ScotGems Plc - Half-year Report
PR Newswire
London, July 31
From: ScotGems plc
LEI: 549300GQHCPU9P1NYM13
Date:1 August 2019
Results for the six months ended 30 June 2019
The Directors of ScotGems plc ("the Company") are pleased to announce the Company's interim results for the six months ended 30 June 2019.
Highlights
- The Company's objective is to provide long-term capital growth by investing in a diversified portfolio of small cap companies listed on global stock markets across a range of sectors.
- The Company was 87.1% invested in equities at 30 June 2019.
- During the interim period the net asset value rose by 3.9% to 96.69p per share while the share price fell by 7.0% to 86.00p.
Top Ten Investments as at 30 June 2019
| S/holders' Funds | Valuation | |||
| Company | Country | Industry | % | £'000 |
| Tata Global Beverages | India | Food Products | 8.8 | 4,576 |
| Philippine Seven | Philippines | Food & Staples Retailing | 6.6 | 3,403 |
| RCL Foods | South Africa | Food Products | 5.5 | 2,865 |
| Delfi | Singapore | Food Products | 5.1 | 2,645 |
| Bank OCBC Nisp | Indonesia | Banks | 5.0 | 2,584 |
| Unilever Nigeria | Nigeria | Household Products | 4.8 | 2,514 |
| Cyient | India | Software | 4.7 | 2,422 |
| Youngone Holdings | Korea | Textiles, Apparel & Luxury Goods | 4.4 | 2,269 |
| Batu Kawan | Malaysia | Holding Company | 4.0 | 2,072 |
| Suprajit Engineering | India | Auto Parts & Equipment | 3.6 | 1,847 |
| Top Ten Investments | 52.5 | 27,197 | ||
Chairman's Statement
During the period our net asset value ("NAV") rose by 3.9% to 96.69p per share while our share price fell by 7.0% to 86.00p. This compares to rises in the Company's comparator indices, the MSCI AC World Index, the MSCI AC World Small Cap Index and the MSCI Emerging Markets Index of 15.0%, 14.0% and 9.3% respectively. These Indices are for comparison purposes only and the portfolio is not managed by reference to any Index.
The Company's Investment Manager continues to find good companies at attractive valuations which they believe will provide shareholders with long term capital growth. The proportion of the Company's portfolio invested in equities increased in the six months to 30 June 2019 from 72.3% to 87.1%.
During the period the Company's discount widened from 0.6% to 11.1%. It is not currently the Board's policy to buy back shares.
While I recognise the apparently lacklustre NAV and share price performance since inception, my fellow Directors and I do not believe that much can be gleaned in investment from short term reference points. Importantly our Investment Manager is sticking to their investment philosophy, which they have proven works well over extended periods.
Shareholders should recognise that their investment is best thought of as a long term commitment, mirroring the commitment the Investment Manager has made to the underlying companies in the portfolio, based on the qualities which they believe will determine long term success. The Investment Manager has set out below a detailed description of the existing portfolio.
Investment Manager's Report
Two years on from launch the portfolio is close to being fully invested. The process to deploy cash has been slower than expected because smaller companies that fit our strict quality criteria have remained expensive, with stock markets hovering near record highs.
In the past six months we took advantage of sporadic short-term weakness in markets to initiate new positions and add to existing holdings. We added three new names in India as the stock market wobbled in the lead up to the general election. This took the total number of holdings in the portfolio up to 25, with the cash level falling to 13.0%. Cash remains split evenly between British Pounds, Singaporean Dollars, and US Dollars; it has had a negligible impact on performance since launch.
We exited one position, our holding in Naryana Hrudayalaya, the low-cost Indian hospital operator. The founding family's desire to provide affordable hospital care across India is certainly admirable but it comes at a cost to the balance sheet, which now has significant leverage. Coupled with our suspicion that hospital businesses are not the easiest to scale - owing to the fact that goodwill is often tied up with individual doctors and not the brand - led to a change of view.
The fact that the Company's net asset value has declined since launch is disappointing. Our holdings in Africa, specifically Nigeria and South Africa, where markets have been especially depressed, have endured some short-term pain. Both countries are in the middle of prolonged recessions, which has led to consumers trading down with negative cash flow consequences. We took the opportunity to add to two of our core holdings RCL Foods and Unilever Nigeria in the belief that the stocks now represent extremely good value.
RCL Foods is transforming from a commodity business (sugar and chicken) to a branded consumer business, and now trades on price to cash-flow of 4x, and price to book of 0.8x, the most depressed valuation in its history. Unilever Nigeria, a leading fast moving consumer goods player in a country of 190 million people, has an Enterprise Value ("EV") of $400 million, which seems quite a bargain when you compare this to the EV of Unilever subsidiaries in countries like Indonesia ($25 billion EV, population: 260 million), and India ($54 billion EV, population: 1.2 billion).
In situations like this our long-term investment horizon is our key competitive advantage. While many market participants focus on 'what's working' for the next 12 months, or pay high multiples for 'perceived safety' from certain types of stocks, we can afford to keep our valuation discipline without compromising the long term quality of our portfolio.
We regularly take positions in high quality businesses experiencing short-term difficulties. These are usually rewarding long-term investments, as we reap the benefit of both temporarily depressed cash-flows and depressed ratings, while the market has a tendency to 'extrapolate' near term fundamentals into the future in an almost linear fashion. In the short-term we may endure some pain as some of these businesses may worsen before they improve.
With the portfolio now constructed, we take comfort that most of our investment theses are only just starting to play out and that many of our holdings have the ability to grow long into the future. It is this process of bottom-up stock-picking which will drive long term asset growth for the Company.
Our quality criteria focuses on the concept of stewardship and backing long-term owner managers who display certain characteristics. It is non-negotiable that these people must be high on integrity and have built their businesses by honest means. We also want to see evidence that a company has been managed in a conservative and counter-cyclical manner by competent operators with an ability to think about all stakeholders.
A case in point is Tata Global Beverages (TGB) the largest position in the portfolio. The investment case was historically questionable because, despite first-rate governance, the business developed a reputation for lacklustre operational and financial performance. Whilst this may be true, we now see evidence of change that suggests a multi-year transformation is underway under new Tata Group chairman Natarajan Chandrasekaran.
He built his reputation at the helm of Tata Consulting Services (TCS), the group's IT services business, transforming it to become India's first $100 billion business by market cap. He did so with a management style that promoted accountability, autonomy and de-centralisation amongst its colossal workforce of more than 200,000 people. A focus on returns and sustainable long-term growth enabled the business to weather downturns and grow through economic cycles.
This same management philosophy is now being promoted across the entire Tata Group by its new chairman, and nowhere more so than at TGB where he also sits on the board as chairman. His appointment alone will not fix TGB, such a view is fanciful, but rather his appointment sets the tone for the business to redefine its strategy and means of operation.
Two years after his appointment the green shoots of change are evident, and there is a sense that the process of upgrading TGB as an organisation is gathering pace.
The first point to note is that capital allocation has become more disciplined. TGB's geographic footprint historically expanded far and wide at the expense of returns but the new regime has quickly exited distracting and loss-making operations in markets like China and Russia.
It is part of a broader pivot to focus more on TGB's large domestic market in India. The new strategy is to evolve beyond tea, which means transforming the business into a broader consumer franchise focused on higher-returning categories such as food and home care. The company's name will even change to Tata Consumer Products.
It also means greater emphasis on Tata Starbucks, a 50/50 joint venture between TGB and its American partner. Having successfully proven concept in major cities like Mumbai and Bangalore, the intention is to scale up rapidly across urban India. For context, India is where East China was ten years ago in terms of store numbers before that operation scaled up ten times.
Linked to improved capital discipline is the introduction of a more appropriate organisation structure. Like many successful consumer goods companies, or indeed Tata Group's most successful business TCS, TGB is de-centralising its management structure to provide greater autonomy and accountability for professional managers. This will remove bureaucracy, speed up decision making, and ultimately attract higher quality professionals.
Recent hires at board and management level suggest that TGB is equipping itself with enhanced capabilities and skillsets in an attempt to catch up with leading Indian consumer companies. The current CEO retires next year and, if media reports are to be believed, TGB's leadership has been vocal about the need for his replacement to have extensive consumer goods experience in order to take the business to the next level.
Our time horizon is also our advantage in a situation like TGB. As long as the right people are at the helm of TGB and its major shareholder Tata Sons, we believe the business will continue to improve and ultimately financial results will follow.
Our view of such people has been built up through decades-old referral networks and extensive on-the-ground research. It is what has enabled us to build conviction and indeed a large position in the portfolio at a time when the business is in transition.
When it comes to valuation, we ignore short-term noise and consensus. Instead, we plot out what a business like this could look like in ten years' time. In the case of TGB we expect an enhanced India business, a rationalised overseas operation, and Starbucks to scale up. The net result will be improved financial returns and continued long term growth. The business can become a lot more valuable over time, compounding capital for the Company's shareholders in the process.
CONTRIBUTION
Positive
Tata Global Beverages announced strategic plans to move beyond beverages and into new consumer categories such as food and home care.
The management at Philippine Seven continues to execute the rollout of convenience stores across the Philippines, where they have significant first mover advantage.
The consumer healthcare brand owned by Haw Par is the medicinal ointment Tiger Balm, which continues to expand its footprint in geographies like India.
VoltronicPower has successfully grown market share over the course of the last year, delivering robust results in the process.
The Indonesian bank BankOCBC Nisp is leveraging its parent's expertise to develop a wealth management offering aimed at Indonesia's growing upper middle classes.
Top Five Contributors - 12 months to 30 June 2019
| Company | Contribution to Return % |
| Tata Global Beverages | 1.50 |
| Philippine Seven | 1.44 |
| Haw Par | 0.60 |
| Voltronic Power | 0.56 |
| Bank OCBC Nisp | 0.49 |
Negative
The majority of RCL Foods' earnings are generated from commodity foods, namely chicken and sugar, which are under pressure from imports. Long term we are backing the company to develop consumer brands in grocery categories.
Unilever Nigeria struggled as Nigeria continues to experience a harsh and prolonged downturn, which has led to some trading down from consumers. The company is responding by introducing brands at lower price points.
Cyient supplies engineering services to leading aerospace businesses which have experienced disruption in light of the problems with Boeing.
Our second and smaller holding in Nigeria, GSK Nigeria, also suffered from prevailing consumer weakness.
Long4Life results have been fine. However our investment was impacted by negative sentiment towards South Africa and a weakened South African Rand.
Top Five Detractors - 12 months to 30 June 2019
| Company | Contribution to Return % |
| RCL Foods | -1.75 |
| Unilever Nigeria | -1.75 |
| Cyient | -1.35 |
| GSK Nigeria | -0.86 |
| Long4Life | -0.34 |
Stewart Investors
Investment Manager
Tel: 0131 473 2900
PATAC Limited
Company Secretary
Tel: 0131 538 6603
The Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity and Cash Flow Statement follow.
Statement of Comprehensive Income
for the six months ended 30 June 2019
Unaudited
| Six months ended 30 June 2019 (unaudited) | Six months ended 30 June 2018 (unaudited) | |||||
| Revenue return £'000 | Capital return £'000 | Total £'000 | Revenue return £'000 | Capital return £'000 | Total £'000 | |
| Investment income | 672 | - | 672 | 280 | - | 280 |
| Gains on investments held at fair value through profit or loss | - | 1,577 | 1,577 | - | 475 | 475 |
| Foreign exchange gains | - | 96 | 96 | - | 74 | 74 |
| Total income | 672 | 1,673 | 2,345 | 280 | 549 | 829 |
| Expenses | (385) | - | (385) | (384) | - | (384) |
| Profit before taxation | 287 | 1,673 | 1,960 | (104) | 549 | 445 |
| Taxation | (34) | - | (34) | (12) | (44) | (56) |
| Profit for the period | 253 | 1,673 | 1,926 | (116) | 505 | 389 |
| Return per share | 0.47p | 3.13p | 3.60p | (0.22p) | 0.95p | 0.73p |
The Total column of this statement represents the Statement of Comprehensive Income of the Company. The Revenue return and Capital return columns are supplementary to this and are prepared under guidance issued by the Association of Investment Companies.
All revenue and capital items in the above statement derive from continuing operations.
| Year ended 31 December 2018 (audited) | |||
| Revenue return £'000 | Capital return £'000 | Total £'000 | |
| Investment income | 603 | - | 603 |
| Losses on investments held at fair value through profit or loss | - | (1,570) | (1,570) |
| Foreign exchange gains | - | 348 | 348 |
| Total income | 603 | (1,222) | (619) |
| Expenses | (748) | - | (748) |
| Loss before taxation | (145) | (1,222) | (1,367) |
| Taxation | (29) | - | (29) |
| Loss for the year | (174) | (1,222) | (1,396) |
| Return per share | (0.33p) | (2.28p) | (2.61p) |
Statement of Comprehensive Income
for the year ended 31 December 2018
Audited
The Total column of this statement represents the Statement of Comprehensive Income of the Company. The Revenue return and Capital return columns are supplementary to this and are prepared under guidance issued by the Association of Investment Companies.
All revenue and capital items in the above statement derive from continuing operations.
Statement of Financial Position
as at 30 June 2019
| (Unaudited) As at 30 June 2019 £'000 | (Unaudited) As at 30 June 2018 £'000 | (Audited) As at 31 December 2018 £'000 | |
| Non-current assets | |||
| Investments held at fair value through profit or loss | 45,087 | 35,388 | 40,997 |
| Current assets | |||
| Receivables | 48 | 315 | 210 |
| Cash and cash equivalents | 6,726 | 16,328 | 8,849 |
| 6,774 | 16,643 | 9,059 | |
| Current liabilities | |||
| Payables | (100) | (389) | (218) |
| Net current assets | 6,674 | 16,254 | 8,841 |
| Net assets | 51,761 | 51,642 | 49,838 |
| Capital and reserves | |||
| Ordinary share capital | 535 | 535 | 535 |
| Share premium | 3,133 | 52,470 | 3,136 |
| Special reserve | 49,315 | - | 49,315 |
| Capital reserve | (1,037) | (983) | (2,710) |
| Revenue reserve | (185) | (380) | (438) |
| Total equity | 51,761 | 51,642 | 49,838 |
| Ordinary shares in issue at period end | 53,533,770 | 53,533,770 | 53,533,770 |
| Net asset value per Ordinary share | 96.69p | 96.47p | 93.10 |
The notes form an integral part of these Interim financial statements.
Statement of Changes in Equity
for the six months ended 30 June 2019
| For the six months ended 30 June 2019 (unaudited) | Share capital £'000 | Share premium £'000 | Special reserve £'000 | Capital reserve £'000 | Revenue reserve £'000 | Total £'000 |
| Balance at 31 December 2018 | 535 | 3,136 | 49,315 | (2,710) | (438) | 49,838 |
| Profit for the period | - | - | - | 1,673 | 253 | 1,926 |
| Share premium cancellation costs | - | (3) | - | - | - | (3) |
| Balance at 30 June 2019 | 535 | 3,133 | 49,315 | (1,037) | (185) | 51,761 |
| For the six months ended 30 June 2018 (unaudited) | ||||||
| Balance at 31 December 2017 | 535 | 52,485 | - | (1,488) | (264) | 51,268 |
| Profit for the period | - | - | - | 505 | (116) | 389 |
| Share premium cancellation costs | - | (15) | - | - | - | (15) |
| Balance at 30 June 2018 | 535 | 52,470 | - | (983) | (380) | 51,642 |
| For the year ended 31 December 2018 (audited) | ||||||
| Balance at 31 December 2017 | 535 | 52,485 | - | (1,488) | (264) | 51,268 |
| Loss for the year | - | - | - | (1,222) | (174) | (1,396) |
| Share premium cancellation | - | (49,315) | 49,315 | - | - | - |
| Share premium cancellation costs | - | (34) | - | - | - | (34) |
| Balance at 31 December 2018 | 535 | 3,136 | 49,315 | (2,710) | (438) | 49,838 |
The notes form an integral part of these Interim financial statements.
Cash Flow Statement
for the six months ended 30 June 2019
Note | (Unaudited) Six months ended 30 June 2019 £'000 | (Unaudited) Six months ended 30 June 2018 £'000 | (Audited) Year ended 31 December 2018 £'000 | |
| Net cash outflow from operations before dividends, interest, purchases and sales | 7 | (319) | (648) | (1,028) |
| Dividends received from investments | 607 | 213 | 486 | |
| Interest from deposits | 3 | - | 3 | |
| Purchases of investments | (10,901) | (26,346) | (48,993) | |
| Sales of investments | 8,428 | 17,176 | 32,239 | |
| Cash outflow from operations | (2,182) | (9,605) | (17,293) | |
| Taxation | (34) | (58) | (29) | |
| Net cash outflow from operating activities | (2,216) | (9,663) | (17,322) | |
| Financing activities | ||||
| Cost of share issues | - | - | (75) | |
| Cost of share premium cancellation | (3) | (15) | (34) | |
| Net cash outflow from financing activities | (3) | (15) | (109) | |
| Decrease in cash and cash equivalents for period | (2,219) | (9,678) | (17,431) | |
| Cash and cash equivalents at start of period | 8,849 | 25,932 | 25,932 | |
| Effect of currency gains | 96 | 74 | 348 | |
| Cash and cash equivalents at the end of the period* | 6,726 | 16,328 | 8,849 |
*Cash and cash equivalents represent cash at bank.
The condensed Financial Statements for the six months to 30 June 2019 comprise the Statement of Total Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity and Cash Flow Statement, together with the notes set out below. They have been prepared in accordance with FRS 104 'Interim Financial Reporting' and the AIC's Statement of Recommended Practice issued in November 2014 and updated in February 2018.
The position as at 31 December 2018 on page 8 of the Interim Report is the same as that contained in the Annual Report and Accounts, which received an unquali?ed audit report and which have been ?led with the Registrar of Companies. This Interim Report has been prepared under the same accounting policies adopted for the year to 31 December 2018.
Expenses - Expenses include the fee paid to the Company's investment manager - Stewart Investors who received a management fee equal to 1% of the net asset value of the Company less any reduction owing to the cap on expenses set at 1.5% of net assets. In the six month period to 30 June 2019 the management fee was £255,000 but was reduced to £157,000 owing to the cap (six month period to 30 June 2018 - management fee was £268,000 but reduced to £172,000 owing to the cap; year to 31 December 2018 - management fee was £509,000 but reduced to £327,000 owing to the cap,).
The return per ordinary share ?gure is based on the net pro?t for the six months ended 30 June 2019 of £1,926,000 (six months ended 30 June 2018: net profit of £389,000; year ended 31 December 2018: net loss of £1,396,000) and on 53,533,770 (six months ended 30 June 2018: 53,533,770; year ended 31 December 2018: 53,533,770) Ordinary shares, being the weighted average number of Ordinary shares in issue during the periods.
At 30 June 2019 there were 53,533,770 Ordinary shares in issue (30 June 2018: 53,533,770; 31 December 2018: 53,533,770).
Investments in securities are ?nancial assets designated at fair value through pro?t or loss on initial recognition. In accordance with FRS 102 and FRS 104, these investments are analysed using the fair value hierarchy described below. Short term balances are excluded as their carrying value at the reporting date approximates to their fair value.
The levels are determined by the lowest (that is, the least reliable or least independently observable) level of input that is signi?cant to the fair value measurement for the individual investment in its entirety as follows:
Level 1 - Investments with prices quoted in an active market;
Level 2 - Investments whose fair value is based directly on observable current market prices or is indirectly being derived from market prices; and
Level 3 - Investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.
All of the Company's investments were categorised as Level 1 for the six month period to 30 June 2019.
Cash Flow Statement
| 2019 £'000 | |
| Reconciliation of net profit before taxation to net cash outflow before dividends, interest, purchases and sales | |
| Net profit on activities before finance cost and taxation | 1,960 |
| Net gains on investments | (1,577) |
| Currency gains | (96) |
| Investment income | (672) |
| Decrease in other payables | (117) |
| Increase in prepayments and other receivables | 183 |
| Total | (319) |
Statement of Principal Risks and Uncertainties
The Board believes that the principal risks to shareholders, which it seeks to mitigate through continual review of its investments and through shareholder communication, are events or developments which can affect the general level of share prices, including, for instance, inflation or deflation, economic recessions and movements in interest rates and currencies.
Other risks faced, and the way in which they are managed, are described in more detail under the heading Principal Risks and Risk Management within the Strategic Report in the Company's Annual Report for the year ended 31 December 2018.
The Company's principal risks and uncertainties have not changed since the date of the Annual Report and are not expected to change for the remaining six months of the Company's financial year.
Going Concern
The Directors believe, in the light of the controls and review processes noted above and bearing in mind the nature of the Company's business and assets, which are considered readily realisable if required, that the Company has adequate resources to continue operating for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.
Related Party Transactions
Details of related party transactions are contained in the Annual Report for the year ended 31 December 2018. There have been no material changes in the nature and type of the related party transactions as stated within the Annual Report.
Directors' Responsibility Statement in Respect of the Interim Report
We confirm that to the best of our knowledge:
the condensed set of financial statements has been prepared in accordance with FRS 104 'Interim Financial Reporting' as adopted by the EU;
the Chairman's Statement and Investment Manager's Report include a fair review of the information required by the Disclosure Guidance and Transparency Rules ("DTR") 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements;
the Statement of Principal Risks and Uncertainties shown above is a fair review of the information required by DTR 4.2.7R; and
- the condensed financial statements include a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during the period, and any changes in the related party transactions described in the last Annual Report that could do so.
On behalf of the Board,
William Salomon, Chairman
31 July 2019
