KOF earned a positive return of 6.0% in October, while the GPR Dutch Small Cap index climbed by 7.4%. In the first ten months of this year, KOF’s Net Asset Value (NAV) decreased by 18.0% versus a downturn of 11.2% for the benchmark.

October was the best month of the year so far for both KOF and the benchmark. Further confirmation of slowing economic growth and the decline in energy and commodity prices overshadowed concerns about the persistently high rate of inflation somewhat. At the same time, the unusually mild autumn weather in large parts of Europe along with full gas reserves caused the gas price to drop sharply, marginally easing the pressure on corporate profits and consumer budgets. Finally, the slowdown in global growth is leading to a decrease in logistics costs. The improved availability of components is enabling companies to bring their historically high order books back down to normal levels. As a result, businesses realised sound utilisation rates and combined with lower energy and transport costs this shored up corporate results reasonably well in the third quarter. Nevertheless, forecasts for the coming quarters in particular are now being adjusted downwards due to a lack of new orders as existing stocks in the sales channel need to be used up first. Suppliers to the semiconductor industry on the one hand face a drop in demand in the short term because of restrictions imposed in China, while on the other companies will relocate in order to meet the continued strong demand in the medium and long term. At this time of uncertainty, our focus continues to be on companies that occupy a robust position in the value chain, enjoy sound balance sheets and have a strong management team, enabling them to concentrate fully on further consolidating their market position.

The largest increases to the KOF portfolio in October were to Sligro, BESI and Basic-Fit. The biggest sales were of ASR, Arcadis and Telenet. Other positions were adjusted based on changes to the model portfolio driven by valuations and upward price potential.

ASR is one of KOF’s top-5 positions and at a total return of +16% over the past 10 months has this year succeeded in escaping the negative sentiment on the global equity markets. The insurer is profiting not only from the higher interest rates on the capital market but also from its strong track record deriving from its 100% focus on the Netherlands and rigorously managed operations. In this context, an acquisition opportunity with a double-digit return on the invested capital more than justifies the positive price reaction to its planned acquisition of Aegon’s Dutch activities. The expected cost synergies of €185 million are a conservative estimate and we believe there is a high probability of this amount being raised in the long term, as in previous acquisitions. The snap issue of 10% new shares and placement of a 30% interest in Aegon mean that ASR’s balance sheet remains solid and smaller transactions (e.g. in brokers) continue to be an option. We see it as positive that CEO Jos Baeten will stay until 2026 and in doing so oversee the entire integration process. It is rare for us to make (almost) no critical comments about a transaction, but ASR appears to have succeeded in this once again.

Basic-Fit so far seems to be the loser in the showdown with the financial markets on presentation of the trading update over the third quarter. The downward adjustments to targets relating to the forecast results, expected growth in the number of new members and number of new clubs to be opened in 2022 came not only relatively late in the year but also after reassuring remarks from management on market trends and the impact of (cost-push) inflation on presentation of the interim results. Although Basic-Fit is viewed as a well-oiled machine in terms of conquering Europe with its value for money fitness proposition, its engine has seemed to stall recently, with an impact on both earnings forecasts and the valuation multiple leading to exaggerated price results. The fact that about 50 new clubs will only open in early 2023 rather than at the end of 2022 only serves to fan the flames for short sellers and supposedly points to an excessively tight cash position at the company. As of the end of the quarter, Basic-Fit held a substantial cash position of €174 million and forecasts a positive operational cashflow from the second half of 2023. This seems to prove that the market’s concerns about its cash position are unfounded. We are in favour of the company raising its membership fees for (cost-push) inflation so that it can revert to earning the original returns on its mature clubs more quickly. As Basic-Fit will still be the cheapest option even after raising its fees, we think this will only have a minor impact on the number of members. It is well known that financial markets value predictability and consistent policies and postponing club openings is not aligned with these qualities.

Signify reported relatively sound results over the third quarter but its lower targets over 2022 are an implicit admission that it expects this trend to be bucked in the fourth quarter. The negative repercussions of the lockdowns in China, the absence of revenue in the horticultural segment due to the high energy prices and the sharp drop in consumer confidence are the main reasons for caution in the short term. In the long term, however, we view Signify as one of the winners in the energy transition, with the time for recouping the cost of switching from traditional lighting to LED in fact being reduced substantially. At a return on Signify’s free cashflow of in excess of 15% over the next three years, the financial markets seem to be classing short-term challenges as structural, which is too negative in our opinion.