Half Yearly Report

RNS Number : 1388T

Mercantile Investment Trust(The)PLC

22 September 2010

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

THE MERCANTILE INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED

31ST JULY 2010

Chairman's Statement

Performance and Market Review

The Company's net asset value total return in the first six months to 31st July 2010 was +10.4% which was 2.5% ahead of the return of +7.9% from our benchmark index, the FTSE All-Share, excluding FTSE 100 constituents and investment trusts.

This represents steady progress, building on the strong recovery in mid and small cap stocks of the previous year.  The Managers continue to be proactive in managing the portfolio, taking advantage of market fluctuations and corporate activity. 

Revenue

The income received from investments in the first half is marginally above that of the half year ended 31st July 2009, showing a small recovery in dividend payments as company profitability and confidence began to return.

Interest received on bank deposits was, once again, significantly lower, due to interest rates remaining depressed.

Dividends

A second interim dividend of 6.0 pence per share has been declared by the Board, payable on 1st November 2010 to shareholders on the register at close of business on 1st October 2010. Together with the first interim dividend of 6.0 pence paid on 30th July 2010 this brings the total dividend for the year to date to 12.0 pence (2009: 12.0 pence) and the Board expects that there will be a third dividend of 6.0 pence paid in early February 2011. The Board's decision as to the quantum of the fourth interim dividend will depend on the progress of the portfolio with regard to revenue. The Board remains mindful of the substantial revenue reserve position that your Company enjoys.

Share Repurchases

The Board has maintained its active approach towards share repurchases in order to enhance the asset value and minimise the absolute level and volatility of the discount on the Company's shares. In the six months to 31st July 2010, 2,892,249 shares were repurchased for cancellation at a total cost of £27.1 million. Those purchases added approximately 4.2 pence to the net asset value per share. The discount, with debt at fair value, has ranged between 10.6% and 14.8% in the period from 1st February 2010 to 20th September 2010, with the average discount during the period of 13.2%.

Accounting Estimates

A greater proportion of historic returns has derived from capital than was hitherto expected and the allocation of expenses is being adjusted to reflect this. With effect from 1st February 2010 the Company will allocate 70% of management fees and financial costs to capital and the remaining 30% to revenue, a change from the former 50/50 basis of allocation. More details are given in note 2(b) to the accounts.

Outlook

The points raised in the last paragraph of the Investment Managers' Report are endorsed by the Board.   In summary, although we continue to foresee challenging times ahead, a return to a stock picker's market should bode well for the Company.

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 six broad categories: investment and strategy; accounting, legal and regulatory; corporate governance and shareholder relations; operational and financial. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st January 2010.

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.

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 the Accounting Standards Board's statement 'Half Year Financial Reports'; and

(ii)        the interim management report includes. a fair review of the information required by 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure and Transparency Rules.

For and on behalf of the Board

Hamish Leslie Melville

Chairman                                                                                                                     22nd September 2010

Investment Managers' Report

The Company's net asset value total return in the first six months to 31st July 2010 was +10.4% which was +2.5% ahead of the return of +7.9% from our benchmark index, the FTSE All Share excluding FTSE 100 constituents and Investment Trusts.

After a strong recovery in the stock market last year, mid and small cap stocks continued to rise during the first part of the year and we took the opportunity at the beginning of the year to reduce portfolio gearing from 111.9% where it was at our year end to 98.7% by our half year end. This reflected our belief that the economic data, which had been coming in ahead of expectations, would begin to stall and that economic recovery would be slow and painful. This feeling was crystallised in the stock market by the austerity budget of the incoming coalition Government which spelt out the need to reduce both Government spending and debt and also by the Governor of the Bank of England pointing out that growth would have to come from exports not public sector or consumer spending. That said, quoted mid and small cap companies are now generally on a firmer footing than they were a year ago, having in many cases taken vigorous cost cutting actions and also refinanced balance sheets.

Nevertheless, reflecting our more cautious outlook we increased the portfolio holdings in utilities and health care and also increased our weighting in oil and gas exploration and production companies which are trading at discounts to their asset values. Our largest underweight position remains in industrials where we are underweight in support services and aerospace and defence, which will be hit by government spending cuts, and in engineering stocks which are trading at all time relative highs reflecting their overseas and export prospects.

At the Company's AGM in May, we took Corporate Activity as our market theme explaining that we expected to see an increase in takeover activity in the mid and small cap market as companies or organisations which had seen their own businesses begin to stabilise began to look to buy either growth or assets by acquisition. This has contributed strongly to the outperformance of the portfolio during the half year as we have received takeover bids for the following stocks which were held in the portfolio: Chloride, Dana Petroleum, Tomkins, BSS, Rensburg Sheppards, Arriva, Dimension Data and Sovereign Reversions.

In terms of the outlook we are entering a phase where the share prices of companies which fail to meet the stock markets growth expectations will be hit hard and where remaining balance sheet problems will begin to emerge perhaps putting the ongoing future of some companies into question. That said, the share prices of companies which are trading at below net asset value or which are continuing to generate growth will carry on performing well. In other words we are now starting to return to a stock picker's market from the macro driven markets of the last three years.

Martin Hudson

Jane Lennard                                                                                                               22nd September 2010

Income Statement

for the six months ended 31st July 2010

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	31st July 2010			31st July 2009			31st January 2010
	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	-	80,313	80,313	-	253,126	253,126	-	362,020	362,020
Net foreign currency gains/
(losses)	-	18	18	-	(113)	(113)	-	(78)	(78)
Income from investments	16,628	-	16,628	14,828	-	14,828	27,899	-	27,899
Other interest receivable and
similar income	333	-	333	3,228	-	3,228	4,349	-	4,349
Gross return	16,961	80,331	97,292	18,056	253,013	271,069	32,248	361,942	394,190
Management fee	(676)	(1,578)	(2,254)	(859)	(859)	(1,718)	(1,971)	(1,971)	(3,942)
Other administrative expenses	(370)	-	(370)	(434)	-	(434)	(1,022)	-	(1,022)
Net return on ordinary activities
before finance costs
and taxation	15,915	78,753	94,668	16,763	252,154	268,917	29,255	359,971	389,226
Finance costs	(1,647)	(3,842)	(5,489)	(2,745)	(2,745)	(5,490)	(5,489)	(5,489)	(10,978)
Net return on ordinary activities
before taxation	14,268	74,911	89,179	14,018	249,409	263,427	23,766	354,482	378,248
Taxation (note 4)	(15)	-	(15)	(48)	-	(48)	(63)	-	(63)
Net return on ordinary activities
after taxation	14,253	74,911	89,164	13,970	249,409	263,379	23,703	354,482	378,185
Return per share (note 5)	14.27p	74.99p	89.26p	13.65p	243.75p	257.40p	23.18p	346.63p	369.81p

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 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.

Reconciliation of Movements in Shareholders' Funds

for the six months ended 31st July 2010 (unaudited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2010	25,487	23,459	11,283	928,785	46,362	1,035,376
Repurchase and cancellation of
the Company's own shares	(723)	-	723	(27,072)	-	(27,072)
Net return on ordinary activities	-	-	-	74,911	14,253	89,164
Dividends appropriated in the period	-	-	-	-	(23,906)	(23,906)
At 31st July 2010	24,764	23,459	12,006	976,624	36,709	1,073,562

Six months ended 31st July 2009 (unaudited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2009	25,580	23,459	11,190	577,602	59,467	697,298
Repurchase and cancellation of
the Company's own shares	-	-	-	(1)	-	(1)
Net return on ordinary activities	-	-	-	249,409	13,970	263,379
Dividends appropriated in the period	-	-	-	-	(24,557)	(24,557)
At 31st July 2009	25,580	23,459	11,190	827,010	48,880	936,119

Year ended 31st January 2010 (audited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2009	25,580	23,459	11,190	577,602	59,467	697,298
Repurchase and cancellation of
the Company's own shares	(93)	-	93	(3,299)	-	(3,299)
Net return on ordinary activities	-	-	-	354,482	23,703	378,185
Dividends appropriated in the year	-	-	-	-	(36,808)	(36,808)
At 31st January 2010	25,487	23,459	11,283	982,785	46,362	1,035,376

Balance Sheet

at 31st July 2010

	31st July	31st July	31st January
	2010	2009	2010
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit
or loss	1,059,103	1,047,151	1,158,236
Current assets
Debtors	20,553	10,445	19,647
Cash and short term deposits	183,193	72,114	40,225
	203,746	82,559	59,872
Creditors: amounts falling due within one year	(12,338)	(16,737)	(5,831)
Net current assets	191,408	65,822	54,041
Total assets less current liabilities	1,250,511	1,112,973	1,212,277
Creditors: amounts falling due after more than
one year	(176,949)	(176,854)	(176,901)
Total net assets	1,073,562	936,119	1,035,376
Capital and reserves
Called up share capital	24,764	25,580	25,487
Share premium	23,459	23,459	23,459
Capital redemption reserve	12,006	11,190	11,283
Capital reserves	976,624	827,010	928,785
Revenue reserve	36,709	48,880	46,362
Shareholders' funds	1,073,562	936,119	1,035,376
Net asset value per share (note 6)	1,083.8p	914.9p	1,015.6p

Cash Flow Statement

for the six months ended 31st July 2010

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July	31st July	31st January
	2010	2009	2010
	£'000	£'000	£'000
Net cash inflow from operating
activities (note 7)	11,870	13,054	25,045
Net cash outflow from servicing of finance	(5,441)	(5,441)	(10,882)
Net cash inflow/(outflow) from capital
expenditure and financial investment	188,435	(82,220)	(106,082)
Dividends paid	(23,894)	(24,557)	(36,820)
Net cash outflow from financing	(28,020)	(1)	(2,350)
Increase/(decrease) in cash in the period	142,950	(99,165)	(131,089)
Reconciliation of net cash flow to movement in net funds/debt
Increase/(decrease) in cash in the period	142,950	(99,165)	(131,089)
Exchange movements	18	(113)	(78)
Other movements	(48)	(49)	(96)
Changes in net funds/debt arising from cash flows	142,920	(99,327)	(131,263)
Net debt at the beginning of the period	(136,676)	(5,413)	(5,413)
Net funds/(debt) at the end of the period	6,244	(104,740)	(136,676)
Represented by:
Cash and short term deposits	183,193	72,114	40,225
Debt due after more than five years	(176,949)	(176,854)	(176,901)
Net funds/(debt)	6,244	(104,740)	(136,676)

Notes to the Accounts

for the six months ended 31st July 2010

1.          Financial Statements

            The information contained within the accounts 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 2010 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 498(2) or 498(3) of the Companies Act 2006.

2.         Accounting policies

            (a)       Basis of accounting

                        The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommend Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in January 2009.

                        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 January 2010.

            (b)       Accounting estimates

                        It remains the Board's determination that the capital return should reflect the indirect costs of earning capital returns. With effect from 1st February 2010 the Company allocates 70% of management fees and finance costs to capital and the remaining 30% to revenue. It had previously allocated 50% of management fees and finance costs to capital and 50% to revenue. The Board monitors the assumptions that underpin the basis of allocation. It concluded from its most recent review that a greater proportion of the Company's long term investment returns will come from capital than was previously expected. The effect of this change is to increase the net revenue return after taxation by £1.5 million and to reduce the net capital return by the same amount. Total net return after taxation is unaffected by the change. The comparative figures have not been restated.

3.         Dividends

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2010	31st July 2009	31st January 2010
	£'000	£'000	£'000
Unclaimed dividends refunded to the Company	-	-	(12)
Fourth quarterly dividend of 18.0p (2009: 18.0p)
paid to shareholders in May	17,961	18,418	18,418
First quarterly dividend of 6.0p (2009: 6.0p) paid
to shareholders in August	5,945	6,139	6,139
Second quarterly dividend of 6.0p paid to
shareholders in November	n/a	n/a	6,139
Third quarterly dividend of 6.0p paid to
shareholders in February	n/a	n/a	6,124
	23,906	24,557	36,808

            A second quarterly dividend of 6.0p (2009: 6.0p) per share, amounting to £5,943,000 (2009: £6,139,000), has been declared payable in respect of the six months ended 31st July 2010.

4.         Taxation

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

5.         Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2010	31st July 2009	31st January 2010
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	14,253	13,970	23,703
Capital return	74,911	249,409	354,482
Total return	89,164	263,379	378,185
Weighted average number of shares in issue	99,892,469	102,321,968	102,264,780
Revenue return per share	14.27p	13.65p	23.18p
Capital return per share	74.99p	243.75p	346.63p
Total return per share	89.26p	257.40p	369.81p

6.         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 July 2010 of 99,055,719 (31st July 2009: 102,321,968; and 31st January 2010: 101,947,968).

7.         Reconciliation of net return on ordinary activities before finance costs and taxation to net cash inflow from operating activities

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2010	31st July 2009	31st January 2010
	£'000	£'000	£'000
Total return on ordinary activities before finance
costs and taxation	94,668	268,917	389,226
Less capital return on ordinary activities
before finance costs and taxation	(78,753)	(252,154)	(359,971)
Scrip dividends included in income	(442)	-	-
Increase in net debtors and accrued income	(1,941)	(1,303)	(611)
Decrease in accrued expenses	(53)	(1,499)	(1,529)
Expenses charged to capital	(1,578)	(859)	(1,971)
Overseas withholding tax	(31)	(48)	(62)
Distribution on dissolution of subsidiary	-	-	(37)
Net cash inflow from operating activities	11,870	13,054	25,045

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

For further information, please contact:

Juliet Dearlove

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary

020 7742 6000

Please note that up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can be found at www.mercantileit.co.uk

 

END

 

 

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