Final Results

RNS Number : 6064A

Mercantile Investment Trust(The)PLC

21 March 2013

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

THE MERCANTILE INVESTMENT TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST JANUARY 2013

The Directors of The Mercantile Investment Trust plc announce the Company's results for the year ended 31^st January 2013.

Chairman's Statement

Over the year to 31st January 2013, the Company delivered a positive share price return of 29.0%. Although the Managers marginally underperformed the Company's benchmark with a return of 26.6%, against 27.2% for the benchmark, this was more than made up for by a narrowing of the discount.

Returns and Dividends

Earnings per share increased by 0.6 % for the year, from 31.9 p to 32.1p.

The Company has paid three interim dividends of 6.0p per ordinary share, and the Directors have declared a fourth quarterly interim dividend of 18.0p, giving a total dividend of 36.0p for the year, maintaining last year's dividend of 36.0p.

In order to even out the flow of dividends paid during the year, the Board intends to increase the level of the three interim dividends from 6.0p to 8.0p per ordinary share throughout the current year ending 31 January 2014. This is a rebalancing exercise and will not necessarily result in an increased total amount for the year.  The level of the final interim dividend will be determined by the Board towards the end of the financial year and will depend on the level of dividends received and anticipated by the Company and take account of the Company's revenue reserve.

Share Buy Backs

During the year under review a total of 255,000 shares were repurchased for cancellation, amounting to 0.26% of issued share capital at the beginning of the year, at a total cost of £2.79 million. Share buy backs during the year under review have added approximately 0.37 pence to the net asset value per share.

The Board continues to use the share repurchase authority to manage imbalances between the supply and demand of the Company's shares, thereby reducing the volatility of the discount. The Board believes that, to date, this mechanism has been helpful and therefore proposes and recommends that the powers to repurchase up to 14.99% of the Company's shares for cancellation be renewed for a further period.

Gearing

The Company ended the year with gearing of 3%. During the year the gearing varied between 3% net cash and 15% geared. It is the Board's intention to continue to operate within the range of 10% net cash and 20% geared, under normal market conditions, and, at the present time, the Company is employing minimal gearing. Gearing is regularly discussed between the Board and the Investment Manager. The Company does not currently have a borrowing facility in place other than the Company's outstanding debenture issues.

Board

All Directors stand for annual re-election. I refer you to the Directors' biographies on pages 17 and 18 of the Annual Report & Accounts for the year ended 31^st January 2013 (the "Annual Report") for further details.

The Board undertakes a formal and rigorous evaluation of its performance, and that of the individual Directors including myself as the Chairman. The Directors conduct an assessment of performance each year, which is compiled into a report to the Nomination Committee which in turn reports its conclusions to the Board.

Investment Managers

During the year under review, the Company's investment management team appointed by JPMorgan comprised Martin Hudson, Guy Anderson who joined the team in a senior capacity in August last year, and Anthony Lynch. As I explained in my statement last year, a detailed review of the Manager was conducted during 2012, which has led to some changes in the way that the portfolio is managed. The Board believes that these changes have been beneficial to the management of the Company's assets.

The Board will continue to monitor the performance of the Manager on a regular basis.

Annual General Meeting

The Company's one hundred and twenty seventh Annual General Meeting will be held at Trinity House, Tower Hill, London EC3N 4DH on Wednesday, 22nd May 2013 at 12 noon. In addition to the formal part of the meeting, there will be a presentation from the Investment Managers who will answer questions on the portfolio and performance. The meeting will be followed by a buffet lunch which will give shareholders an opportunity to meet the Board, the Investment Managers and representatives of JPMAM. I look forward to seeing as many of you as possible at the meeting.

Outlook

The outlook for the current year looks more favourable than at this time last year despite the continuing instability of the Eurozone, the weakening of Sterling, and the issues surrounding the US fiscal cliff. The opportunities are more likely to be company specific as the focus within corporates moves from cost efficiency to investing for growth, taking advantage of strong balance sheets and the cheap credit on offer to publicly listed companies which can be used to fund both capital expenditure and acquisitions. Against this backdrop, UK mid and small sized companies are attractively valued and offer the Managers opportunities to increase shareholder value.

Hamish Leslie Melville

Chairman                                                                                                                                 21st March 2013

For further information, please contact:

Juliet Dearlove

For and on behalf of

JPMorgan Asset Management (UK) Limited - Company Secretary

020 7742 4000

Investment Manager's Report

Market Background

Last year was a very positive one for stock markets globally as they weathered some huge uncertainties, of which the biggest were the intensification of the Eurozone sovereign debt crisis, doubts over the outlook for the Chinese economy and worries about the US budget deficit. Although estimates both for economic growth and company profits were revised downwards throughout the year, Central Banks offered the promise of continuing cheap credit. This has given the politicians time to address structural problems and has allowed assets to reflate.

Mid and small sized UK equities performed strongly in the year ended 31st January 2013.

Performance

The net asset value total return for the year ended 31st January 2013 was 26.6% which was 0.6% behind the Company's benchmark index, the FTSE All-Share excluding FTSE 100 constituents and investment companies, which returned 27.2%. The FTSE 100 index returned 15.5% for the period, with mid and small sized companies performing much more strongly than larger quoted companies last year.

The bar chart on page 4 of the Annual Report shows the relative contributions to performance for the year for the five best and five worst sectors within the portfolio. The bars to the right show positive contributors relative to the benchmark index and reflect both sector weighting and stock selection. The bars to the left show the negative relative contributors.

This shows that the most positive contributor was the Oil and Gas Producers sector where, following its discovery of substantial gas reserves offshore Mozambique, Cove Energy agreed a cash takeover approach from Thailand's PTT at a substantial premium. Takeovers were substantial contributors for the portfolio last year, with the strong performance from the Software and Computer Services sector reflecting an agreed cash takeover for Logica by CGI and also Misys completing its agreed cash takeover by Vista. The positive Fixed Line Telecommunications sector performance reflected an agreed cash takeover of Cable & Wireless Worldwide by Vodafone. However, when takeover approaches fail, share prices can fall substantially and the negative contribution from the Aerospace and Defence sector reflected the decision by Carlyle not to make a formal bid for Chemring following its initial approach. Similarly, African Barrick Gold failed to agree a price with China National Gold Group following a takeover approach and its share price fell sharply in January. The Mining sector also suffered a poor performance from Petropavlovsk, another gold miner which continued to disappoint the market on output and cost of production, and which we sold during the year. The Financial Services sector was a strong performer last year as asset values generally reflated and the negative relative contribution to the portfolio from that sector reflects that the portfolio was too underweight in a strong sector, representing a missed opportunity.

Another sector which performed strongly was Home Construction. Profit forecasts for the housebuilders were increased throughout the year as they delivered better than expected profit margins as a result of both strong cost control and judicious land purchases. Housebuilding is attracting strong Government support in terms of both funding for first time buyers and relaxation of planning rules as there is a structural shortage of new homes to meet anticipated new household formation. Further, a return to historic new build rates would add 2.4% to UK GDP as each house built creates 3.5 direct jobs and one indirect job.

Activity

The investment managers have the flexibility to operate within a gearing range of 10% net cash to 20% geared and a more specific tactical range is agreed regularly with the Board.

Over the course of the year gearing was reduced from 15% at 31st January 2012 to 3% at 31st January 2013 reflecting the fact that, whilst we remain positive, the market for UK mid and small sized stocks has performed strongly whilst profit forecasts have been reduced. Stocks have been steadily re-rated since we increased gearing against a difficult economic backdrop in October 2011.

The portfolio continues to retain its style of broad diversification across all sectors, comprising 130 stocks of which 85 are mid-sized companies and 45 are smaller companies. The ten largest holdings represent 22.2% of total assets less liabilities.

Of the ten, which are shown on page 11 of the Annual Report, Persimmon, Jardine Lloyd Thompson, Cable and Wireless Communications and Phoenix Group were all in the top ten a year ago and the other six stocks were already substantial holdings within the portfolio. At the beginning of the year, as it became clearer that the housebuilders were generating both profits and cash ahead of market expectations, we added to our positions and housebuilders now account for five of the ten largest holdings. Both Berkeley Group and Persimmon have committed to paying substantial cash dividends to shareholders over the course of several years. Turning to the six largest investments of one year ago which are no longer in the top ten: two were taken over, Cove Energy and Misys; two were sold on promotion into the FTSE 100 index, Wood Group and Pennon; Laird was sold following a failed takeover approach from Cooper Industries and the position in African Barrick Gold was reduced.

The pie chart on page 6 of the Annual Report shows, by geography, where the revenues of the companies in which we are invested are generated. Whilst UK mid and small sized companies tend to be more domestic in their focus than the larger FTSE 100 companies, nearly half of the revenue generated by the companies we are invested in is derived from overseas markets. So whilst, for example, the housebuilders focus is on the UK domestic market, we can also access growth markets around the world through our investments in companies involved in insurance, manufacturing, telecommunications, food ingredients, mining and oil and gas production.

The table on page 6 of the Annual Report shows that our holdings in companies which have a market capitalisation of more than £1 billion account for nearly two thirds of the portfolio. We focus on those successful larger companies which are progressing towards promotion into the FTSE 100 index and also on relatively small quoted companies which can offer superior growth prospects. We are relatively overweight in smaller companies with market capitalisations of less than £300 million. At that size they are often overlooked by the professional investment community. Our intensive research process is designed to find the winners of tomorrow before they become better known. During the year we held more than 300 research meetings with companies and this remains an important part of our investment process when evaluating companies.

Outlook

We continue to believe that mid and small sized companies are the most interesting part of the UK stockmarket; it is where new themes emerge, profit growth tends to be higher, growth companies can prosper, value opportunities are present and merger and acquisitions activity is a constant theme. Although it is a more volatile part of the stockmarket, a consistent approach to investing in mid and small sized equities brings substantial rewards over the longer term.

In general, quoted mid and small sized companies' balance sheets are robust, cost cutting over the last five years has increased profit margins and dividend growth is strong. Smaller companies are the growth engine of the economy and policy makers recognise that they can create substantial numbers of new jobs.

In the absence of substantial further disruptive macro-economic news, UK mid and small sized companies enjoyed a strong performance last year. A resurgence of takeover activity demonstrated that acquirers believe there is real value in the stockmarket at current levels despite the generally subdued prospects for economic growth. We believe that we shall continue to see further acquisition activity in mid and small sized equities. Whilst we do not actively seek to buy acquisition targets, the same companies which are attractive to us are often attractive to corporate buyers; those which have market leading positions within their industries, profitable, cash generative growth prospects and strong management teams.

At the stock level, we are positive about the number of attractive opportunities that we continue to find in the mid and small sized company arena despite the difficult economic backdrop.

Martin Hudson

Guy Anderson

Anthony Lynch

Investment Managers                                                                                                              21st March 2013

Principal Risks

With the assistance of the Manager, the Board has drawn up a risk matrix, which identifies the key risks to the Company. These key risks fall broadly under the following categories:

•     Investment and Strategy: An inappropriate investment strategy, for example asset allocation or the level of gearing, may lead to underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount. The Board manages these risks by diversification of investments through its investment restrictions and guidelines which are monitored and reported by the Manager. JPMAM provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the Investment Managers, who attend all Board meetings, and reviews data which show statistical measures of the Company's risk profile. The Investment Managers employ the Company's gearing tactically, within a strategic range set by the Board.

•      Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 ('Section 1158'). Details of the Company's approval are given under 'Business of the Company' in the Directors' Report of the Annual Report. Were the Company to breach Section 1158, it might lose investment trust status and, as a consequence, gains within the Company's portfolio could be subject to Capital Gains Tax. The Section 1158 qualification criteria are continually monitored by JPMAM and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure & Transparency Rules ('DTRs'). A breach of the Companies Act could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules or DTRs could result in the Company's shares being suspended from listing which in turn would breach Section 1158. The Board relies on the services of its Company Secretary, JPMAM, to ensure compliance with The Companies Act and The UKLA Listing Rules.

•      Corporate Governance and Shareholder Relations: Details of the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance report within the Annual Report.

•      Operational: Disruption to, or failure of, JPMAM's accounting, dealing or payments systems or the custodian's records could prevent accurate reporting and monitoring of the Company's financial position. Details of how the Board monitors the services provided by JPMAM and its associates and the key elements designed to provide effective risk management and internal control are included within the Risk Management and Internal Control section of the Corporate Governance report within the Annual Report.

•      Financial: The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk and credit risk. Bank counterparties are subject to daily credit analysis by the Manager and regular consideration at meetings of the Board. In addition the Board receives regular reports on the Manager's monitoring and mitigation of credit risks on share transactions carried out by the Company. Further details are disclosed in note 23 within the Annual Report.

Related Parties Transactions

During the year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.

Directors' Responsibilities

The Directors each confirm to the best of their knowledge that:

(a)  The financial statements, prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and Applicable Law), give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

(b)  The Annual Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

Hamish Leslie Melville

Chairman

21^st March 2013

Income Statement

for the year ended 31st January 2013

		2013			2012
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value
through profit or loss		-	269,028	269,028	-	(108,508)	(108,508)
Net foreign currency losses		-	(136)	(136)	-	(6)	(6)
Income from investments		36,200	-	36,200	36,700	-	36,700
Other interest receivable and similar income		1,247	-	1,247	684	-	684
Gross return/(loss)		37,447	268,892	306,339	37,384	(108,514)	(71,130)
Management fee		(1,494)	(3,485)	(4,979)	(1,496)	(3,492)	(4,988)
Other administrative expenses		(985)	-	(985)	(900)	-	(900)
Net return/(loss) on ordinary activities before
finance costs and taxation		34,968	265,407	300,375	34,988	(112,006)	(77,018)
Finance costs		(3,293)	(7,685)	(10,978)	(3,389)	(7,907)	(11,296)
Net return/(loss) on ordinary activities before    taxation		31,675	257,722	289,397	31,599	(119,913)	(88,314)
Taxation		(32)	-	(32)	(44)	-	(44)
Net return/(loss) on ordinary activities after    taxation		31,643	257,722	289,365	31,555	(119,913)	(88,358)
Return/(loss) per share (note 3)		32.09p	261.34p	293.43p	31.88p	(121.13)p	(89.25)p

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

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

For the year ended 31st January 2013

	Called up	Share	Capital
	share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2011	24,759	23,459	12,011	1,139,698	37,339	1,237,266
Repurchase and cancellation of
the Company's own shares	(81)	-	81	(2,976)	-	(2,976)
Net (loss)/return on ordinary activities	-	-	-	(119,913)	31,555	(88,358)
Dividends paid in the year	-	-	-	-	(35,571)	(35,571)
At 31st January 2012	24,678	23,459	12,092	1,016,809	33,323	1,110,361
Repurchase and cancellation of
the Company's own shares	(64)	-	64	(2,790)	-	(2,790)
Net return on ordinary activities	-	-	-	257,722	31,643	289,365
Dividends paid in the year	-	-	-	-	(35,503)	(35,503)
At 31st January 2013	24,614	23,459	12,156	1,271,741	29,463	1,361,433

Balance Sheet

at 31st January 2013

		2013	2012
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		1,417,228	1,276,856
Current assets
Debtors		2,723	2,115
Cash and short term deposits		139,879	18,447
		142,602	20,562
Creditors: amounts falling due within one year		(21,207)	(9,963)
Net current assets		121,395	10,599
Total assets less current liabilities		1,538,623	1,287,455
Creditors: amounts falling due after more than
one year		(177,190)	(177,094)
Net assets		1,361,433	1,110,361
Capital and reserves
Called up share capital		24,614	24,678
Share premium account		23,459	23,459
Capital redemption reserve		12,156	12,092
Capital reserves		1,271,741	1,016,809
Revenue reserve		29,463	33,323
Total equity shareholders' funds		1,361,433	1,110,361
Net asset value per share (Note 4)		1,382.8p	1,124.9p

Company registration number 20537

Cash Flow Statement

for the year ended 31st January 2013

		2013	2012
		£'000	£'000
Net cash inflow from operating activities		31,897	30,632
Servicing of finance
Interest paid		(10,882)	(11,216)
Net cash outflow from servicing of finance		(10,882)	(11,216)
Taxation
Overseas tax recovered		52	30
Financial investment
Purchases of investments		(729,134)	(956,066)
Sales of investments		867,478	918,124
Other capital charges		(21)	(20)
Net cash inflow/(outflow) from financial investment		138,323	(37,962)
Dividends paid		(35,503)	(35,571)
Net cash inflow/(outflow) before financing		123,887	(54,087)
Financing
Repurchase and cancellation of the Company's own shares		(2,319)	(1,990)
Repayment of short term loan		-	(15,000)
Net cash outflow from financing		(2,319)	(16,990)
Increase/(decrease) in cash in the year		121,568	(71,077)

Notes to the Accounts

for the year ended 31st January 2013

1.             Accounting Policies

(a)           Basis of accounting

The accounts are prepared in accordance with the Companies Act 2006, 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 'SORP') issued by the Association of Investment Companies in January 2009. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments at fair value through profit or loss.

The policies applied in these accounts are consistent with those applied in the preceding year.

		2013	2012
		£'000	£'000
2.	Dividends
(a)	Dividends paid and declared¹
	Unclaimed dividends refunded to the Company	(6)	(70)
	2012 fourth quarterly dividend of 18.0p (2011: 18.0p) paid to shareholders
	in May	17,762	17,826
	First quarterly dividend of 6.0p (2012: 6.0p) paid to shareholders in August	5,917	5,942
	Second quarterly dividend of 6.0p (2012: 6.0p) paid to shareholders
	in November	5,915	5,942
	Third quarterly dividend of 6.0p (2012: 6.0p) paid to shareholders
	in February²	5,915	5,931
	Total dividends paid in the year	35,503	35,571

¹Represents dividends which remain unclaimed after a period of 12 years and thereby become the property of the Company.

²Paid to the Registrars in January.

		2013	2012
		£'000	£'000
	Fourth quarterly dividend declared of 18.0p (2012: 18.0p) payable to
	shareholders in May	17,722	17,768

The fourth quarterly dividend has been declared in respect of the year ended 31st January 2013. In accordance with the accounting policy of the Company, this dividend will be reflected in the accounts for the year ending 31st January 2014.

(b)          Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ('Section 1158')

The requirements of Section 1158 are considered on the basis of dividends declared in respect of the financial year as shown below. The revenue available for distribution by way of dividend for the year is £31,643,000 (2012: £31,555,000).

		2013	2012
		£'000	£'000
	First quarterly dividend of 6.0p (2012: 6.0p) paid in August	5,917	5,942
	Second quarterly dividend of 6.0p (2012: 6.0p) paid in November	5,915	5,942
	Third quarterly dividend of 6.0p (2012: 6.0p) paid in February	5,915	5,931
	Fourth quarterly dividend of 18.0p (2012: 18.0p) payable in May	17,722	17,768
		35,469	35,583

3.             Return/(loss) per share

The revenue return per share is based on the revenue earnings attributable to the ordinary shares of £31,643,000 (2012: £31,555,000) and on the weighted average number of ordinary shares in issue during the year of 98,614,681 (2012: 98,998,335).

The capital gain per share is based on the capital gain attributable to the ordinary shares of £257,722,000 (2012: £119,913,000 loss) and on the weighted average number of ordinary shares in issue during the year of 98,614,681 (2012: 98,998,335).

The total gain per share is based on the total gain attributable to the ordinary shares of £289,365,000 (2012: £88,358,000 loss) and on the weighted average number of ordinary shares in issue during the year of 98,614,681 (2012: 98,998,335).

4.             Net asset value per share

The net asset value per share is based on the net assets attributable to the ordinary shareholders of £1,361,433,000 (2012: £1,110,361,000) and on the 98,455,719 (2012: 98,710,719) shares in issue at the year end.

5.             Status of announcement

2012 Financial Information

The figures and financial information for 2012 are extracted from the published Annual Report and Accounts for the year ended 31st January 2012 and do not constitute the statutory accounts for that year.  The Annual Report and Accounts has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2013 Financial Information

            The figures and financial information for 2013 are extracted from the Annual Report and Accounts for the year ended 31st January 2013 and do not constitute the statutory accounts for the year. The Annual Report and Accounts includes the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

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

21^st March 2013

For further information:

Juliet Dearlove

JPMorgan Asset Management (UK) Limited                                     020 7742 4000

ENDS

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

The annual report will also shortly be available on the Company's website at www.mercantileit.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

 

END

 

 

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