Half Yearly Report

RNS Number : 3276H

JPMorgan Russian Securities PLC

18 June 2013

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

UNAUDITED HALF YEAR RESULTS FOR

THE SIX MONTHS ENDED 30TH APRIL 2013

Chairman's Statement

Performance

I am pleased to announce that over the six month period ended 30th April 2013, the Company's net asset value increased by 6.4%, representing an outperformance of 4.1 percentage points over the benchmark index. The Company's share price increased by 4.3% over the period, reflecting a widening of the discount at which the ordinary shares traded to the net asset value from 10.3% to 12.0%.

The return of the Company's benchmark (the MSCI Russian 10/40 Equity Indices Index), was 2.3%. This performance is disappointing when compared with the outstanding returns generated by some developed markets over the same period. Indeed many emerging markets have lagged the developed world as news flow continues to be unfavourable. The principal external factors which put pressure on Russia and peripheral European markets were the Cyprus banking crisis and Euro weakness. Your Investment Managers have nonetheless managed to create additional value for Shareholders over the period. A full commentary on the market environment and a review of portfolio performance are set out in the Investment Managers' report below.

Discount Control

The Company repurchased 535,000 shares for cancellation at an average discount to net asset value of 12.5%, which resulted in a cumulative increase in net asset value per share of 0.7 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. As global financial headlines are still providing the catalyst for continued volatility in the Russian market, the Board has, on occasion, refrained from implementing share buybacks when the discount has widened beyond 8% over the last six months, as there has been no certainty that such actions would assist in stabilising the discount. The Board continues to monitor the situation.

Revenue and Earnings and Change in Accounting Policy

As reported in my statement in the Annual Report for the year ended 31st October 2012, there has been a marked increase in the payment of dividends by Russian companies. As a result, the Company's income after expenses is expected to be positive for the second financial year in a row. The revenue return after taxation for the six months ended 30th April 2013 was £4,061,000, which is more than sufficient to remove the Company's revenue deficit.

Historically, the Company has allocated indirect expenses wholly to the revenue account. However, the Board has decided, with retrospective effect from 1st November 2012, to allocate to the capital account 80% of management fees and finance costs to reflect the Board's expectation that the majority of long-term return from investing in the Company will be derived from capital gains rather than income. While this change has no impact on the Company's cash flows but only on the presentation of its accounts, a consequence is that earnings per share for this financial year will show further improvement. The Company's key objective remains the provision of capital growth from investments in Russian equities. However, given the significant improvement in the payment of dividends by corporate Russia, it is gratifying that the Company should be able to provide an income distribution to Shareholders.

The Board will be proposing the payment of a final dividend in respect of the year ended 31st October 2013, once the figures for the full year are known. If approved by Shareholders at the Company's 2014 AGM, the distribution will be paid in early March 2014.

Gearing

As the Russian market remains volatile your investment managers did not gear the portfolio during the review period.

Outlook

Although there is presently limited positive news arising from the Russian economy, and forecast growth rates are likely to be revised down further, Russian company valuations remain amongst the cheapest in the global emerging markets space. The average 2013 price to earnings multiple is 5.2 times while the EV/EBITDA multiple for the market is 3.3 times. There is also further evidence of increasingly investor-friendly behaviour from some of the largest companies in the benchmark index and, as previously mentioned, Russian companies in some sectors are now paying out significant dividends. Against this background, your Investment Managers will continue to focus on good quality companies and sectors benefiting from strong domestic demand.

 Lysander Tennant

Chairman

18th June 2013

Investment Managers' Report

Market Commentary

Over the six month reporting period, the MSCI Russian 10/40 Equity Indices Index rose 2.3%. This relatively modest movement in the index belies the significant level of volatility throughout the period on both an individual stock basis as well as the market overall. The market enjoyed its regular New Year rally but has been sliding steadily since the end of January 2013, as the impact of gloomy growth predictions, lower commodity prices and the Cypriot banking crisis took hold.

When compared to previous years, political risk within Russia diminished slightly as the election dramas from the prior year disappeared from media attention, although uncertainties about the sustainability of economic growth and the need for reform provided good ground for debate. Unfortunately, the discussions which began in the public arena were quickly moved behind closed doors, a familiar pattern where government policies are debated openly. However, it is clear that Mr Putin and his administration are keen to regain public support, for example by promoting their image as taking a hard line against corruption. The key opposition party has had little chance of attracting support and Mr Putin continues to consolidate his control over governing institutions. In our opinion a power struggle for the presidency is out of the question for some time. Mr Naval'ny, who is regarded as the leader of the opposition, is currently excluded from the political scene as he is defending himself in court against accusations relating to business activities dating back over five years.

In Cyprus the moratorium on banking transactions created some problems for a few Russian corporates, which used Cyprus for financial planning. In general, however, the impact on Russian companies was greatly exaggerated, and no Russian publicly quoted companies were significantly impacted by this crisis.

There were limited flows into Russian dedicated funds during the review period. The market lacks a necessary major catalyst and investors remain on the sidelines waiting for news on corporate dividend distributions and the commodity price outlook.

Performance

The Company's return on net assets was +6.4%, representing a 4.1 percentage point outperformance against the Company's benchmark index. The share price increased by 4.3%, reflecting a widening of the discount at which the shares trade to their net asset value.

The major contributor to the outperformance of the Company over the reporting period was the portfolio's large underweight in utilities; this sector continues to suffer due to poor regulation and the execution of return-based capital allocation decisions. The best performing stock in the portfolio was CTC Media, which happened to be amongst the worst performers in the Company's previous financial year. The normalisation of the CTC Media's earnings growth and subsequent re-rating of the company were key factors supporting a turnaround in the stock's fortunes.

The largest detractor from the Company's relative performance was the underweight position in Megafon, which was added to the Index following an IPO at the fourth quarter of 2012. We did not take part in the IPO for this company, as we did not consider the stock's valuation as a new market player compared to MTS, an established public player, to be attractive. Megafon was amongst the best performing stocks in the market and now trades at a premium to its sector peers in Russia and other emerging markets.

Portfolio Activity

In the review period, we would like to highlight the following positions within the portfolio:

TNK-BP - this position should benefit from a significant dividend yield and the prospect of a buy-out by its parent at preferential terms. Although TNK-BP is currently a subsidiary of Rosneft, the holding company is only able to extract cash from its subsidiary through the medium of dividend distributions.

Gazprom - our position in this stock is based on the relative valuation of the company, together with our more positive outlook for improved dividend payout policies in the Russian energy sector. Increased and sustainable dividend distributions represent a major improvement in corporate governance and should lead to improved capital allocation discipline. We have consistently sought to persuade companies to adopt sensible dividend payout policies and are therefore pleased to see this positive trend.

CTC Media - the position in this company represented the largest contributor to the Company's performance over the six month review period. We took the opportunity to take some profit and reduced this position over the period. Since the end of the reporting period we have sold the remainder of the Company's position in this stock as we believe it has reached its performance potential.

We continue to look for ways to increase diversification across the portfolio and are keen to see listings of new companies and industries not represented today on the market. As stated last year, we hope that the supply of new companies will come from both the private and state sectors, the latter of which has an ambitious privatisation programme over the next five years.

Outlook

Economic growth in Russia is expected to recover in the second half of 2013 owing to a predicted acceleration in government investment activity and looser monetary policy introduced by the new chairman of the Central Bank of Russia. Political risks are likely to stay neutral until September 2013, when the next set of regional elections will take place. We do not envisage that these elections will cause a substantial increase in market risk.

The Russian market will continue to be influenced by the current uncertainty in global financial markets, but its current valuation (the average 2013 price to earnings multiple is 5.2 times) and the foreseeable dividend increases from companies, make it attractive on a relative basis. We will continue to see risks emanating from the dominance of commodity producers on the Russian market in the long run, although in the short term, the same dominance will generate significant cash inflows both for the state and shareholders. Earnings revisions are likely to be more positive in the second half of 2013 in comparison to the last 12 months of ongoing negative revisions. The central bank's new policy of currency flexibility will help smooth the adjustment of the Russian economy to the volatility of global energy prices.

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

Vitaly N. Kazakov

Investment Managers

18th June 2013

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 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 2012.

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

(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.

For and on behalf of the Board

Lysander Tennant

Chairman                                                                                                                                         

18th June 2013

Income Statement

for the six months ended 30th April 2013

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th April 2013			30th April 2012			31st October 2012
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss	-	16,066	16,066	-	17,933	17,933	-	(7,969)	(7,969)
Net foreign currency gains/(losses)	-	141	141	-	(495)	(495)	-	(417)	(417)
Income from investments	5,570	-	5,570	1,428	-	1,428	8,581	-	8,581
Other interest receivable and similar income	1	-	1	7	-	7	8	-	8
Gross return/(loss)	5,571	16,207	21,778	1,435	17,438	18,873	8,589	(8,386)	203
Management fee	(385)	(1,538)	(1,923)	(1,919)	-	(1,919)	(3,715)	-	(3,715)
Other administrative expenses	(336)	-	(336)	(387)	-	(387)	(978)	-	(978)
Net return/(loss) on ordinary activities before finance costs and taxation	4,850	14,669	19,519	(871)	17,438	16,567	3,896	(8,386)	(4,490)
Finance costs	-	(1)	(1)	(4)	-	(4)	(5)	-	(5)
Net return/(loss) on ordinary activities before taxation	4,850	14,668	19,518	(875)	17,438	16,563	3,891	(8,386)	(4,495)
Taxation	(789)	-	(789)	(185)	-	(185)	(1,137)	-	(1,137)
Net return/(loss) on ordinary activities after taxation	4,061	14,668	18,729	(1,060)	17,438	16,378	2,754	(8,386)	(5,632)
Return/(loss) per share (note 4)	7.59p	27.43p	35.02p	(1.93)p	31.77p	29.84p	5.03p	(15.32)p	(10.29)p

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 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
Shares bought back and cancelled	(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
Six months ended	share	Other	redemption	Capital	Revenue
30th April 2012	capital	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2011	551	48,482	50	266,924	(4,900)	311,107
Shares bought back and cancelled	(4)	(2,275)	4	-	-	(2,275)
Net return/(loss) on ordinary activities	-	-	-	17,438	(1,060)	16,378
At 30th April 2012	547	46,207	54	284,362	(5,960)	325,210
	Called up		Capital
Year ended	share	Other	redemption	Capital	Revenue
31st October 2012	capital	reserve	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2011	551	48,482	50	266,924	(4,900)	311,107
Repurchase of the Company's own shares for cancellation	(13)	-	13	(6,640)	-	(6,640)
Net (loss)/return on ordinary activities	-	-	-	(8,386)	2,754	(5,632)
At 31st October 2012	538	48,482	63	251,898	(2,146)	298,835

Balance Sheet

at 30th April 2013

	(Unaudited)	(Unaudited)	(Audited)
	30th April 2013	30th April 2012	31st October 2012
	£'000	£'000	£'000
Fixed assets
Equity investments held at fair value through profit or loss	310,819	319,152	297,614
Investment in liquidity fund held at fair value through profit or loss	385	2,094	2,172
Total investment portfolio	311,204	321,246	299,786
Current assets
Debtors	3,486	1,865	1,013
Cash and short term deposits	104	2,201	4,217
	3,590	4,066	5,230
Creditors: amounts falling due within one year	(98)	(102)	(6,181)
Net current assets/(liabilities)	3,492	3,964	(951)
Total assets less current liabilities	314,696	325,210	298,835
Net assets	314,696	325,210	298,835
Capital and reserves
Called up share capital	533	547	538
Other reserve	48,482	46,207	48,482
Capital redemption reserve	68	54	63
Capital reserves	263,698	284,362	251,898
Revenue reserve	1,915	(5,960)	(2,146)
Shareholders' funds	314,696	325,210	298,835
Net asset value per share (note 5)	590.5p	594.6p	555.2p

Cash Flow Statement

for the six months ended 30th April 2013

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2013	30th April 2012	31st October 2012
	£'000	£'000	£'000
Net cash (outflow)/inflow from operating activities (note 6)	(795)	(1,785)	2,730
Net cash outflow from returns on investments and servicing of finance	(1)	(4)	(5)
Net cash inflow from capital expenditure and financial investment	1,305	6,658	6,552
Net cash outflow from financing	(4,763)	(2,275)	(4,745)
Decrease/(increase) in cash for the period	(4,254)	2,594	4,532
Reconciliation of net cash flow to movement in net funds
Net cash movement	(4,254)	2,594	4,532
Exchange movements	141	(495)	(417)
Movement in net (debt)/funds in the period	(4,113)	2,099	4,115
Net funds at the beginning of the period	4,217	102	102
Net funds at the end of the period	104	2,201	4,217
Represented by:
Cash and short term deposits	104	2,201	4,217
Net funds at the end of the period	104	2,201	4,217

Notes to the Accounts

for the six months ended 30th April 2013

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 2012 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.

     With the exception of the change in note 3 below, the accounting policies applied in these half year accounts are consistent with those applied in the accounts for the year ended 31st October 2012.

3.  Change in accounting basis

     The Board has determined that a greater proportion of the Company's long term investment returns will come from capital than was previously expected and therefore the capital return should reflect the indirect costs of earning capital returns. Accordingly the Board has resolved to allocate 80% of the management fee and finance costs to capital, with the remaining 20% to revenue, with effect from 1st November 2012. The Company had previously allocated 100% of the management fee and 100% of the finance costs to revenue. The effect of this change is to increase the net revenue return after taxation by £1,539,000 and to reduce the net capital return by the same amount. Total net return after taxation is unaffected by the change. The comparative figures have not been restated.

4.  (Return)/loss per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2013	30th April 2012	31st October 2012
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return/(loss)	4,061	(1,060)	2,754
Capital return/(loss)	14,668	17,438	(8,386)
Total return/(loss)	18,729	16,378	(5,632)
Weighted average number of shares in issue	53,477,637	54,893,191	53,827,112
Revenue return/(loss) per share	7.59p	(1.93)p	5.03p
Capital return/(loss) per share	27.43p	31.77p	(15.32)p
Total return/(loss) per share	35.02p	29.84p	(10.29)p

5. Net asset value per share

     Net asset value per share is based on the net assets attributable to shareholders £314,696,000 (30th April 2012: £325,210,000 and 31st October 2012: £298,835,000) and on the 53,292,112 (30th April 2012: 54,692,312 and 31st October 2012: 53,827,112) shares in issue at the period end.

6.  Reconciliation of total return/(loss) 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 2013	30th April 2012	31st October 2012
	£'000	£'000	£'000
Total return/(loss) on ordinary activities before finance costs and taxation	19,519	16,567	(4,490)
Add back capital (return)/loss before finance costs and taxation	(14,669)	(17,438)	8,386
Net movements in debtors, accrued income and accrued expenses	(3,318)	(729)	(29)
Overseas withholding tax	(789)	(185)	(1,137)
Management fee charged to capital	(1,538)	-	-
Net cash (outflow)/inflow from operating activities	(795)	(1,785)	2,730

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.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

 

 

IR UWAVRONANAAR