Preliminary Results
SchroderJapan Growth Fund PLC
24 September 2007
SCHRODER JAPAN GROWTH FUND plc
Unaudited Results for the year to 31 July 2007
This preliminary announcement of unaudited results was approved by the Board of
Directors on 24 September 2007.
Chairman's Statement
Performance
The year to 31 July 2007 was a disappointing one for sterling-based investors in
Japanese equities, primarily because of the weakness of the Yen relative to the
Pound. Measured in sterling, the TSE First Section Total Return Index produced a
total return of -3.0% over the year. Against this background, the Company's net
asset value per share decreased by 4.6% over the same period (from 113.72p per
share to 108.49p per share). The share price decreased by 10.2% as the discount
widened from 2.8% to 8.5%, reflecting poorer market sentiment towards Japanese
equities. Long-term performance remains ahead of the Index.
Further comment on performance and investment policy may be found in the
Manager's Review.
Gearing
During the year ended 31 July 2007 the Company maintained its total borrowing
facility of Yen 6.5 billion. However, the amount drawn under the facility was
reduced during the year and, at the end of the year, borrowings stood at Yen 5.0
billion. All of the borrowings were obtained via a revolving credit facility to
provide flexibility.
As previously stated, the Directors do not foresee gearing levels in excess of
25% of shareholders' funds. The gearing continues to be operated within the
limits agreed by the Board. At the beginning of the year, the effective gearing
ratio (borrowings less cash and short-term deposits as a percentage of net
assets) was 17.4%, and this had decreased to 13.0% at 31 July 2007.
Electronic Communications and Amendment to the Articles of Association
There have been a number of recent changes to company law and practice
permitting the use of electronic communications as an alternative to traditional
means of communication. We are therefore proposing to adopt revised Articles of
Association which will allow the Company, where a shareholder agrees, to send
certain information relating to the Company (e.g. notices, proxy forms and
accounts) by electronic means or by placing this information on a website, but
only if the shareholder has been sent notice that it is available in this way
and not objected to the change.
Purchase of Shares for Cancellation
At the Company's last Annual General Meeting in November 2006, the Company was
given the authority to purchase up to 14.99% of the Company's issued share
capital for cancellation. The share buy-back facility is one of a number of
tools that may be used to enhance shareholder value and to reduce the discount
volatility. During the year ended 31 July 2007, the Directors did not use the
authority given to them and no purchases for cancellation were undertaken.
The Board continues to consider whether purchases should be made on a regular
basis, and therefore proposes that the authority be renewed at the forthcoming
Annual General Meeting.
Audit Committee Chairman
Peter Lyon has retired as Chairman of the Audit Committee and John Scott has
replaced him in that capacity. Mr Lyon will continue to act as Chairman of the
Management Engagement and Nomination Committees and as a Director of the
Company. The Board would like to take this opportunity to thank Mr Lyon for his
help and advice as Chairman of the Audit Committee.
Annual General Meeting
The Annual General Meeting will be held at 3.30 p.m. on Wednesday 7 November
2007 and shareholders are invited to attend. The meeting will follow our usual
format, which includes a presentation on the prospects for the Japanese economy
and investment strategy.
Outlook
While the Japanese market has been volatile since the end of July in common with
markets globally, your Board sees grounds for optimism about the longer term
outlook for the portfolio. The companies in which your Company is invested
continue to report strong sales and profits growth; our Manager believes their
valuations are attractive; since the end of our financial year, the Yen has
strengthened by approximately 5% relative to Sterling and your Board looks
forward with confidence.
Jonathan Taylor
Chairman
Manager's Report to 31 July 2007
Market Background
The Japanese market rose 9.8% in local currency terms during the year ended 31
July 2007, despite a sluggish domestic economy and disappointing company
earnings forecasts. The rise, however, was more than offset for sterling
investors by the weakness of the Yen, with the index in sterling terms falling
3.0%.
The market was polarised for much of the year, with commodity-related sectors,
such as Shipping, Steel and Wholesalers, rising sharply and domestic sectors,
such as Retail, Banks and Other Finance, declining by over 30% in sterling. The
strength of other Asian economies continued to support exporters into the region
as well as commodity prices, which contrasted with generally weak domestic
trends in consumption and intense competition hampering banks' margin recovery.
Small cap continued to underperform large, as confidence and activity indices
and bank lending data suggested a still tough environment.
Heightened investor expectations for improvements in capital management were,
for the most part, frustrated. Starting with the failure of a leading paper
company to acquire a competitor and the target's management opting instead to
issue shares to friendly parties, the twelve-month period ended with rejection
of all shareholder proposals to raise dividends and a record number of poison
pill defence announcements. While dividends in aggregate have risen by double
digit amounts, dividend payout ratios remain low by international standards,
balance sheets remain under-leveraged and returns on equity are well below other
major markets.
The Company's underperformance of the market by 1.3% stemmed largely from its
low exposure to commodity sectors and holdings in Insurance and Autos. On the
other hand, the Company benefited from its holdings in General Trading companies
(Mitsui & Co and Mitsubishi Corporation) and small Real Estate stocks (Tachihi
Enterprise and Sankei Building) and its cautious position toward Banks.
Outlook
Simply from the standpoint of relative performance, Japan could be expected to
deliver a period of better returns. The economy continues to expand, driven by
exports and corporate investment. Should wage growth accelerate and consumer
spending increase, investor confidence would likely rebuild. Corporate profits
should see another positive year and valuations are now back at more attractive
levels. Cash flows and balance sheets are strong.
Whilst we see considerable value at the stock level, overall returns on equity
are too low and need to rise substantially to justify a market re-rating. Poor
capital management is a major issue and so far has largely ignored growing
investor agitation. Any change in overall attitudes, such a greater willingness
to return surplus cash to shareholders, would be warmly greeted by the market.
Investment Policy
Over the course of the year, we have shifted the portfolio slightly toward more
domestic companies, at the expense of car and electronics manufacturers. The
portfolio's largest overweight position is in Real Estate, mainly through
smaller stocks like Tachihi Enterprise, with substantial latent value in its
land holdings. The portfolio is overweight Retail, particularly speciality
retailers, such as United Arrows, which can demonstrate good growth in a
sluggish environment. We have added to Banks and the portfolio is no longer
significantly underweight. Some stocks in this sector appear undervalued, such
as Fukuoka Financial.
On the other hand, we dislike the Electric Power sector, where hopes of dividend
growth have proved unfounded. The portfolio is underweight many of the commodity
related areas, such as Steel, though continues to hold large positions in
General Trading companies, in particular Mitsui & Co, due to slightly better
earnings visibility and lower valuations.
With the continued correction in small cap relative to large, we are identifying
more opportunities amongst smaller names. A recent acquisition was Union Tool, a
maker of small drill bits for printed circuit board manufacture, and Okamura, a
maker of office furniture.
The gearing in the Company was reduced over the course of the year and stood at
13.0% at the end of July.
Schroder Investment Management Limited
Income Statement (Unaudited)
Year to 31 July 2007
Revenue Capital Total
£'000 £'000 £'000
Losses on investments held at fair value - (9,138) (9,138)
Other currency gains - 2,861 2,861
Income (Note 2) 2,080 - 2,080
Investment management fee (1,565) - (1,565)
Administrative expenses (390) - (390)
________ ________ ________
Net return / (losses) before finance costs and taxation 125 (6,277) (6,152)
Interest payable and similar charges (244) - (244)
________ ________ ________
Net losses on Ordinary Activities before Taxation (119) (6,277) (6,396)
Taxation on ordinary activities (142) - (142)
_______ ________ ________
Net losses attributable to equity shareholders (261) (6,277) (6,538)
====== ====== =====
Net loss per Ordinary share (pence) (Note 3) (0.21) (5.02) (5.23)
===== ====== ======
Income Statement (Comparative)
Year to 31 July 2006
Revenue Capital Total
£'000 £'000 £'000
Gains on investments held at fair value - 21,163 21,163
Other currency gains - 1,853 1,853
Income (Note 2) 2,088 - 2,088
Investment management fee (1,727) - (1,727)
Administrative expenses (375) - (375)
_______ ________ ________
Net (losses) / return before finance costs and taxation (14) 23,016 23,002
Interest payable and similar charges (137) - (137)
________ ________ ________
Net (losses) / return on ordinary activities before taxation (151) 23,016 22,865
Taxation on ordinary activities (144) - (144)
_______ ________ ________
Net (losses) / return attributable to equity shareholders (295) 23,016 22,721
===== ====== ======
Net (losses) / return per Ordinary share (pence) (Note 3) (0.24) 18.41 18.17
===== ====== ======
Notes
1. The total column shown above for each period represents the Profit and Loss
Account of the Company.
2. The revenue and capital items derive from continuing activities.
3. A Statement of Total Recognised Gains and Losses has not been presented as
all gains and losses are recognised in the Income Statement.
Reconciliation of Movements
in Shareholders' Funds
(Unaudited)
for the year to 31 July 2007
Called-up Share Share Warrant Capital Revenue Total £'000
Share premium purchase exercise reserve reserve
capital account reserve reserve £'000 £'000
£'000 £'000 £'000 £'000
At 31 July 2005 12,501 7 97,205 3 17,108 (7,381) 119,443
Net return / (losses) - - - - 23,016 (295) 22,721
on ordinary
activities
______ ______ ______ ______ ______ ______ _____
At 31 July 2006 12,501 7 97,205 3 40,124 (7,676) 142,164
Net losses on - - - - (6,277) (261) (6,538)
ordinary activities
______ ______ ______ ______ ______ ______ ______
At 31 July 2007 12,501 7 97,205 3 33,847 (7,937) 135,626
===== ===== ===== ===== ===== ===== =====
Balance Sheet
(Unaudited)
At At
31 July 31 July
2007 2006
£'000 £'000
Fixed assets
Investments held at fair value through profit or loss 153,014 167,409
_______ _______
153,014 167,409
Current assets
Debtors 2,810 2,083
Cash at bank and short-term deposits 3,015 5,696
_______ _______
5,825 7,779
Current liabilities
Creditors - amounts falling due within one year (23,213) (33,024)
_______ _______
Net Current Liabilities (17,388) (25,245)
_______ _______
Net Assets 135,626 142,164
====== ======
Capital and Reserves
Called-up share capital 12,501 12,501
Share premium account 7 7
Share purchase reserve 97,205 97,205
Warrant exercise reserve 3 3
Capital reserves 33,847 40,124
Revenue reserve (7,937) (7,676)
_______ _______
Equity Shareholders' Funds 135,626 142,164
====== ======
Net asset value per Ordinary share (pence) (Note 4) 108.49 113.72
===== =====
Cash Flow Statement (Unaudited)
Year to Year to
31 July 31 July
2007 2006
£'000 £'000
Operating activities
Dividends and interest received from investments 2,025 2,049
Interest received on deposits 50 27
Investment management fee paid (1,585) (1,667)
Administrative expenses paid (361) (360)
_______ _______
Net cash inflow from revenue activities 129 49
_______ _______
Servicing of Finance
Bank overdraft interest paid (1) -
Bank loan interest paid (238) (135)
_______ _______
Net cash outflow from servicing of finance (239) (135)
_______ _______
Taxation
Overseas tax paid (142) (145)
_______ _______
Total tax paid (142) (145)
_______ _______
Investment Activities
Purchase of investments ( 39,029) (57,055)
Disposal of investments 43,496 49,261
_______ _______
Net cash inflow / (outflow) from investment activities 4,467 (7,794)
_______ _______
_______ _______
Net cash inflow / (outflow) before financing 4,215 (8,025)
_______ _______
Financing
Bank loans (repaid)/drawn (6,180) 9,738
_______ _______
Net cash (outflow) / inflow from financing (6,180) 9,738
_______ _______
Net Cash (outflow) / inflow (1,965) 1,713
====== ======
Notes
1. Accounting Policies
The accounts have been prepared under the historical cost convention, modified
to include the revaluation of investments and in accordance with applicable UK
Accounting Standards and with the Statement of Recommended Practice ('SORP') for
'Financial Statements of Investment Trust Companies' issued in January 2003 and
revised in December 2005 by the Association of Investment Companies (AIC).
The Company's accounting policies have not varied from those described in the
Report and Accounts for the year ended 31 July 2006.
2. Dividends and Other Income
Dividends and Other Income comprise:
2007 2006
£'000 £'000
Income from investments:
Overseas dividends 2,025 2,065
_______ _______
2,025 2,065
Interest on deposits 55 23
_______ _______
2,080 2,088
===== =====
3. Deficit per Ordinary Share
The total deficit per Ordinary share is calculated on the deficit attributable
to Ordinary shareholders of £6,538,000 (2006: return of £22,721,000) and
125,008,200 (2006: 125,008,200) Ordinary shares, being the weighted average
number of shares in issue during the year.
The revenue deficit per Ordinary share is calculated on the deficit attributable
to Ordinary shareholders of £261,000 (2006: £295,000) and 125,008,200 (2006:
125,008,200) Ordinary shares, being the weighted average number of shares in
issue during the year.
The capital deficit per Ordinary share is calculated on the deficit attributable
to Ordinary shareholders of £6,277,000 (2006: return of £23,016,000) and
125,008,200 (2006: 125,008,200) Ordinary shares, being the weighted average
number of shares in issue during the year.
4. Net Asset Value
The Net Asset Value per Ordinary share is calculated on net assets of
£135,626,000 (2006: £142,164,000) and 125,008,200 (2006: 125,008,200) Ordinary
shares in issue at the year-end.
Annual Report and Accounts
The financial information contained in this preliminary announcement of annual
results is unaudited and does not constitute statutory accounts as defined in
Section 240 of the Companies Act 1985. Full statutory accounts for the year
ended 31 July 2006 included a report from the Company's auditors, in accordance
with Section 235 of the Companies Act 1985, which was unqualified, did not
include a reference to any matters to which the auditors drew attention by way
of emphasis without qualifying the report and did not contain statements under
Section 237 (2) and (3) of the Companies Act 1985, were filed with the Registrar
of Companies. No statutory accounts in respect of any period after 31 July 2006
have been reported on by the Company's auditors or delivered to the Registrar of
Companies.
The statutory accounts for the year to 31 July 2007 will be finalised on the
basis of the financial information presented by the Directors in this
preliminary announcement and will be delivered to the Registrar of Companies
following the Annual General Meeting.
The Annual Report and Accounts will be mailed to registered shareholders at
their registered addresses. Copies of the Annual Report will be made available
from the date of release at the Company's registered office, 31 Gresham Street,
London, EC2V 7QA.
Enquiries: John Spedding
020 7658 3206
Schroder Investment Management Limited
Secretary
24 September 2007
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