The following texts refer to the first quarter of 2018.

Performance
KOP’s Net Asset Value (NAV) decreased from €215.78 to €212.52 per participation in the first quarter of 2018. This brings the return over the first quarter to -1.5%. The dividend is being raised from €3.00 to €3.60 and is expected to be paid out in May 2018. The dividend on the holding companies will be paid several weeks after this.

Trading
As of 3 April 2018, KOP’s trading price was €213.52, based on the current NAV including a premium of 0.5% caused by net inflow into the fund. The number of issued KOP shares increased by 2.6% and we were once again able to welcome new participants, including in the new Elbe holding company. We continue to see interest from prospective and existing clients. Partly as a result of the inflow on 3 April, KOP has increased in size to about €715 million. For the next trading date of 2 July 2018, an instruction deadline of 4pm on 31 May 2018 applies for orders in KOP (via Euronext) and a few days before that for the holding companies (via the Kempen transfer agent).

European and Dutch small-cap indices posted a performance of -1% to -3% over the first quarter of 2018, whereby Dutch small caps performed fractionally better than the European average. The capricious nature of the first quarter can be attributed to a mix of positive and more worrying trends. Businesses are profiting from the excellent economic trends and generally sound corporate results. However, the Euro increased in value against the US Dollar, which adversely affects the competitive position of international European businesses. The markets occasionally reacted in a highly volatile manner to (expectations of) higher interest rates, fuelled by robust economic indicators. Inflation looks set to rise slightly, partly driven by higher commodity prices. Volatility is sometimes exacerbated by ‘low levels of market liquidity’ and by higher valuations of listed companies. If companies fail to live up to what can be high expectations, individual equity prices may react sharply. On the other hand, good performance is being sincerely rewarded. In the wake of the announced tax cuts, the US government is now introducing measures to reduce its trade deficit. The specific higher import tariffs to be levied on a selection of goods and countries are an invitation for other countries to implement countermeasures. This will certainly have a negative impact on global trade. The path monetary stimulation takes, with anticipated higher interest rates in the US and some policy tightening by the ECB, could also affect the markets. Businesses could well profit further from the high economic growth, with employees also selectively benefiting from higher wages and shareholders receiving higher dividends. As expected, there were a large number of stock market flotations, although the market climate was less favourable and investors generally critical, especially with respect to valuations. Boosted by very large cash positions and borrowing capacity, listed companies continue to focus on acquisitions, but here too the high prices of some companies are ensuring that buyers also set to work selectively.

Within the KOP portfolio, for the long term we depend on specific trends at the companies in which we participate. Most companies in the portfolio are displaying sound corporate growth, partly aided by a sound financial structure. Well-organised companies with the correct positioning can profit considerably from the robust economic growth. The additional revenue growth that can be achieved will ideally trigger an acceleration in earnings growth and provide capacity for investment for the longer term. In a few cases, we have been positively surprised by the revenue and earnings growth at ‘our’ companies, even though some corporate results have not lived up to expectations. We remain alert to the stronger Euro, which could adversely affect the competitive positions of several participations. For the time being, the major currencies continue to move within a restricted bandwidth. We also expect some of ‘our’ companies to consolidate via further acquisitions and in doing so create additional shareholder value.

The managers again actively adjusted the portfolio in the first quarter and two participations were completed, while some existing interests (under construction) were also sold in part or full. One such former participation that was sold in its entirety was Sweco. A few participations have been expanded. These adjustments are expected to contribute positively to a balanced KOP portfolio composition and price potential.

Portfolio developments as of 31 March 2018

During the first quarter we completed the accrual of two new participations: in the UK’s Avon Rubber and Germany’s Süss MicroTec. This brings the number of participations to 18, excluding some participations still under construction. Having accrued a large number of new participations in the past few months, it may be a while before we add the next participation. We do hold a few new attractive participations still under construction, but price setting and liquidity remain important points for attention.

The UK’s Avon Rubber is a leading manufacturer of rubber-based products for military, law enforcement and fire services as well as farmers. The company manufactures gas masks, breathing apparatus and heat-detection cameras for international end users in the military, law enforcement, fire service and industry. Avon is the only supplier of the M50 mask issued to all US military personnel. It also supplies components for milking machines to farmers and enjoys a market share in Europe in excess of 50% and over 60% in North America. In order to make its range of products even more complete, the company also sells several Nedap products to its customers. KOP has held a 5% interest in Avon Rubber since February 2018. We have been acquainted with Avon Rubber for some time now and after talking to its new management team we started to accrue a position in the second half of 2017. We recently visited the factory in Melksham (UK) and attended the Capital Markets Day in London. Our participation in Avon Rubber represents over 3% of the portfolio.

Germany’s Süss MicroTec develops and manufactures machines for the global semiconductor industry. It operates in what are known as the front-end and back-end segments of the market, with a particular focus on the Photomask, Lithography and Substrate Bonder niches. Its client base comprises all the major chip manufacturers with a special focus on the Far East. Süss has manufacturing facilities in Germany and the US and reported revenue of €175 million and an operating result of €14 million in 2017. We believe that the company’s earnings and free cashflow will improve substantially over the next few years. As a long-term shareholder in BE Semiconductors, we have monitored the global semiconductor equipment industry for years, including the smaller player Süss MicroTec. On the return of its former CEO, we initiated a fundamental analysis of the company and gradually built up a position during 2017. Our participation in Süss represents 2% of the portfolio.

In the first quarter, BESI again displayed a strong price gain of 18%, but was outstripped by Italy’s El.En as its equity price rose by 25%. We are also very satisfied with the price movements of ForFarmers (+9%) and Sligro (+14%).

During our recent visit to Italy, we spoke to the CEO and co-major shareholder of El.En. The trends at this highly innovative company are impressive. In 2017, it achieved 50% growth in sales of industrial lasers, with very high sales figures in China. El.En anticipates further growth in excess of 10% this year. The company is preparing to launch new innovations in lasers for medical applications, in particular for fat removal and the treatment of skin conditions. Sales of Mona Lisa medical lasers are recovering in the US and the outlook is positive. The medical division is also expected to enjoy double-figure growth in 2018.

BESI achieved record earnings over 2017, with a sharp increase in earnings and market share, partly thanks to very strong operational growth in China. Its dividend was raised significantly to €4.64 per share, bringing the dividend yield to about 5.5%. The current semi-cycle will remain positive for a longer period due to the multitude of new technological applications, such as driverless vehicles, cloud solutions and the internet of things. Those BESI machines based on less advanced technology (for manufacturing cheaper chips) are consequently also still selling well. With a view to maintaining equilibrium in the portfolio, we have reduced our position in BESI slightly in favour of new participations.

ForFarmers has had an excellent year and seen higher earnings in the Netherlands and Germany. Efficiency clearly needs improving in the UK, although the company is in a good starting position for success in the longer term. Moreover, ForFarmers has acquired an initial position in the fast-growing Polish market. This chiefly involves chicken feed and provides a foundation for further expansion.

We are positive about the excellent sale of supermarkets by Sligro. The additional proceeds will mainly benefit investors via the company’s (extra) dividend. We discussed the clear opportunities for growth for the remaining food service company with the CEO and CFO. This growth is being boosted by a major and positive transaction with Heineken. Sligro is to be its exclusive beer supplier and will therefore gain new food industry clients that will also be able to purchase other products from Sligro.

The first quarter of 2018 also saw a few equities noting significant negative performances. The prices of La Doria (-25%), Coats (-13%) and Kendrion (-17%) all declined by more than average, partly due to these equities having closed 2017 at record highs.

During recent talks with La Doria, we discussed its investment programme, including the expansion of logistics in the UK (due to growth of the private label market) and production capacity in Italy. These investments support the company’s opportunities for growth in the long term. The equity price may be being squeezed slightly by local price competition for the basic product, but sales in other countries are doing well.

With respect to the lower price for Coats, we can only point to higher procurement costs (related to oil prices) and lower interest rates, which have a negative accounting effect on the pension deficit. Operational improvements are going according to plan at Coats, aided by the simplification and digitisation of the company and by attractive acquisitions. These serve to push up earnings forecasts for 2018 slightly.

Kendrion’s equity price responded negatively to mediocre figures published over the final quarter of 2017. Supplies to the auto industry were particularly disappointing, temporarily as a result of customers operating at less than full capacity and more structurally as sales of diesel vehicles came under pressure. The impact of fewer diesel engines and the ambition to supply more applications are a recurring theme in our regular discussions with management.

Interroll reported double-figure revenue growth, but this sharp growth was at the expense of its profit margin. The company has set up an additional R&D programme and invested heavily in capacity, especially outside Europe. It prefers to focus on large-scale projects in logistics, airports or the food industry, which will continue to be growth markets in the next few years. Profit margin growth has lagged behind and requires attention, although it will improve as a result of a number of measures in 2018 and 2019, partly aided by the robust revenue growth. In spite of a relatively low cashflow yield, Interroll’s positioning fits well in the KOP portfolio.

Last year, we expanded our capital interest at Nedap to 7.7% of the company. Sound revenue growth in the second half of 2017 caused its equity price to rise by 15% this quarter. However, the company needs to be able to operate at a higher structural earnings level and render better account for this in its reports to shareholders. We believe that the company ought to declare its financial ambitions publicly. We have discussed these issues with the management and supervisory board and intend to repeat our wishes at the general meeting of shareholders. Over the next few years, correct operational steering could well create substantial shareholder value at Nedap.

In anticipation of publication of its annual figures, we have further reduced our position in Beter Bed. The remaining interest accounts for only 1.1% of the total portfolio. We will talk to the new CEO sometime in the next few weeks and again enquire about a recovery plan for Germany at the general meeting of shareholders.

SAF Holland reported several acquisitions that further consolidate its range of products. At the start of 2018, this manufacturer was able to report a sharp increase in (expected) sales in China of e.g. axles for trucks and trailers. Sales continue to be strong in Europe and the US, and a recovery looks imminent in Brazil.

We received annual reports from all our companies in the past quarter. These provide us with the most complete picture and information for each company. Most shareholder meetings will be held in the second quarter, with the exception of Sligro, which is holding its annual general meeting of shareholders in March. Prompt financial reporting is also an indication of smooth financial processes at a company. We are preparing for these shareholder meetings, at which we will share important points for attention with the company in advance with a view to achieving change. We conduct our own assessments of all the motions and exercise our voting rights at the meetings.

Valuations:
Based on our earnings forecasts for the next 12 months, the KOP portfolio is trading at a price/earnings (P/E) ratio of about 19. As a large number of companies in our portfolio have a net cash position, something not properly reflected in a P/E ratio, we believe the EV/EBITA ratio to be more relevant. Based on our forecasts, this ratio will be about 13 for the next 12 months, which will be squeezed by portfolio adjustments, sound growth at companies and new participations. The price potential based on our DCF valuation (cashflows) remains attractive and we see sound opportunities for return in the long term.