KOF earned a negative return of 0.9% in May, while the GPR Dutch Small Cap index was up by 0.1%. In the first five months of this year, KOF’s Net Asset Value (NAV) decreased by 3.6% versus a downturn of 1.8% for the benchmark.

Although the benchmark was more or less flat across the month as a whole, May was a month of high volatility. After six trading days the GPR index had dropped by as much as 7.4%, only to rally strongly in the second half of the month. A number of (US) companies, primarily in the tech and consumer sectors, adjusted their forecasts for 2022 downwards and in a few cases sent shockwaves through the global financial markets. Furthermore, it is becoming increasingly apparent that inflation will remain high for longer than previously thought. A fresh round of European Union sanctions against Russia may exert further upward pressure on energy prices. In addition, historically-low unemployment rates in a large number of (European) countries are pushing up wages. The much longer-than-expected COVID-19 lockdown in Shanghai is also causing the shortage of components to persist for longer than anticipated, prolonging the imbalance between supply and demand. It therefore comes as no surprise that rumblings about the ECB (first) raising interest rates in July in an attempt to curb inflation grew ever louder over the course of the month. Our focus on businesses that occupy a robust position in the value chain remains unchanged.

The largest increases to positions in the KOF portfolio in May were to BESI, Signify and ASR. The biggest sales were of Ordina, PostNL and Heijmans. No new positions were accrued and no positions sold in their entirety during the month. Other positions were adjusted based on changes to the model portfolio driven by valuations and upward price potential.

PostNL was forced to adjust its forecasts for 2022 downwards after noting relatively poor results over the first quarter, in which incidentally the structurally shrinking Mail division caused a positive surprise, while the (growing) Parcels division in fact performed worse than had been expected. In underlying terms, we are seeing not just the expected shift from online to offline shopping in the wake of all the COVID-19-related lockdown restrictions being lifted, but also caution among consumers in light of the geopolitical trends (the war in Ukraine, rampant inflation). Moreover, PostNL is experiencing a headwind from cost-push inflation (wages and fuel). Despite the disappointing results, there is also a positive impact for shareholders as the company was able to buy more shares under the share buyback programme that was already underway. Even if you take into account that the positive contribution from COVID-19-related parcel volumes was in retrospect underestimated by management and that the company’s visibility is lower than previously supposed, the valuation of this company continues to be low.

Alfen, which among other things manufactures distribution sub-stations for the Dutch power grid and charging stations for electric vehicles, reported extremely robust results over the first quarter. Despite the ongoing challenges relating to the availability of components, the company recorded revenue growth of no less than 77%, with revenue from charging stations rocketing by an impressive 185%. The strong start to the year and the continuing positive (medium-term) outlook for the individual sub-markets led the company to raise its target revenue for 2022, whereby it now assumes revenue growth of 54%, in the middle of the bandwidth, compared to its previous forecast of 40%. Alfen will play a key role in increasing the capacity of the Dutch power grid and in the expected sharp growth in electric vehicles in the Netherlands and abroad. The positive medium-term trends in the individual markets offer the prospect of persistently robust revenue and earnings growth and in doing so justify the equity’s current valuation.

At more than 5% organic revenue growth and an operational margin in excess of 9%, the results reported by Arcadis over the first quarter lived up to the financial markets’ expectations. Given that Arcadis specialises in themes that will become ever more relevant over the next few years, such as urbanisation, climate change and water management, the outlook for this company’s growth is particularly positive. This is underlined by the fact that its order book has grown further. Not that long ago the company was plagued by a problematic Brazilian business unit and the large amount of working capital required for its operations in the Middle East and elsewhere, resulting in a high level of debt. Nowadays, however, it possesses a solid balance sheet and the question is how the company will spend the surplus financial resources in the future. In our opinion, a (further) improvement in employee productivity and greater insight into capital allocation will be important factors in reducing the equity’s current discount versus its competitors.