Half-year Report

RNS Number : 2225E

Mercantile Investment Trust(The)PLC

16 October 2018

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

The Mercantile Investment Trust plc

(the 'Company')

Half Year Report & FINANCIAL STATEMENTS

 for the six months ended 31st July 2018

Legal Entity Identifier: 549300BGX3CJIHLP2H42

Information disclosed in accordance with DTR 4.2.2

chairman's statement

Performance

The Company has been successful in navigating choppy and difficult markets and has achieved a positive return on net assets for the six months to 31st July 2018 of +3.7%. Given the nature of markets during the period this is a creditable performance by our Manager, even if very marginally behind the Company's benchmark index. This half year progress follows on from positive returns on net assets in each of the last six full years.

Returns and Dividends

Added to that, the revenue account is in a healthy state. The revenue return in the first half of the Company's current financial year increased to 3.95 pence per share, up from 3.26 pence per share for the corresponding period last year (restated to adjust for the ten for one share split undertaken in May this year). That's a 21% increase.

As I explained in my annual statement, the Board has decided to spread out the payment of the total annual dividend more evenly in this current financial year. A first quarterly interim dividend of 1.25 pence was paid on 1st August 2018. A second quarterly interim dividend of 1.25 pence per share has been declared by the Board, payable on 1st November 2018 to shareholders on the register at close of business on 28th September 2018. This brings the total dividend for the year to date to 2.50 pence (2017: 2.10 pence, restated). The Board intends to pay a third quarterly interim dividend of 1.25 pence in early February 2019.

The level of the fourth quarterly interim dividend will depend on income received by the Company for the full financial year. However, in line with the Company's investment policy, the Board recognises shareholders' desire for a growing dividend whilst retaining a healthy revenue reserve.

Discount and Share Buy Backs

The Board has continued to use its share repurchase authority to enhance the net asset value for ongoing shareholders and to attempt to address any imbalance between the supply of and demand for the Company's shares in the market. In the six months to 31st July 2018, a total of 6,473,171 shares were repurchased at a cost of £42.6 million. All of those shares were repurchased into Treasury and the total number of shares held in Treasury at the half year end was 145,381,081. Those shares are available for reissue by the Board, but only at a premium to net asset value.

Management Fee Change

The reduction in the management fee, previously reported, has continued to bear fruit and the Company's ongoing charges ratio fell to 0.44% for the half year, down from 0.45% at the last year end. This level is significantly lower than the average for our investment trust peer group, or indeed similar open-ended funds and represents outstanding value for an actively managed portfolio with such a strong long term performance record.

The Board

Sandy Nairn retired from the Board at the conclusion of the Annual General Meeting in May and the Board and shareholders thanked him then for his contribution over the past 15 years.

On 1st July 2018, Heather Hopkins and Graham Kitchen were appointed Directors. Heather has over two decades of experience in data analytics, research, financial services and international business, with expertise in retail distribution. She is Founder and Managing Director of NextWealth Limited which provides research and consultancy to platforms, asset managers and financial advice firms on the future of retail investment distribution. She was previously Head of Platforum, a research and events business.

Graham has over 20 years experience managing UK equity funds, including open ended investment companies, investment trusts and pension funds. He was Global Head of Equities at Janus Henderson Investors from 2011 to 2018, having previously been Head of UK Equities at Threadneedle Investments and held various positions at Invesco Asset Management.

I believe we will be well served by Heather and Graham who each bring a wealth of relevant, complementary and different experience to the Board and I am sure they will add great value to the Company in the years ahead.

Ian Russell has decided to step down from the Board with effect from 31st December 2018. Ian has been a Director since January 2007 and chaired the Audit Committee between 2007 and 2015. He was due to retire at the conclusion of the next Annual General Meeting in May 2019, but has decided to step down sooner than originally planned owing to his other business commitments. On behalf of the Board and shareholders I would like to thank him for his considerable contribution to the Company over the past 12 years.

Outlook

Anyone who follows markets or reads the business or even front pages of the newspapers will recognise that we live in uncertain times. Reflecting this, gearing has been steadily reduced over the summer. Brexit, the threat of trade wars, turmoil on the high street, politician's murmurings, geo-political upsets and perhaps other things as yet unrecognised all have the potential to unseat markets for a short while. Despite these, earnings growth remains robust, and although markets worry, our fund managers are certainly earning their fee and, as I said in my opening paragraph have done a creditable job thus far.

As it has done since 1884, The Mercantile will stick to the task ahead and continue to aim to make significant returns for shareholders over the long term, as it has to date. The mid and small size company sector has proven to be one of the top performing sectors over the last 25 years and I believe that it will continue to drive long term performance for our shareholders. By adopting a bottom up approach to finding and investing in well-financed companies with strong business models, I am convinced the underlying strength of those companies will eventually shine through, whatever markets throw at us in the short term.

Your Board has recently met to consider future strategy for investment, the balance sheet, and how we can better spread the good news of The Mercantile amongst a wider audience in this digital and fast changing world. As has been borne out, the area of the market we invest in has consistently produced superior returns, we will use the balance sheet judiciously to enhance those returns, and I am excited about the opportunities that technology offers to ensure that as many people, and potential shareholders, as possible know about the success of The Mercantile. I look forward to keeping you in touch with developments as they emerge and the continued success of your Company.

Angus Gordon Lennox

Chairman                                                                                                                                

16th October 2018

Investment Managers' Report

Market background

During the first half of the financial year UK medium and smaller companies (the 'Benchmark' ¹) generated a total return of 4%.

While the market generated a positive return during this period it was far from immune to the plethora of noise emanating from politicians across the globe, with the sell-off through February and March a result of concerns over possible trade wars and the implications of these for future economic growth. In addition to this the UK must contend with the journey towards Brexit, which is creating substantial uncertainty for financial markets.

Against this somewhat fractious environment, the performance of individual companies remains divided between winners and losers, with those companies whose financial results exceed market expectations being rewarded by share price appreciation and those that stumble or outright miss expectations being viciously punished by the reverse.

Portfolio performance and positioning

For the first half of the year the Company achieved a return on net assets of +3.7%.

From a stock selection perspective it was a frustrating six months, with the positive contributions from some of our most successful investments - such as our longstanding holdings in Fever-Tree, the premium mixer company and Softcat, the fast growing technology services distributor - being broadly offset elsewhere. At a sector level, financial services was the greatest detractor from relative performance, driven by weakness from a number of overweight holdings with greater sensitivity to market levels and volatility.

Our relative performance is also impacted by the behaviour of stocks in the Benchmark that are not in our portfolio and not holding Ocado, on valuation grounds, was the greatest detractor as its shares experienced a meteoric rise after announcing several major contract wins.

Adjustments to the portfolio have been relatively limited. One feature of the market we invest in is the presence of takeover activity. The businesses in which we invest often prove desirable to corporate acquirers and this period was no exception, with our holdings in Fenner, Ladbrokes Coral, UBM and ZPG acquired at substantial premia to the prevailing market prices.

The portfolio continues to hold many industrial companies, such as Spirax-Sarco Engineering and Bodycote which are benefiting from a combination of internal management actions to increase their addressable markets and profitability as well as generally improved industrial production globally. In addition the portfolio remains invested in a broad array of other businesses, such as Beazley, the non-life insurance specialist and B&M, the discount retailer, where we expect continued structural growth in their specific markets.

Outlook

Having accelerated from a low base two years ago, global economic growth has remained reasonable and provided some, but not all, companies with a decent platform from which to drive earnings growth. While it has not been as impressive, the domestic economy has also continued to grow. It has been noticeable and a clear positive that after several years of experiencing gradual declines in market estimates of future earnings growth during the year, so far this year companies are in aggregate meeting expectations. Strong growth in the US has caused the Federal Reserve to increase its funds rates from 1.5% to 2.25%, which has inevitably reduced the risk appetite of equity investors.

Furthermore, the geopolitical landscape remains fraught with uncertainty, the most pressing of which remains the risk of trade wars. The lack of clarity about how businesses may be impacted by Brexit presents a further risk, albeit with the potential for a positive surprise should a satisfactory outcome be achieved.

While continued earnings growth should deliver positive returns for markets, these geopolitical factors may weigh for some time and could present far-reaching challenges in the future. With this in mind and having started the year 3% geared, this was reduced such that the portfolio was fully invested but essentially ungeared at period end. This allows the Company to benefit from increases in the stock market while providing plenty of capacity to invest further should the opportunity arise.

We maintain our view that the favourable dynamics of medium- and small-sized companies will continue to drive superior returns over the long-term and remain passionate about identifying and investing in those companies that have strong business models, are suitably financed and are well placed to become tomorrow's market leaders.

Guy Anderson

Martin Hudson

Anthony Lynch

Investment Managers                                                                                                           

16th October 2018

¹ The FTSE All-Share Index excluding constituents of the FTSE 100 and investment trusts.

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; accounting, legal and regulatory; corporate governance and shareholder relations; operational and cybercrime; and financial. Information on each of these areas is given in the Directors' Report within the Annual Report and Accounts for the year ended 31st January 2018.

Related Parties Transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operation existence for at least twelve months from the date of the approval of this half yearly financial report. For these reasons, they consider there is sufficient 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 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 July 2018 as required by the UK Listing Authority Disclosure Guidance and Transparency Rules ('DTRs') 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 DTRs.

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;

•          prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and

•          notify the Company's shareholders in writing about the use, if any, of disclosure exemptions in FRS102 in the preparation of the financial statements

and the Directors confirm that they have done so.

For and on behalf of the Board.

Angus Gordon Lennox

Chairman

16th October 2018

Statement of Comprehensive Income
for the six months ended 31st July 2018

	(Unaudited)			(unaudited)			(audited)
	Six months ended			Six months ended			Year ended
	31st July 2018			31st July 2017			31st January 2018
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value through profit
or loss	-	40,233	40,233	-	242,731	242,731	-	374,818	374,818
Net foreign currency gains	-	1	1	-	16	16	-	15	15
Income from investments	34,901	-	34,901	30,823	-	30,823	57,652	-	57,652
Interest receivable and similar income	377	-	377	411	-	411	640	-	640
Gross return	35,278	40,234	75,512	31,234	242,747	273,981	58,292	374,833	433,125
Management fee	(1,138)	(2,655)	(3,793)	(1,067)	(2,491)	(3,558)	(2,264)	(5,282)	(7,546)
Other administrative expenses	(604)	-	(604)	(575)	-	(575)	(1,151)	-	(1,151)
Net return on ordinary activities before finance
costs and taxation	33,536	37,579	71,115	29,592	240,256	269,848	54,877	369,551	424,428
Finance costs	(1,647)	(3,843)	(5,490)	(1,653)	(3,857)	(5,510)	(3,293)	(7,685)	(10,978)
Net return on ordinary activities before taxation	31,889	33,736	65,625	27,939	236,399	264,338	51,584	361,866	413,450
Taxation	(31)	-	(31)	(222)	-	(222)	(292)	-	(292)
Net return on ordinary activities after taxation	31,858	33,736	65,594	27,717	236,399	264,116	51,292	361,866	413,158
Return per share (note 3)1	3.95p	4.18p	8.13p	3.26p	27.81p	31.07p	6.12p	43.18p	49.30p

¹ Comparative figures for the period ended 31st July 2017 & year ended 31st January 2018 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each in May 2018.

Statement of Changes in Equity
for the six months ended 31st July 2018 (unaudited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	Reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2018	23,612	23,459	13,158	1,897,243	62,121	2,019,593
Repurchase of shares into Treasury	-	-	-	(42,590)	-	(42,590)
Net return on ordinary activities	-	-	-	33,736	31,858	65,594
Dividends paid in the period (note 4)	-	-	-	-	(27,364)	(27,364)
At 31st July 2018	23,612	23,459	13,158	1,888,389	66,615	2,015,233

For the six months ended 31st July 2017 (unaudited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	Reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2017	23,612	23,459	13,158	1,633,936	49,978	1,744,143
Repurchase of shares into Treasury	-	-	-	(72,573)	-	(72,573)
Net return on ordinary activities	-	-	-	236,399	27,717	264,116
Dividends paid in the period (note 4)	-	-	-	-	(21,798)	(21,798)
At 31st July 2017	23,612	23,459	13,158	1,797,762	55,897	1,913,888

Year ended 31st January 2018 (audited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	Reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2017	23,612	23,459	13,158	1,633,936	49,978	1,744,143
Repurchase of shares into Treasury	-	-	-	(98,559)	-	(98,559)
Net return on ordinary activities	-	-	-	361,866	51,292	413,158
Dividends paid in the year (note 4)	-	-	-	-	(39,149)	(39,149)
At 31st January 2018	23,612	23,459	13,158	1,897,243	62,121	2,019,593

1This 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 July 2018

	(Unaudited)	(Unaudited)	(Audited)
	31st July	31st July	31st January
	2018	2017	2018
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	2,022,857	1,970,430	2,090,612
Current assets
Debtors	23,223	2,315	13,836
Cash and short term deposits	60,572	25,709	6,636
Cash equivalents: liquidity fund	99,974	99,895	99,895
	183,769	127,919	120,367
Current liabilities
Creditors: amounts falling due within one year	(13,672)	(6,837)	(13,713)
Net current assets	170,097	121,082	106,654
Total assets less current liabilities	2,192,954	2,091,512	2,197,266
Creditors: amounts falling due after more than one year	(177,721)	(177,624)	(177,673)
Net assets	2,015,233	1,913,888	2,019,593
Capital and reserves
Called up share capital	23,612	23,612	23,612
Share premium	23,459	23,459	23,459
Capital redemption reserve	13,158	13,158	13,158
Capital reserves	1,888,389	1,797,762	1,897,243
Revenue reserve	66,615	55,897	62,121
Total shareholders' funds	2,015,233	1,913,888	2,019,593
Net asset value per share (note 5)1	252.2p	230.2p	246.6p

¹ Comparative figures for the period ended 31st July 2017 and year ended 31st January 2018 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each in May 2018.

Statement of Cash Flows for the six months ended 31st July 2018

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2018	31st July 2017	31st January 2018
	£'000	£'000	£'000
Net cash outflow from operations before dividends and interest	(4,247)	(3,882)	(8,384)
Dividends received	32,980	29,802	56,647
Interest received	340	174	404
Overseas tax recovered/(paid)	39	-	(1)
Interest paid	(5,442)	(5,462)	(10,881)
Net cash inflow from operating activities	23,670	20,632	37,785
Purchases of investments	(339,185)	(372,661)	(699,483)
Sales of investments	440,089	439,596	773,842
Settlement of foreign currency contracts	-	2	(2)
Net cash inflow from investing activities	100,904	66,937	74,357
Dividends paid	(27,364)	(21,798)	(39,149)
Repurchase of shares into Treasury	(43,195)	(78,237)	(104,520)
Net cash outflow from financing activities	(70,559)	(100,035)	(143,669)
Increase/(decrease) in cash and cash equivalents	54,015	(12,466)	(31,527)
Cash and cash equivalents at start of period	106,531	138,058	138,058
Exchange movements	-	12	-
Cash and cash equivalents at end of period	160,546	125,604	106,531
Increase/(decrease) in cash and cash equivalents	54,015	(12,466)	(31,527)
Cash and cash equivalents consist of:
Cash and short term deposits	60,572	25,709	6,636
Cash held in JPMorgan Sterling Liquidity Fund	99,974	99,895	99,895
Total	160,546	125,604	106,531

Notes to the Financial Statements
for the six months ended 31st July 2018

1.          Financial Statements

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

The figures and financial information for the year ended 31st January 2018 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies 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 November 2014 and updated in February 2018.

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 July 2018.

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

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st January 2018.

3.         Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2018	31st July 2017	31st January 2018
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	31,858	27,717	51,292
Capital return	33,736	236,399	361,866
Total return	65,594	264,116	413,158
Weighted average number of shares in issue 1	807,080,131	850,066,810	838,079,040
Revenue return per share	3.95p	3.26p	6.12p
Capital return per share	4.18p	27.81p	43.18p
Total return per share	8.13p	31.07p	49.30p

¹ Comparative figures for the period ended 31st July 2017 and year ended 31st January 2018 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each in May 2018.

4.         Dividends paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2018	31st July 2017	31st January 2018
	£'000	£'000	£'000
Unclaimed dividends refunded to the Company1	(11)	(19)	(19)
2018 fourth quarterly dividend of 2.15p2 (2017: 1.525p2) paid to
shareholders in May	17,334	12,987	12,987
2019 first quarterly dividend of 1.25p2 (2018: 1.05p2) paid to
shareholders in August	10,041	8,830	8,830
2018 second quarterly dividend of 1.05p2 paid to
shareholders in November	n/a	n/a	8,719
2018 third quarterly dividend of 1.05p2 paid to shareholders in February	n/a	n/a	8,632
Total dividends paid in the period	27,364	21,798	39,149

¹ Represents dividends which remain unclaimed after a period of six years and thereby become the property of the Company.

² The dividend rate has been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each in May 2018.

All dividends paid in the period/year have been funded from the income for the period.

A second quarterly dividend of 1.25p (2018: 1.05p²) per share, amounting to £9,989,000 (2018: £8,719,000), has been declared payable in respect of the six months ended 31st July 2018.

5.         Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2018	31st July 2017	31st January 2018
Net assets (£'000)	2,015,233	1,913,888	2,019,593
Number of shares in issue1	799,111,099	831,270,740	819,000,390
Net asset value per share	252.2p	230.2p	246.6p

1Comparative figures for the period ended 31st July 2017 and year ended 31st January 2018 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each in May 2018.

For further information, please contact:

Jonathan Latter

For and on behalf of JPMorgan Funds Limited, Company Secretary 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.hemscott.com/nsm.do

The half year will also shortly be available on the Company's website at www.mercantileit.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 LLFVFIALRLIT