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 its valuation. 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
investments held at fair value through profit or loss |
- |
3,010 |
3,010 |
- |
(424) |
(424) |
Foreign exchange
(losses)/gains |
- |
(36) |
(36) |
- |
8 |
8 |
Total income |
2,061 |
2,974 |
5,035 |
872 |
(416) |
456 |
|
|
|
|
|
|
|
Expenses |
(740) |
- |
(740) |
(624) |
- |
(624) |
Profit/(loss)
before taxation |
1,321 |
2,974 |
4,295 |
248 |
(416) |
(168) |
|
|
|
|
|
|
|
Taxation |
(285) |
(242) |
(527) |
(70) |
(380) |
(450) |
Profit/(loss) for
the year |
1,036 |
2,732 |
3,768 |
178 |
(796) |
(618) |
|
|
|
|
|
|
|
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
31 December 2021 |
As
at
31 December 2020 |
|
£'000 |
£'000 |
Non-current
assets |
|
|
Investments held at
fair value through profit or loss |
48,677 |
44,720 |
|
|
|
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 capital gains |
(350) |
(326) |
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 |
Shares in issue at year end |
53,533,770 |
53,533,770 |
Net asset value per Ordinary share |
92.90p |
85.86p |
|
|
|
Statement of Changes in Equity
For
the year ended
31 December 2021 |
Ordinary share capital |
Share
premium |
Special reserve |
Capital reserve |
Revenue reserve |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
|
|
|
|
|
|
Balance at 31
December 2020 |
535 |
3,133 |
49,315 |
(6,934) |
(85) |
45,964 |
Profit for the
year |
- |
- |
- |
2,732 |
1,036 |
3,768 |
Balance at 31
December 2021 |
535 |
3,133 |
49,315 |
(4,202) |
951 |
49,732 |
For the
year ended
31 December 2020 |
Ordinary
share capital |
Share
premium |
Special
reserve |
Capital
reserve |
Revenue
reserve |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
|
|
|
|
|
|
Balance at 31 December
2019 |
535 |
3,133 |
49,315 |
(6,138) |
(263) |
46,582 |
Loss for the year |
- |
- |
- |
(796) |
178 |
(618) |
Balance at 31 December
2020 |
535 |
3,133 |
49,315 |
(6,934) |
(85) |
45,964 |
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 31 December |
Year ended 31 December |
|
2021 |
2020 |
|
£’000 |
£’000 |
Net cash outflow
from operations before dividends, interest, purchases and
sales |
(642) |
(679) |
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 factors adversely affects the Company’s reputation
and financial performance.
New specific risk identified in year |
ESG is fully embedded
within the Investment Manager’s investment strategy, please refer
to pages 14 and 15 of the Annual Report for a full 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 changing ESG disclosure requirements. |
Principal
Risks |
Risk |
Mitigation |
Investment objective
and strategy
An inappropriate or unattractive objective and strategy may have an
adverse effect on Shareholder returns or cause a reduction in
demand for the Company’s shares, both of which could lead to a
widening discount.
No change to this risk |
The Board conducts an annual strategy reviews
and consider investment performance,
shareholder views and developments in the
marketplace as well as emerging risks which
could impact the Company.
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. |
Investment
performance
Poor investment performance may have an adverse effect on
Shareholder returns.
No change to this risk |
The Board reviews investment performance at each quarterly Board
meeting. The Investment 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. |
Financial and
Economic
The Company’s investments are impacted by financial and economic
factors including market prices, interest rates, foreign exchange
rates, liquidity and credit which could cause losses to the
investment portfolio.
No change to this risk |
The Board regularly reviews and agrees policies for managing market
price risk, interest rate risk, foreign currency risk, liquidity
risk and credit risk. These are explained in detail in note 13 to
the financial statements on pages 37 to 43 of the Annual Report.
The Board recognises that macro-economic and geopolitical factors
may impact the Company's portfolio. However, other than being aware
of such events there is little that the Board can do to mitigate
against these events. |
Operational
The Company is reliant on third party service providers including
Stewart Investors as Investment Manager, Juniper Partners as
Company Secretary and Administrator, J P Morgan as Depositary and
Custodian and Computershare as Registrar. Failure of the internal
control systems of these third parties could result in inaccurate
information being reported or risk to the Company’s assets.
No change to this risk |
Operationally, Covid-19 is affecting each of the Company’s key
service providers and each has put in place the appropriate
arrangements for their staff to work from home should government
guidance
require. To date these services have continued without disruption
and the operational arrangements have proven adequate. The Board
will continue to monitor these arrangements.
The Audit Committee formally reviews each 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. |
Regulatory
The Company operates in a regulatory environment. Failure to comply
with s1158 of the Corporation Tax Act 2010 could result in the
Company losing investment trust status and being subject to tax on
capital gains. Failure to comply with other regulations could
result in financial penalties or the suspension of the Company’s
listing on the London Stock Exchange.
No change to this risk |
Compliance with relevant regulations is monitored on an ongoing
basis by the Company Secretary and Investment Manager who report
regularly to the Board.
The Board monitors changes in the regulatory environment and
receives regulatory updates from the Company Secretary, Lawyers and
Auditors as relevant.
The Board has been updated on any regulatory
changes proposed in respect of the response to the Covid-19
pandemic as required. |
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 December 2021 |
Year
ended
31 December 2020 |
Reconciliation of
profit/(loss) before taxation to net cash outflow before dividends,
interest, purchases and sales |
£’000 |
£’000 |
Net profit/(loss) on
activities before finance costs and taxation |
4,295 |
(168) |
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 receivables |
99 |
(52) |
Net cash outflow
from operations before dividends, interest, purchases and
sales |
(642) |
(679) |
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.