Half Year Results

RNS Number : 4382R

JPMorgan Japan Smaller Co Tst PLC

19 November 2012

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN JAPAN SMALLER COMPANIES TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
30TH SEPTEMBER 2012

Chairman's Statement

Performance

The Japanese smaller companies market continued to be very challenging during the first half of our current financial year. Concern over the prospects for the global economy, the ongoing uncertainty surrounding the Eurozone, the recent US Presidential elections and the strength of the yen were all factors which weighed on sentiment. Positively, the Company outperformed its benchmark index, the S&P/Citigroup Japan Extended Market Index (total return net), with its undiluted net asset value falling by 0.8% compared to the benchmark's decline of 6.1%. The diluted total return on net assets, which assumes that all of the Subscription shares were exercised at the current rate of 174 pence per share, on the other hand, rose by 1.1%. Over the same period, the Company's Ordinary share price fell by 7.5%, reflecting the widening of the discount from 10.4% to 18.0%. Subsequent to the period end, the discount has tightened somewhat and, as at the time of writing, stood at 15.8%.

In my year end statement, I highlighted the measures your Board had taken to address the poor performance delivered in recent years, not least the appointment of a new management team based in Tokyo. It is pleasing to see an immediate marked upturn in relative performance following these changes, albeit in a dull market, and the Board will continue to monitor progress carefully. A more detailed review of the Company's performance is given in the Investment Manager's report below.

Gearing

The Company has a ¥2.0 billion secured credit facility with Scotiabank Europe plc, which gives the Investment Managers the ability to gear tactically. During the six months to 30th September 2012, the Company's gearing ranged from net cash of 2% to 5% geared. At the time of writing, the company was 99% invested.

Subscription Shares

During the six months to 30th September 2012, the Company issued 33,417 new Ordinary shares following valid applications to exercise Subscription shares. At the time of writing, the Company's shares were trading at 136 pence per share, somewhat below the current exercise price of 174 pence per share. Further details of the Subscription shares can be found on the Company's website at www.jpmjapansmallercompanies.co.uk

Outlook

Our Managers remain cautious regarding the near term outlook for the Japanese economy, but are confident of continuing to identify companies with attractive positioning. The Portfolio is focused on high quality Japanese stocks with good earnings progression, strong balance sheets and, in many cases, exposure to the faster growing economies of Asia. We believe a Portfolio of such stocks offers considerable promise.

Alan Clifton

Chairman                                                                                                                           19th November 2012

Investment Managers' Report

Market review

The Japanese market fell during the review period, and the return on S&P/Citigroup Japan Extended Market Index (total return net) was -6.1% in sterling terms. Investors became increasingly risk averse as the outlook for both global and domestic economies deteriorated, the yen continued to strengthen against most other currencies and tensions rose between Japan and China over the disputed Senkaku Islands.

During the three months to end June, the market focused on news emanating from Europe with elections in Greece and France, as well as soaring borrowing costs for Spain and Italy at centre stage. In addition, the economic outlook deteriorated for the US and China, the two largest economies in the world. Employment data in the US, bellweather for the health of the economy, showed that the pace of the recovery has been painfully slow. In China, the local Shanghai Composite index fell to a new post February 2009 low due to poor economic data and lack of decisive policy response.

Although investor sentiment improved markedly in the July to September period, thanks to aggressive monetary easing in Europe, the US and Japan among other countries, the Japanese market failed to participate in the global rally. A stronger yen, rising tensions with China, the failure of the domestic economy to rebound strongly from the adverse shocks of the earthquake and tsunami, as well as the floods in Thailand that disrupted the supply chain for many Japanese exporters in 2011, are all to blame for the underperformance of Japan relative to other markets.

Performance review

The key focus of the Company's holdings was little changed - Japanese companies that have an opportunity to grow in Asia and other emerging economies, those that are restructuring and those that are in structural growth niches within the domestic economy. We focus on companies and industries that are able to show sustained business expansion and that trade at attractive valuations. Typically the balance sheet is strong, operating margins are high, as are returns on assets and equity. Overall there is a very strong focus on business quality.

Over the six months to September, the Company produced a return of -0.8% in sterling terms, while the return of the benchmark S&P/Citigroup Japan Extended Market Index (total return net) was -6.1%. The outperformance over the benchmark is attributable largely to stock selection, although sector allocation also contributed positively. The positive contribution was achieved in a range of sectors, in each of which our focus on quality of earnings and quality of balance sheet helped produce superior returns than the broader market.

The top contributors to the outperformance were Ship Healthcare Holdings which operates dispensing pharmacies and consulting services to hospitals, an online medical portal operator M3, Seven Bank which is an ATM network operator mainly through Seven Eleven convenience stores, Sho-Bond Holdings which specialises in the maintenance and repair of bridges and other social infrastructure, and Sysmex, a medical equipment company. All of them are core holdings whose medium-term growth potential is, we believe, not fully appreciated by the market. In addition, all of them have robust balance sheets and generate strong cash flow. On the other hand, our holdings in cyclical sectors, such as Daido Metal, Skymark Airlines and Eagle Industries, detracted from performance.

With respect to sector allocation, our focus on quality of balance sheet and long-term, as opposed to cyclical, growth potential has resulted in an overweight stance in sectors such as healthcare and internet and a cautious stance towards materials, capital goods and technology. The Company was fully invested at the end of September and the turnover was less than 20% during the six months, down significantly from the same period a year ago.

Outlook and portfolio strategy

We believe that equity market volatility will remain high, due to uncertainties related to the outlook for the economy as well as policy risks around the world. It is our view that global economic growth will be subdued for a protracted period, and the risks are skewed to the downside due to deflationary forces arising from de-leveraging. The Bank of Japan does not appear to be prepared to engage itself in aggressive easing, nor is the government any closer than before to addressing the structural issues of budget deficit, declining working population and deflation. It is likely that there will be another general election before spring next year, and the consensus view is that the ruling Democratic Party of Japan will lose its majority and a new coalition government centred around the Liberal Democratic Party will succeed.

Under such circumstances, we do not intend to change our strategy. In the last report, we wrote the following:

'There are many long-term trends in Japan, both positive and negative. We believe that the differences between those companies that will succeed and those that will not are set to become ever greater. Our local presence on the ground in Tokyo should be a strong competitive advantage in identifying long-term country, sector and stock specific themes. Although there are many macro-economic headwinds we are positive on the outlook for the Company's holdings in the long-term view.'

Indeed, the Japanese equity market has played out almost exactly as we anticipated above. Those companies that are expected to deliver long-term growth have generally performed strongly. On the other hand, companies that lack clear competitive advantage and companies whose balance sheets are highly geared, have seen their share prices fall significantly.

Some of the themes that we have focused on include the internet, an ageing population in Japan and the rise of the middle class in emerging economies. Although we are cautious on the long-term trend for overall domestic demand, we believe we can identify clear winners and losers. The Portfolio comprises stocks which are well positioned to prosper, notwithstanding the challenges facing the Japanese economy.

Shoichi Mizusawa-

Nicholas Weindling

Naohiro Ozawa

Investment Managers                                                                                                   19th November 2012

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; foreign currency; and financial (including credit risk). Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st March 2012.

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.

Directors' Responsibilities

The Board of Directors confirms that, to the best of its knowledge:

(i) the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half-Yearly Financial Reports'; and

(ii)     the interim management report includes a fair review of the information required by DTR 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure and Transparency Rules.

For and on behalf of the Board

Alan Clifton

Chairman                                                                                                                           19th November 2012

For further information, please contact:

Andrew Norman

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary

020 7742 6000

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.jpmjapansmallercompanies.co.uk

Income Statement

for the six months ended 30th September 2012

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th September 2012			30th September 2011			31st March 2012
	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	-	(478)	(478)	-	4,495	4,495	-	936	936
Net foreign currency losses	-	(91)	(91)	-	(441)	(441)	-	(411)	(411)
Income from investments	636	-	636	555	-	555	1,295	-	1,295
Other interest receivable and
similar income	-	-	-	-	-	-	1	-	1
Gross return/(loss)	636	(569)	67	555	4,054	4,609	1,296	525	1,821
Management fee	(349)	-	(349)	(494)	-	(494)	(873)	-	(873)
Other administrative expenses	(188)	-	(188)	(188)	-	(188)	(372)	-	(372)
Net return/(loss) on
ordinary activities before
finance costs and taxation	99	(569)	(470)	(127)	4,054	3,927	51	525	576
Finance costs	(49)	-	(49)	(97)	-	(97)	(124)	-	(124)
Net return/(loss) on ordinary
activities before taxation	50	(569)	(519)	(224)	4,054	3,830	(73)	525	452
Taxation	(45)	-	(45)	(39)	-	(39)	(91)	-	(91)
Net return/(loss) on ordinary
activities after taxation	5	(569)	(564)	(263)	4,054	3,791	(164)	525	361
Return/(loss) per Ordinary share
(note 3)
- undiluted	0.01p	(1.44)p	(1.43)p	(0.67)p	10.27p	9.60p	(0.42)p	1.33p	0.91p
- diluted	0.01p	(1.51)p	(1.50)p	(0.67)p	10.32p	9.65p	(0.42)p	1.34p	0.92p

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

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Total column represents all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ('STRGL'). For this reason a STRGL has not been presented.

Reconciliation of Movements in Shareholders' Funds

	Called up			Capital
Six months ended	share	Share	Other	redemption	Capital	Revenue
30th September 2012	capital	premium	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2012	4,017	716	314,775	1,836	(243,203)	(12,263)	65,878
Repurchase of shares held
in Treasury	-	-	(310)	-	-	-	(310)
Issue of Ordinary shares on exercise
of Subscription shares	3	46	-	-	-	-	49
Net (loss)/return on ordinary activities	-	-	-	-	(569)	5	(564)
At 30th September 2012	4,020	762	314,465	1,836	(243,772)	(12,258)	65,053

	Called up			Capital
Six months ended	share	Share	Other	redemption	Capital	Revenue
30th September 2011	capital	premium	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2011	4,058	710	314,823	1,794	(243,728)	(12,099)	65,558
Cancellation of shares held
in Treasury	(42)	-	-	42	-	-	-
Issue of Ordinary shares on exercise
of Subscription shares	-	6	-	-	-	-	6
Net return/(loss) on ordinary activities	-	-	-	-	4,054	(263)	3,791
At 30th September 2011	4,016	716	314,823	1,836	(239,674)	(12,362)	69,355

	Called up			Capital
Year ended	share	Share	Other	redemption	Capital	Revenue
31st March 2012	capital	premium	reserve	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2011	4,058	710	314,823	1,794	(243,728)	(12,099)	65,558
Repurchase of shares into Treasury	-	-	(48)	-	-	-	(48)
Cancellation of shares in Treasury	(42)	-	-	42	-	-	-
Issue of Ordinary shares on exercise of
Subscription shares	1	6	-	-	-	-	7
Net return/(loss) on ordinary activities	-	-	-	-	525	(164)	361
At 31st March 2012	4,017	716	314,775	1,836	(243,203)	(12,263)	65,878

Balance Sheet

at 30th September 2012

	(Unaudited)	(Unaudited)	(Audited)
	30th September 2012	30th September 2011	31st March 2012
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	64,330	66,263	69,273
Current assets
Debtors	493	1,432	1,490
Cash and short term deposits	5,073	10,305	554
	5,566	11,737	2,044
Creditors: amounts falling due within one year	(67)	(8,645)	(5,439)
Net current assets/(liabilities)	5,499	3,092	(3,395)
Total assets less current liabilities	69,829	69,355	65,878
Creditors: amounts falling due after
more than one year	(4,776)	-	-
Net assets	65,053	69,355	65,878
Capital and reserves
Called up share capital	4,020	4,016	4,017
Share premium	762	716	716
Other reserve	314,465	314,823	314,775
Capital redemption reserve	1,836	1,836	1,836
Capital reserves	(243,772)	(239,674)	(243,203)
Revenue reserve	(12,258)	(12,362)	(12,263)
Total equity shareholders' funds	65,053	69,355	65,878
Net asset value per Ordinary share (note 4)
- undiluted	165.8p	175.8p	167.1p
- diluted	165.8p	171.3p	164.0p

The Company's registration number is 3916716

Cash Flow Statement

for the six months ended 30th September 2012

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2012	30th September 2011	31st March 2012
	£'000	£'000	£'000
Net cash inflow/(outflow) from operating
activities (note 5)	190	(1)	(59)
Net cash outflow from return on investments
and servicing of finance	(53)	(101)	(125)
Net cash inflow from capital expenditure
and financial investment	4,521	10,294	2,325
Net cash outflow from financing	(261)	(6,233)	(7,928)
Increase/(decrease) in cash in the period	4,397	3,959	(5,787)
Reconciliation of net cash flow to movement in
net funds/debt
Net cash movement	4,397	3,959	(5,787)
Net loans repaid	-	6,239	7,887
Exchange movements	(91)	(441)	(411)
Movement in net funds in the period	4,306	9,757	1,689
Net debt at the beginning of the period	(4,009)	(5,698)	(5,698)
Net funds/(debt) at the end of the period	297	4,059	(4,009)
Represented by:
Cash and short term deposits	5,073	10,305	554
Debt falling due after more than one year	(4,776)	(6,246)	(4,563)
Net funds/(debt) at the end of the period	297	4,059	(4,009)

Notes to the Accounts

for the six months ended 30th September 2012

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 March 2012 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.   Accounting policies

      The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in January 2009.

      All of the Company's operations are of a continuing nature.

      The accounting policies applied in these half year accounts are consistent with those applied in the accounts for the year ended 31st March 2012.

3.   Return/(loss) per Ordinary share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2012	30th September 2011	31st March 2012
	£'000	£'000	£'000
Return/(loss) per Ordinary share is based on the following:
Revenue return/(loss)	5	(263)	(164)
Capital (loss)/return	(569)	4,054	525
Total (loss)/return	(564)	3,791	361
Weighted average number of Ordinary shares in issue
during the period used for the purpose of the basic
(undiluted) calculation	39,379,850	39,455,653	39,446,389
Weighted average number of Ordinary shares in issue
during the period used for the purpose of the diluted
calculation	37,514,172	39,267,442	39,134,213
Basic (undiluted)
Revenue return/(loss) per Ordinary share	0.01p	(0.67)p	(0.42)p
Capital (loss)/return per Ordinary share	(1.44)p	10.27p	1.33p
Total (loss)/return per Ordinary share	(1.43)p	9.60p	0.91p
Diluted
Revenue return/(loss) per Ordinary share	0.01p	(0.67)p	(0.42)p
Capital (loss)/return per Ordinary share	(1.51)p	10.32p	1.34p
Total (loss)/return per Ordinary share	(1.50)p	9.65p	0.92p

      The diluted return/(loss) per Ordinary share represents the return/(loss) on ordinary activities after taxation for the period divided by the weighted average number of Ordinary shares in issue during the period, as adjusted in accordance with the requirements of Financial Reporting Standard 22 'Earnings per share'.

4.   Net asset value per Ordinary share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2012	30th September 2011	31st March 2012
Undiluted
Ordinary shareholders' funds (£'000)	65,053	69,355	65,878
Number of Ordinary shares in issue	39,229,318	39,456,287	39,421,401
Net asset value per Ordinary share	165.8p	175.8p	167.1p
Diluted
Ordinary shareholders' funds assuming exercise of
dilutive Subscription shares and reissuance of
any Treasury shares (£'000)	65,053	79,987	76,510
Number of potential Ordinary shares in issue	39,229,318	46,688,796	46,653,796
Net asset value per Ordinary share	165.8p	171.3p	164.0p

      The diluted net asset value per Ordinary share assumes that all outstanding dilutive Subscription shares were converted into Ordinary shares at the period end and any shares held in Treasury at the period end were reissued in accordance with the Board's policy on the reissuance of Treasury shares. At 30th September 2012, the Subscription and Treasury shares have no dilutive effect, as the Ordinary share price was below the Subscriptions share conversion price and the Treasury shares will only be reissued at a premium to net asset value per share.

5.   Reconciliation of net (loss)/return on ordinary activities before finance costs and taxation to net cash inflow/(outflow) from operating activities

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2012	30th September 2011	31st March 2012
	£'000	£'000	£'000
Total (loss)/return on ordinary activities before finance
costs and taxation	(470)	3,927	576
Less capital loss/(return) before finance costs and taxation	569	(4,054)	(525)
Decrease/(increase) in accrued income	164	182	(66)
Decrease in other debtors	2	20	9
(Decrease)/increase in other creditors	(30)	(37)	38
Overseas withholding tax	(45)	(39)	(91)
Net cash inflow/outflow from operating activities	190	(1)	(59)

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

ENDS

A copy of the half year has been submitted to the National Storage Mechanism and will shortly 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.jpmjapansmallercompanies.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

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END

 

 

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