Half-Year Results 2021

RNS Number : 1561P

Mercantile Investment Trust(The)PLC

15 October 2021

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

The Mercantile Investment Trust plc

( the 'Company' )

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 31ST JULY 2021

Legal Entity Identifier: 549300BGX3CJIHLP2H42

Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

Performance

I am pleased to report that in the six months to 31st July 2021 the Company produced a total return on net assets of +25.3%. This compares with the total return of +18.1% from our benchmark index. This performance is excellent in both relative and absolute terms and represents a significant improvement from the six months to 31st July 2020 reported last year.

The return to shareholders was slightly lower at +21.3%, still beating the index handsomely, as the discount at which the Company's shares trade widened from 3.8% to 8.1% (calculated with debt at fair value) over the half year.

The Mercantile has cemented its position as the home of tomorrow's UK market leaders and its performance more than justifies that stance.

Returns and Dividends

We expect the revenue for the Company's financial year ending 31st January 2022 to be significantly higher than 2021, with investee companies beginning to increase and restore their dividends, including by way of special dividends, following the cuts and suspensions made as a result of COVID-19.

A first quarterly interim dividend of 1.35 pence was paid on 2nd August 2021 and a second quarterly interim dividend of 1.35 pence per share has been declared by the Board, payable on 1st November 2021 to shareholders on the register at close of business on 24th September 2021. This brings the total dividend for the year to date to 2.70 pence (2020: 2.70 pence). The Board intends to pay a third quarterly interim dividend of 1.35 pence in early February 2022.

As I have previously noted, one of the structural advantages of a closed end investment trust is our ability to use revenue reserves to smooth dividend payments in more difficult times. It is the Board's current intention at least to maintain last year's total dividend of 6.7 pence per share for this financial year. As was the case last year, it is likely that this will require the use of a small amount of our revenue reserves (which currently amount to 6.9 pence per share), but to a lesser extent than required for 2021.

Discount and Share Buy Backs

At the end of the last financial year, the Company's shares traded at a 3.8% discount. Over the subsequent six months the discount has widened, closing the half year period at 8.1%. The widening of discounts over the period has been a general theme and the Board has not utilised the Company's authority to buy back any shares in the six months to 31st July 2021. However, the Board continues to monitor closely the discount at which the Company's shares trade and will take action should the Company's discount trend diverge from that experienced by its peers.

Gearing and long term debt

The Board of Directors sets the overall strategic gearing policy and guidelines, reviewing these at each Board meeting.

The Board has been discussing for some time with the Investment Managers whether the Company should take advantage of current low rates of interest to rebalance the Company's borrowing profile. As a reminder the Company had in place a £3.85 million perpetual debenture and a £175 million debenture repayable on 25th February 2030, together with a short term £100 million revolving credit facility. Whilst the expiry of the existing long term debt is still some way off, the Directors were keen to take advantage of the current attractive rates to introduce long term debt with different durations. In addition, with the increase in the Company's asset base over recent years, the Board wanted to ensure that the Investment Managers have sufficient flexibility to be able to increase the gearing when they see appropriate investment opportunities.

We were therefore very pleased to secure long term debt financing in September 2021 through the issue of £150 million of Senior Secured Notes (the 'Notes').

The Notes are:

• £55 million maturing in 2041 with a fixed coupon of 1.98%;

• £50 million maturing in 2051 with a fixed coupon of 2.05%; and

• £45 million maturing in 2061 with a fixed coupon of 1.77%.

The net proceeds from the placing of the Notes have been used to repay the £80 million that had been drawn down under the revolving credit facility; the balance of the proceeds will be available to be invested as and when attractive opportunities arise. The revolving credit facility remains available to provide further investment flexibility if required.

This new debt also provides a good spread of maturities, enabling diversification on the liabilities side of the balance sheet.

There has been no change in the Investment Managers' permitted gearing range, as previously set by the Board, to limit gearing within the range of 10% net cash to 20% geared in normal market conditions. The gearing level as at 31st July 2021 was 10.0%.

Environmental, Social and Governance ('ESG') Policy

On pages 12 to 14 of the Company's Half Year Report & Financial Statements ('2021 Half Year Report') we have included a section on ESG. Our Investment Managers have always had a proactive stance in ensuring that the Company is managed with ESG considerations fully integrated into its investment processes. We are delighted that one of our named managers, Anthony Lynch, is taking on additional ESG responsibilities within JP Morgan Asset Management.

Stay Informed

The Company's Manager will shortly begin offering email updates on The Mercantile's progress. These targeted updates will deliver news and views, as well as performance updates. If you have not already signed up to receive these communications I strongly recommend that you do and you can opt in via www.Mercantile-Registration.co.uk or by scanning the QR code in the 2021 Half Year Report.

Outlook

We support the Investment Managers' optimism for continued economic expansion, albeit with the usual caveats and grounds for caution, such as further shocks from the course of the pandemic, inflationary concerns, supply side difficulties and the health of the UK public purse.

The Investment Management team has performed extremely well during what have been challenging markets over recent years, staying focused on identifying tomorrow's UK market leaders and thus likely out-performers. For the first time in years the UK market is not being left behind by international markets, but still remains relatively cheap, and we therefore have every confidence for the future. Guy, Anthony and the team have produced a stand-out performance and we commend them for the results they have achieved.

As the country emerges from the worst of the pandemic into what it is hoped are calmer waters ahead, I look forward to reporting a continuation of the Company's strong performance, supported by the additional investment capacity the Company has recently taken on which will ensure that your Company remains well funded to take advantage of the investment opportunities as they arise.

Angus Gordon Lennox

Chairman    

15th October 2021

INVESTMENT MANAGERS' REPORT

Setting the scene: buoyant financial markets

The recovery in financial markets continued at pace through the six months to 31st July 2021, with many markets reaching and then surpassing previous all-time highs. This included our target market of UK medium and smaller companies (the 'benchmark'), which generated a total return of +18.1%. This was comfortably ahead of the FTSE 100, which despite delivering a not insubstantial +11.8% return, still remains below pre-pandemic levels¹.

Despite a number of continued lockdowns across the globe, the economic recovery that we expected gained significant traction, with a range of lead indicators suggesting potential for a period of substantial growth. While demand has been robust, constraints on the supply-side combined with base effects have led to a surge in inflation, which has captured the market's attention and will no doubt remain a focus in the coming months.

Mercantile performance

For the six months to 31st July 2021, the Company delivered a total return on net assets of +25.3%, comfortably ahead of the benchmark total return of +18.1%. The outperformance was chiefly driven by strong stock selection, with a consistent level of gearing, of around 10%, providing further support. As outlined below, a number of our largest and long-held positions contributed to the strong performance, with further gains made from recent investments in a number of new issues. It has been extremely pleasing to see the pick-up in IPOs² with The Mercantile well placed to take advantage of selective opportunities when they arise.

Spotlight on stocks

We focus on identifying tomorrow's market leaders, targeting UK companies outside of the FTSE 100 Index that have significant opportunities for growth and which may be overlooked by other investors. We invest in the shares of companies that we believe possess the characteristics that may facilitate this growth. These attributes include nimble business models that allow the companies to more easily adapt to circumstances and exploit new opportunities, the ability to innovate or disrupt their industries, or the chance to occupy prime positions in rapidly growing markets.

As our focus turned towards the economic recovery, we have aimed to position the portfolio such that it will continue to benefit from many of the longstanding structural growth opportunities - such as our holdings in the technology sector - but also to gain or increase exposure to those businesses that should emerge stronger from the pandemic, with an improved competitive position and thus the opportunity to accelerate ahead of their peers. Examples in this latter category would include Hollywood Bowl, the ten-pin bowling operator looking to press on with an ambitious site roll-out plan over the coming years, and homewares retailer Dunelm, which has further extended its category leading position through the pandemic by delivering a compelling product offering through a much improved multi-channel experience.

Portfolio highlights in the first half of this year include our investment in Watches of Switzerland, the luxury watch retailer. The company has demonstrated impressive growth throughout the pandemic despite the collapse in tourism and has laid out ambitious plans for future expansion. Our investment in Future, the specialist content publisher, continued to deliver strong returns as growth has accelerated further through this year, in large part driven by the robust demand for digital advertising. On the negative side, our holding in Jet2, the packaged tour operator, continued to struggle under the weight of travel restrictions, but remains well positioned to grow its market share further once mobility does eventually improve.

Outlook for the coming months

The first half of this year was in all likelihood the period of most rapid and substantial economic growth that will be experienced in this cycle. This has led to a number of challenges on the supply-side as well as the aforementioned surge in inflation. These emerging headwinds will need to be monitored, as prolonged disruption could threaten demand and ultimately damage the recovery. In addition, financial markets may also need to contend with changes to monetary and fiscal policy, both of which have been supportive through the pandemic but are likely to be less accommodative in the future.

While we would therefore expect the pace of growth to moderate from this point, barring another substantial demand shock - which could arise as a result of new COVID variants or as a result of prolonged supply disruption or inflation - we would still expect continued economic expansion.

Despite a number of uncertainties that will forever linger on the horizon and which could always impact the short-term performance of the portfolio, we maintain a positive outlook as expressed by the portfolio's 10% gearing. Portfolio companies are for the most part either continuing to perform strongly or recovering well from the recession, and while valuations have evidently increased from the heavily depressed levels of last year, in aggregate they are not yet causing alarm. Furthermore, we continue to find a healthy number of attractive investment opportunities to consider for inclusion in the portfolio.

We focus on investing in structurally robust businesses that operate in growing end markets with the ability to invest capital at high returns. We are excited by the opportunities in our market and believe that many of our holdings will continue to thrive and have the potential to be tomorrow's market leaders.

¹ On a capital basis

² Initial Public Offerings

Guy Anderson

Anthony Lynch

Investment Managers    

15th October 2021

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 Financial Statements for the year ended 31st January 2021.

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 12 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 2021 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

15th October 2021

STATEMENT OF COMPREHENSIVE INCOME  

FOR THE SIX MONTHS ENDED 31ST JULY 2021

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	31st July 2021			31st July 2020			31st January 2021
	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	-	483,704	483,704	-	(487,657)	(487,657)	-	(163,277)	(163,277)
Net foreign currency gains	-	22	22	-	2	2	-	13	13
Income from investments	27,640	-	27,640	14,980	-	14,980	39,914	-	39,914
Interest receivable and similar
income	5	-	5	137	-	137	142	-	142
Gross return/(loss)	27,645	483,726	511,371	15,117	(487,655)	(472,538)	40,056	(163,264)	(123,208)
Management fee	(1,342)	(3,133)	(4,475)	(1,090)	(2,545)	(3,635)	(2,155)	(5,030)	(7,185)
Other administrative expenses	(795)	-	(795)	(764)	-	(764)	(1,402)	-	(1,402)
Net return/(loss) before finance
costs and taxation	25,508	480,593	506,101	13,263	(490,200)	(476,937)	36,499	(168,294)	(131,795)
Finance costs	(1,789)	(4,174)	(5,963)	(1,647)	(3,843)	(5,490)	(3,323)	(7,753)	(11,076)
Net return/(loss) before taxation	23,719	476,419	500,138	11,616	(494,043)	(482,427)	33,176	(176,047)	(142,871)
Taxation charge (note 3)	(875)	-	(875)	(549)	-	(549)	(711)	-	(711)
Net return/(loss) after taxation	22,844	476,419	499,263	11,067	(494,043)	(482,976)	32,465	(176,047)	(143,582)
Return/(loss) per share (note 4)	2.89p	60.19p	63.08p	1.40p	(62.42)p	(61.02)p	4.10p	(22.24)p	(18.14)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 return/(loss) per share represents the profit/(loss) per share for the year and also the total comprehensive income per share.

STATEMENT OF CHANGES IN EQUITY

For the six months ended 31st July 2021 (unaudited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves1	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2021	23,612	23,459	13,158	1,863,612	63,158	1,986,999
Net return	-	-	-	476,419	22,844	499,263
Dividends paid in the period (note 5)	-	-	-	-	(31,661)	(31,661)
At 31st July 2021	23,612	23,459	13,158	2,340,031	54,341	2,454,601
For the six months ended 31st July 2020 (unaudited)
	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2020	23,612	23,459	13,158	2,039,659	82,934	2,182,822
Net (loss)/return	-	-	-	(494,043)	11,067	(482,976)
Dividends paid in the period (note 5)	-	-	-	-	(30,869)	(30,869)
At 31st July 2020	23,612	23,459	13,158	1,545,616	63,132	1,668,977
Year ended 31st January 2021 (audited)
	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2020	23,612	23,459	13,158	2,039,659	82,934	2,182,822
Net (loss)/return	-	-	-	(176,047)	32,465	(143,582)
Dividends paid in the year (note 5)	-	-	-	-	(52,241)	(52,241)
At 31st January 2021	23,612	23,459	13,158	1,863,612	63,158	1,986,999

1  This reserve forms the distributable reserve of the Company and is used to fund distributions to investors via dividend payments.

 

STATEMENT OF FINANCIAL POSITION 

AT 31ST JULY 2021

	(Unaudited)	(Unaudited)	(Audited)
	31st July	31st July	31st January
	2021	2020	2021
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	2,700,853	1,839,263	2,228,555
Current assets
Debtors	6,802	5,672	14,127
Cash and short term deposits	330	303	1,346
Cash equivalents: liquidity fund	9,567	13,340	22,001
	16,699	19,315	37,474
Current liabilities
Creditors: amounts falling due within one year	(4,940)	(11,686)	(21,067)
Net current assets	11,759	7,629	16,407
Total assets less current liabilities	2,712,612	1,846,892	2,244,962
Creditors: amounts falling due after more than one year	(258,011)	(177,915)	(257,963)
Net assets	2,454,601	1,668,977	1,986,999
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	2,340,031	1,545,616	1,863,612
Revenue reserve	54,341	63,132	63,158
Total shareholders' funds	2,454,601	1,668,977	1,986,999
Net asset value per share (note 6)	310.1p	210.9p	251.0p

STATEMENT OF CASH FLOWS 

FOR THE SIX MONTHS ENDED 31ST JULY 2021

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2021	31st July 2020	31st January 2021
	£'000	£'000	£'000
Net cash outflow from operations before dividends and
interest	(5,343)	(4,445)	(8,574)
Dividends received	23,092	16,540	40,276
Interest received	5	137	141
Overseas tax recovered	430	-	-
Interest paid	(5,919)	(5,441)	(10,905)
Net cash inflow from operating activities	12,265	6,791	20,938
Purchases of investments	(359,696)	(263,463)	(567,302)
Sales of investments	365,609	228,838	469,612
Settlement of foreign currency contracts	6	(1)	(1)
Net cash inflow/(outflow) from investing activities	5,919	(34,626)	(97,691)
Dividends paid	(31,661)	(30,869)	(52,241)
Drawdown of loans	-	-	80,000
Net cash (outflow)/Inflow from financing activities	(31,661)	(30,869)	27,759
Decrease in cash and cash equivalents	(13,477)	(58,704)	(48,994)
Cash and cash equivalents at start of period/year	23,347	72,341	72,341
Unrealised gain on foreign currency cash and cash equivalents	27	6	-
Cash and cash equivalents at end of period/year	9,897	13,643	23,347
Decrease in cash and cash equivalents	(13,477)	(58,704)	(48,994)
Cash and cash equivalents consist of:
Cash and short term deposits	330	303	1,346
Cash held in JPMorgan Sterling Liquidity Fund	9,567	13,340	22,001
Total	9,897	13,643	23,347

NOTES TO THE FINANCIAL STATEMENTS 

FOR THE SIX MONTHS ENDED 31ST JULY 2021

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 2021 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 include 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 July 2021.

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 2021.

3.  Taxation

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. The tax charge comprises overseas withholding tax.

4.  Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2021	31st July 2020	31st January 2021
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	22,844	11,067	32,465
Capital return/(loss)	476,419	(494,043)	(176,047)
Total return/(loss)	499,263	(482,976)	(143,582)
Weighted average number of shares in issue	791,522,893	791,522,893	791,522,893
Revenue return per share	2.89p	1.40p	4.10p
Capital return/(loss) per share	60.19p	(62.42)p	(22.24)p
Total return/(loss) per share	63.08p	(61.02)p	(18.14)p

5.  Dividends paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2021	31st July 2020	31st January 2021
	£'000	£'000	£'000
2021 fourth quarterly dividend of 2.65p  (2020: 2.55p) paid to shareholders in April	20,975	20,184	20,183
2022 first quarterly dividend of 1.35p  (2020: 1.35p) paid to shareholders in August1	10,686	10,685	10,686
2021 second quarterly dividend of 1.35p paid  to shareholders in November	n/a	n/a	10,686
2021 third quarterly dividend of 1.35p paid to	n/a	n/a	10,686
shareholders in February
Total dividends paid in the period	31,661	30,869	52,241

¹The Company irrevocably transfers the funds to its Registrar in the month prior to which the dividend is paid to shareholders.

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

The first 2022 quarterly dividend of 1.35p (2021: 1.35p) per share, amounting to £10,686,000 (2021: £10,686,000) was paid on 2nd August 2021 in respect of the six months ended 31st July 2021.

A second quarterly dividend of 1.35p (2021: 1.35p) per share, amounting to £10,686,000 (2021: £10,686,000), has been declared payable in respect of the six months ended 31st July 2021.

6.  Net asset value per share

	(Unaudited) Six months ended  31st July 2021	(Unaudited) Six months ended 31st July 2020	(Audited) Year ended 31st January 2021
Net assets (£'000)	2,454,601	1,668,977	1,986,999
Number of 2.5p ordinary shares in issue	791,522,893	791,522,893	791,522,893
Net asset value per share	310.1p	210.9p	251.0p

For further information, please contact:

Alison Vincent

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 Report 2021 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 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

 

 

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