Interim Results
JPMorgan Smaller Cos IT PLC
25 March 2008
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN SMALLER COMPANIES INVESTMENT TRUST PLC
HALF YEAR RESULTS
CHAIRMAN'S STATEMENT
Performance
In my last statement in October 2007 I noted that it was too early to judge
whether the portfolio of investments would be undermined by weaker confidence
and changing credit conditions. It is disappointing to report that market
conditions for smaller capitalisation stocks have been exceptionally difficult
since then and although we took steps to reduce risk and lower gearing the
portfolio has suffered.
The FTSE Small Cap Index (excluding investment trusts) fell by 25.5%, whilst the
Company assets fell by 25.9% in total return terms over the six month period to
31st January, 2008. The return to shareholders was worse at -29.4% as the
discount to net asset value widened. A full review of the Company's performance
for the first six months is given in the Investment Managers' Report below.
Since the half year end, markets have continued to be volatile. However, at the
time of writing the Company's net asset value has risen 2.6% in capital terms,
compared to a fall of 0.7% in the Company's benchmark index, outperforming its
benchmark by 1.9%.
Share Buybacks
The Company repurchased 744,000 of its shares over the six month period at an
average discount of 18.1% and a total cost of £3,677,130. In common with other
smaller companies stocks investing in the UK, the discount on the ordinary
shares widened substantially during the period as shareholders and market-makers
became concerned about market volatility and the volume of shares traded reduced
substantially. The Board has continued with its policy of utilising share
buybacks to reduce discount volatility. I can report that since the year-end the
discount at which the Company's shares trade has reduced to 15.5%.
Gearing
Gearing remained at an average of just over 5% throughout the review period,
reflecting the Board's cautious stance to gearing. The Company has a one year
committed loan facility of £13.5m with the Bank of Ireland. As at the end of
January 2008 gearing stood at 3.1%.
VAT on Management Fees
In 2004, JPMorgan Claverhouse Investment Trust and the AIC made a joint
application for the payment of investment trust management fees to be exempt
from VAT. In November 2007 the case was found in their favour. With effect from
November 2007, VAT is no longer being charged on our management fees and we
intend to seek reimbursement in relation to the VAT paid in the past. The
Company is in discussions with JPMAM on the recoverable amount but, in the
absence of a definitive agreement with JPMAM, or specific guidance from HM
Revenue and Customs as to how any reclaims will be effected, it is not yet
possible to say how much will be recovered.
Outlook
The Investment Managers' Report below comments in more detail on the outlook for
the remainder of the year. Clearly the outlook for both UK smaller companies and
the stock market is particularly uncertain. The Board remains confident that the
investment management team has the necessary expertise to take advantage of this
turbulent period.
Strone Macpherson
Chairman, 25th March 2008
INVESTMENT MANAGERS' REPORT
Market Background
It has been a rollercoaster ride in the first six months of the Company's
financial year. After the summer sell-off brought about by the credit crisis and
growing concerns over the US economy, the market recovered strongly in the
autumn, only to be followed by a precipitous decline towards the end of 2007,
which continued into January 2008.
This was brought about by a number of factors. Investors became nervous that the
US slowdown would be reflected in the UK economy; the Northern Rock debacle
caused concern over the British banking system, leading to a squeeze on lending
criteria to consumers and companies alike; it became clear that the fiscal
situation in the UK meant that there could be little or no headroom for tax
cuts; the inflation outlook meant that rates could not be cut as aggressively as
in the US. All of these factors led to mid and smaller companies stocks being
hit particularly hard in the period due to their domestic bias.
Portfolio Review
It was a very disappointing period for the Company. The index declined by 25.5 %
in the half year to January 2008, and the Company was fractionally worse,
declining by 25.9 % in net asset value. While gearing was low throughout the
period, it was in place, and it is this that caused the underperformance
relative to the benchmark, outweighing the positive stock selection that
occurred.
Notable strong performers included Wellstream (flexible pipes into the oil
industry), Chemring (defence company long held in the portfolio) and Imperial
Energy (oil company). In terms of sector positions, the underweight position in
financials relative to the Small Cap benchmark was significantly increased, and
this and consumer services remain notable underweights in the portfolio. The
very large overweight position in industrials was reduced in the half year, but
still remains the largest position in the portfolio, and the overweight in the
oil & gas sector was increased. Both of these sectors have retained net upgrades
through the period, reinforcing our confidence.
Despite the 'credit crunch', corporate activity remained a feature in the
smaller companies arena, and three positions in the portfolio were bid for -
Foseco, Tradus (formerly called QXL) and Inspicio. Conversely, while the IPO or
new issue market slowed down markedly during the second half of 2007, a number
of new stocks did come to the market. New issues which the Company participated
in included CVS, a provider of vetinary services, and New Britain Palm Oil, a
palm oil producer in Papua New Guinea.
The investment process underlying the fund, as discussed in our report in
October 2007, remains unchanged. The methodology uses a quantitative screen
which breaks down the individual stocks in the investible universe and ranks
them according to four factors: value, earnings momentum, price momentum and
growth. After fundamental research to check the data, the balance sheet and the
market environment, our aim is to construct the portfolio around stocks which
demonstrate these tilts. This aims to ensure not only that the portfolio is
constructed around our underlying philosophy of fast-growing cheap stocks with
good newsflow, but also ensures that the portfolio has both growth and value
characteristics, which academic evidence has demonstrated to be the two
long-term drivers of outperformance in the stockmarket. This quantitative
approach is the starting point for the stock selection that is the bedrock of
the portfolio; it is then overlaid by the fund managers' extensive knowledge of
individual companies and their markets, and their own research efforts.
Companies
Market Outlook
Volatility is going to be an ongoing feature of stock markets until the extent
of the economic slowdown in the US and in Europe becomes clearer, the credit
freeze ends and the poor newsflow in the financial sector abates. There is
currently a clear mismatch between what many companies are saying and seeing on
the ground, and stockmarket expectations of significant earnings declines.
Analysts have become very cautious and are now downgrading on macro-economic
concerns, despite companies' confidence in their outlook.
Recessionary concerns are reflected in very cheap valuations. Smaller companies
are on a discount to the rest of the market, and now trade on a price/earnings
ratio of 10x and a prospective dividend yield of 3.7%. Given that growth
forecasts for smaller companies are still in double digits, this looks extremely
attractive. The key question is the extent to which this growth forecast is
likely to be revised downwards as the economic environment becomes more
difficult. Our view is that while downgrades are to be expected, smaller company
valuations already reflect much of the bad news that is now anticipated.
We are currently facing a difficult first half of 2008, and crucial to the
outlook for the year as a whole will be the degree to which corporate earnings
are downgraded. However, when the recent interest rate reductions start to take
effect, and investors begin to have more certainty about the extent of the
slowdown in the economy, then we would expect to see better market trends
establishing themselves. We are positioning ourselves accordingly, and taking
advantage of some huge opportunities that have been thrown up by the rapid and
fairly indiscriminate decline in share prices in the last three months.
Georgina Brittain
Sarah-Jane Morley
Investment Managers, 25th March 2008
For further information:
Lucy Dina
For and on behalf of
JPMorgan Asset Management (UK) Limited - Secretary
020 7742 6000
JPMorgan Smaller Companies Investment Trust plc
Unaudited figures for the six months ended 31st January 2008
Income Statement
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31st January 2008 31st January 2007 31st July 2007
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains from
investments held at
fair value through
profit or loss - (37,870) (37,870) - 28,056 28,056 - 35,973 35,973
Net foreign
currency gains/
(losses) - 1 1 - - - - (2) (2)
Income from
investments 1,259 - 1,259 1,108 - 1,108 2,519 - 2,519
Other interest
receivable and
similar income 20 - 20 8 - 8 21 - 21
_______ ________ _______ _______ ________ _______ _______ _______ _______
Gross return/(loss) 1,279 (37,869) (36,590) 1,116 28,056 29,172 2,540 35,971 38,511
Management fee (307) (307) (614) (321) (321) (642) (697) (697) (1,394)
Other
administrative
expenses (144) - (144) (172) - (172) (351) - (351)
_______ _______ _______ _______ _______ _______ _______ _______ _______
Net return/(loss)
on ordinary
activities before
finance costs and
taxation 828 (38,176) (37,348) 623 27,735 28,358 1,492 35,274 36,766
Finance costs (178) (178) (356) (147) (147) (294) (319) (319) (638)
_______ _______ _______ _______ _______ _______ _______ _______ _______
Net return/(loss)
on ordinary
activities before
taxation 650 (38,354) (37,704) 476 27,588 28,064 1,173 34,955 36,128
Taxation (1) - (1) - - - (1) - (1)
______ _______ _______ ______ _______ _______ _______ _______ _______
Net return/(loss)
on ordinary
activities after
taxation 649 (38,354) (37,705) 476 27,588 28,064 1,172 34,955 36,127
===== ===== ===== ===== ===== ===== ===== ===== =====
Return/(loss) per
share
(note 4) 3.11p (183.54)p (180.43)p 2.09p 120.94p 123.03p 5.22p 155.62p 160.84p
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. The 'Total' column represents all the information that is required
to be disclosed in a 'Statement of Total Recognised Gains and Losses' ('STRGL').
For this reason a STRGL has not been presented.
JPMorgan Smaller Companies Investment Trust plc
Reconciliation of Movements in Shareholders' Funds (Unaudited)
Unaudited figures for the six months ended 31st January 2008
Called up Capital
Share Share redemption Capital Revenue
Capital premium reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
At 31st July 2007 5,312 18,360 1,354 117,213 1,418 143,657
Shares bought back and cancelled (186) - 186 (3,704) - (3,704)
Total (loss)/return from ordinary - - - (38,354) 649 (37,705)
activities
Dividends appropriated in the period - - - - (1,046) (1,046)
_______ _______ ________ _______ _______ ________
At 31st January 2008 5,126 18,360 1,540 75,155 1,021 101,202
===== ===== ===== ===== ===== =====
Unaudited figures for the six months ended 31st January 2007
Called up Capital
Share Share redemption Capital Revenue
Capital premium reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
At 31st July 2006 5,757 18,360 909 92,075 1,225 118,326
Shares bought back and cancelled (147) - 147 (2,925) - (2,925)
Total return from ordinary activities - - - 27,588 476 28,064
Dividends appropriated in the period - - - - (979) (979)
_______ _______ ________ _______ _______ ________
At 31st January 2007 5,610 18,360 1,056 116,738 722 142,486
===== ===== ===== ===== ===== =====
Audited figures for the year ended 31st July 2007
Called up Capital
Share Share redemption Capital Revenue
Capital premium reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
At 31st July 2006 5,757 18,360 909 92,075 1,225 118,326
Shares bought back and cancelled (445) - 445 (9,817) - (9,817)
Total return from ordinary activities - - - 34,955 1,172 36,127
Dividends appropriated in the year - - - - (979) (979)
_______ _______ ________ _______ _______ ________
At 31st July 2007 5,312 18,360 1,354 117,213 1,418 143,657
===== ===== ===== ===== ===== =====
JPMorgan Smaller Companies Investment Trust plc
Unaudited figures for the six months ended 31st January 2008
Balance Sheet (Unaudited) (Unaudited) (Audited)
31st January 2008 31st January 2007 31st July 2007
£'000 £'000 £'000
Fixed assets
Investments at fair value through profit or loss 104,297 151,056 154,170
Investments in liquidity funds at fair value through 6,620 4,210 -
profit or loss
_______ _______ _______
Total portfolio 110,917 155,266 154,170
Current assets
Debtors 1,696 796 984
Cash at bank and in hand 225 23 -
_______ _______ _______
1,921 819 984
Creditors : amounts falling due within one year (11,636) (13,599) (11,497)
_______ _______ _______
Net current liabilities (9,715) (12,780) (10,513)
_______ _______ _______
Total assets less current liabilities 101,202 142,486 143,657
_______ _______ _______
Total net assets 101,202 142,486 143,657
===== ===== =====
Capital and reserves
Called up share capital 5,126 5,610 5,312
Share premium 18,360 18,360 18,360
Capital redemption reserve 1,540 1,056 1,354
Capital reserve 75,155 116,738 117,213
Revenue reserve 1,021 722 1,418
_______ _______ _______
Shareholders' funds 101,202 142,486 143,657
=====
===== =====
Net asset value per share (note 5) 493.5p 634.9p 676.1p
Share price 393.0p 550.8p 562.0p
Discount 20.4% 13.2% 16.9%
JPMorgan Smaller Companies Investment Trust plc
Unaudited figures for the six months ended 31st January 2008
Cash Flow Statement
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31st January 31st January 31st July
2008 2007 2007
£'000 £'000 £'000
Net cash inflow from operating activities (note 6) 541 322 932
Net cash outflow from returns on investments and
servicing of finance (415) (253) (586)
Net cash inflow /(outflow) from capital expenditure and
financial investment 5,005 (536) 7,501
Dividends paid (1,046) (979) (979)
Net cash (outflow)/inflow from financing (3,704) 675 (7,817)
_______ _______ ______
Increase / (decrease) in cash for the period 381 (771) (949)
===== ===== ====
Reconciliation of net cash flow to movement in net funds
Net cash movement 381 (771) (949)
Exchange movements 1 - (2)
_______ _______ ______
Movement in net funds/(debt) in the period 382 (771) (951)
Net (debt)/funds at the beginning of the period (157) 794 794
_______ _______ ______
Net funds/(debt) at the end of the period 225 23 (157)
===== ===== ====
Represented by:
Cash at bank and in hand/(bank overdraft) 225 23 (157)
===== ===== ====
Notes to the Accounts
1. Financial Statements
The information contained within the Financial Statements in this preliminary
announcement has not been audited or reviewed by the Company's auditors.
The figures and financial information for the year ended 31st July 2007 are
extracted from the latest published accounts of the Company and do not
constitute statutory accounts for that year. Those accounts have been delivered
to the Registrar of Companies and included the report of the auditors which was
unqualified and did not contain a statement under either section 237(2) or 237
(3) of the Companies Act 1985.
2. Accounting policies
The accounts have been prepared in accordance with United Kingdom Generally
Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended
Practice 'Financial Statements of Investment Trust Companies' dated 31st
December 2005.
All of the Company's operations are of a continuing nature.
The accounting policies applied to these interim accounts are consistent with
those applied in the accounts for the year ended 31st July 2007.
3. Dividends
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31st January 2008 31st January 2007 31st July 2007
£'000 £'000 £'000
Final dividend in respect of the year ended 31st July 2007 of 1,046 * 979 979
5.0p (2006: 4.25p)
====== ====== =====
* The Company declared a dividend of £1,062,000 but the dividend paid amounted
to £1,046,000 as a result of share buybacks.
No interim dividend has been declared in respect of the six months ended 31st
January 2008 (2007: nil).
4. Return/(loss) per share
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31st January 2008 31st January 2007 31st July 2007
£'000 £'000 £'000
Return per share is based on the following:
Revenue return 649 476 1,172
Capital (loss)/return (38,354) 27,588 34,955
_______ _______ ______
Total (loss)/return (37,705) 28,064 36,127
====== ====== =====
Weighted average number of shares in issue: 20,896,483 22,810,148 22,462,361
Revenue return per share 3.11p 2.09p 5.22p
Capital (loss)/return per share (183.54)p 120.94p 155.62p
_______ _______ ______
Total (loss)/return per share (180.43)p 123.03p 160.84p
====== ====== =====
5. Net asset value per share
Net asset value per share is calculated by dividing shareholders' funds by the
number of shares in issue at 31st January 2008 of 20,504,983 (31st January 2007:
22,441,186 and 31st July 2007: 21,248,983).
6. Reconciliation of operating revenue to net cash inflow
from operating activities (Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31st January 2008 31st January 2007 31st July 2007
£'000 £'000 £'000
Net (loss)/return before finance costs and taxation (37,348) 28,358 36,766
Capital loss/(return) before finance costs and taxation 38,176 (27,735) (35,274)
Scrip dividends received as income - (11) (11)
Decrease in accrued income 46 42 130
Increase in other debtors (3) (1) -
(Decrease)/increase in accrued expenses (22) (10) 19
Tax on unfranked investment income (1) - (1)
Expenses charged to capital (307) (321) (697)
_______ _______ ______
Net cash inflow from operating activities 541 322 932
===== ===== ====
7. Contingent asset
In 2004 the AIC lodged a joint appeal for the payment of investment trust
management fees to be exempt from VAT. In November 2007 HM Revenue and Customs
('HMRC') announced their withdrawal from the case. This means that henceforth,
VAT will no longer be charged on investment management fees and that the Company
is entitled to seek reimbursement of VAT paid in the past. The Manager ceased
charging VAT on management fees with effect from 1st October 2007 and has filed
protective claims for the period subsequent to 1st February 2001. As a result an
amount is potentially recoverable for this period. In addition, a decision in
the court of appeal has opened the possibility for further VAT recovery from
HMRC for the period from 1st January 1990 to 4th December 1996. The Company is
unlikely to recover any VAT paid in the intervening period from 5th December
1996 to 31st January 2001. In the absence of a definitive agreement with the
Manager or specific guidance from HMRC as to how the reclaims will be effected,
there is not any certainty as to the amount or timing of any recovery.
Accordingly, no asset has been recognised in the accounts as at 31st January
2008.
JPMORGAN ASSET MANAGEMENT (UK) LIMITED
25th March 2008
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