Half-year Report

RNS Number : 5907J

JPMorgan European Smaller Co.

06 December 2018

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN EUROPEAN SMALLER COMPANIES TRUST PLC

HALF YEAR REPORT & FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30TH SEPTEMBER 2018

Legal Entity Identifier: 54930049CEWDI46Y3U28

Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

Dear Shareholder,

I am pleased to present the Company's results for the six months ended 30th September 2018.

Performance

Net asset value total return of +6.2% in the six months to 30th September 2018 compared with a return of +4.8% over the same period from the Company's benchmark index (the Euromoney Smaller Companies (ex UK) index), an out-performance of 1.4%. The share price return, however, was only +0.3%, resulting from a widening of the discount over the period. As at 30th September 2018, the Company's discount was 12.7% compared to 7.5% at 31st March 2018.

This is another positive result from our Investment Managers in challenging equity market conditions and the main contributor to performance was stock selection, with country allocation being a consequence of the bottom-up investment process.

Their report below reviews the markets and provides more detail on the performance drivers within the portfolio and the stocks and countries in which the Company is invested.

Revenue and Dividends

Gross revenue return for the six months to 30th September 2018 was higher than the corresponding period in 2017 at £13.9 million (2017: £11.5 million) and was the result of an increase in dividend receipts. The Board has decided to pay an interim dividend of 1.2 pence (2017: 1.2 pence) per share which will be paid on 18^th January 2019 to shareholders on the register as at 14th December 2018 (the ex-dividend date will be 13^th December 2018).

Share Repurchases

The Board continues to monitor the level of the discount of the Company's share price to net asset value carefully. It seeks to use its ability to repurchase shares to minimise the short term volatility and the absolute level of the discount. Whilst no shares were repurchased in the period to 30th September 2018, 200,000 shares were purchased in November at an average discount of 12.6%. Equity market volatility, as described in the Managers' report, in addition to Brexit-related uncertainty, led to discounts widening across a range of investment trusts, including those companies investing in European markets.

The Board

As part of the Board's succession planning, and outlined in the Annual Report, I will step down as Chairman and a Director at the Annual General Meeting in 2019. I am pleased that Marc van Gelder has agreed to succeed me and I would like to wish him every success in his new role. The Board has started a recruitment process with a view to appointing a new director.

Outlook

At the time of writing the outcome of the Brexit negotiations remains uncertain and that is creating volatility in the UK stock market. However, the underlying European companies in which the Company invests continue to offer good prospects for growth.

Carolan Dobson

Chairman                                                                                                                                 5th December 2018

INVESTMENT MANAGERS' REPORT

Review

Following a sharp correction at the start of the calendar year, equity markets rebounded between April and September 2018. However the period saw significant volatility due to concerns around slowing global economic growth, margin pressure from rising costs, the threat of a global trade war, political uncertainty in the UK and Italy and the approaching end of quantitative easing and the start of quantitative tightening.

The portfolio rose by 6.2% during the period, outperforming the benchmark Euromoney Smaller European Companies (ex UK) Index, which rose by 4.8%.

Portfolio

With a return of 6.2% over the six months to 30th September 2018, the portfolio outperformed its benchmark. Top performers included Dutch speciality chemicals and food ingredients distributor, IMCD, as it continued to gain scale in North America following a number of accretive acquisitions, Danish brewer, Royal Unibrew, as prolonged good weather over the summer increased demand for its products, and Austrian industrial Internet of Things expert, S&T, due to structurally growing end markets and improving revenue mix. Detractors included French liquid and gas storage and distribution specialist, Rubis, as the business suffered from political disruptions in Turkey and Iran, Swedish cosmetics retailer, Oriflame, as it faced significant foreign exchange headwinds and increasing pricing pressure from competitors, and Finnish consumer packaging manufacturer, Huhtamaki, following raw material price inflation and price pressure from major customers.

As economic momentum weakened, we reduced the portfolio's exposure to companies with more cyclical business models. Many of the companies we sold were manufacturing companies based in Germany such as light construction machinery manufacturer, Wacker Neuson, forklift truck manufacturer, Jungheinrich, automotive LED lighting specialist, Hella, automotive components supplier, Stabilus, truck and trailer components supplier, SAF-Holland, and printing press machine manufacturer, Koenig & Bauer, all due to slowing operational momentum driven by the deteriorating outlook for global growth.

The proceeds from these divestments were used to build positions in companies with more defensive business models. These included the market leading Swiss pharmaceuticals retailer, Galenica, due to its ability to consolidate the Swiss market and expansion opportunities within its own-brand OTC product portfolio, Swedish speciality vegetable oils producer, AAK, as the global trend towards healthier eating continues to increase demand for its plant-based oils, Dutch glasses retailer GrandVision, where the new CEO appears to be successfully executing on his business strategy, and French care home operator, Korian, as the benefits of portfolio repositioning strategy began to feed through to better than expected profitability. We added a number of oil services companies including Austrian Schoeller-Bleckmann, Dutch SBM Offshore, and Italian Saipem as the sector's outlook improved due to the rising oil price and historic underinvestment.

As a result of these changes, Healthcare became the largest sector overweight and the Oil sector moved from an underweight to an overweight position. Conversely, the Industrial Engineering sector moved to an underweight position having been the largest sector overweight at the start of the period. The Netherlands remained the portfolio's largest country overweight while Germany became the largest country underweight. We further de-risked the portfolio by moving from 7.9% geared to 2.4% cash over the period.

Outlook

Nevertheless, long term inflationary expectations remain anchored at around 2% and the US mid-term elections resulted in a split congress, meaning the loose fiscal policies may be reined in. With Italian 2 year yields close to 1% and sterling weak but stable it seems that the bond and currency markets expect political risks in Europe to be manageable. One interpretation could be that the market has concluded that individual counties have far more to lose from confrontation with the EU than the block as a whole and consequently are likely to pare down their demands.

The recent rise in the US 10 year bond, at one point to above a 3.2% yield, reduced the appetite for stocks across all geographies, including Europe. On this side of the Atlantic, fears about the Italian budget and continued uncertainty around Brexit added to the general malaise. The US mid-term elections in the US resulted in a split Congress, meaning the recent loosening of fiscal policy, through tax cuts, is unlikely to be repeated. This has been a driver of higher US interest rates, and therefore we see a standstill here as a positive. In Europe, with Italian 2 year yields close to 1%, bond markets are signalling that political risks are manageable. In summary, we believe the volatility in October was a long overdue correction, rather than start of a more prolonged downturn in markets.

As valuations became more attractive by the end of October we started raising our gearing, finding opportunities in the industrial and automotive sectors in particular.

Francesco Conte

Edward Greaves

Investment Managers                                                                                                                 5th December 2018

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 underperformance and strategy; market and currency; accounting, legal and regulatory; operational; cyber crime, financial and corporate governance and shareholder relations. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st March 2018.

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.

Going Concern

The Directors believe that, having considered the Company's investment objective, risk management policies, capital management policies and procedures, the nature of the portfolio and expenditure and cashflow projections, the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. More specifically, they believe that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least twelve months from the date of the approval of this half yearly financial report. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the financial statements.

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 FRS 104 'Interim 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 30th September 2018, as required by the UK Listing Authority Disclosure Guidance 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 Guidance 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

Carolan Dobson

Chairman                                                                                                                              5th December 2018

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30TH SEPTEMBER 2018

	(Unaudited)				(Unaudited)			(Audited)
	Six months ended				Six months ended			Year ended
	30th September 2018				30th September 2017			31st March 2018
		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		-	34,781	34,781	-	81,304	81,304	-	82,036	82,036
Net foreign currency gains		-	266	266	-	1,426	1,426	-	2,099	2,099
Income from investments		13,798	-	13,798	11,445	-	11,445	13,129	-	13,129
Interest receivable and
similar income		88	-	88	60	-	60	122	-	122
Gross return		13,886	35,047	48,933	11,505	82,730	94,235	13,251	84,135	97,386
Management fee		(1,013)	(2,364)	(3,377)	(927)	(2,162)	(3,089)	(1,931)	(4,506)	(6,437)
Other administrative expenses		(409)	-	(409)	(391)	-	(391)	(739)	-	(739)
Net return on ordinary
activities before finance
costs and taxation		12,464	32,683	45,147	10,187	80,568	90,755	10,581	79,629	90,210
Finance costs		(130)	(305)	(435)	(61)	(143)	(204)	(153)	(356)	(509)
Net return on ordinary
activities before taxation		12,334	32,378	44,712	10,126	80,425	90,551	10,428	79,273	89,701
Taxation		(1,065)	-	(1,065)	(750)	-	(750)	(853)	-	(853)
Net return on ordinary
activities after taxation		11,269	32,378	43,647	9,376	80,425	89,801	9,575	79,273	88,848
Return per share (note 3)		7.04p	20.24p	27.28p	5.86p	50.27p	56.13p	5.98p	49.55p	55.53p

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30TH SEPTEMBER 2018

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 30th September 2018
(Unaudited)
At 31st March 2018	8,000	1,312	7,636	673,600	11,627	702,175
Net return on ordinary activities	-	-	-	32,378	11,269	43,647
Dividend paid in the period (note 4)	-	-	-	-	(8,799)	(8,799)
At 30th September 2018	8,000	1,312	7,636	705,978	14,097	737,023
Six months ended 30th September 2017
(Unaudited)
At 31st March 2017	8,000	1,312	7,636	594,327	9,571	620,846
Net return on ordinary activities	-	-	-	80,425	9,376	89,801
Dividend paid in the period (note 4)	-	-	-	-	(5,600)	(5,600)
At 30th September 2017	8,000	1,312	7,636	674,752	13,347	705,047
Year ended 31st March 2018 (Audited)
At 31st March 2017	8,000	1,312	7,636	594,327	9,571	620,846
Net return on ordinary activities	-	-	-	79,273	9,575	88,848
Dividends paid in the year (note 4)	-	-	-	-	(7,519)	(7,519)
At 31st March 2018	8,000	1,312	7,636	673,600	11,627	702,175

This reserve forms the distributable reserve of the Company and may be used to fund the distribution to investors via dividend payments.

STATEMENT OF FINANCIAL POSITION

AT 30TH SEPTEMBER 2018

	(Unaudited)	(Unaudited)	(Audited)
	30th September 2018	30th September 2017	31st March 2018
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	719,228	722,190	757,861
Current assets
Derivative financial assets	6	-	-
Debtors	13,087	966	18,186
Cash and cash equivalents	37,615	20,798	21,998
	50,708	21,764	40,184
Current liabilities
Creditors: amounts falling due within one year	(8,864)	(38,907)	(3,805)
Derivative financial liabilities	-	-	(10)
Net current assets/(liabilities)	41,844	(17,143)	36,369
Total assets less current liabilities	761,072	705,047	794,230
Creditors: amounts falling due after more than one year	(24,049)	-	(92,055)
Net assets	737,023	705,047	702,175
Capital and reserves
Called up share capital	8,000	8,000	8,000
Share premium	1,312	1,312	1,312
Capital redemption reserve	7,636	7,636	7,636
Capital reserves	705,978	674,752	673,600
Revenue reserve	14,097	13,347	11,627
Total shareholders' funds	737,023	705,047	702,175
Net asset value per share (note 5)	460.7p	440.7p	438.9p

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30TH SEPTEMBER 2018

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2018	30th September 2017	31st March 2018
	£'000	£'000	£'000
Net cash (outflow)/inflow from operations    before dividends and
interest	(2,365)	199	(3,591)
Dividends received	11,448	10,666	12,377
Overseas tax recovered	80	51	66
Interest paid	(372)	(257)	(459)
Net cash inflow from operating activities	8,791	10,659	8,393
Purchases of investments and derivatives	(451,295)	(234,636)	(597,508)
Sales of investments and derivatives	536,093	252,894	563,457
Settlement of forward currency contracts	(204)	142	291
Net cash inflow/(outflow) from investing activities	84,594	18,400	(33,760)
Dividends paid	(8,799)	(5,600)	(7,519)
Drawdown of bank loans	-	22,000	79,613
Repayment of bank loans	(68,969)	(49,015)	(49,015)
Net cash (outflow)/inflow from financing activities	(77,768)	(32,615)	23,079
Increase/(decrease) in cash and cash equivalents	15,617	(3,556)	(2,288)
Cash and cash equivalents at start of period	21,998	24,285	24,285
Exchange movements	-	69	1
Cash and cash equivalents at end of period	37,615	20,798	21,998
Increase/(decrease) in cash and cash equivalents	15,617	(3,556)	(2,288)
Cash and cash equivalents consist of:
Cash and short term deposits	285	271	2,175
Cash held in JPMorgan Euro Liquidity Fund	37,330	20,527	19,823
Total	37,615	20,798	21,998

NOTES TO THE FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30TH SEPTEMBER 2018

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 March 2018 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies, including 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 financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the 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' (the revised 'SORP') issued by the Association of Investment Companies in November 2014 and updated in February 2018.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015 has been applied in preparing this condensed set of financial statements for the six months ended 30th September 2018.

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

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st March 2018.

3.  Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2018	30th September 2017	31st March 2018
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	11,269	9,376	9,575
Capital return	32,378	80,425	79,273
Total return	43,647	89,801	88,848
Weighted average number of shares in issue	159,987,885	159,987,885	159,987,885
Revenue return per share	7.04p	5.86p	5.98p
Capital return per share	20.24p	50.27p	49.55p
Total return per share	27.28p	56.13p	55.53p

4.  Dividends paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2018	30th September 2017	31st March 2018
	£'000	£'000	£'000
2018 final dividend of 5.5p (2017: 3.5p) per share	8,799	5,600	5,600
2018 interim dividend of 1.2p per share	-	-	1,919
Total dividends paid in the period/year	8,799	5,600	7,519

All dividends paid in the period have been funded from the revenue reserve.

An interim dividend of 1.2p (2018: 1.2p) has been declared in respect of the six months ended 30th September 2018, amounting to £1,920,000.

5.  Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2018	30th September 2017	31st March 2018
Net assets (£'000)	737,023	705,047	702,175
Number of shares in issue	159,987,885	159,987,885	159,987,885
Net asset value per share	460.7p	440.7p	438.9p

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.

For further information, please contact:

Faith Pengelly

For and on behalf of

JPMorgan Funds Limited, Secretary 020 7742 4000

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 FUNDS LIMITED

ENDS

A copy of the half year will be 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.jpmeuropeansmallercompanies.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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