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Currency in GBP
Last close As at 25/03/2023
GBP2.61
▲ 2.00 (0.77%)
Market capitalisation
GBP413m
Research: Investment Companies
Henderson Far East Income’s (HFEL) board recently announced that the quarterly dividend has been increased from 5.9p to 6p per share, broadly in line with the last increase. While the increase is modest, it is in the context that the board seeks sustainability in distributions and that HFEL is yielding 8.6%, a substantial premium to peers and the index. Despite the latest modest increase, since launch in 2006 to the end of December 2021 HFEL’s dividend has grown at an annual compound rate of 5.8% versus 3.4% for the benchmark.
Henderson Far East Income |
Attractive yield despite modest dividend increase |
Investment trusts |
12 July 2022 |
Analyst
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Henderson Far East Income’s (HFEL) board recently announced that the quarterly dividend has been increased from 5.9p to 6p per share, broadly in line with the last increase. While the increase is modest, it is in the context that the board seeks sustainability in distributions and that HFEL is yielding 8.6%, a substantial premium to peers and the index. Despite the latest modest increase, since launch in 2006 to the end of December 2021 HFEL’s dividend has grown at an annual compound rate of 5.8% versus 3.4% for the benchmark.
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HFEL’s yield premium to AIC peers persists |
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Source: Refinitiv, Edison Investment Research. Note: Total returns in sterling. AAIF – abrdn Asian Income Fund, SOI – Schroder Oriental Income Fund, JAGI – JPMorgan Asia Growth and Income and IAT – Invesco Asia Trust. |
Dividend: A modest but prudent increase
Fund manager Mike Kerley has been ‘pleasantly surprised’ by the level of income the portfolio is generating. Aside from the regular dividend income that is the bedrock for the portfolio, the fund has benefited from special dividends from companies like JD.com. In the half year to end February 2022, the fund saw a 14.7% increase in underlying income versus the previous year (HY21: +6%).
The board has increased the dividend from 5.9p to 6.0p (+1.69%), compared with FY21 when the dividend was increased from 5.8p to 5.9p (+1.72%). The relatively modest increase (also relative to the high dividend index) signals the confidence of the board and managers in the underling revenues but also acknowledges the high headline yield (8.4%) that the fund offers. The board is very much focused on the sustainability of the distribution so is guarded about increasing it materially at this stage. At end H122, the dividend was c 55% covered by underlying revenues (H121: 48%). In FY21 the dividend was 99% covered by earnings, which gives Kerley optimism that with a continued recovery in dividends, HFEL’s dividend will be fully covered by underlying earnings for FY22.
The analyst’s view
HFEL stands out in the AIC Asia Pacific Equity Income sector for its high level of dividend. At more than 8%, the rate of growth in the dividend has understandably slowed compared with historical growth. Aside from news on the dividend, we discuss changes that the managers Kerley and Sat Duhra have made in terms of geographic and sector weightings in the volatile markets seen throughout 2022.
Performance: Holding up well through CY22
Performance started positively with the financials (a beneficiary of rising interest rates) and energy sectors doing well. In May, concerns escalated around the prospects for economic growth and the chance that the war in Ukraine, together with supply bottlenecks and soaring inflation, could push major economies into recession. This negative sentiment caused a weakness in basic materials, to which the portfolio has a bias, and in some financials, which resulted in weaker performance relative to the benchmark (but less so than for other income-focused peers). Energy stocks continued to make progress while Chinese internet-related stocks performed better through the year (the fund owns JD.com). Although there are weightings of 10.5% to technology within the portfolio via the likes of Samsung and Taiwan Semiconductor Manufacturing Company it is still an underweight position relative to both the conventional and high-yield indices.
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Exhibit 1: CY22 performance holding up versus MSCI Asia Pacific ex-Japan HDY, MSCI Asia Pacific and peers |
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Source: Morningstar. Note: At 30 June 2022. Peers = Morningstar Asian Pacific Equity Income category. |
Bias to cyclicals, Australia and adding to China
Kerley believes that the demand for basic materials will be supported in the long term by the secular tailwinds of increased electric vehicle use and a greater focus on renewable energy infrastructure. These industries are intensive users of copper, nickel and lithium and key positions in the portfolio continue to be Rio Tinto and BHP Group. Together with other overweight sectors in the portfolio such as energy and financials, these areas can be volatile and especially sensitive to macro events like slowing growth, rising interest rates or severe supply chain events.
Financials remain the largest single sector in absolute terms (Exhibit 3). However, in 2022 positions in Singapore, Taiwan and Korean financials such as United Overseas Bank, CTBC Financial Holding and KB Financial have been trimmed as concerns about global growth began to appear. Macquarie Group is the largest single financial position at 3.8%. Among other things, it specialises in investment in renewable energy infrastructure, which will be crucial if the world is to achieve net zero emissions by 2050.
From a country perspective, the principal change from the end of 2021 is the increased weighting to Chinese companies from 10.9% in December 2021 to 21.4 % at end May 2022 (see Exhibit 2) as the managers have become more positive on the outlook for the Chinese economy.
The Chinese zero-COVID policy has been a source of concern for global economists as it has contributed to a slump in consumption and exacerbated supply chain problems (such as delays in shipping), while increasing costs and fuelling inflation. HFEL’s managers note that officially the policy has not changed – lockdowns are becoming more targeted in conjunction with mass testing on a localised basis rather than being applied wholesale. This development could help to mitigate the effects of lockdowns on both the Chinese and global economy.
Against this backdrop, President Xi has reiterated the official 5.5% target for economic growth in 2022. While there may be some scepticism about the likelihood of meeting this target, there is a realisation from the Chinese authorities that the whole economy needs to contribute if it is to meet its growth targets. Consequently, the reopening process must become more effective and the rhetoric around some of the damaging policies previously directed at parts of the economy such as the internet and education sectors have been dialled back. The government is currently utilising measures such as increased infrastructure and real estate investment, but could pull yet more levers such as tax cuts and payment vouchers to support growth. In addition, after the market weakness from early 2021 and into 2022 (Exhibit 5), Chinese equities in aggregate trade on lower valuations (Exhibit 4) relative to historical levels.
Kerley identifies, amongst others, that the core Chinese holdings are JD.COM and Industrial Bank, although there are currently top 10 positions in the energy company Sinopec and basic material corporation China National Building Material, which together account for 8.1% of the portfolio. At the end of last year, Sinopec was not in the portfolio and China National Building Material accounted for 1.9%, demonstrating the change in positioning within the portfolio ytd.
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Exhibit 2: Country weighting changes – December 2021 to May 2022 |
Exhibit 3: Sector weighting changes – December 2021 to May 2022 |
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Source: HFEL |
Source: HFEL |
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Exhibit 4: Chinese valuations more attractive (P/E) relative to their long-term average |
Exhibit 5: Chinese equities have significantly underperformed global equities since February 2021 |
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Source: Morningstar. Note: China P/E= MSCI China Index. |
Source: Morningstar. Note: GBP. Chinese equities = MSCI China Index. Global equities = MSCI ACWI. |
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Exhibit 6: Performance of overweight sectors (financials, materials and energy) year to date |
Exhibit 7: Performance of China, Australia and South Korea year to date |
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Source: Morningstar. Note: GBP. Energy – MSCI Asia ex Japan Energy. Materials – MSCI Asia ex Japan Materials. Financials – MSCI Asia ex Japan Financials. Returns ytd. |
Source: Morningstar. Note: GBP. Australia – MSCI Australia. China – MSCI China. South Korea – MSCI South Korea. Returns ytd. |
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Exhibit 2: Country weighting changes – December 2021 to May 2022 |
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Source: HFEL |
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Exhibit 4: Chinese valuations more attractive (P/E) relative to their long-term average |
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Source: Morningstar. Note: China P/E= MSCI China Index. |
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Exhibit 6: Performance of overweight sectors (financials, materials and energy) year to date |
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Source: Morningstar. Note: GBP. Energy – MSCI Asia ex Japan Energy. Materials – MSCI Asia ex Japan Materials. Financials – MSCI Asia ex Japan Financials. Returns ytd. |
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Exhibit 3: Sector weighting changes – December 2021 to May 2022 |
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Source: HFEL |
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Exhibit 5: Chinese equities have significantly underperformed global equities since February 2021 |
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Source: Morningstar. Note: GBP. Chinese equities = MSCI China Index. Global equities = MSCI ACWI. |
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Exhibit 7: Performance of China, Australia and South Korea year to date |
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Source: Morningstar. Note: GBP. Australia – MSCI Australia. China – MSCI China. South Korea – MSCI South Korea. Returns ytd. |
Australia remains a high weighting at 23.3% of the portfolio (May 2022), mainly via energy companies such as top 10 position Santos and basic materials through top 10 positions Rio Tinto and BHP Group, although Macquarie Group is a top five portfolio position. South Korea is the third largest country weighting in absolute terms via positions in technology companies such as Samsung, which has been hit by the rotation from growth to value and telecoms and banks such as SK Telecom and KB Financial Group.
Share price rating and issuance through CY22
After pausing for breath, the company has again started to reissue shares. Demand for the shares from investors seeking to combat the elevated levels of inflation in the UK has been high and HFEL stands out in its sector for its yield premium to peers and the benchmark.
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Exhibit 8: Actively meeting demand with issuance |
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Source: HFEL, Morningstar. Data to end June 2022. |
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Investment Companies
Research: TMT
Filtronic completed its disposals of high-volume businesses in early 2020 and now only addresses those market niches where its specialist expertise in designing and manufacturing high-performance radio frequency (RF) components and subsystems operating at frequencies up to 180GHz can command a premium. Management’s strategic priority is to broaden the customer base and product range to take advantage of the doubling in RF manufacturing capacity in FY20. Our estimates, which we recently upgraded following the recent post-close update, show this strategy supporting continued revenue growth in FY22 and FY23.
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