TIDMSGEM
From: ScotGems plc
LEI: 549300GQHCPU9P1NYM13
Date: 11 March 2022
Results for the year ended 31 December 2021
The Directors of ScotGems plc ("the Company") are pleased to announce the
Company's results for the year ended 31 December 2021.
* 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.
* During 2021 the share price fell by 0.7% and the Net Asset Value ("NAV")
rose by 8.2%.
Chairman's Statement
The disappointing performance of your Trust in both absolute and relative terms
since inception is attributable to the Managers' cautious approach to investing
the initial funds raised at a time of rising markets, and its subsequent
geographical allocation. In particular, their focus on corporate governance -
firmly endorsed by the Board- has led them to have a minimal weighting in
China. Valuations in South Korea and Taiwan also discouraged them from
establishing significant positions in these very popular markets. The latter
three Asian markets, which together accounted for nearly 50% of the MSCI
Emerging Markets Small Cap Index and over 60% of the MSCI Emerging Index at the
end of 2021, have been the primary driver of the whole emerging markets asset
class over the last few years.
A substantial exposure to Africa, now significantly reduced, has also detracted
from performance over all periods. Specifically, significant difficulties in
convertibility of sales proceeds from Nigeria has resulted in the Trust making
a provision of over 30% against remaining investments in that country. As will
become clear in the following Investment Manager's report, the content of the
portfolio is driven by a bottom up, stock selection process and is not
influenced by index weightings.
Quantitative easing has meant little attention being paid to sustainable cash
flow generation in all markets. Many conceptually attractive but totally
unproven smaller companies have, until recently, achieved astronomical
valuations - hence the outperformance of the Emerging Markets Small Cap Index
since inception and, most noticeably, over the last year.
The investment team at Stewart Investors running your Portfolio changed in late
2019. While performance in 2020 continued to disappoint, a positive NAV return
was achieved in 2021, with the Manager's emphasis on capital preservation and
stewardship leading to much improved relative returns. The Board is pleased to
see this trend being sustained in the volatile markets we have recently been
experiencing. As significant shareholders in the Trust ourselves, we are aware
that there is still considerable ground to recover and that better performance
has yet to be reflected in the wide share price/net asset value discount now
prevailing.
Your Trust currently has a portfolio of 40 companies, the market capitalisation
of each being less than $2.5 billion at the time of investment. The Investment
Manager has set out below a detailed description of the existing portfolio, as
well as their philosophy in selecting the particular companies in which
ScotGems invests.
Given the current focus on environmental, social and governance ("ESG")
investing within the asset management industry, our Investment Manager has set
out on pages 14 and 15 of the Annual Report a detailed description of their
approach to ESG and included a relevant case study. Stewart Investors'
investment philosophy has always been based on the principle of responsible
stewardship, and they have long implemented ESG inputs as part of their
investment process.
The conflict in Ukraine has quickly become an area of focus for the Board. We
will continue to monitor any impact the conflict may have on the Company.
However, the situation has highlighted how little the Board can do to mitigate
against such geopolitical risks. We of course hope that a peaceful outcome can
be found.
Until very recently, our Investment Manager had avoided direct investment in
Russian companies largely on corporate governance concerns. Regrettably, on 24
February 2022, they bought a position (1.1% of Trust NAV) in a London-listed
GDR of a Russian retailer called the Fix Price Group. The Board were very
surprised with such a decision being made, and even more so that First Sentier
Investors permitted such a trading instruction to be processed, in the
prevailing circumstances. Given that stock market trading in all London listed
Russian companies has subsequently been suspended, this investment is now held
in the portfolio at nil value.
James Findlay has decided to stand down from the Board at the AGM in 2022. He
has brought a wealth of experience to the Board of the Company, providing
effective challenge and oversight of the Investment Manager since the Company's
inception.
The Board and Managers remain aligned with the body of shareholders through
their own investment in the Company. The Directors (including persons closely
associated with them) hold 2,290,096 Ordinary shares. In addition a further
2,500,000 shares are held by the Tam O'Shanter Trust, of which Angus Tulloch is
the Chairman. The Investment Management Team have increased their
shareholdings by 489,201 shares and now own 2,176,982 Ordinary shares, with a
further 1,363,364 shares held by other Stewart Investors' employees. Including
shares owned by the Stewart Investors Employee Benefits Trust (unchanged at
5,000,000 Ordinary shares), this brings the total holding of Stewart Investors'
employees to 8,540,346 Ordinary shares. The combined holdings of the Board and
Investment Manager now represent 24.9% of the issued Ordinary share capital of
the Company.
On 9 March 2022 First Sentier Investors resigned from the management of the
Company's portfolio. They will however continue to manage the Company's
portfolio until alternative arrangements have been made (subject to a maximum
period of six months). The Board has received interest from a number parties
regarding the management of the Company's portfolio, and the Board will
communicate the outcome of these discussions in due course.
The Annual General Meeting will be held on 5 May 2022 at the London offices of
First Sentier Investments. I look forward to seeing many of you there. This
will be the first opportunity which we have had to hold such a meeting since
the start of the Covid-19 pandemic. There will be a presentation by the
investment team and an opportunity to question them in more detail about
strategy and individual investments that the Company has made.
Investment Manager's Report
Introduction
We wrote six months ago that ScotGems owns a lot of "jam today" companies - by
which we meant well-stewarded businesses which we can value according to actual
cash flows rather than hopes, dreams, and powerpoint presentations. It feels
like owning "real" businesses could be coming back into fashion. Even modest
increases in some central bank interest rates are focusing the mind on how to
discount far-off predictions back to their value today. But fiddling with
discount rates answers a very linear question. The more important and
distinctly non-linear question is whether predictions for some of the most
generously valued companies are plausible in the first place. Over?paying for
growth is a "linear sin" - the sums change and clients lose maybe 20% or 30% or
50%. Paying anything at all for a concept which doesn't come true is a "non?
linear sin" - you lose nearly everything nearly every time.
Brasil always provides great examples of extremes. A high-profile example is
playing out right now. At its listing in December 2021, "Nubank" was the most
valuable financial company in all of Latin America. It is very "sign of the
times". Although a Brasilian business, it is incorporated in the Caymans and
listed in New York. The founder has shares with 20x votes per share - an
unusually high voting multiple even for fintech. It probably goes without
saying that Nubank is backed by SoftBank's deep but increasingly debt-funded
pockets, and maybe also that "we have incurred losses since our inception, and
we may not achieve profitability". So if none of the above was a surprise in
today's enlightened times - what was? Well, it wasn't that "total expenses for
the 2021 contingent shares awards are expected to be approximately
US$400-500m". No, the surprise was that "None of our subsidiaries is licensed
to operate as a bank". At time of writing in late January, Nubank is merely the
third most valuable financial business in Latin America - as it happens, both
of the firms which have overtaken it have banking licences, make money hand
over fist, and pay dividends. I can't imagine either of them paying their hired
hands half a billion dollars.
The small companies' end of GEM doesn't have quite such glamourous examples as
Nubank but it is not short on conceptual valuations. The very nature of many
smaller companies is that they make only one or two products, selling only to a
handful of customers or to a single industry. The companies may be as honest as
the day is long but they are risky. We don't avoid companies with a narrow
franchise but we do try to value them conservatively recognising that the
famines between the feasts can last some time.
Our other area of concern is Indian valuations. India has a long list of high
quality small and mid-cap companies but valuations are often excessive. The
local retail investor has (re)discovered their appetite for risk, foreign
investors are perhaps redeploying money from nearby communist regimes, and
perhaps above all, money globally remains plentiful and cheap. ScotGems is the
only portfolio we run from Edinburgh which is "underweight" what the benchmark
says we should have in India. For our larger-cap portfolios we grudgingly
accept the full valuations for large and diversified multi-billion dollar
companies - qualitatively they are better than large-cap alternatives. In the
smaller companies world of ScotGems we see Indian over-valuation as a bigger
gamble - the smaller companies are typically less proven and narrower in
franchise yet with no corresponding valuation discount. More importantly and
more optimistically, we think we have found more attractive long term ideas
elsewhere.
One idea added to the portfolio in 2021 was Prodia Widyahusada - a medical
diagnostics firm. It is a family controlled Indonesian business which leads the
market. We believe it has many years of growth ahead of it, not only via
"classic" emerging market factors (rising wealth and growing population) but
more importantly through the competence of its owner-managers. We acquired
shares for the Trust at a trailing price-to-earnings multiple of just under 15x
(or closer to 12x if adjusting for the net cash on balance sheet at the time)
and its historic revenue growth was just shy of 10% in US Dollars for the
previous three and five years. We considered this an attractive entry point. By
way of comparison, the nearest Indian equivalent trades at nearer 75x trailing
price-to-earnings. It has grown more rapidly - between 10-15% per annum for the
last three and five years - but at 75x earnings this growth needs to carry on
for a very long time indeed. One important difference between India and
Indonesia is competitive intensity. Despite the attractiveness of the
Indonesian market, Prodia faces only modest levels of competition. In contrast,
India is to many the "last great untapped opportunity". As a result, every man
and his dog (and the dog's private equity fund) are busy buying shares in
existing companies or providing capital to competitors. This famously happened
in India a decade ago in the telecoms market - licences were begged, borrowed
or stolen and capital was destroyed. India today may be a little cleaner than
it was then, and the sectors attracting capital are less licence dependent
(anything medical, anything online/tech related, all things consumer).
Nonetheless, the potential to lose money is probably quite high. We have been
fortunate in 2021 to make good money in India but we have also trimmed nearly
all our Indian holdings.
I hope the remainder of the report helps explain what we have done with
shareholders' money as well as offer some guidance as to how and why we have
made decisions. Thank you for reading.
Portfolio
The portfolio consists of shares in 40 companies. The ten largest names
represent 40.6% of the portfolio and is a small reduction from 42.7% at the end
of 2020 and 46.4% at the end of 2019 when a shareholder resolution was passed
to allow a slightly longer list of companies. Cash started the year at 2.6% and
ended at 2.9%.
At the end of the year the average market cap (weighted by position size) was
$1.65bn and the average free float (weighted by position size) at the end of
November was 49.1%. This small free float reflects the frequency with which we
find the qualities we require by investing alongside a controlling shareholder.
36 of the 40 companies in the portfolio have a controlling shareholder.
New Holdings
During the year we bought shares in eight new companies. Below is a list shown
in descending order of size in the portfolio at the end of the period. Of the
eight new companies, Prodia Widyahusada and NESR are the product of more recent
work whilst the remainder have been owned before in portfolios managed by our
team, but subject to ongoing research.
Anadolu Efes (or Efes) is a Turkish listed brewer. It is controlled by the
founding Özilhan and Yaz?c? families, and the global brewer ABI has a stake
inherited from its merger with SAB Miller. We like the combination of committed
family and multinational oversight and have seen it succeed many times before
in GEM. In 2018, ABI and Efes pooled their Russian beer businesses into a 50/50
JV which is the joint market leader with approximately 30% market share. Efes
also owns a stake in a Coke bottler operating across several CIS states and in
Pakistan where it is growing rapidly. Although Turkish listed, over three
quarters of earnings are derived outside Turkey. Over the last five years, the
company has rapidly repaid debt meaning it offers a substantial yield earned
from a steadily growing business. The repayment of debt is partly responsible
for our increased conviction here.
Post script - 4 March 2022: Efes has three breweries in Ukraine held through
the 50/50 JV with ABI. These have currently ceased production. These, and the
50/50 JV with global brewer ABI in Russia represent approximately 20-25% of
Efes overall. It remains to be seen what the longer term value of this business
is and whether any profits can be repatriated. The largest part of Efes is a
stake in a Coke bottler (with nil Russian exposure). It also sells beer in
Turkey and several CIS states. Efes is Turkish incorporated and listed on the
Istanbul stock exchange.
Alicorp is a consumer goods company, headquartered in Peru and a market leader
in its home market but also with a presence in Bolivia, Ecuador and other parts
of Latin America. It is controlled by the Romero family. They also control
Credicorp, a bank, and a family member sits on the board of Hochschild Mining,
another holding in ScotGems. Alicorp dominates many of the markets in which it
operates (mayonnaise, pasta, sauces, cookies and crackers) despite competing
against most multinationals. Recent external hires of senior staff with
multinational experience indicate that the company is evolving from a family
business to a more professional one. It is highly cash generative. Risks
include the fact that the company has stretched its balance sheet in the past
as a result of acquiring businesses, although the strong predictable cashflows
of the business means the debt was swifty repaid. Alicorp has some less
glamorous divisions (fish food for farmed prawns and salmon for instance) and
although these do not deserve the rating of some of the branded parts of the
company, they have still contributed useful cashflows. The company was
attractively valued when purchased and we added to the holding during the
recent election-related sell-off in Peru.
Prodia Widyahusada is an Indonesian listed medical diagnostics business with a
US$230m market cap at time of purchase and a free float which represents 25% of
shares outstanding. It is controlled by the founders and their families, and is
conservatively financed after its IPO in 2016. It is the largest private sector
diagnostics business in Indonesia and comes with an excellent record for
quality. One piece of evidence of this is the fact that they are the only
Indonesian diagnostics chain with a College of American Pathologist
accreditation. Its track record demonstrates that the model benefits from large
economies of scale - it can drive down costs as it grows allowing it to reduce
pricing which in turn allows it to continue to gain market share. The business
model has been successful many times in GEM including Integrated Diagnostics
Holdings (IDH) operating primarily in Egypt, and whose shares are also held in
the portfolio. The model deserves a strong social license given that early
diagnosis allows early treatment, and should therefore lead to higher survival
rates. Early diagnosis and treatment also take cost out of a healthcare system
which is chronically underdeveloped. Risks include changes in regulation
although this is mitigated to a degree by the essential nature of its work. In
addition, the similarity to the business model of IDH , the Egyptian
diagnostics business we own, will limit our position size here.
Jumbo is a Greek listed retailer operating in Greece, Cyprus, Bulgaria and
Romania. It is controlled and managed by the Vakakis family. It sells small
baskets of everyday cheap items in a model which is comparable to Dollar
General in the USA. This has so far made it less vulnerable to online retail
than other formats such as the department store model. We are impressed by the
company's ability to grow through past periods of economic stress in Greece and
by its growth in new markets. It is conservatively financed and has pre-paid
historically for much of its inventory in order to improve pricing. We first
met with the company during the wreckage of the 2008 crisis - a period which
the company positively enjoyed. We first tried to establish a position for the
Trust in 2020 but were only able to buy a small number of shares before the
valuation increased beyond a point where we were comfortable.
Bladex (full name Banco Latinoamericano de Exportaciones) is a bank which
facilitates the transactions of international trade. It is listed on the New
York Stock Exchange, is headquartered in Panama and operates across Latin
America and the Caribbean. The central banks of the countries in these regions
own shares and have the opportunity to elect board members. It plays an
important role in the economic development and integration of the region
through its reputation as a supportive lender. This reputation comes from its
historic lending in periods when other international banks avoid the region,
normally in periods of crisis. It is very affordably valued and is well
positioned to enjoy an economic recovery. Although its loans are mostly short
term US$ trade finance, the risk with every bank including Bladex is that it
loses lending discipline in the future.
Vitasoy is a Hong Kong-based producer of healthy plant-based products including
soya milk, tea, juice and tofu with most of its sales from mainland China. Our
team first owned the company in client funds in the 1990s. The founding Lo
family, now in their second generation, owns approximately 20% of the company
and today it is run by professional management. The company demonstrates an
impressive track record of long term decision making - we would argue that the
time frame for these decisions has only been made possible under family
ownership. We admire the decision taken many years ago to take profits
generated in Hong Kong and to use them to invest in building a leading soy milk
franchise in China and Australia. It took a very long time for the company to
succeed, yet China is now its largest market. Today the company is well
positioned to benefit from changing consumer trends towards health and
well-being, increasing demand for protein and increasing water scarcity in
China. This last point relates to the fact that growing soya beans is
significantly less water intensive than dairy production. The company generates
strong cash flows and is financially robust. Recently, an internal memo was
leaked to the press. This memo showed that a staff member had offered
condolences to the family of an employee who had committed a politically
motivated crime, committed as an individual rather than within the company's
sphere of influence, then committed suicide. This led to a boycott of Vitasoy
products - a sign of how unpredictable China is, but also a chance to initiate
a position in the company at what we believe to be an attractive price.
NESR (full name National Energy Services Reunited) is an oilfield services
provider, listed in New York and serving Middle Eastern and North African
markets. NESR does not own oil producing assets but helps its customers access
their reserves more efficiently. It is still in its early stages of
development, but we are backing Sherif Foda the company's founder. He spent two
decades at Schlumberger (also in oilfield services) where he ultimately ran the
largest of its three divisions, a US$30 billion revenue business. NESR
originated as a Special Purpose Acquisition Company (SPAC) but contrary to
common recent use of the SPAC merger approach, often used to acquire
speculative businesses, it was launched to acquire and merge two businesses
from Saudi Arabia and Oman respectively, which were both profitable at time of
acquisition. The sellers of the two businesses remain shareholders of the
combined entity and are well-respected locally. The company operates in the
world's lowest cost region - lowest in terms of operational cost per barrel but
also in terms of environmental impact. It has a tailwind from the desire of
petrostates in the Middle East to increase their sourcing from indigenous firms
- the history and shareholders of this firm tick that box. Although oil
services revenues are more closely linked to volume of production than the oil
price directly, the risks to the investment clearly include the oil price as
well as the speed of transition to alternative sources of energy. Any hint of
untoward procurement practices would also be damaging - we are comforted here
as the decision to turn two private companies into one US listed public company
is a radical increase in transparency. In light of these potential risks, and
in common with our views on any company linked to commodities, we are unlikely
to own a large position.
Youngone Corporation is the operating company of Youngone Holdings which has
been held in the portfolio since near inception. It operates as a clothing
manufacturer listed in Korea but mostly manufacturing in Bangladesh. It has
played a pivotal role in building the garment sector into the country's most
important export industry. Its customers include brands such as The North Face
and Patagonia. During 2021 we invested in shares of the operating company
because we believe that it benefits our company engagement to own shares in
both entities - we admire the group and its ultra-conservative family owners
very much but are keen for a slightly more generous dividend. In addition we
want to increase our exposure to a company which earns hard currency, has a net
cash balance sheet and which remains extremely favourably valued. Youngone
Corporation also owns a majority stake in the bicycle brand "Scott", a business
which has prospered during the pandemic.
Additions
The two largest additions to existing investments were to Orascom Construction
and IAM Chile.
We added to Orascom Construction, an engineering and construction contractor
for infrastructure, industrial and commercial projects, operating in the Middle
East, North Africa and the United States. It
is owned by the founding Sawiris family. Nassef Sawiris, has proven his
entrepreneurial ability many times - most evidently in selling his cement
business to Lafarge with excellent timing. During 2021, the company reported a
healthy pipeline of new projects including Egypt's first high-speed rail system
and sizeable contracts in the student housing sector in the United States. The
company is attractively valued. Some of our addition was merely reinvesting
dividends received - the trailing dividend yield is almost 10%, paid in US
Dollars.
IAM Chile (full name is Inversiones Aguas Metropolitanas) is a holding company
with a 50% stake in Aguas Andinas, Chile's largest water utility. Over the long
term the company has attractive defensive qualities, providing an inflation
protected dividend yield. The company also has a strong social purpose given
that it provides potable water to one of Latin America's largest metropolitan
areas. In the shorter term and as discussed in the Interim Report, it is likely
that it has been affected by investor concerns following a vote to rewrite the
constitution of Chile, possibly partly due to a low turnout and as a rejection
of established political parties. Uncertainty remains but we are more sanguine
than the consensus given that most citizens own assets in some form or another
so have something to lose from any undermining of property rights. A recent
interest rate rise in Chile is also evidence that institutions retain some
independence. Nonetheless this uncertainty has left the company attractively
valued and we have increased our investment.
Disposals
During the year we sold all of the shares held in four companies. Below is a
list in descending order of size at the start of the year.
Voltronic Power is a Taiwanese business, manufacturing and selling
uninterruptable power supplies (UPS) and electrical inverters. The founder Alex
Hsieh owns 20% of the shares. He started his first UPS business in 1979 before
selling it to Phoenixtec. He left in 2007 with a number of colleagues in order
to set up Voltronic, having noticed that there was an opportunity for a company
that did not compete with its branded customers. This lack of competition has
built trust, as has the high quality of Voltronic's own products and their
ability to reduce customers' time to market with their new products. It is rare
for us to find a company as focused as this but we are uncomfortable with itsvaluation. We first discussed reducing it in the 2020 Annual Report but have
now sold all of our shares.
RCL Foods is a South African business generating the majority of its earnings
from commodity foods such as chicken and sugar. The company is controlled by
the Rupert family's South African investment holding company, Remgro. Our
investment case had been based on Remgro's desire to turn it into the leading
consumer goods business in South Africa, using cash flows generated by the
existing business. Remgro has an impressive track record of developing new
businesses including FirstRand, which we believe is perhaps the best financial
services firm in South Africa and Richemont a leading global luxury goods
company. RCL has announced that it will separate its commodity foods business,
whilst growing its consumer goods businesses through acquisitions. This
announcement was well received by investors but one which we believe introduces
additional risk into a business which is already something of a turnaround. The
company's transition may well work and we have the upmost respect for Remgro
but prefer other consumer staples companies such as Alicorp (discussed earlier)
because it is far more cash generative, and has far larger market shares.
Dis-Chem Pharmacies is a pharmacy chain in South Africa. It is a strong
franchise but we have concerns that stewardship might not be as strong as we
had previously thought. This was demonstrated in part by recent poor disclosure
of a related party transaction (RPT), despite us discussing other RPTs with
them. Governance issues such as this are relatively frequent in family owned
GEM companies in their early stages or even before they list. They can be
acceptable on a case-by-case basis, but in this instance we were unable to
remain confident that governance is heading in the right direction.
Indus Motors is Pakistan's largest car manufacturer. It is a 30 year
partnership between Toyota and the Habib group, generates strong cash flow and
is financially very conservative. We sold our investment, banking (modest)
gains as we are concerned by the economic environment. Indus Motors imports a
significant proportion of its components and the Pakistani Rupee is rarely a
long term winner especially if global inflation is rising and oil prices are
high. We would be keen to own the business again if the price gave a suitably
wide margin of error for the economic risks.
Reduced
The three most significant reductions were in businesses listed in India.
Although we think India perhaps has a great number of quality businesses than
any other emerging market, valuations have become increasingly stretched.
Towards the end of the year a tech bubble inflated as enthusiastic local
investors bet on new listings - "growth at any price" has been a popular
(though incoherent) investment mantra of late and India has not been spared.
We reduced Cyient due to valuation. It is an engineering outsourcing business
with global clients in industries such as aerospace and transportation. The CEO
today is the son of the founder. It made some recent acquisitions which
appeared to be disappointing initially although these have now started to
perform better.
Tata Consumer Products is a food and beverages company with a focus on tea and
coffee. We reported reductions in the last two Annual Reports and the last two
Interim Reports. We have trimmed further based on valuation. As discussed
previously we believe that the original investment case remains intact, namely
the importance of a recent management transition and a renewed focus on India
under Tata Group stewardship, but that the company's transformation will take a
long time.
Sundaram Finance is a finance company with a focus on commercial vehicles. We
made a small reduction on valuation.
Demerger
Shareholders may notice a new name in the holdings list of Aclara Resources.
This is not a new purchase but the result of Hochschild Mining demerging its
rare-earth elements project. It is listed on the Toronto Stock Exchange but its
sole asset is in Chile. It is unquestionably a risky investment by our
conservative standards but we are happy staking a very small portion of the
Trust's NAV on a conceptual project. We can only do this because we have some
faith in the major shareholder (Eduardo Hochschild) and because we see Chile as
an acceptable mining jurisdiction - it may have some bureaucracy but it is not
corrupt. Rare-earth elements have a range of industry uses in growing sectors
such as rechargeable batteries and very little of the world's supply is
currently outside China - both are points which could make Aclara attractive.
Post script 4 March 2022: we note the situation in Ukraine. St Andrews Partners
has never owned companies operating at the "commanding heights" of the Russian
economy (oil, gas, metals, finance, telecoms, etc), nor have we owned
state-owned businesses in Russia. We are following the changing situation
closely. We are hoping for a swift and peaceful outcome.
Contribution
During 2021 the Trust's NAV increased by 8.2%. The MSCI Emerging Markets Small
Cap Index increased by 11.1%, the MSCI Emerging Markets ex Asia Index increased
by 4.4%, and the MSCI Emerging Markets Index decreased by 3.7%. Contributors
and detractors are discussed below.
Positive
Cyient is an Indian research and development provider with global clients in
aerospace and transportation. We discussed it as a detractor in the 2020 Annual
Report after a period in which its aerospace customers had struggled.
Furthermore some of its recent acquisitions had appeared disappointing. In
2021, it enjoyed a rebound in operations and investors seem to have
over-rewarded signs that some of its acquisitions are improving. We have
reduced our shareholding during the year on valuation, as discussed above, but
continue to back it on account of the stewardship from the founding family,
including the CEO who is the son of the founder, its high quality franchise,
hard currency earnings and net cash balance sheet.
Prodia Widyahusada is an Indonesian medical diagnostics business. It was
reported as a new purchase in the Interim Report and has not been owned for the
full year. We have been fortunate with the timing of our investment. During the
year it reported strong results linked to the introduction of new services such
as drive-in and teleconsultation, and strong demand for its tests, some of
which have a role in testing for coronavirus. Our investment case is not based
on the pandemic but based on the company's record of quality, economies of
scale as it grows, and a strong social license.
Reunert is a South African conglomerate consisting of three businesses, a
cables business, an office equipment business, and an electrical engineering
business. We discussed this in the Interim Report but it has reported strong
results and an attractive dividend despite reduced economic activity in South
Africa.
City Lodge Hotels is a Hotel chain owner and operator in South Africa, Botswana
and Kenya. We reported this company as a top detractor in the 2020 Annual
Report. Although in 2021 it appears as a contributor as economies start to
re-open, we note that it is still a detractor since first investment in late
2019. We were attracted to the company because it was profitable and free cash
flow generative even at historically low occupancy levels (50-60%) - although
it took a 'direct hit' from Covid, it was this level of background
profitability that meant it survived at all. We supported a rights issue in
2020.
Quiñenco is a Chilean holding company controlled by the Luksic family with
assets in banking, beverages and shipping. Shareholders in the UK may know the
Luksic family better for their controlling stake in Antofagasta, a copper
mining company listed in London. Over long periods they have been successful in
a number of joint ventures with partners such as Heineken, Citibank and Kuehne
+ Nagel. They also have a fantastic record of buying and selling stakes in
cyclical businesses as well as building them. One recent and relevant example
of their time horizon at work is their purchase of a shipping company called
CSAV (known as "Vapores") from near bankruptcy in 2011. Since then Quiñenco
have raised capital, rehabilitated the company and merged it into Hapag-Lloyd.
2021 has seen very positive results from Vapores and allowed Quiñenco to pay a
special dividend, representing an approximate 10% yield. The company describes
this dividend as a payment following a "10-year journey" - shipping rates
remain high and we hope for further large dividends.
Top Ten Contributors - Year ended 31 December 2021
Company Country of Listing Contribution to Return %
Cyient India 2.45
Prodia Widyahusada* Indonesia 2.00
Reunert South Africa 1.81
City Lodge Hotels South Africa 1.64
Quiñenco Chile 1.55
Tata Consumer Products India 1.15
Sundaram Finance India 0.93
Brac Bank Bangladesh 0.90
Integrated Diagnostics United Kingdom 0.87
RCL Foods** South Africa 0.79
* Company not held at start of period
** Company not held at end of period
Negative
Philippine Seven is a 7-Eleven convenience franchise operating in the
Philippines. We reported this as a detractor in the last Annual Report and
discussed it in the last Interim Report. It is particularly sensitive to local
movement restrictions as the bulk of its locations are in urban and business
locations - commuters and office workers are key customers. We are relaxed that
one day restrictions will ease but in the meantime the company continues to
evolve - rejigging some store formats and locations to reflect that some habits
may permanently have changed. The business has a good balance sheet and a
supportive major shareholder (the Taiwanese company, President Chain Store). As
a result the period of 'hibernation' for many of its shops has not impaired
decision making.
IAM Chile is a holding company with a 50% stake in Aguas Andinas, Chile's
largest water utility. We discussed this as a detractor in the Interim Report
and earlier in this report in relation to uncertainty in Chile around
constitutional reform and adding to our investment.
Grupo Herdez is a Mexico listed foods business, 50% owned by the Hernandez-Pons
family and in its fourth generation. It is structured with 100% ownership of an
ice-cream business and series of longstanding 50:50 joint ventures with
multinational brands such as McCormick (jams and teas), Barilla (pasta) and
Hormel (branded foods). We reported this company as a contributor in 2020 and
it appears as a detractor in 2021. During this two year period we don't believe
there have been changes in the fundamental qualities of the business. We
continue to admire its ability to establish multi-decade long relationships
with high quality multinational partners. It has a conservative track record
and strong market share in a wide range of categories. The company has bought
back a significant portion of its own stock in the last two years - we enjoy it
when families with good long-term track records repurchase shares.
Bank OCBC Nisp is a local Indonesian subsidiary of Singaporean bank OCBC. Our
investment case here is based on the strength of the combined ownership from
its Singapore based parent OCBC and the local Surjaudaja family who founded the
bank and are involved in management today. Of note they refuse to take balance
sheet risk with families who defaulted during the Asian Financial Crisis. OCBC
Nisp has a decent track record over the last few years but its conservative
stance means that loan growth and therefore profit growth has been sluggish -
state owned banks are falling over themselves to lend, making margins
unattractive for a rational player such as OCBC Nisp. In the long-term state
owned banks tend to come a cropper, and in any event, OCBC Nisp has been
working hard to increase non-loan revenue - the OCBC brand is strong in wealth
management for example.
Guaranty Trust Bank is a Nigerian bank, with a proven and long-serving
management team. It was weak over the period as it continued to navigate
difficult economic conditions. During 2021, the bank completed its transition
into a holding company structure, which will allow it to see new opportunities
in very under-penetrated businesses such as payments, pensions and asset
management. The Bank survived the 2009 banking crisis in Nigeria and the 2016 -
2017 devaluation with flying colours so has clear and recent proof of
conservatism. As noted in note 2 below, we are applying a discount to the value
of our Nigerian holdings due to difficulties in repatriation of Naira to hard
currency.
Top Ten Detractors - Year ended 31 December 2021
Company Country of Listing Contribution to Return
%
Philippine Seven Philippines -1.49
IAM Chile Chile -1.06
Grupo Herdez Mexico -1.01
Bank OCBC Nisp Indonesia -0.85
Guaranty Trust Bank Nigeria -0.77
CAP Nigeria Nigeria -0.61
NESR* USA -0.59
Hochschild Mining United Kingdom -0.43
Anadolu Efes* Turkey -0.37
Concepcion Industrial Philippines -0.26
* Not held at start of period
For further information contact:
Stewart Investors
Investment Manager
Tel: 0131 473 2900
Juniper Partners Limited
Company Secretary
Tel: 0131 378 0500
The Income Statement, Statement of Financial Position, Statement of Changes in
Equity and Cash Flow Statement follow.
Income Statement
Year ended 31 December 2021 Year ended 31 December 2020
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Income
Investment income 2,061 - 2,061 872 - 872
Gains/(losses) on - 3,010 3,010 - (424) (424)
investments held at fair
value through profit or
loss
Foreign exchange - (36) (36) - 8 8
(losses)/gains
Total income 2,061 2,974 5,035 872 (416) 456
Expenses (740) - (740) (624) - (624)
Profit/(loss) before 1,321 2,974 4,295 248 (416) (168)
taxation
Taxation (285) (242) (527) (70) (380) (450)
Profit/(loss) for the 1,036 2,732 3,768 178 (796) (618)
year
Return/(loss) per share 1.94p 5.10p 7.04p 0.33p (1.49p) (1.16p)
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.
Return/(loss) per share is calculated on 53,533,770 shares (2020: 53,533,770),
being the weighted average number in issue during the year.
Statement of Financial Position
As at As at
31 December 2021 31 December 2020
£'000 £'000
Non-current assets
Investments held at fair value 48,677 44,720
through profit or loss
Current assets
Receivables 173 271
Cash and cash equivalents 1,436 1,504
1,609 1,775
Current liabilities
Payables (204) (205)
Net current assets 1,405 1,570
Non-current liabilities
Deferred tax liability on Indian (350) (326)
capital gains
Net assets 49,732 45,964
Capital and reserves
Ordinary share capital 535 535
Share premium 3,133 3,133
Special reserve 49,315 49,315
Capital reserve (4,202) (6,934)
Revenue reserve 951 (85)
Total equity 49,732 45,964
53,533,770 53,533,770
Shares in issue at year end
92.90p 85.86p
Net asset value per Ordinary share
Statement of Changes in Equity
For the year ended Ordinary Share Special Capital Revenue
31 December 2021 share capital premium reserve reserve reserve
Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 535 3,133 49,315 (6,934) (85) 45,964
December 2020
Profit for the year - - - 2,732 1,036 3,768
Balance at 31 535 3,133 49,315 (4,202) 951 49,732
December 2021
For the year ended Ordinary Share Special Capital Revenue
31 December 2020 share premium reserve reserve reserve
capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 December 535 3,133 49,315 (6,138) (263) 46,582
2019
Loss for the year - - - (796) 178 (618)
Balance at 31 December 535 3,133 49,315 (6,934) (85) 45,964
2020
Share premium. The share premium represents the difference between the nominal
value of new Ordinary shares issued and the consideration the Company receives
for these shares. This is a non-distributable reserve.
Special reserve. Created from the Court cancellation of the share premium
account which had arisen from premiums paid on the Ordinary shares at launch.
Available as distributable profits to be used for the buy back of shares. The
cost of any shares bought back is deducted from this reserve. The cost of any
shares resold from treasury is added back to this reserve. This is a
distributable reserve.
Capital reserve. Gains and losses on the realisation of investments, realised
exchange differences of a capital nature and returns of capital are accounted
for in this reserve. Increases and decreases in the valuation of investments
held at the year end, and unrealised exchange differences of a capital nature
are also accounted for in this reserve. The realised portion of this reserve is
distributable.
Revenue reserve. Any surplus/deficit arising from the revenue profit/loss for
the year is taken to/from this reserve. This is a distributable reserve.
Cash Flow Statement
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Net cash outflow from operations before dividends, (642) (679)
interest, purchases and sales
Dividends received from investments 2,060 859
Interest from deposits - 1
Purchases of investments (13,862) (14,823)
Sales of investments 12,915 12,074
Cash inflow/(outflow) from operations 471 (2,568)
Taxation (503) (124)
Net cash outflow from operating activities (32) (2,692)
Decrease in cash and cash equivalents (32) (2,692)
Cash and cash equivalents at the start of the year 1,504 4,188
Effect of currency (losses)/gains (36) 8
Cash and cash equivalents at the end of the year 1,436 1,504
Principal Risks and Risk Management
The Board has carried out a careful assessment of the principal and emerging
risks facing the Company, these risks, together with a summary of the
mitigating action the Board takes to manage these risks, are set out below.
Emerging Risks - Environmental, Social & Governance ("ESG") factors
Risk Mitigation
Failure to consider the impact of ESG is fully embedded within the Investment
ESG factors adversely affects the Manager's investment strategy, please refer to
Company's reputation and financial pages 14 and 15 of the Annual Report for a full
performance. description of the Investment Manager's
approach to ESG factors.
The Board provides regular challenge to the
Investment Manager in respect of their approach
to ESG, and receives updates in respect of the
New specific risk identified in year changing ESG disclosure requirements.
Principal Risks
Risk Mitigation
Investment objective and strategy
An inappropriate or unattractive The Board conducts an annual strategy reviews
objective and strategy may have an and consider investment performance,
adverse effect on Shareholder shareholder views and developments in the
returns or cause a reduction in marketplace as well as emerging risks which
demand for the Company's shares, could impact the Company.
both of which could lead to a
widening discount. The Board reviews changes to the shareholder
register at quarterly Board meetings and
engages the Administrator to continually
monitor the discount at which the Company's
shares trade, reporting regularly to the Board
and buying back shares when appropriate.
No change to this risk
Investment performance
Poor investment performance may have The Board reviews investment performance at
an adverse effect on Shareholder each quarterly Board meeting. The Investment
returns. Manager reports on the Company's performance,
transaction activity, individual holdings,
portfolio characteristics and outlook.
Investment performance and the portfolio
composition has been monitored specifically in
light of the Covid-19 pandemic.
The Investment Manager is formally appraised at
least annually by the Management Engagement
Committee.
No change to this risk
Financial and Economic
The Company's investments are The Board regularly reviews and agrees policies
impacted by financial and economic for managing market price risk, interest rate
factors including market prices, risk, foreign currency risk, liquidity risk and
interest rates, foreign exchange credit risk. These are explained in detail in
rates, liquidity and credit which note 13 to the financial statements on pages 37
could cause losses to the investment to 43 of the Annual Report. The Board
portfolio. recognises that macro-economic and geopolitical
factors may impact the Company's portfolio.
However, other than being aware of such events
No change to this risk there is little that the Board can do to
mitigate against these events.
Operational
The Company is reliant on third Operationally, Covid-19 is affecting each of
party service providers including the Company's key service providers and each
Stewart Investors as Investment has put in place the appropriate arrangements
Manager, Juniper Partners as Company for their staff to work from home should
Secretary and Administrator, J P government guidance
Morgan as Depositary and Custodian require. To date these services have continued
and Computershare as Registrar. without disruption and the operational
Failure of the internal control arrangements have proven adequate. The Board
systems of these third parties could will continue to monitor these arrangements.
result in inaccurate information
being reported or risk to the The Audit Committee formally reviews each
Company's assets. service provider at least annually, considering
their reports on internal controls.
Further details of the Company's internal
control and risk management system is provided
on pages 58 and 59 of the Annual Report.
No change to this risk
Regulatory
The Company operates in a regulatory Compliance with relevant regulations is
environment. Failure to comply with monitored on an ongoing basis by the Company
s1158 of the Corporation Tax Act Secretary and Investment Manager who report
2010 could result in the Company regularly to the Board.
losing investment trust status and
being subject to tax on capital The Board monitors changes in the regulatory
gains. Failure to comply with other environment and receives regulatory updates
regulations could result in from the Company Secretary, Lawyers and
financial penalties or the Auditors as relevant.
suspension of the Company's listing
on the London Stock Exchange. The Board has been updated on any regulatory
changes proposed in respect of the response to
the Covid-19 pandemic as required.
No change to this risk
Statement of Directors' Responsibilities in Respect of the Annual Financial
Report
In accordance with the Disclosure Guidance and Transparency Rules, we confirm
that to the best of our knowledge:
* The financial statements contained within the Annual Report for the year
ended 31 December 2021, of which this statement of results is an extract,
have been prepared in accordance with applicable United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting Standards,
comprising FRS 102, and applicable law), give a true and fair view of the
assets, liabilities, financial position and net loss of the Company; and
* The Strategic Report includes a fair review of the development and
performance of the business and the position of the Company, together with
a description of the principal risks and uncertainties that it faces.
In addition, each of the Directors considers that the Annual Report, taken as a
whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's performance, position,
business model and strategy.
Going Concern
The Directors believe, in the light of the controls and review processes
reported in the Report of the Audit Committee on page 58 of the Annual Report
and bearing in mind the nature of the Company's business and assets, which are
considered to be readily realisable if required, that the Company has adequate
resources to continue operating for at least twelve months from the date of
approval of the financial statements. For this reason, they continue to adopt
the going concern basis in preparing the accounts.
Related Party Transactions
Related party transactions with the Directors, for the year ended 31 December
2021 are disclosed in the Directors' Report on page 46 of the Annual Report. At
the year end no amounts were due to the Directors (2020: nil).
The AIFM, the Investment Manager and the Company have entered into the
Investment Management Agreement. Pursuant to the terms of the Investment
Management Agreement, the AIFM has delegated to Stewart Investors the
management of the Company's portfolio subject to its and the Directors' overall
supervision. Details of transactions during the year are disclosed in note 3 of
the Annual Report. Amounts outstanding at the year end are shown in note 8 and
note 9 of the Annual Report.
There were no other related-party transactions.
Notes:
1. ScotGems plc is a public company limited by shares, incorporated and
domiciled in England and Wales, and carries on business as an investment
trust. Details of the Company's registered office can be found in the Annual
Report.
The accounts are prepared in accordance with the Companies Act 2006, United
Kingdom Generally Accepted Accounting Practice (Accounting Standards "UK GAAP")
including Financial Reporting Standard (FRS) 102 "The Financial Reporting
Standard applicable
in the UK and Republic of Ireland" and the Statement of Recommended Practice
"Financial Statements of Investment Trust Companies and Venture Capital Trusts"
("the SORP") issued by the Association of Investment Companies in April 2021.
All of the Company's operations are of a continuing nature.
The accounts have been prepared on a going concern basis under the historical
cost convention, as modified by the revaluation of investments held at fair
value through profit or loss.
Estimates and judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.
The following areas are considered to involve a higher degree of judgement or
complexity:
Investment valuation
The Company's AIFM is responsible for ensuring that investments are held at
fair value, and may make adjustments in the absence of a market price or where
strong evidence exists that the market price or price provided by the pricing
source does not represent a fair value for the security. A discount of 35% was
applied to investments in Nigeria, and a discount of 5% was applied to
investments in Sri Lanka at 31 December 2021. Please refer to note 2 below for
further details.
The accounts have also been prepared on the assumption that approval as an
investment trust will continue to be granted.
The functional and reporting currency of the Company is pounds sterling as most
investors in the Company are based in the United Kingdom.
2. Fair Value Hierarchy
The fair value hierarchy used to analyse the fair values of financial assets
and liabilities are described below.
The levels are determined by the lowest (that is, the least reliable or least
independently observable) level of input that is significant 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.
The table below provides an analysis of financial assets and financial
liabilities based on the fair value hierarchy described above. Short term
balances are excluded from the table as their carrying value at the reporting
date approximates to their fair value.
The Company held the following categories of financial instruments as at 31
December 2021:
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
As at December 2021
Listed equities 46,701 1,976 - 48,677
Total 46,701 1,976 - 48,677
Level 2 investments are based indirectly upon quoted market prices. The Fair
Value Pricing Committee at the AIFM (who are independent from the Investment
Manager) assess whether market prices represent fair value, based on a number
of factors.
Nigeria
The Central Bank of Nigeria sets the official exchange rate. The Fair Value
Pricing Committee believes that significant delays with repatriation are
evidence that the official exchange rate does not reflect fair value. At 31
December 2021 a discount of 35% was applied to all Nigerian assets. This
discount is generated daily using the ratio of an observable parallel rate to
the official exchange rate. At 31 December 2021 the carrying value of Nigerian
investments (after applying the discount) was £1,467,000 (2020: £2,413,000).
Sri Lanka
There have been delays in repatriation of cash from Sri Lanka which the Fair
Value Pricing Committee believes is evidence that the exchange rate does not
represent fair value. At 31 December 2021 a discount of 5% was applied to all
Sri Lankan assets. The 5% discount is the ratio of an interbank rate to the
official rate, whilst this interbank rate was in use during the year. At 31
December 2021 the carrying value of Sri Lankan investments (after applying the
discount) was £509,000 (2020: £495,000, however no discount was applied at 31
December 2020, therefore this value is included in Level 1 listed equities).
The Company held the following categories of financial instruments as at 31
December 2020:
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
As at December 2020
Listed equities 42,307 2,413 - 44,720
Total 42,307 2,413 - 44,720
3.
Year ended 31 Year ended
December 2021 31 December
2020
Reconciliation of profit/(loss) before taxation £'000 £'000
to net cash outflow before dividends, interest,
purchases and sales
Net profit/(loss) on activities before finance 4,295 (168)
costs and taxation
Net (gains)/losses on investments (3,010) 424
Currency losses/(gains) 36 (8)
Investment income (2,061) (872)
Decrease in other payables (1) (3)
Decrease/(increase) in prepayments and other 99 (52)
receivables
Net cash outflow from operations before (642) (679)
dividends, interest, purchases and sales
4. These are not statutory accounts in terms of Section 434 of the Companies
Act 2006. Full audited accounts for the year to 31 December 2021 will be sent
to shareholders in March 2022 and will be available for inspection at Broadgate
Tower, 20 Primrose Street, London EC2A 2EW, the registered office of the
Company. The full annual report and accounts will be available on the Company's
website www.scotgems.com.
5. The audited accounts for the year ended 31 December 2021 will be lodged with
the Registrar of Companies.
END
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