HHI Henderson High Income Trust Plc

INTERIM MANAGEMENT REPORT

CHAIRMAN'S STATEMENT

Markets/Performance

The first half of 2024 has been a generally positive period for financial markets. With softer inflation globally, policy makers are focusing on lowering interest rates and investors have responded accordingly by increasing exposure to financial assets. Geopolitical tensions remain elevated however, particularly in Ukraine and the Middle East and the US presidential election campaign is proving eventful. Closer to home in the UK, July saw an earlier than expected general election and of course a change in government.

Against this backdrop the Company made positive progress in the first half of 2024 achieving a net asset value total return of +6.5% compared with a benchmark return of +5.9%, outperformance of 0.6%. The Company's share price total return was lower at +3.4%.

Gearing/Asset Allocation

The Company started 2024 with an overweight position in equities and an underweight position in fixed interest investments compared with its benchmark (80% equities, 20% bonds). This position has not changed markedly during the first half of 2024 and the Company's gearing is also largely unchanged (21.5% as at 30 June 2024).

The Board has continued to regularly review the level of gearing with the Company's Fund Manager during the current period of higher borrowing costs notwithstanding the fact that a proportion of the Company's borrowings are at fixed rates.

Combination with Henderson Diversified Income Trust plc 

As highlighted in the 2023 Report and Accounts, the Company was able to issue £72.1 million of new shares in January 2024 following the successful combination with Henderson Diversified Income Trust plc. This will help to improve the liquidity and marketability in the Company's shares and also help to spread the Company's fixed costs across a larger shareholder base which is in the interests of all our shareholders.

Dividends

The first interim dividend of 2.625 pence per share was paid on 26 April 2024 and the second interim dividend for the same amount was paid on 26 July 2024.

A third interim dividend, to be paid from the Company's revenue account, of 2.675 pence per share was announced on 4 July 2024 and this dividend will be paid on 25 October 2024 to shareholders registered at the close of business on 13 September 2024 (with the shares being quoted ex-dividend on 12 September 2024).

The UK equity market is delivering growth in dividend payouts during 2024 as UK corporates remain in relatively robust financial health. Within the market UK banks in particular have increased payout levels although this has been offset to some degree by lower dividends from the UK mining sector where weaker metals prices globally have impacted profitability.

As usual David Smith, the Company's Fund Manager, regularly updates the Board on prospective income levels from the Company's portfolio of investments and the Board continues to have confidence in the Company's ability to deliver a high income return to shareholders.

Outlook

The immediate outlook for markets is dominated by speculation over the timing of interest rate cuts with the US Federal Reserve having just instigated its first reduction. The Bank of England has made its first cut from 5.25% to 5% and there have been a number of reductions across Europe. Inflationary pressures are abating and with early signs of weaker labour markets across the globe it is now likely that monetary policy will loosen further over the remainder of 2024.

The UK equity market continues to look relatively attractively priced in a global context and is currently in the midst of the half year results season; generally it is showing the UK economy in robust shape compared with other European neighbours and UK banks in particular are seeing low levels of distress across both the corporate and personal sectors although there are undoubted pockets of weaker activity, particularly in UK construction and housebuilding. Overall, however, with real wage growth and expectations that monetary policy is on a downward trajectory, the outlook for UK equities appears to be positive and within the Company's portfolio the Fund Manager has increased exposure to the mid cap sector which should benefit from lower interest rates.

There are of course continuing geopolitical tensions to be mindful of and as we near the US presidential election in November we should expect further volatility. The first Labour government budget at the end of October may also result in higher levels of personal taxation which could prove a headwind, but the new government has made positive noises around focusing on growing the economy.

Against this backdrop the Company will continue to focus on the primary objective of delivering a high level of income to shareholders whilst seeking to deliver longer term capital growth.

Jeremy Rigg

Chairman

26 September 2024

Fund Manager's Report

Markets

The UK equity market made good returns during the first half of the year with the FTSE All-Share Index up 7.4% on a total return basis. Although the Bank of England (BoE) kept its benchmark interest rate on hold at 5.25% during the first half of the year, slowing inflation raised optimism towards the end of the period that interest rates may be cut, and this was confirmed by the BoE's first cut in interest rates on 1^st August. Indeed, annual inflation moderated to 2.0% in May - the first time it had reached the BoE's target in three years, although it may increase again as we head towards the end of the year in response to the proposed rise in the energy price cap and renewed upward pressure on wages as a result of above-inflation pay settlements in the public sector. UK GDP growth expanded by 0.7% over the first quarter as the economy emerged from the technical recession it entered at the end of last year. UK government bond yields rose during the period as expectations over imminent interest rate cuts from central banks at the start of the year were pushed out to the second half. The 10-year gilt yield increased to 4.2% at the end of June, from 3.5% at the beginning of the period.

Larger cap companies continued to outperform mid-caps with the FTSE 100 Index up 7.9% versus the 4.8% gain from the FTSE 250 Index. Sectors such as health care, industrials and financials performed best, while utilities, basic materials and real estate lagged.

Performance

The Company's NAV (with debt at fair value) rose by 6.5% during the period, outperforming the Company's benchmark return of 5.9%. Within the equity portfolio, holdings in Britvic, NatWest and Intermediate Capital were positive for performance. Britvic announced strong results during the period before being subject to a bid approach from Carlsberg. NatWest reported good results with net interest margins ahead of expectations and a 15% increase in the dividend. Alternative asset manager Intermediate Capital announced solid trading with better than expected fund raisings which should lead to future profit growth. Elsewhere the portfolio's positions in Burberry and Mony Group (owner of MoneySuperMarket.com) detracted from returns. Mony Group's share price was weak as investors feared that an easing in insurance premium price inflation would lead to fewer consumers switching their insurance providers. Burberry reported poor results and cautioned on the outlook given the challenging demand environment for luxury goods. After period end the company announced a further deterioration in trading and a suspension of the dividend, hence the position was sold. 

Portfolio Activity

At the start of the year the Company completed the proposed combination with Henderson Diversified Income Trust plc (HDIV). The £72.1 million of new assets taken on as part of the transaction were invested in line with the existing portfolio at the time. The bond allocation remained relatively stable through the period and ended June at 14.0% of net assets.

Within the equity portfolio new holdings were established in Dunelm, Mondi and Aviva. Dunelm is the UK's leading homewares retailer with a strong business model which supports its competitive price position that has driven market share gains. The company also has a robust balance sheet, high free cash flow and an attractive dividend yield. Mondi is an integrated European packaging and paper company where we believe cyclical pressures that had constrained profits in recent years are now easing. Current investment in new capacity should also produce value accretive growth for the company over the medium term. After a period of restructuring, Aviva is now a much simpler business with good market positions in its core operations in the UK and Canada. It is well diversified across both life and general insurance and generates good cash flow. Funding came from the sale of B&M European Value Retail and Woodside Energy. B&M was sold on concerns that the business was being run too aggressively, while fears regarding the oversupplied LNG (Liquefied Natural Gas) market led us to exit the position in Woodside Energy.

David Smith

Fund Manager

26 September 2024

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

1. Accounting policies: basis of accounting

The Company is a registered investment company as defined by Section 833 of the Companies Act 2006 and operates as an investment trust in accordance with Section 1158 of the Corporation Tax Act 2010.

The condensed set of financial statements has been prepared in accordance with FRS 104, Interim Financial Reporting, FRS 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland and the Statement of Recommended Practice for "Financial Statements of Investment Trust Companies and Venture Capital Trusts", which was updated by the Association of Investment Companies in July 2022.

For the period under review the Company's accounting policies have not varied from those described in the Annual Report for the year-ended 31 December 2023. The condensed set of financial statements has been neither audited nor reviewed by the Company's auditor.

2. Management fees

Management fees are charged in accordance with the terms of the management agreement which are set out in the Company's Annual Report for the year-ended 31 December 2023.

3. Revenue return per ordinary share

The revenue return per ordinary share is based on the following figures:

The Company does not have any dilutive securities therefore the basic and diluted returns per share are the same.

4. Fair values of financial assets and financial liabilities

The fair values of the financial assets and liabilities are either carried in the Statement of Financial Position at their fair value (investments and derivatives), or the statement of financial position amount is a reasonable approximation of fair value (due from brokers, dividends, and interest receivable, due to brokers, accruals, cash at bank, bank overdrafts and amounts due under the multi-currency loan facility). At 30 June 2024 the fair value of the senior unsecured note has been estimated to be £18,095,000 (30 June 2023: £17,043,000; 31 December 2023: £18,696,000) and is categorised as Level 3 in the fair value hierarchy.

The current estimated fair value of the senior unsecured note is calculated using a discount rate based on the redemption yield of the relevant existing reference UK Gilt plus a suitable estimated credit spread. The estimated credit spread is based on the spread between the yield of the ICE BofA 10-15 Year A Sterling Non-Gilt Index and the redemption yield of the ICE BofA 10-15 Year UK Gilt Index. The discount rate is calculated and updated at each month end and applied daily to determine the Company's published fair value NAVs.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset:

·      Level 1: the unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.

·      Level 2: valued by reference to valuation techniques using observable inputs other than quoted prices included in Level 1.

·      Level 3: valued by reference to valuation techniques using inputs that are not based on observable market data.

The Company's holdings in options are included within Level 2 and are included in creditors amounts falling due within one year in the Statement of Financial Position. 

Premiums from written options during the half-year ended 30 June 2024 were £nil (half-year ended 30 June 2023: £239,000; year-ended 31 December 2023: £454,000).

5. Net asset value per ordinary share

The net asset value per ordinary share is based on the net assets attributable to the ordinary shares of £304,238,000 (half-year ended 30 June 2023: £213,571,000; year ended 31 December 2023: £222,342,000) and on the 172,141,700 ordinary shares in issue at 30 June 2024 (30 June 2023: 129,796,278; 31 December 2023: 129,796,278).

6. Share capital

On 17 January 2024 the Company issued 42,345,422 new shares to HDIV shareholders in consideration of the £72.1 million of net assets acquired from HDIV in accordance with the scheme of reconstruction and winding up of HDIV under section 110 of the Insolvency Act 1986. No further shares were issued during the six months under review (half-year ended 30 June 2023: nil; year-ended 31 December 2023: nil).

At 30 June 2024 there were 172,141,700 ordinary shares of 5p nominal value in issue. Between 1 July and 26 September 2024, no shares have been issued. The Company has no shares held in Treasury.

7. Dividends

9. Going concern

The assets of the Company consist of securities that are readily realisable and, accordingly, the Directors believe that the Company has adequate resources to continue in operational existence for at least twelve months from the date of approval of the financial statements.

The Company's shareholders are asked every five years to vote for the continuation of the Company. An ordinary resolution to this effect was passed by the shareholders at the annual general meeting held on 23 June 2020.

The Directors have considered the risks associated with global interest rates that continue to remain at higher levels despite recent cuts and the continued impact on the broader financial system, as well as the risks arising from the wider ramifications of geopolitical conflicts, including cash flow forecasting, a review of covenant compliance including the headroom above the most restrictive covenants and an assessment of the liquidity of the portfolio. They have concluded that they are able to meet their financial obligations, including the repayment of the bank loan, as they fall due for a period of at least twelve months from the date of issuance. Having assessed these factors, the principal risks and other matters discussed in connection with the viability statement, the Board has determined that it is appropriate for the financial statements to be prepared on a going concern basis.

10. Transaction with Henderson Diversified Income Trust plc (HDIV)

On 16 January 2024, the Company announced that it had acquired £72.1 million of net assets from HDIV in consideration for the issue of 42,345,422 new Ordinary shares as part of a recommended s110 Scheme under the Insolvency Act.

11. 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 period and the only amounts paid to them were in respect of expenses and remuneration, for which there were no outstanding amounts payable at the period 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 marketing services, there have been no material transactions with Janus Henderson affecting the financial position of the Company during the period under review.

During the period the Company received £442,000 from Janus Henderson to cover project costs paid or payable in relation to the transaction with HDIV.

12. Half Year Report

The half-year report is available at www.hendersonhighincome.com or in hard copy from the Corporate Secretary by emailing itsecretariat@janushenderson.com. An abbreviated version of this half-year report, the 'Update', will be circulated to shareholders in September 2024.

13. General information

a) Company Status

The Company is a UK domiciled investment trust company with registered number 02422514.

SEDOL/ISIN number: 0958057

London Stock Exchange (TIDM) code: HHI

Global Intermediary Identification Number (GIIN): JBA08I.99999.SL.826

Legal Entity Identifier (LEI): 213800OEXAGFSF7Y6G11

b) Directors, Corporate Secretary and Registered Office

The Directors of the Company are Jeremy Rigg (Chairman), Jonathan Silver (Chairman of the Audit & Risk Committee), Zoe King (Senior Independent Director), Richard Cranfield and Francesca Ecsery. The Corporate Secretary is Janus Henderson Secretarial Services UK Limited. The registered office is 201 Bishopsgate, London EC2M 3AE. 

c) Website

Details of the Company's share price and net asset value, together with general information about the Company, monthly factsheets and data, copies of announcements, reports and details of general meetings can be found at www.hendersonhighincome.com