Circle Property — Increasing forecasts again

Circle Property — Increasing forecasts again

Circle Property’s recent interim results show asset management initiatives continuing to drive operational progress, delivering strong growth in rental income and cash earnings, and lifting portfolio valuations. Letting progress has continued in H218, including at recently refurbished assets, but significant reversionary potential remains and capital values remain low. We are raising our estimates again but continue to see potential for further upside from faster letting of refurbished assets than we have assumed. Even before that, the shares trade at a hefty 25% discount to FY18e NAV with a yield of more than 3%.

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Written by

Circle Property

Increasing forecasts again

Update on interim results

Real estate

10 January 2018

Price

159p

Market cap

£45m

Net debt (£m) at 30 September 2017

43.6

Net LTV at 30 September 2017

42.3%

Shares in issue (exc. Treasury)

28.3m

Free float

63.5%

Code

CRC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.3)

2.3

5.0

Rel (local)

(4.6)

(0.9)

(3.0)

52-week high/low

159.5p

150.5p

Business description

Circle Property is an AIM-quoted property investment company with a wholly UK portfolio, currently focused on UK office buildings, mainly outside London. It seeks to increase capital value by refurbishing and re-leasing assets in areas with high demand, and has a progressive dividend policy.

Next events

Trading update

Exp. April 2018

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Circle Property is a research client of Edison Investment Research Limited

Circle Property’s recent interim results show asset management initiatives continuing to drive operational progress, delivering strong growth in rental income and cash earnings, and lifting portfolio valuations. Letting progress has continued in H218, including at recently refurbished assets, but significant reversionary potential remains and capital values remain low. We are raising our estimates again but continue to see potential for further upside from faster letting of refurbished assets than we have assumed. Even before that, the shares trade at a hefty 25% discount to FY18e NAV with a yield of more than 3%.

Year
end

Net rental income (£m)

Adjusted
net profit* (£m)

Adjusted
EPS* (p)

NAV per share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

03/16**

1.1

0.6

2.3

153

2.4

1.04

1.5

03/17

4.4

0.9

3.1

183

5.0

0.87

3.1

03/18e

5.2

2.0

7.0

214

5.3

0.74

3.3

03/19e

5.9

2.4

8.6

232

5.5

0.69

3.5

Note: *EPS is adjusted for gains/losses on sales of investment property, revaluation movements, and non-recurring items. **Period from 4 December to 31 March 2016.

Letting progress driving income and capital gains

H118 net rental income increased 30% on H117 and 11% on H217. Letting progress in the period is yet to fully contribute to income and has continued into H218. The improving income profile of the portfolio had a significant impact on adjusted earnings and dividend-paying capacity, with the former more than tripling y-o-y and more than doubling versus H218. Meanwhile, the 11.3% gain in the portfolio value to £103.5m supported NAV per share growth to 212p. NAV total return was 17.1% during the six-month period. We have increased estimates again, with faster rental growth having a geared impact on adjusted EPS, which for FY18e goes from 5.4p to 7.0p. NAV per share forecasts also increase, though more moderately, and we have increased our FY18e DPS to 5.3p (5.2p).

Upside potential from refurbished assets

Circle specialises in acquiring short-let or part-vacant office properties in the UK’s provincial cities where it can add value by undertaking lease renewals, rent reviews, lettings and refurbishments. Valuation uplift reflects these efforts and, with an additional potential rent income of more than £2m pa as recent refurbishments are let, there should be more to follow. Our near-term forecasts capture only part of this and faster letting progress could lift FY19e underlying EPS by c 50% and NAV per share towards 250p. Liquidity is thin, but management is considering options for enlarging the shareholder base, perhaps in conjunction with growing the asset base.

Valuation: Wide discount with nothing for upside

Our revised forecasts show the shares trading at a 25% discount to FY18e NAV per share supported by a fully covered dividend yield of more than 3%. Given management’s experience and track record, this is a low valuation with nothing obviously being factored in for the upside potential.

Company description: Regional refurbishment specialist

Circle is an internally managed property investment company, registered in Jersey. It was initially founded as a limited partnership in 2002, became a Jersey Property Unit Trust (JPUT) in 2006, and has been quoted on AIM since February 2016. Its focus is office properties in the UK’s provincial cities, targeting assets that may be too small for most institutional investors but too large for most private investors, and where the income profile is likely to deter REIT investors. It typically targets short-let properties (or vacant properties, if the letting prospects are sufficiently strong) where it can add value by undertaking lease renewals, rent reviews, lettings and refurbishments.

Circle’s senior management team includes three full-time property professionals and the company is governed by a highly experienced board. Together, the management and board own approximately 30% of the company, closely aligning their interests with external shareholders. The company has a strong track record of NAV total returns, both prior to IPO and since, and this continued through H118.

The current portfolio of 15 assets is now valued at £103.5m (30 September 2017) of which 11 office buildings comprise 90%. All the assets, with one exception (an office property in Moorgate), are outside London and significant refurbishment programmes have been recently completed at three of them, which are expected to increase rent and capital values significantly on those assets. The concentration of assets is mitigated to some extent by a more diverse lease portfolio of 113 units let to 53 tenants, ranging from major international companies such as Compass Group to local businesses.

For a full description of the company and its strategy see our initiation note.

Exhibit 1: Portfolio sector split by value

Exhibit 2: Portfolio regional split by value

Source: Circle Property 30 September 2017

Source: Circle Property 30 September 2017

Exhibit 1: Portfolio sector split by value

Source: Circle Property 30 September 2017

Exhibit 2: Portfolio regional split by value

Source: Circle Property 30 September 2017

Highlights of the FY18 interim results

H118 results that were released in December show ongoing asset management initiatives continuing to drive operational progress, delivering strong growth in rental income and cash earnings, and lifting investment portfolio valuations. Rental income in H118 benefited from the more than £600k of lease contracts signed in H217, while the period under review saw a further 7.2% added to the annualised rent roll, which is yet to be fully recognised in income. Further leasing progress has already been made in H218 and we review this, and the implications for our forecasts, in a later section.

Exhibit 3: H118 financial summary and comparison

(£’000s)

H118

H117

Change (%)

FY17

Net rental income

2,611

2,007

30%

4,366

Administrative expenses

(801)

(856)

(6%)

(2,115)

Operating profit before revaluations & other one-off items

1,810

1,151

57%

2,251

Gains on disposal

0

0

279

Gains on revaluation

7,307

6,597

7,361

Negative goodwill & listing costs

0

0

88

Operating profit

9,117

7,748

9,979

Net finance costs

(552)

526

(13)

Profit before tax

8,565

8,274

9,966

Taxation

99

(62)

(22)

Profit after tax

8,664

8,212

6%

9,944

Adjusted earnings

1,358

288

372%

889

IFRS EPS (p)

30.6

29.0

35.1

Adjusted EPS (p)

4.8

1.0

372%

3.1

DPS (p)

2.6

2.4

8%

5.0

IFRS & EPRA NAV per share (p)

212

179

183

EPRA NAV total return

17.1%

20.1%

24.1%

Net LTV

42.3%

45.6%

43.9%

Source: Company data

The financial highlights of H118 were:

IFRS earnings of £8.7m or 30.6p per share were 6% higher than the level reported in the prior year period. Gains on the revaluation of investment properties represented a substantial share of the profits in both periods, but were slightly higher in H118 at £7.3m (H117: £6.6m).

On an underlying basis, excluding revaluation, earnings were £1.4m or 4.8p per share, more than tripling compared with the prior year period, benefiting from operational gearing. Net rental income increased 30% to £2.6m while administrative expenses declined by 6%.

The interim dividend of 2.6p is in line with that declared in H217, representing an 8.3% increase over H117 (2.4p).

NAV per share (both IFRS and EPRA) benefited from the substantial revaluation gains that resulted from asset management of the portfolio (see our update note published on 27 October 2017) and increased to 212p compared with 183p at end-FY17.

The growth in NAV per share, taken together with dividends paid per share, generated a strong NAV total return of 17.1% during the six-month period. This compares with 20.1% in H117 and 24.1% for FY17 as a whole.

Gross balance sheet debt was £48.8m at 30 September 2017 and, allowing for cash and unamortised debt issuance costs, the net loan to value ratio (LTV) was 42.3% (end-FY17: 43.9%).

Management remains positive about the prospects for the regional office market, noting a robust occupier market and ongoing constraints on supply, with the investment market also remaining strong with little or no sign of a softening in yields. It expects the favourable demand-supply situation in the occupier market to remain as long as the ongoing conversion of office space to residential continues, or until rents rise sufficiently to encourage new development. While tenants are showing a degree of caution in making long-term leasing decisions against the backdrop of Brexit uncertainty, Circle expects the location and quality of its assets, particularly those that have been refurbished, to continue to appeal to tenants. As discussed below, there is considerable reversionary potential in the portfolio, which should support the company’s ability to both attract tenants and grow rental income.

Portfolio update

The investment portfolio fair value increased by 11.3% in H118 to £103.5m (the balance sheet value of £96.3m, up from £86.1m at end-FY17, includes an adjustment for unamortised lease incentives). The fair value uplift included a 7.9% revaluation gain, with most of the balance accounted for by capex. In terms of composition, the portfolio is relatively concentrated, with 15 properties, and with a current focus on the regions (75% in Milton Keynes, Birmingham and Bristol) and offices, which represent 90% of the value (Exhibits 1 and 2). The annualised contracted rent roll excluding rent-free periods rose to £5.95m at end-H118 (end-FY17: £5.62m), still considerably below the expected rental value (ERV), which also increased to £9.34m (end-FY17: £8.89m). Around £2.0m of the reversionary potential (the potential uplift in rents to ERV) is represented by vacant space at recently completed major refurbishment projects (discussed below) and the balance by leasing events spread across the portfolio. Despite the strong gains in valuation during the period, and since IPO, there is considerable scope for further upside. Although the end-H118 valuation represents a net initial yield of 5.4%, the reversionary yield is 8.48%, while the capital value is low at an average £163 per sqft (which management indicates is below replacement value) with an average rent of £12.80 per sqft.

Exhibit 4: Portfolio valuation summary

Value (£000s)

Initial yield

Reversionary yield

Offices

93,200

5.24%

8.54%

Industrial

1,125

6.13%

13.20%

Motor & roadside

2,950

7.00%

6.87%

High Street retail

1,700

6.90%

7.31%

Retail warehousing

4,550

6.82%

7.57%

Total portfolio

103,525

5.40%

8.48%

Source: Company data

The weighted average unexpired lease term to first break increased to 7.73 years from 7.39 years at end-FY17 and to 11.29 years to lease expiry from 11.23 years at end-FY17. Lease contracts signed during the period added £379k (gross) to the contracted rent roll, or 7.2%. The rent roll (net) increased by c 6%. Further letting progress has been made in H218 and management indicates that, should all the negotiations currently underway convert to lettings, annualised contracted rental income should exceed £6.0m by the end of FY18.

The most significant driver of income growth and asset valuation over the next 18 months or so will be progress in letting the three recently refurbished assets (the “development portfolio” assets) described below. The additional gross rent potential from fully letting remaining available space in these properties is c £2.0m pa, with the potential to lift the contracted rent roll to £8m.

K2, Kents Hill Business Park, Milton Keynes. Reversionary potential £0.6m. This 40,000sqft, two-storey office unit within the Kents Hill Business Park has been refurbished at a cost of £2.4m. In October 2017 management reported significant progress in letting the space, with the majority of the ground floor under offer and good interest in the first floor. The first letting (5,500 sqft) is in solicitors’ hands.

36 Great Charles St, Birmingham. Reversionary potential £0.5m. This 25,000sqft office building in the core office district, near to the major redevelopment of the area around the city hall, was acquired in 2015 for £2.5m (31 March 2017 value £4.6m). A rolling refurbishment was completed in June 2017 at a cost of c £2.1m, and the refurbished space is now being marketed, with one letting in solicitors’ hands.

Somerset House, Temple St, Birmingham. Reversionary potential £0.95m. This building, in the heart of Birmingham’s financial and professional core, and a two-minute walk from the Birmingham New St rail station, was bought in January 2016 for £7.75m. Subsequently, planning permission was obtained to provide two enlarged ground floor restaurant units, for which construction has been completed. Refurbishment of the vacant 43,700sqft of office space has just completed and will now be the subject of a wider marketing campaign. During H118, a new 20-year lease without break was signed with Latin American restaurant Las Iguanas at a rent of £220,000 pa. The second restaurant unit is now under offer.

Exhibit 5: Contracted rents and expected rental value (30 September 2017)

£000s

Contracted rent roll at 30 September 2017

5.95

Development assets expected rent (ERV)

K2, Kents Hill Business Park, Milton Keynes

0.60

Great Charles St, Birmingham uplift

0.50

Somerset House, Temple St., Birmingham

0.95

Potential rent including development assets

8.00

Other, rent reversion potential

1.35

Total portfolio ERV at 30 September 2017

9.35

£000s

Contracted rent roll at 30 September 2017

Development assets expected rent (ERV)

K2, Kents Hill Business Park, Milton Keynes

Great Charles St, Birmingham uplift

Somerset House, Temple St., Birmingham

Potential rent including development assets

Other, rent reversion potential

Total portfolio ERV at 30 September 2017

5.95

0.60

0.50

0.95

8.00

1.35

9.35

Source: Company data

Financials

The H118 financial results were ahead of our unpublished expectations for this stage of the current year. Driven by leasing progress, net rental income was c £200k ahead of our expectations while administrative costs were c £100k lower. Given the income profile of the portfolio, with its significant exposure to asset management projects, the impact of these differences on our forecast adjusted earnings is quite material. Forecast adjusted EPS for the current year increases 31% to 7.0p (from 5.4p) and we have also increased FY19 to an expected 8.6p (from 8.2p). Given this strong profile of adjusted earnings growth we have also raised our dividend expectations and now look for 5.3p in FY18 (was 5.2p) and 5.5p in FY19 (was 5.2p).

Recent new lettings have already improved the income profile of the portfolio and we expect this to continue. Our revised estimates assume £6.2m or c 66% of ERV (end-FY18 c 64%). We allow for c 2% pa ERV growth through H218 and FY19. The effect is to lift forecast FY18 net rental income by c 5%, largely representing a pulling forward of the letting progress that we previously allowed for in FY19. Our FY19 net rental income forecast increases by just under 1% and is based on end-FY19 annualised contracted rents of £7.3m (c 76% of forecast ERV). Faster net rental income growth is the main driver of our forecast upgrades, with a lesser contribution from expected administrative costs and, in FY18, the follow through of a H118 tax credit that was not reflected in our previous forecast.

Exhibit 6: Forecast revisions

Net rental income (£m)

Adjusted net profit (£m)

Adjusted EPS (p)

NAV per share (p)

DPS (p)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

03/18e

4.9

5.2

5.0

1.5

2.0

31.2

5.4

7.0

31.2

210

214

2.1

5.2

5.3

1.9

03/19e

5.8

5.9

1.3

2.3

2.4

4.8

8.2

8.6

4.8

220

232

5.5

5.2

5.5

5.8

Source: Edison Investment Research

Our NAV forecasts had already taken account of the H118 revaluation gains that were pre-announced in October. However, consistent with our assumptions for letting progress, we have increased our forward-looking revaluation gain forecasts. We believe that these remain relatively conservative and make no assumption about the general level of market valuation yields. For H218 we assume a £1m uplift, taking the total increase on the opening value in the year to 8.9% from 7.9% in H118. For FY19 we assume a £4m gain, or 3.8% of the opening value. Looked at alongside the increase in annualised contracted rents, the implied end-FY19 net initial yield actually increases to a little over 6.2% (from 5.4% at end-H118), while the implied reversionary yield declines to c 8.2% (from 8.48% at end-FY18).

The letting of vacant space at a faster pace than we have allowed for in our estimates is a potential source of significant upside to our forecast adjusted earnings and NAV. If we were to capitalise the £8.0m of potential contracted rent including a full contribution from the development assets (but excluding the £1.35m of additional reversionary potential in the portfolio) at 7.0%, the implied value of the investment portfolio assets is £114m, which adds c 14p per share to the current NAV, without any benefit from the remaining reversionary potential or from retained operating earnings between now and end-FY19. The potential uplift is smaller than we last published because we assumed higher revaluation gains in our forecasts. On a full year basis, underlying earnings per share would increase substantially (c 50%) given the operating and financial leverage on the increased rental income (c £1.1m pa above that forecast in FY19).

Valuation

For Circle, unlike a REIT, capital returns are expected to be a significant element of overall total returns, which we think is best measured by NAV total return (the change in NAV per share plus dividends paid per share). In the 10 years to FY16, the average annual return was more than 7.5% pa. NAV total return since IPO has increased and we calculate a 24.1% annual total return for FY17 and our estimates suggest a c 19.9% annual total return in the current year and 10.6% in FY19 (on which we believe are conservative revaluation assumptions). As we have indicated in the financial section above, in current market conditions there is considerable scope for further progress in NAV, over and above that built into our near-term forecasts, as the letting of vacant space progresses, and this would further support NAV total return.

For an investor, expected future capital returns are perhaps less easy to predict than expected dividend returns driven by currently contracted rental income, and this creates a tendency for stocks with the highest yields to also trade at the higher P/NAV ratios. A strong management track record provides additional comfort on the delivery of potential capital returns, and given Circle management’s experience and track record, the current 25% discount to our forecast FY18 NAV per share, supported by a dividend yield of more than 3%, continues to represent a relatively low valuation with nothing obviously being factored in for the upside potential. Some discount for Circle’s relatively small market capitalisation and thin share trading liquidity, and for its above average gearing, may be anticipated. Moreover, while the relatively concentrated nature of the Circle portfolio allows the company to focus its efforts, it does not provide the risk diversification offered by some larger regional commercial property companies. However, despite these considerations and bearing in mind the potential for future NAV growth described above, the low valuation ascribed to Circle within the context of the broad UK-listed property sector is shown clearly in Exhibits 7 and 8.

Exhibit 7: Comparison of historic P/NAV

Source: Bloomberg data as at 2 January 2018, Edison Investment Research

Exhibit 8: Comparison of prospective dividend yield

Source: Bloomberg data as at 2 January 2018, Edison Investment Research

As noted above, Circle management is keen to support trading liquidity in the shares and is considering options for enlarging the shareholder base. Moreover, given the stated desire to grow the portfolio further, we would expect Circle to consider increasing its capital resources, both equity and debt, to fund future acquisitions, although an alternative option would be to recycle capital by disposing of assets that have been repositioned and then fully let. We have not included any property acquisitions in our forecasts, which indicate the net LTV trending down to c 40% by end-FY19. In our previous note we illustrated potential options for funding portfolio growth while managing gearing. Property acquisitions have the potential to enhance EPS and dividend-paying capacity, capturing the likely positive spread between asset yields and funding costs and generating scale efficiency. However, given the current discount to NAV it may be difficult to avoid some NAV per share dilution if the funding of acquisitions includes an element of equity funding. Overall, we do not believe that it would alter the conclusion that the shares are trading at a low valuation compared with the current forecasts and potential for further value creation, while any increase in Circle’s market capitalisation and share trading liquidity should broaden its investor appeal.

Exhibit 9: Financial summary

Year ending 31 March

FY16

FY17

FY18e

FY19e

£000s

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Rental income

664

5,266

5,980

6,735

Other income

595

138

93

0

Total income

1,260

5,404

6,073

6,735

Property expenses

(123)

(1,037)

(920)

(870)

Net rental income

1,137

4,366

5,152

5,865

Administrative expenses

(293)

(2,115)

(2,116)

(2,202)

Operating profit before valuation gains

844

2,251

3,036

3,663

Gains on disposal of investment properties

0

279

0

0

Revaluation of investment properties

0

7,361

8,307

4,000

Exception items

374

88

0

0

Operating profit

1,217

9,979

11,343

7,663

Net finance costs

(112)

(13)

(1,120)

(1,136)

Profit before tax

1,106

9,966

10,223

6,527

Tax

(32)

(22)

73

(101)

Net profit

1,073

9,944

10,295

6,426

Adjusted for:

Gain/(loss) on disposal of investment property

0

(279)

0

0

Revaluation of investment property

0

(7,361)

(8,307)

(4,000)

Fair value movement on interest rate swaps

2

(96)

1

0

Exceptional items

(374)

(88)

0

0

Adjustment for effective interest rate on borrowings

(54)

(1,232)

0

0

Adjusted earnings

648

889

1,989

2,426

Shares ('000s) exc. own shares held

28,297

28,297

28,297

28,297

IFRS EPS (p)

3.8

35.1

36.4

22.7

Diluted adjusted EPS (p)

2.3

3.1

7.0

8.6

Dividend declared (p)

2.4

5.0

5.3

5.5

BALANCE SHEET

Investment properties

75,781

86,054

97,788

102,788

PPE

22

29

26

26

Trade and other receivables

1,771

6,518

6,737

6,737

Deferred tax

915

1,142

1,142

1,142

Financial instruments at FV through P&L

0

1

0

0

Total non-current assets

78,490

93,744

105,693

110,693

Trade and other receivables

2,555

1,195

1,350

1,481

Deferred tax

105

128

322

322

Cash and equivalents

4,516

4,894

4,541

4,770

Total current assets

7,176

6,217

6,212

6,572

Total assets

85,665

99,962

111,905

117,265

Borrowings

(40,028)

(45,590)

(48,831)

(48,891)

Financial liability at FV through P&L

(95)

0

0

0

Total non-current liabilities

(40,123)

(45,590)

(48,831)

(48,891)

Trade and other payables

(2,306)

(2,550)

(2,429)

(2,803)

Total current liabilities

(2,306)

(2,550)

(2,429)

(2,803)

Total liabilities

(42,430)

(48,140)

(51,260)

(51,693)

Net assets

43,236

51,822

60,646

65,572

Basic and diluted IFRS NAV per share (p)

153

183

214

232

CASH FLOW

Profit before tax

1,106

9,966

10,223

6,527

Adjusted for

Net finance expense

112

1,245

1,120

1,136

Depreciation

1

7

6

7

Share-based payments

0

0

0

0

Gains on revaluation

0

(7,361)

(8,307)

(4,000)

Gains on disposal of investment properties

0

(279)

0

0

Amortisation of loan arrangement fees

7

40

59

60

Goodwill, interest rate ans swap valuation movements

(1,751)

(1,523)

1

0

Working capital movements

1,132

(3,512)

(566)

243

Cash from operations

607

(1,416)

2,536

3,972

Tax paid

0

0

(26)

(101)

Net interest (paid)/received

(56)

(1,346)

(1,120)

(1,136)

Net cash from operations

551

(2,763)

1,389

2,736

Net cash from investing

3,610

(2,255)

(3,452)

(1,007)

Net cash used in financing

356

5,396

1,710

(1,500)

Net increase/(decrease) in cash and equivalents

4,516

378

(353)

229

Opening cash

0

4,516

4,894

4,541

Closing cash

4,516

4,894

4,541

4,770

Debt

(40,028)

(45,590)

(48,831)

(48,891)

Net debt

(35,512)

(40,697)

(44,290)

(44,121)

Net LTV

45.7%

43.9%

42.2%

40.1%

Source: Company accounts, Edison Investment Research

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Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Circle Property and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Circle Property and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Scottish Oriental Smaller Companies — Long-established Asian small-cap specialist

Scottish Oriental Smaller Companies Trust (SST) was launched in 1995 with the objective of generating long-term capital growth from investing in smaller companies listed in Asia (excluding Japan and Australasia). Its long-term 10-year performance record continues to be strong, although in more recent years SST has lagged the performance of the comparative MSCI AC Asia ex-Japan Index, which has been driven by large-cap and technology stocks in particular. Since Vinay Agarwal became acting (now formal) lead manager in July 2016, the portfolio has become more concentrated and growth orientated. Agarwal believes the trust is well positioned with reasonably valued, quality companies that can grow structurally through economic cycles.

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