Interim Results

RNS Number : 1589J

JPMorgan Fleming Japanese Smllr Cos

28 November 2008

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN FLEMING JAPANESE SMALLER COMPANIES INVESTMENT TRUST plc

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 

30TH SEPTEMBER 2008

Chairman's Statement

Performance

The global economic slowdown has proved particularly challenging for the Japanese smaller companies market in the six months to 30th September 2008. It is disappointing to report that the Company's net asset value declined by 23.2% over the half year period, which, when compared to the fall of 7.8% from the Company's benchmark, the Citigroup Equity Index Japan Extended Market in sterling terms, reveals an underperformance of 15.4%. The Company's share price decline of 20.6% was moderately better, reflecting a narrowing of the discount from 12.6% to 9.7%. Shareholders should note that the benchmark index does not offer a totally accurate representation of the investment universe within which the Company operates. Whilst reference is made to the Citigroup Equity Index Japan Extended Market, the Board considers several other factors when assessing investment performance, such as the Company's performance against its peers, discount to net asset value, performance attribution and total expense ratio. 

Gearing

The Company has a Japanese Yen 2.5bn credit facility with ING Bank which gives the Managers the ability to gear tactically. The Board has given the investment managers the flexibility to set gearing within the range of 90% to 120% invested. During the period the level of gearing has ranged between 101% and 110%, ending the half year at 107%.

Appointment of New Director

On 1st October 2008 the Board announced the appointment of Robert White as an independent Non Executive Director of the Company. Robert has over 30 years of investment experience in the Japanese market and is currently a Partner of Oldfield Partners LLP responsible for their Japanese investments. I am confident that he will contribute strongly to Board deliberations.

Subscription Shares

On 26th November 2008, the Board announced that it was considering a bonus issue of subscription shares to shareholders. The Board believes that, over the longer term, investment in Japanese markets will deliver strong capital growth and that subscription shares represent an attractive option for shareholders to subscribe in the future for further ordinary shares in the Company. A further announcement will be made in due course.

Outlook

Whilst the outlook in Japan remains challenging and investment sentiment poor, three years of down markets has seen the emergence of extraordinary value in the smaller companies sector. The Manager has attempted to build a portfolio of high quality companies, trading at substantial discounts to reasonable value, that offer the potential to significantly outperform once economic conditions improve and risk aversion diminishes.

Alan Clifton

Chairman    

28th November 2008

Investment Managers' Report

Japanese markets experienced one of the worst performances on record over the six months under review. The Japanese smaller companies market, despite already being heavily sold down, headed lower in sympathy with other major global markets. This is despite the very 'non-bubbled' nature of the Japanese economy and the solid financial position of both its companies and its banking system. Bond and currency markets reflected this underlying solidity by buying Yen and Japanese Government Bonds. So long as investors are aggressively deleveraging, the Yen seems likely to strengthen. Equity investors, in contrast, seemed to focus very much more on short run earnings where the global slowdown and especially the strongly rising Yen hurt exporters' earnings. Valuations, that had already offered widespread value, moved to record lows in price to book ('P/B') terms with smaller caps briefly reaching 0.6x P/B as concerted selling with very few buyers caused stocks to head ever lower. By the end of this period hundreds of stocks in Japan traded below their break up values based on assets alone.

The Company's strategy has been to continue to emphasise those companies that can show ongoing medium term business growth and that also trade at increasingly attractive valuations. In practice this means that many of our holdings trade below their cash values. The market as a whole has entered an area of extreme low valuations, not seen since at least the early 1980s, that strongly indicates that we should be taking a more aggressive stance towards positioning the portfolio given the compelling opportunities that are being presented every day. A striking factor in this sell off is that precisely those companies that are most attractive on a fundamental basis - high return generating, strongly capitalised and with an attractive medium term growth outlook - have been de-rated and punished the most. In contrast, companies with a historically poor record of delivering shareholder value and trading at low price to book multiples at the beginning of this period have outperformed. In most cases we believe that they will be unable to create positive returns and they deserve their lowly ratings. This process has gone even to the extent of some of the best firms trading cheaper than companies with precisely the opposite characteristics. Historically we have sought to identify stocks offering growth at a reasonable price and we remain committed to doing so.

The Company has used the stock price weakness in many highly attractive businesses as an opportunity to invest for the longer term and exploit the market myopia by picking up stocks where the long term picture is attractive even if, in some cases, the shorter term offers some cyclical challenges. This is likely to be driven by areas capable of delivering sustainable secular growth, such as outsourcing of non-core business functions, strong specialist retail franchises, internet and healthcare; cyclical growth, such as semiconductors and machinery, where the stocks are trading at exceptionally depressed prices; and some special situations caused by the current market dislocation. Currently more than 60% of the portfolio is invested in secular growth stocks where companies are currently delivering strong sales and profits growth. Cyclicals and special situations comprise the remainder. In the early summer we sold down our commodity exposure as it became clear that emerging markets could not escape from the global growth slowdown. We also eliminated our banking weighting completely as we anticipated sharply rising credit costs. Despite being right about banks very weak operational performance, the stocks have continued to outperform. The regional banks as a whole conform to the group of historically low returning, weakly managed but lightly held type of firms that have outperformed recently. The extra emphasis on long term growth potential can be seen in the rising service weighting where we added considerably to our weightings in internet and also medical services.

The portfolio has a high weighting in the growth segment that is primarily domestic and service oriented. Investing in growth cyclicals such as machinery, commodities and technology means buying firms where current trading is very difficult, earnings are clearly declining or even negative, but also where valuations have plummeted to extremely low levels. We insist upon strong balance sheets in this area to ensure firms can weather any downturn and can exploit their rivals' financial difficulties. We are closely monitoring the economic indicators to judge when we should increase our exposure to these very cheap economically sensitive stocks. We are especially interested in commodity, environmental, agriculture and infrastructure as areas where we believe the underlying structural demand has not disappeared simply because the global economy has slowed. In many cases delays in new projects, due to currently low prices and lack of financing due to the capital crunch, will simply exacerbate the long term pressures on key raw materials. Asian countries' poor infrastructure for healthcare, power, water, roads and railways that was crimping growth last year remains totally inadequate. The pressures on water and other natural resources will also intensify. Japanese firms have leading edge technology in many of these areas from key power station components to excavators, rice farming equipment and air conditioning. Currently, emerging market demand is declining very sharply but as the economy stabilises again many Japanese firms are exceptionally well placed to benefit from this growth. 

The smaller cap market has been weak for almost three years now and offers exceptionally compelling valuations where you can acquire businesses trading at obvious, substantial discounts to reasonable value. The opportunity runs from growth names such as internet stocks, environmental services, logistics, and retailing through some extreme value to classically cyclical names in the machinery and technology sectors. Overall, we have a portfolio that is showing strong growth, whilst the market is seeing sales and profits decline; and that offers high returns on capital reflecting superior business models. It is hard to expect a fully fledged recovery in the small cap market whilst the global fear pervades and until there is economic stabilisation, however, the valuations are so compelling that in many cases we may already have seen the low point for the stocks. Once risk aversion declines we anticipate that the extremely low valuations, coupled with an improving business outlook, will drive performance for the smaller stocks. The portfolio is heavily oriented to companies that are already performing well, so in a market that is lacking positive earnings, they should gain more attention from investors. We have been trying to increase the overall growth profile of the portfolio and use the current stock price weakness as a wonderful opportunity to acquire great businesses at low prices. Prices that we believe simply will not be available once the economic and market clouds lift.

David Mitchinson

Investment Manager 

28th November 2008

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 2008.

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 4.2.7R and 4.2.8R of the
        UK Listing Authority Disclosure and Transparency Rules.

Alan Clifton

Chairman    

28th November 2008

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.jpmfjapanesesmallercompanies.co.uk

JPMorgan Fleming Japanese Smaller Companies Investment Trust plc

Unaudited figures for the six months ended 30th September 2008

Income Statement 

	(Unaudited) Six months ended 30th September 2008			(Unaudited) Six months ended  30th September 2007			(Audited) Year ended 31st March  2008
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Losses from investments held at fair value through profit or loss	-	(17,421)	(17,421)	-	(12,653)	(12,653)	-	(28,224)	(28,224)
Net foreign currency losses	-	(36)	(36)	-	(32)	(32)	-	(1,102)	(1,102)
Income from investments	370	-	370	391	-	391	1,215	-	1,215
Other interest receivable and similar income	158	-	158	87	-	87	189	-	189
	_______	_______	_______	_______	________	_______	_______	_______	_______
Gross revenue and capital losses	528	(17,457)	(16,929)	478	(12,685)	(12,207)	1,404	(29,326)	(27,922)
Management fee	(494)	-	(494)	(721)	-	(721)	(1,321)	-	(1,321)
Other administrative expenses	(164)	-	(164)	(175)	-	(175)	(320)	-	(320)
	_______	_______	_______	_______	_______	_______	_______	_______	_______
Net loss before finance costs and taxation	(130)	(17,457)	(17,587)	(418)	(12,685)	(13,103)	(237)	(29,326)	(29,563)
Finance costs	(105)	-	(105)	(97)	-	(97)	(186)	-	(186)
	_______	_______	_______	_______	_______	_______	_______	_______	_______
Net loss before taxation Taxation	(235) (26)	(17,457) -	(17,692) (26)	(515) (27)	(12,685) -	(13,200) (27)	(423) (85)	(29,326) -	(29,749) (85)
	_______	_______	_______	_______	_______	_______	_______	_______	_______
Net loss after taxation	(261)	(17,457)	(17,718)	(542)	(12,685)	(13,227)	(508)	(29,326)	(29,834)
Loss per share (note 3)	(0.66)p	(44.41)p	(45.07)p	(1.38)p	(32.21)p	(33.59)p	(1.29)p	(74.50)p	(75.79)p

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. 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.  

JPMorgan Fleming Japanese Smaller Companies Investment Trust plc

Unaudited figures for the six months ended 30th September 2008

Reconciliation of Movements in Shareholders' Funds

Six months ended 30th September 2008 (unaudited)	Called up Share capital £'000	Other reserve  £'000	Capital redemption reserve £'000	Capital reserve  £'000	Revenue reserve £'000	Total £'000
At 31st March 2008	3,930	315,427	1,794	(234,161)	(10,714)	76,276
Net loss from ordinary activities	-	-	-	(17,457)	(261)	(17,718)
	_______	________	________	_______	_______	________
At 30th September 2008	3,930	315,427	1,794	(251,618)	(10,975)	58,558
	=====	=====	====	=====	=====	=====
Six months ended 30th September 2007 (unaudited)	Called up Share capital £'000	Other reserve £'000	Capital redemption reserve £'000	Capital reserve  £'000	Revenue reserve £'000	Total £'000
At 31st March 2007	3,940	315,620	1,784	(204,835)	(10,206)	106,303
Shares bought back and cancelled	(5)	(113)	5	-	-	(113)
Net loss from ordinary activities	-	-	-	(12,685)	(542)	(13,227)
	_______	_______	________	_______	_______	________
At 30th September 2007	3,935	315,507	1,789	(217,520)	(10,748)	92,963
	=====	=====	=====	=====	=====	=====
Year ended 31st March 2008 (audited)	Called up Share capital £'000	Other reserve £'000	Capital redemption reserve £'000	Capital reserve  £'000	Revenue reserve £'000	Total £'000
At 31st March 2007	3,940	315,620	1,784	(204,835)	(10,206)	106,303
Shares bought back and cancelled	(10)	(193)	10	-	-	(193)
Net loss from ordinary activities	-	-	-	(29,326)	(508)	(29,834)
	_______	_______	________	_______	_______	________
At 31st March 2008	3,930	315,427	1,794	(234,161)	(10,714)	76,276
	=====	=====	=====	=====	=====	=====

JPMorgan Fleming Japanese Smaller Companies Investment Trust plc

Unaudited figures for the six months ended 30th September 2008

Balance Sheet	(Unaudited) 30th September  2008 £'000	(Unaudited)   30th September 2007 £'000	(Audited) 31st March  2008 £'000
Fixed assets
Investments at fair value through profit or loss	62,624	103,842	83,522
Current assets
Debtors	2,886	2,172	1,723
Cash and short term deposits	8,272	1,429	1,161
	______	______	______
	11,158	3,601	2,884
Creditors: amounts falling due within one year	(15,224)	(14,480)	(10,130)
	______	______	______
Net current liabilities	(4,066)	(10,879)	(7,246)
Total assets less current liabilities	58,558	92,963	76,276
	______	______	______
Total net assets	58,558	92,963	76,276
	______	______	______
Capital and reserves
Called up share capital	3,930	3,935	3,930
Other reserve	315,427	315,507	315,427
Capital redemption reserve	1,794	1,789	1,794
Capital reserve	(251,618)	(217,520)	(234,161)
Revenue reserve	(10,975)	(10,748)	(10,714)
	______	______	______
Shareholders' funds	58,558	92,963	76,276
	=====	=====	=====
Net asset value per share (note 4)	149.0p	236.2p	194.0p
Cash Flow Statement	(Unaudited) Six months ended 30th September 2008 £'000	(Unaudited) Six months ended    30th September 2007 £'000	(Audited) Year ended  31st March 2008 £'000
Net cash inflow/(outflow) from operating activities	155	(153)	(355)
Net cash outflow from return on investments and servicing of finance	(53)	(106)	(201)
Net cash inflow from capital expenditure and financial investment	1,265	4,474	11,065
Net cash inflow/(outflow) from financing	5,189	(4,543)	(11,666)
	_______	_______	_______
Increase/(decrease) in cash for the period	6,556	(328)	(1,157)
	=====	=====	=====

Reconciliation of net cash flow to movement in net debt
Net cash movement	6,556	(328)	(1,157)
Net loans (drawn down)/repaid	(5,190)	4,430	11,473
Exchange movements	(36)	7	(1,102)
	_______	_______	_______
Movement in net debt in the period	1,330	4,109	9,214
Net debt at the beginning of the period	(6,269)	(15,483)	(15,483)
	_______	_______	_______
Net debt at the end of the period	(4,939)	(11,374)	(6,269)
	=====	=====	=====
Represented by:
Cash and short term deposits	8,272	1,429	1,161
Debt falling due within one year	(13,211)	(12,803)	(7,430)
	_______	_______	_______
Net debt at the end of the period	(4,939)	(11,374)	(6,269)
	=====	=====	=====

JPMorgan Fleming Japanese Smaller Companies Investment Trust plc

Notes to the Accounts

1. Financial Statements

The information contained within the financial statements in this preliminary announcement has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 31st March 2008 are extracted from the latest published accounts of the Company and do not constitute statutory accounts (as defined in Section 434 (3) of the Companies Act 2006) 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 237(2) or 237(3) of the Companies Act 1985 (as amended).

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' dated 31st December 2005.

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

The accounting policies applied in these interim accounts are consistent with those applied in the accounts for the year ended 31st March 2008.

3. Loss per share

	(Unaudited) Six months ended  30th September 2008 £'000	(Unaudited) Six months ended  30th September 2007 £'000	(Audited) Year ended  31st March 2008 £'000
Loss per share is based on the following:
Revenue loss	(261)	(542)	(508)
Capital loss	(17,457)	(12,685)	(29,326)
	----------	-----------	----------
Total loss	(17,718)	(13,227)	(29,834)
	=====	=====	=====
Weighted average number of shares in issue	39,309,423	39,381,645	39,361,346
Revenue loss per share	(0.66)p	(1.38)p	(1.29)p
Capital loss per share	(44.41)p	(32.21)p	(74.50)p
	_______	_______	_______
Total loss per share	(45.07)p	(33.59)p	(75.79)p
	=====	=====	=====

4. Net asset value per share

Net asset value per ordinary share is calculated by dividing shareholders' funds by the number of shares in issue at 30th September 2008

of 39,309,423 (30th September 2007: 39,359,423 and 31st March 2008: 39,309,423).

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

	(Unaudited) Six months ended  30th September  2008 £'000	(Unaudited) Six months ended  30th September  2007 £'000	(Audited) Year ended  31st March 2008 £'000
Total loss on ordinary activities before finance costs and taxation	(17,587)	(13,103)	(29,563)
Less capital loss before finance costs and taxation	17,457	12,685	29,326
Decrease in accrued income	317	331	-
Decrease/(increase) in other debtors	14	(8)	(24)
Decrease in other creditors	(20)	(31)	(9)
Overseas withholding tax	(26)	(27)	(85)			190
Net cash inflow/(outflow) from operating activities	155 _______	(153) _______	(355)                                  _______			588

 

END

 

 

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