Half-year Results to 30th September 2018

RNS Number : 7030G

JPMorgan Japan Smaller Co Tst PLC

08 November 2018

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN JAPAN SMALLER COMPANIES TRUST PLC

(the 'Company')

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
30TH SEPTEMBER 2018

Legal Entity Identifier: 549300KP3CRHPQ4RF811

Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

Dear Shareholders,

This is my first report to you as Chairman following the retirement of Alan Clifton after our Annual General Meeting held in July this year.

Investment Performance

The first half of the financial year proved to be a positive period for the shareholders of the Company. Despite the Japanese market experiencing significant volatility resulting from a range of US related and other global issues, the Company's portfolio was able to deliver positive returns.

In the six months to 30th September 2018, the total return on net assets per share (net of fees and expenses) in sterling terms was +2.9%. This compares with the total return from the Company's benchmark, the S&P Japan SmallCap Net Return Index in sterling terms, of +4.1%. The return to Ordinary shareholders in sterling terms was +6.4%, reflecting a narrowing of the Company's discount to net asset value per share ('NAV') at which it traded at the end of the period.

Performance was mainly a result of sector allocation positioning and gearing while stock selection detracted from performance over the six months period. A market review, summary of portfolio activity, performance appraisal and portfolio positioning, together with their outlook, can be found in the accompanying Investment Managers' report.

Dividend Policy and Discount Management

Following the announcement and shareholders' approval of a change in dividend policy earlier in the year, the Company declared two interim dividends of 4.9 pence per share each. It is important to reiterate that the Company's objective remains the same (to achieve long-term capital growth through investment in small and medium sized Japanese companies) and the investment approach has not changed.

It is pleasing to report that the Company's share price discount to NAV has continued to narrow, signalling the increased appeal of the Company's shares following the dividend policy change. Over the period, the Company's discount narrowed from 11.6% to 8.7%. The Company did not need to repurchase any shares during the six months. The Board continues to monitor the discount closely with its advisers and is prepared to repurchase shares when it feels that it is appropriate, taking into account market conditions. At the time of writing, the discount stands at 11.0%.

Borrowing

The Company has in place a two-year revolving floating rate loan facility of yen 4.0 billion with Scotiabank, which is due to expire in September 2019 when the position will be reviewed by the Board.

The credit facility with Scotiabank is flexible and provides the Investment Managers with the ability to gear tactically. The Company's investment policy permits gearing within a range of 10% net cash to 25% geared. However, the Board requires the Investment Managers, in normal market conditions, to operate in the range of 5% net cash to 15% geared. The level of gearing is reviewed by the Directors at each Board meeting. During the six months, the Company's gearing level ranged between 3.9% and 9.9%, and finished the half year at 6.9%. 

Outlook

Shareholders will understandably be wary of the recent sell off in equity markets and the risks associated with this period of global uncertainty. Although the Board is aware of the impact of global macroeconomic and political challenges on businesses in Japan, it believes that the companies held in the portfolio have healthy balance sheets, good growth prospects and are well managed to deliver strong long-term returns. The Board is therefore confident that the Investment Managers' robust investment process and extensive internal research resources will continue to be able to identify attractively priced high quality companies in which to invest.

Robert White

Chairman                                                                                                                                                                       

7th November 2018

INVESTMENT MANAGERS' REPORT

Market Review

Over the six months to September, the Company's benchmark, the Standard & Poor's Japan SmallCap Net Return Index (in sterling terms) returned 4.1%. The Company's net assets underperformed the index by 1.2 percentage points for the same period, delivering a return on net assets of 2.9% in sterling terms. The Company is ahead of the benchmark by 1.3 percentage points over three years and 2.3 percentage points over five years annualised.

In common with many global markets, the Japanese equity market had a volatile six months but ended the period with a positive return. A major source of this volatility was US-China trade friction and the prospect of US interest rates rising more rapidly than had previously been expected.

Economic indicators released during the quarter were generally positive. The core consumer price index (CPI) rose over the period, real GDP for the April-June quarter was up 0.7% quarter-on-quarter, and the labour market continued to be tight, with a job-to-applicant ratio of 1.63 for August 2018. Business results for the fiscal year 2017/18, as well as for the April-June quarter, were generally robust.

On the political front, Prime Minister Shinzo Abe was re-elected Liberal Democratic Party leader in the party leadership election held on 20th September, providing political continuity.

Performance Review

During the six months under review, our stock selection had a negative impact. This was mitigated to some extent by positive contributions from sector selection, notably software and services, and from the effects of gearing.

Stocks that contributed most positively included Grace Technology (commercial & professional services), Net One Systems (software & services) and Bengo4.com (online legal and consulting services) which was a new purchase during the period. All performed well, reflecting strong earnings growth supported by a tight labour market and the increasing use of online services to improve labour productivity in Japan.

•        Grace Technology is an outsourcing company that specialises in business-to-business repair and maintenance manuals for large manufacturers, who are starting to outsource the production of such manuals that had previously been written in-house at a significant cost. Grace Technology is the market leader, with over 30 years' experience in the field.

•        Net One Systems is a systems integrator whose main service includes network integration. Many Japanese enterprises have begun using cloud computing services, and Net One Systems is benefiting from increasing demand for internet infrastructure integration.

SUMCO, Taiyo Yuden and Mercari were among stocks that contributed negatively to relative performance. Semiconductor and technology hardware companies like SUMCO and Taiyo Yuden underperformed due to concerns over the US-China trade war and current levels of stock held by manufacturers. We believe demand for semiconductor and electronics parts will grow in response to innovation and the increased use of technology in the automotive industry and the emerging 'internet-of-things'. We have, therefore, kept these holdings even in the face of short-term headwinds.

Portfolio Activity

The company maintains its focus on stocks that we believe will be able to compound earnings growth over the long term, supported by strong management teams and healthy cash flow. We avoid stocks that have no clear differentiation and operate in industries plagued by excess supply. Many stocks in the financial and real estate sectors fall into this category.

Over the period, the portfolio's largest overweight positions were in the information technology and healthcare sectors. We increased our weighting in information technology, favouring companies with high earnings growth potential.

Three of our largest purchases in the sector were Mercari, Taiyo Yuden and Bengo4.com. We expect these stocks to benefit from technological innovation in the retail and automotive industries, and also from a tighter labour market, which will increase internet service usage in Japan.

•        Mercari operates the top consumer-to-consumer (C2C) marketplace in Japan. It recently launched a mobile C2C flea market service, and we believe the company has significant potential as the C2C market grows, with further possible upside from overseas growth. Another source of growth comes from the company's efforts to broaden its offering to consumers through a new payment service called Merpay.

•        Taiyo Yuden manufactures large-size multi-layer ceramic capacitors (MLCC). The automotive industry is in the middle of significant technological innovations related to connected cars (cars that use mobile internet technology), autonomous driving, shared services and electric vehicles, which will translate into huge potential markets for MLCC manufactures.

•        Bengo4.com operates an online legal consulting service. As the top website in the legal sector, with nearly 11 million users, Bengo4.com is an attractive marketing tool for lawyers. The company also runs a website called Zeiri4.com, which offers similar services for tax accountants, and has a business called Cloudsign, a cloud service that shifts contract paperwork to digital format, reducing time, paper and postal charges.

Three of our largest divestments were Sanwa Holdings (industrials), Yamabiko (industrials), and Nippon Shinyaku (healthcare). We sold Sanwa Holdings as we now believe it will take longer than expected to improve margins in its US subsidiary ODC, which manufactures doors and openers. We sold Yamabiko in response to tougher competition in the battery outdoor power equipment products, a key area in which it operates. Nippon Shinyaku is a mid-sized pharmaceutical company, and develops drugs for 'orphan' diseases such as Duchenne Muscular Dystrophy (DMD). We sold it as we consider an experimental gene therapy for DMD, developed by a US pharmaceutical company, will be a serious threat to Nippon Shinyaku in the long term.

The company's gearing level rose from 6.3% to 6.9% over the six months to 30 September 2018.

Portfolio Strategy and Outlook

We aim to invest in companies that have strong balance sheets and healthy cash flows, with sustainable competitive advantages. While it is possible, even likely, that they will face occasional short-term setbacks caused by either wider economic issues or more company-specific challenges, we believe their strong and durable competitive positions will allow them to substantially increase their intrinsic value over the long term. Companies exhibiting these attributes combine to form a portfolio with a bias towards quality and growth. At the aggregate level, the companies in which we have invested have returns on equity substantially above the benchmark, with significantly lower leverage. Their historic earnings growth has been faster than that of the benchmark and we expect these portfolio attributes to continue.

While our decisions are based on company-specific dynamics, there are also structural and long-term trends, or themes, that underlie much of our stock selection. These trends include changing demographics, technological innovations and international trade, including tourism. Japan faces slower economic growth due to changing demographics, but some Japanese companies are working to improve the quality of life for an ageing population. Technological innovation is now happening everywhere in Japan. Although Japanese companies are often by nature very conservative, due to the tight labour market caused by a shrinking workforce, many old-fashioned Japanese companies are having to pursue innovation. Moreover, Japan is in a good position to capture the benefits of high economic growth across Asia, as this creates new customers for Japanese goods, services and brands.

Another important change that has taken place in Japan over the past five years has been the improvement in corporate governance, which began with the adoption of a stewardship code and was followed by a corporate governance code.

This has resulted in steady increases in both dividends and share buybacks, a rise in the number of outside directors sitting on company boards, and more companies specifying returns on equity and/or asset targets. Although the pace of change is moderate, we believe this trend will endure. We will continue to engage with companies in order to establish constructive dialogue.

The outlook for Japanese equities remains positive. We believe that global economic growth will continue at a healthy rate, though this may slow due to the US-China trade war. The lack of inflationary pressure suggests that the risk of aggressive tightening in monetary policies around the world is low. Although the Japanese equity market has performed well in the last three to five years, this is largely attributable to earnings growth rather than increasing valuation measures and so the market remains attractively priced.

Eiji Saito

Shoichi Mizusawa

Naohiro Ozawa

Michiko Sakai

Investment Managers                                                                                                                                                      

7th November 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 and strategy; discount; operational; loss of investment team; and political and economic. Information on each of these areas is given in the Business Review within the Annual Report and Financial Statements for the year ended 31st March 2018.

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.

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 and, 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. 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 Reporting' and gives a true and fair view of the state of the 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 and Transparency Rule 4.2.4R; and

(ii)     the interim management report includes a fair review of the information required by DTRs 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure 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

Robert White

Chairman                                                                                                                                                                      

7th November 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	-	7,585	7,585	-	23,824	23,824	-	55,519	55,519
Net foreign currency
(losses)/gains	-	(72)	(72)	-	1,385	1,385	-	1,224	1,224
Income from investments	1,673	-	1,673	1,484	-	1,484	3,735	-	3,735
Gross return	1,673	7,513	9,186	1,484	25,209	26,693	3,735	56,743	60,478
Management fee	(1,213)	-	(1,213)	(1,025)	-	(1,025)	(2,199)	-	(2,199)
Other administrative expenses	(215)	-	(215)	(202)	-	(202)	(415)	-	(415)
Net return on ordinary
activities before finance
costs and taxation	245	7,513	7,758	257	25,209	25,466	1,121	56,743	57,864
Finance costs	(109)	-	(109)	(78)	-	(78)	(170)	-	(170)
Net return on ordinary
activities before taxation	136	7,513	7,649	179	25,209	25,388	951	56,743	57,694
Taxation	(167)	-	(167)	(148)	-	(148)	(373)	-	(373)
Net (loss)/return on ordinary
activities after taxation	(31)	7,513	7,482	31	25,209	25,240	578	56,743	57,321
(Loss)/return
per share (note 3)	(0.06)p	13.78p	13.72p	0.06p	46.01p	46.07p	1.06p	103.70p	104.76p

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30TH SEPTEMBER 2018

	Called up		Capital
	share	Share	redemption	Other	Capital	Revenue
	capital	premium	reserve	reserve1	reserves1	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 30th September 2018 (Unaudited)
At 31st March 2018	5,595	33,978	1,836	311,237	(77,039)	(12,257)	263,350
Repurchase of shares into Treasury	-	-	-	(3)	-	-	(3)
Net return/(loss) on ordinary activities	-	-	-	-	7,513	(31)	7,482
Dividends paid in the period (note 4)	-	-	-	(2,671)	-	-	(2,671)
At 30th September 2018	5,595	33,978	1,836	308,563	(69,526)	(12,288)	268,158
Six months ended 30th September 2017 (Unaudited)
At 31st March 2017	5,595	33,978	1,836	313,004	(133,782)	(12,835)	207,796
Repurchase of shares into Treasury	-	-	-	(1,130)	-	-	(1,130)
Net return on ordinary activities	-	-	-	-	25,209	31	25,240
At 30th September 2017	5,595	33,978	1,836	311,874	(108,573)	(12,804)	231,906
Year ended 31st March 2018 (Audited)
At 31st March 2017	5,595	33,978	1,836	313,004	(133,782)	(12,835)	207,796
Repurchase of shares into Treasury	-	-	-	(1,767)	-	-	(1,767)
Net return on ordinary activities	-	-	-	-	56,743	578	57,321
At 31st March 2018	5,595	33,978	1,836	311,237	(77,039)	(12,257)	263,350

1     These reserves form the distributable reserves of the Company and may be used to fund distributions 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	286,700	248,743	279,946
Current assets
Debtors	1,101	1,022	1,898
Cash and cash equivalents	7,444	2,271	9,117
	8,545	3,293	11,015
Creditors: amounts falling due within one year	(82)	(20,130)	(799)
Net current assets/(liabilities)	8,463	(16,837)	10,216
Total assets less current liabilities	295,163	231,906	290,162
Creditors: amounts falling due after more than one year	(27,005)	-	(26,812)
Net assets	268,158	231,906	263,350
Capital and reserves
Called up share capital	5,595	5,595	5,595
Share premium	33,978	33,978	33,978
Capital redemption reserve	1,836	1,836	1,836
Other reserve	308,563	311,874	311,237
Capital reserves	(69,526)	(108,573)	(77,039)
Revenue reserve	(12,288)	(12,804)	(12,257)
Total shareholders' funds	268,158	231,906	263,350
Net asset value per share (note 5)	491.9p	424.3p	483.1p

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30TH SEPTEMBER 2018

	(Unaudited)	(Unaudited)	(Audited)
	30th September 2018	30th September 2017	31st March 2018
	£'000	£'000	£'000
Net cash outflow from operations before
dividends and interest (note 6)	(1,413)	(1,345)	(2,206)
Dividends received	2,072	1,757	3,200
Interest paid	(108)	(76)	(154)
Net cash inflow from operating activities	551	336	840
Purchases of investments	(48,853)	(22,188)	(55,664)
Sales of investments	49,897	16,949	49,966
Settlement of forward currency contracts	(11)	22	27
Net cash inflow/(outflow) from investing activities	1,033	(5,217)	(5,671)
Dividends paid	(2,671)	-	-
Repurchase of shares into Treasury	(469)	(972)	(1,301)
Drawdown of bank loans	-	3,243	10,385
Net cash (outflow)/inflow from financing activities	(3,140)	2,271	9,084
(Decrease)/increase in cash and cash equivalents	(1,556)	(2,610)	4,253
Cash and cash equivalents at start of the period	9,117	4,895	4,895
Exchange movements	(117)	(14)	(31)
Cash and cash equivalents at end of the period	7,444	2,271	9,117
(Decrease)/increase in cash and cash equivalents	(1,556)	(2,610)	4,253
Cash and cash equivalents consist of:
Cash and short term deposits	7,444	2,271	9,117
Total	7,444	2,271	9,117

 

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.

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 (loss)/return	(31)	31	578
Capital return	7,513	25,209	56,743
Total return	7,482	25,240	57,321
Weighted average number of shares in issue	54,510,339	54,787,042	54,717,778
Revenue (loss)/return per share	(0.06)p	0.06p	1.06p
Capital return per share	13.78p	46.01p	103.70p
Total return per share	13.72p	46.07p	104.76p

4.       Dividend paid

	(Unaudited) Six months ended	(Unaudited) Six months ended	(Audited) Year ended
	30th September 2018 £'000	30th September 2017 £'000	31st March 2018 £'000
First quarterly dividend of 4.9p (2017: n/a)	2,671	n/a	n/a
Total dividend paid in the period	2,671	n/a	n/a

The dividend paid in the period has been funded from the other reserve.

A second quarterly dividend of 4.9p (2017: n/a) per share, amounting to £2,671,000 (2017: nil) has been declared payable in respect of the year ending 31st March 2019. It will be paid on 7th November 2018 to shareholders on the register at the close of business on 12th October 2018.

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)	268,158	231,906	263,350
Number of shares in issue	54,510,339	54,660,239	54,510,339
Net asset value per share	491.9p	424.3p	483.1p

6.       Reconciliation of net return on ordinary activities before finance costs and taxation to net cash outflow from operations before dividends and interest

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2018	30th September 2017	31st March 2018
	£'000	£'000	£'000
Net return on ordinary activities before finance
costs and taxation	7,758	25,466	57,864
Less capital return on ordinary activities before
finance costs and taxation	(7,513)	(25,209)	(56,743)
Decrease/(increase) in accrued income and other debtors	583	439	(172)
(Decrease)/increase in accrued expenses	(251)	(20)	216
Overseas withholding tax	(167)	(148)	(373)
Dividends received	(2,072)	(1,757)	(3,200)
Realised gains/(losses) on foreign exchange transactions	249	(116)	202
Net cash outflow from operations before
dividends and interest	(1,413)	(1,345)	(2,206)

JPMORGAN FUNDS LIMITED

7th November 2018

For further information, please contact:

Divya Amin

For and on behalf of

JPMorgan Funds Limited

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.

ENDS

A copy of the half year will be 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.jpmjapansmallercompanies.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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