Half-year Report

RNS Number : 6272H

JPMorgan Smaller Cos IT PLC

25 March 2020

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
31ST JANUARY 2020

Legal Entity Identifier: 549300PXALXKUMU9JM18

Information disclosed in accordance with DTR 4.2.2

 CHAIRMAN'S STATEMENT

Performance and discount

In his outgoing statement my predecessor sagely observed that, despite challenging circumstances and market volatility, patient and selective investment in good companies should be rewarded over time. Therefore, I am pleased to report that your company has performed strongly over the six months period ended 31st January 2020. Whilst unfolding events have overtaken this good news, the Company's total return on net assets of +24.1% (with net dividends reinvested) significantly outperformed the benchmark, the Numis Small Cap plus AIM (ex Investment Companies) Index, which delivered +8.9% (in sterling terms). In addition, the total return to shareholders was +31.9% as the net asset return was enhanced by a narrowing of the discount over the period.

This outperformance relative to the benchmark index is explained in the Investment Managers' Report which provides a detailed commentary on the portfolio positioning and their current outlook for investing in the UK.

Loan Facility and Gearing

The Company has a highly flexible borrowing facility of £25 million in place with Scotiabank which expired on 4th October 2019 and was then renewed with Scotiabank for a further year. Under the terms of the agreement, the Company has the option to increase the facility commitment amount to £35.0 million in two increments of £5.0 million subject to certain conditions. In January 2020, the Board increased the amount drawn down on the facility to £30.0 million, therefore taking advantage of the accordion facility in place. Given the increase in the net asset value of the company, this gave the managers sufficient additional funding to continue to adjust the gearing tactically within the guidelines.

During a period of low interest rates, the use of gearing is an attractive way of amplifying the effect of rising markets, but inevitably increases the risk of loss if markets fall and volatility. The Company has maintained a fairly constant level of gearing, with the Board giving the Investment Managers flexibility to adjust the gearing tactically within guidelines. During the reporting period, the Company's gearing ranged from 6.1% to 10.2%, ending the half year at 9.8% geared. As at 24th March 2020 the Company's gearing had been reduced to 4.1%, with total borrowings of £30.0 million.

Share buybacks

During the six months to 31st January 2020 the Company repurchased 514,217 shares into Treasury for possible re-issue. These shares were acquired at an average discount of 15.2% enhancing net asset value per share by 0.254 pence. Our objective remains to reduce the volatility of the discount and our action during this period demonstrates the Board's aim to act in the best interests of shareholders by making purchases should supply and demand for shares become unbalanced.

Board succession

As noted in the previous Annual Report, I took over as Chairman of the Company following the retirement of Michael Quicke at the Annual General Meeting ('AGM') in November 2019.

Looking ahead, the Board's next priority is to appoint a successor to the Audit Committee Chairman, Andrew Robson, who will retire from the Board at the AGM in 2020. The Board has commenced the search for a suitable candidate.

Outlook

Since the end of the reporting period, markets have been substantially affected by the economic uncertainty caused by the spread of COVID-19. This has been exacerbated by a slump in the price of oil and the unprecedented measures taken to combat the virus. The progression of the pandemic and its economic fallout is highly uncertain and markets dislike uncertainty. Consequently, share prices have been under severe pressure globally and, a result, your company's net asset value has fallen by 37.9% to 199.6p as at 24th March 2020. The discount has also widened markedly. Globally, governments are taking extraordinary measures to try and limit the effect of the virus and the UK government and Bank of England have coordinated a series of significant initiatives. Whilst we await the progression and eventual economic outcome of these events, your managers' focus is, as ever, on assessing the quality and prospects for your investments. Current events not only present heightened risk but also opportunity and, given time, we hope to capitalise on these.

Andrew Impey

Chairman    

25th March 2020

 INVESTMENT MANAGERS' REPORT

 Performance and Market Background

2019 proved to be quite a year! While the global backdrop was one of continuing Middle Eastern agitation, ongoing (although slowly de-escalating) trade wars between China and the USA, and slowing global growth notably in Europe, caused by those trade wars, the main story for the UK stockmarket was all political. The first half of the financial year saw a new Prime Minister in situ, followed by the 31st October Brexit cliff-hanger, stalemate in Parliament, and then the December 2019 election. The outcome of the Election with its decisive victory and significant majority for the Conservatives, and the disappearance of the risk associated with a Corbyn-led Labour government, provided a level of certainty to UK politics that had been lacking for several years.

Against this backdrop, the UK small and mid cap indices performed very strongly. The Numis Smaller Companies plus AIM (ex Investment Companies) Index was up 8.9% over the six months. Your Company outperformed this significantly and produced a total return on net asset value of 24.1%. The decisive Conservative victory in the Election ended the political impasse and removed a significant degree of uncertainty over Brexit. This led to a sharp narrowing of the discount, leading to a share price total return of 31.9%

Portfolio

The strong outperformance of your Company over the first half of the financial year was broad-based. Many of our long-held positions produced very strong returns, among them Games Workshop, Judges Scientific and Avon Rubber. Other notable contributors included Dunelm, which we bought at the start of 2019, and Team 17, purchased at IPO in 2018. The only notable detractor from performance was not owning Frasers (the re-named Sports Direct).

We made a number of changes to the portfolio in the period. We exited two bid stocks, EI Group and Eland, some mining companies such as Ferrexpo and Hochschild, and sold Marstons, Fevertree and Vitec. The money was re-invested into a range of new businesses, both domestic and international, including CVS (a veterinary company), Bank of Georgia and an IPO, Pebble Group (a supplier of promotional merchandise). As we drew closer to the UK Election, and the outcome became more clear, we also added to a number of our more domestically focussed holdings. Post the Election, we increased this tilt further, and at the end of January we had positioned the portfolio to have a 10% overweight exposure to the UK relative to our index. The last time we had any notable overweight exposure to the UK versus International companies was prior to the Referendum in 2016.

Outlook

Post the Election and Parliamentary approval of a withdrawal agreement from the EU, we believe the political outlook for the UK is clearer than it has been for several years. We now have a pro growth, pro investment Government in place and have already seen Government spending accelerating at its fastest pace in 15 years. The recent Budget confirmed this. Low interest rates, low inflation and very low unemployment all add to the more positive picture.

There are two caveats. First, this positive view is dependent on the outcome of the EU withdrawal negotiations this year, and also the progress of trade talks with the USA, Japan and other countries. Second, and clearly dominant, is the threat to the global economy from the coronavirus, COVID-19. If this pandemic is contained in a timely manner then, given the extraordinary measures of support we have seen from the Government, we would expect a very strong bounce back in markets, and the UK, and in particular the harder hit smaller companies, should participate. If, however, the rest of the world does not recover from the COVID-19 impact at the rate that China appears to have, then all markets, including the UK, will continue to struggle.

As discussed above, we repositioned the portfolio to benefit from the more positive outlook in the UK and at the end of the half year on 31st January 2020, we were 9.8% geared. As the impact of COVID-19 began to take effect, we have reduced our gearing level, in order to provide ourselves with firepower when we believe it is time to add to our holdings.  Current valuations were supportive prior to the recent very sharp decline in stockmarkets, but clearly it is difficult if not impossible to foresee where earnings levels will turn out for this year. When the current situation, and companies' earnings, normalise, we believe valuation levels will look very attractive, but the timing is highly uncertain. Overall your Company holds a portfolio of high quality and strong cash-generating companies, many of which we expect to come out of the current situation with stronger market positions. As we have said before, our focus is on owning long term winners, and while there may of course be exceptions, we think that this testing time will prove this to be the case.

Georgina Brittain

Katen Patel

Investment Managers    

25th March 2020

 INTERIM MANAGEMENT REPORT

  The Company is required to make the following disclosures in its half year report:

Principal Risks and Uncertainties

During 2020, the emergence of the virus COVID-19 (coronavirus) has created significant uncertainty for markets, and therefore risk to the value of investments and volatility. Other than this, the principal risks and uncertainties faced by the Company have not changed significantly and fall into the following broad categories: corporate strategy; investment and performance; discount; smaller company investment; political (including Brexit) and economic; investment management team; market; accounting, legal and regulatory; corporate governance and shareholder relations; operational and counterparty failure; cybercrime; and financial. Information on each of these areas is given in the Business Review within the Annual Report and Financial Statements for the year ended 31st July 2019.

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 (including its liquidity) 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 operational existence for at least twelve months from the date of the approval of this half year financial report. 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 2019, 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

Andrew Impey

Chairman   

25th March 2020

 STATEMENT OF COMPREHENSIVE INCOME

  FOR THE SIX MONTHS ENDED 31ST JANUARY 2020

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	31st January 2020			31st January 2019			31st July 2019
	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	-	46,515	46,515	-	(37,967)	(37,967)	-	(15,909)	(15,909)
Net foreign currency gains/(losses)	-	10	10	-	5	5	-	(4)	(4)
Income from investments	3,281	-	3,281	3,043	-	3,043	6,376	-	6,376
Interest receivable and similar income	21	-	21	39	-	39	71	-	71
Gross return/(loss)	3,302	46,525	49,827	3,082	(37,962)	(34,880)	6,447	(15,913)	(9,466)
Management fee	(265)	(618)	(883)	(272)	(633)	(905)	(534)	(1,245)	(1,779)
Other administrative expenses	(210)	-	(210)	(225)	-	(225)	(441)	-	(441)
Net return/(loss) before finance costs and taxation	2,827	45,907	48,734	2,585	(38,595)	(36,010)	5,472	(17,158)	(11,686)
Finance costs	(32)	(74)	(106)	(57)	(133)	(190)	(166)	(387)	(553)
Net return/(loss) before taxation	2,795	45,833	48,628	2,528	(38,728)	(36,200)	5,306	(17,545)	(12,239)
Taxation	(19)	-	(19)	(40)	-	(40)	(268)	-	(268)
Net return/(loss) after taxation	2,776	45,833	48,609	2,488	(38,728)	(36,240)	5,038	(17,545)	(12,507)
Return/(loss) per share (note 3)	3.55p	58.65p	62.20p	3.12p	(48.63)p	(45.51)p	6.33p	(22.05)p	(15.72)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 net return after taxation represents the profit for the period and also the total comprehensive income.

STATEMENT OF CHANGES IN EQUITY

  for the six months ended 31st january 2020

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
 Six months ended 31st January 2020 (Unaudited)
At 31st July 2019	3,981	25,895	2,903	167,440	7,521	207,740
Repurchase of shares into Treasury	-	-	-	(1,142)	-	(1,142)
Net return on ordinary activities	-	-	-	45,833	2,776	48,609
Dividend paid in the period (note 4)	-	-	-	-	(4,293)	(4,293)
At 31st January 2020	3,981	25,895	2,903	212,131	6,004	250,914
Six months ended 31st January 2019 (Unaudited)
At 31st July 2018	3,985	25,895	2,899	187,547	6,782	227,108
Repurchase and cancellation of the Company's
own shares	(4)	-	4	(190)	-	(190)
Net (loss)/return on ordinary activities	-	-	-	(38,728)	2,488	(36,240)
Dividend paid in the period (note 4)	-	-	-	-	(4,299)	(4,299)
At 31st January 2019	3,981	25,895	2,903	148,629	4,971	186,379
Year ended 31st July 2019 (Audited)
At 31st July 2018	3,985	25,895	2,899	187,547	6,782	227,108
Repurchase and cancellation of the
Company's own shares	(4)	-	4	(190)	-	(190)
Repurchase of shares into Treasury	-	-	-	(2,354)	-	(2,354)
Costs relating to sub-division of shares	-	-	-	(18)	-	(18)
Net (loss)/return	-	-	-	(17,545)	5,038	(12,507)
Dividend paid in the year (note 4)	-	-	-	-	(4,299)	(4,299)
 At 31st July 2019	3,981	25,895	2,903	167,440	7,521	207,740



 STATEMENT OF FINANCIAL POSITION

  at 31st january 2020

	(Unaudited)	(Unaudited)	(Audited)
	31st January 2020	31st January 2019	31st July 2019
	£'000	£'000	£'000
 Fixed assets
Investments held at fair value through profit or loss	275,392	197,392	225,773
Current assets
Debtors	1,014	1,689	2,489
Cash and cash equivalents	5,775	11,552	5,589
	6,789	13,241	8,078
Current liabilities
Creditors: amounts falling due within one year	(31,267)	(24,254)	(26,111)
Net current liabilities	(24,478)	(11,013)	(18,033)
Total assets less current liabilities	250,914	186,379	207,740
Net assets	250,914	186,379	207,740
Capital and reserves
Called up share capital	3,981	3,981	3,981
Share premium	25,895	25,895	25,895
Capital redemption reserve	2,903	2,903	2,903
Capital reserves	212,131	148,629	167,440
Revenue reserve	6,004	4,971	7,521
Total shareholders' funds	250,914	186,379	207,740
Net asset value per share (note 5)	321.5p	234.1p	264.4p

 STATEMENT OF CASH FLOWS

 FOR THE SIX MONTHS ENDED 31ST JANUARY 2020

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2020	31st January 2019	31st July 2019
	£'000	£'000	£'000
 Net cash outflow from operations before dividends and
interest	(1,138)	(1,164)	(2,264)
Dividends received	3,048	3,008	6,079
Interest received	38	51	119
Interest paid	(166)	(186)	(355)
Net cash inflow from operating activities	1,782	1,709	3,579
Purchases of investments	(53,339)	(45,975)	(104,183)
Sales of investments	51,243	59,490	110,307
Net cash (outflow)/inflow from investing activities	(2,096)	13,515	6,124
Dividend paid	(4,293)	(4,299)	(4,299)
Repurchase and cancellation of the Company's own shares	-	(190)	(190)
Repurchase of shares into Treasury	(1,171)	-	(2,325)
Costs relating to sub-division of shares	-	-	(18)
Fees in relation to aborted CULS issue	(33)	-	(99)
Repayment of bank loans	(4,000)	(3,000)	(6,000)
Drawdown of bank loan	10,000	-	5,000
Loan renewal fees	(3)	-	-
Net cash inflow/(outflow) from financing activities	500	(7,489)	(7,931)
Increase in cash and cash equivalents	186	7,735	1,772
Cash and cash equivalents at start of period	5,589	3,817	3,817
Cash and cash equivalents at end of period	5,775	11,552	5,589
Increase in cash and cash equivalents	186	7,735	1,772
Cash and cash equivalents consist of:
Cash and short term deposits	253	286	722
 Cash held in JPMorgan Sterling Liquidity Fund	5,522	11,266	4,867
Total	5,775	11,552	5,589

 RECONCILIATION OF NET DEBT

	As at 31st July 2019 £'000	Cash flows £'000	Other non-cash charges £'000	As at 31st January 2020 £'000
Cash and cash equivalents
Cash	722	(480)	11	253
Cash equivalents	4,867	655	-	5,522
	5,589	175	11	5,775
Borrowings
Debt due within one year	(24,000)	(6,000)	-	(30,000)
	(24,000)	(6,000)	-	(30,000)
Total	(18,411)	(5,825)	11	(24,225)

NOTES TO THE FINANCIAL STATEMENTS

 FOR THE SIX MONTHS ENDED 31ST JANUARY 2020

1.  Financial statements

 The information contained within the financial statements in this half year report has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 31st July 2019 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 have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the revised 'SORP') issued by the Association of Investment Companies in October 2019.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015 has been applied in preparing this condensed set of financial statements for the six months ended 31st January 2020.

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

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st July 2019.

3.  Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2020	31st January 2019	31st July 2019
	£'000	£'000	£'000
 Return per share is based on the following:
Revenue return	2,776	2,488	5,038
Capital return/(loss)	45,833	(38,728)	(17,545)
Total return/(loss)	48,609	(36,240)	(12,507)
Weighted average number of shares in issue	78,152,078	79,635,219	79,561,385
Revenue return per share	3.55p	3.12p	6.33p
Capital return/(loss) per share	58.65p	(48.63)p	(22.05)p
Total return/(loss) per share	62.20p	(45.51)p	(15.72)p

4.  Dividend paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2020	31st January 2019	31st July 2019
	£'000	£'000	£'000
 2019 final dividend of 5.5p (2018: 5.4p1)	4,293	4,299	4,299

 ¹   The dividend rate has been restated following the sub-division of each existing ordinary share of 25p into 5p each on 30th November 2018.

All dividends paid 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 2020 (2019: nil).

5.  Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2020	31st January 2019	31st July 2019
 Net assets (£'000)	250,914	186,379	207,740
Number of shares in issue	78,051,669	79,611,410	78,565,886
Net asset value per share	321.5p	234.1p	264.4p

 25th March 2020

For further information, please contact:

Lucy Dina

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.

JPMORGAN FUNDS LIMITED

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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