MonEuroSmllCosTst - Annual Financial Report
23/06/2023 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20230623:nRSW6627Da&default-theme=true
RNS Number : 6627D Montanaro European Smaller C.TstPLC 23 June 2023
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
2023 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 2023 and the publication of its annual report and
accounts for the same period, which includes the notice of its 2023 annual
general meeting.
Highlights
For the year ended 31 March 2023
Performance
Capital Returns%((1)) 1 year 3 year 5 year 10 year MAM*((2))
Ordinary share price (18.1%)^ 56.4% 72.0% 165.0% 331.1%
Net Asset Value ('NAV') per Ordinary share** (7.6%)^ 65.6% 75.9% 183.1% 363.4%
Benchmark ** (5.5%) 50.4% 19.7% 131.4% 178.0%
Total Returns%((1)) 1 year 3 year 5 year 10 year MAM*((2))
Ordinary share price (17.6%)^ 59.2% 78.4% 193.5% 424.5%
NAV per Ordinary share** (7.1%)^ 68.7% 82.2% 212.1% 452.5%
Benchmark ** (3.2%) 58.7% 31.3% 177.1% 278.6%
Sources: Morningstar Direct, Association of Investment Companies ('AIC'),
Montanaro Asset Management ("MAM").
As at As at
31 March 31 March 12 month
2023 2022 % change
Ordinary share price 137.6p 168.0p (18.1%)
NAV per Ordinary share** 158.4p 171.5p (7.6%)
Discount to NAV((1)) (13.1%) (2.0%)
Net assets** (£'000s) 299,975 324,905 (7.7%)
Market capitalisation** (£'000s) 260,652 318,238 (18.1%)
Net gearing employed((1)) 3.3% 4.6%
Year Year
ended
ended
31 March 31 March
12 month
2023 2022
% change
Revenue return per Ordinary share 1.10p 0.96p 14.6%
Dividend per Ordinary share 0.970p 0.925p 4.9%
Ongoing charges((1)) 1.0% 1.1%
Portfolio turnover** 14% 11%
* From 5 September 2006, when MAM was appointed as Investment Manager.
** Details provided in the Glossary on pages 68 and 69 of the full annual
report and accounts.
(1) Refer to Alternative Performance Measures on pages 66 and 67 of the full
annual report and accounts.
(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).
^ Alternative Performance Measures Calculations provided on page 66 of the
full annual report and accounts.
ChairMAN's statement
For the year ended 31 March 2023
Results
The MSCI Europe (ex-UK) Small Cap Index (in Sterling terms) fell by -5.5%
during the financial year ended 31 March 2023. In comparison, the Net Asset
Value ("NAV") of your Trust fell by -7.6% to 158.4p per share. Over this
period, the share price widened from a discount to NAV of -2% to a discount of
-13.1%. As a result, the share price total return of the Trust was -17.6%. The
Board recognises that while it is not out of line with the peer group, this
change in discount is significant for shareholders: we continue to monitor it
closely.
As discussed in the interim report, inflationary pressures and subsequent
monetary tightening by central banks increased the cost of capital globally.
Such increases disproportionately affected quality growth stocks: high quality
companies underperformed low quality companies in Europe; and growth companies
underperformed "value" companies. These style shifts created headwinds for the
Trust as the Manager invests exclusively in high quality, growth companies
that were out of favour. As a result, in the first half of the year the NAV
total return of your Trust was -27.3%, versus -19.3% for the benchmark.
The second half of the year saw these headwinds fade as bond yields stabilised
and inflationary pressures began to lessen. It was therefore pleasing to see
strong returns in both absolute and relative terms during the 6-month period
to 31 March 2023: the NAV total return was 27.8%, 7.9% ahead of the benchmark.
Short term fluctuations aside, over 5 and 10 years your Trust has delivered
NAV total returns of 82.2% and 212.1%, outperforming the benchmark by 50.9%
and 35.0% respectively. Since Montanaro were appointed in September 2006 the
NAV total return has been 452.5%, 173.9% ahead of the benchmark and 2.5% ahead
of the benchmark on a per annum basis.
Earnings and Dividends
Revenue earnings per share rose to 1.10p in the period (2022: 0.96p). An
interim dividend of 0.20p per share was paid on 5 January 2023. The Board
recommends the payment of a final dividend of 0.77p per share payable on 15
September 2023 to shareholders on the register on 18 August 2023. Subject to
shareholder approval, this would bring the total dividends for the year to
0.97p per share. The overall dividend increase of 5% over last year's dividend
reflects the underlying performance of our investments and is made out of this
year's revenue reserves.
The Trust also holds substantial revenue reserves available for distribution,
which gives the Board the ability to smooth any short-term income volatility.
Moreover, the companies in the portfolio continue to have strong balance
sheets and therefore do not face the prospect of having significant levels of
cash flow diverted to cover increased interest payments.
ESG
Montanaro believe there is a clear correlation between how well a business
fares on Environmental, Social and Corporate 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 2023. Montanaro's score rose from 81.8 to 105.5 (a
strong result), demonstrating their commitment to continual improvement.
An ESG Report is included on pages 8 to 9 of the full Annual Report. It covers
the developments in Montanaro's approach and commitment to ESG as well as how
they are interacting with investee companies.
Borrowings
The Board, in discussion with the Alternative Investment Fund Manager
("AIFM"), regularly reviews the gearing strategy of the Trust and approves any
gearing facility. Gearing increases (or decreases) 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 fiscal year,
the Trust had borrowings (net of cash) of 3.3% compared to 4.6% at the
beginning of the year. The Trust currently has borrowings in the form of a
€10 million fixed rate loan and a partially drawn down €15 million
revolving credit facility, both of which are due to mature on 13 September
2023. The Board expect to replace these with new borrowings upon maturity.
Shares
The Board actively tracks the level of NAV discount for the Trust relative to
its peers over the short and medium term and how it compares with the average
discount for the whole investment trust sector. We recognise the discount is
significant at the year end and has been around this level since the shift in
market sentiment against our quality growth investment style. It is not out of
line with our peer group at this time and we have made neither share buy backs
nor share issuances in line with our stated policies which are set out in our
Annual Report on pages 27 and 28. In line with those policies, the Board will
seek to renew the Trust's share buyback and issuance authorities at the
forthcoming Annual General Meeting.
Administrator and Company Secretary
The Company has appointed, with effect from 1 July 2023, Juniper Partners
Limited as Company Secretary and Administrator, in place of Link Company
Matters Limited and Link Alternative Fund Administrators Limited respectively.
On behalf of the Board and the Manager, I would like to thank the entire team
at Link for their service and commitment to the Trust.
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 continue to explore how best to
communicate with all our shareholders irrespective of how they access us. We
are keen to find ways 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
The AGM will be held at the offices of Montanaro Asset Management Limited, 53
Threadneedle Street, London EC2R 8AR, on 7 September 2023 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
The last few years have been extraordinary. The aftershocks of Covid-19
continue to be felt across the world and indeed by the companies in the
portfolio. Fractured politics both within and between countries show,
sometimes tragically, little sign of improving. Banks on both sides of the
Atlantic have once again needed to be rescued. It should be little surprise
then that stock markets have been so volatile. The stock market indices do not
tell the full story: beneath the surface, we have witnessed some of the
biggest style and factor swings in history.
Perhaps we should take a moment to reflect. No-one at the end of 2019 could
have predicted the combination of a global pandemic, a Russian invasion of
Ukraine, soaring inflation and rising interest rates. Yet they have been major
drivers of stock markets since. Montanaro believe that, rather than attempting
such predictions, investors are best served by long-term ownership of high
quality businesses that can thrive and grow irrespective of the general
macroeconomic or political environment.
Although the pandemic has come to an end and inflation is showing signs of
easing, investors remain relatively cautious. The forward P/E of the MSCI
Europe ex-UK Small Cap Index has fallen below its long-term average and sits
at a 15% discount to LargeCap. Meanwhile, the forward P/E of your portfolio
declined by more than a third since its peak in August 2021 to the end of
March 2023. This is more than the fall in NAV over this period, highlighting
the difference we have seen between the progress of the underlying businesses
in the portfolio and their share prices.
While doubtless the world will again change in ways we cannot imagine in the
coming years, we believe that current valuations offer an attractive entry
point for long-term investors. Together with the Manager's disciplined
investment process, experienced team, and strong track record since being
appointed in 2006, this allows us to look forward to the future with
confidence.
R M CURLING
Chairman
22 June 2023
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 68 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 £1,255, whereas the same £1 invested in smaller companies
would now be worth over £8,300 - nearly 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: as the chart in the full annual report and accounts illustrates,
European "small" companies have outperformed by 4.8% p.a. Moreover, while
European LargeCaps have underperformed their US counterparts, the same is not
true for SmallCaps. Since 2000, the MSCI Europe (ex-UK) Small Cap Index has
delivered gross USD returns of 9.4% p.a. - ahead of the MSCI USA Small Cap
Index at 9.3% p.a.
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 at all. This makes it easier for those with
a high level of internal resources to identify attractive, undervalued
investment opportunities that are undiscovered by the wider investing
community. This in turn makes it possible to deliver long-term performance
over and above that of the benchmark.
Montanaro
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 38 includes 14 analysts
and 12 nationalities, which gives us the breadth of resources and diversity of
experience to conduct thorough fundamental research internally.
At 31 March 2023, we were looking after £3.7 billion of client assets. We
have been the Investment Manager for your Trust since September 2006.
Investment Philosophy and Approach
We specialise in researching and investing in quoted small companies. We have
a disciplined, two-stage investment process which is applied to all the
products we manage, including your Trust.
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 found a company that we believe is high quality, has structural
growth and is well managed from a business and ESG perspective, it must be
approved by the Investment Committee before it can be added to the Montanaro
"Approved List".
We then determine the intrinsic value of each company on the Approved List,
typically through a proprietary discounted cashflow analysis, to ensure they
will make a "good investment" ("good businesses" and "good investments" are
not always the same). Companies that are on the Approved List and which we
also believe are attractively valued are then eligible for inclusion in your
portfolio.
We have an investment team of 17, including 14 sector and ESG specialists
covering many languages. Utilising their industry knowledge and a range of
proprietary screens, they are continually searching 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 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.
Once a company has been added to the portfolio, our 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.
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 2023, the portfolio consisted of 49 companies of which the top ten
holdings represented 39%. Sector and country distribution within the
portfolio is driven by stock selection. Although weightings relative to the
market are monitored, overweight and underweight positions are held based on
where the greatest value and upside are perceived to be.
Performance Attribution
The year to 31 March 2023 saw strong performances from some of our largest
investments:
Kitron is an Electronics Manufacturing Services (EMS) business with its
headquarters in Norway. The company had an excellent year as supply chain
constraints in the electronics industry eased, allowing Kitron to deliver
orders that had built up during the pandemic.
Brunello Cucinelli is an Italian luxury goods company that is particularly
famous for its cashmere products. Its focus on "quiet luxury" and a resurgence
in luxury sales worldwide led to the company raising its financial guidance
repeatedly during the year, buoying the share price as a result.
Fortnox Fortnox provides cloud-based accounting systems to companies in
Sweden. The stock performed well on news of further price increases combined
with continued success in attracting new customers. It has now been a top
three contributor for three years in a row.
The year was not without some stock price falls as well. Our three largest
detractors are detailed below:
MIPS develops patented inserts for helmets, which protects the brain against
rotational motion in a fall. After many years of strong performance,
destocking by helmet retailers led to a weaker year for the company,
particularly in the cycling market.
QT Group is a Finnish company that provides software tools used to design and
build graphical user interfaces. The company saw a slowdown in developer
license sales as customers pushed out the timing of new projects. We grew
concerned that the competitive environment was also worsening and as a result
we sold the position.
ChemoMetec is a globally leading developer of cell counters that are used in
the development of cell therapies. The share price declined due to a slowdown
in new instrument sales as the funding environment for cell-based therapy
R&D became more restrictive. Consumable and service sales nevertheless
continued to grow.
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 2023, we exited positions in companies including
Vitrolife, the developer of media and consumables for IVF treatment, after the
company made an expensive acquisition and saw the departure of key executives.
Endor, which sells hardware used for sim racing, was sold as new competitors
entered the market. Nolato, a third-party manufacturer of plastic components,
was sold as the company grew its tobacco heat-not-burn sales to levels that we
deem to be too high to pass our ethical exclusion tests.
Technoprobe, the Italian developer of probe cards used in the testing of
semiconductors and Bachem, the Swiss peptide contract manufacturer, were
additions 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.
Our Investment Committee has for many years played an important role as
"gatekeeper" to the Approved List: no company can be added to the Approved
List or, therefore, bought, until the Investment Committee has agreed that it
meets our stringent quality and growth thresholds. This is the first stage of
our process. The second stage is valuation, where the analysts determine
whether the companies on the Approved List are currently good investments.
This year we have introduced Investment Committee oversight and approval for
this second stage too. We believe this will help to ensure consistency across
the team with respect to forecast assumptions as well as improving
communication between analysts and fund managers on this critical topic.
From a systems perspective we have made some significant developments. We
identified the need for a system to help us better manage and internally
communicate the large amounts of research that we produce. At the end of 2022
we successfully moved our entire research team from a legacy on-premise folder
based system to a cloud based system built within Microsoft Teams. This new
system has better functionality, organisation and security, as well as being
globally accessible from anywhere with an internet connection. Moreover,
having all our files in the cloud has opened up possibilities to collaborate
and cross-reference which were not available before - we are scratching the
surface of this at the moment but already developing some interesting tools as
a result. Looking ahead, we are keeping abreast of recent developments in AI
and exploring how we can best utilise these tools to improve our processes.
The systems overhaul has not been confined to the research team. Significant
IT investments mean we now have 24/7 threat monitoring and management and
continuous staff training including simulated phishing attacks, on top of a
state-of-the-art software stack, throughout the company.
Gearing
The Alternative Investment Fund Manager ("AIFM"), in consultation with the
Board, is responsible for determining the net gearing level of the Trust. The
Trust ended the fiscal year with gearing of 3.3% (31 March 2022: 4.6%).
How to invest
We have invested a great deal of time to make the Trust readily available to
all investors. We have continued to grow our presence across the UK's
investment platforms and are delighted to see a steady increase, year after
year, in the Trust's retail following. With the Board, we have appointed
Marten & Co to provide sponsored research - you can find the initiation
report published in March 2019 here:
https://www.montanaro.co.uk/mesct-quality-business/ and an update report
published in March 2022 here:
https://quoteddata.com/research/montanaro-european-smaller-companies-unfazed-by-market-turmoil-mc/
For further details about how to invest, please refer to the website:
www.montanaro.co.uk/trust/mesct
MONTANARO ASSET MANAGEMENT LIMITED
22 June 2023
Twenty Largest Holdings
as at 31 March 2023
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. Kitron
is a leading Scandinavian Electronics Manufacturing Services (EMS) company.
4. Fortnox
is Sweden's leading provider of cloud-based applications for accounting,
invoicing and payroll administration.
5. Melexis
is a leading designer of sensors, with a particular focus on automotive
applications.
6. Brunello Cucinelli
is a luxury fashion company, particularly famous for its cashmere products.
7. IMCD
is one of the world's largest speciality chemical distributors.
8. Brembo
is a global leader in the design and production of high end automotive braking
systems.
9. VZ Holding
is a Swiss independent financial consultant and wealth manager.
10. Amadeus FiRe
is a leading personnel service company in Germany, with integrated training
and further education offerings.
11. CTS Eventim
is the market leading ticketing company in Europe, providing an online
platform from which to sell tickets to a range of events such as operas and
pop concerts.
12. Sartorius Stedim
is a world leading supplier of equipment and technologies used to produce
biopharmaceuticals.
13. Bachem
is a leading manufacturer of peptides and oligonucleotides.
14. Atoss Software
develops and sells workforce management software in Europe.
15. Christian Hansen
is a leading developer of microbial solutions for the food, beverage,
nutritional, pharmaceutical and agricultural industries.
16. Tecan
develops automated instruments and solutions that are used in laboratories.
17. Viscofan
Is a global leader in production of casings for meat products.
18. 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.
19. MIPS
develops patented inserts for helmets, which protects the brain against
rotational motion.
20. Reply
is an Italian IT services company.
Holding Country 31 March 31 March 31 March 2023 % of investment portfolio 31 March 31 March 2023 Market cap £m
2023 Value 2022 Value 2023 % of net assets
£'000 £'000
NCAB Sweden 15,643 18,810 5.0 5.2 887
MTU Aero Engines Germany 14,192 12,444 4.6 4.7 10,840
Kitron Norway 14,173 7,873 4.6 4.7 560
Fortnox Sweden 12,479 14,196 4.0 4.2 3,382
Melexis Belgium 12,144 5,678 3.9 4.0 3,767
Brunello Cucinelli Italy 12,016 6,730 3.9 4.0 5,437
IMCD Netherlands 11,235 10,494 3.6 3.8 7,518
Brembo Italy 9,972 6,394 3.2 3.3 3,910
VZ Holding Switzerland 9,933 10,837 3.2 3.3 2,648
Amadeus FiRe Germany 9,758 8,224 3.2 3.3 696
CTS Eventim Germany 9,356 8,395 3.0 3.1 4,846
Sartorius Stedim France 8,674 13,205 2.8 2.9 22,802
Bachem Switzerland 8,091 - 2.6 2.7 6,066
Atoss Software Germany 8,014 9,115 2.6 2.7 1,157
Christian Hansen Denmark 7,999 5,355 2.6 2.7 8,110
Tecan Switzerland 7,948 7,584 2.6 2.6 4,497
Viscofan Spain 7,250 5,682 2.3 2.4 2,692
Belimo Holdings Switzerland 7,222 7,515 2.3 2.4 4,800
MIPS Sweden 7,142 15,030 2.3 2.4 1,069
Reply Italy 6,951 8,238 2.2 2.3 3,708
Twenty Largest Holdings 200,192 64.5 66.7
FURTHER INFORMATION
Montanaro European Smaller Companies Investment Trust PLC's annual report and
accounts for the year ended 31 March 2023 (which includes the notice of
meeting for the Company's AGM) is available at
http://www.rns-pdf.londonstockexchange.com/rns/6627D_1-2023-6-22.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/6627D_1-2023-6-22.pdf) and
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.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END ACSFTMMTMTITTAJ