Last checked at 
24 Jun 2022 07:00
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
2022 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 2022 and the publication of its annual report and accounts for the same period, which includes the notice of its 2022 annual general meeting.
Highlights
For the year ended 31 March 2022
Performance
Capital Returns%(1) | 1 year | 3 year | 5 year | 10 year | MAM* |
Ordinary share price | 4.3% | 88.8% | 141.7% | 314.8% | 426.3% |
Net Asset Value ('NAV') per Ordinary share** | 7.9% | 69.7% | 110.9% | 263.9% | 401.8% |
Benchmark (Composite)(2)** | 2.2% | 35.1% | 39.2% | 180.7% | 194.1% |
Total Returns%(1) | 1 year | 3 year | 5 year | 10 year | MAM* |
Ordinary share price | 4.8% | 92.6% | 151.6% | 363.1% | 536.1% |
NAV per Ordinary share** | 8.4% | 73.1% | 119.0% | 301.7% | 494.6% |
Benchmark (Composite)(2)** | 3.8% | 42.1% | 51.7% | 236.1% | 291.2% |
Sources: Morningstar Direct, Association of Investment Companies ('AIC'), MAM.
As at 31 March 2022
As at 31 March 2022 | As at 31 March 2021 |
12 month % change | |
Ordinary share price | 168.0p | 161.0p^ | 4.3 |
NAV per Ordinary share** | 171.5p | 158.9p^ | 7.9 |
(Discount)/Premium to NAV(1) | (2.0%) | 1.3% | |
Gross assets** (£'000s) | 333,339 | 284,560 | 17.1 |
Net assets** (£'000s) | 324,905 | 276,065 | 17.7 |
Market capitalisation** (£'000s) | 318,238 | 279,709 | 13.8 |
Net gearing employed(1) | 4.6% | 2.4% | 4.3 |
Yearended 31 March 2022 | Yearended 31 March 2021 |
12 month % change | |
Revenue return per Ordinary share | 0.96p | 0.31p^ | 209.7 |
Dividend per Ordinary share | 0.925p | 0.925p^ | 0.0 |
Ongoing charges(1) | 1.1% | 1.2% | |
Portfolio turnover** | 11% | 22% |
* From 5 September 2006, when Montanaro Asset Management Limited ('MAM') was appointed as Investment Manager.
** Details provided in the Glossary on pages 68 and 69.
^ 31 March 2021 restated to reflect the subsequent 10 for 1 share split.
(1) Refer to Alternative Performance Measures on pages 66 and 67.
(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
Results
Please note that throughout this report, previous year numbers have been adjusted to account for the share split (detailed below) for comparative purposes.
As vaccines for COVID-19 rolled out across the world, some of the aftershocks of the pandemic became evident in the form of supply chain stresses and inflationary pressures. These were exacerbated by the appalling Russian invasion of Ukraine. The MSCI Europe (ex-UK) Small Cap Index (in Sterling terms) nevertheless rose by 2.2% during the financial year ended 31 March 2022. In comparison, the Net Asset Value ("NAV") of your Trust rose by 7.9% to 171.5p per share. Over this period, the share price moved from a premium to NAV of over 1% to a discount of 2%. As a result, the share price total return of the Trust was 4.8%.
These headline numbers might appear unremarkable but they disguise significant volatility during the year. The first nine months of the fiscal year were exceptionally strong with the NAV rising by 34.7%, outperforming the benchmark by 23.4%, as high quality, growth companies were particularly in favour with investors. In the final three months of the fiscal year, these trends sharply reversed as inflationary pressures caused bond yields to rise, stock markets to fall and high quality and growth companies to be shunned. Indeed, globally the dramatic rotation into Value companies in January was the second largest monthly shift in 50 years. Nonetheless, we continue to believe that companies capable of generating high returns on capital employed - and that can continue to grow while maintaining or expanding those returns - will be the ones that fundamentally increase most in value over the long term. It is these types of companies that are at the heart of our investment philosophy. Despite the setback in the last quarter of the Company's financial year, MESCT has delivered, over 3 and 5 years respectively to 31 March 2022 a NAV total return of 20.1% and 17.0% p.a. outperforming the benchmark by 7.6% and 8.3% p.a. This makes it the best performing European investment trust over these time periods.
Earnings and Dividends
Revenue earnings per share rose significantly in the period to 0.96p (2021: 0.31p) as many companies returned to paying dividends on the back of strong earnings and better visibility than in the previous year, which coincided with the onset of the pandemic.
We remain confident about the long-term prospects of your investee companies. The Trust holds substantial revenue reserves which are available for distribution to smooth any short-term income volatility. An interim dividend of 0.2p per share was paid on 4 January 2022. The Board recommends the payment of a final dividend of 0.725p per share payable on 16 September 2022 to shareholders on the register on 12 August 2022 (this is unchanged from the prior year). Subject to shareholder approval, this would bring the total dividends for the year to 0.925p per share.
ESG
Montanaro believes there is a 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 the 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 - a certification Montanaro have held since 2019. 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.
An expanded ESG Report is included on pages 8 to 9 of the Annual Report.
Share Split
Following shareholder approval at the last AGM, shareholders received 10 New Ordinary Shares in exchange for each Existing Ordinary Share held at 5pm on the Record Date of 13 September 2021. The New Ordinary Shares were admitted to trading on the premium segment of the Main Market of the London Stock Exchange on 14 September 2021. Following the completion of the share split, as at 14 September 2021, the Trust had 179,682,600 New Ordinary Shares in issue.
Subsequent to the share split, the Trust made an application to the FCA and the London Stock Exchange to increase its block listing facility commensurate with the share split. Application was made for 11,533,260 Ordinary Shares of 5 pence each (the "Shares") to be admitted to the Official List and to trading on the premium segment of the Main Market of the London Stock Exchange. The admission was effective 16 September 2021.
Borrowings
The Board, in discussion with the Manager, regularly reviews the gearing strategy of the Trust and approves the arrangement of 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 4.6% compared to 2.4% at the beginning of the year and nil at the end of December 2021. The Trust currently has borrowings in the form of a €10 million fixed rate loan and a €15 million revolving credit facility, both of which are due to mature on 13 September 2023.
Issue of Shares
During the year, the Trust issued 750,000 shares from treasury (adjusted for the share split) at a weighted average premium of 1.5%. A further 14,945,000 new shares have been issued at a weighted average premium of 2%.
The Board believes that issuing new shares in the Trust is in the interests of both new and existing shareholders as it improves the liquidity of the shares and provides a larger base over which fixed costs can be spread. The value of inflows to the Company from the issue of shares in the year was £31 million (excluding costs).
The Board's stated treasury shares policy is included in the Annual Report and Accounts. The Board will seek to renew the Trust's share buyback and share issuance authorities at the forthcoming Annual General Meeting.
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. As a consequence we continue to explore how best to communicate with our shareholders irrespective of how they access us and are keen to find ways to encourage an open dialogue and keep all shareholders up to date with key developments. We have upgraded our website - www.montanaro.co.uk/trust/mesct - and it 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.
Annual General Meeting
Following the removal of all COVID related restrictions it is the Company's intention to resume AGM meetings in person. Accordingly, the AGM will be held at the offices of Montanaro Asset Management Limited, 53 Threadneedle Street, London EC2R 8AR, on 8 September 2022 at 11.00 a.m. 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 economic backdrop remains extraordinarily volatile. In April 2020, WTI Crude Oil Futures briefly traded for a negative price but have exceeded $100 just two years later; Euro area Consumer Price Inflation, which had been negative at the end of 2020, reached 7.5% in March 2022; and the US 10 year bond yield, well below 1% for most of 2020, was well above 2% by March this year and is expected to rise further. For the first time in over a decade, significant monetary tightening by the world's most important Central Banks looks likely.
The underlying causes of these shifts were as unprecedented as they were unpredictable. But as stated last year, the Montanaro team avoids trying to forecast macroeconomic developments, preferring instead to focus on the fundamentals of your individual investee companies. For example, high quality companies with pricing power are best placed to offset inflationary pressures.
While we cannot predict what inflation, GDP or interest rates will be a year from now, we can say with some confidence that if we invest in companies that can deliver structural growth and high returns on capital employed at reasonable valuations, then investors should enjoy attractive long-term returns. Previous periods of significant underperformance from such quality growth companies have presented good buying opportunities for those with a long-term investment horizon. It is notable that the gearing of the Trust has risen from the very low levels seen in December 2021, reflecting what Montanaro believe is a higher number of attractive investment opportunities following some of the share price falls we have seen.
The disciplined investment process, experienced team, and strong absolute and relative returns since Montanaro were appointed in 2006 enable us to look forward to the future with confidence.
R M CURLING
Chairman
23 June 2022
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 67 years, this has amounted to an average of 3.6% per annum ("the SmallCap Effect"). £1 invested in UK large companies in 1954 would now be worth £1,210, whereas the same £1 invested in smaller companies would now be worth over £10,139 - almost nine 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 above illustrates, European "small" companies have outperformed by over 5.8% per annum.
Moreover, while European LargeCaps have underperformed their US counterparts, the same is not true in SmallCap. Since 2000, the MSCI Europe (ex-UK) Small Cap Index has delivered gross USD returns of just over 10% per annum - ahead of the MSCI USA Small Cap 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 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 36 includes ten nationalities, which gives us the breadth of resources to conduct thorough in-house research.
At 31 March 2022, we were looking after more than £4 billion of client assets.
Investment Philosophy and Approach
We specialise in researching and investing in quoted small companies and 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 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 "Approved List".
In the second stage, we determine the intrinsic value of each company on the Approved List 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 believe are attractively valued are considered for inclusion in your portfolio.
We have an in-house team of eleven analysts who are sector specialists. Utilising their industry knowledge and a range of proprietary screens, they are continually searching for new ideas. With around 4,000 companies to choose from, 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. In normal circumstances, we visit our investee companies on a regular basis, although this was not possible during the pandemic. We are pleased to say these visits have started to resume, with our first site visit on the Continent since the pandemic taking place in December. We are now combining site visits, face to face and virtual meetings.
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 2022, the portfolio consisted of 55 companies of which the top ten holdings represented 36%. 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 2022 saw some strong performances from our largest investments.
NCAB is a global market leader in the supply of Printed Circuit Boards (PCBs). In 2021, the company delivered high organic revenue growth; made some attractive bolt-on acquisitions; saw its order intake (in USD) almost double; and significantly expanded its operating margins. The stock also began being covered by a second sell-side institution during the period.
Fortnox provides cloud-based accounting systems to companies in Sweden. The stock was our largest contributor in the previous year and continued to grow revenues and earnings at strong double-digit rates in 2021. In March 2022, the company announced price increases for their subscription-based products, news that was received well by the market.
MIPS sells a patented insert for helmets which protects the brain against rotational motion. Like Fortnox (above), this company also featured in our top three contributors last year. The company continued to persuade more manufacturers to include MIPS in their helmets, while existing customers expanded the inclusion of MIPS into a wider range of models. Perhaps most notably, the expansion into safety helmets in the commercial market has got off to a strong start. Operating profit for the company almost doubled in 2021.
The year was not without some stock price falls as well. Our three largest detractors are detailed below.
Orpea is a leading provider of nursing homes, post-acute and rehabilitation facilities and psychiatric care clinics. The company was affected by allegations of mistreatment of residents in a book called "The Gravediggers", which led to the ousting of the CEO and negative press in France. With concerns over the quality of the business as a result we sold the position.
Sinch is a Swedish developer of cloud communications and mobile customer engagement offerings. During the year the company came under pressure as telecom providers raised their tariffs. Sinch was unable to completely pass this rising cost on to its own customers, implying commoditisation of the core product. Furthermore, the company has made multiple large acquisitions which appear to be more difficult to integrate than they expected. As a result, the company's level of debt increased significantly. Sensing a deterioration in the core quality of the business, we therefore exited our position.
Gruppo MutuiOnline owns and operates a leading range of online comparison and intermediation brands in Italy and provides Business Process Outsourcing services for financial services in the country. While Orpea and Sinch were examples of mercifully small portfolio positions that performed poorly, Gruppo MutuiOnline was a larger position which saw profit taking after a very strong year last year. The business continued to grow in 2021 and we continue to hold the investment.
Portfolio Changes
We try to keep portfolio turnover as low as possible. Nevertheless, we typically make a few changes each year as we identify new ideas that we consider 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 2022, we exited positions in companies including Elekta, the developer of radiation therapy equipment and software, as we grew concerned about an even more intense competitive threat from its main peer Varian, which has been acquired by Siemens Healthineers. Recordati, which sells pharmaceuticals, was sold as we believe there are more compelling investments elsewhere in the European healthcare landscape. Sinch, as explained above, was sold on fundamental concerns about its business.
New additions to the portfolio included hGears, which develops components for gearboxes used on e-bikes and electric vehicles and Sectra, which develops Picture Archiving and Communication Systems (PACS) for medical use.
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 4.6% (31 March 2021: 2.4%).
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. Together 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 23 June 2022
Top 20 Holdings
Twenty Largest Holdings as at 31 March 2022
1. NCAB
is a global full-service supplier of printed circuit boards (PCBs).
2. MIPS
develops patented inserts for helmets, which protects the brain against rotational motion.
3. Fortnox
is Sweden's leading provider of cloud-based applications for accounting, invoicing and payroll administration.
4. Sartorius Stedim
is a world leading supplier of equipment and technologies used to produce biopharmaceuticals.
5. MTU Aero Engines
manufactures and maintains aircraft engines and components.
6. VZ Holding
is a Swiss independent financial consultant and wealth manager.
7. IMCD
is one of the world's largest speciality chemical distributors.
8. Thule
is a global market leader of niche products and solutions for outdoor activities, including equipment such as bike racks and roof boxes for vehicles.
9. Atoss Software
develops and sells workforce management software in Europe.
10. 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.
11. Reply
is an Italian IT services company.
12. Amadeus FiRe
is a leading personnel service company in Germany, with integrated training and further education offerings.
13. Esker
offers a cloud-based platform that allows companies to digitise and automate their accounts payable and receivable processes.
14. Kitron
is a leading Scandinavian Electronic Manufacturing Services (EMS) company.
15. Tecan
develops automated instruments and solutions that are used in laboratories.
16. 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.
17. QT Group
is a Finnish company that provides software tools used to design and build graphical user interfaces.
18. Brunello Cucinelli
is a luxury fashion company, particularly famous for its cashmere products.
19. ChemoMetec
is a globally leading developer of cell counters that are used in the development of cell therapies.
20. Brembo
is a global leader in the design and production of high end automotive braking systems.
Holding | Country | 31 March 2022 Value £'000 | 31 March 2021 Value £'000 | 31 March 2022 % of investment portfolio | 31 March 2022 % of net assets | 31 March 2022 Market cap £m |
NCAB | Sweden | 18,810 | 10,039 | 5.5 | 5.8 | 1,005 |
MIPS | Sweden | 15,030 | 10,451 | 4.4 | 4.6 | 1,874 |
Fortnox | Sweden | 14,196 | 12,818 | 4.2 | 4.4 | 2,546 |
Sartorius Stedim | France | 13,205 | 11,963 | 3.9 | 4.1 | 28,982 |
MTU Aero Engines | Germany | 12,444 | 6,861 | 3.7 | 3.8 | 9,500 |
VZ Holding | Switzerland | 10,837 | 6,759 | 3.2 | 3.3 | 2,890 |
IMCD | Netherlands | 10,494 | 7,068 | 3.1 | 3.2 | 7,476 |
Thule | Sweden | 9,170 | 9,438 | 2.7 | 2.8 | 3,196 |
Atoss Software | Germany | 9,115 | 8,180 | 2.7 | 2.8 | 1,208 |
CTS Eventim | Germany | 8,395 | 6,342 | 2.5 | 2.6 | 5,037 |
Reply | Italy | 8,238 | 5,516 | 2.4 | 2.5 | 4,742 |
Amadeus FiRe | Germany | 8,224 | 5,830 | 2.4 | 2.5 | 697 |
Esker | France | 7,919 | 9,335 | 2.3 | 2.5 | 847 |
Kitron | Norway | 7,873 | 5,581 | 2.3 | 2.4 | 345 |
Tecan | Switzerland | 7,584 | 6,452 | 2.2 | 2.3 | 3,846 |
Belimo Holdings | Switzerland | 7,515 | 5,436 | 2.2 | 2.3 | 4,997 |
QT Group | Finland | 6,964 | 3,817 | 2.1 | 2.2 | 2,698 |
Brunello Cucinelli | Italy | 6,730 | 4,680 | 2.0 | 2.1 | 3,051 |
ChemoMetec | Denmark | 6,568 | 4,795 | 1.9 | 2.0 | 1,633 |
Brembo | Italy | 6,394 | 4,524 | 1.9 | 2.0 | 2,847 |
Twenty Largest Holdings | 195,705 | 57.6 | 60.2 |
FURTHER INFORMATION
Montanaro European Smaller Companies Investment Trust PLC's annual report and accounts for the year ended 31 March 2022 (which includes the notice of meeting for the Company's AGM) is available at http://www.rns-pdf.londonstockexchange.com/rns/0428Q_1-2022-6-23.pdf and will be available today on 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 in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.