Half-year Report

RNS Number : 2464A

JPMorgan Smaller Cos IT PLC

22 March 2017

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
31ST JANUARY 2017

Legal Entity Identifier: 549300PXALXKUMU9JM18

Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

Performance and discount

Equity markets were volatile during the period under review which started in the immediate aftermath of the EU referendum result and associated fall in the value of Sterling. The election of Donald Trump in November had not been predicted, but was followed by a significant increase in investor confidence ending the half year on a strong note.

During the six months to 31st January 2017, the total return on the Company's net assets before dilution was 13.1% (11.2% after dilution), which compares with 11.4% for the benchmark index. The return to Ordinary shareholders was 12.8%, with the performance from a combination of five ordinary shares and one subscription share (a 'Unit') also being at 12.8%. The outperformance of the Ordinary shares reflects a narrowing of the share price discount to diluted net asset value from 20.5% to 19.7%.

Since the period end the Company's NAV has risen 6.6% (5.5% after dilution) and share price has risen 8.2% as at 17th March 2017. This compares with a rise of 3.5% for the benchmark index.

It is pleasing to be able to report the outperformance for the year to date which is in contrast to earlier periods of underperformance. The Board is aware of the importance to shareholders of the longer-term results, and is in regular dialogue with the Manager with the aim of this being delivered in the future.

The Investment Managers provide a detailed commentary on markets and the portfolio performance in their Report.

Share buybacks

In line with our policy to reduce the volatility of the discount, during the six months to 31st January 2017 the Company repurchased 283,016 Ordinary shares for cancellation at a cost of £2,207,281. These shares were acquired at an average discount of 19.5%, and have enhanced net asset value per share by 3.1 pence. The Board regularly reviews its policy for managing the discount and will continue to repurchase shares as appropriate.

Exercise of Subscription shares

As set out in detail on page 18 of the Half Year Report, the final date for the conversion of Subscription Shares is 30th June 2017, and in May we will be writing to shareholders with a reminder of their rights. A decision to convert Subscription Shares should only be made after careful consideration of the prevailing market price of the Ordinary Shares, particularly if they are trading below the exercise price of 915 pence. During the six months to 31st January 2017, the Company has issued 360 Ordinary shares following the exercise of Subscription shares, amounting to proceeds of £3,294.

Loan Facility and Gearing

The use of gearing in the current period of low interest rates is an attractive way of amplifying the effect of rising markets, but inevitably increases the risk of loss if markets fall. The Company has a highly flexible borrowing facility of £25 million in place with Scotiabank until April 2017. This has been reviewed by the Board and we have decided to renew the facility with Scotiabank for a further year.

The Board sets the overall gearing guidelines and regularly discusses these with the investment manager. The guidelines set a maximum level of gearing with the facility for temporary increases under special circumstances. The Company's gearing level increased during the period from 5.7% at the beginning of the period to 8.3% at 31st January 2017. At the time of writing the Company's gearing was 8.3%, with total borrowings of £19 million.

Board

As noted in the annual report, Richard Fitzalan Howard stepped down as a Director at the AGM last November and we have welcomed Alice Ryder as a new member of the Board. As part of the Board's succession planning and in anticipation of retirements we expect to commence a recruitment process for a new Director later in the year.

Outlook

The political landscape has changed significantly over the last year, and we may see yet further developments in the months ahead. This has made predicting the future more perilous than usual. Despite this, there has been a marked increase in optimism which if sustained will help growth rates in the future. It will be some time before we know whether this positive outlook takes hold or if we revert to a period of disappointing growth.

Partly as a result of this uncertainty, UK smaller companies have relatively low valuations, yet many are showing rising earnings and dividends helped by a weaker currency. Whilst it is likely that we will see a continuing period of share price volatility, long-term investment in growing, high quality smaller companies is attractive, and the Board is confident that they will deliver good returns for patient investors.

Michael Quicke OBE

Chairman                                                                                                                                   

22nd March 2017

INVESTMENT MANAGERS' REPORT

Performance and Market Background

The political and economic backdrop to the first six months of your Company's financial year was tumultuous. A new UK Prime Minister, a UK interest rate cut and £170 billion Bank of England stimulus, the rapid fall in sterling, the surprise victory of Donald Trump in the US Election, the rise in oil prices after the OPEC deal to cut output and a US interest rate rise are but some of the notable events that provided the backdrop to stockmarkets. Due in part to some of these events, and in part despite them, the FTSE Small Cap index rebounded. Economic newsflow steadily improved over the six months, both globally and in the UK, and it gradually became clear that the predictions of a swift, dramatic and on-going decline in both business and consumer confidence in the UK were wrong, or at least very premature.

Against this volatile background, the FTSE Small Cap (ex Investment Trusts) Index enjoyed a rebound in the second half of 2016 post the Brexit-induced fall in the first half, and returned 11.4%. It is pleasing to report that your Company outperformed its benchmark in the half year and provided a total return on net assets of 13.1% (undiluted).

Portfolio

In our last Annual Report, we outlined the reshaping of the portfolio that we undertook as a result of the Referendum. This portfolio repositioning continued in the first six months of this financial year. We further reduced our overweight exposure to the UK consumer, selling out of positions, such as Carpetright and Topps Tiles, using the proceeds from these sales to increase our focus on overseas earners and exporters such as Fenner, Next Fifteen Communications and RPS Group. We also increased our exposure to oil, following the OPEC agreement, buying new positions in Enquest and Faroe Petroleum and continued to invest in new IPOs such as Luceco and Warpaint.

During the six months under review, three of our largest holdings, Fevertree, OneSavings Bank and JD Sports all continued to deliver very strong performance, and were amongst the most significant contributors to your Company's outperformance. The shareprices of both OneSavings Bank and JD Sports were severely impacted in the aftermath of the EU referendum result, but bounced back strongly as a result of continued operational outperformance, which translated into positive share price performance. By contrast, the key detractor from performance was our holding in Plus500, a spread-betting provider, which was knocked by regulatory change.

In our last report we referred to our investment process struggling to add value during the first half of 2016. This was due in part to the dramatic rebound in share prices of a number of distressed resources companies which we did not own, which impacted our relative performance. In this first half of your company's financial year the key metrics that we follow, which focus on attractively valued, high quality companies with positive earnings momentum resumed normal service in line with their long term history. In addition, your company has benefitted from an increase in M & A activity, which we had anticipated. During the six month period our holdings in Lavendon, e2v and Constellation Healthcare were all bid for, whilst since the end of January we have also benefitted from bids for Ithaca Energy and 32Red.

Outlook

The outlook for 2017 is one of increased uncertainty. In the UK newsflow will be dominated by the Brexit negotiations and we expect Article 50 to be triggered in March 2017. Outside the UK, focus will be on the European elections in France, Germany and the Netherlands, and on the emergence of Donald Trump's actual policy intentions in the US, rather than the rhetoric heard during the US election campaign.

At the time of writing, global economic data appears more positive than had been predicted, leading to upgraded expectations both for global growth, and for growth forecasts in the UK economy. However, on the negative side we expect to see a significant increase in the rate of inflation in the UK, due to the rebound in commodity prices and the decline in sterling. This will lead to rising pressure on UK real household earnings with an expected knock-on effect on consumer spending.

Therefore, as outlined in the Portfolio section, we have sought to de-emphasise our exposure to the UK consumer at this time and increased our position in companies which make a significant proportion of their profits overseas. However, it should be noted what where we have high conviction in certain consumer-facing secular growth companies, such as Fevertree, JD Sports and Victoria, we remain very comfortable in continuing to own them. In the small cap arena, valuations remain attractive and dividends continue to grow. In addition, M&A activity continues to re-emerge given that the decline in sterling has provided a significant incentive for overseas purchasers to buy UK assets.

Georgina Brittain

Katen Patel

Investment Managers                                                                                                                     

22nd March 2017

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; discount; smaller company investment; corporate governance and shareholder relations; market; accounting, legal and regulatory; 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 July 2016.

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. 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 FRS 104 'Interim Financial Reporting' 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 31st January 2017, 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.

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

Michael Quicke

Chairman                                                                                                                                        

22nd March 2017

For further information, please contact:

Divya Amin

For and on behalf of

JPMorgan Funds Limited, Secretary

020 7742 4000

Please note that up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can be found at www.jpmsmallercompanies.co.uk

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 31ST JANUARY 2017

	(Unaudited)				(Unaudited)			(Audited)
	Six months ended				Six months ended			Year ended
	31st January 2017				31st January 2016			31st July 2016
	Revenue	Capital	Total	Revenue		Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000		£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments
held at fair value through
profit or loss	-	19,144	19,144	-		(6,682)	(6,682)	-	(16,063)	(16,063)
Net foreign currency gains	-	-	-	-		-	-	-	5	5
Income from investments	1,915	-	1,915	1,459		-	1,459	4,263	-	4,263
Interest receivable and
similar income	46	-	46	5		-	5	21	-	21
Gross return/(loss)	1,961	19,144	21,105	1,464		(6,682)	(5,218)	4,284	(16,058)	(11,774)
Management fee	(224)	(523)	(747)	(241)		(562)	(803)	(463)	(1,081)	(1,544)
Other administrative expenses	(221)	-	(221)	(244)		-	(244)	(487)	-	(487)
Net return/(loss) on ordinary
activities before finance costs
and taxation	1,516	18,621	20,137	979		(7,244)	(6,265)	3,334	(17,139)	(13,805)
Finance costs	(34)	(78)	(112)	(43)		(100)	(143)	(82)	(192)	(274)
Net return/(loss) on ordinary
activities before taxation	1,482	18,543	20,025	936		(7,344)	(6,408)	3,252	(17,331)	(14,079)
Taxation	(36)	-	(36)	(39)		-	(39)	(114)	-	(114)
Net return/(loss) on ordinary
activities after taxation	1,446	18,543	19,989	897		(7,344)	(6,447)	3,138	(17,331)	(14,193)
Return/(loss) per share (note 4)
- undiluted	8.64p	110.86p	119.50p	5.22p		(42.73)p	(37.51)p	18.31p	(101.14)p	(82.83)p
- diluted1	8.64p	110.86p	119.50p	5.22p		(42.73)p	(37.51)p	18.31p	(101.14)p	(82.83)p

¹ The Subscription shares have no dilutive effect as the conversion price for the shares exceeded the average market price of the Ordinary shares from the date of issue to 31st January 2017

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 31ST JANUARY 2017

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 31st January 2017 (Unaudited)
At 31st July 2016	4,236	18,242	2,437	131,019	4,699	160,633
Repurchase and cancellation of the Company's
own shares	(71)	-	71	(2,220)	-	(2,220)
Issue of Ordinary shares on exercise of
Subscription shares	-	3	-	-	-	3
Net return on ordinary activities	-	-	-	18,543	1,446	19,989
Dividend paid in the period	-	-	-	-	(3,055)	(3,055)
At 31st January 2017	4,165	18,245	2,508	147,342	3,090	175,350
Six months ended 31st January 2016 (Unaudited)
At 31st July 2015	4,324	18,190	2,347	151,286	3,450	179,597
Repurchase and cancellation of the Company's
own shares	(28)	-	28	(988)	-	(988)
Issue of Ordinary shares on exercise of
Subscription shares	1	36	-	-	-	37
Net (loss)/return on ordinary activities	-	-	-	(7,344)	897	(6,447)
Dividend paid in the period	-	-	-	-	(1,889)	(1,889)
At 31st January 2016	4,297	18,226	2,375	142,954	2,458	170,310
Year ended 31st July 2016 (Audited)
At 31st July 2015	4,324	18,190	2,347	151,286	3,450	179,597
Repurchase and cancellation of the
Company's own shares	(90)	-	90	(2,936)	-	(2,936)
Issue of Ordinary shares on exercise of
Subscription shares	2	52	-	-	-	54
Net (loss)/return on ordinary activities	-	-	-	(17,331)	3,138	(14,193)
Dividend paid in the year	-	-	-	-	(1,889)	(1,889)
At 31st July 2016	4,236	18,242	2,437	131,019	4,699	160,633

¹ The reserve forms the distributable reserve of the Company and may be used to fund distribution of profits to investors via dividend payments.

STATEMENT OF FINANCIAL POSITION

AT 31ST JANUARY 2017

	(Unaudited)	(Unaudited)	(Audited)
	31st January 2017	31st January 2016	31st July 2016
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	189,850	185,811	169,806
Current assets
Debtors	2,111	452	485
Cash and cash equivalents	3,011	3,745	10,575
	5,122	4,197	11,060
Current liabilities
Creditors: amounts falling due within one year	(19,622)	(19,698)	(20,233)
Net current liabilities	(14,500)	(15,501)	(9,173)
Total assets less current liabilities	175,350	170,310	160,633
Net assets	175,350	170,310	160,633
Capital and reserves
Called up share capital	4,165	4,297	4,236
Share premium	18,245	18,226	18,242
Capital redemption reserve	2,508	2,375	2,437
Capital reserves	147,342	142,954	131,019
Revenue reserve	3,090	2,458	4,699
Total shareholders' funds	175,350	170,310	160,633
Net asset value per Ordinary share (note 5)
- undiluted	1,053.3p	991.6p	948.8p
- diluted	1,029.0p	978.5p	942.9p

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 31ST JANUARY 2017

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2017	31st January 2016	31st July 2016
	£'000	£'000	£'000
Net cash outflow from operations before dividends
and interest	(975)	(1,072)	(2,041)
Dividends received	1,957	1,344	3,902
Interest received	16	4	17
Taxation	2	1	1
Interest paid	(116)	(145)	(278)
Net cash inflow from operating activities	884	132	1,601
Purchases of investments	(32,949)	(35,065)	(78,352)
Sales of investments	30,134	37,686	87,897
Settlement of foreign currency contracts	1	-	6
Net cash (outflow)/inflow from investing activities	(2,814)	2,621	9,551
Dividend paid	(3,055)	(1,889)	(1,889)
Repurchase and cancellation of the Company's
own shares	(2,582)	(988)	(2,574)
Issue of Ordinary shares on exercise of
Subscription shares	3	37	54
Net cash outflow from financing activities	(5,634)	(2,840)	(4,409)
(Decrease)/increase in cash and cash equivalents	(7,564)	(87)	6,743
Cash and cash equivalents at start of period	10,575	3,832	3,832
Cash and cash equivalents at end the period	3,011	3,745	10,575
(Decrease)/increase in cash and cash equivalents	(7,564)	(87)	6,743
Cash and cash equivalents consist of:
Cash and short term deposits	623	853	249
Cash held in JPMorgan Sterling Liquidity Fund	2,388	2,892	10,326
Total	3,011	3,745	10,575

NOTES TO THE FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 31ST JANUARY 2017

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 July 2016 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 and 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 are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP'), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in November 2014.

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 31st January 2017.

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 July 2016.

3.  Dividend paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2017	31st January 2016	31st July 2016
	£'000	£'000	£'000
2016 Final dividend of 18.3p (2015: 11.0p)	3,055	1,889	1,889

All dividends paid and declared in the period have been funded from the Revenue Reserve.

No interim dividend has been declared in respect of the six months ended 31st January 2017 (2016: nil).

4.  Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2017	31st January 2016	31st July 2016
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return	1,446	897	3,138
Capital return/(loss)	18,543	(7,344)	(17,331)
Total return/(loss)	19,989	(6,447)	(14,193)
Weighted average number of shares in issue during
the period used for the purpose of the undiluted
calculation	16,726,551	17,190,970	17,136,321
Weighted average number of shares in issue during the
period used for the purpose of the diluted calculation	16,726,551	17,190,970	17,136,321
Undiluted
Revenue return per share	8.64p	5.22p	18.31p
Capital return/(loss) per share	110.86p	(42.73)p	(101.14)p
Total return/(loss) per share	119.50p	(37.51)p	(82.83)p
Diluted1
Revenue return per share	8.64p	5.22p	18.31p
Capital return/(loss) per share	110.86p	(42.73)p	(101.14)p
Total return/(loss) per share	119.50p	(37.51)p	(82.83)p

¹     There is no dilutive effect as the conversion price for these shares exceeded the average market price of the Ordinary shares from the date of issue to 31st January 2017.

5.  Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2017	31st January 2016	31st July 2016
Undiluted
Ordinary shareholders' funds (£'000)	175,350	170,310	160,633
Number of Ordinary shares in issue	16,647,368	17,174,750	16,930,024
Net asset value per Ordinary share	1,053.3p	991.6p	948.8p
Diluted
Ordinary shareholders' funds assuming exercise of
Subscription shares (£'000)	207,881	202,860	193,168
Number of potential Ordinary shares in issue	20,202,687	20,732,201	20,485,703
Net asset value per Ordinary share	1,029.0p	978.5p	942.9p

6.   Fair valuation of investments

The fair value hierarchy disclosures required by FRS 102 are given below.

		(Unaudited) Six months ended 31st January 2017		(Unaudited) Six months ended 31st January 2016		(Audited) Year ended 31st July 2016
		Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
		£'000	£'000	£'000	£'000	£'000	£'000
	Level 1	189,850	-	185,811	-	169,272	-
	Level 31	-	-	-	-	534	-
	Total value of investments	189,850	-	185,811	-	169,806	-

¹ Relates to Autins Group which was admitted to AIM on 22nd August 2016.

There were no transfers between Level 1, 2 or 3 during the year (2016: same).

JPMORGAN FUNDS LIMITED

22nd March 2017

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.jpmsmallercompanies.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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