Half Yearly Results

RNS Number : 5122G

JPMorgan Russian Securities PLC

29 June 2012

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

UNAUDITED HALF YEAR RESULTS FOR

THE SIX MONTHS ENDED 30TH APRIL 2012

Chairman's Statement

Performance

In my first reporting period as Chairman of your Company, I am pleased to announce that the Company's net asset value increased 5.3% in the six months to 30th April 2012, representing an outperformance of 4.2 percentage points over its benchmark (the MSCI Russian 10/40 Equity Indices Index). During the period under review the Russian market as well as markets globally continued to be characterised by heightened volatility. In the two months from 1st November to the end of December 2011, following an initial rise, the Company's benchmark index fell by just over 9%. By the middle of March the index had rallied by over 23% only to lose most of its gains in the following month, ending the period with a total return of 1.1%. Under such conditions the management team's performance was highly creditable. The Company's share price increased by 2.4% over the period, resulting in a widening of the discount at which the ordinary shares traded to the net asset value from 5.9% to 8.6%. A full commentary on the market environment and a review of portfolio performance are set out in the Investment Managers' report below.

Continuation Vote

The Board would like to express its thanks to Shareholders for voting overwhelmingly in favour of the continuation of the Company at the general meeting held in January 2012. The Company's next continuation vote will be held at the annual general meeting in 2017.

Portfolio Construction

As reported in the last Chairman's Statement to accompany the Company's 2011 year end results, the Board and Investment Managers agreed to introduce additional controls on portfolio construction. These limit the amount by which sector positions in the portfolio can deviate from the benchmark index and introduce a maximum overweight position per stock against its index weighting. The aim of the controls is to reduce the volatility of the Company's performance when compared to its benchmark. The readjustment of the portfolio has now been completed. Shareholders should note that the new investment guidelines continue to allow the Investment Management team to operate with a high degree of conviction in relation to sector and individual stock weightings.

Discount Control

The Company repurchased 432,000 shares for cancellation at an average discount to net asset value of 8.3%. The Board's objective remains to use the share repurchase authority to assist in managing any imbalance between supply and demand for the Company's shares, thereby reducing the volatility of the discount. The Board will only repurchase shares at a discount to their prevailing net asset value, and will only issue new shares when the Company is trading at a premium to its net asset value, so as not to prejudice existing shareholders.

Board of Directors

My predecessor, Pamela Idelson Smith, retired from the Board in April this year, completing the Company's phased programme of renewal to refresh the Board's membership. I, along with my fellow Directors, would like to thank Pamela for her extensive contribution to the Board and sound stewardship of the Company during her tenure and wish her well for the future.

Outlook

The Russian market remains among the cheapest in the global emerging market universe. Our Investment Managers will continue to focus on sectors benefiting from robust domestic demand and companies delivering consistently high returns based on strong free cash flow.

Lysander Tennant

Chairman

29th June 2012

Investment Managers' Report

Market Commentary

Over the six month reporting period, the MSCI Russian 10/40 Equity Indices Index rose 1.1%. This relatively minor market movement belied the extreme volatility of stock prices over the period. The market proved to be directionless as equities decoupled from the oil price and were influenced, in the main, by external factors including a very busy political & election driven agenda.

Political risks were elevated over the period by the election season, as the parliamentary elections in December and irregularities in the vote counting practice triggered a number of street protests. In the end the presidential elections in March were less dramatic than expected, as the voting process was more open than in previous elections. Although the opposition still highlighted certain irregularities and questionable practices of Mr Putin's team, the result came as expected with Mr Putin becoming president in May 2012.

The major issue for us as investors going forward will be the economic agenda of Russia's new rulers. The wishes of the investment community and public are to a certain extent in conflict, and the Government will have to manoeuvre between the two. Economic stability, which has been proposed as a major target by Mr Putin, is not achievable without an acceleration of economic growth. The latter will require a new wave of privatisation, deregulation and large-scale investment in infrastructure & education. The Russian economy needs to improve its competitiveness by reducing administrative barriers and increasing productivity. Until we see revisions to the federal budget, which should be announced in the third quarter of 2012, we will reserve our opinion on the extent of reforms under the new regime.

There were limited flows for the Russian dedicated funds, so the market share redistribution towards ETFs has slowed. We continue to expect that ETFs will be a major threat to market efficiency via index replication and that this will create additional opportunities for active fund managers.

Performance

The Company's return on net assets was +5.3%, representing a 4.2 percentage point outperformance of the Company's benchmark index. The return to shareholders was +2.4%, reflecting a widening of the share price discount to net asset value per share from 5.9% at the end of October 2011 to 8.6% at the end of April 2012.

The major contributor to the outperformance of the Company in the reporting period was the portfolio's relatively large underweight in energy and utilities; the sector was particularly weak due to negative news flow from a lack of privatisations, the weakening price of oil and tariff regulation. The best performing stock in the portfolio was Kalina Concern, which was the subject of a bid by Unilever. Dixy Group (a retailer) also contributed positively following its re-rating. Neither of these stocks were represented in the benchmark. The portfolio's performance benefited further by holding an underweight position in Uralkali (a potash producer) which de-rated relative to the market over the period.

The largest detractors from the Company's relative performance came from stocks in the portfolio not included in the benchmark, including Alliance Oil, Bank of St Petersburg and Pharmacy Chain 36.6. Alliance Oil produced disappointing upstream production figures, there were ongoing concerns over Bank of St Petersburg's level of non-performing loans, and Pharmacy Chain 36.6's operating performance was disappointing following a change in management structure.

Portfolio Activity

At the beginning of the period under review and as reported in our last communication with shareholders, we agreed with the Board of Directors that we would seek to improve control risk in the portfolio by limiting the amount by which sectors in the portfolio can deviate from the benchmark index and by introducing a maximum overweight stock position against the benchmark weighting. We have now completed this rebalancing exercise, which mainly affected positions in the consumer and energy sectors. Going forward, investors should expect a lower tracking error for the Company and lower volatility of returns against the benchmark index.

There were no IPOs during the review period, but we did invest in several new companies that we have not held in the portfolio previously:

Alliance Oil - this company's main asset is an oil refinery located in Russia's Far East and it also benefits from some minor exposure to oil & gas exploration and development projects across Siberia / Timano Pechora regions. We believe that the valuation of this business today is attractive, as the market has ignored the potential coming from the upgrade and restructuring of the Far East oil refinery. This upgrade will improve its operational and financial efficiency several times over and, accordingly, we believe that the market will re-rate the company within the next 12-18 months.

Rostelecom - this is a state controlled federal telecommunication company with close to a monopoly on fixed line operations across the country. This position acts as a small hedge against the potential upside risk of a substantially better outcome of the industry restructuring programme. It was initiated due to a valuation gap for the stock relative to the industry.

Etalon Group - this company is a residential property developer in St. Petersburg and Moscow and the surrounding Moscow region. Although we did not participate in its IPO, as it was felt that the price offered then was too high, a subsequent price correction made the stock attractive. The company used its cash proceeds from the IPO wisely and strengthened its position on the market. Based on the quality of its employees and projects, we view this company as one of the few interesting stories in the Russian real estate sector.

O'KEY - this is a company operating in the food & general retail industry and specializes in the hypermarket format. As with Etalon Group, we did not invest at launch, however, following a price correction and the underlying business developments we changed our investment view. This is an addition to our holdings in the retail sector and partial rotation from an extended position in Magnit. We are still comfortable with our holding in Magnit as the business remains sound, but we are less excited about its stock price and valuation.

IDGC Holding - this is the state controlled federal high voltage electricity network. The company is a hedge position for us, which gives the portfolio exposure to any positive developments in this highly regulated sector. Additionally the company's valuation is attractive following last year's poor performance.

We continue to look for ways to increase diversification across the portfolio and are very keen to see new companies and industries not represented today on the market. We hope that the supply of new companies will come from both the private and state sectors, the latter of which has an ambitious privatisation programme over the next 5 years.

Outlook

Political risks should reduce over the next 12-18 months as some of the requested changes will be initiated or at least discussed in public. The Russian market will not be able to escape from the shadow of uncertainty in global financial markets, but its current valuation (MSCI Russian forward 12 months consensus estimate P/E ratio is currently 4.74x) and foreseeable dividend increases from companies makes it attractive on a relative basis. We will continue to see risks which emanate from the commodity dominance on the Russian market in the long run, although in the short term, the same dominance will produce a vast amount of cash for the state and shareholders. Earnings revisions are likely to be more positive in the second half of 2012 in comparison to the last 12 months of ongoing negative revisions. The new policy of currency flexibility provided by the Central Bank of Russia will help smooth the adjustment of the Russian economy to the volatility of global energy prices.

We believe that the long-term fundamental case for Russian equity market is still intact and provides ample opportunities for active fund managers to add value.

Oleg I. Biryulyov

Vitaly N. Kazakov

Investment Managers

29th June 2012

Interim Management Report

The Company is now required to make the following disclosures in its half year report.

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company have not changed and fall into the following broad categories: investment and strategy; financial; accounting, legal and regulatory; corporate governance and shareholder relations and operational. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st October 2011.

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 during the period.

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 reasonable 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 Yearly Financial Reports'; and

(ii)                   the half year 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

Lysander Tennant
Chairman

29th June 2012

For further information, please contact:

Alison Vincent

For and on behalf of

JPMorgan Asset Management (UK) 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.jpmrussian.co.uk

Unaudited figures for the six months ended 30th April 2012

Income Statement

for the six months ended 30th April 2012

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th April 2012			30th April 2011			31st October 2011
	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	-	17,933	17,933	-	29,267	29,267	-	(63,520)	(63,520)
Net foreign currency losses	-	(495)	(495)	-	(227)	(227)	-	(327)	(327)
Income from investments	1,428	-	1,428	2,565	-	2,565	7,548	-	7,548
Other interest receivable and
similar income	7	-	7	1	-	1	2	-	2
Gross return/(loss)	1,435	17,438	18,873	2,566	29,040	31,606	7,550	(63,847)	(56,297)
Management fee	(1,919)	-	(1,919)	(3,035)	-	(3,035)	(5,760)	-	(5,760)
Other administrative expenses	(387)	-	(387)	(559)	-	(559)	(1,170)	-	(1,170)
Net (loss)/return on ordinary
activities before finance costs
and taxation	(871)	17,438	16,567	(1,028)	29,040	28,012	620	(63,847)	(63,227)
Finance costs	(4)	-	(4)	-	-	-	(1)	-	(1)
Net (loss)/return on ordinary
activities before taxation	(875)	17,438	16,563	(1,028)	29,040	28,012	619	(63,847)	(63,228)
Taxation	(185)	-	(185)	(284)	-	(284)	(969)	-	(969)
Net (loss)/return on ordinary
activities after taxation	(1,060)	17,438	16,378	(1,312)	29,040	27,728	(350)	(63,847)	(64,197)
(Loss)/return per share (note 3)	(1.93)p	31.77p	29.84p	(2.37)p	52.53p	50.16p	(0.63)p	(115.53)p	(116.16)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 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 2012	capital	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2011	551	48,482	50	266,924	(4,900)	311,107
Shares bought back and cancelled	(4)	(2,275)	4	-	-	(2,275)
Net return/(loss) on ordinary activities	-	-	-	17,438	(1,060)	16,378
At 30th April 2012	547	46,207	54	284,362	(5,960)	325,210
	Called up		Capital
Six months ended	share	Other	redemption	Capital	Revenue
30th April 2011	capital	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2010	553	49,281	48	330,771	(4,550)	376,103
Net return/(loss) on ordinary activities	-	-	-	29,040	(1,312)	27,728
At 30th April 2011	553	49,281	48	359,811	(5,862)	403,831
	Called up		Capital
Year ended	share	Other	redemption	Capital	Revenue
31st October 2011	capital	reserve	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2010	553	49,281	48	330,771	(4,550)	376,103
Repurchase of the Company's own shares for
cancellation	(2)	(799)	2	-	-	(799)
Net loss on ordinary activities	-	-	-	(63,847)	(350)	(64,197)
At 31st October 2011	551	48,482	50	266,924	(4,900)	311,107

Balance Sheet

at 30th April 2012

	(Unaudited)	(Unaudited)	(Audited)
	30th April 2012	30th April 2011	31st October 2011
	£'000	£'000	£'000
Fixed assets
Equity investments held at fair value through profit or loss	319,152	397,980	304,496
Investment in liquidity fund held at fair value through
profit or loss	2,094	3,342	7,666
Total investment portfolio	321,246	401,322	312,162
Current assets
Financial assets: Derivative financial instruments	-	1	-
Debtors	1,865	1,787	319
Cash and short term deposits	2,201	853	102
	4,066	2,641	421
Creditors: amounts falling due within one year	(102)	(132)	(1,476)
Net current assets/(liabilities)	3,964	2,509	(1,055)
Total assets less current liabilities	325,210	403,831	311,107
Net assets	325,210	403,831	311,107
Capital and reserves
Called up share capital	547	553	551
Other reserve	46,207	49,281	48,482
Capital redemption reserve	54	48	50
Capital reserves	284,362	359,811	266,924
Revenue reserve	(5,960)	(5,862)	(4,900)
Shareholders' funds	325,210	403,831	311,107
Net asset value per share (note 4)	594.6p	730.5p	564.4p

Cash Flow Statement

for the six months ended 30th April 2012

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2012	30th April 2011	31st October 2011
	£'000	£'000	£'000
Net cash (outflow)/inflow from operating  activities (note 5)
	(1,785)	(1,111)	1,453
Net cash outflow from returns on investments and servicing of finance
	(4)	-	(1)
Net cash inflow/(outflow) from capital expenditure and financial investment
	6,658	(806)	(3,222)
Net cash outflow from financing	(2,275)	-	(799)
Increase/(decrease) in cash for the period	2,594	(1,917)	(2,569)
Reconciliation of net cash flow to movement in net funds
Net cash movement	2,594	(1,917)	(2,569)
Exchange movements	(495)	(228)	(327)
Movement in net funds/debt in the period	2,099	(2,145)	(2,896)
Net funds at the beginning of the period	102	2,998	2,998
Net funds at the end of the period	2,201	853	102
Represented by:
Cash and short term deposits	2,201	853	102
Net funds at the end of the period	2,201	853	102

Notes to the Accounts

for the six months ended 30th April 2012

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 2011 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 in these half year accounts are consistent with those applied in the accounts for the year ended 31st October 2011.

3. (Loss)/return per share
	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2012	30th April 2011	31st October 2011
	£'000	£'000	£'000
(Loss)/return per share is based on the following:
Revenue loss	(1,060)	(1,312)	(350)
Capital return	17,438	29,040	(63,847)
Total return	16,378	27,728	(64,197)
Weighted average number of shares in issue	54,893,191	55,284,312	55,263,230
Revenue loss per share	(1.93)p	(2.37)p	(0.63)p
Capital return per share	31.77p	52.53p	(115.53)p
Total return per share	29.84p	50.16p	(116.16)p

4.   Net asset value per share

      Net asset value per share is based on the net assets attributable to shareholders £325,210,000 (30th April 2011: £403,831,000 and 31st October 2011: £311,107,000) and on the 54,692,312 (30th April 2011: 55,284,312 and 31st October 2011: 55,124,312) shares in issue at the period end.

5.   Reconciliation of total return/(loss) 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 2012	30th April 2011	31st October 2011
	£'000	£'000	£'000
Total return/(loss) on ordinary activities before finance costs and taxation
	16,567	28,012	(63,227)
Add back capital return before finance costs and taxation	(17,438)	(29,040)	63,847
Net movements in debtors, accrued income and accrued expenses	(729)	201	1,802
Overseas withholding tax	(185)	(284)	(969)
Net cash (outflow)/inflow from operating activities	(1,785)	(1,111)	1,453

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 ASSET MANAGEMENT (UK) LIMITED

ENDS

A copy of the half year has been 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.jpmrussian.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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