Half Year Results 2011

RNS Number : 5161J

JPMorgan Russian Securities PLC

30 June 2011

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

UNAUDITED HALF YEAR RESULTS FOR

THE SIX MONTHS ENDED 30TH APRIL 2011

Chairman's Statement

Performance

The Russian market continued to advance in the six months to 30th April 2011, heavily underpinned by high oil prices. After the Company's excellent performance figures for the year ended 31st October 2010, market conditions in the six months to 30th April 2011, proved difficult for the positioning of the Company's portfolio.    In the six months under review, both the Company's share price and net asset value produced positive returns. The Company's total return to shareholders was +6.3% and the total return on net assets was +7.4%, against  a +20.1% total return of the Company's benchmark, the MSCI Russian 10/40 Equities Indices Index in sterling terms.

Long term shareholders in this Company will be aware that its portfolio has maintained an underweight position in the energy sector for many years. Although this strategy has handsomely rewarded shareholders in previous years, over the last six months it has detracted from relative performance against the Company's benchmark. As a Board we continually challenge the managers with respect to the positioning of the portfolio and in particular to this long held underweight position. In their report below the investment managers provide some explanation for the surge in energy stock prices over the period and confirm their rationale for the portfolio's continuing underweight position in this sector. The Board supports the investment managers' convictions, which they believe will deliver significant benefits to long term shareholders.

Revenue and Earnings

The revenue loss after taxation for the six months ended 30th April 2011 was £1,312,000, which equates to a loss per share of 2.37p.

Gearing

Our investment managers did not gear the portfolio during the review period.

Share Repurchases and Discount

The Board continually monitors the discount at which the Company's shares trade to their net asset value and uses the buyback powers granted by shareholders when it is deemed appropriate. The Board's stated policy is to consider utilising its buyback powers if the average discount exceeds 12% over a thirty day period. During the period under review the Company's discount widened marginally to 7.3%, still comfortably below 12%. Accordingly it was not deemed necessary to buy back any of the Company's shares.

Pamela Idelson Smith

Chairman

30th June 2011

Investment Managers' Report

During the six month period under review the Company's net asset value rose by 7.4%. Many shareholders will be aware that emerging markets have had a challenging period particularly in the early part of 2011. An exception to this has been the Russian indices which have been strong beneficiaries of the rising oil price as the indices are dominated by the large Russian energy stocks.  The Company's benchmark index, the MSCI Russian 10/40 Equity Indices Index in sterling terms, rose by 20.1% over the six month period and we discuss below the reasons for the strong performance of the index.

The Market and Portfolio Strategy

Long standing shareholders will be aware that in the portfolio we have for a considerable period of time been significantly underweight the energy sector. We firmly believe that energy companies in Russia are at a structural disadvantage which does not allow them to reap the benefits of a higher oil price.  The punitive tax regime for the sector as well as the high level of capital expenditure required to sustain current production levels mean that we believe earnings are overstated and the sector is generating returns below its cost of capital.  Energy companies therefore compare poorly with other opportunities in the market, notably consumer and retail stocks, which combine superior economic returns with lower risk because of their long-term growth prospects. Unlike the previous period in 2010 where we outperformed this positioning was unhelpful during the six months to 30 April 2011 as the performance of the oil sector and other sectors of the Russian equity market diverged.

The oil price rose by 46.4% in sterling terms over the six months and reached a price of US$126 a barrel at the end of April. We witnessed significant inflows into Russian specific index-tracking exchange tradable funds ('ETFs') who received over five times the inflows of 2009. In this period, when 80+% of new investment flows into the Russian market came through ETFs, the largest stocks, which happen to be energy stocks such as Gazprom and Lukoil, where we are significantly underweight, had a very powerful run. This has led to a distortion in the overall level of general financial efficiency for capital allocation on the Russian market, which in our view is temporary.

In addition to the impact from the portfolio's underweight in the energy sector, and stock selection within this, our large positions in consumer sector stocks like Magnit, Sberbank, MTS and Systema all underperformed in the short term and detracted from performance. The underweight position in the materials sector was positive for returns, as was stock selection in the telecoms sector.

We continually review our rationale for maintaining an underweight position in energy stocks and we believe our stance is valid despite the increased volatility of oil prices.  The forecast earnings growth for our portfolio is 30% compared to that of the benchmark index of 23% and over the medium and long run this should continue to deliver returns for active fundamentally driven investors such as us.

Market and Political comments

In general, interest in the Russian market from foreign investors increased over the review period.  However, domestic investors have been absent from the market for the last 18 months and accordingly missed most of the 2009-2011 rally. 

A stronger market and rising valuations provided the catalyst for many private companies to consider entering the public market as an opportunity to attract additional capital. In the review period the Company took part in two IPOs:

Mostotrest is a large construction company. It floated with an attractive valuation and provided a unique opportunity to gain exposure to the undercapitalised and rapidly growing infrastructure sector. The quality and quantity of roads and general infrastructure in Russia has been notoriously poor and the Government has given a strong commitment to address this issue, which has long been a stumbling block for Russia's economic growth.

Ros Agro is a food company, primarily based on sugar production at present. The food and agricultural industry in Russia has historically not been very efficient. However, this company's flotation represented an opportunity to invest in one of the most efficient players in this environment, at an attractive valuation.

The Russian election season commenced with President Medvedev and Prime Minister Putin both not excluding their interest in participation in the presidential elections in March 2012.  We believe that political risks in Russia for the next 12-18 months will be elevated, as the majority of the business community becomes unsettled about potential change and its impact on the business environment in Russia.  However, we would expect that the most likely outcome will be better than feared, but it will take time for this to become the consensus view.

Outlook

In the short-term, inflation, commodity price movements and politics will weigh on the Russian market. In addition the expectation of further monetary tightening and new equity supply are putting pressure on the market in the absence of positive surprises from the real economy.  In this volatile environment we will continue to focus on identifying quality businesses at sensible valuations. 

We believe that the long term fundamental case for Russian equities is still intact. Individual stock valuations do not reflect all the risks and opportunities in the market and leave space for active fund managers to benefit.

Oleg I. Biryulyov

Vitaly N. Kazakov

Investment Managers

30th June 2011

Interim Management Report

The Company is now required to make the following disclosures in its half year report.

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company fall into the following broad categories: investment and strategy; financial; accounting, legal and regulatory; corporate governance and shareholder relations and operational. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st October 2010.

Related Parties Transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the period.

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

Directors' Responsibilities

The Board of Directors confirms that, to the best of its knowledge:

(i)                    the condensed set of financial statements contained within the half year financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half Yearly Financial Reports'; and

(ii)                   the half year management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure and Transparency Rules.

For and on behalf of the Board

Pamela Idelson Smith
Chairman

30th June 2011

For further information, please contact:

Alison Vincent

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary

020 7742 6000

Please note that up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can be found at www.jpmrussian.co.uk

Unaudited figures for the six months ended 30th April 2011

Income Statement

for the six months ended 30th April 2011

	(Unaudited) Six months ended 30th April 2011			(Unaudited) Six months ended 30th April 2010			(Audited) Year ended 31st October 2010
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value through profit or loss	-	29,267	29,267	-	113,353	113,353	-	119,491	119,491
Net foreign currency (losses)/gains	-	(227)	(227)	-	5	5	-	73	73
Income from investments	2,565	-	2,565	1,772	-	1,772	6,033	-	6,033
Other interest receivable and similar income	1	-	1	-	-	-	1	-	1
Gross return	2,566	29,040	31,606	1,772	113,358	115,130	6,034	119,564	125,598
Management fee	(3,035)	-	(3,035)	(2,270)	-	(2,270)	(4,828)	-	(4,828)
Other administrative expenses	(559)	-	(559)	(355)	-	(355)	(770)	-	(770)
Net (loss)/return on ordinary activities before finance costs and taxation	(1,028)	29,040	28,012	(853)	113,358	112,505	436	119,564	120,000
Finance costs	-	-	-	-	-	-	(1)	-	(1)
Net (loss)/return on ordinary activities before taxation	(1,028)	29,040	28,012	(853)	113,358	112,505	435	119,564	119,999
Taxation	(284)	-	(284)	(219)	-	(219)	(817)	-	(817)
Net (loss)/return on ordinary activities after taxation	(1,312)	29,040	27,728	(1,072)	113,358	112,286	(382)	119,564	119,182
(Loss)/return per share (note 3)	(2.37)p	52.53p	50.16p	(1.93)p	204.05p	202.12p	(0.69)p	215.74p	215.05p

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies. The Total column represents all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ('STRGL'). For this reason a STRGL has not been presented.

Reconciliation of Movements in Shareholders' Funds

	Called up		Capital
Six months ended	share	Other	redemption	Capital	Revenue
30th April 2011	capital	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2010	553	49,281	48	330,771	(4,550)	376,103
Net return/(loss) on ordinary activities	-	-	-	29,040	(1,312)	27,728
At 30th April 2011	553	49,281	48	359,811	(5,862)	403,831
	Called up		Capital
Six months ended	share	Other	redemption	Capital	Revenue
30th April 2010	capital	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2009	559	52,397	42	211,207	(4,168)	260,037
Repurchase of the Company's own shares for cancellation	(6)	(3,116)	6	-	-	(3,116)
Net return/(loss) on ordinary activities	-	-	-	113,358	(1,072)	112,286
At 30th April 2010	553	49,281	48	324,565	(5,240)	369,207
	Called up		Capital
Year ended	share	Other	redemption	Capital	Revenue
31st October 2010	capital	reserve	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2009	559	52,397	42	211,207	(4,168)	260,037
Repurchase of the Company's own shares for cancellation	(6)	(3,116)	6	-	-	(3,116)
Net return/(loss) on ordinary activities	-	-	-	119,564	(382)	119,182
At 31st October 2010	553	49,281	48	330,771	(4,550)	376,103

Balance Sheet

at 30th April 2011

	(Unaudited)	(Unaudited)	(Audited)
	30th April 2011	30th April 2010	31st October 2010
	£'000	£'000	£'000
Fixed assets
Equity investments held at fair value through profit or loss	397,980	368,611	364,854
Investment in liquidity fund held at fair value through profit or loss	3,342	5,106	6,395
Total investment portfolio	401,322	373,717	371,249
Current assets
Financial assets: Derivative financial instruments	1	-	-
Debtors	1,787	3,079	1,986
Cash and short term deposits	853	50	2,998
	2,641	3,129	4,984
Creditors: amounts falling due within one year	(132)	(7,639)	(130)
Net current assets/(liabilities)	2,509	(4,510)	4,854
Total assets less current liabilities	403,831	369,207	376,103
Net assets	403,831	369,207	376,103
Capital and reserves
Called up share capital	553	553	553
Other reserve	49,281	49,281	49,281
Capital redemption reserve	48	48	48
Capital reserves	359,811	324,565	330,771
Revenue reserve	(5,862)	(5,240)	(4,550)
Shareholders' funds	403,831	369,207	376,103
Net asset value per share (note 4)	730.5p	667.8p	680.3p

Company registration number: 4567378.

Cash Flow Statement

for the six months ended 30th April 2011

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2011	30th April 2010	31st October 2010
	£'000	£'000	£'000
Net cash outflow from operating activities (note 5)	(1,111)	(1,449)	(1,769)
Net cash outflow from returns on investments and servicing of finance	-	-	(1)
Net cash (outflow)/inflow from capital expenditure and financial investment	(806)	(2,118)	7,795
Net cash outflow from financing	-	(3,116)	(3,116)
(Decrease)/increase in cash for the period	(1,917)	(6,683)	2,909
Reconciliation of net cash flow to movement in net debt
Net cash movement	(1,917)	(6,683)	2,909
Exchange movements	(228)	5	73
Movement in net funds/debt in the period	(2,145)	(6,678)	2,982
Net funds at the beginning of the period	2,998	16	16
Net funds/(debt) at the end of the period	853	(6,662)	2,998
Represented by:
Cash and short term deposits	853	50	2,998
Bank overdraft	-	(6,712)	-
Net funds/(debt) at the end of the period	853	(6,662)	2,998

 Notes to the Accounts

for the six months ended 30th April 2011

1.    Financial statements

      The information contained within the financial statements in this half year report has not been audited or reviewed by the Company's auditors.

      The figures and financial information for the year ended 31st October 2010 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.   Accounting policies

      The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in January 2009.

      All of the Company's operations are of a continuing nature.

      The accounting policies applied in these half year accounts are consistent with those applied in the accounts for the year ended 31st October 2010.

3.   (Loss)/return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2011	30th April 2010	31st October 2010
	£'000	£'000	£'000
(Loss)/return per share is based on the following:
Revenue loss	(1,312)	(1,072)	(382)
Capital return	29,040	113,358	119,564
Total return	27,728	112,286	119,182
Weighted average number of shares in issue	55,284,312	55,554,389	55,419,350
Revenue loss per share	(2.37)p	(1.93)p	(0.69)p
Capital return per share	52.53p	204.05p	215.74p
Total return per share	50.16p	202.12p	215.05p

4.   Net asset value per share

      Net asset value per share is based on the net assets attributable to shareholders £403,831,000 (30th April 2010: £369,207,000 and 31st October 2010: £376,103,000) and on the 55,284,312 (30th April 2010: 55,284,312 and 31st October 2010: 55,284,312) shares in issue at the period end.

5.   Reconciliation of total return on ordinary activities before finance costs and taxation to net cash outflow from operating activities

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2011	30th April 2010	31st October 2010
	£'000	£'000	£'000
Total return on ordinary activities before finance costs and taxation	28,012	112,505	120,000
Add back capital return before finance costs and taxation	(29,040)	(113,358)	(119,564)
Net movements in debtors, accrued income and accrued expenses	201	(377)	(1,388)
Overseas withholding tax	(284)	(219)	(817)
Net cash outflow from operating activities	(1,111)	(1,449)	(1,769)

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

ENDS

A copy of the half year has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do

The half year will also shortly be available on the Company's website at www.jpmrussian.co.uk 

where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

 

END

 

 

IR EBLFXFQFFBBL