Half-year Report

RNS Number : 9119I

JPMorgan Smaller Cos IT PLC

26 March 2018

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
31ST JANUARY 2018

Legal Entity Identifier: 549300PXALXKUMU9JM18

Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

Performance and discount

Equities rose during the period under review, although the return on domestic markets was pedestrian compared with those experienced overseas as both investors and businesses were held back by an uncertain future for the UK. Within domestic markets, smaller companies delivered an average return that lagged that of the largest companies.

Against this background, I am delighted to report that the Company delivered returns significantly in excess of benchmark. This extends the outperformance I was able to report at the year-end, and is welcome compensation for loyal shareholders following an earlier period of underperformance. The total return on the Company's net assets during the six months to 31st January 2018 was 11.4% compared with 2.2% for the benchmark index.

This outperformance was further compounded by a significant narrowing of the share price discount to net asset value from 22.3% to 10.2%. This, together with a good increase in the dividend meant that shareholders enjoyed a total return of 29.1%.

At the Annual General Meeting in 2016, shareholders approved an increase in the maximum amount that can be invested in AIM listed stocks from 20% to 50%. The Investment Managers' have been taking advantage of this extra flexibility and over the last twelve months investment in AIM stocks has increased from 19% to 25%.

Markets are a little lower since 31st January 2018, and as at 15th March 2018, the benchmark index has fallen by 1.8%. Over the same period, the Company's net asset value reduced by 0.9%, but a widening of the discount to 15.3% has resulted in a 6.3% fall in the share price.

The Investment Managers have provided a more detailed commentary on markets and portfolio performance in their Report.

Share buybacks

During the six months to 31st January 2018 the Company undertook a significant level of share buybacks, repurchasing 1,161,205 shares for cancellation at a cost of £12,007,000. These shares were acquired at an average discount of 18.6% enhancing net asset value per share by 0.84 pence. Our objective remains to reduce the volatility of the discount, and our action during this period demonstrates the Board's willingness to make significant purchases should supply and demand for shares get out of balance.

Loan Facility and Gearing

The Company has a highly flexible borrowing facility of £25 million in place with Scotiabank until April 2018. This has been reviewed by the Board and we have decided to renew the facility with Scotiabank for a further year.

During a period of low interest rates, the use of gearing is an attractive way of amplifying the effect of rising markets, but inevitably increases the risk of loss if markets fall. In the recent past, the Company has maintained a fairly constant level of gearing, with the Board giving the Investment Managers flexibility to adjust the gearing tactically within guidelines. During the reporting period, the Company's gearing ranged from 8.1% to 12.0%, ending the half year at 9.7% geared. As at 15th March 2018 the Company's gearing was 9.4%, with total borrowings of £25 million.

Regulatory Changes

Shareholders may be aware that the Packaged Retail and Insurance-based Investment Products Regulation (the 'PRIIPs Regulation'), came into force on 1st January 2018. This EU regulation requires the Managers to prepare a Key Information Document ('KID') for the Company which is available on our website. Investors should note that the procedures for calculating the risks, costs and potential returns are prescribed by this regulation, and the figures in the KID may not reflect the results investors will experience in the future. As a result, it is recommended that the KID is not considered in isolation but is read in conjunction with other documents published by the Company and its Manager.

Board

As noted in the Annual Report, Ivo Coulson stepped down as a Director at the Annual General Meeting in November. I would like to take this opportunity to repeat my thanks to him for his contribution to the Board. As part of our succession planning, and in anticipation of future retirements, we will be carrying out a formal review of Board roles in the second half of the year.

Outlook

Most economies around the world are currently experiencing good growth, although potentially perverse political decisions could result in a significant reduction in the pace of expansion. This increases the risk of recession for the more exposed economies. The unilateral introduction of trade barriers leading to an increase in protectionism is a significant global risk, and a poor outcome of our negotiations with the EU would hit our domestic economy. These political risks are difficult to assess, and we hope that strong institutions and sound judgements will guide the ultimate outcome.

Markets have enjoyed an extended period of strong returns and whilst average earnings have grown, so have the level of valuations. As demonstrated since the period end, as equities in general have become more expensive, political and economic uncertainties have the capacity to drive a significant increase in short-term volatility.

Smaller company investment should always be considered over an extended period, and whilst conditions are likely to become bumpier, your Board is confident that it remains an attractive sector of the market which should reward the long-term investor.

Michael Quicke OBE

Chairman                                                                                                                                   

26th March 2018

INVESTMENT MANAGERS' REPORT

Performance and Market Background

The global recovery strengthened in 2017, and the forecast for world GDP growth in 2018 now stands at 3.9%. However, the UK's GDP outcome for 2017 was pedestrian at 1.7%, but this number was still better than had been forecast. This, combined with stubbornly strong UK inflation, led to a 0.25% rise in interest rates in November 2017 (and the Bank of England has strongly indicated a minimum further 0.25% rise in 2018). Consumer confidence continues to remain both negative and volatile due at least in part to falling real wages in 2017, but unemployment remains close to a 40 year low.

Against this backdrop, UK stock market indices were up in the six months to January 2018. The FTSE 100 was up +4.0% but the FTSE Small Cap index (ex Investment Trusts) rose only +2.2%. We are very pleased to report that your Company significantly outperformed this benchmark, and the total return on net assets for the period was +11.4%. In addition, the discount to the net asset value narrowed significantly, providing a share price return of +29.1%.

Portfolio

The strong outperformance of your Company during the half year was mainly due to stock selection, although both sector selection and gearing also added to performance. Key stock contributors included long term holdings such as Plus500, Victoria, Fevertree and 4imprint, although newer additions to the portfolio such as Games Workshop and Keywords Studios were also notable contributors. Avoiding stocks such as Carillion and Empiric Student Property also aided performance. On the negative side, there was only one significant detractor from performance, which was our decision not to own Stock Spirits, a company we view as high risk and over-valued.

New additions to the portfolio included a number of IPOs (new companies coming to the stockmarket) which we continue to find a source of good ideas and strong performance. These included Sabre Insurance (a specialist motor insurance company), Gordon Dadds (a legal acquisition vehicle) and Sumo Group (a computer games developer). We also added a number of other exciting investments, including a mining company, Central Asia Metals, a digital payments and banking services provider, Fairfx, and Hogg Robinson, a provider of corporate services focussing on travel. Sales from the portfolio, other than through take-overs, have included Lookers, the car retailer, Amerisur, an oil E&P company, and Hotel Chocolat, the retailer. These changes have continued the trend of increasing our weighting in AIM companies, following the change in our guidelines, and we now hold approximately 25.7% of AIM stocks within the portfolio.

Outlook

Low consumer confidence, high inflation and rising interest rates, not to mention the on-going and tortuous Brexit negotiations, could lead investors to be wary of the prospects for UK companies - and indeed, many commentators are negative on the outlook for the UK stock market.

Herein lies the opportunity. We strongly believe - and your Company's recent results demonstrate - that especially in the arena of smaller company investing, there are many companies performing extremely well, since they are less linked to the performance of the underlying economy. This is due to a variety of factors, notably their presence in niche markets. We do not see this situation changing - aided, as we have discussed for several years, by on-going M&A (i.e. take-overs of smaller companies where valuation discrepancies have appeared). Indeed, just post this six-month period under review, we have received a bid for one of our recent purchases, Hogg Robinson, and would not be surprised to see more bids appear in the near future.

At the time of writing, global stock markets have experienced a short period of volatility. We see this as an indication of healthy markets, rather than the reverse. Our confidence in the companies we are invested in, supported by an attractive valuation picture, is demonstrated by our choosing at the time of writing to make full use of the gearing level set by your Board.

Georgina Brittain

Katen Patel

Investment Managers                                                                                                                

26th March 2018

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 significantly and fall into the following broad categories: investment and strategy; discount; smaller company investment; political and economic; corporate governance and shareholder relations; market; accounting, legal and regulatory; operational and cybercrime; and financial. Information on each of these areas is given in the Business Review within the Annual Report and Financial Statements for the year ended 31st July 2017.

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 and more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least twelve months from the date of the approval of this half year financial report. 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 FRS 104 'Interim Financial Reporting' and gives a true and fair view of the state of affairs of the Company and of the assets, liabilities, financial position and net return of the Company, as at 31st January 2018, 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 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

Michael Quicke OBE

Chairman                                                                                                                                        

26th March 2018

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 31ST JANUARY 2018

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	31st January 2018			31st January 2017			31st July 2017
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair
value through profit or loss	-	18,948	18,948	-	19,144	19,144	-	44,934	44,934
Net foreign currency (losses)/gains	-	(15)	(15)	-	-	-	-	22	22
Income from investments	2,247	-	2,247	1,915	-	1,915	5,133	-	5,133
Interest receivable and
similar income	12	-	12	46	-	46	50	-	50
Gross return	2,259	18,933	21,192	1,961	19,144	21,105	5,183	44,956	50,139
Management fee	(276)	(644)	(920)	(224)	(523)	(747)	(474)	(1,106)	(1,580)
Other administrative expenses	(139)	-	(139)	(221)	-	(221)	(452)	-	(452)
Net return on ordinary activities
before finance costs and
taxation	1,844	18,289	20,133	1,516	18,621	20,137	4,257	43,850	48,107
Finance costs	(40)	(94)	(134)	(34)	(78)	(112)	(66)	(154)	(220)
Net return on ordinary activities
before taxation	1,804	18,195	19,999	1,482	18,543	20,025	4,191	43,696	47,887
Taxation	(52)	-	(52)	(36)	-	(36)	(141)	-	(141)
Net return on ordinary activities
after taxation	1,752	18,195	19,947	1,446	18,543	19,989	4,050	43,696	47,746
Return per share (note 3)
- undiluted	10.51p	109.16p	119.67p	8.64p	110.86p	119.50p	24.24p	261.48p	285.72p
- diluted1,2	10.51p	109.16p	119.67p	8.64p	110.86p	119.50p	24.24p	261.48p	285.72p

¹ As at 31st January 2018 and 31st July 2017 there was no dilution effect as the rights attached to the Subscription shares lapsed on 30th June 2017.

² As at 31st January 2017 the Subscription shares had no dilutive effect as the conversion price for these shares exceeded the average market price of the Ordinary shares from the date of issue to 31st January 2017.

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 31ST JANUARY 2018

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	Reserve 1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 31st January 2018 (Unaudited)
At 31st July 2017	4,275	25,895	2,609	168,812	5,694	207,285
Repurchase and cancellation of the Company's
own shares	(290)	-	290	(12,007)	-	(12,007)
Net return on ordinary activities	-	-	-	18,195	1,752	19,947
Dividend paid in the period (note 4)	-	-	-	-	(3,917)	(3,917)
At 31st January 2018	3,985	25,895	2,899	175,000	3,529	211,308
Six months ended 31st January 2017 (Unaudited)
At 31st July 2016	4,236	18,242	2,437	131,019	4,699	160,633
Repurchase and cancellation of the Company's
own shares	(71)	-	71	(2,220)	-	(2,220)
Issue of Ordinary shares on exercise of
Subscription shares	-	3	-	-	-	3
Net return on ordinary activities	-	-	-	18,543	1,446	19,989
Dividend paid in the period (note 4)	-	-	-	-	(3,055)	(3,055)
At 31st January 2017	4,165	18,245	2,508	147,342	3,090	175,350
Year ended 31st July 2017 (Audited)
at 31st July 2016	4,236	18,242	2,437	131,019	4,699	160,633
Repurchase and cancellation of the Company's
own shares	(172)	-	172	(5,906)	-	(5,906)
Conversion of Subscription shares into
Ordinary shares	(1)	1	-	-	-	-
Issue of Ordinary shares on exercise of
Subscription shares	215	7,652	-	-	-	7,867
Cancellation of Subscription shares	(3)	-	-	3	-	-
Net return on ordinary activities	-	-	-	43,696	4,050	47,746
Dividend paid in the year (note 4)	-	-	-	-	(3,055)	(3,055)
At 31st July 2017	4,275	25,895	2,609	168,812	5,694	207,285

¹ This 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 JANUARY 2018

	(Unaudited)	(Unaudited)	(Audited)
	31st January 2018	31st January 2017	31st July 2017
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	231,904	189,850	224,092
Current assets
Debtors	344	2,111	738
Cash and cash equivalents	4,505	3,011	8,649
	4,849	5,122	9,387
Current liabilities
Creditors: amounts falling due within one year	(25,445)	(19,622)	(26,194)
Net current liabilities	(20,596)	(14,500)	(16,807)
Total assets less current liabilities	211,308	175,350	207,285
Net assets	211,308	175,350	207,285
Capital and reserves
Called up share capital	3,985	4,165	4,275
Share premium	25,895	18,245	25,895
Capital redemption reserve	2,899	2,508	2,609
Capital reserves	175,000	147,342	168,812
Revenue reserve	3,529	3,090	5,694
Total shareholders' funds	211,308	175,350	207,285
Net asset value per Ordinary share (note 5)
- undiluted	1,325.8p	1,053.3p	1,212.2p
- diluted 1	1,325.8p	1,029.0p	1,212.2p

¹ There was no dilutive effect for the periods to 31st January 2018 or 31st July 2017 as the rights attached to the Subscription shares lapsed on 30th June 2017.

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 31ST JANUARY 2018

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2018	31st January 2017	31st July 2017
	£'000	£'000	£'000
Net cash outflow from operations before dividends
and interest (note 6)	(1,183)	(975)	(1,956)
Dividends received	2,317	1,957	4,696
Interest received	53	16	21
Taxation	(1)	2	2
Interest paid	(131)	(116)	(220)
Net cash inflow from operating activities	1,055	884	2,543
Purchases of investments	(38,205)	(32,949)	(77,062)
Sales of investments	46,269	30,134	70,724
Settlement of foreign currency contracts	(12)	1	(2)
Net cash inflow/(outflow) from investing activities	8,052	(2,814)	(6,340)
Dividend paid	(3,917)	(3,055)	(3,055)
Repurchase and cancellation of the Company's
own shares	(12,334)	(2,582)	(5,941)
Issue of Ordinary shares on exercise of
Subscription shares	-	3	7,867
Drawdown of bank loan	3,000	-	3,000
Net cash (outflow)/inflow from financing activities	(13,251)	(5,634)	1,871
Decrease in cash and cash equivalents	(4,144)	(7,564)	(1,926)
Cash and cash equivalents at start of period	8,649	10,575	10,575
Cash and cash equivalents at end of period	4,505	3,011	8,649
Decrease in cash and cash equivalents	(4,144)	(7,564)	(1,926)
Cash and cash equivalents consist of:
Cash and short term deposits	250	623	370
Cash held in JPMorgan Sterling Liquidity Fund	4,255	2,388	8,279
Total	4,505	3,011	8,649

NOTES TO THE FINANCIAL STATEMENTS 

FOR THE SIX MONTHS ENDED 31ST JANUARY 2018

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 July 2017 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies and 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 and updated in January 2017.

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 January 2018.

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 July 2017.

3.  Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2018	31st January 2017	31st July 2017
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	1,752	1,446	4,050
Capital return	18,195	18,543	43,696
Total return	19,947	19,989	47,746
Weighted average number of shares in issue during
the period used for the purposes of the undiluted
calculation	16,668,680	16,726,551	16,710,754
Weighted average number of shares in issue during the
period used for the purposes of the diluted calculation	16,668,680	16,726,551	16,710,754
Undiluted
Revenue return per share	10.51p	8.64p	24.24p
Capital return per share	109.16p	110.86p	261.48p
Total return per share	119.67p	119.50p	285.72p
Diluted1, 2
Revenue return per share	10.51p	8.64p	24.24p
Capital return per share	109.16p	110.86p	261.48p
Total return per share	119.67p	119.50p	285.72p

¹     As at 31st January 2018 and 31st July 2017 there was no dilution effect as the rights attached to the Subscription shares lapsed on 30th June 2017.

²     As at 31st January 2017 there was no dilutive effect as the conversion price for the Subscription shares exceeded the average market price of the Ordinary shares.

4.  Dividends paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2018	31st January 2017	31st July 2017
	£'000	£'000	£'000
2017 Final dividend of 23.0p (2016: 18.3p)	3,917	3,055	3,055

All dividends paid and declared in the period have been funded from the revenue reserve.

No interim dividend has been declared in respect of the six months ended 31st January 2018 (2017: nil).

5.  Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2018	31st January 2017	31st July 2017
Undiluted
Net assets (£'000)	211,308	175,350	207,285
Number of Ordinary shares in issue	15,938,601	16,647,368	17,099,806
Net asset value per Ordinary share	1,325.8p	1,053.3p	1,212.2p
Diluted1
Net assets assuming exercise of
Subscription shares (£'000)	211,308	207,881	207,285
Number of potential Ordinary shares in issue	15,938,601	20,202,687	17,099,806
Net asset value per Ordinary share	1,325.8p	1,029.0p	1,212.2p

¹    As at 31st January 2018 and 31st July 2017 there was no dilution effect as the rights attached to the Subscription shares lapsed on 30th June 2017.

6.  Reconciliation of net return on ordinary activities before finance costs and taxation to net cash outflow from operations before dividends and interest

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2018	31st January 2017	31st July 2017
	£'000	£'000	£'000
Net return on ordinary activities before finance costs
and taxation	20,133	20,137	48,107
Less capital return on ordinary activities before finance
costs and taxation	(18,289)	(18,621)	(43,850)
Scrip dividends received as income	(109)	(86)	(127)
Decrease/(Increase) in accrued income and other debtors	259	162	(150)
(Decrease)/increase in accrued expenses	(69)	(32)	19
Management fee charged to capital	(644)	(523)	(1,106)
Overseas withholding tax	(48)	(38)	(156)
EIR amortisation	(43)	-	-
Dividends received	(2,317)	(1,957)	(4,696)
Interest received	(53)	(16)	(21)
Realised (loss)/gain on foreign currency transactions	(3)	(1)	24
Net cash outflow from operations before dividends
and interest	(1,183)	(975)	(1,956)

7.  Fair valuation of investments

The fair value hierarchy disclosures required by FRS 102 are given below:

	(Unaudited)		(Unaudited)		(Audited)
	Six months ended		Six months ended		Year ended
	31st January 2018		31st January 2017		31st July 2017
	Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
	£'000	£'000	£'000	£'000	£'000	£'000
Level 1	231,904	-	189,850	-	224,092	-
Total	231,904	-	189,850	-	224,092	-

26th March 2018

For further information, please contact:

Lucy Dina

For and on behalf of

JPMorgan Funds Limited

020 7742 4000

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

JPMORGAN FUNDS LIMITED

ENDS

A copy of the half year 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.jpmsmallercompanies.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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