Last checked at 9 Oct 2019 11:26
LONDON STOCK EXCHANGE ANNOUNCEMENT
The Mercantile Investment Trust plc
(the 'Company')
Half Year Report & Accounts for the six months ended 31st July 2019
Legal Entity Identifier: 549300BGX3CJIHLP2H42
Information disclosed in accordance with DTR 4.2.2
CHAIRMAN'S STATEMENT
Performance
The six months to 31st July 2019 was another successful period for the Company, which achieved a return on net assets of +10.7%. This compares with the return of +5.2% from our benchmark index and is another creditable performance by our Investment Managers, enhancing further the Company's long term performance record.
Returns and Dividends
The Company's revenue account also remains in a healthy state. The revenue return in the first half of the Company's current financial year increased to 4.32 pence per share, up from 3.95 pence per share for the corresponding period last year, an increase of 9.4%.
A first quarterly interim dividend of 1.35 pence was paid on 1st August 2019 and a second quarterly interim dividend of 1.35 pence per share has been declared by the Board, payable on 1st November 2019 to shareholders on the register at close of business on 27th September 2019. This brings the total dividend for the year to date to 2.70 pence (2018: 2.50 pence), reflecting the strong revenue position. The Board intends to pay a third quarterly interim dividend of 1.35 pence in early February 2020.
The level of the fourth quarterly interim dividend will depend on income received by the Company for the full financial year. However, as has been stated previously and in line with the Company's investment policy, the Board recognises shareholders' desire for a growing dividend whilst retaining a healthy revenue reserve.
Discount and Share Buy Backs
The Board has continued to use its share repurchase authority to enhance the net asset value for ongoing shareholders and to attempt to address any imbalance between the supply of and demand for the Company's shares in the market. In the six months to 31st July 2019, a total of 263,144 shares were repurchased at a cost of £532,000. Those shares were repurchased into Treasury and the total number of shares held in Treasury at the half year end was 152,263,143. Those shares are available for reissue by the Board, but only at a premium to net asset value. Since the half year end, the Company has repurchased a further 706,144 into Treasury.
Investment Management Team
As announced in August, Martin Hudson will be leaving JPMorgan Asset Management in the fourth quarter of this year and has stepped down from his portfolio management responsibilities. The Company's portfolio continues to be managed by Guy Anderson and Anthony Lynch. Martin has worked as part of the Company's investment management team for over 25 years and we are hugely grateful for everything that he has contributed; not only is he a highly skilled investor, but he has also been an exceptional ambassador for The Mercantile. We wish him well in the future.
Outlook
Looking back at my outlook statements in these reports over the last couple of years there have been some constant themes. We live in uncertain political and economic times. We have adopted and maintained a cautious stance. The area of the market that we invest in has historically outperformed and that we look to the Managers to continue to invest our money in good quality companies with strong business models which should deliver long term returns to shareholders. Despite the headwinds we have experienced, the advantages of having an investment in The Mercantile has shone through and we have prospered.
I would love to say nothing has changed, and to some extent it hasn't, just that the challenges are more pronounced, since as I write the Supreme Court has recently found the Prime Minister's actions to be unlawful, the Brexit situation remains fluid and ever changing, threats of trade wars continue and the EU economy seems to be teetering on the brink of recession. Some might say that the world has gone mad. However, if there is one thing that such a long period of uncertainty has achieved, despite the renewed shrieks from the Westminster bubble, it is that the country has remained resilient thus far and the companies we invest in have got on with doing what they do best; by running their businesses and preparing for all eventualities.
We will do the same and seek excess returns for shareholders, as we have achieved in the past. We will continue to invest in quality companies in a cautious and thoughtful way and prepare to take advantage of the opportunities that may arise.
Angus Gordon Lennox
Chairman
9th October 2019
INVESTMENT MANAGERS' REPORT
Setting the scene: markets bounce but uncertainty lingers
Over the six months to 31st July 2019 the direction of travel for UK medium and smaller companies (the 'Benchmark') was encouraging, generating a total return of +5.2%.
Although the UK equity market progressed, it remained out of favour with international investors troubled by the prolonged Brexit uncertainty. Globally, equity markets defied expectations, recovering strongly from the falls witnessed in the final quarter of 2018.
Trade tensions have ratcheted up further this year with the US and China appearing no closer to settling their many differences. This protracted dispute between the world's leading economic powerhouses is hampering economic growth and increasing uncertainty.
The prospect of weakening global growth has resulted in central banks around the world pursuing monetary easing - lowering interest rates in order to make credit more easily accessible. Meanwhile in the UK the appointment of Boris Johnson as Prime Minister in late July initially appeared to increase the likelihood of a 'hard Brexit', but this remains a fluid situation.
Mercantile delivers a robust performance
For the six months to 31st July 2019, the Company's continued focus on investing in good quality, structurally robust businesses delivered a total return on net assets of +10.7%, outperforming the Benchmark. The share price total return was +8.0%.
Spotlight on stocks
Adjustments to the portfolio over the period were relatively limited although we have marginally reduced the overall number of holdings. Whilst the current environment still provides scope to uncover compelling investment opportunities, we believe the breadth is narrower than it was before. A more concentrated - but still highly diversified - approach allows us to focus on quality businesses with compelling valuations and where we believe that prospects for growth remain underpinned.
By value, the Company's largest holding is alternative asset manager Intermediate Capital Group (ICG) which continued to perform strongly and now manages more than €38 billion of assets.
Steam engineer Spirax-Sarco was promoted to the FTSE 100 Index at the end of 2018. The business has continued to perform strongly, with its share price surging to a new peak in early July after a financial first half year that exceeded expectations. Similarly, shares in AVEVA, the global leader in virtualisation software for industrial customers, also reached new highs as organic growth rates accelerated following the successful integration of Schneider Electric's industrial software business.
Not owning aerospace and defence systems supplier Cobham, which we avoided because it is in the midst of a protracted and challenging business turnaround, hurt relative performance as the aerospace and defence systems supplier's share price rose sharply when it agreed to be bought by a US private equity firm in late July.
Outlook for the coming six months
We are witnessing weaker momentum across the global economy. The trade dispute between the United States and China remains unresolved after more than a year of tit-for-tat tariffs, threats and counter threats. There is little evidence of a resolution occurring any time soon and the dispute is weighing heavily on the prospects for the global economy.
Domestically, Brexit uncertainties are creating a backdrop of elevated political risk, whilst sterling weakness and low consumer confidence are impacting the earnings of UK domestically focused businesses. Thankfully there are positives: UK companies' earnings and dividends have proved resilient, the UK labour market is strong with unemployment remaining low whilst the employment rate nudges historic highs and we are seeing real wage growth for the first time since before the EU referendum. These latter points could provide a platform for an economic upturn. Furthermore the fall in the value of sterling against other currencies may boost inward UK investment as and when economic and political clarity returns.
While the coming months may well be challenging we are confident that we can still unearth and invest in companies that are both fundamentally robust and have the potential to be long-term future winners. We also maintain our view that the favourable dynamics of medium- and small-sized companies can continue to drive superior returns, outperforming larger companies over the long-term.
The Company can hold up to 10% in cash or utilise gearing of up to 20% of net assets where appropriate. At the present time, the portfolio remains fully invested but ungeared. This position allows the Company to benefit from future increases in the stock market while providing us with plenty of capacity to invest further as and when suitable opportunities arise.
Looking ahead, we remain committed to positioning the portfolio for future gains: even when the immediate geo-political and economic climate is testing we will seek out additional investment opportunities that can generate earnings growth over time, as we believe these are the stocks that will continue to be the long-term winners.
Guy Anderson
Anthony Lynch
Investment Managers
9th October 2019
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; accounting, legal and regulatory; corporate governance and shareholder relations; operational and cyber crime; 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 2019.
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 12 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 2019 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;
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and
• notify the Company's shareholders in writing about the use, if any, of disclosure exemptions in FRS102 in the preparation of the financial statements
and the Directors confirm that they have done so.
For and on behalf of the Board.
Angus Gordon Lennox
Chairman
9th October 2019
STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED 31ST JULY 2019
(Unaudited) | (Unaudited) | (Audited) | |||||||
Six months ended | Six months ended | Year ended | |||||||
31st July 2019 | 31st July 2018 | 31st January 2019 | |||||||
Revenue | Capital | Total | Revenue | Capital | Total | Revenue | Capital | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Gains/(losses) on investments | |||||||||
held at fair value through | |||||||||
profit or loss | - | 158,287 | 158,287 | - | 40,233 | 40,233 | - | (208,880) | (208,880) |
Net foreign currency gains | - | 17 | 17 | - | 1 | 1 | - | 42 | 42 |
Income from investments | 37,251 | - | 37,251 | 34,901 | - | 34,901 | 65,363 | - | 65,363 |
Interest receivable and similar | |||||||||
income | 655 | - | 655 | 377 | - | 377 | 995 | - | 995 |
Gross return/(loss) | 37,906 | 158,304 | 196,210 | 35,278 | 40,234 | 75,512 | 66,358 | (208,838) | (142,480) |
Management fee | (1,044) | (2,437) | (3,481) | (1,138) | (2,655) | (3,793) | (2,177) | (5,079) | (7,256) |
Other administrative expenses | (574) | - | (574) | (604) | - | (604) | (1,212) | - | (1,212) |
Net return/(loss) before finance | |||||||||
costs and taxation | 36,288 | 155,867 | 192,155 | 33,536 | 37,579 | 71,115 | 62,969 | (213,917) | (150,948) |
Finance costs | (1,648) | (3,844) | (5,492) | (1,647) | (3,843) | (5,490) | (3,294) | (7,685) | (10,979) |
Net return/(loss) before taxation | 34,640 | 152,023 | 186,663 | 31,889 | 33,736 | 65,625 | 59,675 | (221,602) | (161,927) |
Taxation (charge)/credit (note 3) | (393) | - | (393) | (31) | - | (31) | 75 | - | 75 |
Net return/(loss) after taxation | 34,247 | 152,023 | 186,270 | 31,858 | 33,736 | 65,594 | 59,750 | (221,602) | (161,852) |
Return/(loss) per share (note 4) | 4.32p | 19.18p | 23.50p | 3.95p | 4.18p | 8.13p | 7.47p | (27.69)p | (20.22)p |
STATEMENT OF CHANGES IN EQUITY
For the six months ended 31st July 2019 (unaudited)
Called up | Capital | |||||
share | Share | redemption | Capital | Revenue | ||
capital | premium | reserve | reserves | Reserve 1 | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 31st January 2019 | 23,612 | 23,459 | 13,158 | 1,618,837 | 74,678 | 1,753,744 |
Repurchase of shares into Treasury | - | - | - | (532) | - | (532) |
Net return | - | - | - | 152,023 | 34,247 | 186,270 |
Dividends paid in the period (note 5) | - | - | - | - | (30,882) | (30,882) |
At 31st July 2019 | 23,612 | 23,459 | 13,158 | 1,770,328 | 78,043 | 1,908,600 |
For the six months ended 31st July 2018 (unaudited) | ||||||
Called up | Capital | |||||
share | Share | redemption | Capital | Revenue | ||
capital | premium | reserve | reserves | Reserve 1 | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 31st January 2018 | 23,612 | 23,459 | 13,158 | 1,897,243 | 62,121 | 2,019,593 |
Repurchase of shares into Treasury | - | - | - | (42,590) | - | (42,590) |
Net return | - | - | - | 33,736 | 31,858 | 65,594 |
Dividends paid in the period (note 5) | - | - | - | - | (27,364) | (27,364) |
At 31st July 2018 | 23,612 | 23,459 | 13,158 | 1,888,389 | 66,615 | 2,015,233 |
Year ended 31st January 2019 (audited) | ||||||
Called up | Capital | |||||
share | Share | redemption | Capital | Revenue | ||
capital | premium | reserve | reserves | Reserve 1 | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 31st January 2018 | 23,612 | 23,459 | 13,158 | 1,897,243 | 62,121 | 2,019,593 |
Repurchase of shares into Treasury | - | - | - | (56,804) | - | (56,804) |
Net return | - | - | - | (221,602) | 59,750 | (161,852) |
Dividends paid in the year (note 5) | - | - | - | - | (47,193) | (47,193) |
At 31st January 2019 | 23,612 | 23,459 | 13,158 | 1,618,837 | 74,678 | 1,753,744 |
1This reserve forms the distributable reserve of the Company and is used to fund distributions to investors via dividend payments.
STATEMENT OF FINANCIAL POSITION AT 31ST JULY 2019
(Unaudited) | (Unaudited) | (Audited) | |
31st July | 31st July | 31st January | |
2019 | 2018 | 2019 | |
£'000 | £'000 | £'000 | |
Fixed assets | |||
Investments held at fair value through profit or loss | 1,915,995 | 2,022,857 | 1,754,994 |
Current assets | |||
Debtors | 17,124 | 23,223 | 7,783 |
Cash and short term deposits | 376 | 60,572 | 83,047 |
Cash equivalents: liquidity fund | 173,616 | 99,974 | 99,974 |
191,116 | 183,769 | 190,804 | |
Current liabilities | |||
Creditors: amounts falling due within one year | (20,693) | (13,672) | (14,285) |
Net current assets | 170,423 | 170,097 | 176,519 |
Total assets less current liabilities | 2,086,418 | 2,192,954 | 1,931,513 |
Creditors: amounts falling due after more than one year | (177,818) | (177,721) | (177,769) |
Net assets | 1,908,600 | 2,015,233 | 1,753,744 |
Capital and reserves | |||
Called up share capital | 23,612 | 23,612 | 23,612 |
Share premium | 23,459 | 23,459 | 23,459 |
Capital redemption reserve | 13,158 | 13,158 | 13,158 |
Capital reserves | 1,770,328 | 1,888,389 | 1,618,837 |
Revenue reserve | 78,043 | 66,615 | 74,678 |
Total shareholders' funds | 1,908,600 | 2,015,233 | 1,753,744 |
Net asset value per share (note 6) | 240.9p | 252.2p | 221.3p |
STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 31ST JULY 2019
(Unaudited) | (Unaudited) | (Audited) | |
Six months ended | Six months ended | Year ended | |
31st July 2019 | 31st July 2018 | 31st January 2019 | |
£'000 | £'000 | £'000 | |
Net cash outflow from operations before dividends and | |||
interest | (4,088) | (4,247) | (8,370) |
Dividends received | 34,726 | 32,980 | 63,984 |
Interest received | 655 | 340 | 958 |
Overseas tax recovered | - | 39 | 315 |
Interest paid | (5,443) | (5,442) | (10,883) |
Net cash inflow from operating activities | 25,850 | 23,670 | 46,004 |
Purchases of investments | (408,394) | (339,185) | (592,224) |
Sales of investments | 404,935 | 440,089 | 728,000 |
Settlement of foreign currency contracts | (8) | - | - |
Net cash (outflow)/inflow from investing activities | (3,467) | 100,904 | 135,776 |
Dividends paid | (30,882) | (27,364) | (47,193) |
Repurchase of shares into Treasury | (532) | (43,195) | (58,097) |
Net cash outflow from financing activities | (31,414) | (70,559) | (105,290) |
(Decrease)/increase in cash and cash equivalents | (9,031) | 54,015 | 76,490 |
Cash and cash equivalents at start of period/year | 183,021 | 106,531 | 106,531 |
Exchange movements | 2 | - | - |
Cash and cash equivalents at end of period/year | 173,992 | 160,546 | 183,021 |
(Decrease)/increase in cash and cash equivalents | (9,031) | 54,015 | 76,490 |
Cash and cash equivalents consist of: | |||
Cash and short term deposits | 376 | 60,572 | 83,047 |
Cash held in JPMorgan Sterling Liquidity Fund | 173,616 | 99,974 | 99,974 |
Total | 173,992 | 160,546 | 183,021 |
NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31ST JULY 2019
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 2019 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 31st July 2019.
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 2019.
3. Taxation
The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. The tax charge comprises overseas withholding tax.
4. Return/(loss) per share
(Unaudited) | (Unaudited) | (Audited) | |
Six months ended | Six months ended | Year ended | |
31st July 2019 | 31st July 2018 | 31st January 2019 | |
£'000 | £'000 | £'000 | |
Return per share is based on the following: | |||
Revenue return | 34,247 | 31,858 | 59,750 |
Capital return/(loss) | 152,023 | 33,736 | (221,602) |
Total return/(loss) | 186,270 | 65,594 | (161,852) |
Weighted average number of shares in issue | 792,480,550 | 807,080,131 | 800,340,427 |
Revenue return per share | 4.32p | 3.95p | 7.47p |
Capital return/(loss) per share | 19.18p | 4.18p | (27.69)p |
Total return/(loss) per share | 23.50p | 8.13p | (20.22)p |
5. Dividends paid
(Unaudited) | (Unaudited) | (Audited) | |
Six months ended | Six months ended | Year ended | |
31st July 2019 | 31st July 2018 | 31st January 2019 | |
£'000 | £'000 | £'000 | |
Unclaimed dividends refunded to the Company1 | (26) | (11) | (11) |
2019 fourth quarterly dividend of 2.55p (2018: 2.15p) paid to shareholders in May |
20,209 |
17,334 |
17,334 |
2020 first quarterly dividend of 1.35p (2019: 1.25p) paid to shareholders in August |
10,699 |
10,041 |
10,041 |
2019 second quarterly dividend of 1.25p paid to shareholders in November |
n/a |
n/a |
9,923 |
2019 third quarterly dividend of 1.25p paid to | |||
shareholders in February | n/a | n/a | 9,906 |
Total dividends paid in the period/year | 30,882 | 27,364 | 47,193 |
1Represents dividends which remain unclaimed after a period of six years and thereby become the property of the Company.
All dividends paid in the period/year have been funded from the revenue reserve.
A second quarterly dividend of 1.35p (2018: 1.25p) per share, amounting to £10,695,000 (2018: £9,989,000), has been declared payable in respect of the six months ended 31st July 2019.
6. Net asset value per share
(Unaudited) | (Unaudited) | (Audited) | |
Six months ended | Six months ended | Year ended | |
31st July 2019 | 31st July 2018 | 31st January 2019 | |
Net assets (£'000) | 1,908,600 | 2,015,233 | 1,753,744 |
Number of 2.5p ordinary shares in issue | 792,229,037 | 799,111,099 | 792,492,181 |
Net asset value per share | 240.9p | 252.2p | 221.3p |
For further information, please contact:
Jonathan Latter
For and on behalf of JPMorgan Funds Limited, Company Secretary 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 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.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.