continues to hold a sizeable weighting in small-and medium-sized companies relative to the benchmark. A number of the best performers in the portfolio have come from those with less than £100m market cap. These are often illiquid but our closed-end structure allows illiquid positions to be held.

At the sector level, the two largest sector weightings are financials (largely insurance rather than banks) and industrials. These two sectors provide good diversification against each other as they follow very different cycles - broadly the industrials follow the economic cycle (although they will each have their own distinct end markets) while the insurers follow the underwriting cycle.

Investment Activity

While smaller and medium-sized companies often garner the majority of attention in the portfolio, the FTSE 100 currently makes up 36% of net assets, and is both a good source of income and an area we strive to add value in. The FTSE 100 is well researched, so stocks within it can hardly be described as 'unknown'. Sentiment does, however, often swing in quite an extreme (and sometimes unjustified) manner. This presents opportunities for those with a long time horizon who are willing to invest when a company is temporarily out of favour.

New larger company purchases during the year included Royal Mail and AstraZeneca. We sold Royal Mail shortly after the EU referendum vote as a result of concerns about the level of exposure it has to the domestic UK market, in a business with high fixed costs and therefore the potential for large swings in earnings. Following poor share price performance, however, we bought the position back in January 2017. By this point the shares had materially de-rated and we felt that the positives of the business (excellent management team, market leader in parcels, good scope for margin improvements over the long term) were not being appreciated. In the case of AstraZeneca we had an existing (small) position to which we added on the day of a trial failure that caused the shares to fall approximately 15%. This share price movement was too extreme given the breadth of their portfolio.

Where new smaller company holdings were added during the year it was often to take advantage of attractive income opportunities. New positions included Randall & Quilter (which buys closed books of non-life insurance), Redde (services for motor insurers) and Ten Entertainment (bowling alleys). All of these new holdings yield over 5% and have good scope to grow the dividend over time. This yield would be difficult to replicate from large cap income stocks that in a low yield environment are increasingly trawled over. A yield of over 5% in a FTSE 100 company often signals that there are questions regarding the sustainability of the dividend, whereas this is not the case in small cap.

Last year we wrote about Standard Chartered, as the new CEO Bill Winters was doing a good job of returning the business to growth. During the course of this year, Standard Chartered re-rated to nearer book level and therefore we reduced the position for portfolio balance reasons. We also reduced another of our larger recovery buys from the previous year, owner of British Airways, IAG. This had strong earnings upgrades as ticket pricing held up better than expected (particularly in the transatlantic route which is important for BA), and as a result the shares performed well. Given the lack of visibility surrounding airline earnings we took the opportunity to reduce the position.

Additional sales during the year were primarily in good quality companies that had re-rated and in our view were approaching fair value. An example of this would be Scapa. During the financial year Scapa's share price moved ahead of earnings growth and by the time of the final sale, Scapa was approaching a price/earnings multiple of 30x. While Scapa has an excellent management team and scope to grow margins, we were surprised to see it approach this rating and thought it prudent to sell the position. Other examples of companies reduced on valuation grounds (but where we still like the business fundamentals) include Hill & Smith, Elementis and Hiscox.

There were two takeover approaches during the year, one for energy services provider Cape, and one for insurer Novae. In both cases they received cash offers at material premiums from international buyers.

Outlook

The tightening of global monetary conditions has begun, led by the US. It is likely that interest rates in the UK will rise in the short term and the very accommodating monetary policy in Europe will slowly be tightened. The question for investors to struggle with is how far and fast rates will be increased. The UK has above target inflation but the consensus view is that this is very much a product of sterling deprecation and it is certainly less of a problem in strong currency countries. However, the full effect of sterling's fall will take time to be fully reflected. Increased costs of imported items are being partly absorbed by companies and slowly fed through in order not to lose market share. At the same time wages will not grow at a lower rate than inflation indefinitely, despite the low level of unemployment. These factors may result in inflation staying higher for longer than currently forecast and result in interest rates rising further than expected. This is one of the reasons Lowland took out £30m twenty year senior unsecured loan notes last year at a low rate by historical standards of 3.15%.

Lowland is an equity fund and its focus is on holding stock in companies that have an excellence in their product or service which will allow management to take the business through a more difficult economic environment. Companies held have been preparing themselves for a more challenging time. The balance of the portfolio has been marginally altered in preparation. The gearing has been reduced and domestically orientated companies without defensive qualities have been sold. We need to be open to new investment opportunities that may emerge but after eight years of economic growth and share price appreciation it is important to remember to stick with investment disciplines.

James Henderson and Laura Foll

Fund Managers

14 December 2017

 

Twenty Largest Holdings as at 30 September 2017

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

Rank 2017 (2016)	Company	% of portfolio	Approximate Market Capitalisation	Valuation 2017 £'000
1 (1)	Royal Dutch Shell The company explores, produces and refines oil; it produces fuels, chemicals and lubricants as well as operating filling stations worldwide. They have attacked their cost base and have very high class assets, which positions them well for the future.	5.5	£200bn	25,583
2 (2)	HSBC The global bank provides international banking and financial services. The diversity of the countries it operates in as well as its exposure to faster growing economies make it well placed.	3.4	£150bn	15,884
3 (5)	Phoenix The company operates primarily in the UK and specialises in taking over and managing closed life and pension funds.	3.0	£3bn	14,341
4 (3)	Hiscox The international insurance company manages underwriting syndicates and underwrites a range of personal and commercial insurance. They are very disciplined and have over the long-term achieved a high return on capital.	3.0	£4bn	13,970
5 (4)	Senior The company manufactures specialist engineering products for the automotive and aerospace sectors. Having come under margin pressure in recent years, we think they are well positioned to grow margins as end markets recover and new aerospace programs ramp up production.	3.0	£1.2bn	13,795
6 (8)	Prudential The company provides an assortment of insurance and investment products around the world. The business in the Far East has grown impressively in recent years.	2.5	£50bn	11,612
7 (12)	Irish Continental1 The group markets holiday packages and provides passenger transport, roll-on and roll-off freight transport and container services between Ireland, the United Kingdom and Continental Europe. It is a very cash generative well-run company.	2.1	£940m	10,011
8 (6)	Standard Chartered The international banking group operates principally in Asia, Africa and the Middle East. The new management team has focussed the bank back to areas of relative strength in its growing markets.	1.9	£25bn	9,113
9 (9)	GKN The manufacturer produces automotive components and aerospace parts. Similar to Senior, operating margins have come under pressure recently but we think they have good scope to grow in the future.	1.9	£5.5bn	8,788
10 *	Aviva This company provides a wide range of insurance and financial services. The management team have done a good job of simplifying the business, exiting peripheral and low return areas. They pay an attractive yield that has good scope to grow.	1.7	£21bn	7,975
11 *	Low & Bonar A specialist polymer producer across a wide range of markets (products include carpet tiles, truck tarpaulins, roofing products). Shares have been weak recently as they have struggled to fully pass onto customers higher raw material costs. The new management team have, however, simplified the business and we think they have good scope to grow margins over time.	1.7	£220m	7,909
12 *	Standard Life Aberdeen Following the acquisition of Aberdeen, the company is predominantly an asset manager. The acquisition diversifies Standard Life away from what were primarily absolute return products.	1.7	£13bn	7,882
13 (16)	Johnson Service2 A textile rental company that provides linens for use across workwear, hotels and restaurants. In recent years the management team has successfully de-geared the balance sheet and grown operating margins.	1.6	£540m	7,440
14 (15)	Relx The company publishes information for the scientific, medical, legal and business sectors, serving customers worldwide. It is a consistent, high quality growth business.	1.6	£36bn	7,366
15 (19)	Rolls-Royce The company designs and manufactures engines as well as providing aftermarket services for use across aerospace and industry. They have successfully won market share across many of the large new civil aerospace programmes and under a new management team have a renewed focus on removing duplicate costs.	1.6	£18bn	7,318
16 *	Direct Line A UK provider of car and home insurance. Their well-known brands allow them to grow policies well while maintaining underwriting discipline. A strong balance sheet allows them to pay an attractive dividend yield to shareholders.	1.5	£5bn	7,272
17 (17)	BP A producer and refiner of oil. Following the fall in the oil price they have successfully focused on cost reduction.	1.5	£100bn	6,921

18 *	DS Smith A cardboard packaging manufacturer. Management have done an excellent job in recent years of successfully integrating acquisitions and growing operating margins.	1.4	£5.5bn	6,654
19 *	International Personal Finance The company provides unsecured cash loans in markets such as Mexico and Poland. Potential changes to regulation in Poland (one of their largest markets) has meant the shares have been weak. While regulation is uncertain, the geographies they operate in should mean there is good potential for growth and it is a high returning business.	1.4	£450m	6,644
20 (13)	Headlam The company distributes floor tiles and carpeting. They are increasing the price of their products and their national coverage positions them well to continue growing.	1.4	£500m	6,638

At 30 September 2017 these investments totalled £203,116,000 or 43.4% of the portfolio.

* Not in the top 20 largest investments last year

1 Overseas listed stocks (Ireland)

2 AIM stocks

PRINCIPAL RISKS AND UNCERTAINTIES

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

Investment Activity and Strategy Risk

An inappropriate investment strategy or poor execution, for example, in terms of asset allocation or level of gearing, may result in underperformance against the Company's benchmark index and the companies in its peer group, and also in the Company's shares trading on a wider discount to the net asset value per share.

The Board manages these risks by ensuring a diversification of investments and a regular review of the extent of borrowings. Janus Henderson operates in accordance with investment limits and restrictions and policy determined by the Board, which includes limits on the extent to which borrowings may be employed.

The Board reviews the investment limits and restrictions on a regular basis and the Manager confirms adherence to them every month. Janus Henderson provides the Board with management information, including performance data and reports and shareholder analyses.

The Board monitor the implementation and results of the investment process with the Fund Managers at each Board meeting and monitor risk factors in respect of the portfolio.

Investment strategy is reviewed at each meeting.

Portfolio and Market Price Risk

Market risk arises from uncertainty about the future prices of the Company's investments. Although the Company invests almost entirely in securities that are listed on recognised markets, share prices may move rapidly. The companies in which investments are made may operate unsuccessfully, or fail entirely.

The Fund Managers seek to maintain a diversified portfolio to mitigate against this risk. The Board regularly reviews the portfolio, activities and performance.

Financial Risk

The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk, currency risk and credit and counterparty risk.

The Company minimises the risk of a counterparty failing to deliver securities or cash by dealing through organisations that have undergone rigorous due diligence by Janus Henderson. The Company holds its liquid funds almost entirely in interest bearing bank accounts in the UK or on short-term deposit. This, together with a diversified portfolio which comprises mainly investments in large and medium-sized companies mitigates the Company's exposure to liquidity risk. Currency risk is mitigated by the low exposure to overseas stocks.

Gearing Risk

At the point of drawing down debt, gearing will never exceed 29.99% of the portfolio valuation. In the event of a significant or prolonged fall in equity markets gearing would exacerbate the effect of the falling market on the Company's NAV per share and, consequently its share price.

The Company minimises the risk by the regular monitoring of the levels of the Company's borrowings in accordance with the agreed limits. The Company confirms adherence to the covenants of the loan facilities on a monthly basis.

Operational Risk

Disruption to, or the failure of, Janus Henderson's accounting, dealing or payment systems or the custodian's records could prevent the accurate reporting or monitoring of the Company's financial position.

Janus Henderson contracts some of the operational functions (principally those relating to trade processing, investment administration and accounting), to BNP Paribas Securities Services.

Accounting, Legal and Regulatory Risk

In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 ('Section 1158'). A breach of Section 1158 could result in the Company losing investment trust status and, as a consequence, capital gains realised within the Company's portfolio would be subject to Corporation Tax.

Compliance with the requirements of Section 1158 is monitored by Janus Henderson and the results are reported at each Board meeting. The Company must comply with the provisions of the Companies Act 2006 and, since its shares are listed on the London Stock Exchange, the UKLA's Listing and Disclosure Guidance and Transparency Rules and the Prospectus Rules ('UKLA Rules').

A breach of the Companies Act 2006 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. A breach of the Listing Rules could result in the suspension of the Company's shares; which in turn would breach Section 1158.

The Board relies on its Company Secretary and its professional advisers to ensure compliance with the Companies Act 2006 and Listing Rules.

The Board receives internal control reports produced by Janus Henderson on a quarterly basis, which confirm regulatory compliance.

The Board considers these risks to have remained unchanged throughout the year under review.

VIABILITY STATEMENT

The Company is a long-term investor; the Board believes it is appropriate to assess the Company's viability over a five-year period in recognition of our long-term horizon and what we believe to be investors' horizons, taking account of the Company's current position and the potential impact of the principal risks and uncertainties as documented above.

The assessment has considered the impact of the likelihood of the principal risks and uncertainties facing the Company, in particular investment strategy and performance against benchmark, whether from asset allocation or the level of gearing, and market risk, materialising in severe but plausible scenarios, and the effectiveness of any mitigating controls in place.

The Board has taken into account the liquidity of the portfolio and the gearing in place when considering the viability of the Company over the next five years and its ability to meet liabilities as they fall due. This included consideration of the duration of the Company's loan facilities and how a breach of the loan facility covenants could impact on the Company's liquidity, net asset value and share price.

The Board does not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place. The Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period as the Company's assets are liquid, its commitments are limited and the Company intends to continue to operate as an investment trust. Only a substantial financial crisis affecting the global economy could have an impact on this assessment.

Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five-year period.

RELATED PARTY TRANSACTIONS

The Company's current related parties are its Directors and the Janus Henderson. There have been no material transactions between the Company and its Directors during the year and the only amounts paid to them were in respect of expenses and remuneration for which there were no outstanding amounts payable at the year end. Directors' shareholdings are disclosed in the Annual Report.

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

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

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

• the Company's financial statements, which have been prepared in accordance with UK Accounting Standards and applicable law give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

• the Strategic Report, Report of the Directors and financial statements include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

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

For and on behalf of the Board

Robert Robertson

Chairman

14 December 2017

 

INCOME STATEMENT

	Year ended 30 September 2017			Year ended 30 September 2016
	Revenue return £'000	Capital return £'000	Total £'000	Revenue return £'000	Capital return £'000	Total £'000
Gains on investments held at fair value through profit or loss	-	52,847	52,847	-	29,331	29,331
Income from investments (note 2)	16,871	-	16,871	15,944	-	15,944
Other interest receivable and similar income (note 4)	50	-	50	108	-	108
				---------	---------	---------
Gross revenue and capital gains	16,921	52,847	69,768	16,052	29,331	45,383
Management fee	(1,920)	-	(1,920)	(1,806)	-	(1,806)
Performance fee	-	(416)	(416)	-	-	-
Other expenses	(553)	-	(553)	(472)	-	(472)
				---------	---------	---------
Net return on ordinary activities before finance costs  and taxation	14,448	52,431	66,879	13,774	29,331	43,105
Finance costs	(1,009)	-	(1,009)	(764)	-	(764)
				---------	---------	---------
Net return on ordinary activities before taxation	13,439	52,431	65,870	13,010	29,331	42,341
Taxation on net return on ordinary activities	(186)	-	(186)	(117)	-	(117)
				---------	---------	---------
Net return on ordinary activities after taxation	13,253	52,431	65,684	12,893	29,331	42,224
				=====	=====	=====
Return per ordinary share  -  basic and diluted (note 5)	49.1p	194.1p	243.2p	47.7p	108.7p	156.4p
				=====	=====	=====

The total columns of this statement represent the Profit and Loss Account of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. The Company had no other comprehensive income other than those disclosed in the Income Statement. The net return is both the profit for the year and the total comprehensive income.

 

STATEMENT OF CHANGES IN EQUITY

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

Year ended 30 September 2016	Called up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Other capital reserves £'000	Revenue reserve £'000	Total £'000
At 1 October 2015	6,723	59,923	1,007	275,268	11,642	354,563
Net return on ordinary activities after taxation	-	-	-	29,331	12,893	42,224
Ordinary shares issued	32	1,696	-	-	-	1,728
Third interim dividend (10.0p) for the year ended 30 September 2015 paid 30 October 2015	-	-	-	-	(2,689)	(2,689)
Final dividend (11.0p) for the year ended 30 September 2015 paid 29 January 2016	-	-	-	-	(2,972)	(2,972)
First interim dividend (11.0p) for the year ended 30 September 2016 paid 29 April 2016	-	-	-	-	(2,972)	(2,972)
Second interim dividend (11.0p) for the year ended 30 September 2016 paid 29 July 2016	-	-	-	-	(2,972)	(2,972)
	---------	----------	----------	-----------	----------	-----------
At 30 September 2016	6,755	61,619	1,007	304,599	12,930	386,910
	=====	=====	=====	======	=====	======

STATEMENT OF FINANCIAL POSITION

	As at 30 September 2017 £'000	As at 30 September 2016 £'000
Investments held at fair value through profit or loss
Listed at market value in the United Kingdom	365,646	326,129
Listed at market value on AIM	74,881	58,403
Listed at market value overseas	24,743	24,384
Unlisted	2,218	2,101
	-----------	-----------
	467,488	411,017
	-----------	-----------
Current assets
Debtors	2,061	2,129
Cash at bank	11,362	2,178
	-----------	-----------
	13,423	4,307
	-----------	-----------
Creditors: amounts falling due within one year	(11,260)	(28,414)
	-----------	-----------
Net current assets/(liabilities)	2,163	(24,107)
	-----------	-----------
Total assets less current liabilities	469,651	386,910
Creditors: amounts falling due after one year	(29,755)	-
	-----------	-----------
Net assets	439,896	386,910
	=======	=======
Capital and reserves
Called up share capital	6,755	6,755
Share premium account	61,619	61,619
Capital redemption reserve	1,007	1,007
Other capital reserves	357,030	304,599
Revenue reserve	13,485	12,930
	-----------	-----------
Total shareholders' funds	439,896	386,910
	=======	=======
Net asset value per ordinary share - basic and diluted	1,628.1p	1,432.0p
	=======	=======

STATEMENT OF CASH FLOWS

	Year ended 30 September 2017 £'000	Year ended 30 September 2016 £'000
Cash flows from operating activities
Net return on ordinary activities before taxation	65,870	42,341
Add back: finance costs	1,009	764
Less: gains on investments held at fair value through profit or loss	(52,847)	(29,331)
Withholding tax on dividends deducted at source	(211)	(136)
Decrease/(increase) in debtors	93	(374)
Increase/(decrease) in creditors	423	(827)
	-----------	-----------
Net cash inflow from operating activities	14,337	12,437
Cash flows from investing activities
Purchase of investments	(72,559)	(67,620)
Sale of investments	68,038	102,719
	-----------	-----------
Net cash (outflow)/inflow from investing activities	(4,521)	35,099
Cash flows from financing activities
Equity dividends paid (net of refund of unclaimed distributions and reclaimed distributions)	(12,698)	(11,605)
Proceeds from issue of ordinary shares	-	1,728
Net loans repaid	(16,897)	(35,418)
Senior unsecured loan notes	29,755	-
Interest paid	(789)	(832)
	-----------	-----------
Net cash outflow from financing activities	(629)	(46,127)
Net increase in cash and cash equivalents	9,187	1,409
Cash and cash equivalents at start of year	2,178	669
Effect of foreign exchange rates	(3)	100
	-----------	-----------
Cash and cash equivalents at end of year	11,362	2,178
	=======	=======
Comprising:
Cash at bank	11,362	2,178
	-----------	-----------
	11,362	2,178
	=======	=======
Cash inflow from dividends net of taxation was £16,755,000 (2016: £15,483,000)

 

NOTES TO THE FINANCIAL STATEMENTS

1.	Accounting Policies
	a) Basis of Preparation The Company is a registered investment company as defined in section 833 of the Companies Act 2006 and is incorporated in the United Kingdom. It operates in the United Kingdom and is registered at 201 Bishopsgate, London, EC2M 3AE. The financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 - The Financial Reporting Standard applicable in the UK and Republic of Ireland and with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (the 'SORP') issued in November 2014 and updated in January 2017 with consequential amendments. The Company has early adopted the amendments to FRS 102 in respect to the fair value hierarchy disclosures as published in March 2016. The principal accounting policies applied in the presentation of these financial statements are set out below. These policies have been consistently applied to all the years presented. The financial statements have been prepared under the historical cost basis except for the measurement of fair value of investments. In applying FRS 102, financial instruments have been accounted for in accordance with Sections 11 and 12 of the standard. All of the Company's operations are of a continuing nature. b) Going Concern The assets of the Company consist of securities that are readily realisable and, accordingly, the Directors believe that the Company has adequate resources to continue in operational existence for at least twelve months from the date of approval of the financial statements. Having assessed these factors, the principal risks and other matters discussed in connection with the viability statement, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements.
2.	Gains on Investments held at Fair Value through Profit or Loss	2017 £'000	2016 £'000
	Gains on the sale of investments based on historical cost	27,440	23,452
	Less: revaluation gains recognised in previous years	(14,713)	(14,374)
		-----------	-----------
	Gains on investments sold in the year based on carrying value at previous Statement of Financial Position date	12,727	9,078
	Revaluation gains on investments held at 30 September	40,123	20,153
	Exchange (losses)/gains	(3)	100
		----------	----------
		52,847	29,331
		======	=====

3.	Income from Investments	2017 £'000	2016 £'000
	UK dividends:
	Listed investments	13,025	12,767
	Unlisted	49	48
	Property income dividends	148	228
		---------	---------
		13,222	13,043
		---------	---------
	Non UK dividends:
	Overseas dividend income	3,649	2,901
		---------	---------
		3,649	2,901
		---------	---------
		16,871	15,944
		=====	=====

4.	Other Interest Receivable and Similar Income	2017 £'000	2016 £'000
	Stock lending commission	16	44
	Income from underwriting	34	64
		---------	---------
		50	108
		=====	=====
	At 30 September 2017 the total value of securities on loan by the Company for stock lending purposes was £1,000 (2016: £2,830,000). The maximum aggregate value of securities on loan at any time during the year ended 30 September 2017 was £20,418,000 (2016: £25,560,000). The Company's agent holds collateral comprising FTSE 100 stocks with a collateral value of £1,000 (2016: £2,979,000) amounting to a minimum of 105% (2016: minimum 105%) of the market value of any securities on loan. Stock lending commission has been shown net of brokerage fees of £4,000 (2016: £11,000).

5.	Return per Ordinary Share - Basic and Diluted
	The return per ordinary share is based on the net return attributable to the ordinary shares of £65,684,000 (2016: £42,224,000) and on 27,018,565 ordinary shares (2016: 26,992,028) being the weighted average number of ordinary shares in issue during the year. The return per ordinary share can be further analysed between revenue and capital, as below.
				2017 £'000		2016 £'000
	Net revenue return			13,253		12,893
	Net capital return			52,431		29,331
				---------		---------
	Net total return			65,684		42,224
				=====		=====
	Weighted average number of ordinary shares in issue during the year			27,018,565		26,992,028
				2017 Pence			2016 Pence
	Revenue return per ordinary share			49.1		47.7
	Capital return per ordinary share			194.1		108.7
				----------		-----------
	Total return per ordinary share			243.2		156.4
				======		======
	The Company does not have any dilutive securities; therefore the basic and diluted returns per share are the same.
6.	Dividends Paid and Payable on the Ordinary Shares
	Dividends on ordinary shares	Record date	Payment date		2017 £'000			2016 £'000
	Third interim dividend (10.0p) for the year ended 30 September 2015	9 October 2015	30 October 2015		-			2,689
	Final dividend (11.0p) for the year ended 30 September 2015	8 January 2016	29 January 2016		-			2,972
	First interim dividend (11.0p) for the year ended 30 September 2016	8 April 2016	29 April 2016		-			2,972
	Second interim dividend (11.0p) for the year ended 30 September 2016	1 July 2016	29 July 2016		-			2,972
	Third interim dividend (11.0p) for the year ended 30 September 2016	7 October 2016	31 October 2016		2,972			-
	Final dividend (12.0p) for the year ended 30 September 2016	6 January 2017	31 January 2017		3,242			-
	First interim dividend (12.0p) for the year ended 30 September 2017	7 April 2017	28 April 2017		3,242			-
	Second interim dividend (12.0p) for the year ended 30 September 2017	30 June 2017	28 July 2017		3,242			-
					---------			---------
					12,698 =====			11,605 =====

The third interim dividend and the final dividend for the year ended 30 September 2017 have not been included as a liability in these financial statements. The total dividends payable in respect of the financial year, which form the basis of the retention test under Section 1158 of the Corporation Tax Act 2010, are set out below.
		2017 £'000
	Revenue available for distribution by way of dividend for the year	13,253
	First interim dividend (12.0p) for the year ended 30 September 2017	(3,242)
	Second interim dividend (12.0p) for the year ended 30 September 2017	(3,242)
	Third interim dividend (12.0p) for the year ended 30 September 2017	(3,242)
	Proposed final dividend (13.0p) for the year ended 30 September 2017 (based on 27,018,565 ordinary shares in issue at 12 December 2017)	(3,512)
		---------
	Revenue surplus	15
		=====
	For Section 1158 purposes the Company's undistributed revenue represents 0.1% of the income from investments.

7.	Called up Share Capital
			Number of shares entitled  to dividend	Total number          of shares	Nominal value of shares £'000
	At 30 September 2016		27,018,565	27,018,565	6,755
			-----------	-----------	-----------
	At 30 September 2017		27,018,565	27,018,565	6,755
During the year, the Company issued no ordinary shares (2016: 126,138 shares for proceeds of £1,728,000).

8.	Net Asset Value per Ordinary Share
	The net asset value per ordinary share of 1,628.1p (2016: 1,432.0p) is based on the net assets attributable to the ordinary shares of £439,896,000 (2016: £386,910,000) and on 27,018,565 (2016: 27,018,565) shares in issue on 30 September 2017. The movements during the year of the assets attributable to the ordinary shares were as follows:
		2017 £'000	2016 £'000
	Total net assets at 1 October	386,910	354,563
	Total net return on ordinary activities after taxation	65,684	42,224
	Share issue proceeds	-	1,728
	Net dividends paid in the year:
	Ordinary shares	(12,698)	(11,605)
		-----------	-----------
	Net assets attributable to the ordinary shares at 30 September	439,896	386,910
		======	======

9.

2017 Financial Information

The figures and financial information for the year ended 30 September 2017 are extracted from the Company's annual financial statements for that period and do not constitute statutory accounts. The Company's annual financial statements for the year to 30 September 2017 have been audited but have not yet been delivered to the Registrar of Companies. The Independent Auditors' Report on the 2017 annual financial statements was unqualified, did not include a reference to any matter to which the Auditors drew attention without qualifying the report, and did not contain any statements under sections 498(2) or 498(3) of the Companies Act 2006.

10.	2016 Financial Information
	The figures and financial information for the year ended 30 September 2016 are compiled from an extract of the published financial statements for that year and do not constitute statutory accounts. Those financial statements have been delivered to the Registrar of Companies and included the report of the Auditor which was unqualified, did not include a reference to any matter to which the Auditor drew attention without qualifying the report, and did not contain any statements under sections 498(2) or 498(3) of the Companies Act 2006.
11.	Dividend
	The final dividend, if approved by the shareholders at the Annual General Meeting, of 13.0p per ordinary share will be paid on 31 January 2018 to shareholders on the register of members at the close of business on 5 January 2018. This will take the total dividends for the year to 49.0p (2016: 45.0p). The Company's shares will be traded ex-dividend on 4 January 2018.

12.	Annual Report
	The Annual Report will be posted to shareholders in December 2017 and will be available on the Company's website (www.lowlandinvestment.com) or in hard copy format from the Company's Registered Office, 201 Bishopsgate, London, EC2M 3AE.

13.	Annual General Meeting
	The Annual General Meeting will be held on Monday, 29 January 2018 at 12.30 pm at 201 Bishopsgate, London, EC2M 3AE. The Notice of Meeting will be sent to shareholders with the Annual Report.

For further information please contact:
James Henderson	Laura Foll
Fund Manager	Fund Manager
Lowland Investment Company plc	Lowland Investment Company plc
Telephone: [phone]	Telephone: [phone]
Sarah Gibbons-Cook	James de Sausmarez
Investor Relations and PR Manager	Head of Investment Trusts
Janus Henderson Investors	Janus Henderson Investors
Telephone: [phone]	Telephone: [phone]

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

 

END

 

 

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