abrdn Smaller Companies Income Trust plc 13
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
Hilton Foods (Hilton) was a detractor from performance as
shares fell sharply in response to a downgrade to
profitability. This was based on a surge in the price of
salmon and other seafood, which has been exacerbated
by the war in Ukraine. It is important to note, however, that
the company’s established meat business model has
remained robust in the face of severe cost pressures,
protected by the cost-plus nature of its contracts. The
warning was largely due to cost inflation in its multi-
customer businesses, an area in which the company has
increased exposure through acquisitions in recent years.
In our meeting with management we took comfort that
profitability in these businesses will be restored over the
next two years as Hilton increases prices and generates
operational efficiencies, while commodities normalise.
Importantly, these businesses improve Hilton’s overall
offering, which will help drive organic growth in its core
single customer business. Although underlying volumes in
its core business have been affected by a channel
rebalancing and a softening consumer outlook, Hilton has
a number of levers to offset this over the next few years
and a recovery in its multi-customer businesses and the
entry into a new geography will make the greatest
difference to Hilton’s earnings over the next few years. We
reduced our holding but retained a position because
Hilton’s offering is highly valuable to grocers, offering them
a way to meaningfully reduce cost, improve the
company’s supply chains and deepen its product offering.
We believe that the issue is short-term and should not
distract from future opportunities which allow Hilton to
generate exceptional returns on capital.
Mortgage Advice Bureau (MAB) shares fell, as visibility over
MAB’s shorter term financial outlook was clouded by
turmoil in the mortgage market following the mini budget.
In a perfect storm of external factors MAB’s share price
was hit by fears over sterling weakness, gyrations in
interest rate expectations and dislocation in mortgage
markets. The rationale for retaining the holding is its
position at the strategic forefront of the industry, it is not
totally at the mercy of market conditions. From here we
are likely to see a strategy acceleration as the business
tends to gain market share more rapidly in weak market
conditions, as advisers have more need of the support
which MAB can provide compared to other mortgage
networks. The potential to expand the franchise has been
significantly augmented by MAB’s capacity to generate
leads for network members, reinforced by the acquisition
of Fluent which materially strengthens access to national
lead sources. Analysts’ medium term expectations
are unchanged.
The retail sector has had a torrid start to the year on fears
of a consumer collapse and we have seen material
downgrades across the sector. Share prices, in turn, have
plummeted in the face of macro concerns and rising
costs. Seraphine, the online maternity wear retailer
detracted from performance as shares fell sharply
following a profit warning due to supply chain pressure
and poor management of duties. We exited the position
given its poor matrix score, and fears over the ability of the
business to manage ongoing supply chain and inflationary
challenges against a weakening consumer backdrop.
Portfolio activity
During the year we added eleven new holdings and
exited eight.
We added a new position in Pets at Home a leading player
in the UK pet care market. The business is set to benefit
from post-pandemic trends which will serve to underpin
group growth into future years. Its customer centric,
omnichannel model, spanning healthcare and retail can
not only drive incremental share gains but is also
differentiated and difficult to replicate. Notwithstanding
short term, industry wide pressures on retailers, the long
term story remains intact and the business is generally
assumed to have better defensiveness than most retailers
from the service levels attaching to pet ownership. Clearly
an element of that is discretionary spend and subject to
weakness, but Pets at Home is in the buildout phase of a
number of major upgrades to warehouse, digital and vet
practice systems and these should underpin longer term
sales growth at a premium rate to 4% market growth. The
shares have an attractive free cashflow yield of 5.5%
giving a well-funded 3% dividend yield. The balance sheet
is net cash, providing optionality for M&A.
We initiated a holding in gas exploration and production
business Energean. The business is founder run with a
strong track record of growing reserves and resources.
The company’s management is focused on maximising
production from its large scale gas focused portfolio to
deliver material free cash flow and maximise total
shareholder return in a sustainable way. Energean is
insulated from commodity price volatility because of
contracted floor pricing in gas sale and purchase
agreements (GSPAs) providing long-term visibility.
Management announced the company will pay $1billion
back to shareholders at least by 2025 which will see them
paying a sector leading dividend. The policy implies a 7.5%
yield from Q4 2022, growing to 15% in 2024/25. This is
underpinned by a Free Cash Flow yield of around 25%
from 2023-2030 and should enable Energean to continue