Half Yearly Report

RNS Number : 2409S

JPMorgan Japan Smaller Co Tst PLC

05 November 2013

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN JAPAN SMALLER COMPANIES TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED

30TH SEPTEMBER 2013

Chairman's Statement

Performance

The Japanese smaller companies market rose during the six month period ended 30th September 2013. The Company outperformed its benchmark index, the S&P/Citigroup Japan Extended Market Index (total return net), with its undiluted net asset value increasing by 11.2% compared to the benchmark's increase of 1.3%. 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, rose by 9.8%.

Over the same period, the Company's Ordinary share price rose by 11.5%, reflecting the narrowing of the discount on a diluted basis from 10.9% to 9.6%. Subsequent to the period end, the discount has widened and, as at the time of writing, stood at 12.2%.

In my year end statement, I was pleased to report that the revised portfolio management arrangements, put in place in 2012, had worked more effectively over the course of the year. I highlighted the outperformance of the benchmark by means of a sensible, well thought out approach, focusing on judicious stock picking. The Board continues to monitor progress carefully. A more detailed review of the Company's performance is given in the Investment Manager's report in the half year report.

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. This facility matures on 5th November 2013 and is being replaced by an unsecured three year term loan for ¥3.0 billion, to allow for the Company's enlarged asset base. During the six months to 30th September 2013 the Company's gearing ranged from 7% to 10%. At the time of writing, the Company was 9% geared.

Subscription Shares

During the six months to 30th September 2013, the Company issued 108,798 new Ordinary shares following valid applications to exercise the rights attached to Subscription shares. Subscription shareholders are reminded that the final exercise date for Subscription shares is 31st March 2014. At the time of writing, the Company's shares were trading at 198 pence per share, somewhat above the current exercise price of 174 pence per share. Further details of the Subscription shares can be found in the half year report and on the Company's website at www.jpmjapansmallercompanies.co.uk

Alternative Investment Fund Managers Directive ('AIFMD')

The Board has been considering the implications of AIFMD for the Company and is taking advice on compliance with these new regulations. As part of this, the Board has agreed in principle to appoint JPMorgan as its Manager. AIFMD introduces new reporting requirements and there will be a need to appoint a Depositary to perform an oversight role in relation to the Company's custody and cash management operations. Further information will be announced by the Board as implementation of AIFMD progresses.

Board

John Gibbon, Director and Audit Committee Chairman, retired from the Board following the Annual General Meeting. Chris Russell has been appointed Audit Committee Chairman.

Outlook

It is just over a year since Prime Minister Abe launched his programme to re‑energise the Japanese economy. Commentators seem agreed that the policy changes implemented so far have achieved a good measure of success. There is more to do, however, if the growth pattern evident to date is to be firmly entrenched. The stock market has performed strongly over the past twelve months and our Investment Managers believe that the potential exists for further good gains. Portfolio positioning will be crucial if these gains are to be maximised and our Investment Managers have carefully considered sector strategy and have firm views as to which market segments have the greatest appeal, as they explain in their Report. I look forward to a further period of satisfactory returns for shareholders.

Alan Clifton

Chairman

5th November 2013

Investment Managers' Report

Market review

The Japanese market rose strongly during the six months to the end of September, delivering a double digit return in Sterling terms. In April, the new Governor of the Bank of Japan ('BoJ'), Haruhiko Kuroda, released a new policy framework. The BoJ now targets 2% inflation within two years by doubling the size of the monetary base. The change marks a significant departure from previous policies. In response to the BoJ's aggressive monetary easing plans, the Japanese Yen has depreciated against most major currencies.

The rally stalled in May, after eight months of consecutive gains. This coincided with the US Federal Reserve's announcement that they were preparing a withdrawal of the quantitative easing programme, which caused a sell-off in US Treasury stocks and concern about the outlook for emerging market economies which, so far, have enjoyed strong foreign capital inflows.

The market resumed its ascent from the middle of June in anticipation of a Liberal Democratic Party ('LDP') victory in the Upper House election in July. The LDP did win the election, giving the ruling coalition a majority in both the Lower and Upper Houses of the Diet for the first time since 2007. On 7th September 2013, the International Olympic Committee announced that Tokyo would host the 2020 Summer Olympic Games, bringing the event back to the Japanese capital for the first time in 56 years.

The earnings outlook has improved markedly during the period, partly as a result of the fall in the Yen against the US Dollar and other major currencies, which helps to restore profitability of the export sector. The best performing sectors on TSE First Section included steel, cement, brokerage firms, telecom and IT services. On the other hand, defensive sectors such as pharmaceuticals, land transport and food were among the bottom performers.

Performance review

The portfolio has maintained a bias towards domestic sectors, with a focus on financials including real estate and companies that are likely to benefit from an improving economy. We also maintained the gearing of the fund between 7% and 10% throughout the review period.

Over the six months to 30th September 2013 the portfolio generated a return of 11.2% on an undiluted basis (9.8% diluted) in Sterling terms and outperformed the benchmark S&P Japan Small Cap Index. The outperformance was attributable mostly to stock selection, which was particularly strong in software & services, retailing, materials and real estate. Stocks that contributed most positively included: Taiheiyo Cement (materials), which has enjoyed strong domestic demand; Don Quijote (retailing), which has continued to deliver steady earnings growth; and Nihon M&A Center (commercial and professional services), which has seen rising demand for its advisory service from small and medium-sized enterprises, many of which are family owned and seeking to sell their businesses due to lack of successors. Other strong performers included Raito Kogyo (capital goods) and Tokyo Tatemono (real estate). The former is a construction company specialising in road repair and maintenance and a beneficiary of the Abe administration's initiative to inflate the economy through infrastructure spending. Tokyo Tatemono, together with other real estate stocks, performed strongly in anticipation of rising office rents and property prices. On the other hand, Itochu Techno-Solutions (software services), Pal (retailing) and Arcs (food and staples retailing) were among stocks that detracted from performance. Itochu Techno-Solutions disappointed investors with poor April to June quarter results and, as a consequence, we have sold the entire holding. The two retail companies underperformed due to poor same store sales trends. With the exception of luxury items whose sales have expanded strongly thanks to the wealth effect, the broader consumption trend has remained challenging due to lack of income growth. However, it is our belief that income will eventually rise, following strong corporate earnings growth with some degree of time lag. Based on this view, we remain positive on consumption in the medium term.

The impact of sector allocation was neutral. Positive contributors included gearing and the underweight position in banks. The banking sector within the benchmark is dominated by regional banks which typically demonstrate defensive characteristics and therefore tend to underperform in a rising market. Their positive contribution was offset by a large negative contribution from being overweight real estate. The benchmark constituents of the real estate sector are skewed towards REITS, which as a group underperformed the broader market after significant outperformance in the January to March quarter. The portfolio's holding in the sector was broad‑based and collectively outperformed the benchmark.

Outlook and portfolio strategy

The key themes which we expect to continue are strong political leadership, changing inflation expectations, improving investor sentiment, strong corporate earnings prospects, Yen weakness and attractive valuations. The LDP won the Upper House election in July, as expected. As a result, Prime Minister Abe has strong political capital to pursue a structural reform and growth agenda. We expect that the 2020 Olympics will act as a catalyst for some infrastructure projects and possibly the legislation of integrated resorts around casinos. We continue to believe that although exporter earnings will be boosted by the weaker currency, the effects of this increase in profits will be felt keenly in the domestic economy. This explains our current portfolio positioning. It is important to emphasise that alongside this macro view the long term themes in the portfolio - such as the ageing population, factory automation, greater use of mobile devices such as smart phones, consolidation in retail and the growth of e-commerce - remain unchanged.

Shoichi Mizusawa-

Nicholas Weindling

Naohiro Ozawa

Investment Managers

5th November 2013

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 have not changed and fall into the following broad categories: investment and strategy; market; liquidity; discount; accounting, legal and regulatory; corporate governance and shareholder relations; operational; loss of investment team; political and economic; foreign currency; and financial. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st March 2013.

Related Parties Transactions

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

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

Directors' Responsibilities

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

      (i)   the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half Yearly Financial Reports' and gives a true and fair view of the state of the affairs of the Company and of the assets, liabilities, financial position and net return of the Company, as at 30th September 2013, as required by the UK Listing Authority Disclosure and Transparency Rules 4.2.4R; and

      (ii)  the interim management report includes a fair review of the information required by DTR 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

Alan Clifton
Chairman-

5th November 2013

Income Statement

for the six months ended 30th September 2013

	(Unaudited) Six months ended 30th September 2013			(Unaudited) Six months ended 30th September 2012			(Audited) Year ended 31st March 2013
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss	-	8,890	8,890	-	(478)	(478)	-	17,176	17,176
Net foreign currency gains/(losses)	-	752	752	-	(91)	(91)	-	(19)	(19)
Income from investments	513	-	513	636	-	636	1,261	-	1,261
Gross return/(loss)	513	9,642	10,155	636	(569)	67	1,261	17,157	18,418
Management fee	(488)	-	(488)	(349)	-	(349)	(708)	-	(708)
Other administrative expenses	(234)	-	(234)	(188)	-	(188)	(357)	-	(357)
Net (loss)/return on ordinary activities before finance costs and taxation	(209)	9,642	9,433	99	(569)	(470)	196	17,157	17,353
Finance costs	(68)	-	(68)	(49)	-	(49)	(93)	-	(93)
Net (loss)/return on ordinary activities before taxation	(277)	9,642	9,365	50	(569)	(519)	103	17,157	17,260
Taxation	(37)	-	(37)	(45)	-	(45)	(89)	-	(89)
Net (loss)/return on ordinary activities after taxation	(314)	9,642	9,328	5	(569)	(564)	14	17,157	17,171
(Loss)/return per Ordinary share (note 3)
- undiluted	(0.80)p	24.64p	23.84p	0.01p	(1.44)p	(1.43)p	0.04p	43.67p	43.71p
- diluted	(0.79)p	24.18p	23.39p	0.01p	(1.51)p	(1.50)p	0.04p	43.67p	43.71p

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. 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 2013	capital	premium	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2013	4,021	764	314,775	1,836	(226,611)	(12,249)	82,536
Repurchase of shares held in Treasury	-	-	(1)	-	-	-	(1)
Issue of Ordinary shares on exercise of Subscription shares	11	179	-	-	-	-	190
Net return/(loss) on ordinary activities	-	-	-	-	9,642	(314)	9,328
At 30th September 2013	4,032	943	314,774	1,836	(216,969)	(12,563)	92,053

	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
Year ended	share	Share	Other	redemption	Capital	Revenue
31st March 2013	capital	premium	reserve	reserve	reserves	reserve	Total
(Audited)	£'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 into Treasury	-	-	-	-	(565)	-	(565)
Issue of Ordinary shares on exercise of Subscription shares	4	48	-	-	-	-	52
Net return on ordinary activities	-	-	-	-	17,157	14	17,171
At 31st March 2013	4,021	764	314,775	1,836	(226,611)	(12,249)	82,536

Balance Sheet

at 30th September 2013

	(Unaudited)	(Unaudited)	(Audited)
	30th September 2013	30th September 2012	31st March 2013
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	98,887	64,330	88,488
Current assets
Debtors	448	493	596
Cash and short term deposits	3,575	5,073	1,239
	4,023	5,566	1,835
Creditors: amounts falling due within one year	(10,857)	(67)	(7,787)
Net current (liabilities)/assets	(6,834)	5,499	(5,952)
Total assets less current liabilities	92,053	69,829	82,536
Creditors: amounts falling due after more than one year	-	(4,776)	-
Net assets	92,053	65,053	82,536
Capital and reserves
Called up share capital	4,032	4,020	4,021
Share premium	943	762	764
Other reserve1	314,774	314,465	314,775
Capital redemption reserve	1,836	1,836	1,836
Capital reserves	(216,969)	(243,772)	(226,611)
Revenue reserve	(12,563)	(12,258)	(12,249)
Total equity shareholders' funds	92,053	65,053	82,536
Net asset value per Ordinary share (note 4)
- undiluted	234.9p	165.8p	211.2p
- diluted	225.6p	165.8p	205.4p

1        Comprises the redesignated share premium account.

The Company's registration number is 3916716

Cash Flow Statement

for the six months ended 30th September 2013

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2013	30th September 2012	31st March 2013
	£'000	£'000	£'000
Net cash (outflow)/inflow from operating activities (note 5)	(113)	190	139
Net cash outflow from return on investments and servicing of finance	(59)	(53)	(96)
Net cash (outflow)/inflow from capital expenditure and financial investment	(2,556)	4,521	(914)
Net cash inflow/(outflow) from financing	5,247	(261)	1,937
Increase in cash in the period	2,519	4,397	1,066
Reconciliation of net cash flow to movement in net (debt)/funds
Net cash movement	2,519	4,397	1,066
Net loans repaid	(5,266)	-	(2,243)
Exchange movements	753	(91)	(19)
Movement in net (debt)/funds in the period	(1,994)	4,306	(1,196)
Net debt at the beginning of the period	(5,205)	(4,009)	(4,009)
Net (debt)/funds at the end of the period	(7,199)	297	(5,205)
Represented by:
Cash and short term deposits	3,575	5,073	1,239
Debt falling due within one year	(10,774)	(4,776)	(6,444)
Net (debt)/funds at the end of the period	(7,199)	297	(5,205)

Notes to the Accounts

for the six months ended 30th September 2013

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 2013 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 2013.

3.   Return/(loss) per Ordinary share

		(Unaudited)	(Unaudited)	(Audited)
		Six months ended	Six months ended	Year ended
		30th September 2013	30th September 2012	31st March 2013
		£'000	£'000	£'000
	Return/(loss) per Ordinary share is based on the following:
	Revenue (loss)/return	(314)	5	14
	Capital return/(loss)	9,642	(569)	17,157
	Total return/(loss)	9,328	(564)	17,171
	Weighted average number of Ordinary shares in issue during the period used for the purpose of the basic (undiluted) calculation	39,125,711	39,379,850	39,289,157
	Weighted average number of Ordinary shares in issue during the period used for the purpose of the diluted calculation	39,886,422	37,514,172	39,289,157
	Undiluted
	Revenue (loss)/return per Ordinary share	(0.80)p	0.01p	0.04p
	Capital return/(loss) per Ordinary share	24.64p	(1.44)p	43.67p
	Total return/(loss) per Ordinary share	23.84p	(1.43)p	43.71p
	Diluted
	Revenue (loss)/return per Ordinary share	(0.79)p	0.01p	0.04p
	Capital return/(loss) per Ordinary share	24.18p	(1.51)p	43.67p
	Total return/(loss) per Ordinary share	23.39p	(1.50)p	43.71p

      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 2013	30th September 2012	31st March 2013
	Undiluted
	Ordinary shareholders' funds (£'000)	92,053	65,053	82,536
	Number of Ordinary shares in issue	39,190,436	39,229,318	39,081,638
	Net asset value per Ordinary share	234.9p	165.8p	211.2p
	Diluted
	Ordinary shareholders' funds assuming exercise of dilutive Subscription shares and reissuance of any Treasury shares (£'000)	104,387	65,053	95,060
	Number of potential Ordinary shares in issue	46,279,296	39,229,318	46,279,296
	Net asset value per Ordinary share	225.6p	165.8p	205.4p

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 2013, the Treasury shares have no dilutive effect, as the Treasury shares will only be reissued at a premium to net asset value per share.

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

		(Unaudited)	(Unaudited)	(Audited)
		Six months ended	Six months ended	Year ended
		30th September 2013	30th September 2012	31st March 2013
		£'000	£'000	£'000
	Total return/(loss) on ordinary activities before finance costs and taxation	9,433	(470)	17,353
	Less capital (return)/loss before finance costs and taxation	(9,642)	569	(17,157)
	Decrease in accrued income	133	164	74
	Decrease/(increase) in other debtors	15	2	(11)
	Decrease in other creditors	(15)	(30)	(31)
	Overseas withholding tax	(37)	(45)	(89)
	Net cash (outflow)/inflow from operating activities	(113)	190	139

JPMORGAN ASSET MANAGEMENT (UK) 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 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.

 

END

 

 

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