Half Year Results

RNS Number : 9464J

JPMorgan Russian Securities PLC

19 June 2014

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

UNAUDITED HALF YEAR RESULTS FOR

THE SIX MONTHS ENDED 30TH APRIL 2014

Chairman's Statement

Performance

Over the six month period ended 30th April 2014, the Company's net asset value on a total return basis declined by 28.4%. The Company's share price total return faired marginally better with a decrease of 27.6% over the period, which led to a narrowing of the discount to net asset value to 10.5%.

The Company's net asset value and share price performance mirrored the widespread fall in markets across the region in November 2013 following the outbreak of political unrest in Ukraine; the Company's benchmark ended the reporting period down 26.4%. The collapse of the Yanukovich government and the annexation of Crimea by the Russian authorities led to sanctions from the International community and a worsening economic crisis in Ukraine. This situation has inevitably resulted in an increase in Russia's risk rating.

Discount Control

The Company repurchased 135,000 shares for cancellation at an average discount to net asset value of 13.5%, which resulted in a cumulative increase in net asset value per share of 0.2 pence. The Board's objective remains to use the share repurchase authority to assist in managing any imbalance between supply and demand for the Company's shares, thereby reducing the volatility of the discount. The Board operates a policy under which the Company intends, subject to market conditions, to buy shares at discounts above 8% to achieve this. At present there is increased volatility in the Russian market and the Company's discount to net asset value, therefore the Board may refrain from implementing share buybacks when the discount widens beyond 8% if it does not believe that this course of action would assist in stabilising the discount. The Board continues to monitor the situation.

Revenue and Earnings

The capital returns generated by the Company over the reporting period have been disappointing. It is perhaps of limited comfort, but dividends paid by Russian companies continue to be strong compared to historic levels. However, given changes made by the Investment Manager to the portfolio over the past six months, the Manager estimates that dividend income receivable by the Company in 2014 will decrease from the level seen in 2013. The Company's objective is to provide capital growth and hence the Investment Manager's portfolio positioning is not influenced by the dividend yields of the underlying investments. Despite the fall in income the Company expects to recommend that a final dividend in respect of the year ended 31st October 2014 be paid to shareholders in March 2015.

The Alternative Investment Fund Managers' Directive (the 'AIFMD')

The Company is on course to be fully compliant with the AIFMD by 22nd July 2014. The Company will shortly appoint JPMorgan Funds Limited as its AIFM and will enter into a new management agreement with this entity on the same commercial terms as the previous one. A key requirement of the Directive is the appointment of a depositary, and the Company will shortly be appointing Bank of New York Mellon for this purpose. For more information on the AIFMD and its implications for the Company please refer to my statement to accompany the results for the year ended 31st October 2013.

Outlook

The events in Ukraine are likely to dominate the outlook with the threat of widening sanctions against Russian individuals and companies by the West. The Board is tracking developments in this area closely, with the assistance of JPMorgan Asset Management's compliance and investment functions. At the time of writing, none of the Company's investments are caught by the scope of sanctions imposed to date and therefore no action is required by the Company. Both the Board and JPMorgan Asset Management will continue to monitor the impact of sanctions and take appropriate action as necessary.

Despite the shadow cast over the Russian market from political events, current valuations in Russia look attractive with relatively high dividend yields. Positive developments include buoyant energy markets, reviving consumer confidence and increasing capital investment. It is hoped that the election of a new Ukrainian Government in late May 2014 led by President Poroshenko will bring a measure of peace and stability to the country. The EU and USA have pledged the Ukraine a significant financial support package which will ease its short-term debt servicing requirements.

We share our Investment Manager's belief that equity markets in Russia still provide a good long-term investment opportunity, and the current investment approach of maintaining a portfolio focused on strong cash flow generation continues to provide the best strategy for the Company to prosper.

Lysander Tennant

Chairman                                                                                                                                                       

19th June 2014

Investment Manager's Report

Market Commentary

During the last six month reporting period, the MSCI Russian 10/40 Equity Index fell by 26.4%. The Company's net asset value fell 28.4% and the share price return was -27.6%. All figures quoted are on a total return basis. These disappointing results reflect the recent political crisis in Ukraine, which has resulted in a change in the political status of the Crimea peninsula and the introduction of US and EU-sponsored political sanctions against individuals closely related to President Putin and businesses controlled by them. There is a clear increase in Russian country risk on the back of the escalating conflict between Moscow and the West.

The Ukrainian state is going through an extreme period of political instability and economic disruption. The collapse of the Yanukovich government on the back of public protests was a surprise for most of the major players and politicians both inside and outside Ukraine. With the country on the verge of civil war, the West has criticized the Russian authorities for using the unrest as an opportunity to annex Crimea and to stoke violent protests in Ukraine's eastern regions where ethnic Russians are in the majority. There seems to be little desire on both sides to become involved in a full-blown military or economic conflict, but with tactical mistakes made on all sides and a limited desire to negotiate, the current situation is now almost a binary process, with each party waiting for the other side to withdraw its demands. The economic situation in Ukraine continues to deteriorate, and the country's dependency on external funding is rising. Devaluation of the currency has already happened, and the expectation of default this year seems almost certain for at least some portion of national debt and obligations. The lack of economic reform over the last 20 years will exacerbate the current difficulties for the economy and population. Ukraine is among the few countries in the world where GDP per capita is lower today than it was 20 years ago.

The situation in the Ukraine has fanned the flames of a continuing uneasy relationship between Russia and the West, but in particular between Russia and the US. Of course Russia's stand-off with the US can also be seen in the wider context of President Putin's desire to re-establish Russia as a global power. So far, it would appear that Mr Putin is ready to shoulder the financial costs of minor economic sanctions in exchange for more significant gains in the geopolitical game. These developments are clearly detrimental for equity investors in Russian markets. The cost of capital is increasing, and economic growth has decreased to zero.

Although the political situation in Ukraine will not be resolved overnight, surprisingly, it could be said that as a result of the Ukrainian crisis the political situation in Russia is now more stable and predictable than it was six months ago. This is on the basis that Mr Putin will continue to consolidate public support and strengthen the power of his Government's bureaucratic machine.

In such an uncertain environment, investors have retreated from the Russian market. Dividends to be paid in the next six months may improve this situation as a large portion is likely to be reinvested.

Performance

The Company's return was negative in both absolute and relative terms. Performance lagged behind the benchmark index by 200bps over the review period. Relatively large exposures to small and medium cap consumer names were major detractors from performance. Performance suffered from large price falls in Sollers (automaker), Cherkizovo & Rosagro (both agricultural producers), DIXY (food retail chain). Tinkoff (credit card provider) was a major disappointment as the company's operating environment changed drastically, and growth and profitability will continue to be under pressure in the near future. We consider that all these companies are sound long term holdings with the ability to produce sustainable and superior returns on shareholder capital. The closed end structure of the fund allows it to maintain portfolio positions in the current hostile period in the equity market, with the expectation that benefits will accrue in the long term.

Another negative factor for the Company was that stocks with low free floats and lower investment attractiveness outperformed as a result of limited trading activity and international shareholdings. These stocks experienced relatively strong performance as their prices were not adjusted downwards during the general sell-off in the market. This is regarded as a temporary factor with little expectation of a repeat in the future. On that basis we recognize the current impact on the portfolio, but are reluctant to add any such holdings to the portfolio, as we do not favour these companies' investment fundamentals.

Portfolio Activity

For the period under review, I would like to highlight the following positions within the portfolio:

Alrosa, a state-controlled diamond mining company, should benefit from a significant dividend yield and the prospect of steady production and steady prices for diamonds. It is a play on global consumer demand recovery and it will benefit from any Ruble weakness as a major Russian exporter.

Qiwi, which offers integrated business solutions, including equipment and software for receipt of payments, suffered a significant price adjustment and became an attractive option to play the infrastructure story for Russian consumers. They have an unparalleled network of terminals which provide clients with instant electronic access to payment systems including access to 400+ service providers in a variety of industries from housing to banking / mobile telephony and travel. The Company has a clear dividend policy and high level of returns on deployed equity.

Positions in Yandex, the Russian equivalent of Google and Mail Ru, a developer of internet communications and entertainment services in Russia and globally, were initiated following significant price moves and relatively attractive current valuations compared to growth prospects. The light capital model of new media and exposure to consumer related electronic advertising and social network business offer an attractive combination of factors.

A benefit of the recent sharp fall in the equity market is that it provides us with new opportunities to achieve an attractive entry point to some of the names which we like as a business, but previously considered to be overpriced.

Outlook

We believe that there will be a gradual but peaceful resolution of the Ukrainian situation. Based on this premise, we believe that valuations in Russia are attractive. Shares are trading close to levels last seen during the 2008-2009 period of the global financial crisis, whilst clearly the current general economic environment is much improved. The Russian dividend yield will be one of the highest in the world, as distributions have not tracked the general decline in the market. Elevated oil prices, some recovery of consumer confidence, rejuvenated state-led and private investments, which have rebuilt depleted inventories, are all expected to result in rapid economic growth from current exceptionally low levels. All in all, Russia again presents a mixed picture: a considerable investment opportunity albeit without a clear period of time to realise and capitalize on that potential.

The Russian government is likely to use all available tools to stimulate economic growth in the second half of 2014 and throughout 2015. That may include adjustments to the cost of state-related funding and guarantees, state-led investments in infrastructure and some tax adjustments. Development of the Far East and Crimea regions will be clearly prioritized, and as recently seen in Sochi, Kazan and Vladivostok, the Russian state is capable of delivering large scale infrastructure projects on time. World Cup 2018 will come into focus as an investment theme after this year's World Cup in Brazil.

Unfortunately privatisation will be postponed for some time due to current market valuations. This will delay diversification of the Russian equity market and restrict its representation and depth. However we believe that the reduction of state presence in the economy will remain a long-term strategy for the Russian Government.

We believe that the long-term fundamental case for the Russian equity market is still intact and continues to provide ample opportunity for active fund managers to add value.

Oleg I. Biryulyov

Investment Manager                                                                                                                                        

19th June 2014

Interim Management Report

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

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company have not changed since the Company's year end and fall into the following broad categories: investment and strategy; market; accounting, legal and regulatory; corporate governance and shareholder relations; operational; and financial. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st October 2013.

Related Party 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 yearly financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half Yearly Financial Reports' and gives a true and fair view of the state of affairs of the Company and of the assets, liabilities, financial position and net return of the Company, as at 31st March 2014, as required by the UK Listing Authority Disclosure and Transparency Rules 4.2.4R; and

(ii) the interim 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.

In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

•    select suitable accounting policies and then apply them consistently;

•    make judgements and accounting estimates that are reasonable and prudent;

•    state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

•    prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;

and the Directors confirm that they have done so.

For and on behalf of the Board

Lysander Tennant

Director

19th June 2014

Income Statement

for the six months ended 30th April 2014

	(Unaudited)				(Unaudited)			(Audited)
	Six months ended				Six months ended			Year ended
	30th April 2014				30th April 2013			31st October 2013
	Revenue	Capital	Total	Revenue		Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000		£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments
held at fair value through
profit or loss	-	(90,887)	(90,887)	-		16,066	16,066	-	33,247	33,247
Net foreign currency (losses)/gains	-	(139)	(139)	-		141	141	-	(145)	(145)
Income from investments	487	-	487	5,570		-	5,570	12,901	-	12,901
Other interest receivable and
similar income	-	-	-	1		-	1	1	-	1
Gross return/(loss)	487	(91,026)	(90,539)	5,571		16,207	21,778	12,902	33,102	46,004
Management fee	(355)	(1,418)	(1,773)	(385)		(1,538)	(1,923)	(753)	(3,014)	(3,767)
Other administrative expenses	(292)	-	(292)	(336)		-	(336)	(849)	-	(849)
Net (loss)/return on ordinary
activities before finance costs
and taxation	(160)	(92,444)	(92,604)	4,850		14,669	19,519	11,300	30,088	41,388
Finance costs	-	-	-	-		(1)	(1)	-	(1)	(1)
Net (loss)/return on ordinary
activities before taxation	(160)	(92,444)	(92,604)	4,850		14,668	19,518	11,300	30,087	41,387
Taxation	(37)	-	(37)	(789)		-	(789)	(1,643)	-	(1,643)
Net (loss)/return on ordinary
activities after taxation	(197)	(92,444)	(92,641)	4,061		14,668	18,729	9,657	30,087	39,744
(Loss)/return per share (note 4)	(0.37)p	(175.86)p	(176.23)p	7.59p		27.43p	35.02p	18.14p	56.52p	74.66p

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 2014	capital	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2013	527	48,482	74	275,809	7,511	332,403
Repurchase of the Company's own
shares for cancellation	(1)	-	1	(718)	-	(718)
Net loss on ordinary activities	-	-	-	(92,444)	(197)	(92,641)
Dividend paid in the period	-	-	-	(526)	(7,511)	(8,037)
At 30th April 2014	526	48,482	75	182,121	(197)	231,007
	Called up		Capital
Six months ended	share	Other	redemption	Capital	Revenue
30th April 2013	capital	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2012	538	48,482	63	251,898	(2,146)	298,835
Repurchase of the Company's own
shares for cancellation	(5)	-	5	(2,868)	-	(2,868)
Net return on ordinary activities	-	-	-	14,668	4,061	18,729
At 30th April 2013	533	48,482	68	263,698	1,915	314,696
	Called up		Capital
Year ended	share	Other	redemption	Capital	Revenue
31st October 2013	capital	reserve	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2012	538	48,482	63	251,898	(2,146)	298,835
Repurchase of the Company's own
shares for cancellation	(11)	-	11	(6,176)	-	(6,176)
Net return on ordinary activities	-	-	-	30,087	9,657	39,744
At 31st October 2013	527	48,482	74	275,809	7,511	332,403

Balance Sheet

at 30th April 2014

	(Unaudited)	(Unaudited)	(Audited)
	30th April 2014	30th April 2013	31st October 2013
	£'000	£'000	£'000
Fixed assets
Equity investments held at fair value through profit or loss	229,483	310,819	327,200
Investment in liquidity fund held at fair value through
profit or loss	1,416	385	4,015
Total investment portfolio	230,899	311,204	331,215
Current assets
Debtors	219	3,486	1,939
Cash and short term deposits	374	104	3,627
	593	3,590	5,566
Creditors: amounts falling due within one year	(485)	(98)	(4,378)
Net current assets	108	3,492	1,188
Total assets less current liabilities	231,007	314,696	332,403
Net assets	231,007	314,696	332,403
Capital and reserves
Called up share capital	526	533	527
Other reserve	48,482	48,482	48,482
Capital redemption reserve	75	68	74
Capital reserves	182,121	263,698	275,809
Revenue reserve	(197)	1,915	7,511
Shareholders' funds	231,007	314,696	332,403
Net asset value per share (note 5)	439.7p	590.5p	631.1p

Cash Flow Statement

for the six months ended 30th April 2014

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2014	30th April 2013	31st October 2013
	£'000	£'000	£'000
Net cash (outflow)/inflow from operating
activities (note 6)	(162)	(795)	5,117
Net cash outflow from returns on investments
and servicing of finance	-	(1)	(1)
Net cash inflow from capital expenditure
and financial investment	6,140	1,305	2,172
Dividend paid (note 3)	(8,037)	-	-
Net cash outflow from financing	(1,055)	(4,763)	(7,733)
Decrease in cash for the period	(3,114)	(4,254)	(445)
Reconciliation of net cash flow to movement in
net funds
Net cash movement	(3,114)	(4,254)	(445)
Exchange movements	(139)	141	(145)
Movement in net debt in the period	(3,253)	(4,113)	(590)
Net funds at the beginning of the period	3,627	4,217	4,217
Net funds at the end of the period	374	104	3,627
Represented by:
Cash and short term deposits	374	104	3,627
Net funds at the end of the period	374	104	3,627

Notes to the Accounts

for the six months ended 30th April 2014

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 2013 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. 

3.   Dividend

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2014	30th April 2013	31st October 2013
	£'000	£'000	£'000
Final dividend paid in respect of the year ended
31st October 2013 of 15.3p (2012: 0.0p)	8,037	-	-

      No interim dividend has been declared in respect of the six months ended 30th April 2014 (2013: nil).

4.   (Loss)/return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2014	30th April 2013	31st October 2013
	£'000	£'000	£'000
(Loss)/return per share is based on the following:
Revenue (loss)/return	(197)	4,061	9,657
Capital (loss)/return	(92,444)	14,668	30,087
Total (loss)/return	(92,641)	18,729	39,744
Weighted average number of shares in issue	52,567,222	53,477,637	53,232,345
Revenue (loss)/return per share	(0.37)p	7.59p	18.14p
Capital (loss)/return per share	(175.86)p	27.43p	56.52p
Total (loss)/return per share	(176.23)p	35.02p	74.66p

5.   Net asset value per share

      Net asset value per share is based on the net assets attributable to shareholders £231,007,000 (30th April 2013: £314,696,000 and 31st October 2013: £332,403,000) and on the 52,532,112 (30th April 2013: 53,292,112 and 31st October 2013: 52,667,112) shares in issue at the period end.

6.   Reconciliation of net (loss)/return on ordinary activities before finance costs and taxation to net cash (outflow)/inflow from operating activities

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2014	30th April 2013	31st October 2013
	£'000	£'000	£'000
Net (loss)/return on ordinary activities before finance
costs and taxation	(92,604)	19,519	41,388
Add back capital loss/(return) before finance costs and taxation	92,444	(14,669)	(30,088)
Net movements in debtors, accrued income and accrued expenses	1,453	(3,318)	(1,526)
Overseas withholding tax	(37)	(789)	(1,643)
Management fee charged to capital	(1,418)	(1,538)	(3,014)
Net cash (outflow)/inflow from operating activities	(162)	(795)	5,117

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.morningstar.co.uk/uk/NSM

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

 

 

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