Lowland hit by industrials and insurance exposure – Lowland has announced results for the year ended 30 September 2020. Lowland’s NAV declined by 24.8% during the year, and its share price by a similar amount. These declines compare with a fall in the company’s benchmark, the All-Share index, of 16.6%.
The dividend has been increased by 0.5p to 60p even though the revenue per share fell from 68p to 33.8p. The balance has come from reserves and these now stand at £11.3m or 41.8p per share. The chairman says “We will continue to monitor the dividend outlook very closely. Our latest review concluded that, under a reasonable domestic recovery scenario, we can return to almost covering the current level of dividend in our 2022 financial year. If prospects appear much worse than this, we may have to review our policy.”
Sticking by value approach
The chairman’s statement discusses the underperformance, which can largely be attributed to COVID-19’s impact on sectors such as industrials and insurance, where the fund has an overweight exposure. He says “Consideration of strategy is intensified in times of difficulty. Whereas some value-focused trusts have abandoned their historic approach, we are persuaded to stick to our last, and convinced that rewards will ensue.”
[We note that since the period end, the share price up by about 25% and NAV by about 20%.]
Extracts from the manager’s report
“We estimate gearing detracted 3.5% from net asset value total return during the year.” [This will have worked in their favour over the last few months]
Positive contributions to performance came from:
1. Avon Rubber. A provider of defence equipment (such as gas masks and body armour). In recent years they have used selective acquisitions and disposals to re-shape the portfolio. The valuation rose to a materially higher level than where it had traded historically and relative to defence peers, therefore the position was reduced.
2. Ilika. A designer and manufacturer of solid state batteries, with the potential for faster charging and longer battery life than traditional batteries. This year Ilika made further progress towards commercialisation, and the shares performed well as a result.
3. XP Power. A designer and manufacturer of power converters for a range of end-markets. Healthcare and semiconductor end markets have proven resilient, offsetting weakness in industrial end markets and allowing group earnings to continue to grow during 2020.
4. Phoenix Group. A closed book life insurer (life insurance policies and pension funds that are in gradual run-off). It continued to grow via selective acquisitions and benefitted from its ability to continue to pay an attractive dividend yield throughout the year, at a time when many companies reduced or suspended dividend payments.
5. Somero Enterprises. A producer of concrete levelling equipment for the commercial building industry. After initial weakness in Spring, demand recovered strongly and recovered to historic levels in their key North American market.
Negative contributions to performance came from:
1. Senior. An engineering firm that produces equipment such as structures for aeroplane wings and fluid transportation systems for aerospace, industrial and energy markets. Approximately half of group sales are exposed to the civil aerospace market, where production cuts from Boeing and Airbus have meant material earnings downgrades. With a large portion of the global aeroplane fleet currently grounded, overcapacity in the market is likely to extend for several years even as passenger demand recovers (which, in our view, it will). This means profitability for Senior is likely to be suppressed for several years. We reduced the position during the period but we have maintained a small holding on a recovery in earnings as the valuation is very low.
2. Hiscox. A global insurer that writes predominantly small- and medium-sized business insurance. Among its coverage is business interruption and event cancellation insurance, an area that has seen highly contested claims as the insurance was not intended to cover prolonged forced closures as a result of a pandemic. There has recently been clarity on claims levels as a result of a test case in the UK High Court. We modestly added to the holding during the year in a placing by the company to ensure the balance sheet could fund COVID-19 claims.
3. Hammerson. An owner and operator of prime retail assets in the UK and Continental Europe. At a time when there was already a structural shift in consumer spending to online, there was then a forced closure of a material portion of their retail estate, leading to low rental payments from tenants. Towards the end of the financial year Hammerson undertook a rights issue (in which the Company participated) and disposal of some properties in order to re-set the balance sheet. In our view, there is a future for prime retail assets in combination with online, allowing a coherent multichannel offering for brands. However, in the short term, with uncertainty as to the extent of enforced closures, the trading outlook for retailers, and therefore the outlook for rents, remains uncertain.
4. International Personal Finance. A provider of door-to-door and digital lending. A wide range of regulatory changes (including debt moratoria) were imposed across a number of end markets at the beginning of the pandemic, leading to concerns of heightened bad debts. While this effect has (so far) been manageable, there were also concerns regarding the company’s ability to refinance a sizeable corporate bond which expires early in 2021. This refinancing issue has, following the financial year end, been resolved. The valuation of the company has modestly recovered but remains low.
5. Rolls-Royce. A designer and manufacturer of engines. As with Senior, approximately half of group sales are exposed to the civil aerospace market. Therefore both aftermarket sales and new engine sales have been materially impacted by reduced demand. Other markets to which the group is exposed, such as defence, have been more resilient and the management team have responded to the downturn with material cost savings across the business.
LWI : Lowland hit by industrials and insurance exposure