Schroder UK Mid Cap (SCP)
28/11/2024
Results analysis from Kepler Trust
Intelligence
Schroder UK
Mid Cap (SCP) released its financial results for the year ending
30/09/2024, with NAV total return of 17.3%, versus 21.4% for the
FTSE 250 ex-Investment Trusts index.
Relative
returns were impacted by a shift in the mid-cap sector that
favoured interest rate-sensitive companies with weaker balance
sheets, to which SCP has limited exposure.
The proposed
final dividend, combined with the interim dividend already paid on
09/08/2024 should bring total dividends for the year to 21.5p per
share. However, with revenue return per share of 20.54p, the
dividend is not fully covered.
The
discount slightly widened during the year from 12% to 12.3% (as of
30/09/2024). However, since the publication of the annual report,
the discount has narrowed slightly to 11.3% by
26/11/2024.
Net gearing
increased to 9.5% as of 30/09/2024, up from 6.8% at the end of the
previous year, and was a net benefit to performance as a result of
the rising market.
The managers
have taken advantage of attractive prices to add companies
benefitting from structural growth in market
niches.
Outgoing
chairman Robert Talbut discussed the valuation opportunity stating:
"We continue to
remain optimistic about the outlook for UK mid-caps and the
company's portfolio holdings, which are largely focused upon longer
term growth businesses."
Kepler
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Whilst SCP has delivered strong return in
absolute terms, the managers underperformed the benchmark by 4.1
percentage points. With the Bank of England lowering interest
rates, cyclical companies, to which SCP typically has low exposure,
have benefited from a tailwind. However, this may only be a
temporary drawback as the companies SCP invests in should be less
reliant on monetary policy to deliver long-term returns.
The managers believe that recent upgrades in
forecasts for the UK economy forecasts may counter bearish
structural arguments against UK equities. They also consider FTSE
250 companies to be undervalued relative to their FTSE 100 peers
and expect the valuation gap between FTSE 250 and FTSE 100 stocks
to close over time. Moreover, they argue M&A could further
support performance going forward. In our view, these factors could
provide support for a long-term recovery of UK mid-caps.
The paid and proposed dividends for the
financial year 2024 total 21.5p per share, up from 20.5p in
2023.With revenue per share at 20.54p during the period, the
dividend is not fully covered. However, we note that the trust has
revenue reserves equal to more than 100% of the dividends paid in
2024. The dividend has been increased regularly since inception and
is, in our opinion, one of the differentiating features of SCP,
despite not being an explicit goal of the managers.
Despite the strong absolute
performance, SCP's shares still trade at a double-digit discount.
We believe this discount presents an attractive entry point for
long-term investors.
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