Half Yearly Report

RNS Number : 0270A

Mercantile Investment Trust(The)PLC

23 September 2015

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

THE MERCANTILE INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
31ST JULY 2015

Chairman's Statement

The Company's net asset value total return in the six months to 31st July 2015 was 15.0%, 3.9% ahead of the return of 11.1% from our benchmark index, the FTSE All-Share, excluding FTSE 100 constituents and investment trusts. The share price return was 15.6%.

Returns and Dividends

The income from investments in the first half of the Company's current financial year reflects an increase on that of the half year ended 31st July 2014, primarily due to growth in ordinary dividend receipts from portfolio companies.

A second interim dividend of 10.0 pence per share has been declared by the Board, payable on 2nd November 2015 to shareholders on the register at close of business on 2nd October 2015. Together with the first interim dividend of 10.0 pence paid on 31st July 2015 this brings the total dividend for the year to date to 20.0 pence (2014: 16.0 pence). In order to even out the flow of dividends paid during the year, the Board has increased the level of the first two dividends to 10.0 pence per ordinary share. This was a rebalancing exercise and will not necessarily result in an increased total amount for the year. The Board anticipates that there will be a third interim dividend of 10.0 pence to be paid in early February 2016.

The level of the fourth interim dividend will depend on income received by the Company for the balance of the current financial year and a prudent view to be adopted by the Board, taking account of the level of the Company's Revenue Reserve.

Share Buy Backs and Discount

The Board has continued to carry out share repurchases in order to enhance the asset value and minimise the absolute level and volatility of the discount on the Company's shares. In the six months to 31st July 2015, 1,456,094 shares were repurchased for cancellation at a cost of £22,939,000. Against a backdrop of substantial market volatility, the discount to NAV, at which the Company's shares have traded during the period from 1st February to 2nd September 2015, has fluctuated between 10.6% and 16.8%. As at close of business on 22nd September 2015 the discount was 13.4% (cum income debt at par).

Board Changes

I am pleased to announce the appointment of Angus Gordon Lennox as a Director of the Company, with effect from today. Angus is Executive Chairman of two private family businesses. He is also a Non-Executive Director of Securities Trust of Scotland plc, a role he has held since 2013. Previously he had a 24 year career as a corporate broker, first as a Partner of Cazenove & Co, and later as a Managing Director of JPMorgan Cazenove, which he resigned from in August 2010.

Outlook

In contrast to many of the global equity indices the market for UK medium and small sized companies has proved resilient to recent external headwinds. The domestic economy has been a net beneficiary of lower oil prices which, coupled with a return to modest wage inflation, is resulting in improving consumer confidence. Looking forward, the UK economy is expected to continue to perform well over the medium term and this is likely to lead to further relative outperformance by UK medium and small sized companies.

For and on behalf of the Board
Hamish Leslie Melville
Chairman

23rd September 2015

Investment Managers' Report

Market background

The stock market outperformance of small and medium sized companies relative to their larger counterparts continued in the first six months of the Company's financial year. This outperformance reflected investor recognition of the better relative growth prospects of small and medium sized companies given their domestic bias and lower commodity exposure.

The EU entering a period of Quantitative Easing has driven increased demand for higher risk assets in the search for yield, and the UK market has benefitted from this trend. After an initial surge in financial markets in the first few months of 2015, the focus in the UK shifted towards the unusually uncertain outcome of the General Election. A Conservative majority was unexpected and whilst the initial reaction from the financial markets has subsequently been drowned out by increasing concerns over the level and sustainability of global growth, this result does provide a more certain environment for the next five years, with a concomitant increase in business confidence.

The price of crude oil, having fallen from the peak of $115 per barrel of Brent crude in June 2014 to the trough of $46 in January, staged a modest recovery through the first quarter of this fiscal year, reaching $70 in May. However, a combination of greater than anticipated supply growth and weaker than expected global demand has seen this reverse through the second quarter, with crude prices back towards and since period end, below the levels seen in January. Other commodity prices have also been weak through this period.

Portfolio performance and positioning

Against this backdrop, your Company has had a positive six months; the return on net assets over the period was 15.0%, ahead of the 11.1% benchmark return for the FTSE All-Share Index excluding FTSE 100 constituents and Investment Trusts. Reflecting a slight tightening of the discount, the share price total return was 15.6% for the period.

This positive relative performance has been delivered despite retaining a conservative overall level of gearing and therefore exposure to market moves, with the portfolio 2.5% net cash at 31st July 2015, having been fully invested but ungeared at the start of the period. As a result, outperformance has been driven by a combination of sector allocation and stock selection. This has been achieved across a broad range of sectors and individual stocks, with the most significant contributions from the beverages sector, driven by the holding in Fever-Tree, the owner and distributor of premium brand mixers, and the mining sector, where the fund's underweight positioning has added value as the companies continue to struggle with weakening metal prices.

The overall shape and key end market exposures of the portfolio have remained substantially unchanged through the first half of the year - in aggregate the portfolio remains overweight in domestic, consumer exposed stocks whilst being underweight stocks in resources and resource exposed industries.

Transactions have been stock specific and across a range of industry sectors; the largest purchases include Betfair Group, the internet betting exchange, DS Smith, the provider of corrugated packaging solutions, and Bellway, the house builder. Significant sales have resulted from takeover situations, such as Catlin Group, TSB Banking Group and CSR, and from holdings being divested post promotion into the FTSE 100, such as Inmarsat and Hikma Pharmaceuticals.

Outlook

The UK economy continues to perform well against a tough global backdrop, and is expected to be the fastest growing G7 economy for the second year running. Rising wages and employment combined with limited inflation continue to lift household spending power, which has positive implications for consumer facing companies, whilst continued weakness in commodity prices negatively impacts energy and related industries. Based upon our view that these changes are still not fully reflected in share prices, the portfolio remains positively exposed to such domestic, consumer related stocks whilst negatively positioned in energy and related industries.

In addition to these factors, other uncertainties such as the pace of emerging market growth, the timing and magnitude of interest rate increases and the future of Europe continue to influence our view on your Company's overall exposure to the market. The current cash position leaves significant capacity to deploy further capital into the market in the event of increased volatility presenting opportunities, as confidence in growth increases or as other risks unwind.

Despite this somewhat uncertain backdrop, we believe that the favourable dynamics of investing in small and medium-sized companies will continue to drive superior returns over the long-term.

Guy Anderson
Martin Hudson
Anthony Lynch

23rd September 2015

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

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 twelve 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

(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.

Hamish Leslie Melville
Chairman

23rd September 2015

Statement of Comprehensive Income

for the six months ended 31st July 2015

	(Unaudited) Six months ended 31st July 2015			(Unaudited) Six months ended 31st July 2014			(Audited) Year ended 31st January 2015
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) from investments held at fair value through profit or loss	-	225,998	225,998	-	(24,696)	(24,696)	-	43,822	43,822
Net foreign currency gains	-	15	15	-	5	5	-	41	41
Income from investments	32,565	-	32,565	28,781	-	28,781	47,091	-	47,091
Other interest receivable and similar income	522	-	522	305	-	305	1,045	-	1,045
Gross return/(loss)	33,087	226,013	259,100	29,086	(24,691)	4,395	48,136	43,863	91,999
Management fee	(1,097)	(2,560)	(3,657)	(1,139)	(2,658)	(3,797)	(2,132)	(4,975)	(7,107)
Other administrative expenses	(661)	-	(661)	(439)	-	(439)	(1,180)	-	(1,180)
Net return/(loss) on ordinary activities before finance costs and taxation	31,329	223,453	254,782	27,508	(27,349)	159	44,824	38,888	83,712
Finance costs	(1,671)	(3,903)	(5,574)	(1,685)	(3,925)	(5,610)	(3,359)	(7,838)	(11,197)
Net return/(loss) on ordinary activities before taxation	29,658	219,550	249,208	25,823	(31,274)	(5,451)	41,465	31,050	72,515
Taxation (note 4)	(162)	-	(162)	(15)	-	(15)	(113)	-	(113)
Net return/(loss) on ordinary activities after taxation	29,496	219,550	249,046	25,808	(31,274)	(5,466)	41,352	31,050	72,402
Return/(loss) per share (note 5)	30.54p	227.30p	257.84p	26.27p	(31.83)p	(5.56)p	42.10p	31.61p	73.71p

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.

Statement of Changes in Equity

for the six months ended 31st July 2015

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2015	24,426	23,459	12,344	1,615,974	36,893	1,713,096
Repurchased and cancellation of the Company's   own shares	(364)	-	364	(22,939)	-	(22,939)
Net return on ordinary activities	-	-	-	219,550	29,496	249,046
Dividends paid in the period	-	-	-	-	(26,019)	(26,019)
At 31st July 2015	24,062	23,459	12,708	1,812,585	40,370	1,913,184
Six months ended 31st July 2014 (unaudited)
	Called up		Capital
	share	Share	redemption	Capital	Revenue1
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2014	24,560	23,459	12,210	1,592,851	34,830	1,687,910
Net return on ordinary activities	-	-	-	(31,274)	25,808	(5,466)
Dividends appropriated in the period	-	-	-	-	(23,571)	(23,571)
At 31st July 2014	24,560	23,459	12,210	1,561,577	37,067	1,658,873
Year ended 31st January 2015 (audited)
	Called up		Capital
	share	Share	redemption	Capital	Revenue1
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2014	24,560	23,459	12,210	1,592,851	34,830	1,687,910
Repurchase and cancellation of the Company's   own shares	(134)	-	134	(7,927)	-	(7,927)
Net return on ordinary activities	-	-	-	31,050	41,352	72,402
Dividends paid in the year	-	-	-	-	(39,289)	(39,289)
At 31st January 2015	24,426	23,459	12,344	1,615,974	36,893	1,713,096

¹This 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 July 2015

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2015	30th June 2014	31st December 2014
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	1,864,253	1,606,981	1,722,405
Current assets
Debtors	13,108	28,540	2,573
Cash and short term deposits	229,600	220,594	193,167
	242,708	249,134	195,740
Creditors: amounts falling due within one year	(16,345)	(19,907)	(27,666)
Net current assets	226,363	229,227	168,074
Total assets less current liabilities	2,090,616	1,836,208	1,890,479
Creditors: amounts falling due after more   than one year	(177,432)	(177,335)	(177,383)
Net assets	1,913,184	1,658,873	1,713,096
Capital and reserves
Called up share capital	24,062	24,560	24,426
Share premium	23,459	23,459	23,459
Capital redemption reserve	12,708	12,210	12,344
Capital reserves	1,812,585	1,561,577	1,615,974
Revenue reserve	40,370	37,067	36,893
Shareholders' funds	1,913,184	1,658,873	1,713,096
Net asset value per share (note 6)	1,987.8p	1,688.6p	1,753.3p

Company registration number 20537

Statement of Cash Flows

for the six months ended 31st July 2015

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2015	31st July 2014	31st January 2015
	£'000	£'000	£'000
Cash inflow from operations (note 7)	26,771	23,074	39,852
Interest paid	(5,528)	(5,528)	(11,057)
Overseas tax recovered	-	27	62
Net cash inflow from operating activities	21,243	17,573	28,857
Purchases of investments	(435,209)	(524,302)	(1,148,222)
Sales of investments	499,967	723,692	1,328,276
Other capital charges	(18)	(13)	(27)
Net cash inflow from investing activities	64,740	199,377	180,027
Dividends paid	(26,019)	(23,571)	(39,289)
Shares repurchased	(27,184)	-	(3,681)
Net cash outflow from financing activities	(53,203)	(23,571)	(42,970)
Increase in cash and cash equivalents	32,780	193,379	165,914
Cash and cash equivalents at the start of the period	193,167	27,211	27,211
Exchange movements	15	4	42
Cash and cash equivalents at the end of the period	225,962	220,594	193,167
Increase in cash and cash equivalents	32,780	193,379	165,914
Cash and cash equivalents consist of (note 9):
Cash at bank and in hand	-	394	367
Bank overdraft	(3,638)	-	-
Short term deposits	229,600	220,200	192,800
	225,962	220,594	193,167

Notes to the Financial Statements

for the six months ended 31st July 2015

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 2015 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 including 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 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 July 2015.

      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 January 2015 with the following exceptions and amendments:

      Finance costs

      Finance costs are accounted for on an accruals basis using the effective interest method and 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 (in accordance with the requirements of the Alternative Investment Fund Managers Directive regulations, investments are regarded as cash equivalents if they meet all of the following criteria; highly liquid investments held in the sub-fund's base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond).

      Taxation

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

      Deferred tax is accounted for in accordance with FRS 102.

      Foreign currency

      In accordance with FRS 102 the Company is required to identify its functional currency, being the currency of the primary economic environment in which the Company operates. The Board, having regard to the currency of the Company's share capital and the predominant currency in which its shareholders operate, has determined that Sterling is the functional currency. Sterling is also the currency in which the accounts are presented.

      Repurchases of ordinary shares for cancellation

      The cost of repurchasing ordinary shares including the related stamp duty and transactions costs is charged to capital reserves and dealt with in the Statement of Changes in Equity.

      Only the relevant section of the applicable policies from the last year end accounts 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.

3.   Dividends¹

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2015	31st July 2014	31st January 2015
	£'000	£'000	£'000
Unclaimed dividends refunded to the Company	(1)	(7)	(7)
Fourth quarterly dividend of 17.0p (2014: 16.0p)   paid to shareholders in May	16,395	15,719	15,719
First quarterly dividend of 10.0p (2014: 8.0p) paid to   shareholders in July	9,625	7,859	7,859
Second quarterly dividend of 8.0p paid to shareholders   in October	n/a	n/a	7,859
Third quarterly dividend of 8.0p paid to shareholders   in February	n/a	n/a	7,859
Total dividends paid in the period	26,019	23,571	39,289

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

A second quarterly dividend of 10.0p (2014: 8.0p) per share, amounting to £9,625,000 (2014: £7,859,000), has been declared payable in respect of the six months ended 31st July 2015.

4.   Taxation

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

5.   Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2015	31st July 2014	31st January 2015
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return	29,496	25,808	41,352
Capital return/(loss)	219,550	(31,274)	31,050
Total return/(loss)	249,046	(5,466)	72,402
Weighted average number of shares in issue	96,589,828	98,240,719	98,277,527
Revenue return per share	30.54p	26.27p	42.10p
Capital return/(loss) per share	227.30p	(31.83)p	31.61p
Total return/(loss) per share	257.84p	(5.56)p	73.71p

6.   Net asset value per share

Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue at 31st July 2015 of 96,248,541 (31st July 2014: 98,240,719 and 31st January 2015: 97,704,635).

7.   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 July 2015	31st July 2014	31st January 2015
	£'000	£'000	£'000
Net return on ordinary activities before finance costs   and taxation	254,782	159	83,712
(Net capital return)/net capital loss before finance   costs and taxation	(223,453)	27,349	(38,888)
Scrip dividends received as income	(479)	-	-
Increase in net debtors and accrued income	(535)	(1,404)	(179)
(Decrease)/increase in accrued expenses	(565)	(61)	639
Management fee charged to capital	(2,560)	(2,658)	(4,975)
Overseas withholding tax	(419)	(311)	(457)
Net cash inflow from operating activities	26,771	23,074	39,852

8.   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 July 2015		31st July 2014		31st January 2015
	Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
	£'000	£'000	£'000	£'000	£'000	£'000
Quoted prices for identical
instruments in active markets	1,861,364	-	1,603,951	-	1,769,516	-
Valuation techniques using
non-observable data1	2,889	-	3,030	-	2,889	-
Total value of investments	1,864,253	-	1,606,981	-	1,772,405	-

¹Consists only of the holding of unquoted stock of Tennants Consolidated (31st July 2014 also includes Brookwell).

9.   Net funds

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2015	31st July 2014	31st January 2015
	£'000	£'000	£'000
Cash and cash equivalents	225,962	220,594	193,167
Debentures falling due after more than
five years	(177,432)	(177,335)	(177,383)
Net funds	48,530	43,259	15,784

10.  Subsequent event

      On 26th August 2015, International Ferro Metals Limited was suspended at the company's request. Consequently, nil value has been applied to the security with effect from 27th August 2015.

For further information, please contact:

Juliet Dearlove

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.mercantileit.co.uk

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 FUNDS LIMITED

ENDS

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

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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