TRG.L Regulatory News (TRG)

Legal Entity Identifier: 213800N1B1HCQG2W4V90

TR EUROPEAN GROWTH TRUST PLC

Financial results for the year ended 30 June 2019

This announcement contains regulated information

Investment Objective

The Company seeks capital growth by investing in smaller and medium sized companies which are quoted, domiciled, listed or have operations in Europe.

Highlights

·; Net Asset Value total return1 of -7.3% compared to a total return from the benchmark of 0.6%

·; Share price total return2 of -10.4%

·; Total dividend3 of 22.00p for the year, up 15.8% on the prior year

·; The discount4 widened to - 14.2% (2018: -11.0%)

Financial highlights

1. Net Asset Value (NAV) total return (including dividends reinvested)

2. Share price total return using mid-market price

3. Includes the interim dividend paid on 12 April 2019 and final dividend recommended to shareholders for approval

4. Share price discount to the NAV as at 30 June 2019

5. Net asset value per ordinary share with income reinvested

6. Euromoney Smaller Companies Index (ex UK) total return and expressed in Sterling

7. The sector is the AIC European Smaller Companies sector

8. Average share price for the AIC European Smaller Companies sector

9. Calculated using the methodology prescribed by the Association of Investment Companies and excluding the performance fee

Sources: Morningstar for the AIC, Janus Henderson, Datastream

Chairman's Statement

Backdrop

European equities continued their rollercoaster ride in the second six months of the Company's financial year amid trade tensions and Brexit uncertainty. The last quarter of 2018 with its rising US central bank interest rates and an end to the European Central Bank's ("ECB") quantitative easing, saw the benchmark lose 14.2% of NAV total return, with our portfolio's performance not far behind.

Fortunes reversed in the first three months of 2019, with the index regaining some of its losses and producing an NAV total return of 7.4%. The Company performed slightly better than the benchmark with the NAV total return marginally higher at 7.9% by the end of March. However, rising trade tensions, uncertainty caused by a delayed Brexit, Italy's standoff with the European Union and signs of widespread economic weakness across the Eurozone led to a European equity sell off in May, as indicated clearly in the chart below. In the first six months of 2019, the open-ended European smaller companies sector experienced net outflows totalling £266m, continuing the trend seen in the last nine months of 2018, where £523m left the sector.

The first six months of 2019 saw the benchmark, and the Company's performance in NAV total return terms, fall back into negative territory, only to be buoyed once more going into June on speculation of fresh rounds of monetary stimulus to keep the region's slowing economies afloat along with news of the nomination of Christine Lagarde as the next ECB president. It is expected that she will continue the loose monetary policy of the current incumbent, Mario Draghi.

Performance

Against this unsettled backdrop, the Company performed poorly, producing a net asset value per share total return of negative 7.3% for the year ended 30 June 2019, compared to the benchmark of 0.6%, largely the result of the Company's exposure to micro-cap companies. The share price total return was a negative 10.4%. However, the five year performance figures remained notably ahead of the benchmark with a NAV total return of 73.3%, 7.2% ahead of the benchmark.

Dividend

The income generated by the portfolio remained robust over the year despite the ongoing volatile market conditions and the Board is pleased to recommend a final dividend of 14.50p per ordinary share. Subject to shareholder approval at the upcoming annual general meeting, the dividend will be paid on 29 November 2019 to shareholders on the register on 24 October 2019.

The recommendation for the final dividend represents a 3.6% increase over the prior year and, combined with the interim dividend of 7.50p per ordinary share, brings the total dividend for the year to 22.00p per ordinary share (2018: 19.00p), an increase of 15.8% over last year.

Changes to the Board

As it is my intention to retire at the 2019 Annual General Meeting, and Andrew Martin Smith had indicated that he wishes to retire by the time of the 2020 Annual General Meeting, the Board has progressed with implementing its succession plans during the course of the year.

We were pleased to announce the appointment of Ann Grevelius on 23 September 2019. Ann brings with her almost twenty years of investment management experience having been Chief Investment Officer and Global Head of Investment Strategy at SEB. She will continue to strengthen the presence of European-based directors on the Board which enables us to stay in touch with sentiment on the Continent.

On 2 October 2019, we further announced the appointment of Daniel (Dan) Burgess to the Board. Dan will succeed Christopher Casey as Chairman of the Audit Committee when Christopher becomes Chairman of the Board following my resignation at the conclusion of the 2019 Annual General Meeting. The decision to appoint Christopher as my successor was taken to ensure a strong level of continuity on the Board which is especially important for the Company given the entirely non-executive nature of the Board. 

Dan has extensive audit and accounting experience having been a partner at KPMG for twenty-three years. He initially led the statutory audits of a number of large public limited companies and public interest entities before specialising in due diligence and regulatory services on mergers and acquisitions and capital market transactions. His appointment will become effective from 25 November 2019.

Continuation vote

The 2019 Annual General Meeting is due to be held at 12.30 pm on 25 November 2019 at 201 Bishopsgate, London EC2M 3AE. I encourage all shareholders to attend or, if they are unable to do so, to vote by completing their Form of Proxy which is enclosed with this document. All of the resolutions being put to shareholders are set out in the accompanying Notice of Meeting.

In keeping with the provisions of the Articles of Association, shareholders will be invited to vote on the continuation of the Company at the annual general meeting. We appreciate that performance over the last 12 months has been lack-lustre, but I wish to highlight the long term performance of the Company over the five and ten year horizons. These are the periods for which the structure of the Company is best suited for delivering the capital growth set out in the investment objective. The Fund Manager, Ollie Beckett, will provide a presentation on the Company's performance and be available to shareholders for questions.

The Board recommend that shareholders vote in favour of all resolutions, including the continuation of the Company, as they intend to do in respect of their personal holdings.

Outlook

The Company is operating in an environment of low economic growth globally, compounded by escalating Sino-American trade wars. This has clearly had a negative impact, given that Europe is geared to global growth. Within Europe, a lack of political clarity on the continent and Brexit uncertainty in the UK has undermined confidence in the region. This means that Europe and smaller companies are currently very much out of favour, which has been reflected in the widening of the discount to NAV.

However, despite the uncertainty, a combination of supportive monetary policy and, in some countries, supportive fiscal policy means that a global recession is avoidable. As an asset class, European smaller companies has often seen periods of unpopularity, but in the long run, historical performance would suggest a rewarding asset class for the patient investor.

We recognise that the last year has not been a fruitful one for the Company's investors. We are hopeful that our managers, with a vast investment universe to explore, can navigate these uncertain markets and preserve the Company's unique, true small-cap offering, while delivering healthy returns for our investors.

Audley Twiston-Davies

Chairman

FUND MANAGER'S REPORT

Introduction

The financial year ending June 2019 was a relatively poor one for the Company, with underperformance driven by both 'top down' and 'bottom up' decisions. Markets were volatile throughout the review period. President Trump escalated his rhetoric and actions on trade towards Europe and China, causing further uncertainty. The Italian government tussled with the European Union over budget deficits, while Brexit uncertainty acted as a drag on the European economy and the ratings of many quoted companies. The global economy lost momentum as central banks began to raise interest rates and commence quantitative tightening measures.

We were too optimistic in our hopes for a resolution to the global trade war, underestimating the impact of US President Trump's tweets on risk appetite, and misjudged the speed at which global central banks would tighten policy. The protracted market fall we saw towards the end of 2018 was bad news for the Company, which paid for its exposure to the smaller end of the market cap scale, where stocks can often be relatively illiquid or economically sensitive. The subsequent market rally in the first half of 2019 did not deliver enough for the Company to recover the losses.

Overall in the financial year ending June 2019 the portfolio lost 7.3% versus a rise of 0.6% in the benchmark index.

The Portfolio

We continue to focus the portfolio on a blend of structural growth, mis-priced cash flows and self-help investment cases, with keen valuation awareness. This is not a value portfolio - value has been out of vogue since the global financial crisis, after all. Also, we are simplistically looking for relatively small companies that will grow. However, we are of the belief that what we pay for the cash flows of a company is crucial and will ultimately be what drives market prices over the longer term.

We have invested in what we see as attractively valued companies, such as Italian loan management servicer Dovalue (formerly Dobank). This was a business that traded like an Italian bank, despite not running principal risk on the non-performing loans that it helps collect. Elsewhere, we invested in French recreational vehicle Manufacturer Trigano, which we believe is well positioned to benefit from the new Euro 6d engine standards which came into force this summer. We also invested in structural growth names such as Norwegian liquefied natural gas ("LNG") ship owner FLEX LNG, which has a modern fleet exposed to the growing LNG market. Similar growth investments included Swedish video game developer THQ Nordic and Varta, the German manufacturer of miniaturised lithium-ion batteries.

Performance attribution

Poor performance during the review period was largely due to a combination of misjudged investments in specific stocks and being too leveraged into weaker markets that characterised the first halfof the financial year. At a stock level, the largest detractor was German lifestyle e-commerce business Westwing. This was an initial public offering ("IPO") that was poorly handled by the listing banks, coupled with - in hindsight - a steep valuation that was undermined by substantial earnings downgrades caused by weakness in its international business. We retain a holding in the company as the core German business alone more than justifies the current market cap.

Finnish modular construction business Lehto also disappointed, after management deviated from the core strategy to take on a series of renovation projects generating substantial losses. We developed concerns about the balance sheet and exited the position at a loss. Dutch oil services company Fugro has been a disappointment having not yet seen the market recovery we anticipated.

We saw a positive contribution to performance from French LNG container system engineering company Gaztransport et Technigaz ("GTT"). LNG is structurally growing as a fuel and GTT is the dominant player in designing the liners for the associated carrier vessels. A position in German listed technology company Dialog Semiconductor also added value. We reinvested in the company after the market became overly despondent about the business after Apple, its largest client, announced plans to take power chip development in-house. French producer of silicon-on-insulator semiconductor wafers S.O.I.T.E.C. was another strong performer. Its products, which offer big improvements in semiconductor power efficiency, began to gain serious traction.

Geographical and sector distribution

Our investment process is fundamentally one of bottom-up stock picking, rather than allocating capital to specific sectors or geographies, although we keep a keen eye on the overall portfolio structure in order to avoid risky concentrations. We do not use the benchmark as a guide to structure and are content to run the portfolio with substantial divergence from the benchmark.

At a geographical level, the Company remains overweight in Germany, Finland and the Netherlands, underweight Spain and Austria, where we have struggled to find significant pockets of value. In Germany, we initiated a position in specialty pharmaceutical services company Medios, which is experiencing double digit sales growth. We also invested in Ströer, a leading provider of out-of-home advertising in Germany, and Befesa, the global leader in the collection and recycling of steel dust, salt slags and aluminium residues. We exited a position in 3D laser manufacturer SLM Solutions, which has struggled to turn its technological advantages into sales. We also exited restaurant group Vapiano as it struggled to cope with the pace of growth and cost inflation.

In Finland we bought a position in consumer packaging products manufacturer Huhtamaki, as the company seems poised to reap the benefits of a substantial investment phase. In the Netherlands we invested in Icelandic headquartered (but Dutch listed) food processing technology company Marel, which manufactures equipment used in meat handling and processing.

At a sector level, we are overweight industrials, consumer discretionary and technology. In industrials, we added names such as Swiss sealing solutions provider Daetwyler and German engine manufacturer Deutz. In consumer discretionary, we liked the look of MIPS, which designs and manufactures brain protection system for helmets. MIPS's clients purchase its designs to integrate into cycling, skiing and horse riding helmets, and they will soon be used in motorcycle, army and construction helmets. In technology, we added names such as Data Respons, which provides research and development engineering services and technology to help customers solve complex problems such as car automation.

The Company remains underweight real estate where there is a scarcity of attractively valued opportunities, and consumer staples, where valuations look steep for pedestrian growth.

Other purchases

Other substantial purchases include Swedish listed Karnov, which provides critical legal information for the law profession in Sweden and Denmark. We bought shares in Spanish dermatology pharmaceuticals producer, Almirall, Norwegian salmon producer Salmar and Irish health care services provider UDG.

Other disposals

We sold the holdings in Swedish rack-and-pinion lift manufacturer Alimak, Norwegian sports retailer XXL and Finnish weather equipment producer Vaisala. We also closed the position in Brainlab after 17 years, all but completing the disposal of unquoted holdings that the Company had purchased under the previous manager. We retain a very small position in 21 Centrale Partners.

Currency

The Company is denominated in Sterling, while investing in largely euro-denominated assets. We do not hedge this currency exposure.

Outlook

The global economy appears to be slowing as a consequence of trade wars, arguably too rapid monetary tightening and general political uncertainty. Europe is out of favour with asset allocators and the European equities market has seen heavy outflows this year. The transition to a new EU Commission, new leadership at the European Central Bank and Brexit all need to be navigated in the coming months. We do not expect global politics to become more harmonious or less noisy, but are of the view that economics matters more than politics.

Our current view is that the risks associated with an overly rapid tightening of policy have been recognised by central banks, resulting in a change of tack that should allow global money supply to grow sufficiently, warding off imminent recession. A settlement to the trade dispute between the US and China looks more remote. Most participants now accept this will be a generational battle between two hegemonies. Hopefully, fiscal stimulus in the US and China will help stabilise the economy. A fiscal stimulus from Europe is also possible.

In this environment, valuations for European smaller companies do not look stretched, although investor demand has pushed multiples for reliable "bond proxies", "low volatility" equities and favoured momentum names to very high levels. The Company is not a value portfolio, but we are acutely aware of valuation. "Value" stocks have rarely looked so cheap. We continue to hunt out the mispriced opportunities in our market and see attractive potential in those stocks where we have invested capital.

The portfolio offers both healthy earnings growth and strong income. There are ample investment opportunities in our market, with good businesses that trade at attractive prices. In the medium term we believe that European smaller companies will continue to deliver superior investment returns, as they have in the past.

Ollie Beckett and Rory Stokes

Sector exposure at 30 June 2019 (% of portfolio excluding cash)

Geographic exposure at 30 June 2019 (% of portfolio excluding cash)

Principal risks

The Board, with the assistance of Janus Henderson, has carried out a robust assessment of the principal risks and uncertainties facing the Company that would threaten the business model, future performance, solvency and liquidity. This includes consideration of the market uncertainty arising from the United Kingdom's negotiations to leave the European Union ("Brexit") and the possible implications for Sterling, and therefore the value of the Company's portfolio. A matrix of these risks has been drawn up, along with the steps taken to mitigate them. The principal risks are set out below and, in our view, have remained unchanged throughout the year:

·; Investment activity and performance

An inappropriate investment strategy (for example, in terms of asset allocation or the level of gearing) may result in underperformance against the Company's benchmark index and the companies in its peer group.

The Board monitors investment performance at each Board meeting and regularly reviews the extent of its borrowings.

·; Portfolio and market price

Although the Company invests almost entirely in securities that are listed on recognised markets, share prices may move rapidly. The companies in which investments are made may operate unsuccessfully or fail entirely. Investments in European stock markets may be impacted by political events. A fall in the market value of the Company's portfolio would have an adverse effect on shareholders' funds.

The Fund Manager is committed to maintaining a diversified portfolio to mitigate against this risk. The Board regularly reviews the portfolio and performance at each meeting.

·; Tax and regulatory

A breach of s.1158/9 could lead to a loss of investment trust status, resulting in capital gains realised within the portfolio being subject to corporation tax. A breach of the Listing Rules could result in suspension of the Company's shares, while a breach of the Act could lead to criminal proceedings, or financial or reputational damage.

The Manager provides investment, company secretarial, administration and accounting services through qualified professionals. The Board receives internal control reports produced by the Manager on a quarterly basis, which confirm regulatory compliance.

·; Operational

Disruption to, or failure of, the Manager's accounting, dealing or payment systems or the custodian's records could prevent the accurate reporting and monitoring of the Company's financial position. The Company is exposed to the operational risk that one or more of its service providers may not provide the required level of service.

The Board monitors the services provided by its third-party service providers and receives reports on the key elements in place to provide effective internal control.

Viability Statement

The Board considers the Company's viability over three years. We believe this is a reasonable period reflecting the longer-term investment horizon of the Company, as well as that of its investors, but acknowledges the inherent shorter term uncertainties in equity markets.

The Company's viability is considered as part of the continuing programme of risk monitoring. In carrying out this assessment, we take account of the likely impact of the principal risks facing the Company materialising in severe, but plausible, scenarios. In particular, we considered the investment strategy and gearing applied by the Manager in the market conditions prevailing at the time of the assessment, the nature of the Company's borrowing facilities and how a breach of any covenants could impact on the Company's net asset value and share price, as well as the liquidity of the portfolio. We review the mitigating controls currently in place and consider if these continue to be appropriate.

Following conclusion of the assessment, we determined that the Company's assets are liquid, its commitments limited and that, as we intend that the Company continue operating as an investment trust, the business model remains appropriate. No significant changes to the current principal risks and the mitigating controls in place are anticipated, and we do not envisage any material change in the investment objective and policy. We are not aware of any events that would prevent the Company from continuing to operate in its current capacity.

The continuation of the Company is due to be considered by shareholders at the upcoming annual general meeting. The Board supports the continuation of the Company and expects that it will continue to exist for the foreseeable future as it offers investors a unique exposure to European small and medium sized companies. However, if such a vote were not passed the directors would follow the provisions in the Articles of Association relating to the winding

up of the Company's assets.

Based on this assessment, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next three year period from the date of this report.

Related party transactions

The Company's transactions with related parties in the year were with the directors, the subsidiary and the Manager, Janus Henderson. There have been no material transactions between the Company and its directors during the year. The only amounts paid to them were in respect of expenses and remuneration for which there were no outstanding amounts payable at the year end. The Company has paid expenses on behalf of the subsidiary as set out in the Annual Report.

In relation to the provision of services by the Manager, other than fees payable by the Company in the ordinary course of business, which included marketing services, there have been no material transactions affecting the financial position of the Company during the year under review.

Directors' responsibility STATEMENTS

Each of the Directors confirms that, to the best of his or her knowledge:

·; the Group financial statements prepared in accordance with IFRSs adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit and loss of the issuer and the undertakings included in the consolidation taken as a whole; and

·; the Strategic Report includes a fair review of the development and performance of the business and the position of the Group and Parent Company, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Christopher Casey

Director

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Equity

Parent Company Statement of Changes in Equity

Consolidated and Parent Company Balance Sheets

Consolidated and Parent Company Cash Flow Statements

1. In accordance with IAS7.31 cash inflow from dividends was £13,447,000 (2018: £12,611,000) and cash inflow from interest was £1,000 (2018: nil).

Notes to the Financial Statements

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.