Shires Income benefits from narrower discount – Over the year to the end of March 2019, Shires Income returned 4.0% in NAV terms and 8.0% in share price terms, as the shares moved from trading at a discount to a small premium. The All-Share Index returned 6.4%. The trust’s equity portfolio did beat the benchmark, returning 7.5% but the trust’s fixed income holdings held back returns overall. Nevertheless, these did contribute to the revenue account, making up for fewer special dividends and lower income from option writing. The dividend was increased to 13.2p from 13.0p. This was just uncovered by earnings, which were 13.06p. The company has revenue reserves equivalent to 1.2x the total dividend, which it can use to make up temporary revenue shortfalls, as it did this year.
Extract from the manager’s report
“By sector, the greatest positive contributions came from Mining, Telecommunications and Technology. Underweight positions in Consumer Goods, Consumer Services and Oil & Gas detracted from performance. The performance of the equity portfolio should be seen in the context of what was a difficult market for income investors, with traditional income sectors like telecoms and financials underperforming.
Five stocks stood out as material positive contributors this year. Telecom Plus was the largest single contributor, as the stock rallied strongly on robust earnings and a re-rating. The company sells long term utility contracts and did well as energy prices increased throughout the year. The shares increased in value by 30%.
Shares in John Laing increased by 45% as the company continued to increase the value of its investments. Having bought into the company when the shares traded at a discount to NAV, the valuation has increased and the shares now trade at a small premium. We still see this as an attractive valuation given the cautious assumptions in the NAV and the track record of compound growth over time.
Inmarsat’s shares delivered a return of almost 60% following a bid for the company. While the investment case on Inmarsat was not based on a bid, it did reflect the long term strategic value of the company’s satellite network and a corporate offer has seen this realised earlier than we might have anticipated. BHP Billiton benefitted from the continued strong backdrop for commodities. The company also continues to maintain spending discipline, delivering high levels of free cashflow. Finally, Experian’s shares continued to deliver on stable earnings growth over the year, proving the resilience of the business model.
The largest negative contributor was GVC, with its shares down by 36% over the year. The underlying performance of the company has actually been very solid, with earnings and cashflow growing. However, this has been trumped by increasing regulation of the UK gaming sector, with a higher tax take and weakening sentiment on the space. The company now trades with over 10% free cash yield in 2020, even ahead of the benefit of the regulation of sports gaming in the US, so with a 5.4% yield we believe it is one to hold onto for the longer term.
The second greatest negative for the portfolio was our underweight position in Royal Dutch Shell. The shares in the company delivered a return of almost 14% this year, helped by oil trading higher over the period and by strong cash generation as oil & gas companies generally maintained discipline after the last fall in the oil price. We have historically maintained an underweight position in the sector due to the high level of cyclicality, but we reduced the underweight this year, seeing positive signs from both Royal Dutch Shell and BP that capital discipline will hold and support dividends which currently generate a yield of almost 6%.
Thirdly, the holding in Aberdeen Smaller Companies Income Trust was a detractor, with the shares down by 0.4% over the year. The shares have underperformed the benchmark index modestly, reflecting primarily a difficult period in October to December last year when smaller companies were broadly out of favour as the market looked for lower risk investments. The company has since bounced back strongly, with the NAV up 22% year to date at the end of March. Furthermore, the company continues to trade at a material discount to NAV, something we hope will close over time and provide a tailwind to performance.”
SHRS : Shires Income benefits from narrower discount