JPMorgan UK Smaller - Half-year Report
23/03/2023 12:57
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RNS Number : 0514U JPMorgan UK Smaller Cos IT PLC 23 March 2023
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN UK SMALLER COMPANIES INVESTMENT TRUST PLC
UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
31ST JANUARY 2023
Legal Entity Identifier: 549300PXALXKUMU9JM18
Information disclosed in accordance with DTR 4.2.2
CHAIRMAN'S STATEMENT
Investment Performance
The half year saw a continuation of the unpleasant cocktail of challenges
faced in the prior period. Equity markets continued to grapple with rising
interest rates, high inflation, the threat of recession, supply chain
constraints, a significant tightening of liquidity and further geopolitical
headwinds from heightened tensions between the US and China and in Ukraine.
Just at the point that global investors began to sense a relative improvement
in the economic outlook and markets began to recover, the UK temporarily
suffered from a spectacular own goal due to domestic political machinations.
The poorly considered and communicated economic policy of the short lived
Truss premiership had a significant negative impact on domestic equity and
debt markets but which thankfully recovered by the end of our reporting period
following the appointment of Rishi Sunak as prime minister.
With continued market volatility, the Company's total return on net assets
(with net dividends reinvested) over the six months to 31st January 2023 was
-1.2%, which was marginally behind the Numis Smaller Companies plus AIM
(excluding Investment Companies) Index which returned -0.4%. However, the
return to shareholders for the reporting period was +0.4% which reflects a
narrowing of the share price discount to net asset value from 11.0% at the
start of the financial year to 9.8% at the end of the half year. Despite the
difficult challenges faced by UK smaller companies over recent years, over the
longer term performance remains strong with the Company being up 202.8% over
the past ten years, some 56.4% ahead of the benchmark. Further details can be
found in the Half Year Report.
Since the end of the reporting period, markets have fallen due to concerns in
the banking sector. From 31st January 2023 to 21st March 2023, the Company's
total return on net assets was -6.6%, marginally underperforming the Company's
benchmark index which declined by -6.0% as at 21st March 2023. Over the same
period, the Company delivered a return to ordinary shareholders of -10.7% as
the discount widened.
In their report, the Investment Managers provide a review of the Company's
performance for the period and the outlook for the remainder of the year.
Loan Facility and Gearing
During the reporting period, the Company continued to utilise its revolving
credit facility to maintain a meaningful but modest level of gearing. As
noted in the previous Annual Report, on 1st October 2021 the Board renewed and
increased the borrowing facility with Scotiabank to £50 million for a period
of 24 months. There is a further option to increase borrowings to £60 million
subject to certain conditions. As at 31st January 2023, £21 million was drawn
on the loan facility. Since the end of the reporting period an additional £5
million was drawn down. The current facility matures on 1st October 2023 and
the Board will review the Company's borrowing requirements in advance of
this date.
The Company has maintained a fairly constant level of gearing, with the Board
giving the Investment Managers flexibility to adjust the gearing tactically
within a range set by the Board of 10% net cash to 15% geared in normal
markets. During the reporting period, the Company's gearing ranged from 4.0%
to 8.7%, ending the half year at 7.6% as the Investment Managers took
advantage of perceived attractive valuations. As at 21st March 2023 the
Company's gearing was 6.9%, with total borrowings of £26 million.
Share Repurchases and Issuance
During the six months to 31st January 2023, the Company did not repurchase or
issue any shares. However, the Board's objective remains to act in the best
interests of shareholders by using the repurchase and allotment authorities to
manage imbalances between the supply and demand of the Company's shares with
the intention of reducing the volatility of the discount or premium in normal
market conditions. As at the end of the reporting period there were 79,611,410
shares in issue (including 1,559,741 shares held in Treasury).
Board Succession
Having completed nine years of service as a Director, Frances Davies retired
from the Board at the Annual General Meeting (AGM) in December 2022. Frances
was also Chairman of the Remuneration Committee and Senior Independent
Director. Following her retirement Alice Ryder took over these roles. Katrina
Hart was also formally appointed at the AGM and is proving to be a valuable
addition to the Board.
Being a Board of four, the Directors are mindful that the size of the Board
may need to be increased in light of new regulations. In accordance with the
FCA's new policy on diversity, the Board currently complies with the gender
recommendation and is committed to increasing diversity and inclusion over
time.
Outlook
Following a period of optimism that inflation might fall back significantly
towards the end of 2023 and that interest rate rises were coming to an end,
markets have become nervous over the path of interest rates. More recently UK
and global equities have fallen and government bond yields have risen
suggesting that, despite the significant rise in interest rates over the past
year, economic activity remains unexpectedly robust and investors are again
growing concerned about inflation and monetary policy. Whatever the eventual
outcome it seems likely that markets will be influenced by key data and policy
announcements as investor sentiment is likely being driven by hopes of a more
supportive US policy rather than improving fundamentals. Recent developments
in the banking sector have raised concerns over the solvency of several banks
and whether this is potentially a systemic problem. However, central and
commercial banks have acted decisively in unison to contain the issue and a
by-product of this maybe a more dovish approach to interest rates. In this
environment volatility is likely to remain.
However, as the managers comment in their outlook, despite being cautious on
the timing of interest rate reductions and the short term path of the economy,
they find reasons to be more optimistic. This more encouraging view is
primarily built upon the attractive valuation on which UK smaller companies
currently stand. Whilst these are difficult markets to navigate, experience
points to opportunity for patient investors.
Andrew Impey
Chairman
23rd March 2023
INVESTMENT MANAGERS' REPORT
Performance and Market Background
The first half of the Company's financial year endured a bleak backdrop. The
atrocious war in Ukraine raged on, energy prices and inflation remained
uncomfortably high, interest rates rose swiftly and there was a growing threat
of recession in 2023 in much of the developed world. While public sector
strike action grew in the UK in response to the stark cost of living increase
over the year, towards the end of the period there were a few positives of
note. China backed down on its zero-Covid policy; inflation appeared to have
peaked in the US, UK and Europe; recessionary risks in Europe and the UK began
to diminish; and in the UK the new Prime Minister, Rishi Sunak, calmed markets
and investors after the disastrous Liz Truss mini budget in September.
Against this backdrop, the Numis Smaller Companies plus AIM (excluding
Investment Companies) Index was effectively flat at -0.4% for the six months
(although it is notable that this hid significant declines at the start of the
period, followed by a rebound as markets looked to life beyond peak
inflation). The Company was marginally behind and produced a total return on
net asset value of -1.2% in the period, while the total return to shareholders
was +0.4%.
Portfolio
Among the positive contributors to performance in the six months were Ashtead
Technology, Bank of Georgia, Dunelm and Hollywood Bowl. We have owned Ashtead
Technology (subsea rental equipment) since its IPO at the end of 2021 and it
continued to produce impressive results and see growing demand, while Bank of
Georgia benefitted from the strength of the Georgian economy, which is
currently among the strongest globally. Both Dunelm (the homewares retailer)
and Hollywood Bowl (a bowling company) enjoyed a rerating following strong
figures which demonstrated the strength of their appeal to consumers. On the
negative side, the main detractors included Serica Energy, the North Sea gas
producer, following the Government's extra tax levy on North Sea oil and gas
producers, the housebuilder Vistry, on concerns over the housing market, and
not owning Micro Focus, which hurt performance on a relative basis as it
received a bid at a very significant premium.
We continued to make changes to the portfolio to adapt to the fast-changing
economic outlook. New additions included: the book publisher, Bloomsbury,
purchased due to the quality of its portfolio and long-term track record of
earnings upgrades; the high street card retailer, Card Factory, purchased on
indications that the business has successfully turned around following a more
challenging period; the price comparison website, Moneysupermarket.Com, on
valuation grounds; and Zoo Digital, which provides localisation services such
as dubbing to the film industry and is benefitting from the proliferation of
video content globally.
Outlook
It is very easy to paint a dark and gloomy picture of the UK economy and to
make a direct read across to the UK stockmarket. However, markets (and
investors) are pre-emptive and looking out to the next 12 to 18 months
provides reasons to be more optimistic.
In line with most economists, we expect a mild recession in the UK in 2023 at
worst, or minimal growth at best. The most recent composite UK Purchasing
Managers Index (PMI) data was a positive surprise at 53, where anything over
50 signals expansion. We believe inflation has peaked in the UK, and while we
expect it to remain elevated, we do foresee a significant decline from the
current 10.1% over the course of this year. In part this is due to gas prices,
which are substantially lower than the peak in 2022, although still high
versus history. After ten increases since December 2021, interest rates at 4%
have substantially normalised and are much closer to peak. Current market
expectations are for a first cut of 25bp in the second half of 2023, but we
think that is likely to be premature and we do not expect them to come down
any time soon. Consumer confidence remains very weak - headlines, strikes,
utility bills and potential house price declines are all playing a part - but
has picked up significantly this February. The unemployment rate remains very
low at 3.7% and there are still over a million job vacancies. Freight rates
have fallen significantly, and it appears that supply chains are beginning to
function more normally, aided by the re-opening of China.
This leads us to valuations. The environment is going to remain extremely
difficult for businesses and consumers to navigate this year - but a lot of
this is already reflected in valuations. While the stockmarket has rallied off
its low in October, the Numis Smaller Companies plus AIM (excluding Investment
Companies) Index is on a similar P/E ratio to the FTSE 100 of under 11x,
despite growing faster. The Company's portfolio has a lower forecast P/E of
10.5x and on our favoured free cashflow yield metric the portfolio is
undeniably attractive on an historic free cashflow yield of 6.8%. As we have
said before, acquirors of UK businesses recognise this. M&A continued in
2022 despite the economic backdrop; we have already seen a number of bids in
the small cap arena in 2023 and we strongly believe this trend will continue
this year while valuations remain so compelling on any sensible timeframe.
Georgina Brittain
Katen Patel
Portfolio
Managers
23rd March 2023
INTERIM MANAGEMENT REPORT
The Company is required to make the following disclosures in its half year
report:
Principal and Emerging Risks and Uncertainties
The principal risks and uncertainties faced by the Company have not changed
significantly and fall into the following broad categories: strategic and
performance risk; discount/premium; smaller company investment and market;
political and economic (including the continuing war in Ukraine and the
heightened political tensions between the US and China); investment
management team; accounting, legal and regulatory; cybercrime; global
pandemics; and climate change. Information on each of these areas is given in
the Strategic Report within the Annual Report and Financial Statements for the
year ended 31st July 2022 and in the view of the Board, these principal and
emerging risks and uncertainties are as applicable to the remaining six months
of the financial year as they were to the period under review.
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 (including its liquidity) 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 12 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 financial statements.
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 January 2023, as required by the UK Listing
Authority Disclosure and Transparency Rules 4.2.4R; and
(ii) the half year 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
Andrew Impey
Chairman
23rd March 2023
CONDENSED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31st January 2023 31st January 2022 31st July 2022
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Losses on investments
held at fair value through
profit or loss - (4,427) (4,427) - (32,407) (32,407) - (85,781) (85,781)
Net foreign currency
gains/(losses) - 3 3 - 1 1 - (2) (2)
Income from investments 2,848 - 2,848 3,609 - 3,609 8,101 - 8,101
Interest receivable and
similar income 67 - 67 4 - 4 50 - 50
Gross return/(loss) 2,915 (4,424) (1,509) 3,613 (32,406) (28,793) 8,151 (85,783) (77,632)
Management fee (289) (674) (963) (406) (948) (1,354) (748) (1,744) (2,492)
Other administrative expenses (288) - (288) (259) - (259) (566) - (566)
Net return/(loss) before
finance costs and taxation 2,338 (5,098) (2,760) 2,948 (33,354) (30,406) 6,837 (87,527) (80,690)
Finance costs (140) (327) (467) (78) (183) (261) (180) (419) (599)
Net return/(loss) before
taxation 2,198 (5,425) (3,227) 2,870 (33,537) (30,667) 6,657 (87,946) (81,289)
Taxation (15) - (15) (18) - (18) (106) - (106)
Net return/(loss) after
taxation 2,183 (5,425) (3,242) 2,852 (33,537) (30,685) 6,551 (87,946) (81,395)
Return/(loss) per share (note 3) 2.80p (6.95)p (4.15)p 3.65p (42.97)p (39.32)p 8.39p (112.68)p (104.29)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 prepared under guidance issued by the
Association of Investment Companies.
The net return after taxation represents the profit for the period or loss and
also the total comprehensive income.
CONDENSED STATEMENT OF CHANGES IN EQUITY
Called up Capital
share Share redemption Capital Revenue
capital premium reserve reserves(1) reserve(1) Total
£'000 £'000 £'000 £'000 £'000 £'000
Six months ended 31st January 2023 (Unaudited)
At 31st July 2022 3,981 25,895 2,903 220,248 7,420 260,447
Net (loss)/return after taxation - - - (5,425) 2,183 (3,242)
Dividend paid in the period (note 4) - - - - (5,386) (5,386)
At 31st January 2023 3,981 25,895 2,903 214,823 4,217 251,819
Six months ended 31st January 2022 (Unaudited)
At 31st July 2021 3,981 25,895 2,903 308,194 5,318 346,291
Net (loss)/return after taxation - - - (33,537) 2,852 (30,685)
Dividend paid in the period (note 4) - - - - (4,449) (4,449)
At 31st January 2022 3,981 25,895 2,903 274,657 3,721 311,157
Year ended 31st July 2022 (Audited)
At 31st July 2021 3,981 25,895 2,903 308,194 5,318 346,291
Net (loss)/return after taxation - - - (87,946) 6,551 (81,395)
Dividend paid in the period (note 4) - - - - (4,449) (4,449)
At 31st July 2022 3,981 25,895 2,903 220,248 7,420 260,447
(1) This reserve forms the distributable reserve of the Company and may be
used to fund distribution of profits to shareholders.
CONDENSED STATEMENT OF FINANCIAL POSITION
(Unaudited) (Unaudited) (Audited)
At 31st January At 31st January At 31st July
2023 2022 2022
£'000 £'000 £'000
Fixed assets
Investments held at fair value through profit or loss 271,061 340,828 275,604
Current assets
Debtors 647 1,512 1,476
Cash and cash equivalents 2,345 8,941 9,650
2,992 10,453 11,126
Current liabilities
Creditors: amounts falling due within one year (22,234) (124) (1,283)
Net current (liabilities)/assets (19,242) 10,329 9,843
Total assets less current liabilities 251,819 351,157 285,447
Creditors: amounts falling due after one year - (40,000) (25,000)
Net assets 251,819 311,157 260,447
Capital and reserves
Called up share capital 3,981 3,981 3,981
Share premium 25,895 25,895 25,895
Capital redemption reserve 2,903 2,903 2,903
Capital reserves 214,823 274,657 220,248
Revenue reserve 4,217 3,721 7,420
Total shareholders' funds 251,819 311,157 260,447
Net asset value per share (note 5) 322.6p 398.7p 333.7p
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31st January 2023 31st January 2022 31st July 2022
£'000 £'000 £'000
Net cash outflow from operations before dividends and
interest (note 6) (1,288) (1,674) (3,018)
Dividends received 3,417 3,385 7,419
Interest received 77 4 40
Interest paid (409) (265) (604)
Net cash inflow from operating activities 1,797 1,450 3,837
Purchases of investments (43,844) (38,883) (105,409)
Sales of investments 44,132 42,776 122,651
Settlement of foreign currency contracts - - (4)
Net cash inflow from investing activities 288 3,893 17,238
Dividend paid (5,386) (4,449) (4,449)
Litigation expense - (31) (52)
Repayment of bank loans (4,000) (3,000) (18,000)
Drawdown of bank loans - 8,000 8,000
Net cash (outflow)/inflow from financing activities (9,386) 520 (14,501)
(Decrease)/increase in cash and cash equivalents (7,301) 5,863 6,574
Cash and cash equivalents at start of period/year 9,650 3,077 3,077
Exchange movements (4) 1 (1)
Cash and cash equivalents at end of period/year 2,345 8,941 9,650
Cash and cash equivalents consist of:
Cash and short term deposits 346 278 294
Cash held in JPMorgan Sterling Liquidity Fund 1,999 8,663 9,356
Total 2,345 8,941 9,650
RECONCILIATION OF NET DEBT
As at Other As at
31st July non-cash 31st January
2022 Cash flows charges 2023
£'000 £'000 £'000 £'000
Cash and cash equivalents
Cash 294 56 (4) 346
Cash equivalents 9,356 (7,357) - 1,999
9,650 (7,301) (4) 2,345
Borrowings
Debt due in less than one year (25,000) 4,000 - (21,000)
Total (15,350) (3,301) (4) (18,655)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED 31ST JANUARY 2023
1. Financial statements
The information contained within the condensed 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 2022 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 July 2022.
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 2023.
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 2022.
3. Return/(loss) per share
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31st January 2023 31st January 2022 31st July 2022
£'000 £'000 £'000
Return per share is based on the following:
Revenue return 2,183 2,852 6,551
Capital loss (5,425) (33,537) (87,946)
Total loss (3,242) (30,685) (81,395)
Weighted average number of shares in issue 78,051,669 78,051,669 78,051,669
Revenue return per share 2.80p 3.65p 8.39p
Capital loss per share (6.95)p (42.97)p (112.68)p
Total loss per share (4.15)p (39.32)p (104.29)p
4. Dividends paid
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31st January 2023 31st January 2022 31st July 2022
£'000 £'000 £'000
2022 final dividend of 6.9p (2021: 5.7p) 5,386 4,449 4,449
All dividends paid in the period have been funded from the revenue reserve.
The Company will normally declare one final dividend for the year ending 31st
July 2023, therefore no interim dividend has been declared in respect of the
six months ended 31st January 2023 (2022: nil).
5. Net asset value per share
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31st January 2023 31st January 2022 31st July 2022
Net assets (£'000) 251,819 311,157 260,447
Number of shares in issue 78,051,669 78,051,669 78,051,669
Net asset value per share 322.6p 398.7p 333.7p
6. Reconciliation of net loss 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 2023 31st January 2022 31st July 2022
£'000 £'000 £'000
Net loss before finance costs and taxation (2,760) (30,406) (80,690)
Add: capital loss before finance costs and 5,098 33,354 87,527
taxation
Scrip dividends received as income (27) (145) (145)
Decrease/(increase) in accrued income and
other debtors 598 (103) (440)
(Decrease)/increase in accrued expenses (21) (19) 36
Management fee charged to capital (674) (948) (1,744)
Tax on unfranked investment income (15) (18) (106)
Dividends received (3,417) (3,385) (7,419)
Interest received (77) (4) (40)
Realised loss on foreign exchange
transactions 7 - 3
Net cash outflow from operations before dividends and interest
(1,288) (1,674) (3,018)
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 2023 31st January 2022 31st July 2022
Assets Liabilities Assets Liabilities Assets Liabilities
£'000 £'000 £'000 £'000 £'000 £'000
Level 1 271,061 - 340,828 - 275,604 -
Total 271,061 - 340,828 - 275,604 -
JPMORGAN FUNDS LIMITED
23rd March 2023
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 ASSET MANAGEMENT (UK) LIMITED
ENDS
A copy of the Half Year Report will shortly be submitted to the FCA's National
Storage Mechanism and will be available for inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
The Half Year Report will also shortly be available on the Company's website
at www.jpmuksmallercompanies.co.uk (http://www.jpmuksmallercompanies.co.uk)
where up to date information on the Company, including daily NAV and share
prices, factsheets and portfolio information can also be found.
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