LOWLAND INVESTMENT COMPANY PLC

ANNUAL FINANCIAL RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2024

This announcement contains regulated information.

INVESTMENT OBJECTIVE

The Company aims to give shareholders a higher than average return with growth of both capital and income over the medium to long-term, by investing in a broad spread of predominantly UK Companies. The Company measures its performance against the FTSE All-Share Index Total Return.

INVESTMENT POLICY

Asset Allocation

The Company invests in a combination of large, medium and smaller companies listed in the UK.  We are not constrained by the weightings of any index; we limit risk by running a diversified portfolio, which is constructed on a bottom-up, stock-picking basis.  In normal circumstances up to half the portfolio is invested in FTSE 100 companies; the remainder is divided between small and medium-sized companies.  The Manager may also invest a maximum of 15% in other listed trusts.

Dividend

The Company aims to pay a progressive dividend, with each quarterly dividend equal to or greater than its previous equivalent.

Gearing

The Board believes that debt in a closed-end fund is a valuable source of long-term outperformance, and therefore the Company will usually be geared.  At the point of drawing down debt, gearing will not exceed 20% of the portfolio valuation but generally will be around half that level. Borrowing will be a mixture of short and long-dated debt, depending on relative attractiveness of rates.

Key Data as at 30 September 2024

·      Net Asset Value ('NAV') Total Return^1,8 of 16.3%

·      Benchmark Total Return² of 13.4%

·      Dividend growth of 2.8%

·      Dividend for the Year³ of 6.425p

Sources: Morningstar Direct, Janus Henderson, Factset

Historical Performance (%)

CHAIRMAN'S STATEMENT

Lowland Chairmans Statement FY24

Performance

I am pleased to report that, for the second successive year, Lowland achieved a strong return, both in absolute terms and compared with its benchmark. Net Asset Value per share ('NAV') rose 16.3% compared with a 13.4% increase in the FTSE All-Share index, very much in line with the numbers achieved in 2023. The share price increased by 18.3%. (All figures on a total return basis).

Last year I commented on the fact that the UK market was undervalued, most especially the mid/small cap space where Lowland is more invested than its benchmark. While there has been some improvement in UK valuations, this has not really affected the smaller sector or, to a major extent, those with a particular UK focus. The market continues to bear a substantial discount to international peers. The outperformance during the year is predominantly attributable to stock picking. Take-over activity was helpful, in itself emphasising the humble valuations prevailing in UK markets, and the Company also benefitted from gearing, one of the opportunities open to investment trusts. The Fund Managers explain the attribution of performance in more detail in their report. 

The performance of the revenue account, which reflects the dividend income, was more muted. Earnings per share declined 6.3% to 6.29p, reflecting a number of factors. Lowland has chosen to prioritise longer term gains in growing capital which will facilitate income growth in due course, and steadfastly declined to chase earnings. During this year a number of highly rewarding investments, such as Marks and Spencer and Rolls-Royce, had zero or lower dividend yields but were in this category. Timing was an issue with some major dividends being paid just after the year-end, and foreign exchange, interest rates and a trend to replace special dividends by share buy-backs were also factors.

Dividends

The Company is proposing a final dividend of 1.625p per share. If approved at the AGM, this will result in total dividends for the year of 6.425p, a 2.8% increase year-on-year. This dividend is not quite fully covered, but your Board has confidence that earnings will resume their upward trajectory, and is committed to maintaining its quarterly progressive dividend.

Gearing

Lowland has £30m of long-term debt notes, at a fixed 3.15% rate, due in 2037, as well as a £40m variable rate revolving credit facility. The benefit of having an element of fixed long-term debt has been evident during the year, as has been the overall gearing employed. Lowland does not tend to vary levels of gearing dramatically; it was little changed during the year, ending at 11.0% compared to 12.3% a year earlier.

Ongoing Charges

Ongoing Charges are in line with the prior year at 0.66%.

After the year end, the government and the FCA announced that the cost disclosures for the Key Information Document ('KID') would be changed and will now reflect Ongoing Charges, calculated in line with AIC methodology, rather than the potentially misleading disclosures which previously applied. This is an important win for common sense. Investment Trusts were at a significant disadvantage compared to open-ended funds in this regard. The management charge for Investment Trusts are generally lower than for their counterpart products in the open-ended space. It will be helpful if this is clearly shown when like-for-like comparisons are made.

Discount

During the year the discount varied between 8% and 15%, with an average of 12%. The
Board believes that a discount control mechanism would not be in shareholders' interests, for the reasons set out in the annual report.

Investment Trust discounts were volatile over the year, in response to which a number of trusts undertook programmes to buy-back their own shares. Nothing we have seen has encouraged us to change our view.

The Board

We welcomed Mark Lam to the Board during the year. Originally from Singapore, Mark brings a welcome diversity of experience from his career in technology and telecommunications.

Mark stands for election at the January AGM for the first time, and the Board will revert to its normal complement of five, with my retirement.

Helena Vinnicombe stands for election as Chair at the AGM. I am delighted to have such a talented successor.

I will have served as Chair for eight years when I retire. This has been a privilege. My chairmanship has coincided with events, not least Brexit, Covid and chaotic British politics, which have not been helpful to the performance of a company with our investment policy. I am confident that sticking to our investment policy has been the right thing to do, and will reward shareholders in the long term. I am grateful to a capable Board in helping steer this course, while providing robust challenge to the Fund Managers, who have embraced the opportunity for debate and consistently and diligently pursued shareholder interests. Finally, I am grateful to shareholders for their support and loyalty.

Contact with Shareholders

I and the Board are always pleased to hear from shareholders. Please contact me or my successor with comments or questions via ITSecretariat@janushenderson.com or sign up for updates on Lowland by using the QR code on the inside front cover of the annual report.

AGM

The AGM will be held at the Janus Henderson office on 28 January 2025.  Full details of the business to be conducted at the meeting are set out in the Notice which this year is included at the end of the annual report.  Our Fund Managers, James Henderson and Laura Foll, will be making a presentation to shareholders.  The Board and Fund Managers always welcome the opportunity to hear from shareholders, and we encourage as many as possible to attend.

Outlook

A meaningful re-rating of the UK market, and smaller companies in particular, has not really happened. Lowland's portfolio is on a Price Earnings ratio of 10.2 times, or 8.9 on a 'look-though' basis, taking our discount into account. Reflecting the UK focus of our investee companies this is substantially below the UK market as a whole, and, even more so, international markets. Thankfully our shareholders' patience has been rewarded this year with an attractive growth in capital and a dividend yield of around 5%.

We had hoped that a decisive UK election result would remove the uncertainty inherent in a Conservative Government with a propensity to self-destruct but the new Labour Government seems pre-occupied with painting an Armageddon-like picture of the economy it inherited. Ours is a bottom-up approach to investing, but the economic landscape in which our companies are operating is disappointing given initial optimism after the UK election.  The long build-up to the budget, and its eventual content, were not helpful, with many facing substantial cost increases as a result of the increase in the minimum wage and National Insurance costs.   The prospects for inflation and interest rates are less benign than they had appeared.  Confidence, optimism and economic growth have suffered, and the uncertainties implicit in the result of the US election have not helped.

Despite this backdrop, we believe good, well managed UK companies will continue to prosper.  A revaluation of the UK market, and particularly a portfolio such as ours, may be further deferred, but should come in time with a material capital uplift when the fundamentals of UK equities are more widely appreciated. 

Robert Robertson

Chairman

4 December 2024

FUND MANAGER'S REPORT

Source: Janus Henderson, Morningstar Direct, all performance figures shown on total return basis.

Overview

We are pleased to report on a second successive year of outperformance relative to the Company's FTSE All-Share benchmark, as well as a good absolute return. The UK economy returned to growth in the second quarter of the financial year, inflation fell, interest rates started to come down and company directors began to feel more confident as shown by the high level of corporate takeover activity. The background was therefore helpful for Lowland's portfolio which has more of the earnings from the underlying companies coming from the UK economy than is the case with the benchmark index.

A new government with a large majority was elected during the summer and this has led to the hope that, after several years of policy turmoil, economic policy might be more stable. This is, as yet, unproven. A missing factor in the improving scenario has been that there has been little pick-up in investor confidence. The Investment Trust sector has seen substantial levels of disinvestment. There is a general pessimism about the UK economy which has resulted in money flowing into overseas markets and left UK stocks generally at a significant valuation discount to overseas ones:

http://www.rns-pdf.londonstockexchange.com/rns/8726O_1-2024-12-4.pdf

The companies in the Lowland portfolio are not a proxy for the UK economy but they are a collection of well managed businesses that we believe provide excellent products and services. The results they have generally reported this year are evidence of their strength.       

Performance Attribution

The Company's return during the financial year was driven predominantly by its FTSE 100 and FTSE 250 holdings, with positive stock selection in both indices (comparing the third and fifth columns in the table below). There was also positive stock selection within AIM portfolio holdings, although the underperformance of AIM more broadly compared to the main market meant that despite positive stock selection, our holdings in this area remained an overall detractor from relative returns. Within the FTSE SmallCap Index (which is now a relatively small index, outside of investment companies) stock selection was negative, driven by the holdings in Vanquis Banking Group and TT Electronics, on which we go into more detail later in this report.

Weights for Lowland and for FTSE All-Share are shown as at the year end.  Note the weights for Lowland do not add up to 100 as there is a small % of the portfolio held overseas and in the FTSE Fledgling Index.  Lowland portfolio returns are calculated excluding cash.

When viewed through a different lens, what can be seen is that size allocation of the portfolio (in other words the Company holding more than its benchmark in small and medium sized companies) was not a big driver of relative performance this year, and instead it was stock selection and to a lesser extent the use of gearing that drove the relative return. Note that in the below chart, the Company returns are shown with debt at par, and gross of management fees (this is why the return differs from the 16.3% NAV total return reported).

http://www.rns-pdf.londonstockexchange.com/rns/8726O_2-2024-12-4.pdf

Within the FTSE 100, the good performance was driven predominantly by the holdings in Rolls-Royce and Marks & Spencer, as well as banks NatWest and Barclays. Rolls-Royce benefitted from a combination of favourable end markets and ongoing 'self-help' (such as cost cutting and a more commercial focus on pricing). The position was sold during the financial year as the valuation had recovered a long way at the same time as market expectations had become more realistic. The holding was a good reminder that non-dividend payers can serve a role within an income portfolio, as the capital growth from Rolls-Royce can now be reinvested. M&S continued its recent outperformance as a result of higher than forecast earnings as well as a higher valuation, as both sides of its business (food and clothing) performed well under the new team. We have recently reduced the holding as its turnaround is now better understood and reflected in valuations. The banks performed well in an environment of more 'normal' interest rates, where they can earn a healthier margin between what they charge for lending and what they pay out for deposits.

http://www.rns-pdf.londonstockexchange.com/rns/8726O_3-2024-12-4.pdf

Turning to the FTSE 250, the best performers included pork and poultry processor Cranswick, contractor Balfour Beatty, ship broker Clarkson and building products company Marshalls. While there would be no end market commonality to these businesses, each would be among the market leaders in their area with a path to further earnings growth. For example, in the case of Cranswick, they are already the market leader in pork and are now investing in chicken, while in the case of Marshalls there is a need to build more housing and with this will come greater demand for its products.

Within the FTSE SmallCap index, while there were positions (such as free-to-air broadcaster STV) that performed well, there were two key detractors - Vanquis Banking and TT Electronics. In the case of Vanquis (which is predominantly a provider of credit cards), profitability is currently minimal as the new management team work through a number of issues (such as higher than expected claims costs and the need to move prices up in some areas in order to generate a good return). With respect to the claim costs, higher claims were largely driven by external claims companies, and the uphold rate of the complaints has been low, but nevertheless there is a charge from the financial ombudsman for any complaint (regardless of whether it is upheld). The holding has been poor and the company has gone through several phases of restructuring over a number of years. The valuation is currently very low relative to the potential returns the company would earn if the new team do succeed in turning the business round. In the case of TT Electronics the company substantially lowered earnings guidance as a result of challenging industrial end markets. In the period after Covid, due to supply chain outages there was a period where customers built up stock levels to much higher than normal levels, in order to ensure they wouldn't be caught out by not having a particular component. What followed were several years of 'unwinding', as stock levels were steadily moved back to normal levels. At the same time higher interest rates have been depressing demand. For a company such as TT Electronics, if and when demand recovers, we would expect a substantial earnings recovery.

The performance of the AIM index overall has been disappointing and, as the chart below shows, it has materially underperformed other areas of the UK market. This has likely been due to a combination of outflows from the area, weak sentiment towards domestic UK (to which AIM is more exposed) and more recently tax uncertainty, both around the future of inheritance tax relief and for specific sectors such as companies operating in the North Sea. Within Lowland specifically, Serica Energy was the largest detractor from absolute returns over the year and this was primarily due to an extension of the energy profits levy as well as uncertainty surrounding the level of capital expenditure deductibility (in other words the extent to which capital spend can be used to reduce tax). This is not to say, however, that there have not been successes on AIM, and a position such as Epwin (a manufacturer of window and door frames) was among the best performers during the year as it delivered against conservatively managed expectations.

http://www.rns-pdf.londonstockexchange.com/rns/8726O_4-2024-12-4.pdf

Source: Bloomberg as at 30 September 2024. Total return, GBP, rebased to 100 at start date.

The top ten absolute contributors to performance at the stock level were:

The top ten absolute detractors from performance at the stock level were:

Portfolio Activity

While we go into more detail on individual stock purchases and sales later in the report, at a top-down level the purchases during the year have almost entirely fallen outside of the FTSE 'top 20' (the largest 20 companies in the UK such as Shell and AstraZeneca). The reason we make this distinction is, as the chart in the attribution section shows, the FTSE top 20 has meaningfully outperformed in recent years. This means that the portfolio is increasingly 'underweight' the FTSE top 20, as the next chart shows, and we are now modestly 'overweight' the remainder of the FTSE 100, driven by purchases such as Sainsbury and Beazley. This deliberate, but gradual, re-positioning of the portfolio away from the largest UK companies is because, in our view, the best valuation opportunities fall outside of that area. Smaller businesses are, on average, more domestic and have therefore been more exposed to weaker sentiment towards the UK economy as well as outflows from UK equities. Third party equity investors are not the only buyers of these assets and the companies themselves are increasingly becoming their own 'net buyer' via share buybacks.

http://www.rns-pdf.londonstockexchange.com/rns/8726O_5-2024-12-4.pdf

Much of the selling activity during the year was driven by acquisitions, with seven companies (Alpha Financial Markets Consulting, Finsbury Food, Wincanton, IDS, Hipgnosis Songs Fund, Tyman and DS Smith) agreeing takeover offers from a mixture of private equity or competing firms. In addition the largest individual sale was the holding in Rolls-Royce, which was sold on valuation grounds following good performance.

Turning to purchases, within the FTSE 100, new positions included Beazley, Sainsbury and Smith & Nephew. In all cases they are among the market leaders in what they produce, whether in global cyber security insurance in the case of Beazley or wound care in the case of Smith & Nephew. In each case we think there is a strength to the business that is not currently reflected in the valuation; for example Sainsbury is now back regaining market share following a period of price re-setting.

Within small and medium-sized companies, new positions purchased included property owners Shaftesbury Capital and Workspace, as well as retailer Dunelm and corporate restructuring firm FRP Advisory. There is no end market commonality to these new holdings, but in all cases we can see a long pathway of future earnings growth, whether that is from rental growth in prime London property in the case of Shaftesbury or market share growth in homewares in the case of Dunelm.

Portfolio Valuation

While the UK equity market as a whole trades on a valuation discount relative to overseas, there remains a subset of UK shares that trade on a discount to the broader UK market. Domestic earners in particular have underperformed substantially since Brexit (although Brexit is not the only culprit - smaller businesses have also been impacted more by, for example, the growing desire for liquidity among fund managers).

As Lowland invests across the breadth of the UK market (in small, medium and large companies) it has comparatively more exposure to these smaller, domestic businesses that have seen their valuations penalised. This means that the Lowland portfolio continues to trade at a valuation discount to the broad UK market:

Source: Janus Henderson Investors as at 30 September 2024.

Dividends

The earnings were held back by the strength of sterling in the second half of the financial year (as some dividends are paid in overseas currencies such as the US Dollar), as well as the delay of ex dividend dates to our 2024/25 financial year.  It is also notable that some of our better performing holdings are lower yielding or are not yet back on the dividend list. An example of this amongst the larger company holdings would be Rolls-Royce and in the smaller, recovery stock, Renold.  These holdings have provided capital growth and when that capital is recycled into dividend paying shares they help Lowland's income growth. It is capital growth that over time produces sustainable income growth.  There is also a growing trend for companies to prefer share buybacks rather than special dividends if they believe they have excess cash and the graph below shows this increase in share buybacks reported over the past twenty years.

http://www.rns-pdf.londonstockexchange.com/rns/8726O_6-2024-12-4.pdf

Outlook

Satisfactory company results have been achieved over the past year despite a UK economy that has fluctuated between modest growth and modest recession (with a general election and Budget uncertainty thrown in). This is because the companies held are not a proxy for the UK economy, but rather a diverse collection of conservatively managed, often market leading businesses that remain on modest valuations. As we look to an equally uncertain year ahead for the UK (and global) economy, when we return to company fundamentals, especially at current valuation levels, we cannot help but feel optimistic.

James Henderson and Laura Foll

Fund Managers

4 December 2024

Twenty Largest Holdings as at 30 September 2024

     The stocks in the portfolio are a diverse mix of businesses operating in a wide range of end markets.

At 30 September 2024 these investments totalled £165,096,000 or 38.2% of portfolio.

*Not in the top 20 largest investments last year

MANAGING RISKS  

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks and uncertainties, including emerging risks, facing the Company including those that would threaten its business model, future performance, solvency, liquidity and reputation. The Board regularly considers the principal risks facing the Company and has drawn up a matrix of risks. The Board has put in place a schedule of investment limits and restrictions, appropriate to the Company's investment objective and policy, in order to mitigate these risks as far as practicable. The principal risks which have been identified and the steps taken by the Board to mitigate these are set out in the table below. The principal financial risks are detailed in note 14 to the financial statements.

At the half year stage, the Board completed a thorough review of the principal risks and uncertainties facing the Company. It was not considered necessary to make changes to the principal risks and uncertainties as a result of this review.

EMERGING RISKS

In addition to the principal risks facing the Company, the Board also regularly considers potential emerging risks, which are defined as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of the probability of them happening and the possible effects on the Company. Should an emerging risk become sufficiently clear, it may be moved to a principal risk.

VIABILITY STATEMENT

The Company is a long-term investor; the Board believes it is appropriate to assess the Company's viability over a five-year period in recognition of our long-term horizon and what we believe to be investors' horizons, taking account of the Company's current position and the potential impact of the

principal and emerging risks and uncertainties as documented above in the annual report.

The assessment has considered the impact of the likelihood of the principal and emerging risks and uncertainties facing the Company, in particular investment strategy and performance against benchmark, whether from asset allocation or the level of gearing, and market risk, including

climate risk, in severe but plausible scenarios, and the effectiveness of any mitigating controls in place.

The Board has reviewed three additional model scenarios which evaluate the impact on the revenue forecast and reserves. These range from a worst case scenario which includes a 10% reduction in income and net assets, through to a scenario where there is no income growth and no reduction in income or net assets. Increasing dividends to shareholders could continue under all three scenarios,

although the Company would need to use its capital reserves in some cases. None of the results of the scenarios used would therefore threaten the viability of the Company.

The Board has taken into account the liquidity of the portfolio and the gearing in place when considering the viability of the Company over the next five years and its ability to meet liabilities as they fall due. This included consideration of the duration of the Company's loan facilities and how a breach of the loan facility covenants could impact on the Company's liquidity, net asset value and share price.

The Board does not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place. Also the Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period as the Company's assets are liquid, its commitments are limited and the Company intends to continue to operate as an investment trust. Only a substantial financial crisis affecting the global economy could have an impact on this assessment.

In coming to this conclusion, the Directors have considered the ongoing impact of the wars in Ukraine and Israel and changes in the international political landscape, in particular the impact on income and the Company's ability to meet its investment objective. The Board does not believe that these will have a long-term impact on the viability of the Company and its ability to continue in operation, notwithstanding the short-term uncertainty it has caused in the markets.

Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five-year period. The Directors have also concluded that the Company has adequate resources to continue in operational existence for at least twelve months from the date of approval of these financial statements being 31 December 2025, and it is therefore appropriate to prepare these financial statements on a going concern basis.

RELATED PARTY TRANSACTIONS

The Company's current related parties are its Directors and Janus Henderson. There have been no material transactions between the Company and its Directors during the year. The fees and expenses paid to Directors are set out in the annual report. There were no outstanding amounts payable at the year end.

In relation to the provision of services by Janus Henderson, other than fees payable by the Company in the ordinary course of business and the provision of sales and marketing services, there have been no material transactions with Janus Henderson affecting the financial position of the Company during the year under review. More details on transactions with Janus Henderson, including amounts outstanding at the year end, are given in note 20 in the annual report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

In accordance with Disclosure Guidance and Transparency Rule 4.1.12, each of the Directors confirms that, to the best of his or her knowledge:

·      the Company's financial statements, which have been prepared in accordance with UK Accounting Standards and applicable law give a true and fair view of the assets, liabilities, financial position and return of the Company; and

·      the Strategic Report, Report of the Directors and financial statements include 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.

On behalf of the Board

Robert Robertson

Chairman

4 December 2024

INCOME STATEMENT

The total columns of this statement represent the Profit and Loss Account of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. The Company had no other comprehensive income other than those disclosed in the Income Statement. The net return is both the profit for the year and the total comprehensive income.

STATEMENT OF CHANGES IN EQUITY

STATEMENT OF FINANCIAL POSITION

STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS

¹ The residual will be transferred from the revenue reserve (2023: £1,241,000 transferred to the revenue reserve)

No shares were allotted or bought back during the year (2023: nil)

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) are incorporated into, or form part of, this announcement.