Half Yearly Report

RNS Number : 9166S

Mercantile Investment Trust(The)PLC

29 September 2014

 



London Stock Exchange Announcement

THE MERCANTILE Investment Trust PLC

Unaudited Half Year Results
for the six months ended 31^ST JULY 2014

Chairman's Statement

Performance and Market Review

The Company's net asset value total return in the six months to 31st July 2014 was -0.4%, marginally ahead of the return of -0.7% from our benchmark index, the FTSE All-Share, excluding FTSE 100 constituents and investment trusts. The share price return was -4.7% due to an increase in the discount to NAV which occurred during the period in common with a number of other investment trusts.

Returns and Dividends

The income received from investments in the first half of the current year is lower than that for the half year ended 31st July 2013. The primary reason for the reduction in income is the lower level of gearing employed over the period. This averaged 2.5% over the six month period, compared to an average of 8.1% over the same period last year, reflecting the Investment Managers' caution in the light of material UK and global political event risk and current valuation levels, as explained further in their report below.

A second interim dividend of 8.0 pence per share has been declared by the Board, payable on 31st October 2014 to shareholders on the register at close of business on 3rd October 2014. Together with the first interim dividend of 8.0 pence paid on 1st August 2014 this brings the total dividend for the year to date to 16.0 pence (2013: 16.0 pence). The Board anticipates that there will be a third interim dividend of 8.0 pence to be paid in early February 2015.

The level of the fourth interim dividend will depend on income received by the Company for the balance of the current financial year and a prudent view to be adopted by the Board, taking account of the level of the Company's Revenue Reserve.

Share Buy Backs

The Board has continued to consider share repurchases in order to enhance the asset value. However, in the six months to 31st July 2014, in accordance with advice from the Company's brokers, no shares were repurchased for cancellation. The discount, cum income with debt at fair value, has ranged between 7.8% and 13.9% in the period from 1st February 2014 to 10th September 2014, with the average discount during the period of 10.8%.

Alternative Investment Fund Managers Directive ('AIFMD' or 'Directive')

JPMorgan Funds Limited ('JPMF'), which is authorised by the Financial Conduct Authority as an Alternative Investment Fund Manager, was appointed as Manager and Company Secretary to the Company, effective 1st July 2014. This change of entity does not in any way affect the actual management of the portfolio which will continue to be managed under a delegated authority by JPMorgan Asset Management (UK) Limited. The Company Secretarial support will continue to be conducted as previously. No extra fees are being charged by any JPMorgan entity as a result of the Company's AIFMD obligations.

Although JPMorgan Chase Bank, N.A. will continue as the Company's custodian, the new requirements of a depositary function are now being undertaken by Bank of New York Mellon.

Outlook

The UK has continued to recover strongly from the downturn and is now expected to be the fastest growing of the G7 economies in 2014. Despite this progress heightened geopolitical uncertainty has caused equity markets to stall this year as investors weigh up potential tail risks that could hamper recovery.

Notwithstanding these short term considerations, the Board continues to believe that UK mid and small cap companies will continue to deliver strong returns to investors over the longer term.

For and on behalf of the Board
Hamish Leslie Melville

Chairman

29^th September 2014

Investment Managers' Report

The previous two years provided exceptional returns for investors in small and medium-sized companies, as the market re-rated in anticipation of an improving economic environment that would facilitate higher company profits. To achieve continued positive returns, the market would thus require delivery of these expectations. Whilst there have clearly been pockets of the market in which this has occurred, in aggregate the key annual results season was somewhat disappointing, and this, coupled with macroeconomic and geopolitical developments, led to market turbulence. Against this background your Company's total return on net assets was -0.4%, which was slightly ahead of the benchmark return for the FTSE All-Share Index excluding FTSE 100 constituents and Investment Trusts, which was -0.7%.

Whilst our views on the long-term attractiveness of investing in small and medium-sized companies remain positive, the higher valuations coupled with an increasing number of exogenous risks led us to reduce gearing for the portfolio from 8.9% geared at 31^st January to 2.6% net cash at 31^st July 2014. In addition to this change, and as a result of various stock specific opportunities, there was a shift in the mix of the portfolio, with exposure to consumer goods lowered in favour of consumer services. We took some profits from the house builders, reducing our holding from 16.9% of the portfolio at the beginning of the period to 9.5% at 31^st July. Conversely, we invested in a number of new issues that are within the consumer services sector, including SSP Group, an operator of food and beverage outlets in travel locations, and several retailers, including B&M European Value Retail, Card Factory and Poundland, each of which are gaining substantial market share with their value-driven offerings.

Since the period end, reflecting the lower valuations and expectations in the market, we have reinvested such that the portfolio is now modestly geared, and we continue to find new investment opportunities. We believe that the favourable dynamics of investing in small and medium-sized companies will drive superior returns over the long-term.

Martin Hudson

Guy Anderson

Anthony Lynch

29^th September 2014

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; market; accounting, legal and regulatory; corporate governance and shareholder relations; operational 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 2014.

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. 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 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.

In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and accounting estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed

and explained in the financial statements; and

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

and the Directors confirm that they have done so.

For and on behalf of the Board.

Hamish Leslie Melville

Chairman

29^th September 2014

For further information, please contact:

Juliet Dearlove

For and on behalf of

JPMorgan Funds Limited, Secretary

020 7742 4000

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

Income Statement

for the six months ended 31st July 2014

	(Unaudited) Six months ended 31st July 2014				(Unaudited) Six months ended 31st July 2013			(Audited) Year ended 31st January 2014
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held at fair value through profit or loss	-	(24,696)	(24,696)	-	221,244	221,244	-	336,198	336,198
Net foreign currency gains/(losses)	-	5	5	-	(13)	(13)	-	(13)	(13)
Income from investments	28,781	-	28,781	31,611	-	31,611	52,385	-	52,385
Other interest receivable and similar income	305	-	305	697	-	697	719	-	719
Gross return/(loss)	29,086	(24,691)	4,395	32,308	221,231	253,539	53,104	336,185	389,289
Management fee	(1,139)	(2,658)	(3,797)	(922)	(2,150)	(3,072)	(1,986)	(4,633)	(6,619)
Other administrative expenses	(439)	-	(439)	(383)	-	(383)	(859)	-	(859)
Net return on ordinary activities before finance costs and taxation	27,508	(27,349)	159	31,003	219,081	250,084	50,259	331,552	381,811
Finance costs	(1,685)	(3,925)	(5,610)	(1,647)	(3,843)	(5,490)	(3,301)	(7,703)	(11,004)
Net return/(loss) on ordinary activities before taxation	25,823	(31,274)	(5,451)	29,356	215,238	244,594	46,958	323,849	370,807
Taxation (note 4)	(15)	-	(15)	(17)	-	(17)	(312)	-	(312)
Net return/(loss) on ordinary activities after taxation	25,808	(31,274)	(5,466)	29,339	215,238	244,577	46,646	323,849	370,495
Return/(loss) per share (note 5)	26.27p	(31.83)p	(5.56)p	29.84p	218.93p	248.77p	47.46p	329.52p	376.98p

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 2014 (unaudited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2014	24,560	23,459	12,210	1,592,851	34,830	1,687,910
Net return on ordinary activities	-	-	-	(31,274)	25,808	(5,466)
Dividends appropriated in the period	-	-	-	-	(23,571)	(23,571)
At 31st July 2014	24,560	23,459	12,210	1,561,577	37,067	1,658,873

Six months ended 31st July 2013 (unaudited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2013	24,614	23,459	12,156	1,271,741	29,463	1,361,433
Repurchase and cancellation of the Company's own shares	(54)	-	54	(2,739)	-	(2,739)
Net return on ordinary activities	-	-	-	215,238	29,339	244,577
Dividends appropriated in the period	-	-	-	-	(25,561)	(25,561)
At 31st July 2013	24,560	23,459	12,210	1,484,240	33,241	1,577,710

Year ended 31st January 2014 (audited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2013	24,614	23,459	12,156	1,271,741	29,463	1,361,433
Repurchase and cancellation of the Company's own shares	(54)	-	54	(2,739)	-	(2,739)
Net return on ordinary activities	-	-	-	323,849	46,646	370,495
Dividends appropriated in the year	-	-	-	-	(41,279)	(41,279)
At 31st January 2014	24,560	23,459	12,210	1,592,851	34,830	1,687,910

Balance Sheet

at 31st July 2014

	(Unaudited)	(Unaudited)	(Audited)
	31st July	31st July	31st January
	2014	2013	2014
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	1,606,981	1,753,615	1,831,759
Current assets
Derivative financial instruments	-	-	1
Debtors	28,540	9,936	16,925
Cash and short term deposits	220,594	5,320	27,211
	249,134	15,256	44,137
Creditors: amounts falling due within one year	(19,907)	(13,923)	(10,699)
Net current assets	229,227	1,333	33,438
Total assets less current liabilities	1,836,208	1,754,948	1,865,197
Creditors: amounts falling due after more than one year	(177,335)	(177,238)	(177,287)
Net assets	1,658,873	1,577,710	1,687,910
Capital and reserves
Called up share capital	24,560	24,560	24,560
Share premium	23,459	23,459	23,459
Capital redemption reserve	12,210	12,210	12,210
Capital reserves	1,561,577	1,484,240	1,592,851
Revenue reserve	37,067	33,241	34,830
Shareholders' funds	1,658,873	1,577,710	1,687,910
Net asset value per share (note 6)	1,688.6p	1,606.0p	1,718.1p

Company registration number 20537

Cash Flow Statement

for the six months ended 31st July 2014

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July	31st July	31st January
	2014	2013	2014
	£'000	£'000	£'000
Net cash inflow from operating activities (note 7)	23,074	25,357	44,648
Net cash outflow from servicing of finance	(5,528)	(5,425)	(10,892)
Overseas tax recovered	27	-	-
Net cash inflow/(outflow) from capital expenditure and financial investment	199,377	(124,719)	(100,935)
Dividends paid	(23,571)	(25,561)	(41,279)
Net cash (outflow)/inflow from management of liquid resources	(193,300)	-	112,800
Net cash outflow from financing	-	(4,198)	(4,196)
Increase/(decrease) in cash in the period	79	(134,546)	146
Reconciliation of net cash flow to movement in net funds/(debt)
Increase/(decrease) in cash in the period	79	(134,546)	146
Net cash inflow/(outflow) from management of liquid resources	193,300	-	(112,800)
Exchange movements	4	(13)	(14)
Other movements	(48)	(48)	(97)
Changes in net funds/(debt) arising from cash flows	193,335	(134,607)	(112,765)
Net debt at the beginning of the period	(150,076)	(37,311)	(37,311)
Net funds/(debt) at the end of the period	43,259	(171,918)	(150,076)
Represented by:
Cash and short term deposits	220,594	5,320	27,211
Debentures falling due after more than five years	(177,335)	(177,238)	(177,287)
Net funds/(debt)	43,259	(171,918)	(150,076)

Notes to the Accounts

for the six months ended 31st July 2014

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 2014 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 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 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 2014.

3.   Dividends

		(Unaudited)	(Unaudited)	(Audited)
		Six months ended	Six months ended	Year ended
		31st July 2014	31st July 2013	31st January 2014
		£'000	£'000	£'000
	Unclaimed dividends refunded to the Company	(7)	(8)	(8)
	Fourth quarterly dividend of 16.0p (2013: 18.0p) paid to shareholders in May	15,719	17,710	17,710
	First quarterly dividend of 8.0p (2013: 8.0p) paid to shareholders in August	7,859	7,859	7,859
	Second quarterly dividend of 8.0p paid to shareholders in November	n/a	n/a	7,859
	Third quarterly dividend of 8.0p paid to shareholders in January	n/a	n/a	7,859
		23,571	25,561	41,279

      A second quarterly dividend of 8.0p (2013: 8.0p) per share, amounting to £7,859,000 (2013: £7,859,000), has been declared payable in respect of the six months ended 31st July 2014.

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 2014	31st July 2013	31st January 2014
		£'000	£'000	£'000
	(Loss)/return per share is based on the following:
	Revenue return	25,808	29,339	46,646
	Capital (loss)/return	(31,274)	215,238	323,849
	Total (loss)/return	(5,466)	244,577	370,495
	Weighted average number of shares in issue	98,240,719	98,314,946	98,277,527
	Revenue return per share	26.27p	29.84p	47.46p
	Capital (loss)/return per share	(31.83)p	218.93p	329.52p
	Total (loss)/return per share	(5.56)p	248.77p	376.98p

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 2014 of 98,240,719 (31st July 2013: 98,240,719 and 31st January 2014: 98,240,719).

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 2014	31st July 2013	31st January 2014
	£'000	£'000	£'000
Net return on ordinary activities before finance costs and taxation	159	250,084	381,811
Less capital loss/(return) on ordinary activities before finance costs and taxation	27,349	(219,081)	(331,552)
Scrip dividends received as income	-	-	(25)
Increase in net debtors and accrued income	(1,404)	(2,679)	(75)
Decrease in accrued expenses and other debtors	(61)	(243)	(200)
Management fee charged to capital	(2,658)	(2,470)	(4,953)
Overseas withholding tax	(311)	(254)	(358)
Net cash inflow from operating activities	23,074	25,357	44,648

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 has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM

The half year report 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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