Scottish Oriental Smaller Comapanies has published a decent set of results covering the 12 months ended 31 August 2024. Over that period, the NAV return was 18.6%, well ahead of the 13.5% return on MSCI AC Asia ex Japan Small Cap, and the return to shareholders was 16.5%.

The managers have earned a performance fee of £98,000, but the way that these are calculated has changed. The performance fee is based on the comparative performance of the company’s share price total return against the performance of the MSCI AC Asia ex Japan Small Cap Index plus a hurdle of 2%. A performance fee of 10% of the out-performance is calculated on a rolling three-year basis. The key terms of the new methodology are:

• Periods of under-performance are now accumulated and applied against potential future performance fees.
• A high watermark provision has been introduced, whereby a performance fee will only be paid when the company’s share price exceeds the level where a performance fee was previously paid.
• If the total fee payable (base fee plus performance fee) in a year would be in excess of the cap of 1.5% of total assets, such excess will be carried forward and may be paid in future periods of positive performance where a performance fee is otherwise payable.

The discount at the end of the period was 14%. During the year, the company bought back 782,085 ordinary shares (3.2% of the shares in issue as at 31 August 2023).

The dividend is being raise from 13.0p to 14.0p, but there is also an 8p per share special dividend.

The shares are going to be split on a five-for-one basis, to improve their liquidity and marketability.

Extracts from the manager’s report

The largest contributors to performance were the holdings in India and Philippines. The biggest detractors from performance were the holdings in Indonesia and Hong Kong.

Top Five Contributors

• Colgate Palmolive (India) reported strong sales and profit growth, as several of the initiatives introduced by its new Chief Executive Officer, Prabha Narasimhan, delivered results. The company has increased investments in brand-building, enhanced its focus on faster growing distribution channels and introduced new product variants across its portfolio. Colgate’s strong pricing power has also helped the company improve its profitability levels.
• Blue Star is a leading air-conditioner manufacturer in India, serving the consumer and projects segments. The company delivered strong growth in revenues and higher profitability levels during the year. The company benefited from rapid growth in demand for air-conditioners in India, while it continued to gain market share through optimising its product portfolio and expanding its distribution. Its projects business also benefited from strong demand in infrastructure development, in areas such as metro rail projects and data centres.
• Philippine Seven is the exclusive franchise operator for 7-Eleven stores in the Philippines. It continued its recovery after the disruption caused by the pandemic. Footfalls rose across their store network, and the changes made to the store footprint, store assortment and increased digitisation during the pandemic led to strong same store sales growth for the company. These changes also led to a significant improvement in the company’s profitability during the year, as it benefited from operating leverage.
• JNBY Design is a leading designer apparel brand in China. The company reported strong growth in its revenues and profits, as it benefited from the removal of movement restrictions in China. In recent years, the company has refurbished its store network and strengthened its digital initiatives, focused on its membership program. These loyal members have driven strong growth for the brand, despite the relatively weak consumer environment in China.
• Godrej Industries is a leading Indian conglomerate, which controls the group’s key businesses in consumer products, real estate development, agriculture and financial services. Its consumer products, real estate and agriculture businesses reported strong performance during the year. The company has also been investing to scale-up its financial services operations, which are growing rapidly from its currently low base.

Top Five Detractors

• Hero Supermarket is a leading retailer in Indonesia, with operations across pharmacies, supermarkets and the franchise to operate IKEA stores in the country. During the year, the company reported a loss from operations due to weakening profitability at its IKEA stores and the intense competitive environment in the supermarket industry. The company expects the profitability of IKEA stores to improve as the brand’s recognition develops further in Indonesia, while benefiting from the optimisation of its supermarket store network.
• Vitasoy International is the market leader in soy-based beverages and lemon tea with operations in Hong Kong, China, as well as a number of other countries in Asia-Pacific. The company’s operations in China have struggled since a political issue in Hong Kong led to a boycott of its products in China. It has also faced disruptions to its business in Australia, which led to a decline in its profitability.
• Mitra Adiperkasa is the exclusive franchise operator for several leading global brands including Zara, Starbucks, Domino’s and Sephora in Indonesia. The company’s operations were affected by the negative consumer sentiment for some of its global brands, related to the conflict in the Middle East. The management has taken several steps to engage with various local stakeholders and increased brand building investments to mitigate this impact.
• Sarimelati Kencana is the exclusive franchise operator for Pizza Hut in Indonesia. Its performance has been disappointing, with a net loss from operations recorded for 2023. The company expanded its store network substantially in previous years, with some of these stores performing below management’s expectations. It was also negatively impacted by the consumer sentiment towards multinational brands during the year. The management is taking initiatives including rationalising its store footprint, introducing more innovative products in its menu and investing in brand-building to improve its operating performance.
• Nissin Foods operates a leading instant noodle brand with operations mainly in Hong Kong and China. The company has suffered due to the poor consumer sentiment in both its key markets. Consumers have shifted towards lower priced products, which has affected Nissin due to its strong position in the premium segment. Migration of blue-collar workers from Southern China towards inland areas has also hurt its growth, as Nissin has a stronger presence in the Southern regions. Its management is launching more variants in the mid-priced segment and expanding its distribution presence to address these challenges.

SST : Scottish Oriental Smaller Companies splits shares after decent year