Half Year Results

RNS Number : 0883P

JPMorgan Smaller Cos IT PLC

18 March 2009

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN SMALLER COMPANIES INVESTMENT TRUST plc

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 

31st JANUARY 2009

Chairman's Statement

Performance

The six months period to 31st January 2009 has been a most extraordinarily difficult period for investors in UK equity markets, with the global economy sliding into recession and the world financial system in difficulties. Dominated by the credit crunch, UK smaller companies in particular, have produced extremely disappointing results. Against this backdrop, the Company produced a negative return of 39.0% for shareholders in the six months period. The total return on net assets was negative 37.6% compared with the FTSE Small Cap Index (excluding investment trusts) return of negative 37.6%. The Investment Manager's report gives a more detailed commentary about the unprecedented market conditions experienced during this period.

Share Buybacks

During the half year, the Company repurchased a total of 360,100 ordinary shares for cancellation for a total consideration of £864,178 representing 1.85% of the issued share capital at the beginning of the year. The shares were repurchased at an average discount of 17% and added approximately 1p per share to the net asset value for continuing shareholders. 

The Board's objective remains to use this policy of utilising share buybacks to help maintain an orderly market for the Company's shares, thereby reducing the volatility of the discount.

Gearing and New Loan Facility

Gearing at 31st January 2009 was at 104.3%. A flexible loan facility of £13.5 million is currently in place with Bank of Ireland, which expires in April 2009. I am pleased to report that the Board is in the process of arranging a new loan facility to be made available when the current facility expires, which can continue to be used tactically as investment opportunities present themselves, with the aim of enhancing returns. At the end of January 2009, £5 million had been drawn on the current facility.

VAT and Special Interim Dividend

The Board announced on 8th January 2009 that an agreement with JPMorgan on the recovery of past VAT had been executed. Following receipt of the payment of the VAT recovery and interest announced on 24th December 2008, the Directors declared a special one-off interim dividend of 3p per share for the year ending 31st July 2009, and paid that on 30 January 2009 to shareholders on the register at the close of business on 16th January 2009. The ex-dividend date was 14th January 2009. 

Outlook

The Board remains cautious in its outlook and expects 2009 to be a difficult year for investors, as Governments worldwide take drastic measures to counter the global recession. However, there will come a point when these initiatives start to become effective and investors' confidence is regained, with re-rating of the value of many stocks. As highlighted in her report, the Investment Manager continues to take advantage of the excellent opportunity in these markets to invest in companies that will survive the recession and are also likely to grow their market share. The Board is confident that the Company's portfolio is well positioned to survive the turmoil and benefit strongly from any upturn in the market when it happens.

Strone Macpherson

Chairman                                    

18th March 2009

Investment Managers' Report

Market Background

The Autumn of 2008 will be hard for any investor to forget. The banking crisis which began in the summer of 2007 reached a climax in this reporting period, and during these six months the crisis expanded out of the financial sector and into the real economy.

As has been well documented, the collapse of Lehman Brothers brought panic to markets around the world. Banks refused to lend to each other, for fear of counterparty risk, and in turn this led to a collapse in orders in the fourth quarter of 2008. The speed of the contraction took most companies and commentators by surprise. While GDP in the UK turned negative in Q3 2008, down 0.6%, it was the fourth quarter that saw the full impact of the crisis, leading to a GDP decline of 1.5% quarter on quarter - which was the largest quarterly decline since 1980. 

As fears of an outright depression, rather than short term recession, gathered pace, and the inflationary threat of early 2008 turned to concerns over deflation, governments around the world reacted. The dramatic policy response in the UK led to the slashing of interest rates to the unprecedented level of 1.5% by January 2009 (now at 0.5% in March 2009). This, allied with further aggressive Government measures, has since December led to a slow and gradual easing in credit markets.

Portfolio Review

In the stockmarket turmoil of the last six months, company fundamentals were ignored. Smaller companies were aggressively sold off, on account of three factors: risk aversion, deleveraging by hedge funds/redemptions by investors, and derating/downgrading of forecasts. Against this backdrop, your company delivered a flat return on net assets against the benchmark, which itself was down a staggering 37.6%.

Over the last twelve months, the portfolio had become more defensive, and this trend continued in the period. This can be seen in the sector analysis, where the most notable change was the reduction in the Industrials overweight position, and most recently a small increase in the Financials holdings, although we remain very significantly underweight this area of the market. In terms of sector performance, the underweight position in Real Estate was the single most notable contributor to relative performance, followed by the overweight position in Technology. Overall, stock selection was the main positive. 

Avoiding losers was as important as holding winners in the period. While we clearly did not avoid them all, there were over 40 stocks in the small cap arena that lost 75% of their value in the last six months. A few notable outperformers within the portfolio included long-time holding Chemring, Micro Focus (tech) and the positions in Axon and Imperial Energy, both of which were acquired in the period. The small amount of gearing that was in place at the worst of market declines cost your company approximately 2%. 

It is important to emphasise that during this extraordinarily volatile period, the investment process which underlies the fund did not change. The methodology uses a quantitative screen which breaks down the individual stocks in the investible universe and ranks them according to four factors: value, earnings momentum, price momentum and growth. After fundamental research to check the data, the balance sheet and the market environment, the portfolio is constructed around stocks which demonstrate these tilts. This aims to ensure not only that the portfolio is constructed around our underlying philosophy of fast-growing cheap stocks with good newsflow, but also that the portfolio has both growth and value signatures, which academic evidence has demonstrated to be the two long-term drivers of outperformance in the stockmarket. This quantitative approach is the starting point for the stock selection that is the bedrock of the portfolio; it is then overlaid by the fund managers' extensive knowledge of individual companies and their markets, and their own research efforts.

Market Outlook

It is all too easy to paint a picture of unrelenting gloom - and indeed, the newspapers currently are full of little else. 2009 is going to see recessions in the UK, US, Germany, France and Japan to name but a few. Unemployment is rising, orders in a large number of industries are declining, and companies are unable to forecast accurately, or at all, given the speed of the recent declines.

Against this bleak backdrop, there are reasons for optimism. The emphatic and on-going policy response of governments is helping the credit markets to begin to recover. President Obama's economic stimulus plan and the Chinese reflationary package should help to kick-start the US economy and return China to its 8% annual growth target. In the UK, the decline in input costs and the weakness of sterling over the last several months will prove to be of huge benefit to our exporters.

Most compelling of all is the valuation argument. Stockmarkets are pre-emptive, and a very significant amount of the poor economic outlook is currently priced into UK equities. Among small cap companies, which were worst hit in the flight from risk seen in 2008, there are some compelling bargains. It is currently possible to invest in certain companies with an enterprise value of less than one times EBITDA. What this means is that these businesses are currently being valued, netting out the cash which they own, on less than one year's cashflow. Such bargains cannot last, and these stocks should at some point be comprehensively rerated. While we currently remain defensive in our overall positioning, and are focussing on companies that will not only survive but should grow market share in this recession, we are also selectively buying into certain higher risk situations where we believe the eventual rewards will far outweigh the current risk.

Georgina Brittain

Kent Kwan

Investment Managers                                

18th March 2009

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 six 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 July 2008.

During the market turmoil in the latter part of 2008, JPMAM reacted with heightened management scrutiny of counterparty risk. In addition, reviews were initiated of exposures, policies, procedures and legal arrangements applicable to the major sources of counterparty exposure.

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' 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.

Strone Macpherson

Chairman    

18th  March 2009

For further information, please contact:

Divya Amin

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.jpmsmallercompanies.co.uk

JPMorgan Smaller Companies Investment Trust plc

Unaudited figures for the six months ended 31st January 2009

Income Statement

		(Unaudited)				(Unaudited)				(Audited)
		Six months ended				Six months ended				Year ended
		31st January 2009				31st January 2008				31st July 2008
	Revenue		Capital	Total	Revenue		Capital	Total	Revenue		Capital	Total
	£’000		£’000	£’000	£’000		£’000	£’000	£’000		£’000	£’000
Losses from investments held at
fair value through profit or loss	—		(38,688)	(38,688)	—		(37,870)	(37,870)	—		(41,818)	(41,818)
Net foreign currency gains	—		—	—	—		1	1	—		1	1
Income from investments	1,226		—	1,226	1,259		—	1,259	2,943		—	2,943
Other interest receivable and similar income (note3)	145		—	145	20		—	20	34		—	34
Gross return/(loss)	1,371		(38,688)	(37,317)	1,279		(37,869)	(36,590)	2,977		(41,817)	(38,840)
Management fee	(168)		(168)	(336)	(307)		(307)	(614)	(533)		(533)	(1,066)
VAT recoverable (note 3)	488		466	954	—		—	—	—		—	—
Other administrative expenses	(156)		—	(156)	(144)		—	(144)	(314)		—	(314)
Net return/(loss) on ordinary activities
before finance costs
and taxation	1,535		(38,390)	(36,855)	828		(38,176)	(37,348)	2,130		(42,350)	(40,220)
Finance costs	(93)		(93)	(186)	(178)		(178)	(356)	(335)		(335)	(670)
Net return/(loss) on ordinary activities
before taxation	1,442		(38,483)	(37,041)	650		(38,354)	(37,704)	1,795		(42,685)	(40,890)
Taxation	(2)		—	(2)	—		—	—	(10)		—	(10)
Net return/(loss) on ordinary activities
after taxation	1,440		(38,483)	(37,043)	650		(38,354)	(37,704)	1,785		(42,685)	(40,900)
Return/(loss) per share (note 5)	7.23p		(193.32)p	(186.09)p	3.11p		(183.54)p	(180.43)p	8.67p		(207.22p)	(198.55p)

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.

  JPMorgan Smaller Companies Investment Trust plc

Unaudited figures for the six months ended 31st January 2009

Reconciliation of Movements in Shareholders' Funds

Six months ended 31st January 2009 (unaudited)
	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£’000	£’000	£’000	£’000	£’000	£’000
At 31st July 2008	5,006	18,360	1,660	68,853	2,156	96,035
Shares bought back and cancelled	(90)	—	90	(869)	—	(869)
Net (loss)/return from ordinary activities	—	—	—	(38,483)	1,440	(37,043)
Dividends appropriated in the period	—	—	—	—	(1,990)	(1,990)
At 31st January 2009	4,916	18,360	1,750	29,501	1,606	56,133
Six months ended 31st January 2008 (unaudited)
	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£’000	£’000	£’000	£’000	£’000	£’000
At 31st July 2007	5,312	18,360	1,354	117,213	1,418	143,657
Shares bought back and cancelled	(186)	—	186	(3,704)	—	(3,704)
Net (loss)/return from ordinary activities	—	—	—	(38,354)	650	(37,704)
Dividends appropriated in the period	—	—	—	—	(1,047)	(1,047)
At 31st January 2008	5,126	18,360	1,540	75,155	1,021	101,202
Year ended 31st July 2008 (audited)
	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£’000	£’000	£’000	£’000	£’000	£’000
At 31st July 2007	5,312	18,360	1,354	117,213	1,418	143,657
Shares bought back and cancelled	(306)	—	306	(5,675)	—	(5,675)
Net (loss)/return from ordinary activities	—	—	—	(42,685)	1,785	(40,900)
Dividends appropriated in the year	—	—	—	—	(1,047)	(1,047)
At 31st July 2008	5,006	18,360	1,660	68,853	2,156	96,035

  JPMorgan Smaller Companies Investment Trust plc

Unaudited figures for the six months ended 31st January 2009

Balance Sheet

	(Unaudited)	(Unaudited)	(Audited)
	31st January 2009	31st January 2008	31st July 2008
	£’000	£’000	£’000
Fixed assets
Investments at fair value through profit or loss	58,520	104,297	101,394
Investments in liquidity funds at fair value through
profit or loss	2,305	6,620	4,535
Total investments	60,825	110,917	105,929
Current assets
Debtors	342	1,696	237
Cash at bank and in hand	288	225	99
	630	1,921	336
Creditors: amounts falling due within one year	(5,322)	(11,636)	(10,230)
Net current liabilities	(4,692)	(9,715)	(9,894)
Total assets less current liabilities	56,133	101,202	96,035
Total net assets	56,133	101,202	96,035
Capital and reserves
Called up share capital	4,916	5,126	5,006
Share premium	18,360	18,360	18,360
Capital redemption reserve	1,750	1,540	1,660
Capital reserves	29,501	75,155	68,853
Revenue reserve	1,606	1,021	2,156
Shareholders’ funds	56,133	101,202	96,035
Net asset value per share (note 6)	285.4p	493.5p	479.6p

  JPMorgan Smaller Companies Investment Trust plc

Unaudited figures for the six months ended 31st January 2009

Cash Flow Statement

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2009	31st January 2008	31st July 2008
	£’000	£’000	£’000
Net cash inflow from operating activities (note 7)	1,956	541	1,443
Net cash outflow from returns on investments and
servicing of finance	(214)	(415)	(788)
Net cash inflow from capital expenditure
And financial investment	6,342	5,006	7,225
Dividends paid	(1,990)	(1,047)	(1,047)
Net cash outflow from financing	(5,905)	(3,704)	(6,578)
Increase in cash for the period	189	381	255
Reconciliation of net cash flow to movement in
net debt
Net cash movement	189	381	255
Cash outflow from changes in debt	5,000	—	1,000
Exchange movements	—	1	1
Movement in net debt in the period	5,189	382	1,256
Net debt at the beginning of the period	(9,901)	(11,157)	(11,157)
Net debt at the end of the period	(4,712)	(10,775)	(9,901)
Represented by:
Cash at bank and in hand	288	225	99
Debt due within one year	(5,000)	(11,000)	(10,000)
Net debt	(4,712)	(10,775)	(9,901)

Notes to the Accounts

 

1.             Financial statements

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

                The figures and financial information for the year ended 31st July 2008 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’ 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 July 2008.

 

3.             VAT recoverable

                No VAT has been charged on management fees since November 2007 when HM Revenue & Customs announced acceptance that VAT was not chargeable on investment trust management fees. The Company has since recovered VAT amounting to £954,000 and interest of £139,000 in respect of VAT paid in the past. The VAT recovered has been allocated between income and capital in the proportions in which it was originally expensed to income and capital. The interest has been credited wholly to income and is included within ‘Other interest receivable and similar income’.

 

4.             Dividends

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2009	31st January 2008	31st July 2008
	£’000	£’000	£’000
Final dividend in respect of the year ended
31st July 2008 of 7.0p (2007: 5.0p)	1,3991	1,047	1,047
Special dividend in respect of the year ending
31st July 2009 of 3.0p (2008: nil)	5912	—	—

 

1The Company declared a dividend of £1,402,000 but the dividend paid amounted to £1,399,000 as a result of share buybacks.

2The Company paid a Special dividend of 3.0p in January 2009 representing the amount of VAT recovered and the associated interest taken to income.

No interim dividend has been declared in respect of the six months ended 31st January 2009 (2008: nil).

 

5.             Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2009	31st January 2008	31st July 2008
	£’000	£’000	£’000
Return per share is based on the following:
Revenue return	1,440	650	1,785
Capital loss	(38,483)	(38,354)	(42,685)
Total loss	(37,043)	(37,704)	(40,900)
Weighted average number of shares in issue:	19,906,185	20,896,483	20,598,483
Revenue return per share	7.23p	3.11p	8.67p
Capital loss per share	(193.32)p	(183.54)p	(207.22)p
Total loss per share	(186.09)p	(180.43)p	(198.55)p

 

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 January 2009 of 19,665,222 (31st January 2008: 20,504,983 and 31st July 2008: 20,025,322).

 

7.             Reconciliation of net loss 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 January 2009	31st January 2008	31st July 2008
	£’000	£’000	£’000
Net loss before finance cost and taxation	(36,855)	(37,348)	(40,220)
Add back capital loss before finance costs
and taxation	38,390	38,176	42,350
Scrip dividends received as income	(8)	—	—
Decrease/(increase) in accrued income	129	46	(98)
Decrease/(increase) in other debtors	8	(3)	(13)
Decrease in accrued expenses	(4)	(23)	(33)
Tax on unfranked investment income	(2)	—	(10)
VAT recoverable included in capital	466	—	—
Expenses charged to capital	(168)	(307)	(533)
Net cash inflow from operating activities	1,956	541	1,443

 

 

END

 

 

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