Half Yearly Report

RNS Number : 4252S

JPMorgan European Smaller Co.

30 November 2012

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN EUROPEAN SMALLER COMPANIES TRUST PLC

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED

30TH SEPTEMBER 2012

Chairman's Statement

Performance

The economic backdrop for European investors has continued to be uncertain over the first six months of the Company's financial year. Quantitative easing in Europe and the US encouraged investor confidence, only for this to fall away with continued political and economic uncertainty, particularly in the Eurozone. However, further to the announcement in July that the European Central Bank was prepared to take action to support the Euro, equity market confidence has improved.

For the six months ended 30th September 2012, the Company produced a net asset value total return of -4.4%. Although a negative return, it outperformed the return of -5.0% from the benchmark index, the HSBC Smaller European Companies (ex UK) Index. The share price total return was -6.3%, as the discount on the Company's shares widened from 15.5% to 17.3% over the period.

Longer term performance remains positive, with a net asset value total return of +314.7% against the benchmark total return of +236.1% over the ten years ended 30th September 2012.

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

Revenue and Dividend

As detailed in my Chairman's Statement for the year ended 31st March 2012, the Board's dividend policy is to pay out the vast majority of revenue available each year. However, shareholders are reminded that the management of the portfolio will not be constrained to deliver income, given that the Company's objective is to achieve capital growth. Gross revenue return for the six months to 30th September 2012 was a little lower than the corresponding period in 2011 at £6.5 million (2011: £7.8 million). The Board has decided to maintain the interim dividend at 6.0 pence per share, which will be paid on 16th January 2013 to shareholders on the register as at 21st December 2012.

Reverse Auction Tender Offer, Share Buybacks and Discount

During the six months ended 30th September 2012, a total of 4,156,880 shares were repurchased for cancellation. 3,991,880 of those shares were repurchased as a result of the reverse auction tender offer undertaken in July 2012, at a discount of 9%. The tender offer met its principal objective of providing a liquidity event to shareholders seeking a full or partial exit from the Company at a level determined by shareholders, whilst at the same time enhancing the net asset value for ongoing shareholders, who also received a final dividend of 11.0 pence in late August. The Company has not bought back any further shares since the tender offer, but the Board continues to monitor closely the level of the discount.

Directorate

As detailed in the annual report, we were pleased to welcome Stephen White to the Board on 1st April 2012. In July 2012, after nine years' service, Michael Wrobel stepped down as a Director. Due to new commitments, I will retire from the Board on 31st December 2012 and I wish Mrs Carolan Dobson, Chairman designate, every success as she takes on the role from 1st January 2013. The Board has engaged the services of an independent agency to assist in the appointment of a new Director and a further announcement will follow shortly.

Outlook

In spite of continued macro economic and political uncertainty, the Board believes that the prospects for European small cap equities are more encouraging than they have been for some time and is confident that the Investment Managers' bottom-up stock picking approach will continue to identify good investment opportunities for the Company's portfolio.

Paul Manduca

Chairman                                                                                                                                                                                            30th November 2012

Investment Managers' Report

Review

The confidence generated by the European Central Bank's ('ECB') liquidity injection of nearly €1 trillion into the banking system between December 2011 and February 2012 began to wane at the start of the financial year. This came about as markets focused increasingly on the structural difficulties of the Euro project, namely that the ECB was unwilling to act as lender of last resort in the same way as the Bank of England or the US Federal Reserve Board.

With markets losing confidence in the Euro, bond yields in the two largest Eurozone periphery economies, Italy and Spain, reached unsustainable levels by the end of July 2012. Equity markets fared poorly in this environment and looked set to worsen, when ECB President Draghi gave a now historic speech on 26th July where he famously said: 'Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough.'

Markets interpreted this to mean that the ECB was indeed prepared to act as lender of last resort to prevent a break up of the Euro. Bond yields and equity markets rapidly changed trajectory and by the end of September 2012 the large company MSCI World Europe (ex UK) Index had virtually eradicated all losses, declining by 0.9% in sterling terms. Smaller companies were unable to fare as well, the benchmark HSBC Smaller European Companies (ex UK) Index falling by 5.0%.

Portfolio

The net asset value of the portfolio declined by 4.4% in the six months ended 30th September 2012, slightly outperforming the benchmark index. This was due to positive asset allocation, namely the overweight position in Denmark and underweight position in Sweden. The portfolio benefited from holdings in companies which had either a high level of recurring revenues or good visibility.

Top stock contributors over the six months included Danish hearing aid manufacturer GN Store Nord, French IT outsourcing company Atos Origin, Norwegian seismic survey provider TGS Nopec Geophysical, French food and pharma testing services provider Eurofins  and German industrial lubricants group Fuchs Petrolub. Negative stock contributors tended to be stock specific, including Dutch oil service company SBM (following write downs of some of its projects), Italian life insurance and asset manager Mediolanum (on higher Italian bond yields), and Italian cement manufacturer Buzzi Unicem and Italian scooter manufacturer Piaggio (on slowing economic growth).

Gearing at the end of the period was approximately 3.5%, although with improving confidence, we have raised the level at the time of writing to some 6%.

Given that global economic growth is likely to be limited in the near term, we are focusing our stock picking efforts on companies that should be able to thrive despite anaemic economies. Examples include French oil storage and energy distribution supplier Rubis, Italian diagnostics company Diasorin, Swiss insurance company Helvetia, Danish food ingredients manufacturer Christian Hansen and Irish gambling company Paddy Power.

Outlook

We are more confident in markets than we have been for some time. The risk of a Eurozone implosion has decreased significantly following President Draghi's words and the setting up of a €700 billion European Stability Mechanism to help countries in financial difficulties.

The economic plight of countries in the peripheral Eurozone, whilst harsh at the human level, is having the desired effects of improving primary and current account deficits, while at the same time forcing painful structural reforms which should ultimately make these countries far more competitive.

The next step for the Euro integration project is the establishment of banking union. As with all grand Eurozone projects that require the giving up of sovereignty, it will not be agreed overnight, but the resolve to move towards a closer union has now been tested in many countries, both core and periphery, and each time it has not been found wanting.

Recent elections in Holland, one of the strongest core Eurozone countries, and Greece, the weakest of the periphery countries, resulted in pro-European coalitions, despite fears of anti-Eurozone electoral revolts. The German Constitutional Court accepted the legality of the establishment of the European Stability Mechanism, and governments in Italy, Spain, Portugal and Greece are pushing ahead with budgetary austerity and reform despite electoral unpopularity.

On the macroeconomic front, the Eurozone may be slowing down, but it is by no means collapsing like it did in 2008/09. Macroeconomic data, while soft, is generally better than expected and the rate at which it is worsening is abating. In the US, the housing market and the financial system are recovering quickly. Questions remain over the so-called US 'fiscal cliff', whereby expiration of certain tax cuts could lead to a sharp economic contraction, however it would seem to be in all parties' interests to find a solution, as they did with the earlier problem of the debt ceiling. Indications from the emerging markets of China, India and Brazil are that the worst of the slowdown is behind them.

On the microeconomic front, second and third quarter results, while generally weak in absolute terms, were largely in line with or better than analysts' expectations. Those results confirmed that, in many cases, companies have solid balance sheets and are able to pay attractive dividends.

The path ahead will not be smooth, because the world faces many challenges, however, central banks in the US and Europe have shown repeatedly that they are strongly committed to the reflation of the global economy. So much cheap liquidity combined with attractive valuations makes us confident that, despite expected volatility, the underlying trend for equity markets should remain positive over the coming months.

Jim Campbell

Francesco Conte

Investment Managers                                                                                                                                                                        30th November 2012

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 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 March 2012.

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, 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 assets, liabilities, financial position and net return of the Company 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.

For and on behalf of the Board

Paul Manduca

Chairman                                                                                                                                                                                            30th November 2012

Income Statement

for the six months ended 30th September 2012

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th September 2012			30th September 2011			31st March 2012
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Losses on investments held at
fair value through profit
or loss	-	(26,775)	(26,775)	-	(112,497)	(112,497)	-	(104,011)	(104,011)
Net foreign currency gains	-	2,550	2,550	-	475	475	-	1,382	1,382
Income from investments	6,388	-	6,388	7,688	-	7,688	10,040	-	10,040
Other interest receivable and
similar income	118	-	118	155	-	155	175	-	175
Gross return/(loss)	6,506	(24,225)	(17,719)	7,843	(112,022)	(104,179)	10,215	(102,629)	(92,414)
Management fee	(490)	(1,142)	(1,632)	(741)	(1,728)	(2,469)	(1,301)	(3,035)	(4,336)
Other administrative expenses	(250)	-	(250)	(300)	-	(300)	(620)	-	(620)
Net return/(loss) on ordinary
activities before finance costs
and taxation	5,766	(25,367)	(19,601)	6,802	(113,750)	(106,948)	8,294	(105,664)	(97,370)
Finance costs	(94)	(219)	(313)	(182)	(425)	(607)	(360)	(841)	(1,201)
Net return/(loss) on ordinary
activities before taxation	5,672	(25,586)	(19,914)	6,620	(114,175)	(107,555)	7,934	(106,505)	(98,571)
Taxation	(450)	-	(450)	(591)	-	(591)	(879)	-	(879)
Net return/(loss) on ordinary
activities after taxation	5,222	(25,586)	(20,364)	6,029	(114,175)	(108,146)	7,055	(106,505)	(99,450)
Return/(loss) per share (note 4)	13.53p	(66.28)p	(52.75)p	14.28p	(270.46)p	(256.18)p	17.12p	(258.41)p	(241.29)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	Share	redemption	Capital	Revenue
30th September 2012	capital	premium	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2012	10,021	1,312	5,615	319,700	5,651	342,299
Repurchase and cancellation of the Company's
own shares	(1,039)	-	1,039	(28,943)	-	(28,943)
Net (loss)/return on ordinary activities	-	-	-	(25,586)	5,222	(20,364)
Dividends appropriated in the period	-	-	-	-	(3,952)	(3,952)
At 30th September 2012	8,982	1,312	6,654	265,171	6,921	289,040
	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
Year ended	share	Share	redemption	Capital	Revenue
31st March 2012	capital	premium	reserve	reserves	reserve	Total
(Audited)	£'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	(856)	-	856	(31,523)	-	(31,523)
Net (loss)/return on ordinary activities	-	-	-	(106,505)	7,055	(99,450)
Dividends appropriated in the year	-	-	-	-	(4,156)	(4,156)
At 31st March 2012	10,021	1,312	5,615	319,700	5,651	342,299

Balance Sheet

at 30th September 2012

	(Unaudited)	(Unaudited)	(Audited)
	30th September 2012	30th September 2011	31st March 2012
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	299,223	374,079	359,138
Investments in liquidity funds held at fair value
through profit or loss	25,558	-	15,003
Total investments	324,781	374,079	374,141
Current assets
Debtors	5,559	10,937	15,077
Cash and short term deposits	7,152	15	568
Derivative financial instruments: forward currency
contracts held at fair value through profit or loss	2	1	-
	12,713	10,953	15,645
Creditors: amounts falling due within one year	(48,454)	(43,087)	(47,487)
Net current liabilities	(35,741)	(32,134)	(31,842)
Total assets less current liabilities	289,040	341,945	342,299
Net assets	289,040	341,945	342,299
Capital and reserves
Called up share capital	8,982	10,241	10,021
Share premium	1,312	1,312	1,312
Capital redemption reserve	6,654	5,395	5,615
Capital reserves	265,171	317,941	319,700
Revenue reserve	6,921	7,056	5,651
Equity shareholders' funds	289,040	341,945	342,299
Net asset value per share (note 5)	804.5p	834.8p	854.0p

Company registration number: 2431143

Cash Flow Statement

for the six months ended 30th September 2012

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2012	30th September 2011	31st March 2012
	£'000	£'000	£'000
Net cash inflow from operating activities (note 6)	4,123	4,772	3,807
Net cash outflow from returns on investments
and servicing of finance	(339)	(847)	(1,411)
Tax recovered	84	73	203
Net cash inflow from capital expenditure
and financial investment	35,264	56,809	61,385
Dividend paid	(3,952)	(1,725)	(4,156)
Net cash outflow from financing	(29,305)	(60,232)	(57,858)
Increase/(decrease) in cash in the period	5,875	(1,150)	1,970
Reconciliation of net cash flow to movement in
net debt
Net cash movement	5,875	(1,150)	1,970
Net loans drawn down in the period	-	34,620	26,696
Exchange movements	2,549	478	1,386
Movement in net funds in the period	8,424	33,948	30,052
Net debt at the beginning of the period	(41,106)	(71,158)	(71,158)
Net debt at the end of the period	(32,682)	(37,210)	(41,106)
Represented by:
Cash and short term deposits and bank overdrafts	7,152	15	568
Debt falling due within one year	(39,834)	(37,225)	(41,674)
Net debt at the end of the period	(32,682)	(37,210)	(41,106)

Notes to the Accounts

for the six months ended 30th September 2012

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 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 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 2012.

3.   Dividends

		(Unaudited)	(Unaudited)	(Audited)
		Six months ended	Six months ended	Year ended
		30th September 2012	30th September 2011	31st March 2012
		£'000	£'000	£'000
	Final dividend in respect of the year ended 31st March 2012 of 11.0p (2011: 4.0p)	3,952	1,725	4,409

      An interim dividend of 6.0p (2011: 6.0p) has been declared in respect of the six months ended 30th September 2012, amounting to £2,156,000.

4.   Return/(loss) per share

		(Unaudited)	(Unaudited)	(Audited)
		Six months ended	Six months ended	Year ended
		30th September 2012	30th September 2011	31st March 2012
		£'000	£'000	£'000
	Return/(loss) per share is based on the following:
	Revenue return	5,222	6,029	7,055
	Capital loss	(25,586)	(114,175)	(106,505)
	Total loss	(20,364)	(108,146)	(99,450)
	Weighted average number of shares in issue	38,601,926	42,214,624	41,215,645
	Revenue return per share	13.53p	14.28p	17.12p
	Capital loss per share	(66.28)p	(270.46)p	(258.41)p
	Total loss per share	(52.75)p	(256.18)p	(241.29)p

5.   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 2012 of 35,926,923 (30th September 2011: 40,962,803 and 31st March 2012: 40,083,803).

6.   Reconciliation of total loss 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 2012	30th September 2011	31st March 2012
		£'000	£'000	£'000
	Total loss on ordinary activities before finance costs and taxation	(19,601)	(106,948)	(97,370)
	Less capital loss before finance costs and taxation	25,367	113,750	105,664
	Scrip dividends received as income	(442)	(786)	(1,077)
	Decrease in accrued income	631	1,336	853
	(Increase)/decrease in other debtors	(3)	40	18
	(Decrease)/increase in accrued expenses	(36)	(10)	1
	Overseas withholding tax	(651)	(882)	(1,247)
	Management fee charged to capital	(1,142)	(1,728)	(3,035)
	Net cash inflow from operating activities	4,123	4,772	3,807

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.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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