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Lowland extends its run of above average dividend increases

Lowland extends its run of above average dividend increases – Lowland’s NAV total return was 17.0% for the year ended 30 September 2017, compared with the benchmark All-Share Index return of 11.9%. Three interim dividends of 12.0p have been paid and a final dividend of 13.0p is proposed, total dividends for the year will amount to 49.0p, an increase of 8.9%. The dividend has grown at a compound rate of 10% over the past five years.

The manager’s report says that the top five active contributors to performance (relative to the benchmark), were:
1. Conviviality
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.

They say that the reason for the original purchase was that they 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 they have now (reluctantly) begun reducing the holding on valuation grounds.

The top five active detractors from performance (relative to the benchmark):
1. Carillion
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 their view that the strengths of the support services business were being overlooked. They admit that 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 they have maintained the (small) remaining position. The holding has been a reminder to them 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.

LWI : Lowland extends its run of above average dividend increases

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