Interim Results

RNS Number : 7496X

JPMorgan Russian Securities PLC

27 June 2008

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 

30TH APRIL 2008

Highlights

• Share price total return of +5.0% over six months to 30.04.08

• Russia harbours significant investment opportunities

• George Nianias joins the board 

• Since the end of April, the Russian market has been strong, rising by approximately 10% as at 23rd June 2008. The Company's assets have outperformed the Index rising by 17.9% over the comparable period.

Quote from Chairman

'The Company's net asset value and share price have both produced positive returns. Stock selection in the consumer discretionary sector was the greatest contributor to performance, while investments in Materials, Transportation and Capital Goods also positively contributed.'

Quote from Manager

'Despite volatility Russia proved to be a relatively safe haven when the majority of other global financial markets were in turmoil. Our investment strategy of being overweight in materials and consumer related themes at the expense of the energy sector, continued to be the right combination. However it is now evident that such a strategy is becoming riskier as divergence in performance of these sectors is getting wider.'

For further media enquiries contact:

Jayne Bowers

[e-mail]

Tel: [phone]

Chairman's Statement 

Performance

I am pleased to report that over the six months to 30th April 2008, the Company's net asset value and share price have both produced positive returns. Although the increases are small in comparison to last year's outstanding results, it is very

comforting that the Investment Managers have been able to outperform the benchmark under such testing market conditions.

The net asset value rose by +3.2% which was ahead of the benchmark index, the MSCI Russian 10/40 Equities Indices Index in Sterling terms, which increased by +2.5%. The discount at which the ordinary shares traded to the net asset value narrowed over the period, resulting in a share price total return of +5.0%.

Stock selection in the consumer discretionary sector was the greatest contributor to performance, while investments in Materials, Transportation and Capital Goods also positively contributed. Stock selection and an overweight position in the

financials detracted from returns, as did an underweight position in the energy sector.

Revenue and Earnings

The revenue loss after taxation for the six months ended 30th April 2008 was £2,976,000, which equates to a loss per share of 5.32p.

Board of Directors

We were pleased to announce on 10th March 2008 the appointment of George Nianias as a non-executive Director of the Company. He brings to the Board experience of capital markets and risk management and of advising sovereign and local governments, financial institutions and corporations in western and eastern Europe. Mr Nianias has also been financial adviser to several east European cities including Krakow and Moscow. Mr Nianias is the Founder and Group Chairman of Denholm Hall Group. Denholm Hall Group was founded in 1992 and has established a significant track record in corporate finance, debt placement and consulting in Russia, the CIS and eastern Europe.

Outlook

As detailed in the Investment Manager's Report the short term market outlook for Russia looks uncertain. However, the Investment Managers and the Board remain confident over the longer term. The returns of the last few years are unlikely to be emulated, but the country still harbours significant investment opportunities to allow for strong future growth.

Pamela Idelson Smith

Chairman 27th June 2008

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 fall into five 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 October 2007.

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. 

Directors' Reponsibilities

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.

for and on behalf of the Board

Pamela Idelson Smith

Chairman 27th June 2008

Investment Mangers' Report

It is pleasing to report that in the face of significant volatility in Russian markets over the six months to 30th April 2008 both the Company's net asset value and share price outperformed its benchmark, the MSCI Russian 10/40 Equity Indices Index in Sterling terms.

Economic and Political Review

Despite this volatility Russia proved to be a relatively safe haven when the majority of other global financial markets were in turmoil. Our investment strategy of being overweight in materials and consumer related themes at the expense of the energy sector, continued to be the right combination. However it is now evident that such a strategy is becoming riskier as divergence in performance of these sectors is getting wider.

Russians went to the polls twice during the period in both Parliamentary and Presidential elections. Both passed off without any drama or surprises. Led by Mr. Putin, at the time still the acting President, United Russia had a landslide victory in December and now has a super-majority (winning more than 75% of the vote) in the Russian Parliament. Having served as President for two terms, constitutionally mandated term times dictate that Mr. Putin had to relinquish power and, as expected, his chosen successor Mr. Dmitry Medvedev, successfully won in the first round of elections on 2nd March. The new Russian Government has now been approved and following a nomination from the new President Mr. Putin has taken up his new post as Prime Minister. The resulting transition of power appears to be going through with no issues, which has been of considerable relief for investors.

Future Opportunities in the Russian Market

We believe that despite rapid appreciation, the mining and steel sector still offers value for investors. Prices for coal, iron ore and steel are based on real supply/demand balances and, due to a high degree of technical specification and qualitative/chemical differences, such prices are not conducive to financial speculation. This sector has a number of advantages: high levels of consolidation, vertical integration (particularly marked in Russian companies), strong capital allocation disciplines and a relatively neutral taxation system. Furthermore infrastructure spending in Russia is about to undergo a massive investment wave led by the State, which is expected to be followed by the private sector. We would not be surprised to see fixed capital formation play a leading role in GDP growth in the next decade in parallel to that witnessed in China over the last twenty years. We will be positioning the portfolio to take advantage of these economic trends.

Consumption is the second key area of interest. It is a little known fact that the average middle class consumer in Russia has a greater available spending power than his peers in the UK. A difference in taxation and a high level of house/apartment ownership, together with low mortgage/credit card penetration effectively means that Russians have a far superior spending power. One of the major achievements of Mr. Putin's rule was a significant increase in the standard of living for approximately 25 per cent. of the population, who moved out of poverty and into the low level middle class. This has had a major impact on the demand for service sector industries and has injected increased spending power into the booming consumption market. We are however mindful that in some situations markets have been running ahead of themselves and valuations for some consumer stories are pricing in too much for future growth and accordingly we are very careful in our assessment of this growth area.

The Energy Sector

We were surprised by the oil price appreciation in the last 12 months, as it doubled again from $65 pbbl to $130 pbbl. This is unprecedented and although a great macro situation for the Russian budget, it may not be such good news for Russian oil companies. When we look at the production profile of the Russian energy sector we feel vindicated about our decision to remain underweight in this sector particularly in the light of our concerns about the disappearance of cheap growth. In fact the growth which is still available and used by market commentators for forecasts is not cheap at all. This is the only way that we can explain why the Russian Government is content to reduce mineral extraction tax by 104bn RUB from 2009. This equates to approximately $4.2bn or 10% of net income in the energy sector in 2007 and created a rally in oil stocks from February this year. We are somewhat sceptical that all these tax savings will come through as earnings from next year. More probably they will be consumed by the galloping increase in CAPEX budgets and the impact of high inflation on costs. But even if the optimists are correct and all tax savings go to earnings, this could perhaps justify an increase in the economic value of the Russian energy sector by $42-45bn. But as often happens in the equity market, the tax cuts pushed the energy sector up by $135-140bn, which we consider excessive and likely to be downgraded by future reality. High capital requirements and soaring costs, coupled with high taxation, inferior processing and low prices for output, continue to make the Russian energy sector an unappealing investment opportunity, particularly at current valuations, for the reasons listed above.

Possible Threats to Russian Equities

We believe that globalisation as an economic trend is here to stay, as most politicians understand that it generates more winners than losers worldwide. Inflation has been a self created problem by the central banks. Increased inflation has been viewed as a means of guarding against economic slowdown particularly in the financial sector, without much consideration for the longer term impact of such action. Today, inflation is the major threat to the economic stability of Russia and is an area which we closely monitor. Valuations and our ability to make a correct prognosis about a company's future development is crucial for the Company's success. Our process of gaining an in depth knowledge of a company's business, its management and its market space, together with regular reality checks is now tried and tested and we believe it is the best methodology for ensuring the continued success in constructing the Company's portfolio.

Outlook

Since the end of April, the Russian market has been strong, rising by approximately 10% as at 23rd June 2008. The Company's assets have outperformed the Index rising by 17.9% over the comparable period. The rise was helped by the sale of one of the larger investments in the portfolio.

We expect that the Russian market will continue to be challenging and volatile in the short and medium term. However we believe that there are still significant investment opportunities available in Russia and that we will be able to steer the Company through any rough waters.

Oleg I. Biryulyov

Vitaly N. Kazakov

Investment Managers 

27th June 2008

JPMorgan Russian Securities plc

Unaudited figures for the six months ended 30th April 2008

 

Income Statement

 

	(Unaudited) Six months ended 30th April 2008			(Unaudited) Six months ended 30th April 2007			(Audited) Year ended 31st October 2007
	Revenue £’000	Capital £’000	Total £’000	Revenue £’000	Capital £’000	Total £’000	Revenue £’000	Capital £’000	Total £’000
Gains from investments held at fair value through profit or loss	-	17,077	17,077	-	58,933	58,933	-	137,901	137,901
Net foreign currency (losses)/gains	-	(1,159)	(1,159)	-	830	830	-	1,786	1,786
Income from investments	1,483	-	1,483	1,623	-	1,623	7,311	-	7,311
Other interest receivable and similar income	66	-	66	14	-	14	158	-	158
	_______	________	_______	_______	________	_______	_______	_______	_______
Gross return	1,549	15,918	17,467	1,637	59,763	61,400	7,469	139,687	147,156
Management fee	(3,035)	-	(3,035)	(2,256)	-	(2,256)	(5,063)	-	(5,063)
Other administrative expenses	(396)	-	(396)	(406)	-	(406)	(903)	-	(903)
	_______	_______	_______	_______	_______	_______	_______	_______	_______
Net (loss)/return on ordinary activities before finance costs and taxation	(1,882)	15,918	14,036	(1,025)	59,763	58,738	1,503	139,687	141,190
Finance costs	(894)	-	(894)	(547)	-	(547)	(1,259)	-	(1,259)
	_______	_______	_______	_______	_______	_______	_______	_______	_______
Net (loss)/return on ordinary activities before taxation	(2,776)	15,918	13,142	(1,572)	59,763	58,191	244	139,687	139,931
Taxation	(200)	-	(200)	(214)	-	(214)	(983)	-	(983)
	______	_______	_______	______	_______	_______	_______	_______	_______
Net (loss)/return on ordinary activities after taxation	2,976)	15,918	12,942	(1,786)	59,763	57,977	(739)	139,687	138,948
	=====	=====	=====	=====	=====	=====	=====	=====	=====
(Loss)/return per share (note 3)	(5.32)p	28.46p	23.14p	(3.19)p	106.75p	103.56p	(1.32)p	249.63p	248.31p

 

 

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. 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. 

 

 

  

JPMorgan Russian Securities plc

Unaudited figures for the six months ended 30th April 2008

 

Reconciliation of Movements in Shareholders’ Funds

 

Six months ended 30th April 2008 (unaudited)	Called up Share capital £’000	Other reserve £’000	Capital redemption reserve £’000	Capital reserve £’000	Revenue reserve £’000	Total £’000
At 31st October 2007	559	52,397	42	352,914	(2,398)	403,514
Net return/(loss) from ordinary activities	-	-	-	15,918	(2,976)	12,942
	_______	________	________	_______	_______	________
At 30th April 2008	559	52,397	42	368,832	(5,374)	416,456
	=====	=====	=====	=====	=====	=====
Six months ended 30th April 2007 (unaudited)	Called up Share capital £’000	Other reserve £’000	Capital redemption reserve £’000	Capital reserve £’000	Revenue reserve £’000	Total £’000
At 31st October 2006	560	52,813	41	213,227	(1,659)	264,982
Repurchase of shares for cancellation	(1)	(416)	1	-	-	(416)
Net return/(loss) from ordinary activities	-	-	-	59,763	(1,786)	57,977
	_______	_______	________	_______	_______	________
At 30th April 2007	559	52,397	42	272,990	(3,445)	322,543
	=====	=====	=====	=====	=====	=====
Year ended 31st October 2007 (audited)	Called up Share capital £’000	Other reserve £’000	Capital redemption reserve £’000	Capital reserve £’000	Revenue reserve £’000	Total £’000
At 31st October 2006	560	52,813	41	213,227	(1,659)	264,982
Repurchase of shares for cancellation	(1)	(416)	1	-	-	(416)
Net return/(loss) from ordinary activities	-	-	-	139,687	(739)	138,948
	_______	_______	________	_______	_______	________
At 31st October 2007	559	52,397	42	352,914	(2,398)	403,514
	=====	=====	=====	=====	=====	=====

 

 

 

JPMorgan Russian Securitiesplc

Unaudited figures for the six months ended 30th April 2008

 

Balance Sheet	(Unaudited) 30th April 2008 £’000	(Unaudited)         30th April 2007 £’000	(Audited) 31st October 2007 £’000
Fixed assets
Equity investments at fair value through profit or loss	454,965	339,668	424,128
Investment in liquidity fund at fair value through profit or loss	6,276	-	17,676
	______	______	______
Total investment portfolio	461,241	339,668	441,804
	______	______	______
Current assets
Derivative financial instrument	1	-	-
Debtors	812	2,595	2,784
Cash and short term deposits	19,013	1,447	17,553
	______	______	______
	19,826	4,042	20,337
Creditors: amounts falling due within one year	(64,611)	(21,167)	(58,627)
	______	______	______
Net current liabilities	(44,785)	(17,125)	(38,290)
Total assets less current liabilities	416,456	322,543	403,514
	______	______	______
Total net assets	416,456	322,543	403,514
	______	______	______
Capital and reserves
Called up share capital	559	559	559
Other reserve	52,397	52,397	52,397
Capital redemption reserve	42	42	42
Capital reserve	368,832	272,990	352,914
Revenue reserve	(5,374)	(3,445)	(2,398)
	______	______	______
Shareholders’ funds	416,456	322,543	403,514
	=====	=====	=====
Net asset value per share (note 4)	744.6p	576.7p	721.4p
Cash Flow Statement	(Unaudited) Six months ended 30th April 2008 £’000	(Unaudited) Six months ended   30th April 2007 £’000	(Audited) Year ended 31st October 2007 £’000
Net cash (outflow)/inflow from operating activities	(2,127)	(1,279)	1,108
Net cash outflow from returns on investments and servicing of finance	(936)	(477)	(1,134)
Net cash outflow from capital expenditure and financial investment	(6,060)	(9,265)	(9,542)
Net cash inflow from financing	9,930	10,610	25,447
	_______	_______	_______
Increase/(decrease) in cash for the period	807	(411)	15,879
	=====	=====	=====

 

Reconciliation of net cash flow to movement in net debt
Net cash movement	807	(411)	15,879
Loans drawn down in the period	(9,930)	(11,026)	(25,863)
Exchange movements	(1,162)	830	1,787
	_______	_______	_______
Movement in net debt in the period	(10,285)	(10,607)	(8,197)
Net debt at the beginning of the period	(16,144)	(7,947)	(7,947)
	_______	_______	_______
Net debt at the end of the period	(26,429)	(18,554)	(16,144)
	=====	=====	=====
Represented by:
Cash and short term deposits	19,013	1,447	17,553
Debt falling due within one year	(45,442)	(20,001)	(33,697)
	_______	_______	_______
Net debt at the end of the period	(26,429)	(18,554)	(16,144)
	=====	=====	=====

 

 

Notes to the Accounts

1. Financial Statements

The information contained within the financial statements in this preliminary announcement has not been audited or reviewed by the Company’s auditors.

The figures and financial information for the year ended 31st October 2007 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 237(2) or 237(3) of the Companies Act 1985.

 

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’ dated 31st December 2005.

 

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 October 2007.

 

3. (Loss)/return per share

	(Unaudited) Six months ended 30th April 2008 £’000	(Unaudited) Six months ended 30th April 2007 £’000	(Audited) Year ended 31st October 2007 £’000
(Loss)/return per share is based on the following:
Revenue loss	(2,976)	(1,786)	(739)
Capital return	15,918	59,763	139,687
	_______	_______	_______
Total return	12,942	57,977	138,948
	=====	=====	=====
Weighted average number of shares in issue	55,932,812	55,982,043	55,957,427
Revenue loss per share	(5.32)p	(3.19)p	(1.32)p
Capital return per share	28.46p	106.75p	249.63p
	_______	_______	_______
Total return per share	23.14p	103.56p	248.31p
	=====	=====	=====

4. Net asset value per share

Net asset value per share is based on the net assets attributable to the ordinary shareholders of £416,456,000 (30th April 2007: £322,543,000 and 31st October 2007: £403,514,000) and on the 55,932,812 (30th April 2007: 55,932,812 and 31st October 2007: 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) Six months ended 30th April 2008 £’000	(Unaudited) Six months ended 30th April 2007 £’000	(Audited) Year ended 31st October 2007 £’000
Total return on ordinary activities before finance costs and taxation	14,036	58,738	141,190
Capital return before finance costs and taxation	(15,918)	(59,763)	(139,687)
Movement in debtors, accrued income and accrued expenses	(45)	(40)	588
Overseas taxation	(200)	(214)	(983)
	_______	_______	_______
Net cash (outflow)/inflow from operating activities	(2,127)	(1,279)	1,108
	=====	=====	=====

 

 

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

27 JUNE 2008

www.jpmrussian.co.uk

 

END

 

 

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