Half Yearly Report

RNS Number : 1096T

JPMorgan Smaller Cos IT PLC

23 March 2016

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
31ST JANUARY 2016

CHAIRMAN'S STATEMENT

Performance and discount

The investment environment was challenging during the half year to 31st January 2016 resulting in volatile equity markets. Investor sentiment was dominated by uncertainty over the timing and pace of interest rate rises in the US and concern over the impact of a Chinese slowdown on global growth, ending with markets declining sharply in January 2016.

The total return on net assets before dilution was -3.6% (-2.9% after dilution), which compares with -5.9% for the benchmark index. The return to Ordinary shareholders was +0.6%, with the return from a combination of five ordinary shares and one subscription share (a 'Unit') being +0.8%. The outperformance of the Ordinary shares reflects a narrowing of the share price discount to diluted net asset value from 17.0% to 14.3%.

UK equity markets have risen since the period end, with the diluted net asset value increasing by 1.3%. The Ordinary share price, however, has declined by 1.2%, reflecting a widening of the discount from 14.3% to 16.3% since 31st January 2016.

Exercise of Subscription Shares and Share Buybacks

During the six months to 31st January 2016, the Company issued 4,091 Ordinary shares following the exercise of Subscription shares, raising £37,433. Further details of the Subscription shares can be found on the Company's website at www.jpmsmallercompanies.co.uk

In line with our policy to reduce the volatility of the discount, during the six months to 31st January 2016 the Company repurchased 112,696 Ordinary shares for cancellation at a cost of £988,385. The Board will continue to monitor the discount and repurchase shares as appropriate.

Loan Facility and Gearing

The use of gearing in the current 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 Company has a highly flexible borrowing facility of £24 million in place with Scotiabank until April 2016. The loan facility has been reviewed by the Board and a new facility will be put in place.

The Board sets the overall gearing guidelines and regularly discusses these with the investment manager. The guidelines set a maximum level of gearing of 15%. The Company's gearing level increased during the period from 8.4% at the beginning of the period to 9.0% at 31st January 2016. At the time of writing the Company's gearing was 8.1%, with total borrowings of £19 million.

Allocation of Expenses

As announced in November 2015, the Board has reviewed the Company's policy on the allocation of management fees and finance expenses. In order to reflect the expected returns from the Company's portfolio, it has been agreed that 70% (formerly 50%) of management fees and finance expenses will be allocated to capital and 30% (formerly 50%) to revenue. This change has been effective from 1st August 2015.

Board

As part of the Board's succession planning and in anticipation of retirements we expect to recruit a new non-executive Director this year.

Outlook

There is much uncertainty confronting the global economy at the moment, both economic and political. This inevitably suppresses business activity and consumer spending and has resulted in an overall reduction in equity market levels. To that we can add our own particularly domestic concerns, with the forthcoming vote on our relationship with Europe a prime example.

Successful investing, particularly in smaller companies, requires a long-term perspective. Despite the concerns, there are reasons to be cautiously optimistic about the future. The UK economy remains in reasonable shape, with respectable growth, falling unemployment and subdued inflation. Whilst the fall in the price of oil has caused stress in certain areas, cheaper energy will in due course benefit economic activity and reduce costs for most businesses.

Our Managers continue to invest in high quality smaller companies, with significant earnings growth prospects and strong financial characteristics irrespective of the macroeconomic outlook. Whilst the Board expects a continuing period of volatility in markets whilst investors digest current uncertainties, we are confident that your Company will continue to deliver good returns for shareholders over the long term.

Michael Quicke OBE

Chairman                                                                                                                                                                                                  23rd March 2016

INVESTMENT MANAGERS' REPORT

Performance and Market Background

In the first six months of your Company's financial year, the FTSE Smaller Companies (ex Investment Trusts) Index fell by 5.9%. All of the decline came in the month of January 2016, as stock markets globally fell significantly. In comparison, your Company outperformed, providing a total return on net assets of -2.9% (after dilution). The share price total return was somewhat better; the 'unit' share price total return (comprising both Ordinary and Subscription shares) was up 0.8%.

Volatility remained a notable feature of both the smaller companies index and the broader stock market in the period. Concerns over the outlook for Chinese growth caused a dramatic decline in August, followed by a slower recovery in the markets up to Christmas. January then saw a repeat performance. In addition to a renewal of fears over slowing Chinese growth, other concerns included the further collapse of oil and commodity prices, currency wars, fears of deflation, and concerns regarding global recession.

Portfolio

The outperformance of the fund over the period was due mainly to stock selection. It was also aided by the overall positioning of the portfolio. We have aimed to benefit from the benign economic backdrop in the UK, and in particular from the resurgence of the UK consumer. This can be seen in some of the key positive contributions to performance - JD Sports (the retailer), Fevertree Drinks (supplier of drink mixers to the consumer) and Mortgage Advice Bureau (which benefits from the growth in the mortgages market).

We have made a number of changes to the portfolio. With the cash received from three bids made earlier in the year, Quintain, HellermanTyton and Anite, we participated in three IPOs or new entrants to the stock market. These were The Gym Group, a rapidly growing gym company focussed on the low cost end of the market, Softcat, a technology software reseller, and Ibstock, the UK's number one brick manufacturer. In addition, we invested in two online gambling companies, 888 Holdings and 32Red. We also bought a new holding in McBride, a turnaround situation, and increased our position in another turnaround, Mothercare, as in both of these companies we see evidence that new management is starting to have significant impact.

Outlook

The stock market declines seen in January continued into February, leading to a torrid start to 2016 for stock markets around the world. However, it is our belief that these recent fears, and the subsequent share price falls, have been overdone. While the IMF has recently reduced its forecasts for global growth, it is still predicting 3.4% for 2016, a rise from the 3.1% growth seen in 2015. Likewise, at some point investors will remember that low oil prices are good for oil-importing countries such as the UK and in particular for the consumer, and will realise that the recent further collapse in the oil price in the last few months does not presage a collapse in global demand but rather continues to reflect excess supply.

Turning to the UK, forecasts for GDP growth in 2016 are in the range of 2.0 - 2.2%. The country is still enjoying extremely low inflation, increasing capital investment and declining unemployment. While the rate of wage growth may have slowed recently, household disposable income is still rising and was up over 7% in December 2015 versus the prior year. Also of note is the fact that the first interest rate rise since 2008 looks to have been deferred by the Bank of England once again. Market projections are now for no interest rate rises for at least the next two years.

All of these data points indicate a benign economic backdrop both for companies and for households, and January's consumer confidence figures bore this out. However, since then, the Government has set the date for the EU Referendum. This looming deadline has already had an impact on sterling (which is now close to a thirty year low versus the US dollar) and on consumer confidence. From now until 23rd June, the date set for the Referendum, we foresee the likelihood of considerable market volatility due to the uncertainty of both the outcome and the potential implications if the UK population did vote to leave. Despite their cheap valuations compared to the broader market, smaller companies will not be immune from this volatility. We will be monitoring this situation extremely closely. In our portfolio, we will continue to own cash-generative companies with strong balance sheets which have growth opportunities and we expect to continue to enjoy the benefits of this growth.

Georgina Brittain

Katen Patel

Investment Managers                                                                                                                                                                              23rd March 2016

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; smaller company investment; 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 2015.

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 FRS 104 'Interim Financial Reporting' 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 2016, 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                                                                                                                                                                                                  23rd March 2016

For further information, please contact:

Divya Amin

For and on behalf of

JPMorgan Funds 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

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 31ST JANUARY 2016

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	31st January 2016			31st January 2015			31st July 2015
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments
held at fair value through
profit or loss	-	(6,682)	(6,682)	-	(2,605)	(2,605)	-	22,012	22,012
Net foreign currency gains	-	-	-	-	-	-	-	13	13
Income from investments	1,464	-	1,464	1,160	-	1,160	3,604	-	3,604
Other interest receivable and
similar income	-	-	-	-	-	-	2	-	2
Gross return/(loss)	1,464	(6,682)	(5,218)	1,160	(2,605)	(1,445)	3,606	22,025	25,631
Management fee	(241)	(562)	(803)	(359)	(359)	(718)	(733)	(733)	(1,466)
Other administrative expenses	(244)	-	(244)	(226)	-	(226)	(486)	-	(486)
Net return/(loss) on ordinary
activities before finance costs
and taxation	979	(7,244)	(6,265)	575	(2,964)	(2,389)	2,387	21,292	23,679
Finance costs	(43)	(100)	(143)	(70)	(70)	(140)	(140)	(140)	(280)
Net return/(loss) on ordinary
activities before taxation	936	(7,344)	(6,408)	505	(3,034)	(2,529)	2,247	21,152	23,399
Taxation	(39)	-	(39)	(37)	-	(37)	(79)	-	(79)
Net return/(loss) on ordinary
activities after taxation	897	(7,344)	(6,447)	468	(3,034)	(2,566)	2,168	21,152	23,320
Return/(loss) per share (note 4)
- undiluted	5.22p	(42.73)p	(37.51)p	2.59p	(16.82)p	(14.23)p	12.20p	119.02p	131.22p
- diluted1	5.22p	(42.73)p	(37.51)p	-	-	-	12.20p	119.02p	131.22p

¹     The Subscription shares have no dilutive effect as the conversion price for these shares exceeded the average market price of the Ordinary shares from the date of issue to 31st January 2016

All revenue and capital items in the above statement derive from continuing operations.

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.

STATEMENT OF CHANGES IN EQUITY

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 31st January 2016 (Unaudited)
At 31st July 2015	4,324	18,190	2,347	151,286	3,450	179,597
Repurchase and cancellation of the Company's
own shares	(28)	-	28	(988)	-	(988)
Issue of Ordinary shares on exercise of
Subscription shares	1	36	-	-	-	37
Net (loss)/return on ordinary activities	-	-	-	(7,344)	897	(6,447)
Dividend appropriated in the period	-	-	-	-	(1,889)	(1,889)
At 31st January 2016	4,297	18,226	2,375	142,954	2,458	170,310
Six months ended 31st January 2015 (Unaudited)
At 31st July 2014	4,549	18,360	2,117	137,187	3,016	165,229
Repurchase and cancellation of the Company's
own shares	(90)	-	90	(2,616)	-	(2,616)
Subscription shares issue costs	-	(237)	-	-	-	(237)
Net (loss)/return on ordinary activities	-	-	-	(3,034)	468	(2,566)
Dividend appropriated in the period	-	-	-	-	(1,734)	(1,734)
At 31st January 2015	4,459	18,123	2,207	131,537	1,750	158,076
Year ended 31st July 2015 (Audited)
At 31st July 2014	4,549	18,360	2,117	137,187	3,016	165,229
Repurchase and cancellation of the
Company's own shares	(230)	-	230	(7,053)	-	(7,053)
Bonus Issue of Subscription shares	4	(4)	-	-	-	-
Issue of Ordinary shares on exercise of
Subscription shares	1	54	-	-	-	55
Subscription share issue costs	-	(220)	-	-	-	(220)
Net return on ordinary activities	-	-	-	21,152	2,168	23,320
Dividend appropriated in the year	-	-	-	-	(1,734)	(1,734)
At 31st July 2015	4,324	18,190	2,347	151,286	3,450	179,597

¹     This reserve forms the distributable reserve of the Company and may be used to fund distribution of profits to investors via dividend payments.

STATEMENT OF FINANCIAL POSITION AT 31ST JANUARY 2016

	(Unaudited)	(Unaudited)	(Audited)
	31st January 2016	31st January 2015	31st July 2015
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	185,811	173,487	196,292
Investment in liquidity fund held at fair value
through profit or loss	2,892	2,961	2,539
	188,703	176,448	198,831
Current assets
Debtors	452	884	231
Cash and short term deposits	853	155	1,293
	1,305	1,039	1,524
Creditors: amounts falling due within one year	(19,698)	(411)	(20,758)
Net current (liabilities)/assets	(18,393)	628	(19,234)
Total assets less current liabilities	170,310	177,076	179,597
Creditors: amounts falling due after more than one year	-	(19,000)	-
Net assets	170,310	158,076	179,597
Capital and reserves
Called up share capital	4,297	4,459	4,324
Share premium	18,226	18,123	18,190
Capital redemption reserve	2,375	2,207	2,347
Capital reserves	142,954	131,537	151,286
Revenue reserve	2,458	1,750	3,450
Total equity shareholders' funds	170,310	158,076	179,597
Net asset value per Ordinary share (note 5)
- undiluted	991.6p	886.2p	1,039.1p
- diluted	978.5p	-	1,017.9p

Company registration number: 2515996.

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 31ST JANUARY 2016

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2016	31st January 2015	31st July 2015
	£'000	£'000	£'000
Net cash outflow from operations before dividends
and interest	(1,072)	(965)	(1,917)
Dividends received	1,344	1,243	3,127
Interest received	4	9	18
Interest paid	(145)	(143)	(279)
Taxation	1	-	-
Net cash inflow from operating activities	132	144	949
Purchases of investments	(35,065)	(34,871)	(67,153)
Sales of investments	37,686	38,758	75,546
Settlement of foreign currency contracts	-	-	1
Net cash inflow from investing activities	2,621	3,887	8,394
Dividends paid	(1,889)	(1,734)	(1,734)
Subscription share issue costs	-	(6)	(220)
Issue of Ordinary shares on exercise of
Subscription shares	37	-	55
Repurchase and cancellation of the Company's
own shares	(988)	(2,789)	(7,226)
Net cash outflow from financing activities	(2,840)	(4,529)	(9,125)
(Decrease)/increase in cash and cash equivalents	(87)	(498)	218
Cash and cash equivalents at the start of the period	3,832	3,614	3,614
Cash and cash equivalents at the end of the period	3,745	3,116	3,832
(Decrease)/increase in cash and cash equivalents	(87)	(498)	218
Cash and cash equivalents consist of:
Cash and short term deposits	853	155	1,293
Investment in liquidity fund	2,892	2,961	2,539
Total	3,745	3,116	3,832

NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31ST JANUARY 2016

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 auditor.

The figures and financial information for the year ended 31st July 2015 are extracted from are latest published financial statements of the Company and do not constitute statutory accounts for that year. These financial statements 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 financial statements are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP'), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in November 2014.

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 31st January 2016.

As a result of the first time adoption of FRS 102 and the revised SORP, comparative numbers and presentational formats have been restated where required.

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 July 2015 with the following exceptions and amendments:

Finance costs

Finance costs are accounted for on an accruals basis using the effective interest method in accordance with the provisions of FRS 102.

Financial instruments

Cash and cash equivalents may comprise cash (including demand deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents. Liquidity funds are considered cash equivalents as they are held for cash management purposes as an alternative to cash.

Taxation

Current tax is provided at the amounts expected to be received or paid.

Deferred tax is accounted for in accordance with FRS 102.

Dividends payable

In accordance with FRS 102 the final dividend is included in the financial statements in the year in which it is approved by shareholders.   

Only the relevant section of the applicable policies from the last year end financial statements which have changed as a result of the application of the 2014 AIC SORP and FRS 102 have been reproduced above - all other aspects of those policies remain the same. The impact of the changes is substantially in relation to presentational, disclosure and non-quantifiable aspects.

Change in allocation of expenses

With effect from 1st August 2015, the management fee and finance costs incurred by the Company have been allocated 70% to capital and 30% to revenue. In previous periods, these charges were allocated 50% to revenue and 50% to capital. In line with the guidance provided in the SORP, this change is not considered to be a matter of accounting policy and consequently no prior period restatements have been made as a result of this change.

3.   Dividend paid¹

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2016	31st January 2015	31st July 2015
	£'000	£'000	£'000
2015 Final dividend of 11.0p (2014: 9.6p)	1,889	1,734	1,734

¹     All dividends paid and declared in the period have been funded from the Revenue Reserve.

No interim dividend has been declared in respect of the six months ended 31st January 2016 (2015: nil).

4.   Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2016	31st January 2015	31st July 2015
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return	897	468	2,168
Capital (loss)/return	(7,344)	(3,034)	21,152
Total (loss)/return	(6,447)	(2,566)	23,320
Weighted average number of Ordinary shares in issue
during the period used for the purpose of the
undiluted calculation	17,190,970	18,033,118	17,772,488
Weighted average number of Ordinary shares in issue
during the period used for the purpose of the
diluted calculation1	17,190,970	-	17,772,488
Undiluted
Revenue return per share	5.22p	2.59p	12.20p
Capital (loss)/return per share	(42.73)p	(16.82)p	119.02p
Total (loss)/return per share	(37.51)p	(14.23)p	131.22p
Diluted2
Revenue return per share	5.22p	-	12.20p
Capital (loss)/return per share	(42.73)p	-	119.02p
Total (loss)/return per share	(37.51)p	-	131.22p

¹     There were no Subscription shares in issue as at 31st January 2015.

²     There is no dilutive effect as the conversion price for these shares exceeded the average market price of the Ordinary shares from the date of issue to 31st January 2016.

5.   Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2016	31st January 2015	31st July 2015
	£'000	£'000	£'000
Undiluted
Ordinary shareholders' funds (£'000)	170,310	158,076	179,597
Number of Ordinary shares in issue	17,174,750	17,838,248	17,283,355
Net asset value per Ordinary share (pence)	991.6	886.2	1,039.1
Diluted
Ordinary shareholders' funds assuming exercise of
Subscription shares (£'000)	202,860	-	212,184
Number of potential Ordinary shares in issue	20,732,201	-	20,844,807
Net asset value per Ordinary share (pence)	978.5	-	1,017.9

6.   Fair valuation of investments

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

	(Unaudited)		(Unaudited)		(Audited)
	Six months ended		Six months ended		Year ended
	31st January 2016		31st January 2015		31st July 2015
	Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
	£'000	£'000	£'000	£'000	£'000	£'000
Quoted prices for identical instruments
in active markets1	188,703	-	176,448	-	198,831	-
Total value of investments	188,703	-	176,448	-	198,831	-

¹     Includes JPMorgan Sterling Liquidity Fund.

JPMORGAN FUNDS LIMITED

23rd March 2016

ENDS

A copy of the half year will be 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.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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