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Montanaro European Smaller Companies TrustAnnouncement

21/06/2024 07:30

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RNS Number : 3678T  Montanaro European Smaller C.TstPLC  21 June 2024

Montanaro European Smaller Companies Trust plc

(Incorporated in Scotland)

Company Number:
SC074677

ISIN: GB00BM8H3X05

LEI: 213800CWSC5B8BG3RS21

('Montanaro European Smaller Companies Trust', or the 'Company')

 

 

MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

 

2024 ANNUAL RESULTS ANNOUNCEMENT

 

AND

 

NOTICE OF ANNUAL GENERAL MEETING

 

Montanaro European Smaller Companies Trust plc announces its annual results
for the year ended 31 March 2024 and the publication of its annual report and
accounts for the same period, which includes the notice of its 2024 annual
general meeting.

 

Highlights

Performance

For the year ended 31 March 2024

 Total return%                             1 year   3 year  5 year  10 year  MAM*
 Net Asset Value ("NAV") per share((1))  4.9%       5.7%    68.6%   203.4%   478.5%
 Share Price((1))                        4.3%       (9.8%)  65.7%   190.4%   447.4%
 Benchmark **((2))                       5.9%       6.4%    45.6%   124.7%   301.1%

 

 Capital return%     1 year  3 year   5 year  10 year  MAM*
 NAV per share((1))  4.2%    3.7%     63.0%   177.7%   382.0%
 Share Price((1))    3.6%    (11.5%)  60.1%   163.9%   346.4%
 Benchmark **((2))   3.4%    (0.1%)   32.1%   86.7%    187.5%

Sources: Morningstar Direct, Association of Investment Companies ('AIC'),
Montanaro Asset Management ("MAM").

 

 As at 31 March                     2024     2023

                                                      % change
 Ordinary share price               142.5p   137.6p   3.6
 NAV per Ordinary share**           165.1p   158.4p   4.2
 Discount to NAV((1))               (13.7%)  (13.1%)
 Net assets** (£'000s)              312,720  299,975  4.2
 Market capitalisation** (£'000s)   269,934  260,652  3.6
 Net gearing employed((1))          2.9%     3.3%

 

 Year ended 31 March                2024    2023

                                                    % change
 Revenue return per Ordinary share  1.42p   1.10p   29.1
 Dividend per Ordinary share((1))   1.125p  0.970p  16.0
 Ongoing charges((1))               1.0%    1.0%
 Portfolio turnover((1))            16%     14%

 

*   From 5 September 2006, when MAM was appointed as Investment Manager.

** Details provided in the Glossary on pages 65 and 66 of the Annual Report.

((1)   ) Refer to Alternative Performance Measures on page 63 of the Annual
Report.

((2))  From 5 September 2006, the benchmark was the MSCI Europe SmallCap
Index. The benchmark was changed on 1 June 2009 to the MSCI Europe ex-UK
SmallCap Index (in Sterling terms).

 

 

Chairman's Statement

For the year ended 31 March 2024

Results

The Net Asset Value ("NAV") (with dividends reinvested) rose by 4.9% to 165.1p
per share during the financial year ended 31 March 2024. In comparison, the
benchmark (the MSCI Europe (ex-UK) Small Cap Index) rose by 5.9% (in Sterling
terms). The share price (with dividends reinvested) gained 4.3% as the
discount to NAV widened from 13.1% to 13.7%.

The first half of the period was characterised by an environment where
'growth' companies underperformed 'value' and high‑quality companies
underperformed low quality. As Montanaro Asset Management ("Montanaro", "MAM"
or the "Manager") seeks to invest exclusively in high quality, growing
companies, these style shifts acted as a headwind. These headwinds subsided
around the end of October 2023 which led to better performance in the second
half of the year to 31 March 2024.

Whilst recognising that recent short-term performance has been challenging,
Montanaro have a long-term investment approach. Over 5 and 10 years, your
Trust has delivered NAV total returns of 68.6% and 203.4%, outperforming the
benchmark by 23.0% and 78.7% respectively. The Trust's performance compares
favourably with the European Smaller Companies peer group, with the NAV total
return being second over five years and first over ten years. Since Montanaro
were appointed in September 2006, the NAV total return has been 478%, 177%
ahead of the benchmark and 2.1% per annum ahead of the benchmark.

Earnings and Dividends

Revenue earnings per share rose to 1.42p in the period (2023: 1.10p).

An interim dividend of 0.225p per share was paid on 26 January 2024. The
Board recommends the payment of a final dividend of 0.9p per share payable on
16 September 2024 to shareholders on the register on 16 August 2024. Subject
to shareholder approval, this would bring the total dividends for the year to
1.125p per share, an increase of 16%.

The Trust holds substantial revenue reserves available for distribution, which
gives the Board the ability to smooth any short-term income volatility.

Environmental, Social and Governance ("ESG")

Montanaro believe there is a clear correlation between how well a business
fares on Environmental, Social and Governance grounds and the value it creates
for its shareholders. This is why ESG considerations have formed an integral
part of their assessment of a company's 'quality' and have been fully
integrated into their investment process for many years.

The depth of Montanaro's commitment is perhaps best exemplified by the fact
that they are one of the few UK asset managers to be a certified B
Corporation.

Certified B Corporations are businesses that meet the highest standards of
verified social and environmental performance, public transparency and legal
accountability to balance profit and purpose. It is a certification Montanaro
have held since 2019 and which was renewed for a further three years in 2022.
Montanaro's score rose from 81.8 to 105.5 (classified as 'outstanding'), which
demonstrates their commitment to continual improvement. Montanaro's commitment
to ESG has been recognised: they have won two awards: one from Ethical Finance
for "Best Small & Mid-Cap Sustainable Investment Boutique 2024 - UK" ; and
another from Investors' Chronicle and the Financial Times for "ESG Company of
the Year 2023".

An ESG Report is included on pages 8 and 9 of the Annual Report. It covers the
developments in Montanaro's approach and commitment to ESG as well as how they
are interacting with investee companies.

Board Composition

The Board is actively engaged in an independent recruitment process for a
fourth non-executive Director. We expect the Board to be comprised of four
members going forward following this process.

Borrowings

The Board, regularly reviews the gearing strategy of the Trust and approves
any gearing facility. Gearing amplifies the returns from underlying profits or
losses generated by the investment portfolio.

The Board has set a maximum limit on borrowing (net of cash) of 30% of
shareholders' funds at the time of borrowing. At the end of the financial
year, the Trust had borrowings (net of cash) of 2.9% compared to 3.3% at the
beginning of the year.

During the year, the Trust's borrowings in the form of a €10 million fixed
rate loan and a €15 million revolving credit facility matured. The Board has
replaced these facilities with a new €10 million fixed rate loan and a new
€15 million revolving credit facility, both of which are due to mature on
13 September 2026.

Authority to Issue and Buyback Shares

Our stated policies on share buybacks and share issuances are set out on page
27 of the Annual Report. The Board will seek to renew the Trust's share
buyback and issuance authorities at the forthcoming Annual General Meeting
(see page 69 of the Annual Report).

The Board actively monitors the level of NAV discount for the Trust relative
to its peers and how it compares with the average discount for the investment
trust sector as a whole.

The discount was high by historical standards at the year-end, but in line
with the peer group. As a result, no share buybacks were implemented during
the period.

Communication with Shareholders

Over the past few years, the composition of our shareholder base has changed
significantly with an increasing number of individual investors coming onto
the register via investment platforms. We are keen to encourage an open
dialogue to keep all shareholders up to date with key developments. Our
website - www.montanaro.co.uk/trust/mesct - is continually updated with
factsheets, reports, presentations, webinar recordings and commentaries as
well as more details about the Manager, investment philosophy and process. We
encourage shareholders to visit regularly and welcome any feedback and
suggestions.

Annual General Meeting ("AGM")

The AGM will be held at the offices of Montanaro Asset Management Limited, 53
Threadneedle Street, London EC2R 8AR on 5 September 2024 at 11.00 am.
Shareholders are encouraged to attend the meeting where there will be an
opportunity to meet and ask questions of the Board and the Manager.

Outlook

As reported in our Interim Results, European SmallCap valuation indicators
remain at levels significantly below their long-term average. Since the peak
in August 2020, the forward P/E of SmallCaps in Continental Europe has fallen
from over 23x to around 13x at the end of March 2024. This de-rating means
they sit at a discount to their long-term history, as shown in the chart on
page 3 of the Annual Report. Moreover, European SmallCap is valued at a
discount to the wider market, which is unusual. Indeed, the discount is at a
level last seen in the depths of the Global Financial Crisis.

The two charts as shown on page 3 and page 4 of the Annual Report, suggest
that European SmallCap is attractive on both an absolute and relative basis.
Over the long term, we believe that earnings are the most important driver of
share prices. In 2023, the average company in your portfolio grew its earnings
by double digits and delivered high returns on capital. This, combined with
attractive absolute and relative valuations for the asset class, means that we
look forward to the future with confidence.

R M Curling

Chairman

20 June 2024

Manager's Report

The Attractions of Quoted European Smaller Companies ("SmallCap")

The key attraction of investing in smaller companies is their long-term record
of delivering higher returns to investors than large companies. In the UK,
over the last 69 years, this has amounted to an average of 3.1% per annum (the
"SmallCap Effect"). £1 invested in UK large companies on 1 January 1955 would
now be worth £1,357 whereas the same £1 invested in smaller companies would
now be worth £9,171 - almost seven times more.

There is less comprehensive data on Europe - it only goes back to 2000.
However, this suggests that the SmallCap Effect is even more pronounced on the
Continent, European 'small' companies have outperformed by 4.2% p.a.
Remarkably, European SmallCaps have returned just shy of 10% p.a. since the
turn of the century, thereby outperforming the vast majority of SmallCap
markets around the world including the UK, Japan, Australia, the BRICs
(Brazil, Russia, India and China) and even the USA (based on the Russell 2000
index).

The market for European smaller companies is inefficient. While some large
companies are analysed by more than 50 brokers, many smaller companies in
Europe have little or no coverage. We believe that this makes it easier for
those with a high level of internal resources to identify attractive,
undervalued and overlooked investment opportunities. This in turn makes it
possible to deliver long-term performance over and above that of the
benchmark.

Montanaro Asset Management

Montanaro was established in 1991. We have one of the largest and most
experienced specialist teams in the UK dedicated exclusively to researching
and investing in quoted small companies. Our team of 39 includes 12
nationalities and 18 Analysts and Portfolio Managers, which gives us the
breadth of resources required to conduct thorough in-house research.

At 31 March 2024, we were looking after around £3.3 billion of client assets.
We have been the Manager of your Trust since September 2006.

Investment Philosophy and Approach

We specialise in researching and investing in quoted smaller companies. We
have a disciplined, two-stage investment process.

In the first stage, we identify 'good businesses' within our investable
universe. We look for high quality companies in markets that are growing. They
must be profitable; have good and experienced management; deliver sustainably
high returns on capital employed; enjoy high and ideally growing profit
margins reflecting pricing power and a strong market position; and provide
goods and services that are in demand and likely to remain so. We prefer
companies that can deliver self-funded organic growth and remain focused on
their core areas of expertise, rather than businesses that spend a lot of time
on acquisitions.

Conversely, we avoid those with stretched balance sheets; poor free cash flow
generation; incomprehensible or heavily adjusted accounts; unproven or
unreliable management; or that face structurally challenged business models
with stiff competition.

A company must also pass our stringent quality and ESG checklists. ESG has
been integrated into our disciplined investment process for almost two
decades.

When we have identified a company that we believe is high quality, has
structural growth and is well managed from a business and ESG perspective, it
is reviewed by our Investment Committee before it can proceed to the next
stage. Companies that do not possess all these attributes are rejected.

Companies that pass the first stage then undergo a valuation assessment. We
determine their intrinsic value, typically through a proprietary discounted
cash flow analysis, to ensure they will make a 'good investment' ('good
businesses' and 'good investments' are not always the same). The Investment
Committee scrutinises the forecasts and assumptions made for each business and
discusses the risk profile with the Analyst for a company before adding it to
our Approved List.

Companies that are on the Approved List and which we also believe are
attractively valued are then eligible for inclusion in your portfolio.

Our Investment Team use their industry knowledge and a range of proprietary
screens to continually search for new ideas. With thousands of quoted
companies from which to choose, we are spoiled for choice.

We believe that a deep understanding of a company's business model and the way
it is managed are essential. We visit our investee companies on a regular
basis. We examine management's past track record in detail as we seek to
understand their goals and aspirations. In smaller companies, the decisions
and motivation of the entrepreneurial management can make or break a company,
which is why meeting them is so important. We look closely at the board
structure; the level of insider ownership; and examine remuneration and
corporate governance policies carefully.

Once a company has been added to the portfolio, our Investments Team conducts
ongoing analysis. We will sell a holding if we believe that the company's
underlying quality is deteriorating or if there has been a fundamental change
to the investment case or management. We will get things wrong and make
mistakes, but we try to learn from them.

In summary, we invest in well managed, high quality, growing companies bought
at sensible valuations. We keep turnover and transaction costs low and follow
our companies closely over many years. We would rather pay more for a higher
quality, more predictable company that can be valued with greater certainty.
Finally, we align our interests with our investors by investing meaningful
amounts of our own money alongside yours. We are significant shareholders in
the Trust.

The Portfolio

At 31 March 2024, the portfolio consisted of 50 companies of which the top ten
holdings represented 37%. Sector and country distributions within the
portfolio are driven by stock selection. Although weightings relative to the
market are monitored, overweight and underweight positions are based on where
the greatest value and upside are perceived to be.

Performance Attribution

The largest positive contributors over the period were:

ATOSS Software is a developer of workforce management software, primarily
within the DACH region. The company had an excellent year, with strong demand
for its products driving continued double-digit revenue and earnings growth.

VZ Holding is a Swiss independent financial consultant and wealth manager. The
company had another strong year of underlying growth while higher interest
rates on deposits provided an additional boost to profits.

CTS Eventim is the market leading ticketing company in Europe. A few years
ago, this was one of the largest detractors as Covid-19 lockdowns meant
concert ticket sales disappeared almost entirely. As long-term shareholders,
we did not sell our position as we expected concert attendance to rebound once
restrictions ended. It is pleasing to see this has happened with the company
now posting record results.

Inevitably the year was not without some stock price declines as well. Our
largest detractors were:

Melexis develops sensors that are mainly used in cars. The shares fell during
the year as investors fretted about the potential impact of destocking among
its customers.

Medistim is the global market leader for transit time flow measurement devices
used in coronary bypass surgeries. The company struggled in 2023 as
constrained hospital budgets and a shift to a direct sales model in China held
back revenue growth.

Amadeus FiRe is a German provider of staffing and training services. The stock
fell as investors were concerned about the state of the German economy and
consequently the employment market, despite the company increasing its
revenues and profits. We believe the long term outlook for these businesses
continues to be positive and we remain shareholders.

Portfolio Changes

We try to keep portfolio turnover as low as possible. However, we typically
make a few changes each year as we identify new investment ideas that we
expect will provide stronger long-term returns than existing holdings.
Companies that become too large, are acquired or where the investment case
deteriorates are also replaced with new ideas from our Approved List.

In the year to 31 March 2024, we exited positions in companies including
Photocure, which sells pharmaceuticals used to help in the detection of
bladder cancer, as the reimbursement landscape for its procedures
deteriorated. Meanwhile, SimCorp, the developer of investment management
software, received a takeover offer from Deutsche Boerse at a significant
premium to the pre-announcement share price.

Borregaard, the supplier of specialised biochemicals manufactured from
renewable sources, and BioGaia, which develops and sells probiotic products,
were added to the portfolio.

Continual Improvement

Each year we take time to look back at our successes and mistakes to assess
how our systems and processes can be improved.

The IT investments that we wrote about last year continue to bear fruit. One
example of this is we are now able to seamlessly record, transcribe and
summarise our meetings using AI tools. The output is not perfect but it is
rapidly improving and already good enough to materially reduce the amount of
time our team spend typing up notes - a necessary but time consuming task.
Every minute we save is a minute that can be spent thinking and doing more
research.

Montanaro has continued to invest in the wider business as well. For example,
our HR function has been improved with the addition of an external consultant;
a new cloud-based HR system for employees; and a benchmarking exercise around
policies and benefits. We have an extremely low staff turnover both at group
level and within the Investments Team. We believe that this is in part due to
our employees having the right support and working environment, something that
we will continue to develop. We focus on getting the work/life balance right.

MONTANARO ASSET MANAGEMENT LIMITED

20 June 2024

 

 

Twenty Largest Holdings

as at 31 March 2024

 

1.     NCAB

is a global full-service supplier of printed circuit boards (PCBs).

2.     MTU Aero Engines

manufactures and maintains aircraft engines and components.

 

3.     ATOSS Software

develops and sells workforce management software in Europe.

 

4.     CTS Eventim

is the market leading ticketing company in Europe, providing an online
platform selling tickets to a range of events such as operas and pop concerts.

 

5.     Fortnox

        is Sweden's leading provider of cloud-based applications for
accounting, invoicing and payroll administration.

 

6.     IMCD

is one of the world's largest speciality chemical distributors.

7.         Esker

offers a cloud-based platform that allows companies to digitise and automate
their accounts payable and receivable processes.

8.     Kitron

is a leading Scandinavian Electronics Manufacturing Services (EMS) company.

9.         VZ Holding

is a Swiss independent financial consultant and wealth manager.

10.   Brunello Cucinelli

is a luxury fashion company, particularly famous for its cashmere products.

 

11.   Tecan

develops automated instruments and solutions that are used in laboratories.

 

12.      Reply

is an IT services company.

13.      Brembo

is a global leader in the design and production of high end automotive braking
systems.

14.      Bachem

is a leading manufacturer of peptides and oligonucleotides.

 

15.      Melexis

is a leading designer of sensors, with a particular focus on automotive
applications.

 

16.   Amadeus FiRe

is a leading personnel service company in Germany, with integrated training
and further education offerings.

17.   Sartorius Stedim

is a world leading supplier of equipment and technologies used to produce
biopharmaceuticals.

18.   Rational

is the global market leader in the field of advanced cooking systems for
commercial kitchens.

19.      Belimo Holding

develops and manufactures electrical motorised control devices (actuators) for
air and water. These are predominantly used in large buildings with
sophisticated Heating, Ventilation and Air Conditioning (HVAC) systems.

20.   Thule Group

is a global market leader of niche products and solutions for outdoor
activities, including equipment such as bike racks and roof boxes for
vehicles.

 

                                       31 March  31 March  31 March  31 March  31 March

                                       2024      2023      2024      2023      2024
                                       Value     Value     % of net  % of net  Market Cap
 Holding                  Country      £'000     £'000     assets    assets    £m
 NCAB                     Sweden       14,350    15,643    4.6       5.2       976
 MTU Aero Engines         Germany      14,121    14,192    4.5       4.7       10,858
 ATOSS Software           Germany      14,058    8,014     4.5       2.7       1,863
 CTS Eventim              Germany      13,075    9,356     4.2       3.1       6,785
 Fortnox                  Sweden       12,493    12,479    4.0       4.2       3,047
 IMCD                     Netherlands  11,870    11,235    3.8       3.7       7,958
 Esker                    France       10,344    6,918     3.3       2.3       959
 Kitron                   Norway       9,964     14,173    3.2       4.7       494
 VZ Holding               Switzerland  9,663     9,933     3.1       3.3       3,865
 Brunello Cucinelli       Italy        9,518     12,016    3.0       4.0       6,164
 Tecan                    Switzerland  8,996     7,948     2.9       2.6       4,182
 Reply                    Italy        8,976     6,951     2.9       2.3       4,197
 Brembo                   Italy        8,628     9,972     2.7       3.3       3,389
 Bachem                   Switzerland  8,339     8,091     2.7       2.7       5,686
 Melexis                  Belgium      8,338     12,144    2.7       4.0       2,591
 Amadeus FiRe             Germany      8,182     9,758     2.6       3.3       556
 Sartorius Stedim         France       7,907     8,674     2.5       2.9       20,826
 Rational                 Germany      7,558     5,427     2.4       1.8       7,812
 Belimo Holding           Switzerland  7,186     7,222     2.3       2.4       4,778
 Thule Group              Sweden       7,177     5,970     2.2       2.0       2,529
 Twenty Largest Holdings               200,743             64.2      65.2

 

FURTHER INFORMATION

 

Montanaro European Smaller Companies Trust plc's annual report and accounts
for the year ended 31 March 2024 (which includes the notice of meeting for the
Company's AGM) will be available today on
https://montanaro.co.uk/trust/montanaro-european-smaller-companies-trust/
(https://montanaro.co.uk/trust/montanaro-european-smaller-companies-trust/)

 

It has also been submitted in full unedited text to the Financial Conduct
Authority's National Storage Mechanism and is available for inspection at
data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) in accordance with
DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and
Transparency Rules.

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