Half-year Report

RNS Number : 5738K

Mercantile Investment Trust(The)PLC

22 September 2016

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

THE MERCANTILE INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
31ST JULY 2016

Chairman's Statement

The Company's net asset value total return in the six months to 31st July 2016 was -1.0%, compared to a return of +5.7% from our benchmark index, the FTSE All-Share, excluding FTSE 100 constituents and investment trusts. The share price return was -4.0%.

EU Referendum

The Company's portfolio was positioned, in line with the consensus, for a vote to remain. Since the outcome of the EU referendum the Investment Managers have made some changes to the portfolio, which are explained in the Investment Managers' Report.

Returns and Dividends

The income received from investments in the first half of the Company's current financial year is behind that of the half year ended 31st July 2015. This is predominantly due to the timing of special dividends within the year.

A second interim dividend of 10.25 pence per share has been declared by the Board, payable on 1st November 2016 to shareholders on the register at close of business on 7th October 2016. Together with the first interim dividend of 10.25 pence paid on 1st August 2016 this brings the total dividend for the year to date to 20.50 pence (2015: 20.00 pence). The Board anticipates that there will be a third interim dividend of 10.25 pence to be paid in early February 2017.

The level of the fourth interim dividend will depend on income received by the Company for the balance of the current financial year. The Board recognises shareholders' desire for a growing dividend in line with the Company's investment policy, whilst maintaining a prudent view and monitoring closely the level of the Company's Revenue Reserve.

Discount and Share Buy Backs

The Board has continued to use share repurchase authority to enhance value and manage imbalances between the supply and demand of the Company's shares. In the six months to 31st July 2016, 2,057,822 shares were repurchased at a cost of £34,057,000. Of the shares repurchased, 1,507,822 were cancelled and 550,000 are held in treasury.

Gearing

The Company has maintained a conservative position in relation to gearing and ended the period under review with 8.3% net cash.

Board Apprentice

The Board has agreed to participate in this initiative once again, with the appointment of Anjola Adeniyi on the same basis as the previous Board Apprentice.

Management Fee

Following the regular review of management fees, the Board and the Manager have agreed a reduction in fees. The current rate of 0.50% per annum of the Company's market capitalisation will fall by 10% to 0.45% per annum. This will take effect in two equal steps on 1st February 2017 and 1st February 2018.  This will ensure that the Company's ongoing charges ratio remains amongst the lowest in the investment trust market.

Outlook

Since the result of the EU referendum market volatility has increased, although economic data releases and company trading statements have generally shown little change from previous indicators. The economy grew slowly during the first half of the year, and continues to improve, although at a more gradual rate. The Board remains confident in the prospects for small- and medium-sized UK companies and the Investment Managers' ability to take advantage of these, particularly in light of the substantial gearing capacity that is available and currently unutilised.

Hamish Leslie Melville

Chairman                                                                                                                                                                                 22nd September 2016

Investment Managers' Report

Market Background

The UK equity market experienced a period of increased volatility through the first six months of your Company's financial year. Having recovered from the start of year sell-off that was driven primarily by concerns that the Chinese economy was slowing, as well as the growth outlook more broadly, the UK market generated minor gains up until June, when the focus turned more sharply to the UK referendum. Following the vote to leave the EU there was an immediate and sharp sell-off. This was then recouped through July following a swift political transition to Theresa May as Prime Minister and the actions of the Bank of England to reduce interest rates and introduce a further round of Quantitative Easing.

Market performance FYTD (31st January 2016 - 31st July 2016)

However, underlying this aggregate view of the market there has been notable divergence in performance at a stock and sector level. In the immediate aftermath of the referendum result, stock performance diverged significantly as different assets were re-priced - with the change in FX rates (Sterling depreciated by ~10% against the US Dollar, and by nearly the same against the Euro) and the increased uncertainty on the outlook for the domestic economy being the two most obvious areas of focus. In broad terms this led to significant outperformance of international and defensive earners, and underperformance of domestic and cyclical earners. This was reflected in a stronger relative performance from the FTSE 100, which is more international and has lower exposure to the domestic cyclical sectors.

Portfolio performance and positioning

Against this backdrop, your Company had a challenging six months; the return on net assets over the period was -1.0%, behind the 5.7% return from the benchmark, the FTSE All-Share Index excluding FTSE 100 constituents and Investment Trusts. Reflecting a widening of the discount, the share price total return was -4.0% for the period.

Given the portfolio positioning prior to the vote - overweight domestic consumer and underweight international - this negative relative performance was suffered in the final week of June after the referendum vote, during the period of market dislocation.

Since the referendum on the 23rd June and reflecting the increased level of uncertainty on the outlook for the UK economy, we have made some changes to the positioning of the portfolio. This has resulted in a somewhat more concentrated portfolio (99 holdings from 114 the week of the vote) and an increase in the level of net cash from 4.4% net cash at the start of the year to 8.3% at the period end (and 5.2% net cash at the time of writing). The aim of this repositioning has been to focus on those companies where the investment case is less dependent upon a favourable UK macroeconomic environment, or where the valuation remains compelling.

As a result of these changes, the portfolio is now more evenly balanced between domestically and internationally derived revenue and from a sector perspective has slightly lower exposure to the domestic consumer in favour of greater exposure to industrials.

Outlook

Global economic growth remains positive but muted, and Central Bank policies, including those of The Bank of England, continue to support asset prices but do not diminish the longer term risks. The vote to leave the EU has also introduced uncertainty into the outlook for the UK economy, and while initial economic indicators have been encouraging, it is too early to understand fully the ramifications of this process.

Against this backdrop, we have maintained our conservative view on the aggregate level of market exposure and the portfolio currently holds 5.2% net cash, leaving us as before with plenty of capacity (from the net cash and the gearing facilities) to take advantage of any investment opportunities that result from market- or company-specific events. We believe that the key is to focus on investing in those companies that have strong business models, are suitably financed and are well placed to succeed.

We remain committed to this approach and are confident about the investment opportunities that can be found in our market, and we expect that the favourable dynamics of investing in medium- and small-sized companies will continue to drive superior returns over the long-term.

Guy Anderson

Martin Hudson

Anthony Lynch

Investment Managers

22nd September 2016

Interim Management Report

The Company is required to make the following disclosures in its half year report.

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company fall into the following broad categories: investment and strategy; market; accounting, legal and regulatory; corporate governance and shareholder relations; operational and financial. Information on each of these areas is given in the Directors' Report within the Annual Report and Accounts for the year ended 31st January 2016.

Related Parties Transactions

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

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operation existence for at least twelve months from the date of the approval of this half yearly financial report. For these reasons, they consider there is sufficient evidence to continue to adopt the going concern basis in preparing the accounts.

Directors' Responsibilities

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

(i)      the condensed set of financial statements contained within the half year financial report has been prepared in accordance with FRS 104 'Interim Financial Reporting' and 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 July 2016 as required by the UK Listing Authority Disclosure Guidance and Transparency Rules ('DTRs') 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 DTRs.

In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

•       select suitable accounting policies and then apply them consistently;

•       make judgements and accounting estimates that are reasonable and prudent;

•       state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

•       prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;

and the Directors confirm that they have done so.

For and on behalf of the Board.

Hamish Leslie Melville

Chairman

22nd September 2016

Financial Statements

Statement of Comprehensive Income for the six months ended 31st July 2016

	(Unaudited) Six months ended 31st July 2016			(Unaudited) Six months ended 31st July 2015			(Audited) Year ended 31st January 2016
	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	-	(41,344)	(41,344)	-	225,998	225,998	-	177,274	177,274
Net foreign currency (losses)/gains	-	(9)	(9)	-	15	15	-	85	85
Income from investments	29,443	-	29,443	32,565	-	32,565	55,783	-	55,783
Interest receivable and similar income	337	-	337	522	-	522	1,065	-	1,065
Gross return/(loss)	29,780	(41,353)	(11,573)	33,087	226,013	259,100	56,848	177,359	234,207
Management fee	(1,101)	(2,570)	(3,671)	(1,097)	(2,560)	(3,657)	(2,279)	(5,317)	(7,596)
Other administrative expenses	(759)	-	(759)	(661)	-	(661)	(1,362)	-	(1,362)
Net return/(loss) on ordinary activities before finance costs and taxation	27,920	(43,923)	(16,003)	31,329	223,453	254,782	53,207	172,042	225,249
Finance costs	(1,674)	(3,905)	(5,579)	(1,671)	(3,903)	(5,574)	(3,345)	(7,806)	(11,151)
Net return/(loss) on ordinary activities before taxation	26,246	(47,828)	(21,582)	29,658	219,550	249,208	49,862	164,236	214,098
Taxation	(421)	-	(421)	(162)	-	(162)	(282)	-	(282)
Net return/(loss) on ordinary activities after taxation	25,825	(47,828)	(22,003)	29,496	219,550	249,046	49,580	164,236	213,816
Return/(loss) per share (note 4)	27.19p	(50.36)p	(23.17)p	30.54p	227.30p	257.84p	51.46p	170.47p	221.93p

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 return/(loss) per share represents the profit/(loss) per share for the year and also the total comprehensive income per share.

Statement of Changes in Equity for the six months ended 31st July 2016 (unaudited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2016	23,989	23,459	12,781	1,752,255	41,246	1,853,730
Repurchase and cancellation of the Company's own shares	(377)	-	377	(25,073)	-	(25,073)
Repurchase of shares into Treasury	-	-	-	(8,984)	-	(8,984)
Net (loss)/return on ordinary activities	-	-	-	(47,828)	25,825	(22,003)
Dividends paid in the period	-	-	-	-	(22,044)	(22,044)
At 31st July 2016	23,612	23,459	13,158	1,670,370	45,027	1,775,626

For the six months ended 31st July 2015 (unaudited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2015	24,426	23,459	12,344	1,615,974	36,893	1,713,096
Repurchase and cancellation of the Company's own shares	(364)	-	364	(22,939)	-	(22,939)
Net return on ordinary activities	-	-	-	219,550	29,496	249,046
Dividends paid in the period	-	-	-	-	(26,019)	(26,019)
At 31st July 2015	24,062	23,459	12,708	1,812,585	40,370	1,913,184

Year ended 31st January 2016 (audited)

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2015	24,426	23,459	12,344	1,615,974	36,893	1,713,096
Repurchase and cancellation of the Company's own shares	(437)	-	437	(27,955)	-	(27,955)
Net return on ordinary activities	-	-	-	164,236	49,580	213,816
Dividends paid in the year	-	-	-	-	(45,227)	(45,227)
At 31st January 2016	23,989	23,459	12,781	1,752,255	41,246	1,853,730

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 July 2016

	(Unaudited)	(Unaudited)	(Audited)
	31st July	31st July	31st January
	2016	2015	2016
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	1,629,102	1,864,253	1,775,622
Current assets
Debtors	3,760	13,108	6,185
Cash and cash equivalents	329,596	229,600	262,644
	333,356	242,708	268,829
Current liabilities
Creditors: amounts falling due within one year	(9,304)	(16,345)	(13,242)
Net current assets	324,052	226,363	255,587
Total assets less current liabilities	1,953,154	2,090,616	2,031,209
Creditors: amounts falling due after more than one year	(177,528)	(177,432)	(177,479)
Net assets	1,775,626	1,913,184	1,853,730
Capital and reserves
Called up share capital	23,612	24,062	23,989
Share premium	23,459	23,459	23,459
Capital redemption reserve	13,158	12,708	12,781
Capital reserves	1,670,370	1,812,585	1,752,255
Revenue reserve	45,027	40,370	41,246
Total equity shareholders' funds	1,775,626	1,913,184	1,853,730
Net asset value per share (note 5)	1,891.0p	1,987.8p	1,931.8p

Company registration number 20537

Statement of Cash Flows for the six months ended 31st July 2016

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st July 2016	31st July 2015	31st January 2016
	£'000	£'000	£'000
Net cash outflow from operations before dividends and interest	(4,562)	(4,689)	(9,076)
Dividends received	28,008	31,132	53,827
Interest received	581	341	840
Overseas tax recovered	116	-	-
Interest paid	(5,530)	(5,528)	(11,058)
Net cash inflow from operating activities	18,613	21,256	34,533
Purchases of investments	(385,858)	(435,209)	(726,385)
Sales of investments	489,166	499,949	838,773
Settlement of forward currency contracts	-	2	(21)
Net cash inflow from investing activities	103,308	64,742	112,367
Dividends paid	(22,044)	(26,019)	(45,227)
Repurchase and cancellation of the Company's own shares	(25,073)	(27,184)	(32,201)
Repurchase of shares into Treasury	(7,840)	-	-
Net cash outflow from financing activities	(54,957)	(53,203)	(77,428)
Increase in cash and cash equivalents	66,964	32,795	69,472
Cash and cash equivalents at start of period	262,644	193,167	193,167
Exchange movements	(12)	-	5
Cash and cash equivalents at end of period	329,596	225,962	262,644
Increase in cash and cash equivalents	66,964	32,795	69,472
Cash and cash equivalents consist of:
Cash and short term deposits	229,834	229,600	162,719
Bank overdraft	-	(3,638)	-
Cash held in JPMorgan Sterling Liquidity Fund	99,762	-	99,925
Total	329,596	225,962	262,644

Notes to the Financial Statements for the six months ended 31st July 2016

1.    Financial Statements

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

The figures and financial information for the year ended 31st January 2016 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 are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP'), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in November 2014.

FRS 104 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015 has been applied in preparing this condensed set of financial statements for the six months ended 31st July 2016.

In March 2016, the FRC published amendments to FRS 102 concerning fair value hierarchy disclosures. These amendments are effective for accounting periods beginning on or after 1st January 2017. The Company has elected to adopt these amendments early in these interim financial statements.

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

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st January 2016.

3.    Dividends paid¹

		(Unaudited)	(Unaudited)	(Audited)
		Six months ended	Six months ended	Year ended
		31st July 2016	31st July 2015	31st January 2016
		£'000	£'000	£'000
	Unclaimed dividends refunded to the Company²	(26)	(1)	(14)
	Fourth quarterly dividend of 13.0p (2015: 17.0p) paid to shareholders in May	12,422	16,395	16,395
	First quarterly dividend of 10.25p (2015: 10.0p) paid to shareholders in August (2015: July)	9,648	9,625	9,625
	Second quarterly dividend of 10.0p (2015: 8.0p) paid to shareholders in November	n/a	n/a	9,625
	Third quarterly dividend of 10.0p (2015: 8.0p) paid to shareholders in February	n/a	n/a	9,596
	Total dividends paid in the period	22,044	26,019	45,227

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

² Represents dividends which remain unclaimed after a period of twelve years and thereby become the property of the Company.

A second quarterly dividend of 10.25p (2015: 10.0p) per share, amounting to £9,625,000 (2015: £9,625,000), has been declared payable in respect of the six months ended 31st July 2016.

4.    Return/(loss) per share

		(Unaudited)	(Unaudited)	(Audited)
		Six months ended	Six months ended	Year ended
		31st July 2016	31st July 2015	31st January 2016
		£'000	£'000	£'000
	Return/(loss) per share is based on the following:
	Revenue return	25,825	29,496	49,580
	Capital (loss)/return	(47,828)	219,550	164,236
	Total (loss)/return	(22,003)	249,046	213,816
	Weighted average number of shares in issue	94,976,088	96,589,828	96,340,857
	Revenue return per share	27.19p	30.54p	51.46p
	Capital (loss)/return per share	(50.36)p	227.30p	170.47p
	Total (loss)/return per share	(23.17)p	257.84p	221.93p

5.    Net asset value per share

		(Unaudited)	(Unaudited)	(Audited)
		Six months ended	Six months ended	Year ended
		31st July 2016	31st July 2015	31st January 2016
	Net assets (£'000)	1,775,626	1,913,184	1,853,730
	Number of shares in issue	93,899,218	96,248,541	95,957,040
	Net asset value per share	1,891.0p	1,987.8p	1,931.8p

For further information, please contact:

Juliet Dearlove

For and on behalf of

JPMorgan Funds Limited, Secretary

020 7742 4000

Please note that up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can be found at www.mercantileitco.uk

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

JPMORGAN FUNDS LIMITED

ENDS

A copy of the half year 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.mercantileit.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

 

END

 

 

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