Shires Income has announced its interim results for the six months ended 30 September 2016. During the period, the trust provided an NAV total return of 15.9% and a share price total return of 16.4%, both of which outperformed its FTSE All-Share Index benchmark, which it says returned 12.9%. The trust’s chairman, Anthony B Davidson, says that markets enjoyed a good six months, for the period under review, with oil and other commodity prices increasing; these were a significant driver of returns during the early part of the period.
In terms of portfolio developments, two new holdings were introduced during the period: BBA Aviation and Essentra. BBA Aviation provides fixed base operations for private planes, mainly in the US. The business has recently bought an additional portfolio of assets, which the manager says strengthens its market leading position in an industry where network density brings a competitive advantage. He also says that flight volumes are increasing as the US economy recovers and that the business generates solid cash flows that support an attractive yield. Essentra manufactures and distributes healthcare and personal goods packaging, specialist cigarette filters and a broad array of niche specialist components across a number of industries. The manager says that the low cost but critical nature of the business’s products allows them to make attractive margins and these have manifested themselves in growth in the dividend in excess of 15% over the medium term. One holding, Cobham, was exited during the period. Cobham is a business involved in the Aerospace and Defence industries. The manager says that the company’s balance sheet had become uncomfortably stretched following the acquisition of Aeroflex and, subsequent to the disposal of the holding from the portfolio, Cobham announced a rights issue to seek to repair their finances.
The manager says that changes were not made to the portfolio in anticipation of the outcome of the EU referendum but that many of the companies that the Manager invests in have broad diversified international revenue streams. The manager says that, reflecting this, there is less exposure to the more cyclical and domestically orientated areas of the market and these factors were beneficial to performance. Gearing decreased during the period from 24.9% to 22.1% (primarily due to an increase in net assets) but otherwise there has been no significant change to the overall allocations in the portfolio.
In terms of income generation, the manager says that there have been several pleasing increases in the dividends received during the period. These include; Aveva, Provident Financial and Wood Group which raised their final payments by 20%, 26% and 10% respectively. Croda, the speciality chemicals company, announced a special dividend. On the downside, Standard Chartered passed on its dividend altogether this year and Rolls Royce have halved their interim distribution. The manager also says that BHP Billiton’s dividend cut resulted in a sizable decrease in the dividend received in the period but that the impact should be much more muted in the next six months. Given the weakness of Sterling, foreign exchange has unsurprisingly had a material impact on some of the payments the Company has received. BP, Elementis and Unilever are examples where currencies have helped them to register uplifts of between 15% and 27% to the payouts they made.
In terms of outlook, the manager says that reflecting uncertainty as to what the post Brexit landscape will look like, a period of slower activity is expected and some of the economic and confidence surveys that have been released since the vote support this. The manager says that companies that have actually traded quite well in the first half of 2016 find themselves having to inject caution into their outlook statements as a result of this uncertainty. However, the manager thinks that this does not mean that the long term prospects for the economy have been irretrievably damaged. The Bank of England has responded to signs of a slowdown in the UK economy with interest rates being reduced to 0.25%, a term funding scheme has been created to encourage banks to lend, the existing asset purchase programme for gilts has been increased by £60 billion to £435 billion and a small programme of corporate bond purchases has been introduced. In the meantime the manager says that the weakness of Sterling is providing a boost to UK plc profitability. The manager believes that, whilst earnings expectations have declined slightly compared to forecasts before the vote, they have not declined by anything like as much as the more negative commentary of the outlook for the economy as a whole would suggest.
Shires Income beats benchmark aided by rising oil and commodity prices : SHRS