Half Year Results

RNS Number : 0362D

JPMorgan Smaller Cos IT PLC

24 March 2014

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
31ST JANUARY 2014

Chairman's Statement

Performance and discount

After the Company's strong results of the previous financial year, I am pleased to report that UK smaller companies continued to rise during the first half of the current year as investors have become increasingly positive about the UK economy. The total return on the Company's net assets was +14.0% for the six months to 31st January 2014. By comparison, the benchmark, the FTSE Small Cap Index (excluding investment trusts) recorded a rise of 19.5% during the same period. This short-term underperformance against the benchmark was largely due to disappointing results from a small number of holdings in a particularly unforgiving market. Recent performance should be considered in the light of substantial outperformance in past years, and by way of example the return on the Company's net assets has exceeded the benchmark by 27.6% over the five years to 31st January 2014.

The Company's discount to net asset value reduced significantly from 18.3% to 13.4% during the period as part of a general reduction in discounts for smaller company investment trusts. The Company did not engage in any share repurchases during the half year.

The combination of underlying performance and the reduction in the discount resulted in a share price total return for the reporting period of +21.1%. UK equity markets have continued to rise strongly since the period end, with the net asset value and share price increasing by 2.0% and 4.8% respectively up to the time of writing.

The Investment Manager provides a detailed commentary on markets and the portfolio performance in her Report.

Gearing and Loan Facility

The use of gearing in a period of low interest rates is an attractive way of amplifying the effect of rising markets, but inevitably increases the risk of loss if markets fall. The Board sets the overall gearing guidelines and regularly discusses them with the investment manager. The guidelines set a maximum level of gearing with the facility for temporary increases under special circumstances. The Company's gearing level increased during the period from 8.4% at the beginning of the period to 8.9% at 31st January 2014. At the time of writing the Company was 9.6% geared. This was after drawing down fully on the £19 million flexible loan facility with Scotiabank in December 2013. The loan facility which expires in April 2014 has been reviewed by the Board and will be replaced with a £24 million two year flexible loan facility again with Scotiabank. This increased facility reflects the rise in net assets and allows sufficient headroom for further drawdowns subject to the Board's overall guidelines.

Outlook

Your company and smaller companies in general have delivered particularly strong absolute performance over the last two years. The rise in valuations has outstripped growth in earnings, leaving smaller companies less cheap than they were, increasing the likelihood of a period of consolidation in share prices. Near term prospects for equity markets will also be influenced by the pace of economic recovery and the inevitable tightening in monetary conditions. Notwithstanding these short-term factors, the Board remains confident in the Investment Manager's approach and the long-term growth prospects for smaller company shares.

Michael Quicke

Chairman

24th March 2014

Investment Manager's Report

Performance and Market Background

Your Company produced a total return on net assets of +14.0% over the first six months of the financial year. While a good absolute return, this was disappointing compared to the Company's benchmark, the FTSE Small Cap Index (ex Investment Trusts), which rose by 19.5%. However, the Company's discount to its net asset value narrowed significantly, which led to a strong return to shareholders of +21.1%.

Prior to the start of your Company's financial year, the stock market declined as investors digested the implications of the likelihood of tapering by the US Federal Reserve. Subsequently, markets rallied strongly through the six month period. In the UK, the key reason for this rally was the growing strength of the UK economy. Forecasts for UK GDP growth for 2014 rose from 1.8% a year ago to the OBR's current expectation of 2.7%, a 50% increase over the year. The domestic bias of mid and smaller companies led to their continued strong performance.

Portfolio

As the UK recovery gained traction, we made significant changes to the portfolio. Most notably, we significantly reduced our exposure to the larger FTSE 250 stocks, reinvesting the gains from certain long-held positions into the smaller end of the market, and we increased our exposure to UK domestic-facing companies, particularly in the retail and media areas. This can be seen in the chart (overleaf), where the key change in the period was the increase in the portfolio's exposure to Consumer Services.

Strong positives over the six months include our positions in a number of IPOs we participated in during 2013, notably Fusionex and Plus500. Another notable contributor to performance was the zero weighting in mining stocks, which underperformed significantly in the half year. However, while we avoided a number of underperforming stocks, we had some significant disappointments in the portfolio, namely Carclo, Dialight and International Personal Finance. All of these were long-term holdings which seriously disappointed. We have sold out of the latter, and substantially reduced our positions in the former two companies. We remained geared throughout the period, which was beneficial to returns.

Outlook

One year ago market forecasters were concerned that the UK was going to enter a 'triple dip' recession. It subsequently transpired that the UK economy never even had a 'double dip' recession. The recent strength of the recovery has taken everyone by surprise; the UK is now the fastest growing economy in the Western World.

There are a number of other positives: the inflation rate has now fallen below the Bank of England's 2% target, unemployment has fallen more rapidly than was expected, business and consumer confidence are both on the rise. Key indicators for growth such as the Purchasing Managers' Index indicate that the UK will continue to be in an expansionary phase, and business investment has begun to increase, notably in the fourth quarter of 2013.

Inevitably, there are potential concerns: the impact of US tapering, its knock-on effects on emerging markets, the slowdown in China, and, key for us, the timing and magnitude of interest rate rises in the UK. However, it is our view that interest rates will not rise until 2015 and will follow a path that ensures the sustainability of the economic recovery. Taken overall, this is a strong backdrop for domestically-focused companies. Unsurprisingly, valuations have risen as the outlook has steadily improved. Smaller companies are no longer cheap, but we remain comfortable with valuations due both to the strength of the companies we are invested in and to the growth potential of those companies.

Georgina Brittain

Investment Manager

24th March 2014

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 the following broad categories: investment and strategy; discount; political; corporate governance and shareholder relations; market; accounting, legal and regulatory; 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 2013.

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 yearly financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half Yearly 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 31st January 2014, as required by the UK Listing Authority Disclosure 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 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

Michael Quicke

Chairman

24th March 2014

For further information, please contact:

Divya Amin

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.jpmsmallercompanies.co.uk

Income Statement

for the six months ended 31st January 2014

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	31st January 2014			31st January 2013			31st July 2013
	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	-	21,159	21,159	-	23,349	23,349	-	47,532	47,532
Net foreign currency gains	-	-	-	-	-	-	-	1	1
Income from investments	1,311	-	1,311	1,477	-	1,477	2,910	-	2,910
Other interest receivable and   similar income	-	-	-	-	-	-	27	-	27
Gross return	1,311	21,159	22,470	1,477	23,349	24,826	2,937	47,533	50,470
Management fee	(358)	(358)	(716)	(247)	(247)	(494)	(546)	(546)	(1,092)
Other administrative expenses	(187)	-	(187)	(181)	-	(181)	(403)	-	(403)
Net return on ordinary activities   before finance costs and taxation	766	20,801	21,567	1,049	23,102	24,151	1,988	46,987	48,975
Finance costs	(55)	(55)	(110)	(55)	(55)	(110)	(98)	(98)	(196)
Net return on ordinary activities   before taxation	711	20,746	21,457	994	23,047	24,041	1,890	46,889	48,779
Taxation	5	-	5	(9)	-	(9)	2	-	2
Net return on ordinary activities after taxation	716	20,746	21,462	985	23,047	24,032	1,892	46,889	48,781
Return per share (note 4)	3.93p	113.87p	117.80p	5.40p	126.41p	131.81p	10.38p	257.26p	267.64p

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	Share	redemption	Capital	Revenue
31st January 2014	capital	premium	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st July 2013	4,555	18,360	2,111	126,167	2,923	154,116
Net return on ordinary activities	-	-	-	20,746	716	21,462
Dividends appropriated in the period	-	-	-	-	(1,731)	(1,731)
At 31st January 2014	4,555	18,360	2,111	146,913	1,908	173,847
	Called up		Capital
Six months ended	share	Share	redemption	Capital	Revenue
31st January 2013	capital	premium	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st July 2012	4,571	18,360	2,095	79,585	2,671	107,282
Repurchase and cancellation of the Company's   own shares	(16)	-	16	(307)	-	(307)
Net return on ordinary activities	-	-	-	23,047	985	24,032
Dividends appropriated in the period	-	-	-	-	(1,640)	(1,640)
At 31st January 2013	4,555	18,360	2,111	102,325	2,016	129,367
	Called up		Capital
Year ended	share	Share	redemption	Capital	Revenue
31st July 2013	capital	premium	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st July 2012	4,571	18,360	2,095	79,585	2,671	107,282
Repurchase and cancellation of the Company's   own shares	(16)	-	16	(307)	-	(307)
Net return on ordinary activities	-	-	-	46,889	1,892	48,781
Dividends appropriated in the year	-	-	-	-	(1,640)	(1,640)
At 31st July 2013	4,555	18,360	2,111	126,167	2,923	154,116

Balance Sheet

at 31st January 2014

	(Unaudited)	(Unaudited)	(Audited)
	31st January 2014	31st January 2013	31st July 2013
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	189,330	137,895	166,550
Investments in liquidity funds held at fair value through profit or loss	2,650	1,100	1,700
Total investments	191,980	138,995	168,250
Current assets
Debtors	2,057	680	1,157
Cash and short term deposits	123	1,001	328
	2,180	1,681	1,485
Creditors: amounts falling due within one year	(20,313)	(11,309)	(15,619)
Net current liabilities	(18,133)	(9,628)	(14,134)
Total assets less current liabilities	173,847	129,367	154,116
Net assets	173,847	129,367	154,116
Capital and reserves
Called up share capital	4,555	4,555	4,555
Share premium	18,360	18,360	18,360
Capital redemption reserve	2,111	2,111	2,111
Capital reserves	146,913	102,325	126,167
Revenue reserve	1,908	2,016	2,923
Total equity shareholders' funds	173,847	129,367	154,116
Net asset value per share (note 5)	954.2p	710.1p	845.9p

Cash Flow Statement

for the six months ended 31st January 2014

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2014	31st January 2013	31st July 2013
	£'000	£'000	£'000
Net cash inflow from operating activities (note 6)	325	758	1,402
Net cash outflow from returns on investments and   servicing of finance	(114)	(124)	(267)
Total tax recovered	17	-	9
Net cash (outflow)/inflow from capital expenditure and financial investment	(2,702)	1,028	(5,156)
Dividend paid	(1,731)	(1,640)	(1,640)
Net cash inflow from financing	4,000	693	5,693
(Decrease)/increase in cash for the period	(205)	715	41
Reconciliation of net cash flow to movement in net debt
Net (debt)/cash movement	(205)	715	41
Net drawdown of loans	(4,000)	(1,000)	(6,000)
Exchange movements	-	-	1
Movement in net debt in the period	(4,205)	(285)	(5,958)
Net debt at the beginning of the period	(14,672)	(8,714)	(8,714)
Net debt at the end of the period	(18,877)	(8,999)	(14,672)
Represented by:
Cash and short term deposits	123	1,001	328
Debt falling due within one year	(19,000)	-	-
Debt falling due after more than one year	-	(10,000)	(15,000)
Net debt	(18,877)	(8,999)	(14,672)

Notes to the Accounts

for the six months ended 31st January 2014

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 July 2013 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 July 2013.

3.   Dividend paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2014	31st January 2013	31st July 2013
	£'000	£'000	£'000
Final dividend in respect of the year ended 31st July 2013 of 9.5p   (2012: 9.0p)	1,731	1,640	1,640

      No interim dividend has been declared in respect of the six months ended 31st January 2014 (2013: nil).

4.   Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2014	31st January 2013	31st July 2013
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	716	985	1,892
Capital return	20,746	23,047	46,889
Total return	21,462	24,032	48,781
Weighted average number of shares in issue:	18,219,372	18,232,484	18,225,982
Revenue return per share	3.93p	5.40p	10.38p
Capital return per share	113.87p	126.41p	257.26p
Total return per share	117.80p	131.81p	267.64p

5.   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 2014 of 18,219,372 (31st January 2013: 18,219,372 and 31st July 2013: 18,219,372).

6.   Reconciliation of net return 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 2014	31st January 2013	31st July 2013
	£'000	£'000	£'000
Net return on ordinary activities before finance cost and taxation	21,567	24,151	48,975
Add back capital return before finance costs and taxation	(20,801)	(23,102)	(46,987)
Scrip dividends received as income	(63)	(7)	(8)
Decrease/(increase) in accrued income	29	(101)	(9)
(Increase)/decrease in other debtors	(11)	4	3
(Decrease)/increase in accrued expenses	(33)	26	-
Tax on unfranked investment income	(5)	(9)	(26)
Management fee charged to capital	(358)	(204)	(546)
Net cash inflow from operating activities	325	758	1,402

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 will be submitted to the National Storage Mechanism and will shortly be available for inspection at www. www.morningstar.co.uk/uk/NSM

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