money & pens

High and growing dividend yield

Merchants Trust (The) 26 November 2018 Review
Download PDF

The Merchants Trust

High and growing dividend yield

Investment trusts

 

26 November 2018

Price

472.5p

Market cap

£514m

AUM

£630m

NAV*

458.1p

Premium to NAV

3.2%

NAV**

472.0p

Premium to NAV

0.1%

*Excluding income. **Including income. As at 22 November 2018.

Yield

5.4%

Ordinary shares in issue

108.7m

Code

MRCH

Primary exchange

LSE

AIC sector

UK Equity Income

Benchmark

FTSE All-Share

Share price/discount performance

Three-year performance vs index

52-week high/low

539.0p

455.0p

565.0p

467.6p

**Including income.

Gearing

Gross*

23.0%

Net*

20.7%

*As at 31 October 2018.

Analysts

Mel Jenner

+44 (0)20 3077 5720

Sarah Godfrey

+44 (0)20 3681 2519

The Merchants Trust is a research client of Edison Investment Research Limited

The Merchants Trust (MRCH) is managed by Simon Gergel, chief investment officer of UK equities at AllianzGI. He says the current uptick in volatility in the UK stock market is providing a lot of opportunities for active stock pickers, with a wide divergence between the valuation of shares in companies with steady growth characteristics and those whose earnings outlook is less clear. Although MRCH’s annual dividend has increased in each of the last 36 years, growth in the years following the global financial crisis has been modest. However, the manager says the refinancing of a large tranche of the trust’s high-cost debt in January 2018, coupled with higher levels of portfolio income, means the board has increased confidence in growing the dividend at a faster rate, from a starting yield of more than 5%.

12 months ending

Share price (%)

NAV* (%)

Blended benchmark** (%)

FTSE All-Share (%)

FTSE 100 (%)

31/10/14

(3.1)

(2.6)

0.7

1.0

0.7

31/10/15

(2.0)

2.6

0.8

3.0

0.8

31/10/16

1.1

9.1

13.7

12.2

13.7

31/10/17

21.5

15.5

13.2

13.4

12.1

31/10/18

3.3

(1.9)

(1.5)

(1.5)

(0.9)

Source: Thomson Datastream. Note: All % on a total return basis in pounds sterling. *NAV with debt at market value. **Blended benchmark is FTSE 100 index until 31 January 2017 and FTSE All-Share index thereafter.

Investment strategy: Valuation-based approach

The manager employs a contrarian approach to stock selection, seeking companies that are trading at a wide discount to their perceived intrinsic value. There are three pillars to the stock selection process – company fundamentals, valuation and external themes – to ensure that companies within the portfolio are high quality, attractively valued and operating in a supportive environment. The resulting fund comprises c 40–60 UK equities, and aims to generate a high and growing level of income and long-term capital growth.

Market outlook: Volatility may continue

UK equities are experiencing much higher levels of volatility compared with the below-average levels in 2017. Given the continued uncertainty over Brexit, this backdrop looks set to continue. However, this environment is creating opportunities – UK companies with domestic operations have seen their share prices under particular pressure, potentially providing rich pickings for long-term investors with a disciplined approach to stock selection.

Valuation: Above-average dividend yield

MRCH’s discount has been in a narrowing trend in recent months; its current 0.1% share price premium to cum-income NAV (with debt at market value) compares with a c 6% discount in mid-August 2018. Average discounts over the last one, three, five and 10 years range from 2.3% to 5.4%. The trust has a distinguished dividend history; the annual distribution has increased for the last 36 consecutive years. MRCH currently offers an above-average dividend yield of 5.4% (Exhibit 12).

Exhibit 1: Trust at a glance

Investment objective and fund background

Recent developments

The Merchants Trust’s investment objective is to provide an above-average level of income and income growth, together with long-term growth of capital, through investing mainly in higher-yielding large-cap UK companies. Since 1 February 2017, the benchmark is the FTSE All-Share Index.

24 September 2018: six-month report to 31 July 2018. NAV TR +7.4% versus benchmark TR +5.0%. Share price TR +8.7%. Second interim dividend of 6.5p declared (+4.8% year-on-year).

3 July 2018: first interim dividend of 6.4p declared (+4.9% year-on-year).

29 March 2018: annual report to 31 January 2018. NAV TR +14.5% versus benchmark TR +11.3%. Share price TR +13.3%. Final interim dividend of 6.3p declared (+3.3% year-on-year).

Forthcoming

Capital structure

Fund details

AGM

May 2019

Ongoing charges

0.59%

Group

Allianz Global Investors

Final results

March 2019

Net gearing

20.7%

Manager

Simon Gergel

Year end

31 January

Annual mgmt fee

0.35%

Address

199 Bishopsgate, London,

EC2M 3TY, UK

Dividend paid

Quarterly

Performance fee

None

Launch date

February 1889

Trust life

Indefinite

Phone

+ 44 (0)800 389 4696

Continuation vote

None

Loan facilities

See page 7

Website

www.merchantstrust.co.uk

Dividend policy and history (financial years)

Share buyback policy and history (financial years)

Dividends are paid quarterly in August, November, February and May. The annual dividend has increased for 36 consecutive years.

Renewed annually, the trust has authority to purchase up to 14.99% and allot up to 5% of issued share capital.

Shareholder base (as at 31 October 2018)

Portfolio exposure by sector (ex-cash as at 31 October 2018)

Top 10 holdings (as at 31 October 2018)

Portfolio weight %

Company

Sector

31 October 2018

31 October 2017*

Royal Dutch Shell 'B' Shares

Oil & gas

6.9

8.2

GlaxoSmithKline

Healthcare

6.7

5.9

HSBC

Banks

4.2

4.7

BP

Oil & gas

4.0

5.8

BHP Billiton

Mining

4.0

3.3

Legal & General

Insurance

3.2

2.8

Imperial Brands

Tobacco

3.0

N/A

Standard Life Aberdeen

Financial services

2.9

3.4

BAE Systems

Aerospace & defence

2.8

N/A

SSE

Electricity

2.7

N/A

Top 10 (% of holdings)

40.3

44.0

Source: The Merchants Trust, Edison Investment Research, Bloomberg, Morningstar. Note: *N/A where not in end-October 2017 top 10.

Market outlook: Volatility providing opportunities

UK equities, along with share prices across the globe, have returned to more normal levels of volatility following a particularly benign period in 2017. Ongoing Brexit uncertainty is putting extra pressure on the UK stock market, particularly for shares in companies with domestic, rather than international operations, while global institutional allocations to UK equities remain very low compared with historical averages. Over the last six months, the valuation of UK equities has become more attractive, with lower multiples and higher dividend yields across the market capitalisation spectrum. Although the current investment backdrop presents challenges, it can also provide opportunities for investors with a disciplined, long-term approach to stock picking.

Exhibit 2: Valuation metrics for FTSE 100, 250 and Small Cap indices (as at 22 Nov 2018)

Source: Edison Investment Research, Bloomberg

Fund profile: Distinguished dividend track record

Launched in February 1889, MRCH is one of the oldest investment trusts listed on the London Stock Exchange. Since 2006 the lead manager has been Simon Gergel, chief investment officer of UK equities at AllianzGI, which has c £460bn in assets under management. He aims to generate an above-average level of income and income growth, and long-term capital growth from a relatively concentrated portfolio of c 40–60 UK equities. The manager has a contrarian approach to stock selection, seeking attractively valued stocks that can be held for the long term. MRCH is benchmarked against the FTSE All-Share index (FTSE 100 index prior to January 2017). There are investment guidelines in place to diversify risk; the portfolio must be invested in at least five sectors (with a maximum 35% in each), and there is a limit of 15% in a single holding. Gearing is permitted in a range of 10–25% of net assets (at the time of drawdown); at end-October 2018, net gearing was 20.7%. MRCH has a distinguished dividend history; annual distributions have increased for the last 36 consecutive years, using reserves to supplement income when required. Its yield compares favourably with the majority of its peers (Exhibit 12).

The fund manager: Simon Gergel
The manager’s view: Opportunities in a polarised market

Gergel says that so far in 2018 there have been big swings in sentiment; issues that investors are grappling with include Brexit, the US/China trade dispute, the government budget in Italy, and the pace and magnitude of US interest rate hikes. The manager says an environment of rising interest rates can lead to pressure on equities, as witnessed by weakness in global stock markets in October 2018. He notes a polarisation in the UK stock market, with shares in companies perceived as being able to generate steady growth significantly outperforming the rest of the market. In addition, with continued outflows from UK equities putting pressure on stock prices, the manager is finding a large number of attractively priced investment opportunities. Gergel says the operating environment for UK companies generally remains ‘okay’, but that commentary from Q318 earnings reports suggests that ‘life is getting a little bit tougher’ due to rising raw material and labour costs, and there are specific industries under pressure, such as autos and retail. However, he believes there will be pent-up demand in the UK economy if there is a favourable Brexit outcome.

Asset allocation
Investment process: In-depth fundamental approach

At the heart of MRCH’s investment process is in-depth fundamental research to identify companies that are trading at a meaningful discount to their perceived intrinsic value. Gergel is able to draw on the well-resourced investment team at AllianzGI to construct a relatively concentrated portfolio of primarily higher-yielding UK equities. He says historical evidence shows that, in aggregate, companies paying above-average dividend yields have delivered higher-than-average total returns as well as a higher level of income. The manager stresses that yield alone is never a sufficient reason to buy a stock, and there is no automatic sale if a company’s dividend yield falls below that of the market. MRCH’s investment process is centred on three pillars – company fundamentals, valuations and external themes – to answer three critical questions regarding the quality of a company’s business, whether its shares are undervalued, and how supportive the operating environment is. Shares are sold when they have reached their target price, if there is a change in the investment thesis, or if there is a more attractive investment opportunity available.

Current portfolio positioning

Exhibit 3: Market capitalisation breakdown (% unless stated)

Index

Portfolio end-October 2018

Portfolio end-October 2017

Change (pp)

FTSE 100

64.9

58.7

6.2

FTSE 250

26.9

35.4

(8.5)

FTSE Small Cap

5.1

4.0

1.1

FTSE Fledgling

0.8

0.6

0.2

Cash

2.3

1.3

1.0

100.0

100.0

Source: The Merchants Trust, Edison Investment Research

Exhibit 4: Portfolio sector exposure vs benchmark (% unless stated)

Portfolio end- October 2018

Portfolio end- October 2017

Change (pp)

Index weight

Active weight vs index (pp)

Trust weight/ index weight (x)

Financials

29.9

28.0

1.9

25.4

4.5

1.2

Industrials

17.0

16.5

0.5

10.8

6.2

1.6

Consumer services

11.7

14.5

(2.8)

11.2

0.5

1.0

Oil & gas

11.0

14.1

(3.1)

14.7

(3.7)

0.7

Consumer goods

7.0

5.2

1.8

14.1

(7.1)

0.5

Utilities

6.9

7.8

(0.9)

2.7

4.2

2.5

Healthcare

6.8

6.0

0.8

9.8

(3.0)

0.7

Basic materials

5.8

4.8

1.0

7.6

(1.8)

0.8

Telecommunications

1.6

1.8

(0.2)

2.8

(1.2)

0.6

Technology

0.0

0.0

0.0

0.9

(0.9)

0.0

Cash

2.3

1.3

1.0

0.0

2.3

N/A

100.0

100.0

100.0

Source: The Merchants Trust, FTSE Russell, Edison Investment Research

Gergel highlights MRCH’s recent initiation of a position in Imperial Brands. He says he avoided the tobacco stocks for the last year, as he was nervous about structural changes in the industry, including a reduction in demand and the proliferation of next-generation products cannibalising the market for traditional cigarettes. The manager became interested in Imperial Brands after its dividend yield doubled from c 4% in 2016 to c 8% in 2018. He believes the sharp sell-off in the company’s share price is unwarranted, as although Imperial Brands has lower overall volumes – due to reduced demand and from rationalising its long tail of smaller brands – its premium brands are gaining share. He is also encouraged by the company’s line up of next-generation products and its commitment to generate a meaningful percentage of total sales from these products by 2020.

Other new positions in MRCH’s portfolio include ITV and Keller. The manager says the position in ITV is controversial because of the structural pressure on its traditional TV business, due to competition from streaming. However, Gergel says that although audiences are fragmenting, ITV owns the only commercial station in the UK where advertisers can reach large audiences, and he is encouraged by the growth in its studio business (around one-third of sales), which is providing companies such as Amazon and Netflix with valuable content. Keller is a smaller company but is the world leader in geotechnical (ground) engineering. The firm is benefiting from urbanisation trends globally and the replacement of ageing infrastructure. Gergel says that local scale is important; equipment used within the industry does not move around much as ground conditions vary with location. Keller is also growing as a result of bolt-on acquisitions. The manager believes that the company’s valuation is compelling.

Recent disposals within the portfolio include Diageo and Sainsbury’s. Gergel recognises Diageo as a well-positioned, high-quality global spirits company. However, he found the company’s valuation unattractive. The stock has outperformed a weak market, so the manager viewed the modest position as a good source of cash. Sainsbury’s share price rallied following the announced merger with ASDA. Gergel believes the deal makes financial sense, but he has concerns over the timing of the merger, and whether it will gain regulatory approval without significant asset sales. In addition, the manager is mindful of the risks involved when companies enter into transformational deals.

Performance: Outperformance over 10 years

Exhibit 5: Investment trust performance to 31 October 2018

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Thomson Datastream, Edison Investment Research. Note: NAV with debt at market value. Three, five and 10-year performance figures annualised. Blended benchmark is FTSE 100 index until 31 January 2017 and FTSE All-Share index thereafter.

In H119 (ending 31 July), MRCH’s NAV and share price total returns of +7.4% and +8.7% respectively were ahead of the benchmark’s 5.0% total return. After taking financing costs and movements in the value of debt into account, gearing contributed 1.1pp to the trust’s excess return. In terms of individual share price moves, the largest contributors to relative performance were not owning British American Tobacco (+0.7pp), which suffered from weak industry fundamentals, and the position in UBM (+0.7pp), which performed well ahead of its acquisition by Informa. The largest detractor was Standard Life Aberdeen (-1.0pp), which has continued to experience outflows since Standard Life and Aberdeen merged in August 2017; investors were also unimpressed by the terms of the deal to sell its life assurance business to Phoenix Group in exchange for c 20% of the firm and cash.

As shown in Exhibits 5, 6 and 7, in recent months MRCH’s NAV and share price have been negatively affected by volatility in the UK stock market. However, its share price has outperformed the benchmark over one and three months and over one year.

Exhibit 6: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to blended benchmark

0.1

0.3

(0.4)

4.8

0.0

(6.4)

22.5

NAV relative to blended benchmark

(2.2)

(3.2)

(3.7)

(0.5)

(2.5)

(4.0)

16.2

Price relative to FTSE All-Share

0.1

0.3

(0.4)

4.8

1.2

(7.6)

14.0

NAV relative to FTSE All-Share

(2.2)

(3.2)

(3.7)

(0.5)

(1.4)

(5.2)

8.2

Price relative to FTSE 100

(0.2)

(0.0)

(0.9)

4.2

0.4

(6.0)

23.0

NAV relative to FTSE 100

(2.6)

(3.5)

(4.2)

(1.1)

(2.1)

(3.6)

16.7

Source: Thomson Datastream, Edison Investment Research. Note: Data to end-October 2018. Geometric calculation.

Exhibit 7: NAV total return performance relative to blended benchmark over three years

Source: Thomson Datastream, Edison Investment Research

Discount: Meaningful narrowing in recent months

In Exhibits 8 and 9, we show MRCH’s discounts over the last three years with debt at book value and market value respectively. Due to the low level of interest rates, the market value of the trust’s relatively high-cost debt is higher than its book value, meaning that MRCH’s share price discount to NAV with debt at market value is lower than its discount with debt at book value. The trust’s current 0.1% share price premium to cum-income NAV (debt at market value) compares with average discounts of 4.5%, 5.4%, 3.5% and 2.3% over the last one, three, five and 10 years respectively.

Exhibit 8: Three-year premium/discount to NAV (debt at par or book value)

Exhibit 9: Three-year cum-income premium/discount to NAV (debt at fair or market value)

Source: Thomson Datastream, Edison Investment Research

Source: Thomson Datastream, Edison Investment Research

Exhibit 8: Three-year premium/discount to NAV (debt at par or book value)

Source: Thomson Datastream, Edison Investment Research

Exhibit 9: Three-year cum-income premium/discount to NAV (debt at fair or market value)

Source: Thomson Datastream, Edison Investment Research

Capital structure and fees

MRCH is a conventional investment trust with 108.7m ordinary shares in issue. Following the repayment of the trust’s £34m, 11.125% debt in January 2018, via a £35m, 35-year private placement note at 2.96%, MRCH’s interest costs are considerably lower. Interest is charged 65:35 to the capital and revenue accounts, and costs will be £2.8m pa lower as a result of the debt refinancing. The trust’s debt structure is as follows: a c £45m 9.25% bond maturing in 2023; a c £30m 5.875% bond maturing in 2029; the £35m 2.96% note maturing in 2052; along with £2.6m in 3.65% cumulative preference shares and 4.0% perpetual debenture stock.

Exhibit 10: MRCH’s debt profile

Financial year ending

31 January 2017

31 January 2018

Gross debt

£111m

£110m

Average interest rate*

8.5%

6.1%

Average duration*

7.2 years

16.8 years

First maturity

January 2018

May 2023

Source: The Merchants Trust, Edison Investment Research. Note: *Excludes modest level of perpetual debt.

AllianzGI is paid 0.35% per year of the value of MRCH’s gross assets (minus current liabilities, short-term loans and any funds within the portfolio managed by AllianzGI), which is allocated 65:35 between the capital and revenue accounts respectively, to reflect the board’s expected split of long-term returns between capital and income. In FY18, the ongoing charge of 0.59% was 4bp lower than 0.63% in FY17.

Dividend policy and record

MRCH aims to generate a high and growing level of income; quarterly dividends are usually paid in August, November, February and May. The total H119 distribution of 12.9p is a 4.9% increase compared with H118. After deducting the H119 dividends, at the end of July 2018, MRCH had a revenue reserve equivalent to 14.0p per share (+5.3% y-o-y). The board intends to pay at least 6.5p per share for the third and final interim dividends in FY19; the minimum expected total dividend of 25.9p represents a 4.4% increase compared with FY18, and a prospective dividend yield of 5.5%.

Exhibit 11: MRCH’s dividend yield and growth (%)

Growth of MRCH’s dividend vs UK inflation

MRCH’s dividend yield vs FTSE All-Share dividend yield

Source: Thomson Datastream, The Merchants Trust, Edison Investment Research

MRCH’s board is proud of the trust’s dividend history – annual distributions have increased in each of the last 36 consecutive years, and over this time have compounded at a significantly higher annual rate than the level of UK inflation (Exhibit 11, LHS). As shown in the right-hand exhibit above, over the last decade, MRCH has consistently offered a higher dividend yield than that available on the FTSE All-Share index.

Peer group comparison

MRCH is a member of the AIC UK Equity Income sector, which comprises 24 trusts. In Exhibit 12, we highlight the 12 largest, with market caps in excess of £300m. MRCH’s NAV total returns (with debt at par value) are above average over one and three years, ranking third and sixth out of 12 funds respectively, while lagging over five and 10 years. Looking at the whole sector averages, MRCH is again above the mean over one and three years, ranking fourth and seventh out of 24 funds respectively, while ranking 20th out of 24 funds over five years and ninth out of 23 over 10 years. The trust’s ongoing charge is below the selected peer group average, and it has a higher-than-average level of gearing. MRCH’s dividend yield is the second-highest out of 12 funds (1.2pp above the mean) and fourth out of 24 funds (0.6pp above the mean).

Exhibit 12: Selected peer group as at 21 November 2018*

% unless stated

Market cap £m

NAV TR 1 year

NAV TR 3 year

NAV TR 5 year

NAV TR 10 year

Discount (cum-fair)

Ongoing charge

Perf. fee

Net gearing

Dividend yield

Merchants Trust

517.5

(2.8)

18.7

18.5

208.9

0.4

0.6

No

121

5.3

BMO Capital & Income

308.0

(4.6)

25.5

36.7

182.7

0.8

0.6

No

107

3.6

City of London

1,431.0

(3.3)

15.4

30.7

213.4

1.3

0.4

No

113

4.5

Diverse Income Trust

364.6

(4.1)

11.9

42.5

(0.3)

1.1

No

100

3.4

Dunedin Income Growth

356.6

(4.2)

20.3

19.2

192.2

(8.9)

0.6

No

118

5.4

Edinburgh Investment Trust

1,227.6

(5.5)

6.4

35.8

207.9

(9.1)

0.6

No

110

4.5

Finsbury Growth & Income

1,361.3

2.5

38.7

71.5

452.9

0.8

0.7

No

103

2.0

JPMorgan Claverhouse

395.1

(5.4)

17.4

30.3

218.0

1.2

0.8

No

112

4.0

Lowland

369.5

(7.4)

17.3

25.9

355.9

(5.7)

0.6

Yes

114

3.9

Murray Income Trust

487.9

(2.2)

23.1

25.5

203.5

(8.6)

0.7

No

108

4.5

Perpetual Income & Growth

784.7

(7.8)

(0.7)

21.3

207.0

(11.7)

0.7

No

116

4.3

Temple Bar

798.5

(5.1)

21.2

19.0

255.6

(6.1)

0.5

No

114

3.6

Selected average (12 peers)

700.2

(4.1)

17.9

31.4

245.3

(3.8)

0.7

111

4.1

MRCH rank (12 peers)

6

3

6

12

6

5

8

1

2

MRCH rank (24 whole sector)

6

4

7

20

9

6

19

3

4

Source: Morningstar, Edison Investment Research. Note: *Performance to 20 November 2018. NAV with debt at par. TR=total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

The board

MRCH’s board has five directors, all of whom are non-executive and independent of the manager. Simon Fraser has served as chairman since May 2010, having been appointed to the board in August 2009. He has announced his intention to retire in 2019, so a search for a new chairman is underway. The other four directors are: Paul Yates (appointed in March 2011), Sybella Stanley (senior independent director), Mary Ann Sieghart (both appointed in November 2014), and Timon Drakesmith (appointed in November 2016). The broad prides itself on its diversity in terms of gender, and wide-ranging experience in both investment and corporate commercial environments.

General disclaimer and copyright

This report has been commissioned by The Merchants Trust and prepared and issued by Edison, in consideration of a fee payable by The Merchants Trust. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved 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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

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 4, 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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by The Merchants Trust and prepared and issued by Edison, in consideration of a fee payable by The Merchants Trust. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved 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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

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 4, 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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues