Half Yearly Results

RNS Number : 5086O

JPMorgan Russian Securities PLC

30 June 2010

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

UNAUDITED HALF YEAR RESULTS FOR

THE SIX MONTHS ENDED 30TH APRIL 2010

Chairman's Statement

Performance

The six months to 30th April 2010 has seen the Russian equity market continue the recovery it began in January 2009. In the six months under review, the Company's total return to shareholders was +45.4%. This compares favourably with the +29.1% total return of the Company's benchmark, the MSCI Russian 10/40 Equities Indices Index in Sterling terms. The total return on net assets was +43.6%.

Revenue and Earnings

The revenue loss after taxation for the six months ended 30th April 2010 was £1,072,000, which equates to a loss per share of 1.93p.

Gearing

Owing to the volatility of the markets, our investment managers did not gear the portfolio during the review period.

Share Repurchases and Discount

During the period the Company repurchased 648,000 shares at an average discount to net asset value of 10.9%. These shares were bought back and cancelled for a total consideration of £3,100,000. Your Board have been reviewing the various methods that are available to the Company to reduce the discount at which the shares trade. We have concluded that an active usage of the existing buyback powers granted by shareholders is the most appropriate way of managing the discount, with the objective of reducing the discount from its historic levels. The Company has been active in this respect over the last six months and will continue to be so in the interest of shareholders. 

Outlook

In May 2010, the month after our review period ended, the Company's benchmark fell 6.44% following a shock to investor confidence coming this time from Greece and concerns about its ability to service its sovereign debt. Risk aversion was the immediate and widespread market reaction. Russian equities were among the asset classes that investors sold.  It is clear that investor risk perception is the key factor determining Russian market performance in the short term. Despite this, our investment managers remain positive on the prospects for the Russian equity market in the medium to long term. Russia today is much better placed than in the second half of 2008: low interest rates, stronger corporate balance sheets, combined with reduced financial leverage, provides a sound investment case for longer term investors.

Pamela Idelson Smith

Chairman

30th June 2010

Investment Managers' Report

Market Review

The MSCI Russian 10/40 Equity Indices Index continued its meteoric rise, following the dramatic sell-offs of 2008, returning 29.1% in sterling terms in the six months ended 30th April 2010. The sharp rebound of commodity prices was a key contributor to this performance. As mentioned in previous reports, a strong oil price provides a good foundation for a sound budget position in Russia. Oil & commodities dominate Russian exports, and strong demand for them has supported higher volumes and prices, leading to a current account surplus, the accumulation of foreign exchange reserves and Ruble appreciation.

Performance

The Company booked very strong relative and absolute performance over the six months to 30th April 2010. The return on net assets was +43.6%, representing a 14.5 percentage point out-performance of the Company's benchmark index.

If we look at the underlying stock selection, the top contributors to relative performance include an underweight position in energy company Gazprom and an overweight position in Sistema, a consumer services business. Off-benchmark positions in Cherkizovo Group, a meat production and processing company, Magnitogorsk Iron & Steel Works and Magnit, a retail group, also contributed positively to performance. A number of stocks that we did not hold performed poorly against the benchmark index and the portfolio benefited from their exclusion; such stocks include Lukoil Holdings, an oil and gas company, and Polyus Gold, a leading gold producer in Russia. 

The largest detractors from the Company's relative performance came from stocks that the portfolio did not hold. Novatek, a natural gas producer, and Rushydro, a hydro-power generating company, both performed well to the detriment of the portfolio.   

In general terms our performance was assisted by deliberately eliminating positions in companies with poor quality balance sheets and concentrating our portfolio in potential industry leaders. This strategy may deprive us of some short-term gains, but we believe that we will be vindicated by the market in times of increased volatility, as such an environment will be difficult for companies with poor credit ratings. We did not employ any gearing in the portfolio over the period, due to the continuing high level of market volatility. 

Outlook for Investment Opportunities in Russia

Our central investment strategy is based on a simple concept: Equity markets will go up if they have support from valuations, liquidity and growth.

Valuations in Russia today are not stretched. However we no longer have access to any outright bargains. The market is currently estimated to be valued at 12X P/E, close to the average of the last 10 years. Major Central Banks are keeping rates at their historically lowest levels and there is no sign that they are willing to move rates up until there are signs of a steady economic recovery. This creates an extraordinary situation - whereby risk takers receive higher premiums than should be normally allocated by the market.

In terms of growth, we need to be clear that there are two types of growth which we are looking for: economic growth represented by GDP and earnings growth reported by companies. These two types of growth have multiple links, but their performance may decouple as we witnessed during the last recession. With stagnant or falling economic growth we still saw some expansion of margins and profits in the results of industry leaders, which succeeded in increasing their market share and margins.

In the coming months we do not expect to change our investment strategy. We will continue to concentrate the portfolio on structural growth companies rather than cyclical companies, with a preference for high quality stocks which we believe are better prepared to face the ongoing uncertain environment.  Despite the very recent market setback caused by the Eurozone sovereign debt crisis and the subsequent weakness of the market following a shock to investor confidence, it is worth highlighting a number of factors that differentiate Russia today from Russia one and a half years ago:  rather than too little liquidity, the banking sector is a large net lender to the Central Bank; the banking sector was net short USD 50 billion hard currency in 2008. Today it is net long USD 40 billion; the corporate sector has restructured its balance sheet and is lean - inventories are too low, rather than too high; leverage in the equity market is lower; and the Central Bank is intervening in the foreign exchange market to buy currency, not to sell it. Such factors provide a sound investment case for us investing in the Russian equity market.

Politics and Specific Risk Factors

Disappointingly, there is very little to report in respect of reform. As we have previously reported, Russia needs to agree and enforce difficult reforms to eradicate inefficiencies and diversify the economy.  This lack of reform may leave Russia as a laggard with its economic fortunes highly dependent on the commodity cycle, and a lack of investment opportunities with sustainable growth stories.

The political situation is currently stable, and there is an ongoing tendency for political activity to stagnate. The autocratic structure of political power in Russia is becoming a clear stumbling block for future development of the country as it prevents the creation of any opposition or a new generation of political leaders.

Oil and commodity prices continue to be a risk factor for Russia equities. Clearly if there were a global economic slowdown it is difficult to believe that adjustments would not be made to commodity prices to reflect it.

Finally, the recent developments in Greece and the Eurozone, which led to risk-contagion across many asset classes, are a perfect reminder of the risks still existing in the system.   However the impact of such crises has a two dimensional effect: on the one hand it is clearly negative as it affects global risk appetite and global liquidity, on the other hand it highlights the strength of the fiscal and budgetary position in Russia.

Oleg L Biryulyov

Vitaly N Kazakov

Investment Managers

30th June 2010

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 seven broad categories: market; 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 October 2010.

Related Party 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 yearly financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half-Yearly 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.

Pamela Idelson Smith

Chairman        

For further information, please contact:

Alison Vincent

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.jpmrussian.co.uk

Income Statement

for the six months ended 30th April 2010

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th April 2010			30th April 2009			31st October 2009
	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	-	113,353	113,353	-	20,457	20,457	-	119,124	119,124
Net foreign currency gains	-	5	5	-	432	432	-	554	554
Income from investments	1,772	-	1,772	214	-	214	885	-	885
Other interest receivable and
similar income	-	-	-	60	-	60	65	-	65
Gross return	1,772	113,358	115,130	274	20,889	21,163	950	119,678	120,628
Management fee	(2,270)	-	(2,270)	(873)	-	(873)	(2,391)	-	(2,391)
Other administrative expenses	(355)	-	(355)	(436)	-	(436)	(719)	-	(719)
Net (loss)/return on ordinary
activities before finance costs
and taxation	(853)	113,358	112,505	(1,035)	20,889	19,854	(2,160)	119,678	117,518
Finance costs	-	-	-	(41)	-	(41)	(69)	-	(69)
Net (loss)/return on ordinary
activities before taxation	(853)	113,358	112,505	(1,076)	20,889	19,813	(2,229)	119,678	117,449
Taxation	(219)	-	(219)	15	-	15	(70)	-	(70)
Net (loss)/return on ordinary
activities after taxation	(1,072)	113,358	112,286	(1,061)	20,889	19,828	(2,299)	119,678	117,379
(Loss)/return per share (note 3)	(1.93)p	204.05p	202.12p	(1.90)p	37.35p	35.45p	(4.11)p	213.97p	209.86p

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

	Called up		Capital
Six months ended	share	Other	redemption	Capital	Revenue
30th April 2010	capital	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2009	559	52,397	42	211,207	(4,168)	260,037
Repurchase and cancellation of the
Company's own shares	(6)	(3,116)	6	-	-	(3,116)
Net return/(loss) on ordinary activities	-	-	-	113,358	(1,072)	112,286
At 30th April 2010	553	49,281	48	324,565	(5,240)	369,207
	Called up		Capital
Six months ended	share	Other	redemption	Capital	Revenue
30th April 2009	capital	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2008	559	52,397	42	91,529	(1,869)	142,658
Net return/(loss) on ordinary activities	-	-	-	20,889	(1,061)	19,828
At 30th April 2009	559	52,397	42	112,418	(2,930)	162,486
	Called up		Capital
Year ended	share	Other	redemption	Capital	Revenue
31st October 2009	capital	reserve	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2008	559	52,397	42	91,529	(1,869)	142,658
Net return/(loss) on ordinary activities	-	-	-	119,678	(2,299)	117,379
At 31st October 2009	559	52,397	42	211,207	(4,168)	260,037

Balance Sheet

at 30th April 2010

	(Unaudited)	(Unaudited)	(Audited)
	30th April 2010	30th April 2009	31st October 2009
	£'000	£'000	£'000
Fixed assets
Equity investments held at fair value through   profit or loss	368,611	146,127	261,277
Investments in liquidity funds held at fair value
through  profit or loss	5,106	14,833	431
Total investment portfolio	373,717	160,960	261,708
Current assets
Debtors	3,079	3,141	3,207
Cash and short term deposits	50	372	16
	3,129	3,513	3,223
Creditors: amounts falling due within one year	(7,639)	(1,987)	(4,894)
Net current (liabilities)/assets	(4,510)	1,526	(1,671)
Total assets less current liabilities	369,207	162,486	260,037
Total net assets	369,207	162,486	260,037
Capital and reserves
Called up share capital	553	559	559
Other reserve	49,281	52,397	52,397
Capital redemption reserve	48	42	42
Capital reserves	324,565	112,418	211,207
Revenue reserve	(5,240)	(2,930)	(4,168)
Shareholders' funds	369,207	162,486	260,037
Net asset value per share (note 4)	667.8p	290.5p	464.9p

Cash Flow Statement

for the six months ended 30th April 2010

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2010	30th April 2009	31st October 2009
	£'000	£'000	£'000
Net cash (outflow)/inflow from operating
activities (note 5)	(1,449)	3,718	2,761
Net cash outflow from returns on investments
and servicing of finance	-	(41)	(69)
Net cash outflow from capital expenditure
and financial investment	(2,118)	(3,914)	(3,407)
Net cash (outflow)/inflow from financing	(3,116)	-	25
Decrease in cash for the period	(6,683)	(237)	(690)
Reconciliation of net cash flow to movement in
net debt
Net cash movement	(6,683)	(237)	(690)
Net loans drawn down in the period	-	-	(25)
Exchange movements	5	432	554
Movement in net funds/debt in the period	(6,678)	195	(161)
Net funds at the beginning of the period	16	177	177
Net (debt)/funds at the end of the period	(6,662)	372	16
Represented by:
Cash and short term deposits	50	372	16
Debt falling due within one year	(6,712)	-	-
Net (debt)/funds at the end of the period	(6,662)	372	16

Notes to the Accounts

for the six months ended 30th April 2010

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 October 2009 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

      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 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 half year accounts are consistent with those applied in the accounts for the year ended 31st October 2009.

3.   (Loss)/return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2010	30th April 2009	31st October 2009
	£'000	£'000	£'000
(Loss)/return per share is based on the following:
Revenue loss	(1,072)	(1,061)	(2,299)
Capital return	113,358	20,889	119,678
Total return	112,286	19,828	117,379
Weighted average number of Ordinary shares in issue	55,554,389	55,932,812	55,932,812
Revenue loss per share	(1.93)p	(1.90)p	(4.11)p
Capital return per share	204.05p	37.35p	213.97p
Total return per share	202.12p	35.45p	209.86p

4.   Net asset value per share

      Net asset value per share is based on the net assets attributable to shareholders £369,207,000 (30th April 2009: £162,486,000 and 31st October 2009: £260,037,000) and on the 55,284,312 (30th April 2009: 55,932,812 and 31st October 2009: 55,932,812) shares in issue at the period end.

5.   Reconciliation of total return on ordinary activities before finance costs and taxation to net cash (outflow)/inflow from operating activities

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2010	30th April 2009	31st October 2009
	£'000	£'000	£'000
Total return on ordinary activities before finance
costs and taxation	112,505	19,854	117,518
Add back capital return before finance costs and taxation	(113,358)	(20,889)	(119,678)
Net movements in debtors, accrued income and accrued expenses	(377)	4,738	4,991
Overseas withholding tax	(219)	15	(70)
Net cash (outflow)/inflow from operating activities	(1,449)	3,718	2,761

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

www.jpmrussian.co.uk

 

END

 

 

IR KKKDNCBKKKAN