SHIRES INCOME PLC

HALF YEARLY FINANCIAL REPORT

FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2022

Legal Entity Identifier (LEI):  549300HVCIHNQNZAYA89

INVESTMENT OBJECTIVE

The Company’s investment objective is to provide shareholders with a high level of income, together with the potential for growth of both income and capital from a diversified portfolio substantially invested in UK equities but also in preference shares, convertibles and fixed income securities.

BENCHMARK

The Company’s benchmark is the FTSE All-Share Index (total return).

DIVIDENDS

The Company pays dividends to Ordinary shareholders on a quarterly basis.

Performance

Net asset value per Ordinary share total returnA		Share price total returnA
Six months ended 30 September 2022			Six months ended 30 September 2022
-12.3%		-15.7%
Year ended 31 March 2022	+11.4%		Year ended 31 March 2022	+18.4%
Benchmark index total return			Earnings per Ordinary share (revenue)
Six months ended 30 September 2022			Six months ended 30 September 2022
-8.3%		7.50p
Year ended 31 March 2022	+13.0%		Six months ended 30 September 2021	7.21p
Dividend yieldA			(Discount)/premium to net asset valueA
As at 30 September 2022			As at 30 September 2022
6.0%		(3.7)%
As at 31 March 2022	4.9%		As at 31 March 2022	0.3%
A Considered to be an Alternative Performance Measure.

Financial Calendar, Dividends and Highlights

Financial Calendar

Expected payment dates of quarterly dividends	28 October 202227 January 202328 April 202328 July 2023
Financial year end	31 March 2023
Expected announcement of results for year ended 31 March 2023	May 2023
Expected date of Annual General Meeting	6 July 2023

Financial Highlights

	30 September 2022	31 March 2022	% change
Total assets (£’000)A	92,754	104,819	-11.5
Shareholders’ funds (£’000)	73,809	85,819	-14.0
Net asset value per share	238.20p	278.29p	-14.4
Share price (mid-market)	229.50p	279.00p	-17.7
(Discount)/premium to net asset value (cum-income)B	(3.7)%	0.3%
Dividend yieldB	6.0%	4.9%
Net gearingB	24.4%	20.4%
Ongoing charges ratioB	1.18%	1.14%
A Less current liabilities excluding bank loans of £9,000,000.
B Considered to be an Alternative Performance Measure. .

Performance (total return)

	Six months ended	Year ended	Three years ended	Five years ended
	30 September 2022	30 September 2022	30 September 2022	30 September 2022
Net asset valueA	-12.3%	-13.0%	+2.5%	+8.0%
Share priceA	-15.7%	-10.6%	+2.0%	+10.8%
FTSE All-Share Index	-8.3%	-4.0%	+2.4%	+11.3%
A Considered to be an Alternative Performance Measure.
All figures are for total return and assume reinvestment of net dividends excluding transaction costs.

For further information, please contact:

Luke Mason

abrdn Investments Limited

0207 463 6100

Chairman’s Statement

Market Background

The first half of the financial year was highly volatile for financial markets. In the early part of 2022, markets saw a sharp rotation as investors digested the prospects of sustained higher inflation and interest rates. This dynamic continued to dominate market movements during the period under review. Notably, inflation has been higher in the last few months than for many years, putting pressure on income forecasts of both consumers and corporates. The causes of higher inflation are diverse, but a major catalyst has been resurgent demand following the Covid-19 pandemic at a time when the economy still has many capacity constraints from reduced labour availability, productivity levels and supply-chain issues. The inflationary pressures have then been heightened by the fall out of the Russia-Ukraine conflict which has disrupted commodity supply, leading to a rise in the prices of energy and food. After a long period of historically low interest rates, central banks around the world have been forced to confront inflation by raising interest rates. The US Federal Reserve increased the base rate from 0.25% at the start of the year to 4.0%, whilst the Bank of England and ECB have moved almost as quickly, with interest rates rising to 3.0% and 2.0% respectively.

This pace of interest rate increase from a low base has meant that investors have needed to re-evaluate the prices of companies’ shares, especially those of highly rated growth companies. Combined with increasing concerns around slowing economic activity and increased uncertainties more broadly, this has led to a sell-off in global equity markets. The MSCI World Global Equity Index fell by 22% over the period under review, the US S&P 500 Index fell by 21% and the MSCI Europe Index fell by 14%. In this context, UK equities held up relatively well, with the FTSE All-Share Index falling by 8.3% in total return terms. A high weighting to energy and materials, which have benefitted from rising commodity prices, and to banks, which benefit from rising interest rates have helped the UK market, which has a low weighting to more highly rated sectors, such as technology.

For income investors, the background has been perhaps surprisingly reassuring so far this year. Since the Company’s year-end in March, dividend expectations for many companies within the benchmark index have actually grown modestly. While this seems at odds with the economic outlook, it is consistent with what the Investment Manager is seeing from companies in the portfolio. Management teams are confident on the outlook for dividend payments and this confidence is backed up by the distribution ratio for the benchmark index (the proportion of earnings distributed as dividends) being close to historic lows. After many companies rebased dividends during the pandemic, there is now headroom for them to maintain or even grow their dividends. This should provide some reassurance to investors as we brace ourselves for a continuing period of economic uncertainty.

Investment Performance

During the six-month period to 30 September 2022, the Company delivered a net asset value (“NAV”) total return of -12.3%, underperforming the FTSE All-Share Index benchmark by 4.0%. While the underperformance has been disappointing, it has been concentrated in two areas: the Company’s investments in preference shares and in abrdn Smaller Companies Income Trust plc (“aSCIT”) . In both instances, the underperformance is as would be expected given the macro-economic backdrop .

Firstly, the Company’s position in preference shares has been a drag on performance, with the holdings declining in value by 13.0% and detracting just over 1% from relative performance. Preference shares, which are a fixed income investment, naturally decline in value as bond yields rise and we saw this over the six-month period. However, as shareholders will be aware, the reason for holding the preference shares within the portfolio is not for capital growth but for income, and the distributions from the issuing companies have been very resilient. The preference share portfolio now yields over 7.5% and generates an important and robust part of the Company’s income stream. Secondly, we have seen the holding in aSCIT decline in value by 36%, detracting around 1.8% from the performance of the portfolio. The holding in the investment trust is a diversifier for the portfolio and provides access to higher growth companies within the UK market. Over the long term, aSCIT has delivered positive returns, but its style has been out of favour so far this year and the underperformance is largely explained by this dynamic.

More positively, the Company’s equity portfolio has continued to outperform the benchmark, as well as delivering a superior dividend yield. Overweight positions in energy and financial companies have helped performance, while the underweight allocation to the consumer discretionary sector has also been beneficial. On an individual stock basis, there were strong returns from the energy sector. The greatest positive contributor on an individual stock basis was Diversified Energy , which increased in value by 16% as it continued to deliver resilient earnings and to grow its dividend as it acquired further energy producing assets at low prices.

Other energy companies also performed well during the period. Energean , which increased in value by 16%, delivered the first gas from its Karish development offshore Israel and has also upgraded guidance as a result of inflation linkage in its long term gas sale agreements. The maiden dividend has also been paid, with the dividend yield expected to rise to 13% in FY24. The company continues to offer stable and high free cashflow yield for the next decade, with further potential to come following recent successful exploration drilling.

Away from the energy sector, tobacco was also a strong contributor to performance, with the mix of defensive value particularly attractive in a time of rising bond yields and increasing recessionary fears. Imperial Brands was particularly strong, increasing in value by 18% during the period. Other notable performers included: Telecom Plus which benefitted from higher energy prices; Balfour Beatty which reported strong results; Euromoney Institutional Investor , which was bid for at a 40% premium; and Coca-Cola Hellenic Bottling Company , which continued to recover from the impact of the Russia-Ukraine conflict and rose by 22% after reporting positive results.

Negative performance for the equity portfolio in general is concentrated in two areas: property and UK cyclical companies. Property companies have been a source of stable and growing income in recent years, but rising interest rates have more recently challenged their valuations. The impact of exposure to this sector has therefore been negative and we have seen valuations of Sirius Real Estate , Countryside Partnerships and Urban Logistics , as examples, move lower. The impact of rising interest rates on both portfolio valuations and on cash generation (due to higher interest charges) is meaningful and the Investment Manager has consequently reduced the Company’s allocation to the sector.

UK cyclical companies have been weak due to concerns around the domestic economy, the depreciation of Sterling and recession concerns. Marshalls , Howden Joinery and Bodycote all underperformed for these reasons – in each case the Investment Manager considers these to be high quality companies that will perform better when the economic cycle turns and they have a preference to hold them through the cycle.

Portfolio Activity

During the period, the Investment Manager initiated seven new positions and exited six. Below are brief details on the companies that were added and removed from the portfolio.

In April, The Investment Manager introduced a new position in Supermarket Income REIT . The company invests in supermarket real estate, with long term tenancy agreements and inflation linked pricing. This provides a reliable and defensive source of income. The company should also be able to deliver growth over time as it acquires additional property.

In July, a new position was initiated in Legal & General . The shares have fallen this year given concerns about how rising interest rates will impact the credit quality of their holdings. In the Investment Manager’s view, Legal & General has a secure outlook and actually benefits from rising interest rates through its stronger Solvency 2 position. This means the dividend, at an 8% yield, should be secure and the company should continue to grow.

The Investment Manager also took a position in private equity firm Intermediate Capital Group. Private equity managers have seen share prices fall as bond yields have risen, but the Investment Manager sees more limited impact on underlying portfolio valuations and views this as an attractive entry point for long term investors. While private equity firms have suffered from rising interest rates, banks have been beneficiaries. The Investment Manager started a position in NatWest due to its high level of exposure to the positive effects of rising interest rates, something the Investment Manager feels is still under-estimated by the market. The Investment Manager is relatively relaxed about the impact on the company of potential rising bad debts, due to a high level of existing provisions built up through the Covid-19 pandemic. In addition, with a significant excess capital position, NatWest is expected to return a large portion of its value to shareholders in the next two to three years.

The Investment Manager has also added to a number of holdings in companies with significant overseas earnings. The first of these was KONE, which manufactures, distributes and maintains lift systems . The company’s shares have de-rated on China growth concerns and the Investment Manager considers that the company now looks attractively valued given the quality of the business, and with a very secure balance sheet. The weighting of earnings to recurring service revenue should make it resilient, and the dividend yield is at a premium to the market. The Investment Manager also started a new position in French utility company Engie. The implementation of a power price cap in Europe above market expectations and the company’s business plan provides the Investment Manager with confidence in the dividend which has an attractive yield of around 8%. The company also has an attractive long term renewable growth story.

The final addition to the portfolio was reinsurer Hiscox. After weak performance post-2019, an impressive new CEO has put the balance sheet in a strong position and sorted out legacy issues in the portfolio. The Investment Manager considers the company to be well positioned for better underwriting conditions and higher investment returns, both of which should drive strong earnings growth in the next two years.  The company’s US retail business also has the potential to be much larger if it can deliver as management expects.

The first position exited was Schroders (non-voting shares), which had been purchased last year with a view that the discount of the non-voting shares to the voting shares was too wide and would close over time. The announcement in April that the company would combine the two lines of stock caused the discount to close, resulting in a 29% increase in value. With the investment case having played out, the Investment Manager chose to sell and look for other investment ideas.

Fortum performed poorly during the period due to its exposure to Russia and the risks to the business from higher European gas prices. While the Investment Manager considered that much of the risk was in the price, uncertainty remained very high and as a result they decided that they could find similarly high yields which were likely to be more secure, so chose to move on. The Investment Manager also sold the position in United Utilities which had held up well as a source of defensive exposure but looked fairly priced.

A more positive exit was that of Euromoney Institutional Investor following a bid for the company at a reasonably attractive price. Finally, the Investment Manager sold out of two positions which were inherited as spin outs from other holdings and were subscale in the portfolio. Haleon was spun out of GlaxoSmithKline and has an attractive end market position, but high debt and litigation risk combined with a low yield make it less appropriate for the portfolio. The Investment Manager also sold out of Woodside Energy , another subscale inherited position from BHP, after it went ex-dividend.

Investment Income

The revenue earnings per share for the period were 7.50p, which compares to 7.21p for the equivalent period last year. Across the portfolio, there has been a higher level of dividend income. This reflects particularly the continued recovery of dividends following the pandemic-impacted shareholder returns in 2020. Dividend expectations within the benchmark index remain around 25% lower than pre-pandemic levels, giving considerable scope for continued growth. Furthermore, some of the most income generative sectors, including energy, materials and financials, have seen earnings growth in the past year. In many cases there has also been a benefit from a stronger US Dollar for those companies that pay dividends in this currency.  Portfolio changes have also been made with the aim of enhancing the level of income generation. At a time of inflation and uncertain economic outlook we see a high level of income as being an important constituent of the total return potential provided by your company.

Dividends

A first interim dividend of 3.2p per Ordinary share in respect of the year ending 31 March 2023 (2022: first interim dividend – 3.2p) was paid on 28 October 2022. The Board declares a second interim dividend of 3.2p per Ordinary share (2022: second interim dividend – 3.2p), payable on 27 January 2023 to shareholders on the register at close of business on 6 January 2023.

Subject to unforeseen circumstances, it is proposed to pay a further interim dividend of 3.2p per Ordinary share and, as in previous years, the Board will decide on the level of final dividend having reviewed the full year’s results, taking into account the outcome of the revenue account for the year and the general outlook for the portfolio’s investment income at that time. However, it is the Board’s current intention that the final dividend will be no less than 4.2p per Ordinary share (2022: 4.2p), resulting in a total dividend for the year of at least 13.8p per Ordinary share (2022: 13.8p). This is equivalent to a dividend yield of 6.0% based on the share price of 229.50p at 30 September 2022.

Gearing

During the period, the Board made the decision, in light of the prospect of future interest rate rises, together with some concern about access to credit within the wider economy, to renew the loan facility ahead of its expiry date in September 2022. Consequently, the Company entered into a new £20 million loan facility with The Royal Bank of Scotland International Limited, London Branch, on 3 May 2022. In addition, the Board took the view that securing a five-year agreement, so removing much uncertainty over future funding given its importance to the strategy of the Company, was the prudent thing to do.

£10 million of the new loan facility was drawn down and fixed at an all-in interest rate of 3.903%. £9 million of the facility was drawn down on a short-term basis and can be repaid without incurring any financial penalties. The proceeds of the new loan were used to repay and cancel in full the Company’s previous loan facilities. At the end of the period, the Company’s drawn down borrowings amounted to £19 million. Net of cash, this represented gearing of 24.4%, compared to 20.4% at the start of the period, reflecting the fall in NAV over the period.

As in previous years, the Board takes the view that the borrowings are notionally invested in the less volatile fixed income part of the portfolio which generates a high level of income, giving the Investment Manager greater ability to invest in a range of equity stocks with various yields and growth prospects. This combination means that the Company can continue to achieve a high level of dividend but also deliver some capital appreciation to shareholders.

Outlook

Recent months have been challenging for financial markets and there are a number of economic dark clouds impacting the investment outlook, with the Bank of England now predicting a “prolonged recession”. While this is certainly a challenging time for equities, there are reasons to be more constructive. Firstly, a recession is now largely expected by financial markets; and secondly many companies are significantly cheaper than they were at the start of the year.  In addition, there are reasons to support a view that we are close to the peak of inflation and interest rate fears, and as these factors moderate, valuations can find support. Hence a time of widespread gloom could well be providing investors with attractive opportunities, and we have already seen signs of this with the strong rally across global equity markets since the middle of October.

In the shorter term, there is the likelihood of continued market turbulence. However, for those willing to take a longer-term view, there are strong supportive arguments that UK equity valuations look attractive. The market is on a multi-year high discount to other developed markets and has a record high yield premium. Furthermore, as the majority of company earnings come from overseas, any earnings downgrades will largely be offset by the currency benefit of weak Sterling. Importantly, from an income perspective the Investment Manager does not consider there to be a material risk of dividend cuts, with the UK distribution ratio at a seven year low. That will compress as earnings expectations likely fall, but there is plenty of headroom for most companies to maintain their dividends. That income should be helpful to many investors in these difficult market conditions. Overall, therefore, the Board takes the view that the Company continues to provide an outcome in-line with the investment mandate, namely a high level of current income with the potential for both income and capital growth.

Robert Talbut
Chairman
30 November 2022

Interim Management Statement

Directors’ Responsibility Statement

The Directors are responsible for preparing the Half Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

–  the condensed set of financial statements within the Half Yearly Financial Report has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’; and

–  the Interim Board Report (constituting the Interim Management Report) includes a fair review of the information required by rules 4.2.7R of the Disclosure Guidance and Transparency Rules (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year) and 4.2.8R (being related party transactions that have taken place during the first six months of the financial year and that have materially affected the financial position of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could so do).

Principal and Emerging Risks and Uncertainties

The Board regularly reviews the principal and emerging risks and uncertainties faced by the Company together with the mitigating actions it has established to manage the risks. These are set out within the Strategic Report contained within the Annual Report for the year ended 31 March 2022 and comprise the following risk headings:

–  Strategic objectives and investment policy

–  Investment performance

–  Failure to maintain, and grow the dividend over the longer term

–  Widening of discount

–  Gearing

–  Regulatory obligations

–  Operational

–  Exogenous risks such as health, social, financial and geo-political

In addition to these risks, the Board is conscious of the continuing impact caused by the war in Ukraine, inflation, increasing interest rates and volatility in global equity and bond markets . The Board considers that these are risks that could have further implications for financial markets.

In all other respects, the Company’s principal and emerging risks and uncertainties have not changed materially since the date of the Annual Report and are not expected to change materially for the remaining six months of the Company’s financial year.

Going Concern

The Company’s assets consist mainly of equity shares in companies listed on the London Stock Exchange. The Board has performed stress testing and liquidity analysis on the portfolio and considers that, in most foreseeable circumstances, the majority of the Company’s investments are realisable within a relatively
short timescale.

The Board has set limits for borrowing and regularly reviews actual exposures, cash flow projections and compliance with banking covenants, including the headroom available. The Company has a £20 million loan facility which matures on 30 April 2027. £9 million of this amount is drawn down on a short-term basis through a revolving credit facility and can be repaid without incurring any financial penalties.

Having taken these factors into account, the Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and has the ability to meet its financial obligations as they fall due for the period to 30 November 2023, which is at least twelve months from the date of approval of this Report. For these reasons, they continue to adopt the going concern basis of accounting in preparing the financial statements.

On behalf of the Board
Robert Talbut
Chairman
30 November 2022