Henderson Far East Income — Attractive yield despite modest dividend increase

Henderson Far East Income (LSE: HFEL)

Last close As at 13/04/2024

GBP2.27

2.00 (0.89%)

Market capitalisation

GBP368m

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Henderson Far East Income — Attractive yield despite modest dividend increase

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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Investment Companies

Henderson Far East Income

Attractive yield despite modest dividend increase

Investment trusts
Asia Pacific equity income

12 July 2022

Price

277.5p

Market cap

£424m

Total assets

£461m

NAV*

272.8p

Share premium to NAV

1.0%

*Including income. At 30 June 2022.

Yield

8.6%

Shares in issue

153.8m

Code Ord/A-share

HFEL/JE00B1GXH751

Primary exchange

LSE

AIC sector

Asia Pacific Equity Income

52-week high/low*

325.0p

274.5p

319.4p

271.7p

*Including income.

Gearing

Net gearing at 11 July 2022

6%

Fund objective

Henderson Far East Income aims to provide shareholders with a growing total annual dividend per share and capital appreciation, from a diversified portfolio of investments in the Asia-Pacific region.

Bull points

Highest-yielding fund among its peers.

On track for fully covered FY22 dividend.

Experienced portfolio management team.

Bear points

NAV long-term performance has lagged peers.

Income investing can be out of favour.

Focus on yield may dampen total returns

Analyst

David Holder

+44 (0)20 3681 2500

Henderson Far East Income is a research client of Edison Investment Research Limited

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.

HFEL’s yield premium to AIC peers persists

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.

Exhibit 1: CY22 performance holding up versus MSCI Asia Pacific ex-Japan HDY, MSCI Asia Pacific and peers

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.

Exhibit 2: Country weighting changes – December 2021 to May 2022

Exhibit 3: Sector weighting changes – December 2021 to May 2022

Source: HFEL

Source: HFEL

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

Source: Morningstar. Note: China P/E= MSCI China Index.

Source: Morningstar. Note: GBP. Chinese equities = MSCI China Index. Global equities = MSCI ACWI.

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

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.

Exhibit 2: Country weighting changes – December 2021 to May 2022

Source: HFEL

Exhibit 4: Chinese valuations more attractive (P/E) relative to their long-term average

Source: Morningstar. Note: China P/E= MSCI China Index.

Exhibit 6: Performance of overweight sectors (financials, materials and energy) year to date

Source: Morningstar. Note: GBP. Energy – MSCI Asia ex Japan Energy. Materials – MSCI Asia ex Japan Materials. Financials – MSCI Asia ex Japan Financials. Returns ytd.

Exhibit 3: Sector weighting changes – December 2021 to May 2022

Source: HFEL

Exhibit 5: Chinese equities have significantly underperformed global equities since February 2021

Source: Morningstar. Note: GBP. Chinese equities = MSCI China Index. Global equities = MSCI ACWI.

Exhibit 7: Performance of China, Australia and South Korea year to date

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.

Exhibit 8: Actively meeting demand with issuance

Source: HFEL, Morningstar. Data to end June 2022.

General disclaimer and copyright

This report has been commissioned by Henderson Far East Income and prepared and issued by Edison, in consideration of a fee payable by Henderson Far East Income. Edison Investment Research standard fees are £60,000 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 research department of Edison 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 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

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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.

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Frankfurt +49 (0)69 78 8076 960

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Sydney +61 (0)2 8249 8342

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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 Henderson Far East Income and prepared and issued by Edison, in consideration of a fee payable by Henderson Far East Income. Edison Investment Research standard fees are £60,000 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 research department of Edison 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 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison 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.

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.

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

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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