Half Yearly Report

RNS Number : 9984S

JPMorgan European Smaller Co.

29 November 2011

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN EUROPEAN SMALLER COMPANIES TRUST PLC

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED

30TH SEPTEMBER 2011

Chairman's Statement

Performance

The first six months of the Company's financial year was another highly volatile period for equity markets. The principal concern in the Eurozone remained the sovereign debt crisis in southern Europe, in particular the likelihood of debt write‑down in Greece. Coupled with similar concerns over the US economy, investors became risk averse and markets fell sharply as a result.

For the six months to 30th September 2011, the Company produced a total return on net assets of -23.6%. Whilst disappointing in absolute terms, this return compares favourably with the return of -27.2% from the benchmark index, the HSBC Smaller European Companies (ex UK) Index, again demonstrating the value added by our Investment Managers. The return to shareholders over the period was -21.7% as the discount on the Company's shares narrowed over the period from 15.2% as at 31st March 2011 to 13.2% as at 30th September 2011.

In their report, the Investment Managers provide details of the key factors driving performance during the half year.

Revenue and Dividend

Gross revenue return for the six months to 30th September 2011 was £7.8 million, a little higher than the revenue generated in the corresponding period in 2010 (£6.7 million), reflecting a continuing improvement in corporate earnings and increasing distributions by European companies.

Historically, the Company has allocated indirect expenses wholly to the revenue account. However, it has decided, with effect from 1st April 2011, to capitalise 70% of management fees and finance costs in the light of its long term expected split of returns. A consequence of this change is that earnings per share for this financial year are likely to increase sharply and therefore the Board has declared an interim dividend of 6.0p per share payable on 16th January 2012 to shareholders on the register as at the close of business on 23rd December 2011. The Board's dividend policy for future years will be detailed in the annual report for the year ending 31st March 2012.

Share Buybacks and Discount

In the six months to 30th September 2011 the Company did not buy back any shares in the market for cancellation. However, as stated in the annual report, following discussions with a number of institutional shareholders in connection with the relatively wide level of the discount on the Company's shares, it became apparent that one large long-term shareholder was seeking a partial exit for its holding at a price close to net asset value. As a result, the Board implemented a one-off Tender Offer for up to 5% of the Company's issued share capital. A total of 2,155,936 were successfully tendered and bought in by the Company at a price of 1,008.35 pence per share in July 2011.

Outlook

Against a gloomy macro-economic backdrop, the current market environment is very challenging. However, as the Company's Investment Managers point out in their report, many European companies are well positioned to benefit from continued growth in Asia and on a long term view, equity valuations are attractive. Given their strong long-term track record, the Board remains confident of the Investment Managers' ability to add value for shareholders through superior stock selection and appropriate use of gearing.

Paul Manduca

Chairman

29th November 2011

Investment Managers' Report

Review

Renewed concerns over the resolution of the sovereign debt crises in the United States and Europe led to a sharp sell-off in equities during the first half of the Company's year. The US suffered the first ever downgrade by Standard & Poor's of its AAA credit rating whilst Europe continued to wrestle with a palatable outcome to Greece's looming debt write-down. This has jeopardised European economic recovery in only its second year, as manifested in Eurozone quarterly GDP growth of just 0.2% in the second quarter of 2011. With the VSTOXX Index of European option volatility breaking the highs of May 2010, the large company MSCI World Europe (ex UK) Index declined by 21.2% in sterling terms in the six months to the end of September 2011. Smaller companies suffered most from the market sell-off and the benchmark HSBC Smaller European Companies (ex UK) Index fell by 27.2%.

Portfolio

The net asset value of the portfolio declined by 23.6% in the first half of the Company's year, partially mitigating the fall in the benchmark index through a combination of positive asset allocation, stock selection and active management of gearing. The portfolio benefitted from overweight positions in the defensive telecom and health care sectors and from a limited weighting in banks. The top stock contributors over the six months comprised Irish bookmaker Paddy Power, driven by a strong performance in online gambling, defensively positioned French consumer staples producer Société Bic and Italian luxury goods producer Salvatore Ferragamo, which enjoyed a successful initial public offering in June. Negative stock contributors included Swiss private bank EFG International on a deteriorating operating performance. Gearing of 17% at the end March 2011 was reduced to zero during May as the immediate prospects for markets deteriorated and during early August we made full use of the latitude to hold up to 20% cash. With improving confidence, this cash was redeployed and the portfolio ended September with gearing of 9%.

The key shift in the portfolio was to move to overweight in defensive sectors at the expense of value cyclical sectors where the portfolio ended September with a significantly reduced exposure. Relatively strong performance and the addition of such new holdings as Swedish medical products supplier Elekta and German hospital operator Rhoen Klinikum pushed health care to become the most overweight sector. The overweight positions in industrial engineering and financial services were unwound with the disposal, respectively, of holdings in Finnish crane manufacturer Konecranes and Swiss industrial equipment producer OC Oerlikon, and Swiss private banks EFG International and Julius Baer and Dutch bank SNS Reaal.

Outlook

Driven by Germany, there is increasing momentum to achieve a resolution to the Eurozone debt crisis. The outcome centres upon the breadth and magnitude of the required write-down of sovereign debt and the path to subsequent bank recapitalisation through a combination of private and public funding. The momentum of recovery in the United States appears to be on firmer footing with growth in 2012 predicted to comfortably outpace that in Europe. Almost an afterthought in the frenzy over Europe, the Chinese economy continues to make strong progress and remains one of the foundations of global growth.

The current market environment is one of the most perplexing that we have witnessed and identifying sustainable trends has become extremely challenging. For some months analysts have been downgrading estimates of European corporate earnings for this year and next with banks and financial services bearing the brunt. Smaller companies have not been immune from this trend with over half reporting third quarter earnings which failed to meet forecasts.

European companies have become adept at adjusting promptly their costs bases and working capital to the prevailing economic mood and, with net debt to equity at the lowest level in over ten years, are in good shape to weather current uncertainty. Equity valuations remain attractive and the prospective price to earnings ratio for European equities for 2012 now stands at just over 9.0. We are alert to improving market confidence as an opportunity to more fully deploy the Company's gearing capacity.

Jim Campbell

Francesco Conte

Investment Managers

29th November 2011

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 five broad categories: Investment and strategy; 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 March 2011.

Related Parties Transactions

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

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

Paul Manduca

Chairman

29th November 201

Income Statement

for the six months ended 30th September 2011

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th September 2011			30th September 2010			31st March 2011
	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	-	(112,497)	(112,497)	-	(8,720)	(8,720)	-	78,917	78,917
Net foreign currency gains/(losses)	-	475	475	-	(379)	(379)	-	(1,540)	(1,540)
Income from investments	7,688	-	7,688	6,484	-	6,484	8,963	-	8,963
Other interest receivable and similar income	155	-	155	194	-	194	278	-	278
Gross return/(loss)	7,843	(112,022)	(104,179)	6,678	(9,099)	(2,421)	9,241	77,377	86,618
Management fee	(741)	(1,728)	(2,469)	(1,980)	-	(1,980)	(4,298)	-	(4,298)
Other administrative expenses	(300)	-	(300)	(283)	-	(283)	(664)	-	(664)
Net return/(loss) on ordinary activities before finance costs and taxation	6,802	(113,750)	(106,948)	4,415	(9,099)	(4,684)	4,279	77,377	81,656
Finance costs	(182)	(425)	(607)	(322)	-	(322)	(1,304)	-	( 1,304)
Net return/(loss) on ordinary activities before taxation	6,620	(114,175)	(107,555)	4,093	(9,099)	(5,006)	2,975	77,377	80,352
Taxation	(591)	-	(591)	(581)	-	(581)	(606)	-	(606)
Net return/(loss) on ordinary activities after taxation	6,029	(114,175)	(108,146)	3,512	(9,099)	(5,587)	2,369	77,377	79,746
Return/(loss) per share (note 5)	14.28p	(270.46)p	(256.18)p	7.80p	(20.20)p	(12.40)p	5.33p	174.02p	179.35p

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	Share	redemption	Capital	Revenue
30th September 2011	capital	premium	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2011	10,877	1,312	4,759	457,728	2,752	477,428
Repurchase and cancellation of the Company's own shares	(636)	-	636	(25,612)	-	(25,612)
Net (loss)/return on ordinary activities	-	-	-	(114,175)	6,029	(108,146)
Dividends appropriated in the period	-	-	-	-	(1,725)	(1,725)
At 30th September 2011	10,241	1,312	5,395	317,941	7,056	341,945
	Called up		Capital
Six months ended	share	Share	redemption	Capital	Revenue
30th September 2010	capital	premium	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2010	11,771	1,312	3,865	397,184	1,750	415,882
Repurchase and cancellation of the Company's own shares	(240)	-	240	(6,548)	-	(6,548)
Purchase of shares into Treasury	-	-	-	(4,591)	-	(4,591)
Cancellation of shares held in Treasury	(487)	-	487	-	-	-
Net (loss)/return on ordinary activities	-	-	-	(9,099)	3,512	(5,587)
Dividends appropriated in the period	-	-	-	-	(1,367)	(1,367)
At 30th September 2010	11,044	1,312	4,592	376,946	3,895	397,789
	Called up		Capital
Year ended	share	Share	redemption	Capital	Revenue
31st March 2011	capital	premium	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2010	11,771	1,312	3,865	397,184	1,750	415,882
Repurchase and cancellation of the Company's own shares	(407)	-	407	(12,242)	-	(12,242)
Purchase of shares into Treasury	-	-	-	(4,591)	-	(4,591)
Cancellation of shares held in Treasury	(487)	-	487	-	-	-
Net return on ordinary activities	-	-	-	77,377	2,369	79,746
Dividends appropriated in the year	-	-	-	-	(1,367)	(1,367)
At 31st March 2011	10,877	1,312	4,759	457,728	2,752	477,428

Balance Sheet

at 30th September 2011

	(Unaudited)	(Unaudited)	(Audited)
	30th September 2011	30th September 2010	31st March 2011
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	374,079	411,406	557,047
Investments in liquidity funds held at fair value through profit or loss	-	693	2,010
Total investments	374,079	412,099	559,057
Current assets
Debtors	10,937	13,593	5,164
Cash and short term deposits	15	183	87
Derivative financial instruments: forward currency contracts held at fair value through profit or loss	1	8	5
	10,953	13,784	5,256
Creditors: amounts falling due within one year	(43,087)	(28,088)	(86,885)
Derivative financial instruments: forward currency contracts held at fair value through profit or loss	-	(6)	-
Net current liabilities	(32,134)	(14,310)	(81,629)
Total assets less current liabilities	341,945	397,789	477,428
Net assets	341,945	397,789	477,428
Capital and reserves
Called up share capital	10,241	11,044	10,877
Share premium	1,312	1,312	1,312
Capital redemption reserve	5,395	4,592	4,759
Capital reserves	317,941	376,946	457,728
Revenue reserve	7,056	3,895	2,752
Equity shareholders' funds	341,945	397,789	477,428
Net asset value per share (note 6)	834.8p	900.4p	1097.3p

Company registration number: 2431143

Cash Flow Statement

for the six months ended 30th September 2011

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2011	30th September 2010	31st March 2011
	£'000	£'000	£'000
Net cash inflow from operating activities (note 7)	4,772	3,782	2,063
Net cash outflow from returns on investments and servicing of finance	(847)	(330)	(1,049)
Tax recovered	73	177	513
Net cash inflow/(outflow) from capital expenditure and financial investment	56,809	6,280	(38,774)
Dividend paid	(1,725)	(1,367)	(1,367)
Net cash outflow from financing	(60,232)	(7,985)	38,227
(Decrease)/increase in cash in the period	(1,150)	557	(387)
Reconciliation of net cash flow to movement in net debt
Net cash movement	(1,150)	557	(387)
Net loans repaid/(drawn down) in the period	34,620	(3,947)	(56,100)
Exchange movements	478	(610)	(1,527)
Movement in net debt in the period	33,948	(4,000)	(58,014)
Net debt at the beginning of the period	(71,158)	(13,144)	(13,144)
Net debt at the end of the period	(37,210)	(17,144)	(71,158)
Represented by:
Cash and short term deposits and bank overdrafts	15	183	(334)
Debt falling due within one year	(37,225)	(17,327)	(70,824)
Net debt at the end of the period	(37,210)	(17,144)	(71,158)

Notes to the Accounts

for the six months ended 30th September 2011

1.    Financial statements

      The information contained within the financial statements in this half year report has not been audited or reviewed by the Company's auditors. The figures and financial information for the year ended 31st March 2011 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 by the Association of Investment Companies in January 2009.

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

      The accounting policies applied to these half year accounts are consistent with those applied in the accounts for the year ended 31st March 2011.

3.   Change in accounting basis

      With effect from 1st April 2011, the Company has allocated 70% of the management fee and finance costs to capital and the remaining 30% to revenue. It had previously allocated 100% of the management fee and finance costs to revenue. It is the Board's determination that the capital return should reflect the indirect costs of earning capital returns and the above allocation reflects their expected long term split of returns in the form of capital and income respectively. The effect of this change is to increase net revenue return after taxation by £2,153,000 and to reduce capital return by the same amount. Total net return after taxation is unaffected by the change. The comparative figures have not been restated.

4.   Dividends

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2011	30th September 2010	31st March 2011
	£'000	£'000	£'000
Final dividend in respect of the year ended 31st March 2011 of 4.0p (2010: 3.0p)	1,725	1,387	1,387

An interim dividend of 6.0p (2010: nil) has been declared in respect of the six months ended 30th September 2011, amounting to £2,458,000.

5.   Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2011	30th September 2010	31st March 2011
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return	6,029	3,512	2,369
Capital (loss)/return	(114,175)	(9,099)	77,377
Total (loss)/return	(108,146)	(5,587)	79,746
Weighted average number of shares in issue	42,214,624	45,036,035	44,464,022
Revenue return per share	14.28p	7.80p	5.33p
Capital (loss)/return per share	(270.46)p	(20.20)p	174.02p
Total (loss)/return per share	(256.18)p	(12.40)p	179.35p

6.   Net asset value per share

      The net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue at 30th September 2011 of 40,962,803 (30th September 2010: 44,178,739 and 31st March 2011: 43,508,739).

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

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2011	30th September 2010	31st March 2011
	£'000	£'000	£'000
Total (loss)/return on ordinary activities before finance costs and taxation	(106,948)	(4,684)	81,656
Less capital loss/(return) before finance costs and taxation	113,750	9,099	(77,377)
Scrip dividends received as income	(786)	(365)	(365)
Decrease/(increase) in accrued income	1,336	709	(653)
Decrease/(increase) in other debtors	40	30	(5)
Decrease in accrued expenses	(10)	(44)	(15)
Overseas withholding tax	(882)	(963)	(1,178)
Management fee charged to capital	(1,728)	-	-
Net cash inflow from operating activities	4,772	3,782	2,063

-

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

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

ENDS

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

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

 

 

IR BLBDBIDDBGBC