Half-year Report

RNS Number : 9737C

Mercantile Investment Trust(The)PLC

23 October 2020

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

The Mercantile Investment Trust plc

( the 'Company' )

Half Year Report & Accounts for the six months ended 31st July 2020

Legal Entity Identifier: 549300BGX3CJIHLP2H42

Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

When I signed my statement for last year's Annual Report, in mid April, we were in the midst of the COVID-19 pandemic and the UK had gone into full lockdown. At that stage no one was sure what the immediate future held but we remained convinced of the quality of our portfolio and that the Mercantile was well placed to ride out the coming storm. This report covers both the initial shock to markets brought about by COVID and also the partial rally in equity markets which followed. Since then, although volatile, markets stabilised somewhat and Government restrictions were progressively eased. The economy seemed to be on the mend. However, as I write, the rate of infection is increasing again and some restrictions are being reintroduced. As we enter winter we are once again facing challenging times, but this time we are in a more robust position as we continue to identify tomorrow's market leaders.

Performance

In the six months to 31st July 2020 the Company produced a return on net assets of -22.1%. This compares with the return of -23.2% from our benchmark index. Although such negative returns are always distressing, for our Investment Managers to outperform our benchmark index is a highly creditable achievement especially given the circumstances, the market volatility and the fact that the portfolio has been geared for most of the period.

The return to shareholders was -28.5%, as the discount at which the Company's shares trade widened from 1.4% to 8.1% (calculated with debt at fair value) over the half year, consistent with a general widening of discounts across the investment trust sector.

Returns and Dividends

The Company's revenue account has been severely impacted by the consequences of COVID-19 as many portfolio companies either cut or cancelled their dividends. The revenue return in the first half of the Company's current financial year decreased from 4.32 pence per share for the corresponding period last year to 1.40 pence per share, a decrease of 67.6%.

A first quarterly interim dividend of 1.35 pence was paid on 3rd August 2020 and a second quarterly interim dividend of 1.35 pence per share has been declared by the Board, payable on 2nd November 2020 to shareholders on the register at close of business on 25th September 2020. This brings the total dividend for the year to date to 2.70 pence (2019: 2.70 pence). The Board intends to pay a third quarterly interim dividend of 1.35 pence in early February 2021.

One of the structural advantages of a closed end investment trust is the ability to use revenue reserves to smooth dividend payments in more difficult times and the Board confirms that its current intention is at least to maintain last year's total dividend of 6.60p per share for this financial year.

Discount and Share Buy Backs

At the end of the last financial year, the Company's shares traded at a narrow discount, closing the year at 1.4%, but it widened rapidly during the period as market volatility increased sharply following the onset of COVID-19. The Board continues to monitor closely the discount at which the Company's shares trade however, given the volatile nature of the market, it did not use its authority to buy back any shares in the six months to 31st July 2020.

Marketing

Shareholders may notice a different image on the cover of the half year report than in previous years. The Board approved a refresh to the Company's branding in conjunction with an advertising and PR campaign. Our goal is to increase demand for our Company's shares among retail investors. Early signs are that the campaign is having an impact and we will continue to monitor the shareholder register closely.

Outlook

It would be a brave Chairman who predicts the future in such extraordinary and challenging times. I have already said that COVID-19 is rearing its ugly head again and the immediate future remains uncertain. However, we can but continue to do what we do best, in the knowledge that things will eventually return to something approaching normal or be managed in such a way that it allows companies and the economy to flourish once again. Such difficulties also present new opportunities and our Investment Managers have adopted a positive stance, which we fully endorse, especially when they can identify and invest in robust businesses at reasonable, even cheap, valuations. By investing in companies which have positioned themselves well to take advantage of the massive and accelerated changes that have occurred in markets, I am highly confident that when sustained recovery is upon us, we will again thrive and prosper for our shareholders.

Angus Gordon Lennox
Chairman  

22nd October 2020

INVESTMENT MANAGERS' REPORT

Setting the scene: a challenging period for financial markets

The six months to 31st July 2020 were a torrid time for UK medium and smaller companies (the 'Benchmark'), which generated a total return of -23.2%. At its mid-March nadir, which roughly coincided with the commencement of the UK's national lockdown, the Benchmark had fallen over 40% since just the end of January.

The word unprecedented is much overused in financial commentary, but it seems apt for 2020: the rapid spread of the COVID-19 virus has resulted in a dramatic contraction in economic activity - in the UK potentially the most severe since before the industrial revolution - as countries around the world implemented lockdowns of varying degrees. Reacting to such widespread economic damage, and in an
effort to curtail its longer-term implications, both monetary and fiscal policy have been loosened substantially. With government spending and support reaching new highs, national debt in the UK once
again overtook annual GDP, a threshold unsurpassed since the 1960s when the country was still dealing with the aftermath of heavy wartime borrowing.

This massive fiscal intervention - in particular the Coronavirus Job Retention Scheme ('CJRS') but also other measures - has provided valuable support to many of the UK's corporates, including listed companies, as businesses would otherwise have struggled to retain employees and fulfil their obligations in such an environment. Markets began to recover in late March and, while the trajectory has been far from linear, have recouped nearly half of the falls from those first six weeks.

Mercantile performance

While the investment team's continued focus on investing in high quality, structurally robust and appropriately valued businesses led to outperformance against the Benchmark, the return on net assets for the six months to 31st July 2020 was nevertheless a disappointing -22.1%.

Spotlight on stocks

In a period of such drastic change it is inevitable that there would need to be changes to the portfolio as businesses may no longer be appropriately capitalised - after all very few can operate with or close to zero revenue for any sustained period. Moreover, it may be the case that previous investment hypotheses are no longer valid, or extreme share price moves open up better opportunities elsewhere. As a result of these factors and maintaining our rigorous investment criteria there were a number of changes to the portfolio, resulting in a small reduction in the number of holdings. Despite this, turnover remained in line with recent averages, reflecting a resiliently positioned portfolio.

In such an environment it is also inevitable that there would be greater bifurcation between those companies that succeed and those that - often for reasons outside of their own control - do not. As a result, the variation between stock price performances has been particularly marked this year, with those well placed such as our technology investments in AVAST, Computacenter and Softcat delivering very robust returns, while those in the travel and leisure sectors, such as National Express, SSP and WH Smith suffering significant share price declines. Indeed, in each of the latter three cases the companies have come to the market to raise new equity in order to shore up their balance sheets.

Outlook for the coming months

Having suffered such a sharp and sudden contraction through the second calendar quarter, as economies were gradually brought out of lockdown the question facing markets was and remains what the shape of this recovery looks like and whether there will be long lasting economic damage. It is too early to answer these questions and with infection rates increasing again and social distancing remaining - for now at least - the politicians' preferred approach to containing the virus, there may be setbacks and volatility on the path to recovery.

In the immediate future, in addition to developments surrounding the ongoing public health crisis, financial markets will have to contend with the implications of Brexit and of the US Presidential Election. While this may sound daunting we are viewing the future with optimism and the portfolio is currently 10% geared. We believe the challenges to be widely understood and reflected in the depressed levels of our market. In contrast, economic lead indicators suggest an encouraging recovery and many of our portfolio companies have reported substantial improvements in trading through the summer months. As a result of this we are finding an increasing number of attractive investment opportunities.

We focus on investing in structurally robust businesses that operate in growing end markets with the ability to invest capital at high returns. This pandemic has accelerated pre-existing trends and driven changes across many areas of society. We believe that many of our holdings will ultimately benefit from these and be tomorrow's market leaders.

Guy Anderson
Anthony Lynch
Investment Managers  

22nd October 2020

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; accounting, legal and regulatory; corporate governance and shareholder relations; operational and cyber crime; and financial. Information on each of these areas is given in the Directors' Report within the Annual Report and Financial Statements for the year ended 31st January 2020.

Related Parties Transactions

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

Going Concern

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 and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operation existence for at least 12 months from the date of the approval of this half yearly financial report. For these reasons, they consider there is sufficient 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 year 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 July 2020 as required by the UK Listing Authority Disclosure Guidance and Transparency Rules ('DTRs') 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 DTRs.

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;

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and

• notify the Company's shareholders in writing about the use, if any, of disclosure exemptions in FRS102 in the preparation of the financial statements;

and the Directors confirm that they have done so.

For and on behalf of the Board
Angus Gordon Lennox
Chairman   22nd October 2020

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 31ST JULY 2020

	(Unaudited) Six months ended 31st July 2020				(Unaudited) Six months ended 31st July 2019				(Audited) Year ended 31st January 2020
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000		Capital £'000	Total £'000	Revenue £'000		Capital £'000	Total £'000
(Losses)/gains on investments held at fair value through profit or loss	-	(487,657)	(487,657)	-		158,287	158,287	-		435,491	435,491
Net foreign currency gains	-	2	2	-		17	17	-		53	53
Income from investments	14,980	-	14,980	37,251		-	37,251	66,450		-	66,450
Interest receivable and similar income	137	-	137	655		-	655	1,269		-	1,269
Gross return/(loss)	15,117	(487,655)	(472,538)	37,906		158,304	196,210	67,719		435,544	503,263
Management fee	(1,090)	(2,545)	(3,635)	(1,044)		(2,437)	(3,481)	(2,206)		(5,149)	(7,355)
Other administrative expenses	(764)	-	(764)	(574)		-	(574)	(1,106)		-	(1,106)
Net return/(loss) before finance costs and taxation	13,263	(490,200)	(476,937)	36,288		155,867	192,155	64,407		430,395	494,802
Finance costs	(1,647)	(3,843)	(5,490)	(1,648)		(3,844)	(5,492)	(3,295)		(7,687)	(10,982)
Net return/(loss) before taxation	11,616	(494,043)	(482,427)	34,640		152,023	186,663	61,112		422,708	483,820
Taxation charge (note 3)	(549)	-	(549)	(393)		-	(393)	(602)		-	(602)
Net return/(loss) after taxation	11,067	(494,043)	(482,976)	34,247		152,023	186,270	60,510		422,708	483,218
Return/(loss) per share (note 4)	1.40p	(62.42)p	(61.02)p	4.32p		19.18p	23.50p	7.64p		53.37p	61.01p

STATEMENT OF CHANGES IN EQUITY

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserves £'000	Revenue reserve1 £'000	Total shareholders funds £'000
Six months ended 31st July 2020 (Unaudited)
At 31st January 2020	23,612	23,459	13,158	2,039,659	82,934	2,182,822
Net (loss)/return	-	-	-	(494,043)	11,067	(482,976)
Dividends paid in the period (note 5)	-	-	-	-	(30,869)	(30,869)
At 31st JULY 2020	23,612	23,459	13,158	1,545,616	63,132	1,668,977
Six months ended 31st July 2019 (unaudited)
At 31st January 2019	23,612	23,459	13,158	1,618,837	74,678	1,753,744
Repurchase of shares into Treasury	-	-	-	(532)	-	(532)
Net return	-	-	-	152,023	34,247	186,270
Dividends paid in the period (note 5)	-	-	-	-	(30,882)	(30,882)
At 31st July 2019	23,612	23,459	13,158	1,770,328	78,043	1,908,600
Year ended 31st January 2020 (audited)
At 31st January 2019	23,612	23,459	13,158	1,618,837	74,678	1,753,744
Repurchase of shares into Treasury	-	-	-	(1,886)	-	(1,886)
Net return	-	-	-	422,708	60,510	483,218
Dividends paid in the year (note 5)	-	-	-	-	(52,254)	(52,254)
At 31st January 2020	23,612	23,459	13,158	2,039,659	82,934	2,182,822

¹ This reserve forms the distributable reserve of the Company and is used to fund distributions to investors via dividend payments.

STATEMENT OF FINANCIAL POSITION

AT 31ST JULY 2020

	(Unaudited) 31st July 2020 £'000	(Unaudited) 31st July 2019 £'000	(Audited) 31st January 2020 £'000
Fixed assets
Investments held at fair value through profit or loss	1,839,263	1,915,995	2,289,569
Current assets
Debtors	5,672	17,124	4,632
Cash and short term deposits	303	376	299
Cash equivalents: liquidity fund	13,340	173,616	72,042
	19,315	191,116	76,973
Current liabilities
Creditors: amounts falling due within one year	(11,686)	(20,693)	(5,854)
Net current assets	7,629	170,423	71,119
Total assets less current liabilities	1,846,892	2,086,418	2,360,688
Creditors: amounts falling due after more than one year	(177,915)	(177,818)	(177,866)
Net assets	1,668,977	1,908,600	2,182,822
Capital and reserves
Called up share capital	23,612	23,612	23,612
Share premium	23,459	23,459	23,459
Capital redemption reserve	13,158	13,158	13,158
Capital reserves	1,545,616	1,770,328	2,039,659
Revenue reserve	63,132	78,043	82,934
Total shareholders' funds	1,668,977	1,908,600	2,182,822
Net asset value per share (note 6)	210.9p	240.9p	275.8p

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 31ST JULY 2020

	(Unaudited) Six months ended 31st July 2020 £'000	(Unaudited) Six months ended 31st July 2019 £'000	(Audited) Year ended 31st January 2020 £'000
Net cash outflow from operations before dividends and interest (note 7)	(4,445)	(4,088)	(8,470)
Dividends received	16,540	34,726	63,981
Interest received	137	655	1,269
Overseas tax recovered	-	-	43
Interest paid	(5,441)	(5,443)	(10,885)
Net cash inflow from operating activities	6,791	25,850	45,938
Purchase of investments	(263,463)	(408,394)	(751,163)
Sale of investments	228,838	404,935	648,682
Settlement of foreign currency contracts	(1)	(8)	(4)
Net cash outflow from investing activities	(34,626)	(3,467)	(102,485)
Dividends paid	(30,869)	(30,882)	(52,254)
Repurchase of shares into Treasury	-	(532)	(1,886)
Net cash outflow from financing activities	(30,869)	(31,414)	(54,140)
Decrease in cash and cash equivalents	(58,704)	(9,031)	(110,687)
Cash and cash equivalents at start of period	72,341	183,021	183,021
Unrealised gain on foreign currency cash and cash equivalents	6	2	7
Cash and cash equivalents at end of period	13,643	173,992	72,341
Decrease in cash and cash equivalents	(58,704)	(9,031)	(110,687)
Cash and cash equivalents consist of:
Cash and short term deposits	303	376	299
Cash held in JPMorgan Sterling Liquidity Fund	13,340	173,616	72,042
Total	13,643	173,992	72,341

NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31ST JULY 2019

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 January 2020 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies and include the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.  Accounting policies

The financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the revised 'SORP') issued by the Association of Investment Companies in October 2019.

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 July 2020.

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 January 2020.

3.  Taxation

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. The tax charge comprises overseas withholding tax.

4.  Return/(loss) per share

	(Unaudited) Six months ended 31st July 2020 £'000	(Unaudited) Six months ended 31st July 2019 £'000	(Audited) Year ended 31st January 2020 £'000
Return per share is based on the following:
Revenue return	11,087	34,247	60,510
Capital (loss)/return	(494,043)	152,023	422,708
Total (loss)/return	(482,976)	186,270	483,218
Weighted average number of shares in issue	791,522,893	792,480,550	792,023,084
Revenue return per share	1.40p	4.32p	7.64p
Capital (loss)/return per share	(62.42)p	19.18p	53.37p
Total (loss)/return per share	(61.02)p	23.50p	61.01p

5.  Dividends paid

	(Unaudited) Six months ended 31st July 2020 £'000	(Unaudited) Six months ended 31st July 2019 £'000	(Audited) Year ended 31st January 2020 £'000
Unclaimed dividends refunded to the Company1	-	(26)	(26)
2020 fourth quarterly dividend of 2.55p (2019: 2.55p) paid to shareholders in May	20,184	20,209	20,209
2021 first quarterly dividend of 1.35p (2020: 1.35p) paid to shareholders in August	10,685	10,699	10,699
2020 second quarterly dividend of 1.35p paid to shareholders in November	n/a	n/a	10,686
2020 third quarterly dividend of 1.35p paid to shareholders in February	n/a	n/a	10,686
Total dividends paid in the period	30,869	30,882	52,254

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

All dividends paid in the period/year have been funded from the revenue reserve.

The first 2021 quarterly dividend of 1.35p (2020: 1.35p) per share, amounting to £10,685,000 (2020: £10,699,000) was paid on 3rd August 2020 in respect of the six months ended 31st July 2020.

A second quarterly dividend of 1.35p (2020: 1.35p) per share, amounting to £10,685,000 (2020: £10,686,000), has been declared payable in respect of the six months ended 31st July 2020.

6.  Net asset value per share

	(Unaudited) Six months ended  31st July 2020	(Unaudited) Six months ended 31st July 2019	(Audited) Year ended 31st January 2020
Net assets (£'000)	1,668,977	1,908,600	2,182,822
Number of 2.5p ordinary shares in issue	791,522,893	792,229,037	791,522,893
Net asset value per share	210.9p	240.9p	275.8p

For further information, please contact:

Jonathan Latter

For and on behalf of JPMorgan Funds Limited, Company Secretary 020 7742 4000

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

JPMORGANFUNDS LIMITED

ENDS

A copy of the half year report will be submitted to the National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

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

 

END

 

 

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