Half-year Report

RNS Number : 0514U

JPMorgan UK Smaller Cos IT PLC

23 March 2023

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN UK SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
31ST JANUARY 2023

Legal Entity Identifier: 549300PXALXKUMU9JM18

Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

Investment Performance

The half year saw a continuation of the unpleasant cocktail of challenges faced in the prior period. Equity markets continued to grapple with rising interest rates, high inflation, the threat of recession, supply chain constraints, a significant tightening of liquidity and further geopolitical headwinds from heightened tensions between the US and China and in Ukraine. Just at the point that global investors began to sense a relative improvement in the economic outlook and markets began to recover, the UK temporarily suffered from a spectacular own goal due to domestic political machinations. The poorly considered and communicated economic policy of the short lived Truss premiership had a significant negative impact on domestic equity and debt markets but which thankfully recovered by the end of our reporting period following the appointment of Rishi Sunak as prime minister.

With continued market volatility, the Company's total return on net assets (with net dividends reinvested) over the six months to 31st January 2023 was -1.2%, which was marginally behind the Numis Smaller Companies plus AIM (excluding Investment Companies) Index which returned -0.4%. However, the return to shareholders for the reporting period was +0.4% which reflects a narrowing of the share price discount to net asset value from 11.0% at the start of the financial year to 9.8% at the end of the half year. Despite the difficult challenges faced by UK smaller companies over recent years, over the longer term performance remains strong with the Company being up 202.8% over the past ten years, some 56.4% ahead of the benchmark. Further details can be found in the Half Year Report.

Since the end of the reporting period, markets have fallen due to concerns in the banking sector.  From 31st January 2023 to 21st March 2023, the Company's total return on net assets was -6.6%, marginally underperforming the Company's benchmark index which declined by -6.0% as at 21st March 2023. Over the same period, the Company delivered a return to ordinary shareholders of -10.7% as the discount widened.

In their report, the Investment Managers provide a review of the Company's performance for the period and the outlook for the remainder of the year.

Loan Facility and Gearing

During the reporting period, the Company continued to utilise its revolving credit facility to maintain a meaningful but modest level of gearing. As noted in the previous Annual Report, on 1st October 2021 the Board renewed and increased the borrowing facility with Scotiabank to £50 million for a period of 24 months. There is a further option to increase borrowings to £60 million subject to certain conditions. As at 31st January 2023, £21 million was drawn on the loan facility. Since the end of the reporting period an additional £5 million was drawn down. The current facility matures on 1st October 2023 and the Board will review the Company's borrowing requirements in advance of this date.

The Company has maintained a fairly constant level of gearing, with the Board giving the Investment Managers flexibility to adjust the gearing tactically within a range set by the Board of 10% net cash to 15% geared in normal markets. During the reporting period, the Company's gearing ranged from 4.0% to 8.7%, ending the half year at 7.6% as the Investment Managers took advantage of perceived attractive valuations. As at 21st March 2023 the Company's gearing was 6.9%, with total borrowings of £26 million.

Share Repurchases and Issuance

During the six months to 31st January 2023, the Company did not repurchase or issue any shares. However, the Board's objective remains to act in the best interests of shareholders by using the repurchase and allotment authorities to manage imbalances between the supply and demand of the Company's shares with the intention of reducing the volatility of the discount or premium in normal market conditions. As at the end of the reporting period there were 79,611,410 shares in issue (including 1,559,741 shares held in Treasury).

Board Succession

Having completed nine years of service as a Director, Frances Davies retired from the Board at the Annual General Meeting (AGM) in December 2022. Frances was also Chairman of the Remuneration Committee and Senior Independent Director. Following her retirement Alice Ryder took over these roles. Katrina Hart was also formally appointed at the AGM and is proving to be a valuable addition to the Board.

Being a Board of four, the Directors are mindful that the size of the Board may need to be increased in light of new regulations. In accordance with the FCA's new policy on diversity, the Board currently complies with the gender recommendation and is committed to increasing diversity and inclusion over time.

Outlook

Following a period of optimism that inflation might fall back significantly towards the end of 2023 and that interest rate rises were coming to an end, markets have become nervous over the path of interest rates. More recently UK and global equities have fallen and government bond yields have risen suggesting that, despite the significant rise in interest rates over the past year, economic activity remains unexpectedly robust and investors are again growing concerned about inflation and monetary policy. Whatever the eventual outcome it seems likely that markets will be influenced by key data and policy announcements as investor sentiment is likely being driven by hopes of a more supportive US policy rather than improving fundamentals. Recent developments in the banking sector have raised concerns over the solvency of several banks and whether this is potentially a systemic problem. However, central and commercial banks have acted decisively in unison to contain the issue and a by-product of this maybe a more dovish approach to interest rates. In this environment volatility is likely to remain.

However, as the managers comment in their outlook, despite being cautious on the timing of interest rate reductions and the short term path of the economy, they find reasons to be more optimistic. This more encouraging view is primarily built upon the attractive valuation on which UK smaller companies currently stand. Whilst these are difficult markets to navigate, experience points to opportunity for patient investors.

Andrew Impey

Chairman   23rd March 2023

INVESTMENT MANAGERS' REPORT

Performance and Market Background

The first half of the Company's financial year endured a bleak backdrop. The atrocious war in Ukraine raged on, energy prices and inflation remained uncomfortably high, interest rates rose swiftly and there was a growing threat of recession in 2023 in much of the developed world. While public sector strike action grew in the UK in response to the stark cost of living increase over the year, towards the end of the period there were a few positives of note. China backed down on its zero-Covid policy; inflation appeared to have peaked in the US, UK and Europe; recessionary risks in Europe and the UK began to diminish; and in the UK the new Prime Minister, Rishi Sunak, calmed markets and investors after the disastrous Liz Truss mini budget in September.

Against this backdrop, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index was effectively flat at -0.4% for the six months (although it is notable that this hid significant declines at the start of the period, followed by a rebound as markets looked to life beyond peak inflation). The Company was marginally behind and produced a total return on net asset value of -1.2% in the period, while the total return to shareholders was +0.4%.

Portfolio

Among the positive contributors to performance in the six months were Ashtead Technology, Bank of Georgia, Dunelm and Hollywood Bowl. We have owned Ashtead Technology (subsea rental equipment) since its IPO at the end of 2021 and it continued to produce impressive results and see growing demand, while Bank of Georgia benefitted from the strength of the Georgian economy, which is currently among the strongest globally. Both Dunelm (the homewares retailer) and Hollywood Bowl (a bowling company) enjoyed a rerating following strong figures which demonstrated the strength of their appeal to consumers. On the negative side, the main detractors included Serica Energy, the North Sea gas producer, following the Government's extra tax levy on North Sea oil and gas producers, the housebuilder Vistry, on concerns over the housing market, and not owning Micro Focus, which hurt performance on a relative basis as it received a bid at a very significant premium.

We continued to make changes to the portfolio to adapt to the fast-changing economic outlook. New additions included: the book publisher, Bloomsbury, purchased due to the quality of its portfolio and long-term track record of earnings upgrades; the high street card retailer, Card Factory, purchased on indications that the business has successfully turned around following a more challenging period; the price comparison website, Moneysupermarket.Com, on valuation grounds; and Zoo Digital, which provides localisation services such as dubbing to the film industry and is benefitting from the proliferation of video content globally.

Outlook

It is very easy to paint a dark and gloomy picture of the UK economy and to make a direct read across to the UK stockmarket. However, markets (and investors) are pre-emptive and looking out to the next 12 to 18 months provides reasons to be more optimistic.

In line with most economists, we expect a mild recession in the UK in 2023 at worst, or minimal growth at best. The most recent composite UK Purchasing Managers Index (PMI) data was a positive surprise at 53, where anything over 50 signals expansion. We believe inflation has peaked in the UK, and while we expect it to remain elevated, we do foresee a significant decline from the current 10.1% over the course of this year. In part this is due to gas prices, which are substantially lower than the peak in 2022, although still high versus history. After ten increases since December 2021, interest rates at 4% have substantially normalised and are much closer to peak. Current market expectations are for a first cut of 25bp in the second half of 2023, but we think that is likely to be premature and we do not expect them to come down any time soon. Consumer confidence remains very weak - headlines, strikes, utility bills and potential house price declines are all playing a part - but has picked up significantly this February. The unemployment rate remains very low at 3.7% and there are still over a million job vacancies. Freight rates have fallen significantly, and it appears that supply chains are beginning to function more normally, aided by the re-opening of China.

This leads us to valuations. The environment is going to remain extremely difficult for businesses and consumers to navigate this year - but a lot of this is already reflected in valuations. While the stockmarket has rallied off its low in October, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index is on a similar P/E ratio to the FTSE 100 of under 11x, despite growing faster. The Company's portfolio has a lower forecast P/E of 10.5x and on our favoured free cashflow yield metric the portfolio is undeniably attractive on an historic free cashflow yield of 6.8%. As we have said before, acquirors of UK businesses recognise this. M&A continued in 2022 despite the economic backdrop; we have already seen a number of bids in the small cap arena in 2023 and we strongly believe this trend will continue this year while valuations remain so compelling on any sensible timeframe.

Georgina Brittain

Katen Patel

Portfolio Managers   23rd March 2023

INTERIM MANAGEMENT REPORT

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

Principal and Emerging Risks and Uncertainties

The principal risks and uncertainties faced by the Company have not changed significantly and fall into the following broad categories: strategic and performance risk; discount/premium; smaller company investment and market; political and economic (including the continuing war in Ukraine and the heightened political tensions between the US and China); investment management team; accounting, legal and regulatory; cybercrime; global pandemics; and climate change. Information on each of these areas is given in the Strategic Report within the Annual Report and Financial Statements for the year ended 31st July 2022 and in the view of the Board, these principal and emerging risks and uncertainties are as applicable to the remaining six months of the financial year as they were to the period under review.

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 12 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 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 year 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 2023, as required by the UK Listing Authority Disclosure and Transparency Rules 4.2.4R; and

(ii)  the half year 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   23rd March 2023

CONDENSED STATEMENT OF COMPREHENSIVE INCOME

	(Unaudited)				(Unaudited)				(Audited)
	Six months ended				Six months ended				Year ended
		31st January 2023				31st January 2022				31st July 2022
	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	-		(4,427)	(4,427)	-		(32,407)	(32,407)	-		(85,781)	(85,781)
Net foreign currency
gains/(losses)	-		3	3	-		1	1	-		(2)	(2)
Income from investments	2,848		-	2,848	3,609		-	3,609	8,101		-	8,101
Interest receivable and
similar income	67		-	67	4		-	4	50		-	50
Gross return/(loss)	2,915		(4,424)	(1,509)	3,613		(32,406)	(28,793)	8,151		(85,783)	(77,632)
Management fee	(289)		(674)	(963)	(406)		(948)	(1,354)	(748)		(1,744)	(2,492)
Other administrative expenses	(288)		-	(288)	(259)		-	(259)	(566)		-	(566)
Net return/(loss) before
finance costs and taxation	2,338		(5,098)	(2,760)	2,948		(33,354)	(30,406)	6,837		(87,527)	(80,690)
Finance costs	(140)		(327)	(467)	(78)		(183)	(261)	(180)		(419)	(599)
Net return/(loss) before
taxation	2,198		(5,425)	(3,227)	2,870		(33,537)	(30,667)	6,657		(87,946)	(81,289)
Taxation	(15)		-	(15)	(18)		-	(18)	(106)		-	(106)
Net return/(loss) after
taxation	2,183		(5,425)	(3,242)	2,852		(33,537)	(30,685)	6,551		(87,946)	(81,395)
Return/(loss) per share (note 3)	2.80p		(6.95)p	(4.15)p	3.65p		(42.97)p	(39.32)p	8.39p		(112.68)p	(104.29)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 net return after taxation represents the profit for the period or loss and also the total comprehensive income.

CONDENSED STATEMENT OF CHANGES IN EQUITY

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves1	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 31st January 2023 (Unaudited)
At 31st July 2022	3,981	25,895	2,903	220,248	7,420	260,447
Net (loss)/return after taxation	-	-	-	(5,425)	2,183	(3,242)
Dividend paid in the period (note 4)	-	-	-	-	(5,386)	(5,386)
At 31st January 2023	3,981	25,895	2,903	214,823	4,217	251,819
Six months ended 31st January 2022 (Unaudited)
At 31st July 2021	3,981	25,895	2,903	308,194	5,318	346,291
Net (loss)/return after taxation	-	-	-	(33,537)	2,852	(30,685)
Dividend paid in the period (note 4)	-	-	-	-	(4,449)	(4,449)
At 31st January 2022	3,981	25,895	2,903	274,657	3,721	311,157
Year ended 31st July 2022 (Audited)
At 31st July 2021	3,981	25,895	2,903	308,194	5,318	346,291
Net (loss)/return after taxation	-	-	-	(87,946)	6,551	(81,395)
Dividend paid in the period (note 4)	-	-	-	-	(4,449)	(4,449)
At 31st July 2022	3,981	25,895	2,903	220,248	7,420	260,447

¹ This reserve forms the distributable reserve of the Company and may be used to fund distribution of profits to shareholders.

CONDENSED STATEMENT OF FINANCIAL POSITION

	(Unaudited)	(Unaudited)	(Audited)
	At 31st January	At 31st January	At 31st July
	2023	2022	2022
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	271,061	340,828	275,604
Current assets
Debtors	647	1,512	1,476
Cash and cash equivalents	2,345	8,941	9,650
	2,992	10,453	11,126
Current liabilities
Creditors: amounts falling due within one year	(22,234)	(124)	(1,283)
Net current (liabilities)/assets	(19,242)	10,329	9,843
Total assets less current liabilities	251,819	351,157	285,447
Creditors: amounts falling due after one year	-	(40,000)	(25,000)
Net assets	251,819	311,157	260,447
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	214,823	274,657	220,248
Revenue reserve	4,217	3,721	7,420
Total shareholders' funds	251,819	311,157	260,447
Net asset value per share (note 5)	322.6p	398.7p	333.7p

CONDENSED STATEMENT OF CASH FLOWS

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2023	31st January 2022	31st July 2022
	£'000	£'000	£'000
Net cash outflow from operations before dividends and
interest (note 6)	(1,288)	(1,674)	(3,018)
Dividends received	3,417	3,385	7,419
Interest received	77	4	40
Interest paid	(409)	(265)	(604)
Net cash inflow from operating activities	1,797	1,450	3,837
Purchases of investments	(43,844)	(38,883)	(105,409)
Sales of investments	44,132	42,776	122,651
Settlement of foreign currency contracts	-	-	(4)
Net cash inflow from investing activities	288	3,893	17,238
Dividend paid	(5,386)	(4,449)	(4,449)
Litigation expense	-	(31)	(52)
Repayment of bank loans	(4,000)	(3,000)	(18,000)
Drawdown of bank loans	-	8,000	8,000
Net cash (outflow)/inflow from financing activities	(9,386)	520	(14,501)
(Decrease)/increase in cash and cash equivalents	(7,301)	5,863	6,574
Cash and cash equivalents at start of period/year	9,650	3,077	3,077
Exchange movements	(4)	1	(1)
Cash and cash equivalents at end of period/year	2,345	8,941	9,650
Cash and cash equivalents consist of:
Cash and short term deposits	346	278	294
Cash held in JPMorgan Sterling Liquidity Fund	1,999	8,663	9,356
Total	2,345	8,941	9,650

RECONCILIATION OF NET DEBT

	As at		Other	As at
	31st July		non-cash	31st January
	2022	Cash flows	charges	2023
	£'000	£'000	£'000	£'000
Cash and cash equivalents
Cash	294	56	(4)	346
Cash equivalents	9,356	(7,357)	-	1,999
	9,650	(7,301)	(4)	2,345
Borrowings
Debt due in less than one year	(25,000)	4,000	-	(21,000)
Total	(15,350)	(3,301)	(4)	(18,655)

NOTES TO THE FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 31ST JANUARY 2023

1.  Financial statements

The information contained within the condensed 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 2022 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 July 2022.

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 2023.

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 2022.

3.  Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2023	31st January 2022	31st July 2022
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	2,183	2,852	6,551
Capital loss	(5,425)	(33,537)	(87,946)
Total loss	(3,242)	(30,685)	(81,395)
Weighted average number of shares in issue	78,051,669	78,051,669	78,051,669
Revenue return per share	2.80p	3.65p	8.39p
Capital loss per share	(6.95)p	(42.97)p	(112.68)p
Total loss per share	(4.15)p	(39.32)p	(104.29)p

4.  Dividends paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2023	31st January 2022	31st July 2022
	£'000	£'000	£'000
2022 final dividend of 6.9p (2021: 5.7p)	5,386	4,449	4,449

All dividends paid in the period have been funded from the revenue reserve.

The Company will normally declare one final dividend for the year ending 31st July 2023, therefore no interim dividend has been declared in respect of the six months ended 31st January 2023 (2022: nil).

5.  Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2023	31st January 2022	31st July 2022
Net assets (£'000)	251,819	311,157	260,447
Number of shares in issue	78,051,669	78,051,669	78,051,669
Net asset value per share	322.6p	398.7p	333.7p

6.  Reconciliation of net loss 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
	31st January 2023	31st January 2022	31st July 2022
	£'000	£'000	£'000
Net loss before finance costs and taxation	(2,760)	(30,406)	(80,690)
Add: capital loss before finance costs and    taxation	5,098	33,354	87,527
Scrip dividends received as income	(27)	(145)	(145)
Decrease/(increase) in accrued income and
other debtors	598	(103)	(440)
(Decrease)/increase in accrued expenses	(21)	(19)	36
Management fee charged to capital	(674)	(948)	(1,744)
Tax on unfranked investment income	(15)	(18)	(106)
Dividends received	(3,417)	(3,385)	(7,419)
Interest received	(77)	(4)	(40)
Realised loss on foreign exchange     transactions	7	-	3
Net cash outflow from operations before dividends and interest
	(1,288)	(1,674)	(3,018)

7.  Fair valuation of investments

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

	(Unaudited)		(Unaudited)			(Audited)
	Six months ended		Six months ended			Year ended
	31st January 2023		31st January 2022			31st July 2022
	Assets	Liabilities	Assets	Liabilities	Assets		Liabilities
	£'000	£'000	£'000	£'000	£'000		£'000
Level 1	271,061	-	340,828	-	275,604		-
Total	271,061	-	340,828	-	275,604		-

JPMORGAN FUNDS LIMITED

23rd March 2023

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 ASSET MANAGEMENT (UK) LIMITED

ENDS

A copy of the Half Year Report will shortly be submitted to the FCA's National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The Half Year Report will also shortly be available on the Company's website at www.jpmuksmallercompanies.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

 

END

 

 

IR LXLFLXXLEBBE