Half-year Report

RNS Number : 5158J

JPMorgan European Discovery Trust

13 December 2022

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMorgan European DISCOVERY Trust plc

Half Year Report & FINANCIAL STATEMENTS for the six months

ended 30TH September 2022

Legal Entity Identifier: 54930049CEWDI46Y3U28

Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

Dear Shareholder,

I hereby present the Company's results for the half-year ended 30th September 2022. 

Performance

European markets have faced a challenging environment during recent months, dominated by significant geo-political uncertainty and heightened market volatility. Following the Covid-19 pandemic, supply side bottlenecks and consequential rising prices have been further stressed by the tragic events following Russia's invasion of Ukraine. Food supplies and energy needs affected by the disruption have become key concerns. It has had a material adverse short-term impact on the value of our portfolio. However, the longer-term performance of our portfolio remains strong.

During the half year to 30th September 2022, the Company recorded a total return on net assets of -18.1%, with the Company's benchmark index, the MSCI Europe (ex UK) Small Cap Index, returning -19.3% over the same period. The total return to shareholders was -19.8%, reflecting a slight widening of the discount at which the Company's shares trade from 14.4% to 16.5% over the six months.

The Company's longer term performance with the 5 year and 10 year total return on net assets was 3.9% and 202.7%, respectively, whilst the benchmark total return was 9.1% and 171.4%. The Investment Managers' Report that follows provides a review of markets, more detail on the performance drivers within the portfolio and the outlook for investing.

Revenue and Dividends

Net revenue return for the six months to 30th September 2022 was higher than the corresponding period in 2021 at 10.43 pence per share (2021: 6.57 pence). The Board has decided to maintain the interim dividend of 1.2 pence (2021: 1.2 pence) per share which will be paid on 3rd February 2023 to shareholders on the register as at 23rd December 2022 (the ex-dividend date will be 22nd December 2022). The Board will keep this under review and take into account the income received and the level of the Company's revenue reserves when determining the final dividend for the year in 2023.

Discount Management and Share Repurchases

The Board continues to monitor closely the level of the discount and considers its ability to repurchase shares to minimise the short term volatility and the absolute level of the discount of prime importance. 995,000 shares were repurchased in the six months to 30th September 2022. No shares have been repurchased since the period end.

The Board

In line with the Board's succession planning, the intention had been for Ashok Gupta to stand down at this year's AGM, having served on the Board for nine years. However, in light of some of the recent changes in the Board composition, the Board agreed that it would be appropriate for the Company to continue to benefit from Ashok's extensive industry experience for a further few months.

No changes were made to the Board in the reporting period.

Environmental, Social and Governance ('ESG')

As highlighted in the 2022 Annual Report, the Board has continued to engage with the Manager on the integration of ESG factors into its investment process. While the investment managers have always considered environmental, social and governance ('ESG') issues in their investment process, it is now rigorously integrated into their investment processes so that ESG issues are considered at every stage of the investment decision. For more details, please refer to pages 21 to 23 of the 2022 Annual Report which can be found on the Company's website at: www.jpmeuropeandiscovery.co.uk

Outlook

Geopolitical tensions, elevated market volatility, and the fastest pace of central bank tightening in decades are meaningful economic headwinds contributing to an unusually uncertain environment at the moment. In Europe, inflation is being acutely felt as the Russia-Ukraine conflict has pushed gas prices to new highs, triggering a cost of living crisis. It seems probable that equity markets will continue to struggle until higher interest rates appear to be working and bringing inflation under control. Nonetheless, European equities continue to trade at a discount to global peers, providing attractive investment opportunities for our Portfolio Managers. It is likely that the macroeconomic

environment may remain uncertain over the coming months, however, the Portfolio Managers' approach to dealing with an uncertain economic and geo-political environment should continue to serve shareholders well.

Marc van Gelder
Chairman

INVESTMENT MANAGERS' REPORT

Review

Equity market weakness continued in the six months to September 2022 as inflationary pressures remained high. Several factors contributed to inflation including the Russian invasion of Ukraine, continued supply chain disruptions exacerbated by China's Zero-Covid policy, and a normalisation of demand post Covid-19 related lockdowns.

The benchmark MSCI Europe (ex UK) Small Cap NR Index fell by 19.3 per cent, underperforming the large cap MSCI Europe (ex UK) NR Index which fell 10.5 per cent.

Portfolio

The NAV of the portfolio decreased by 18.1 per cent over the period, outperforming its benchmark by 1.2 per cent.

Contributors to performance included the French market research company, Ipsos, after the company continued to report a very strong order backlog as high global macroeconomic uncertainty resulted in high demand for customer insights. The Company also continued to benefit from its strong tilt towards the sustainability theme. Investments in the European cable manufacturers, Pysmian, Nexans and NKT (Italian, French and Danish listed), continued to outperform supported by very high demand for electrification. French Engineering company, Spie, also fits into this category as it is focused in rolling out the practical solutions required to electrify infrastructure.

As in the previous period, detractors from performance were predominantly past 'high quality growth' winners that continued to see significant multiple contraction due to rising bond yields. Underperformers include Belgian warehousing companies, Warehouses De Pauw and VGP. The German forklift truck manufacturer, Kion, detracted from performance as it was unable to pass on cost inflation in a number of its long term projects. Inflation has also weighed on consumer demand which has been a headwind for companies such as Danish audio solutions manufacturer, GN Store Nord and French animal pharmaceutical company, Virbac.

During the period we took advantage of significant valuation deratings to purchase a number of attractive high quality companies which now trade on significantly lower valuations. These included Italian diagnostics company, DiaSorin, Italian pure play renewables company, ERG, whose high exposure to spot power prices directly benefited the company given the European energy situation, and Finnish consumer packaging producer, Huhtamaki, whose margins are likely to benefit from falling raw material prices and continued strong demand for their sustainable solutions.

To fund these purchases sold out of several companies which are likely to be impacted by the current uncertain macroeconomic environment and high energy prices. These include industrial companies Indutrade, Pirelli, Rexel, and Belimo.

Communication Services rose to become the largest sector overweight. This shift was a result of the outperformance of Ipsos, the French market research company mentioned above, and a reduction in the Industrials overweight. This reduction was a result of the sale of several of the Company's more macroeconomically exposed investments such as the Dutch manufacturer of energy-efficient lighting solutions, Signify, and Italian premium tyre manufacturer, Pirelli. Financials and Energy were the largest underweights.

France and Italy remained the two largest country overweights, while Norway and Germany remained the two largest underweights.

At the end of September, the net cash was -4.16%.

Outlook

We started the year believing (like many market participants) that inflation would prove to be transitory. The sad events in the Ukraine and more recently the lockdowns in China make it highly unlikely that the high levels we are currently seeing will quickly revert to Central Bank targets. The positive aspect of equities, unlike bonds, is that there are companies and sectors that can still perform in inflationary environments and those are the companies which we have been increasingly investing in. For instance, companies with high barriers to entry and pricing power should be able to pass on inflation. Certain areas of insurance combine a positive exposure to rising bond yields and defensive business models. Companies who see demand greatly exceeding their potential to supply, such as the high voltage cable manufacturers, or those companies exposed to the electrification theme, should also find themselves well placed to raise their prices.

While it is difficult to predict when the current inflationary environment will end, historically European smaller companies have been one of the best performing asset classes globally, and we do not see the fundamentals that drove this changing. Innovation has powered smaller companies and will continue to do so long into the future. As always it is our job to uncover these opportunities.

Francesco Conte
Edward Greaves
Investment Managers

INTERIM MANAGEMENT REPORT

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

Principal Risks and Uncertainties

The principal and emerging risks and uncertainties faced by the Company fall into the following broad categories:

investment underperformance and strategy; market and currency; accounting, legal and regulatory; operational;

cyber-crime, financial, corporate governance and shareholder relations, climate change and emerging risks.

The Board has reviewed the principal risks and uncertainties, reported in the Annual Report and Financial Statements for the year ended 31st March 2022, and concluded that the emerging risks identified within that Annual Report in respect of geopolitical and global recession are now principal risks. In the view of the Board, these principal risks and uncertainties are as much applicable to the remaining six months of the financial year as they were to the six months under review.

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

In accordance with The Financial Reporting Council's guidance on going concern and liquidity risk, including its Covid-19 guidance, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Board has, in particular, considered the impact of heightened market volatility since the Covid-19 outbreak and more recently the Russian invasion of Ukraine, but does not believe the Company's going concern status is affected. The Company's assets, which are investments in quoted securities which are readily realisable, exceed its liabilities significantly under all stress test scenarios reviewed by the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis. Furthermore, the Directors are satisfied that the Company and its key third party service providers have in place appropriate business continuity plans. Accordingly, having assessed the principal and emerging risks and other matters, the Directors believe that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least 12 months from the date of the approval of this half yearly financial report.

Directors' Responsibilities

The Board of Directors confirm 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 FRS 104 'Interim Financial Reports' and gives a true and fair view of the state of affairs of the Company and of the assets, liabilities, financial position and net return of the Company, as at 30th September 2022, as required by the UK Listing Authority Disclosure Guidance and Transparency Rules 4.2.4R; 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 Guidance 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
Marc van Gelder
Chairman

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30th SEPTEMBER 2022

	(Unaudited) Six months ended 30th September 2022			(Unaudited) Six months ended 30th September 2021					(Audited) Year ended 31st March 2022
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000		Capital £'000		Total £'000	Revenue £'000	Capital £'000	Total £'000
(Losses)/gains on investments held at fair value through profit or loss	-	(164,778)	(164,778)	-		105,756		105,756	-	(1,046)	(1,046)
Foreign exchange gains/(losses) on liquidity fund	-	1,819	1,819	-	38		38		-	(860)	(860)
Net foreign currency losses	-	(1,455)	(1,455)	-	(1,097)		(1,097)		-	(253)	(253)
Income from investments	19,359	-	19,359	13,687	-		13,687		16,360	-	16,360
Interest receivable and similar income	70	-	70	113	-		113		138	-	138
Gross return/(loss)	19,429	(164,414)	(144,985)	13,800	104,697		118,497		16,498	(2,159)	14,339
Management fee	(989)	(2,308)	(3,297)	(1,168)	(2,725)		(3,893)		(2,360)	(5,507)	(7,867)
Other administrative expenses	(312)	-	(312)	(309)	-		(309)		(719)	-	(719)
Net return/(loss) before finance costs and taxation	18,128	(166,722)	(148,594)	12,323	101,972		114,295		13,419	(7,666)	5,753
Finance costs	(138)	(321)	(459)	(136)	(318)		(454)		(271)	(633)	(904)
Net return/(loss) before taxation	17,990	(167,043)	(149,053)	12,187	101,654		113,841		13,148	(8,299)	4,849
Taxation	(1,548)	-	(1,548)	(1,716)	-		(1,716)		(1,994)	-	(1,994)
Net return/(loss) after taxation	16,442	(167,043)	(150,601)	10,471	101,654		112,125		11,154	(8,299)	2,855
Return /(loss) per share(note 3)	10.43p	(105.95)p	(95.52)p	6.57p	63.75p		70.32p		7.00p	(5.21)p	1.79p

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30th SEPTEMBER 2022

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserves1 £'000	Revenue reserve1 £'000	Total £'000
Six months ended 30th September 2022 (Unaudited)
At 31st March 2022	7,924	1,312	7,712	805,617	11,154	833,719
Repurchase and cancellation of the Company's own shares	(50)	-	50	(4,254)	-	(4,254)
Net (loss)/return	-	-	-	(167,043)	16,442	(150,601)
Dividend paid in the period (note 4)	-	-	-	-	(8,661)	(8,661)
At 30th September 2022	7,874	1,312	7,762	634,320	18,935	670,203
Six months ended 30th September 2021 (Unaudited)
At 31st March 2021	7,974	1,312	7,662	820,196	9,160	846,304
Net return	-	-	-	101,654	10,471	112,125
Dividend paid in the period (note 4)	-	-	-	-	(8,770)	(8,770)
At 30th September 2021	7,974	1,312	7,662	921,850	10,861	949,659
Year ended 31st March 2022 (Audited)
At 31st March 2021	7,974	1,312	7,662	820,196	9,160	846,304
Repurchase and cancellation of Company's own shares	(50)	-	50	(4,760)	-	(4,760)
Net (loss)/return on ordinary activities	-	-	-	(8,299)	11,154	2,855
Dividends paid in the year (note 4)	-	-	-	(1,520)	(9,160)	(10,680)
At 31st March 2022	7,924	1,312	7,712	805,617	11,154	833,719

¹   These reserves form the distributable reserves of the Company and may be used to fund distribution of profits to investors via dividend payments.
For the year ended 31st March 2022 the dividend payment was split between revenue reserve and capital reserve as the revenue reserve opening balance was entirely exhausted.

STATEMENT OF FINANCIAL POSITION

AT 30th SEPTEMBER 2022

	(Unaudited) 30th September 2022 £'000	(Unaudited) 30th September 2021 £'000	(Audited) 31st March 2022 £'000
Fixed assets Investments held at fair value through profit or loss	642,346	961,055	834,018
Current assets
Derivative financial instruments	-	1	2
Debtors	5,482	12,400	2,266
Cash and cash equivalents	57,729	54,918	75,318
	63,211	67,319	77,586
Current liabilities
Creditors: amounts falling due within one year	(35,354)	(1,339)	(77,885)
Derivative financial liabilities	-	(18)	-
Net current assets/(liabilities)	27,857	65,962	(299)
Total assets less current liabilities	670,203	1,027,017	833,719
Creditors: amounts falling due after more than one year	-	(77,358)	-
Net assets	670,203	949,659	833,719
Capital and reserves
Called up share capital	7,874	7,974	7,924
Share premium	1,312	1,312	1,312
Capital redemption reserve	7,762	7,662	7,712
Capital reserves	634,320	921,850	805,617
Revenue reserve	18,935	10,861	11,154
Total shareholders' funds	670,203	949,659	833,719
Net asset value per share (note 5)	425.6p	595.5p	526.1p

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30th SEPTEMBER 2022

	(Unaudited) Six months ended 30th September 2022 £'000	(Unaudited) Six months ended 30th September 2021 £'000	(Audited) Year ended 31st March 2022 £'000
Net cash outflow from operations before dividends and interest (note 6)	(2,882)	(4,740)	(10,675)
Dividends received	16,084	11,254	13,119
Interest received	-	1	1
Overseas tax recovered	531	148	215
Interest paid	(536)	(458)	(919)
Net cash inflow from operating activities	13,197	6,205	1,741
Purchases of investments and derivatives	(258,862)	(322,461)	(620,647)
Sales of investments and derivatives	282,414	378,263	707,608
Settlement of forward currency contracts	184	53	118
Net cash inflow from investing activities	23,736	55,855	87,079
Dividends paid	(8,661)	(8,770)	(10,680)
Repurchase and cancellation of the Company's own shares	(4,412)	-	(4,602)
Repayment of bank loans	(42,528)	-	-
Net cash outflow from financing activities	(55,601)	(8,770)	(15,282)
(Decrease)/increase in cash and cash equivalents	(18,668)	53,290	73,538
Cash and cash equivalents at start of period	75,318	1,407	1,407
Exchange movements	1,079	221	373
Cash and cash equivalents at end of period	57,729	54,918	75,318
(Decrease)/increase in cash and cash equivalents	(18,668)	53,290	73,538
Cash and cash equivalents consist of:
Cash and short term deposits	266	267	430
Cash held in JPMorgan Euro Liquidity Fund	57,463	54,651	74,888
Total	57,729	54,918	75,318

NOTES TO THE FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30th SEPTEMBER 2022

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 March 2022 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements 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 financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the 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' (the revised 'SORP') issued by the Association of Investment Companies in April 2021.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015
has been applied in preparing this condensed set of financial statements for the six months ended
30th September 2022.

All of the Company's operations are of a continuing nature.

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st March 2022.

3.  Return/(loss) per share

	(Unaudited) Six months ended 30th September 2022 £'000	(Unaudited) Six months ended 30th September 2021 £'000	(Audited) Year ended 31st March 2022 £'000
Return per share is based on the following:
Revenue return	16,442	10,471	11,154
Capital (loss)/return	(167,043)	101,654	(8,299)
Total (loss)/return	(150,601)	112,125	2,855
Weighted average number of shares in issue	157,662,663	159,462,885	159,257,259
Revenue return per share	10.43p	6.57p	7.00p
Capital (loss)/return per share	(105.95)p	63.75p	(5.21)p
Total (loss)/return per share	(95.52)p	70.32p	1.79p

4 .   Dividends paid

	(Unaudited) Six months ended 30th September 2022 £'000	(Unaudited) Six months ended 30th September 2021 £'000	(Audited) Year ended 31st March 2022 £'000
2022 final dividend of 5.5p (2021: 5.5p) per share	8,661	8,770	8,770
2022 interim dividend of 1.2p per share	-	-	1,910
Total dividends paid in the period/year	8,661	8,770	10,680

All dividends paid in the period have been funded from the revenue reserve. For the year ended 31^st March 2022 the dividend payment was split between revenue reserve and capital reserve as the revenue reserve opening balance was entirely exhausted.

An interim dividend of 1.2 p (2021:1.2p) has been declared in respect of the six months ended 30th September 2022, amounting to £ 1,890,000 .

5 .   Net asset value per share

	(Unaudited) Six months ended 30th September 2022	(Unaudited) Six months ended 30th September 2021	(Audited) Year ended 31st March 2022
Net assets (£'000)	670,203	949,659	833,719
Number of shares in issue	157,474,931	159,462,885	158,469,931
Net asset value per share	425.6p	595.5p	526.1p

6.  Reconciliation of net (loss)/return before finance costs and taxation to net cash outflow from operations
  before dividends and interest

	(Unaudited) Six months ended 30th September 2022 £'000	(Unaudited) Six months ended 30th September 2021 £'000	(Audited) Year ended 31st March 2022 £'000
Net (loss)/return before finance costs and taxation	(148,594)	114,295	5,753
Add capital losses/(less capital return) before finance costs and taxation	166,722	(101,972)	7,666
Scrip dividends received as income	(188)	-	-
(Increase)/decrease in accrued income and other debtors	(1)	14	(202)
(Decrease)/increase in accrued expenses	(15)	(25)	(1)
Management fee allocated to capital	(2,308)	(2,725)	(5,507)
Overseas withholding tax	(3,093)	(2,447)	(3,049)
Dividends received	(16,084)	(11,254)	(13,119)
Interest received	-	(1)	(1)
Realised losses on foreign exchange transactions	(59)	(425)	(804)
Realised exchange gains/(losses) on liquidity	738	(200)	(1,413)
Net cash outflow from operations before dividends and interest	(2,882)	(4,740)	(10,675)

7.  Fair valuation of investments

The fair value hierarchy analysis for financial instruments held at fair value at the period end is as follows:

	(Unaudited) Six months ended 30th September 2022		(Unaudited) Six months ended 30th September 2021		(Audited) Year ended 31st March 2022
	Assets £'000	Liabilities £'000	Assets £'000	Liabilities £'000	Assets £'000	Liabilities £'000
Level 1	642,346	-	961,055	-	834,018	-
Level 21	-	-	1	(18)	2	-
Total	642,346	-	961,056	(18)	834,020	-

¹ Includes forward foreign currency contracts.

13th December 2022

For further information, please contact:

Priyanka Vijay Anand

For and on behalf of JPMorgan Funds Limited,

Company Secretary

020 7742 4000

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 report will be submitted to the FCA's National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

The half year will also shortly be available on the Company's website at www.jpmeuropeandiscovery.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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