18 Jun 2018 11:59
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN RUSSIAN SECURITIES PLC
UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED30TH APRIL 2018
Legal Entity Identifier: |
549300II3MHI98ZLVH37 Information disclosed in accordance with DTR 4.2.2 |
CHAIRMAN'S STATEMENT
Performance
It has been a difficult six months for investors in Russia. When I wrote my Chairman's statement for the Annual Report last January I referred to the political risk but I do not think that anyone would have anticipated the extent to which relationships between the West and Russia deteriorated over the next few months. However what I said at that time about the economy in Russia continuing to grow remains true and the Company is invested in companies with strong balance sheets, able to support substantial dividend payouts.
During the six months ended 30th April 2018 the Company's net asset value on a total return basis increased 2.2% and the Company's return to shareholders on a total return basis was positive 1.1% over the period. It is pleasing that both these measures were ahead of the Company's benchmark (RTS index) which returned 0.6% on a total return basis. The Company's discount to net asset value has remained disappointingly wide and was slightly higher at the end of the period at 15.6% (at the end of the Company's last financial year the discount was 14.5%). The average discount over the period was 13.8%. However, this is not surprising given the increasing sanctions against Russia and political tensions that persist between Russia and many other major nations.
Russia's international relations with the United States and European governments have fallen to a new low during the period, as demonstrated by the repatriation of embassy staff following alleged Russian government involvement in the poisoning of a former Russian spy and his daughter in the UK in March. Relations soured further with allegations that Russian backed Syrian military launched a chemical attack on Syrian civilians in a suburb of Damascus. The United States reacted to these events by introducing further economic sanctions on Syrian sites suspected of being involved with chemical weapons.
As referred to in the Company's announcement on the 13th April 2018, the only holding in the Company's portfolio directly impacted by the new sanctions was United Company Rusal, a major aluminium producer. This investment represented approximately 1% of the Company's portfolio, and in compliance with the sanctions, the forced disposal of Rusal cost the Company 0.52% in performance terms.
Although at the time of writing there have been no further major incidents, it is clear that events have the potential to escalate. This could give rise to further economic sanctions against Russia that adversely affect Russian companies and the market and hence potentially the Company's performance. JPMorgan Asset Management's compliance function monitors the Company's investments and provides assurances of compliance with the current sanctions regime. In addition JPMorgan and the Board closely monitor both economic and political risks to the Company.
The Investment Managers Report includes further comment on the economic and political impacts on the Russian market.
Discount Control
The Board's objective remains to use the share repurchase authority to assist in managing any imbalance between supply and demand for the Company's shares, thereby reducing the volatility of the discount. During the period the discount ranged from 10.7% to 17.6%. Following discussion with the Company's major shareholders during the period, the Board has agreed that, subject to market conditions, it will increase its buy back activity with a view to buying back at least 6.0% of its issued share capital per annum. During the course of the six month period 1,226,443 shares were bought back, approximately 2.4% of the Company's issued share capital at 30th April 2018. The average discount at which these shares were bought back was 13.8% and these buybacks represented approximately 18.0% of traded market volume during the period in which they were undertaken.
It is hoped that this buy back strategy will have the effect of gradually stabilising and narrowing the discount at which the Company trades. The policy was initiated in January and since that time the political turmoil has been such that it is no surprise the discount remains wider than we would like it to be.
Revenue, Earnings and Dividend
Revenue for the six month period to 30th April 2018 after taxation was £2,188,000 (2017: £1,460,000) and the return per share, calculated on the basis of the average number of shares in issue was 4.22 pence (2017: 2.79 pence) per share.
The Company's current income forecast for the year indicates continuing growth in dividend income. Following the pattern of the previous year, the Company's interim dividend is expected to be considered by the Board for declaration in September 2018 and is likely to represent the large majority of the total annual dividend, with a significantly smaller final dividend being recommended for approval by the shareholders at the Annual General Meeting for payment in March 2019.
Investment Manager
Oleg Biryulyov and Habib Saikaly continue to be the Company's Investment Managers supported by JPMorgan Asset Management's Emerging Markets and Asia Pacific equities team (EMAP), which consists of approximately 100 investment professionals. This strength and depth is one of the advantages of having the fund managed by a major investment house such as JPMorgan Asset Management. The Board reviews the performance of the Investment Managers each year and works pro-actively with the house to improve all aspects of the running of the Company.
The Investment Managers have maintained a consistent approach to investing in well managed companies with strong balance sheets. They continue to believe that the equity market in Russia provides a good long term investment opportunity, despite the significant political risks, if the right stocks are selected. The relatively high levels of dividend payments in the Russian corporate sector is forecast to continue, as is the generally stable domestic economic outlook, with no large changes anticipated in interest rates or inflation. The price of oil is a major determining factor for the Russian economy and a recent increase in tensions in the Middle-East has contributed to a rising oil price. The recent rise in the price of oil is yet to be reflected in the performance of the Russian market. For those prepared to ride out this time of heightened tension the underlying investment case for investing in Russia remains strong.
Gill Nott
Chairman
15th June 2018
INVESTMENT MANAGER'S REPORT
Market review and performance
During the six months under review, the Company's net asset value was up 2.2% on a total return basis, and the return to shareholders was 1.1% in sterling terms. This resulted in the Company outperforming its benchmark, the RTS Index, by 1.6% on a net asset value total return basis.
The Russian market started the period strongly supported by rising oil prices and the Central Bank further cutting interest rates, a trend which has continued against the tide of global tightening. In February, S&P upgraded Russian debt to investable rating amid signs of an improving economic outlook. However the U.S. announcement of sanctions in April was a surprise and hit the market hard. April saw Russia as one of the weakest markets globally, negatively impacted by currency losses following the imposition of additional U.S. sanctions.
As the uncertainty surrounding further sanctions reduces, the stronger oil price is proving supportive for the economy and dividend payouts are continuing on the positive trend highlighted in the Company's previous annual report.
Post reporting period, on 7th May, Vladimir Putin was inaugurated as President for another six years as anticipated.
Portfolio positioning
We actively manage your portfolio and continue to build up internal research capabilities and a growing team of professional analysts with deep expertise in emerging markets and Russia/Commonwealth of Independent States (CIS) markets.
In terms of portfolio activity, we would highlight that:
During the period we took profits from energy names Tatneft and Gazprom, and also Sberbank on the back of share price strength. We continued to trim our position in Evraz, a multinational vertically integrated steel making and mining company, taking advantage of strong performance.
With regards to additions:
We bought Norilsk Nickel, a palladium and nickel mining and smelting company. The weaker ruble and stronger metals prices made this stock more attractive.
We also initiated a position in Surgutneftgaz, an oil and gas company. We view this company as a compelling opportunity given their significant USD cash reserves and strong balance sheet.
Our energy holdings are relatively high as we continue to see a better outlook for energy prices and dividend stories there.
On the positive side, we gained from our positions in:
Magnit - our recent move to underweight exposure in Magnit, Russia's largest retailer, contributed to relative returns, as the stock fell sharply following the abrupt departure of founding CEO Sergey Galitskiy, and the impact of several macro factors, such as a lack of food price inflation, subdued disposable income growth, and elevated competition.
Sberbank - The company reported strong preliminary results for 2017, boosted by solid net-interest-margin (NIM) performance, continuing mortgage growth, strong deposit inflows and a seasonal decline in the corporate loan book. We are encouraged by the long-term investment opportunity that Sberbank offers, and the company's investor day in December reaffirmed our view.
In a similar vein, our lack of exposure to VTB contributed. The company struggled in a low interest rate, low volatility environment. As a reminder, we do not own this company due to capital allocation concerns, preferring the quality and market leadership of Sberbank.
Evraz, a steel and mining company, has been a beneficiary of the rally in coal prices and a turnaround in the steel industry, which has been driven the supply reforms in the Chinese steel market.
Notable stock-level detractors were:
Rusal - the company was specifically targeted by the new sanctions, requiring US investors to divest of all assets related to the company by 7th May. It was clearly very difficult to dispose of the stock but we did so to comply with these restrictions.
Sollers - the auto manufacturer fell on the back of news that the board of directors decided not to pay a dividend to its shareholders.
The position in Ros-Agro, an agricultural commodity and food business detracted on the back of weaker-than-expected numbers, as the company continues to be impacted by weakness in sugar prices. We have high conviction in this name for the long term and will continue to hold the stock through this underperformance.
Outlook
The most recent reminder of the risks in this market came in the form of a new round of Russia sanctions announced in April, largely covering companies associated with oligarch Oleg Deripaska. The new sanctions were a surprise to the market in timing and in substance. However, we believe that their impact will be transitory. To us, they are a reminder of the importance of assessing the complete set of risks associated with a particular investment (in emerging markets or elsewhere) and of the importance of diversification. Our portfolio has not been immune to the impact of these sanctions, but we believe well-managed, profitable companies in Russia - will overcome short-term pressures and outperform over time.
While this has had an impact on the broader market, we have held a constructive view on Russian equities based on: (a) orthodox economic policies which have contained fiscal deficits and inflation; (b) a gradual recovery in domestic demand which is supporting corporate earnings; and (c) valuation support from rising dividend payouts and a high dividend yield (which is now above 6%).
An improving domestic economy, backed by earnings growth and rising commodity prices, is supportive for Russian equities, with potential upside coming from stronger investments and the recovery of domestic consumption. The lower level of inflation gives the Central Bank room to support more rate cuts in the next 12-18 months. Additionally, the domestic political outlook is stable following recent presidential elections, although we would expect to see some rotation of specialists in the government and presidential administration.
We continue to believe that Russian equity valuations are supportive for investors who are willing to accept the current level of country risk.
Oleg I. Biryulyov
Habib Saikaly
Investment Managers
15th June 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 remain unchanged and fall into the following broad categories: investing in Russia; share price discount and Net Asset Value per share; investment underperformance and strategy; failure of investment process; loss of investment team and Manager; operational and cyber crime; board relationship and shareholders; political and economic regulatory and legal market and financial. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st October 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 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 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/loss of the Company, as at 30th April 2018 as required by the UK Listing Authority Disclosure and Transparency Rule 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
Gill Nott
Chairman
15th June 2018
STATEMENT OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED 30TH APRIL 2018
(Unaudited) | (Unaudited) | (Audited) | ||||||||
Six months ended | Six months ended | Year ended | ||||||||
30th April 2018 | 30th April 2017 | 31st October 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 | - | 5,069 | 5,069 | - | 17,281 | 17,281 | - | 17,750 | 17,750 |
|
Net foreign currency losses | - | (55) | (55) | - | (58) | (58) | - | (42) | (42) |
|
Income from investments | 3,102 | - | 3,102 | 2,519 | - | 2,519 | 15,957 | - | 15,957 |
|
Interest receivable and similar income | 17 | - | 17 | 8 | - | 8 | 23 | - | 23 |
|
Gross return | 3,119 | 5,014 | 8,133 | 2,527 | 17,223 | 19,750 | 15,980 | 17,708 | 33,688 |
|
Management fee | (313) | (1,253) | (1,566) | (305) | (1,219) | (1,524) | (598) | (2,391) | (2,989) |
|
Other administrative expenses | (395) | - | (395) | (365) | - | (365) | (1,017) | - | (1,017) |
|
Net return on ordinary activities before finance costs and taxation | 2,411 | 3,761 | 6,172 | 1,857 | 16,004 | 17,861 | 14,365 | 15,317 | 29,682 |
|
Finance costs | - | (1) | (1) | - | - | - | - | - | - |
|
Net return on ordinary activities before taxation | 2,411 | 3,760 | 6,171 | 1,857 | 16,004 | 17,861 | 14,365 | 15,317 | 29,682 |
|
Taxation (charge)/credit | (223) | - | (223) | (397) | 237 | (160) | (1,822) | - | (1,822) |
|
Net return on ordinary activities after taxation | 2,188 | 3,760 | 5,948 | 1,460 | 16,241 | 17,701 | 12,543 | 15,317 | 27,860 |
|
Return per share (note 3) | 4.22p | 7.24p | 11.46p | 2.79p | 31.03p | 33.82p | 23.97p | 29.27p | 53.24p |
|
STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED 30TH APRIL 2018
Called up | Capital | |||||
share | redemption | Other | Capital | Revenue | ||
capital | reserve | reserve | Reserves 1 | Reserve 1 | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Six months ended 30th April 2018 (Unaudited) | ||||||
At 31st October 2017 | 523 | 78 | 46,838 | 245,854 | 7,068 | 300,361 |
Repurchase and cancellation of the Company's own shares | (12) | 12 | (6,420) | - | - | (6,420) |
Net return on ordinary activities | - | - | - | 3,760 | 2,188 | 5,948 |
Dividend paid in the period (note 4) | - | - | - | - | (3,119) | (3,119) |
At 30th April 2018 | 511 | 90 | 40,418 | 249,614 | 6,137 | 296,770 |
Six months ended 30th April 2017 (Unaudited) | ||||||
At 31st October 2016 | 524 | 77 | 47,204 | 230,537 | 6,552 | 284,894 |
Net return on ordinary activities | - | - | - | 16,241 | 1,460 | 17,701 |
Dividend paid in the period (note 4) | - | - | - | - | (4,187) | (4,187) |
At 30th April 2017 | 524 | 77 | 47,204 | 246,778 | 3,825 | 298,408 |
Year ended 31st October 2017 (Audited) | ||||||
At 31st October 2016 | 524 | 77 | 47,204 | 230,537 | 6,552 | 284,894 |
Repurchase and cancellation of the Company's own shares | (1) | 1 | (366) | - | - | (366) |
Net return on ordinary activities | - | - | - | 15,317 | 12,543 | 27,860 |
Dividends paid in the year (note 4) | - | - | - | - | (12,027) | (12,027) |
At 31st October 2017 | 523 | 78 | 46,838 | 245,854 | 7,068 | 300,361 |
1 These reserves form distributable reserves of the Company and may be used to fund distribution of profits to investors via dividend payments.
STATEMENT OF FINANCIAL POSITION AT 30TH APRIL 2018
(Unaudited) | (Unaudited) | (Audited) | |
30th April 2018 | 30th April 2017 | 31st October 2017 | |
£'000 | £'000 | £'000 | |
Fixed assets | |||
Investments held at fair value through profit or loss | 294,504 | 297,491 | 294,066 |
Current assets | |||
Derivative financial assets | 1 | - | - |
Debtors | 1,659 | 377 | 5,145 |
Cash and cash equivalents | 1,789 | 3,020 | 1,281 |
3,449 | 3,397 | 6,426 | |
Current liabilities | |||
Creditors: amounts falling due within one year | (1,183) | (2,480) | (131) |
Net current assets | 2,266 | 917 | 6,295 |
Total assets less current liabilities | 296,770 | 298,408 | 300,361 |
Net assets | 296,770 | 298,408 | 300,361 |
Capital and reserves | |||
Called up share capital | 511 | 524 | 523 |
Capital redemption reserve | 90 | 77 | 78 |
Other reserve | 40,418 | 47,204 | 46,838 |
Capital reserves | 249,614 | 246,778 | 245,854 |
Revenue reserve | 6,137 | 3,825 | 7,068 |
Total shareholders' funds | 296,770 | 298,408 | 300,361 |
Net asset value per share (note 5) | 581.5p | 570.2p | 574.7p |
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED 30TH APRIL 2018
| (Unaudited) | (Unaudited) | (Audited) |
Six months ended | Six months ended | Year ended | |
30th April 2018 | 30th April 2017 | 31st October 2017 | |
£'000 | £'000 | £'000 | |
Net cash outflow from operations before dividends and interest | (2,007) | (1,879) | (4,030) |
Dividends received | 3,426 | 2,350 | 13,540 |
Interest received | 17 | 8 | 23 |
Overseas tax paid | - | (52) | (53) |
Interest paid | (1) | - | - |
Net cash inflow from operating activities | 1,435 | 427 | 9,480 |
Purchases of investments | (40,515) | (64,283) | (101,778) |
Sales of investments | 48,845 | 65,992 | 100,857 |
Settlement of forward currency contracts | (9) | (26) | (26) |
Net cash inflow/(outflow) from investing activities | 8,321 | 1,683 | (947) |
Repurchase and cancellation of the Company's own shares | (6,142) | - | (364) |
Dividends paid | (3,108) | (4,187) | (12,038) |
Net cash outflow from financing activities | (9,250) | (4,187) | (12,402) |
Increase/(decrease) in cash and cash equivalents | 506 | (2,077) | (3,869) |
Cash and cash equivalents at start of period/year | 1,281 | 5,150 | 5,150 |
Exchange movements | 2 | (53) | - |
Cash and cash equivalents at end of period/year | 1,789 | 3,020 | 1,281 |
Increase/(decrease) in cash and cash equivalents | 506 | (2,077) | (3,869) |
Cash and cash equivalents consist of: | |||
Cash and short term deposits | 519 | 3,020 | 253 |
Cash held in JPMorgan US Dollar Liquidity Fund | 1,270 | - | 1,028 |
Total | 1,789 | 3,020 | 1,281 |
NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 30TH APRIL 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 October 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 February 2018.
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 30th April 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 October 2017.
3. Return per share
(Unaudited) | (Unaudited) | (Audited) | |
Six months ended | Six months ended | Year ended | |
30th April 2018 | 30th April 2017 | 31st October 2017 | |
£'000 | £'000 | £'000 | |
Return per share is based on the following: | |||
Revenue return | 2,188 | 1,460 | 12,543 |
Capital return | 3,760 | 16,241 | 15,317 |
Total return | 5,948 | 17,701 | 27,860 |
Weighted average number of shares in issue | 51,899,865 | 52,337,112 | 52,325,194 |
Revenue return per share | 4.22p | 2.79p | 23.97p |
Capital return per share | 7.24p | 31.03p | 29.27p |
Total return per share | 11.46p | 33.82p | 53.24p |
4. Dividends paid
(Unaudited) | (Unaudited) | (Audited) | |
Six months ended | Six months ended | Year ended | |
30th April 2018 | 30th April 2017 | 31st October 2017 | |
£'000 | £'000 | £'000 | |
2017 final dividend of 6.0p (2016: 8.0p) | 3,119 | 4,187 | 4,187 |
2017 interim dividend of 15.0p | - | - | 7,840 |
Total dividends paid in the period/year | 3,119 | 4,187 | 12,027 |
All dividends paid in the period/year have been funded from the revenue reserve.
The 2018 interim dividend is expected to be payable in October 2018.
5. Net asset value per share
(Unaudited) | (Unaudited) | (Audited) | |
Six months ended | Six months ended | Year ended | |
30th April 2018 | 30th April 2017 | 31st October 2017 | |
Net assets (£'000) | 296,770 | 298,408 | 300,361 |
Number of shares in issue | 51,035,669 | 52,337,112 | 52,262,112 |
Net asset value per share | 581.5p | 570.2p | 574.7p |
JPMORGAN FUNDS LIMITED
18th June 2018
For further information, please contact:
Paul Winship
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.hemscott.com/nsm.do
The half year will also shortly be available on the Company's website at www. www.jpmrussian.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.