Half-year Report

RNS Number : 3028I

JPMorgan European Smaller Co.

11 December 2020

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMorgan European Smaller Companies Trust plc

( the 'Company' )

Half Year Report & Accounts for the six months ended 30^th September 2020

Legal Entity Identifier: 54930049CEWDI46Y3U28

Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

I hope that you are all keeping safe and healthy during these uncertain times. When I published my annual statement in June, we were emerging from the severe, unprecedented restrictions imposed in March as a result of the Covid-19 pandemic and by that time equity markets had rebounded from their lows in March and April. Over the course of the first half of the Company's financial year, markets have stabilised and continued to rise.

Performance

I am very pleased to report that the Company recorded a total return on net assets of +49.2% in the six months to 30th September 2020, outperforming by some margin the Company's benchmark index, the MSCI Europe (ex UK) small cap net total return index in sterling terms, which returned +34.9% over the same period. This outperformance was almost entirely a result of positive stock selection, which is a credit to our Investment Managers, whose strategy of focusing on Technology, Wellness and Environmental themes is paying off. The total return to shareholders was +62.4%, reflecting the narrowing of the discount at which the Company's shares trade from 22.5% to 16.0% over the six months.

I would also highlight the Company's long term performance: over the five and ten year periods to 30th September 2020, the total return on net assets was +87.7% and +203.3%, respectively, outperforming the benchmark index total return by +8.3% and 54.7%, respectively.

The Investment Managers' Report that follows provides a review of markets, 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 2020 was significantly lower than the corresponding period in 2019 at 4.46 pence per share (2019: 6.91 pence), reflecting the fact that many companies either cut or cancelled their dividends as a result of the Covid-19 pandemic. However, the Board has decided to maintain the interim dividend of 1.2 pence per share (2019: 1.2 pence) which will be paid on 22nd January 2021 to shareholders on the register as at 18th December 2020 (the ex-dividend date will be 17th December 2020). The Board will keep this under review and take into account the income received and the level of the Company's revenue reserves when determining the final dividend for the year in 2021.

Discount Management and Share Repurchases

The discount of the Company's share price to the net asset value narrowed from 22.5% at the beginning of the financial year, at a time of market turmoil due to the impact of Covid-19, to 16.0% at the end of the half year. Since the half year end, it has continued to narrow and at the time of writing, the Company's shares are trading on a discount of approximately 9.3%. The Board continues to monitor closely the level of the discount and considers its ability to repurchase shares to minimise the short term volatility and the absolute level of the discount of prime importance. However, no shares were repurchased in the six months to 30th September 2020.

Environmental, Social and Governance ('ESG')

As highlighted in the 2020 Annual Report, ESG issues have been integrated into the Investment Managers' investment processes and as a result ESG issues are considered at every stage of the decision making process. For more details, please refer to Page 8 of the 2020 Annual Report which can be found on the Company's website
at: www.jpmeuropeansmallercompanies.co.uk

Outlook

In the short term, it is likely that the Covid-19 pandemic will continue to weigh on business activity in Europe, and with it on the fortunes of the smaller company sector in which we invest. What impact the recent approval of various vaccines and their future roll out will have on economies is difficult to predict given the lack of historical precedence. However, they do sign post finally a path towards a return to normalcy. Your Company's portfolio has a significant exposure to industries and companies that are positioned for such a recovery. The Board thus remains confident that the companies in which we are invested are well placed to survive these troubled and uncertain times and have the ability to flourish again once this crisis is behind us.

Marc van Gelder
Chairman     11th December 2020

INVESTMENT MANAGERS' REPORT

Review

During the six months to 30th September 2020, equity markets recovered strongly from the Covid-19 related sell-off at the end of the first quarter of 2020 which saw markets plunge at the sharpest rate since the 1929 financial crisis. A reduction in the number of new Covid-19 infections and the gradual lifting of lockdown restrictions boosted investor sentiment. The commitment by governments and central banks to fully support the economy and to protect jobs also helped to mitigate concerns around the magnitude of the impact to the economy and the speed and shape of its eventual rebound. However, progress stalled in September as Covid-19 infection rates began to rise again, making the speed of the economic recovery more uncertain.

With such strong central bank and government support, smaller companies outperformed large caps. During the six month period, the MSCI Europe (ex UK) sterling adjusted TR Index and the benchmark MSCI Europe (ex UK) Small Cap sterling adjusted TR Index rose by 19.5 per cent and 34.9 per cent respectively.

Portfolio

With a return on net assets of +49.2 per cent over the six months to 30th September 2020, the portfolio outperformed its benchmark by 14.3 per cent.

Top performers included Swiss and German online pharmacies, Zur Rose and Shop Apotheke, after the German government passed a law to mandate e-prescriptions; and Ipsen, the French pharmaceutical company, following positive newsflow regarding its drug pipeline. We also saw a continuation of ESG (environmental, social &
governance)-related outperformance with top performers including renewable energy operators Solaria Energia (Spain) and Encavis (Germay) whose solid growth prospects have been unaffected by the Covid-19 crisis.

Detractors from performance included Swiss insurance companies Helvetia and Baloise, which suffered from the low interest rate environment; and Alstria Office, the German office REIT, as working from home threatened demand for office real estate. Renewable energy operator Falck Renewables and specialty vegetable oil manufacturer AAK also underperformed due to profit taking following strong performances.

During the period we added a number of companies with merger and acquisition rollup stories that should continue to generate growth independent of the economic environment. These included Beijer Ref and Indutrade, two high quality industrials, and Compugroup Medical, a developer of software solutions for the healthcare sector that should benefit from the implementation of e-prescriptions in Germany. We also selectively invested in fundamentally high quality companies that are experiencing near-term headwinds due to Covid-19, but where we see significant medium term upside potential. These include CTS Eventim, the German online ticketing platform; ENAV, the Italian air traffic control operator; Pandox, the Swedish real estate company focused on hotels; Technogym, the Italian
manufacturer of premium fitness equipment; and Valeo, the French automotive components manufacturer which is a leader in vehicle electrictification. While the timing of the recovery of these stocks is difficult to forecast, we see them as "recovery options" with significant upside potential over the medium term as the economic environment
normalises.

We participated in two IPOs: Volue, a Norwegian technology company offering a software platform for smart grid management, which we expect to benefit from increasing electricity grid complexity as renewables gain share in the energy mix; and GVS, an Italian manufacturer of niche filtration solutions that is operating in structurally growing markets (healthcare and air quality).

To fund these investments we divested from a number of companies with deteriorating operational momentum. These included Remy Cointreau (spirits) and Huhtamaki (food packaging), due to concerns that sales from on-trade channels (restaurants, bars, hotels, airports) will recover more slowly than initially expected. We also reduced our exposure to the cyclically exposed construction sector by selling Uponor and Caverion. We sold out of Korian as their care homes were affected by high mortality rates due to Covid-19. We also sold a number of positions we felt had become too expensive following significant   outperformance. These included Belimo, the Swiss manufacturer of actuators for heating and ventilation systems, which had been very resilient through the crisis; and Shop Apotheke, the German online pharmacy, which enjoyed robust demand for delivery of over the counter drugs as people were required to stay at home.

During the period, Electricity (renewable energy) and Software & Computer Services remained the largest sector overweight positions, while Capital Goods grew to become the third largest. Financial Services and Real Estate
remained the largest underweight positions. Italy and France grew to be the portfolio's largest country overweights as we reduced the weight of defensive Swiss stocks and added recovery options. Finland grew to be the largest
underweight position, followed by Sweden.

Gearing increased over the six month period to 5.6 per cent, from 3.8 per cent at the start of the period.

Outlook

As we write, European markets have recouped close to 80% of the fall that took place from mid-February to mid-March as a result of unprecedented government and central bank support. While most companies enjoyed a sequential recovery during the third quarter, many of them highlighted the uncertainty caused by the Covid-19 "second wave". Despite this, we are pleased to report that in early October, the Company's share price reached an all-time high.

In the United States, Joe Biden won the US presidential election although the Democratic "Blue Wave" did not materialise. With Republicans likely to remain in control of the senate, major policy shifts are unlikely. As a result
of reduced future uncertainty, equity markets reacted positively. President-elect Biden's environmental agenda should help raise awareness about the fight against climate change, supporting renewable energy operators and other
environmentally-friendly business models.

On 9th November, Pfizer and BioNTech announced very positive trial data for their potential Covid-19 vaccine. This led to a sharp reversal in recent trends, with global value seeing its biggest daily gain relative to global growth in more than 20 years. The "recovery options" we had gradually been adding to the portfolio performed extremely strongly, enabling the Company to outperform its benchmark on the day. Just as the Covid-19 pandemic underpinned the themes of environmental improvement, technological progress and wellness, we expect the vaccine will further
reinforce them. We hold many world leaders in markets that should grow regardless of the pace of recovery.  

Francesco Conte
Edward Greaves
Investment Managers     11th December 2020

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 fall into the following broad categories: investment underperformance and strategy; market and currency; accounting, legal and regulatory; operational; cyber crime, financial, corporate governance and shareholder relations, implication of Brexit, pandemic risk and emerging risks. Information on these areas is given within the Annual Report and Financial Statements for the year ended 31st March 2020.  

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.

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, the nature of the portfolio and expenditure projections, taking into account the impact of Covid-19 on the revenue expected from underlying investments in these 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, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operation existence for at least twelve months from the date of the approval of this half yearly financial report. The Company's investments are in quoted securities which are readily realisable and exceed its liabilities significantly. Gearing levels and compliance with loan notes covenants are reviewed by the Board on a regular basis. The Company's key third party suppliers, including its Manager, are not experiencing any operational difficulties to adversely affect their services to the Company. For these reasons, they consider that 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 2020, 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;

• 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
Marc van Gelder
Chairman     11th December 2020

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30th September 2020

	(Unaudited) Six months ended 30th September 2020				(Unaudited) Six months ended 30th September 2019				(Audited) Year ended 31st March 2020
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000		Capital £'000	Total £'000	Revenue £'000		Capital £'000	Total £'000
Gains/(losses) on investments held at fair value through profit or loss	-	248,387	248,387	-		29,815	29,815	-		(113,854)	(113,854)
Foreign exchange gains/(losses) on liquidity fund	-	1,365	1,365	-		(102)	(102)	-		505	505
Net foreign currency losses	-	(1,601)	(1,601)	-		(103)	(103)	-		(2,611)	(2,611)
Income from investments Interest receivable and similar income	7,671 340	- -	7,671 340	13,642 117		- -	13,642 117	14,823 254		- -	14,823  254
Gross return/(loss)	8,011	248,151	256,162	13,759		29,610	43,369	15,077		(115,960)	(100,883)
Management fee	(810)	(1,890)	(2,700)	(937)		(2,186)	(3,123)	(1,885)		(4,399)	(6,284)
Other administrative expenses	(367)	-	(367)	(358)		-	(358)	(723)		-	(723)
Net return/(loss) before finance costs and taxation	6,834	246,261	253,095	12,464		27,424	39,888	12,469		(120,359)	(107,890)
Finance costs	(145)	(334)	(479)	(31)		(72)	(103)	(171)		(398)	(569)
Net return/(loss) before taxation	6,689	245,927	252,616	12,433		27,352	39,785	12,298		(120,757)	(108,459)
Taxation	423	-	423	(1,421)		-	(1,421)	(1,412)		-	(1,412)
Net return/(loss) after taxation	7,112	245,927	253,039	11,012		27,352	38,364	10,886		(120,757)	(109,871)
Return/(loss) per share (note 3)	4.46p	154.22p	158.68p	6.91p		17.15p	24.06p	6.83p		(75.73)p	(68.90)p

STATEMENT OF CHANGES IN EQUITY

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserves £'000	Revenue reserve1 £'000	Total shareholders funds £'000
Six months ended 30th September 2020 (Unaudited)
At 31st March 2020	7,974	1,312	7,662	487,512	12,793	517,253
Net return	-	-	-	245,927	7,112	253,039
Dividends paid in the period (note 4)	-	-	-	-	(8,770)	(8,770)
At 30th September 2020	7,974	1,312	7,662	733,439	11,135	761,522
Six months ended 30th September 2019 (unaudited)
At 31st March 2019	7,974	1,312	7,662	608,269	12,591	637,808
Net return	-	-	-	27,352	11,012	38,364
Dividends paid in the period (note 4)	-	-	-	-	(8,771)	(8,771)
At 30th September 2019	7,974	1,312	7,662	635,621	14,832	667,401
Year ended 31st March 2020 (audited)
At 31st March 2019	7,974	1,312	7,662	608,269	12,591	637,808
Net (loss)/return	-	-	-	(120,757)	10,886	(109,871)
Dividends paid in the year (note 4)	-	-	-	-	(10,684)	(10,684)
At 31st March 2020	7,974	1,312	7,662	487,512	12,793	517,253

¹ This reserve forms the distributable reserve of the Company and may be used to fund distribution of profits to investors.

STATEMENT OF FINANCIAL POSITION

AT 30th SEPTEMBER 2020

	(Unaudited) 30th September 2020 £'000	(Unaudited) 30th September 2019 £'000	(Audited) 30th September 2020 £'000
Fixed assets
Investments held at fair value through profit or loss	804,024	670,087	537,036
Current assets
Derivative financial assets	-	-	16
Debtors	4,703	1,748	11,226
Cash and cash equivalents	34,797	18,214	106,257
	39,500	19,962	117,499
Current liabilities
Creditors: amounts falling due within one year	(366)	(22,647)	(26,668)
Derivative financial liabilities	-	(1)	-
Net current assets/(liabilities)	39,134	(2,686)	90,831
Total assets less current liabilities	843,158	667,401	627,867
Creditors: amounts falling due after more than one year	(81,636)	-	(110,614)
Net assets	761,522	667,401	517,253
Capital and reserves
Called up share capital	7,974	7,974	7,974
Share premium	1,312	1,312	1,312
Capital redemption reserve	7,662	7,662	7,662
Capital reserves	733,439	635,621	487,512
Revenue reserve	11,135	14,832	12,793
Total shareholders' funds	761,522	667,401	517,253
Net asset value per share (note 5)	477.6p	418.5p	324.4p

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30th SEPTEMBER 2020

	(Unaudited) Six months ended 30th September 2020 £'000	(Unaudited) Six months ended 30th September 2019 £'000	(Audited) Year ended 31st March 2020 £'000
Net cash outflow from operations before dividends and interest	(1,108)	(3,901)	(6,152)
Dividends received	6,160	11,892	12,935
Interest received	-	1	1
Overseas tax recovered	626	455	568
Interest paid	(519)	(158)	(429)
Net cash inflow from operating activities	5,159	8,289	6,923
Purchases of investments and derivatives	(317,362)	(493,898)	(980,965)
Sales of investments and derivatives	280,322	470,427	954,435
Settlement of forward currency contracts	177	197	102
Net cash outflow from investing activities	(36,863)	(23,274)	(26,428)
Dividends paid	(8,770)	(8,771)	(10,684)
Drawdown of bank loans	-	13,377	108,262
Repayment of bank loans	(30,510)	-	-
Net cash (outflow)/inflow from financing activities	(39,280)	4,606	97,578
(Decrease)/increase in cash and cash equivalents	(70,984)	(10,379)	78,073
Cash and cash equivalents at start of period	106,257	28,596	28,596
Exchange movements	(476)	(3)	(412)
Cash and cash equivalents at end of period	34,797	18,214	106,257
(Decrease)/increase in cash and cash equivalents	(70,984)	(10,379)	78,073
Cash and cash equivalents consist of:
Cash and short term deposits	248	926	60,227
Cash held in JPMorgan Euro Liquidity Fund	34,549	17,288	46,030
Total	34,797	18,214	106,257

NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
30TH SEPTEMBER 2020

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 2020 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 October 2019.

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 2020.

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 2020.

3.  Return/(loss) per share

	(Unaudited) Six months ended 30th September 2020 £'000	(Unaudited) Six months ended 30th September 2019 £'000	(Audited) Year ended 31st March 2020 £'000
Return/(loss) per share is based on the following:
Revenue return	7,112	11,012	10,886
Capital return/(loss)	245,927	27,352	(120,757)
Total return/(loss)	253,039	38,364	(109,871)
Weighted average number of shares in issue	159,462,885	159,462,885	159,462,885
Revenue return per share	4.46p	6.91p	6.83p
Capital return/(loss) per share	154.22p	17.15p	(75.73)p
Total return/(loss) per share	158.68p	24.06p	(68.90)p

4.  Dividends paid

	(Unaudited) Six months ended 30th September 2020 £'000	(Unaudited) Six months ended 30th September 2019 £'000	(Audited) Year ended 31st March 2020 £'000
2020 final dividend of 5.5p (2019: 5.5p) per share	8,770	8,771	8,770
2020 interim dividend of 1.2p per share	-	-	1,914
Total dividends paid in the period/year	8,770	8,771	10,864

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

An interim dividend of 1.2p (2019: 1.2p) has been declared in respect of the six months ended 30th September 2020, amounting to £1,914,000.

5.  Net asset value per share

	(Unaudited) Six months ended  30th September 2020	(Unaudited) Six months ended 30th September 2019	(Audited) Year ended 31st March 2020
Net assets (£'000)	761,522	667,401	517,253
Number shares in issue	159,462,885	159,462,885	159,462,885
Net asset value per share	477.6p	418.5p	324.4p

For further information, please contact:

Priyanka Vijay Anand

For and on behalf of JPMorgan Funds Limited

Company Secretary

020 7742 4000

ENDS

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.

A copy of the half year report will be submitted to the FCA's National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism . 

The half year report 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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