JPMorgan European Discovery Trust plc (LON:JEDT) has announced its half year report and financial statements for the six months ended 30 September 2021.
CHAIRMAN’S STATEMENT
I am pleased to present the Company’s results for the half-year ended 30th September 2021.
Performance
I would like to report that as a result of positive stock selection, the Company recorded a total return on net assets of +13.3% in the six months to 30th September 2021, outperforming the Company’s benchmark index, the MSCI Europe (ex UK) Small Cap Index, which returned +9.8% over the same period. The total return to shareholders was +11.7%, reflecting a slight widening of the discount at which the Company’s shares trade from 12.9% to 14.4% over the six months.
The Company’s longer term performance remains strong with the 5 year and 10 year total return on net assets rising 76.7% and 311.4%, respectively, whilst the benchmark total return rose 78.1% and 273.2%. The Investment Managers’ Report that follows provides a review of markets, more detail on the performance drivers within the portfolio and the outlook for investing.
Revenue and Dividends
Gross revenue return for the six months to 30th September 2021 was higher than the corresponding period in 2020 at 6.57 pence per share (2020: 4.46 pence), reflecting the fact that many companies are slowly coming back to pre-Covid dividend levels. The Board has decided to maintain the interim dividend of 1.2 pence (2020: 1.2 pence) per share which will be paid on 28th January 2022 to shareholders on the register as at 17th December 2021 (the ex-dividend date will be 16th December 2021). The Board will keep this under review and take into account the income received and the level of the Company’s revenue reserves when determining the final dividend for the year in 2022.
Discount Management and Share Repurchases
The Board continues to monitor closely the level of the discount and considers its ability to repurchase shares to minimise the short term volatility and the absolute level of the discount of prime importance. No shares were repurchased in the six months to 30th September 2021; however, since then 293,930 shares have been repurchased, at an average discount of 13.3%.
The Board
The 2021 Annual Report highlighted that the Board progressed its succession plans during the year resulting in the decision to appoint Sarah Watters as an independent non-executive director with effect from 1st July 2021. As planned and announced previously, Stephen White retired from the Board on 31st October 2021, having served as a Director for more than nine years. Further, as announced on 8th September 2021, due to external time commitments, Tanya Cordrey also stepped down from the Board, on 26th November 2021. The Board would like to thank Stephen and Tanya for their significant contributions to the Company during their tenure and wishes them well for the future.
The Board has commenced a recruitment process to ensure that it continues to have an appropriate balance of skills and diverse approaches to its tasks.
Environmental, Social and Governance (‘ESG’)
The Board has continued to engage with the Manager on the integration of ESG factors into its investment process. While the investment managers have always considered ESG issues in their investment process, it is now rigorously integrated into their investment processes so that these are considered at every stage of the investment decision. For more details, please refer to pages 19 to 21 of the 2021 Annual Report which can be found on the Company’s website at: www.jpmeuropeandiscovery.co.uk
Name Change
The Company changed its name in June 2021 to better reflect the Company’s investment strategy and portfolio. The name change was well received by the investors.
Outlook
Europe’s economy recovered strongly over the summer after being severely affected by Covid-19 in the spring. However, supply chain disruption, enormous increases in energy prices, shortage of certain key products and the potential for new variants of Covid-19 to flare up continue to threaten economic growth. European companies have weathered the difficult 2020 well and are generally in good shape. There is substantial fiscal stimulus coming through in Europe and the US as the recovery from Covid-19 takes priority. This will help support equities, as will the measures taken by the European Central Bank. Monetary and fiscal policy remain extremely supportive despite growing inflationary pressures. While uncertainty still looms, this will not distract the investment team from executing their philosophy and process. We are fortunate that our stock research is conducted in a large diverse region of opportunities. It allows us to uncover high quality niche opportunities at attractive prices, and this is what will drive our long-term returns.
Marc van Gelder
Chairman, JPMorgan European Discovery Trust
8th December 2021
INVESTMENT MANAGERS’ REPORT
Review
During the six months to September 2021, equity markets continued to rise strongly from the Covid-19 related sell off in early 2020. Earnings grew more strongly than expected as the economic backdrop remained supportive and companies proved to be better than expected at coping with cost inflation.
During the period the benchmark MSCI Europe (ex UK) Small Cap Net Total Return Index rose by 9.8 per cent, outperforming the large cap MSCI Europe (ex UK) Net Total Return Index that rose by 8.3 per cent.
Portfolio
With a return of 13.3 per cent over the six months to September 2021, the NAV of the portfolio outperformed its benchmark by 3.5 per cent.
Contributors to performance included two suppliers to the healthcare industry, Eckert & Ziegler in Germany and Vitrolife in Sweden. Eckert & Ziegler is benefitting from growing demand for their radionuclide generators which are used by the healthcare industry for the diagnosis and treatment of cancer. Vitrolife is a global leader in providing fertility solutions for IVF clinics and it recently announced the acquisition of Igenomix to complement its offering in the fast growing genetic testing segment. The Italian IT consultant, Reply, also contributed to performance as demand for its digitalisation expertise remained buoyant.
Detractors from performance included Scatec Solar, a Norwegian listed renewable energy generation company focused on emerging markets, due to concerns that it will not achieve its targeted growth objectives this year; Valeo, a French automotive components supplier, due to concerns around order intake in its electric mobility JV with Siemens; and Aramis, a French used car e-commerce platform, which underperformed despite its guidance upgrade because of uncertainties around the supply of pre-registered cars due to chip shortages.
During the period we continued to reduce our exposure to renewable energy generation via the disposals of ERG, Falck Renewables and Scatec Solar, as we believed that their valuations had become less attractive while competition is increasing. We also sold Stillfront, the Swedish mobile video game developer, as we considered Apple’s privacy rules change to be a significant threat to their business model, and the aforementioned automotive components supplier, Valeo.
The proceeds from these divestments were used to continue to add to fundamentally high quality companies with strong growth prospects. These include intralogistics solutions providers such as Interroll and Kardex, which are seeing increased investment into warehouse automation as their clients recognise the growing importance of efficient supply chains; Bachem, the global leader in the contract manufacturing of peptides used by the pharma industry, which sees a fast-growing pipeline of new drugs using peptides and increasing outsourcing of manufacturing by pharma companies; and Lotus Bakeries, the Belgian manufacturer of Biscoff biscuits and other snacks, which has successfully entered the US market and continues to gain market share in the biscuit industry. We also increased our exposure to the insurance sector by topping up Unipol Gruppo, Helvetia and asr Nederland due to attractive valuations.
During the period we participated in a number of IPOs: of Azelis, a specialty chemical distributor, which is a high-quality company with defensive properties; Aramis, the French used cars e-commerce platform,
whose leading position in Europe puts it in a strong position to capture a greater share of the used cars market; Cherry, a German manufacturer of high-end components for gaming and industrial keyboards; Vimian, a Swedish company that intends to consolidate the fragmented animal health market; and Antin, a French infrastructure fund manager, which should see strong demand for their funds given the yield offered by infrastructure.
Based on the Industry Classification Benchmark (ICB) methodology, Software & Computer Services remains the largest sector overweight as we invest in companies benefitting from technological disruption. Construction & Materials remains the second largest sector overweight due to our investments in companies benefitting from the drive to improve building energy efficiency. Non-life insurance has become the third largest sector overweight due to attractive valuations and further earnings recovery potential as economies continue to normalise. The two largest sector underweights are Real Estate and Banks, both sectors we see as commoditised.
France has become the largest country overweight followed by Italy, while Germany and Spain are the largest underweights.
Gearing decreased over the period, ending at 1.2 per cent, versus 8.8 per cent gearing at the start of the period. There are a number of interesting upcoming IPOs and we want to ensure that we have sufficient funds to participate in these.
Outlook
The global economy continues to bounce back strongly as lockdowns are eased, supported by accommodative fiscal and monetary policies. However, due to this rapid growth, supply chains have been placed under extreme pressure which has resulted in component shortages and increasing input costs. In this context, we focus on high-quality companies that have pricing power, allowing them to mitigate cost inflation via price increases. We expect these pressures to alleviate over time as supply constraints are resolved and economic growth slows back to trend.
The discovery of the new Omicron Covid variant has roiled markets. It is too early to know how disruptive this new variant will be to economic activity although it does seem likely that existing vaccines are likely to provide some protection. Additionally, governments are now in a much better position to control new outbreaks given past experience. While it does appear that Covid will remain with us perhaps indefinitely, this risk should be mitigated by our continued focus on companies that have a combination of high returns on invested capital, strong cash flows, business models that are protected by economic moats and end markets that are likely to remain strong for the foreseeable future.
Francesco Conte
Edward Greaves
Investment Managers
8th December 2021
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 underperformance and strategy; market and currency; accounting, legal and regulatory; operational; cyber crime, financial, corporate governance and shareholder relations, pandemic risk and emerging risks. Information on these areas is given within the Annual Report and Financial Statements for the year ended 31st March 2021.
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, the nature of the portfolio and expenditure projections, taking into account the impact of Covid-19 on the revenue expected from underlying investments in these projections, the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. 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. The Company’s investments are in quoted securities which are readily realisable and exceed its liabilities significantly. Gearing levels and compliance with loan notes covenants are reviewed by the Board on a regular basis. The Company’s key third party suppliers, including its Manager, are not experiencing any operational difficulties to adversely affect their services to the Company. For these reasons, they consider that 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-yearly financial report has been prepared in accordance with FRS 104 ‘Interim Financial Reports’ 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 30th September 2021, as required by the UK Listing Authority Disclosure Guidance and Transparency Rules 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 Guidance 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
Marc van Gelder
Chairman, JPMorgan European Discovery Trust
8th December 2021
