DUNEDIN INCOME GROWTH INVESTMENT TRUST PLC

HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 31 JULY 2024

Legal Entity Identifier (LEI):  549300PXLZPR5JTL763

INVESTMENT OBJECTIVE

The objective of Dunedin Income Growth Investment Trust PLC is to achieve growth of income and capital from a portfolio invested mainly in companies listed or quoted in the United Kingdom that meet the Company's sustainable and responsible investing criteria as set by the Board.

BENCHMARK

The Company's benchmark is the FTSE All-Share Index (total return). Performance is measured on a net asset value total return basis over the long-term.

PERFORMANCE HIGHLIGHTS

FINANCIAL CALENDAR

FINANCIAL HIGHLIGHTS

For further information, please contact:

Ben Heatley

abrdn Fund Managers Limited

0131 372 2200

Chairman's Statement

Review of the Period

The UK equity market delivered a strong total return over the six months under review, driven by an improving domestic macroeconomic landscape and attractive starting valuations. The Bank of England's recent base rate cut in August signals a potential peak in the current interest rate cycle, marking a shift towards a more accommodative monetary policy. Lower inflation alleviates cost pressures on businesses, enhances consumer purchasing power, and provides central banks with more flexibility to ease interest rates, collectively supporting economic stability and growth.

In a politically charged year, marked by elections in over 100 countries, representing nearly half of the global population, the UK general election outcome in July was largely as expected. Following the decisive outcome of the election, there are signs of renewed interest in UK equities as institutional investors re-engage with the UK market and turn their focus more to economic and business fundamentals. This, along with an increase in UK merger and acquisition activity, signals a potential shift in sentiment which could support a UK market recovery.

Against this backdrop, the Company's net asset value ("NAV") total return for the six months ended 31 July 2024 was 8.2%. This compares to a total return of 12.3% from the FTSE All-Share Index. The share price total return for the period was 10.5%, reflecting a narrowing of the discount at which the shares trade relative to the NAV, from 10.7% to 9.0% at the end of the period.

The Company's performance relative to the market reflects the portfolio of high quality companies which were out of favour during the period. The portfolio continues to showcase strong quality characteristics while delivering a premium yield and stronger dividend growth compared to the FTSE All-Share Index. Furthermore, the portfolio remains concentrated, exhibiting a high active share and stock-specific risk, which underscores the Company's differentiated approach to generating income and capital growth in contrast to many UK income equity investment trust peers.

A detailed review of portfolio activity during the period is contained in the Investment Manager's Review.

Earnings and Dividends

Revenue earnings per share increased by 8.1% during the period, to 8.92p per share compared to 8.25p per share for the first six months of last year. This was due principally to an increase in income generated from option writing activity, along with the impact of the reduction in the number of shares in issue as a result of the share buy back activity. Underlying dividend income from the portfolio was broadly unchanged compared to the same period last year, but the Investment Manager has seen a number of dividend declarations well ahead of their expectations and they expect to see further progress in the second half of the financial year. Further details are provided in the Investment Manager's Review.

A first interim dividend in respect of the year ending 31 January 2025, of 3.2p (2024: 3.2p) per share, was paid on 30 August 2024 and the Board has declared a second interim dividend of 3.2p (2024: 3.2p) per share, which will be paid on 29 November 2024 to shareholders on the register on 1 November 2024.

Based on last year's annual dividend of 13.75p per share, the dividend yield on the Company's shares was 4.6% at the end of the period. This is one of the higher yields available from the AIC's UK Equity Sector and is approximately 20% higher than the yield available from the UK equity market as measured by the FTSE All-Share Index.  

Our distribution policy remains to grow the dividend faster than inflation over the medium term and, with the Company's robust revenue and capital reserves and the healthy underlying dividend and earnings growth of the companies within the portfolio, we believe that the policy remains very well supported.

Regulatory Change

In line with my statement in the Annual Report on the UK's sustainability disclosure requirements and investment labels regime (together "SDR"), the Board has continued to consult with the Investment Manager on the application of the new regime to the Company. 

As background, shareholders will be aware that the Company adopted a sustainable investment overlay to its investment objective in 2021 and full details of the sustainable and responsible investing criteria adopted by the Board are set out in the Company's Annual Report each year. The move reflected an evolution of the investment process and formalised the existing approach to quality investing, which incorporates an assessment of long term environmental, social and governance risks and opportunities.   

At the time of writing, our understanding of the way in which the new regime will apply to the Company continues to evolve but the Board wishes to emphasise that it intends to be fully compliant with the SDR regime from its implementation date on 2 December 2024 and the Investment Manager is not intending to change its strategy in managing the Company's portfolio.

Gearing

The level of gearing (net of cash) was 9.5% as at 30 June 2024, compared to 6.8% at the beginning of the period. During the period, the Investment Manager drew down an additional £6 million from the Company's revolving credit facility ("RCF") to enable it to take advantage of some of the attractive investment opportunities in the market. Gearing also increased as a result of a lower cash balance held at the period end than at the start of the period, and through the impact of share buy backs, which reduce the Company's capital base.

Since the end of the period, the Company has announced the renewal of its multi-currency RCF with Bank of America, N.A., London Branch (the "Lender") on a secured basis. The facility replaced the previous, unsecured, £30 million facility with Bank of Nova Scotia London Branch, which expired on 8 August 2024. 

Under the terms of the new facility, the Company has the option to increase the level of the commitment from £30 million to £40 million at any time, subject to the Lender's consent. The facility sits alongside the Company's £30 million secured 30 year loan note, which is drawn down in full until 8 December 2045 at an all-in rate of 3.99%.

Following the renewal of the facility, the level of the Company's borrowings remains unchanged.

Discount

As stated above, at the end of the period the Company's shares traded at a discount of 9.0% (on a cum-income basis with borrowings stated at fair value), compared to a discount of 10.7% at the beginning of the period.  We continued to buy back shares during the period, buying back 3.4 million shares (2.3% of the share capital) at an average discount of 10.9%, thereby providing a small enhancement to the NAV per share for shareholders. Since the end of the period we have bought back a further 1.5 million shares.

As we have previously stated, the Board believes a consistent rating of the Company's shares close to the underlying asset value is of significant benefit to shareholders. As well as a strong focus on execution of the investment strategy, the Board continues to support efforts to attract new investors and retain existing ones through clear messaging and regular engagement with investors. We are confident that the Company's attractive dividend yield and differentiated positioning are a good basis to support a strong rating for its shares over the medium term. The Company will continue to buy back shares to provide liquidity and address any imbalances between buyers and sellers.

Board Succession

It is the Company's stated policy that Directors should stand down after nine years on the Board. Jasper Judd, who is Chairman of the Audit Committee, and I, both joined the Board in February 2016. As stated in the Annual Report, we will therefore stand down from the Board at the conclusion of the Company's AGM in 2025. The Board will recruit a further Director during the course of this financial year who, it is intended, will take over from Jasper as Chairman of the Audit Committee. The number of Directors will therefore increase to six for a short period to allow for an orderly handover and smooth succession. Howard Williams, who has been a Director since April 2018, will succeed me as Chair of the Company and it is the Board's intention to recruit a fifth Director in 2025 to bring the number of Directors back to five.

Outlook

The UK macroeconomic picture, while still subdued, looks more encouraging than it did at the turn of the year. Inflation has fallen to close to the Bank of England's 2% target, there is the prospect of further interest rate reductions and economic growth is expected to gradually improve.

There remain a number of geo-political risks. The details of the new government's first budget will be important in setting the economic and fiscal landscape in the UK. Protracted conflicts in Ukraine and the Middle East continue to pose potential upside risks to commodity prices. The outcome of the upcoming US presidential election in November adds a layer of uncertainty that could significantly impact global international relations. While the UK macro environment is showing signs of improvement, the US economy is projected to experience a moderation in growth, although it is expected to avoid a significant recession. Meanwhile, the Chinese economy faces substantial challenges, including weak domestic demand and an unstable real estate sector.

The Investment Manager continues to select high-quality, sustainable companies that can provide income resilience and capital growth across various economic conditions, and remains optimistic for the outlook for the companies in the portfolio. The concentrated portfolio reflects the Investment Manager's best investment ideas to meet this objective. While performance can lag the benchmark in periods where businesses exposed to rising commodity prices and positively geared to rising interest rates are in favour, the Investment Manager believes that limiting exposure to the most cyclical companies with high financial and operating risks, while favouring those exposed to structural growth and stronger balance sheets will support long term shareholder total returns.

David Barron
Chairman
1 October 2024

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 has been prepared in accordance with Financial Reporting Standard 104 'Interim Financial Reporting';

-        The Interim Board Report (constituting the interim management report) includes a fair review of the information required by DTR 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 year; and

-        The financial statements include a fair review of the information required by DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

Principal Risks and Uncertainties

The Board regularly reviews the principal 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 January 2024 and comprise the following risk categories:

-       Investment objectives

-       Investment strategies

-       Investment performance

-       Income/dividends

-       Financial/market

-       Gearing

-       Regulatory

-       ESG risks

-       Operational (including cyber-crime)

-       Geo-political

The Company's principal 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.

In addition to those principal risks and uncertainties, the Board considers that the development of Artificial Intelligence ("AI") presents potential risks to businesses in almost every sector. The extent of the risk presented by AI is extremely hard to assess at this point but the Board considers that it is an emerging risk and, together with the Manager, will monitor developments in this area.

Going Concern

The Company's assets consist mainly of equity shares in companies listed on the London Stock Exchange and in most circumstances are considered to be realisable within a short timescale. The Board has set limits for borrowing and derivative contract positions and regularly reviews actual exposures, cash flow projections and compliance with loan covenants. The Directors have considered the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary. The Directors have also performed stress testing on the portfolio and the loan financial covenants.

Having taken these matters into account, the Directors believe that the Company has adequate financial resources to continue in operational existence for the foreseeable future and for at least twelve months from the date of this Report. Accordingly, they continue to adopt the going concern basis of accounting in preparing the financial statements.

On behalf of the Board
David Barron
Chairman
1 October 2024

Investment Manager's Review

Performance and Market Review

The UK equity market experienced a strong appreciation in the first half of the Company's financial year, driven by a continued decline in the inflation rate, which has now reached target levels, alongside improving sentiment regarding both UK and global economic activity. The Bank of England joined the global rate cutting cycle at the end of the period, with the first reduction in rates since April 2020. 

Against this backdrop, the Company's net asset value ("NAV") total return for the six months to 31 July 2024 was 8.2%, which compared to a total return of 12.3% from the FTSE All-Share Index. In the first quarter of the year, cyclical sectors, particularly banks, energy, and mining companies, led the market, with mid-cap stocks outperforming as risk appetite grew and signs of a more resilient global economy emerged. The market exhibited a wide dispersion of stock returns, with investors willing to reward high performers while penalising those missing expectations.

Commodity prices rose, notably for oil amid escalating tensions in the Middle East, and for copper, driven by strong demand against a backdrop of constrained supply, although prices retreated toward the end of the period. Overall, global economic data remained mixed but generally exceeded initial expectations for the year. However, China stands out as an exception, with economic activity continuing to lag and persistent concerns surrounding its real estate market.

At the company level the portfolio benefitted from a number of positive performers. Intermediate Capital has delivered strong performance, with the company forecasting a positive outlook for fundraising within private credit. Morgan Sindall has also excelled, with its fit-out division demonstrating significant growth as clients invest to upgrade office space standards. This has led to strong profit growth and a further significant dividend increase. Unilever has also performed well as the company's strategy under the new CEO, Hein Schumacher, starts to take hold, delivering accelerating revenue growth and greater than expected margin expansion.

There were a number of companies that underperformed over the period. These included the French digital services and payments company Edenred, which was impacted by the political uncertainty generated by the recent elections, expectations of falling interest rates and declining inflation impacting its income, and a regulatory investigation into contract tendering processes in its Italian business. Despite these headwinds, the company has maintained its guidance for double-digit revenue growth, highlighting new client wins and the rollout of new products while the valuation and dividend yield look increasingly attractive. Meanwhile, Diageo's shares also underperformed, primarily due to weakened consumer demand in Latin America and the Caribbean, compounded by a prolonged destocking cycle in the United States. We believe the downgrade cycle is coming closer to an end, while the underlying valuation remains attractive, presenting an opportunity to continue to back a high-quality business going through a challenging cyclical period. The Company's underweight exposure to the banking sector also detracted from performance during the period under review, where we remain somewhat cautious on the sustainability of profitability and, by extension, dividend generation.

Portfolio Activity

We have introduced several new companies to the portfolio. One notable addition is Genuit, a leading manufacturer of piping solutions for water, climate, and ventilation management. The company has a strong focus on sustainability and, while it is cyclical, is well-positioned for long-term structural growth and offers potential margin expansion. We also added Convatec, which specialises in advanced wound care, ostomy care, continence care, and infusion care. Convatec benefits from favourable demographic trends, including an aging population and an increasing incidence of chronic conditions. The company has strong brands and is experiencing accelerated growth due to product innovation and improved execution. We believe it has the potential to enhance its operating margins, a positive outlook that is not yet reflected in its valuation.

Additionally, we initiated a position in Azelis, a Belgian-listed specialty chemical distributor. We see strong long-term growth prospects as it supplies chemicals to fast-growing end markets, such as life sciences. Azelis operates a capital-light business model and has a network of application laboratories that provide technical guidance on product development. Finally, we acquired a stake in Gaztransport & Technigaz ("GTT"), a French-listed industrial engineering design firm known for its design of membranes used in LNG carrier ships for the storage of liquefied natural gas ("LNG"). GTT's capital-light model is supported by strong pricing power, with growth driven by the expansion of the global LNG fleet, premium pricing on new designs, and the application of its technology in areas like hydrogen. The company has a net cash balance sheet, generates high cash conversion rates, and returns excess liquidity to investors, positioning it well to provide a growing dividend stream.

We added to positions in UK mid-cap companies such as Assura, and Softcat, where we see attractive total return prospects in this segment of the market. We also increased the holding in animal genetics company Genus, given its depressed valuation relative to historical levels and its strong long-term potential. In addition, we significantly increased the Company's investment in National Grid at the time of its rights issue, which has strengthened the company's capital position and enabled significant future growth.

To fund these purchases, we reduced the position in Intermediate Capital after a significant increase in its share price exceeded our risk appetite. We exited a small position in Moonpig following a strong recovery in its share price, as well as in the specialty chemicals manufacturer Croda, where we have lower conviction in the firm's competitive position. We divested the holding in Scandinavian bank Nordea after it paid its large annual dividend, trimmed the position in Marshalls following a strong share price recovery, and reduced the substantial position in AstraZeneca, as we believe its prospects no longer justify such a significant allocation of the Company's capital.

We continued to generate income from option writing. We wrote a number of options to both generate income and to position the portfolio. This included puts over branded consumer health company Haleon which we are looking to introduce to the portfolio. In addition, we wrote puts over TotalEnergies, Genus, Azelis and Prudential where we are happy to increase the holdings, and calls over Taylor Wimpey, Croda and Intermediate Capital.

The level of investment income rose healthily year on year, boosted by the timing of option income, with dividend income more or less flat. Overall, the income delivery from the portfolio was solid, with a number of declarations well ahead of our expectations. While the decision by Close Brothers to pass its dividend given the ongoing regulatory investigation into its auto lending business was frustrating, we were able to largely make up the lost income from other sources.

Gearing

In May we took the decision to increase the level of gearing by just over 1%, drawing down an additional £6 million from the revolving credit facility, reflecting the very healthy pipeline of potential investment opportunities that we have open to us. The last time we increased borrowings was in March 2020 amidst the market turmoil sparked by the pandemic. The Company also continued to buy back its own shares in the market - we consider the current discount to NAV as attractive, particularly when we believe the underlying portfolio is on an undemanding rating.

Outlook

Despite recent market volatility, the UK macroeconomic landscape is gradually improving, with growth set to recover slowly, inflation moderating, and consumer confidence picking up, painting a more encouraging picture than at the turn of the year. The recent change in government in the UK has brought a degree of political stability that reassures markets, although attention is now focused on the upcoming autumn budget, which is expected to have significant implications for various sectors.

The current valuation of the market and the portfolio reflects muted expectations, potentially providing a springboard for strong prospective returns. Mergers and acquisitions remain a prominent feature, while share buybacks continue to provide support. There have also been some encouraging early signs of international investors returning to the UK market. A confluence of a steadily improving economic landscape, declining interest rates, and a softer currency could present a compelling investment case for UK equities, particularly in the mid-cap sector, where the Company holds a strategic overweight position.

However, risks remain, and elevated tensions in the Middle East and Ukraine, along with their potential impact on energy prices, warrant close monitoring. Likewise, the Chinese economy continues to struggle and there are increasing signs of a slowdown in the United States, both factors to remain vigilant to.  As ever, we shall continue to seek a balance in our positioning of the portfolio, giving the Company the potential to perform in a range of market environments while keeping watch for new opportunities in high-quality companies with attractive long-term prospects that align with the Company's sustainable and responsible investing criteria.

Ben Ritchie and Rebecca Maclean
abrdn Investments Limited
1 October 2024

Investment Portfolio

Condensed Statement of Comprehensive Income (unaudited)

Condensed Statement of Financial Position (unaudited)

Condensed Statement of Changes in Equity (unaudited)

Condensed Statement of Cash Flows (unaudited)

Notes to the Financial Statements (unaudited)

For the year ended 31 July 2024

Alternative Performance Measures ("APMs")

By order of the Board

abrdn Holdings Limited

Company Secretary

1 October 2024

Please note that past performance is not necessarily a guide to the future and the value of investments and the income from them may fall as well as rise.  Investors may not get back the amount they originally invested