Larger Shires Income explores ways to strengthen revenue account

Over the 12 months ended 31 March 2024, Shires Income generated an NAV return of 5.1% and a share price return of -5.5% (as the discount widened to 13.3%), both behind the 8.4% return delivered by the company’s All-Share Index benchmark. The chairman suggests that “the performance for the year is in line with what we would expect, given the defensive and income focused nature of the portfolio”.

The dividend was increased from 14.2p to 14.4p (+1.4%) and this was covered by earnings of 14.75p, but this revenue per share was down on last year’s figure of 14.83p. With effect from 1 April 2024, costs will be allocated 40:60 revenue:capital – they had been allocated on a 50:50 basis. That will help boost revenue earnings.

The company did expand following the merger with abrdn Smaller Companies Income, but still has a market cap of less than £100m. The extra shares issued in connection with the transaction meant that the revenue reserve has fallen from 1.05p per share to 0.69p per share. The company has plans to convert its share premium account into a distributable reserve.

The company bought back 863,532 shares during the year at a cost of £1.9m and an average discount of 9.3%.

The company is also proposing a tweak to its investment policy which would increase the amount that it is able to invest in overseas companies from 10% of the portfolio to 20%.

Extracts from the manager’s report

On a stock specific level, there were a number of strong performers in the portfolio. Intermediate Capital, a private equity fund manager, delivered robust performance and flows, with its shares rising by 78%. The exposure to banks performed well as returns improved, benefitting from higher interest rates and low credit write-offs: NatWest’s shares increased by 31% during the period and Standard Chartered increased by 16%. Industrials generally performed well as economic activity remained robust and valuations recovered. Melrose Industrials (+65%) re-rated after spinning out its lower quality autos business and Morgan Sindall (+45%) delivered continued growth as its fit out and construction businesses performed strongly. Finally, the addition of a number of small cap UK companies around the middle of the year also had a positive impact as these responded well to robust results and falling interest rate expectations. Hollywood Bowl (+24%) and 4Imprint (+46%) performed particularly well.

Offsetting this, the portfolio suffered from holding a number of companies that disappointed in the year for fundamental reasons. XP Power, which provides power supply to high tech manufacturing, fell by 61% after issuing a profit warning as end clients de-stocked. This was particularly disappointing, coming only a matter of weeks after management had reassured on the outlook for the business. XP Power was one company that fell victim to a lack of visibility in client orders as many industries went through a de-stocking cycle, having built up inventory during the pandemic period. Dr. Martens (-36%) faced similar issues, with high inventory levels in US wholesalers and supply chain challenges causing downgrades to expectations. Another cyclical disappointment was Genus, with its shares down 40% due to weakening demand for pork in China. Close Brothers fell by 51% after the announcement of an FCA review into auto lending in the UK, although we feel the impact of this is overstated. Some commodity companies also suffered from falling prices: Anglo American fell by 24% due to lower metals prices and disappointing production figures, while Diversified Energy fell 40% due to a sustained fall in the US gas prices to very low levels. Given its weighting in the portfolio, the fall in Diversified Energy had a meaningful impact on the portfolio, detracting 1.4% from performance over the year.

SHRS : Larger Shires Income explores ways to strengthen revenue account