The following texts refer to the fourth quarter of 2020.

Performance
In the fourth quarter of 2020, KOP’s Net Asset Value (NAV) increased from €212.76 to €244.14 per share, bringing the total return over the fourth quarter to +14.7%. With a total return of +19.0% over 2020, we are pleased with how the portfolio has performed. KOP has averaged a return of +6.2% per year over the past three years and +17.8% per year over the past five years, resulting in a performance above our target of an average total return of around 10% per year in the long term.

Trading
On the trade date 4 January 2021, the trading price was €245.36, based on the NAV of that date plus a premium of 0.5% caused by net inflow into the fund. The size of the fund is €900 million as of the start of 2020. For the next trade date of 1 April 2021, an instruction deadline of 4pm on 26 February 2021 applies for orders in KOP (via Euronext) a few days before that for the holding companies (via the Van Lanschot Kempen transfer agent).

Market view
After the roller coaster first half of 2020 and a calm third quarter, the fourth quarter saw a sharp upturn in equity prices. In addition to companies publishing relatively solid third-quarter earnings reflecting strong consumer spending, the most important news was the rapid availability and high efficacy rate of a range of vaccines against the COVID-19 virus. Moreover, central banks repeated their intention to keep interest rates low, even if inflation rises to over 2%. These are the ingredients for a 2021 scenario comprising a robust economic recovery and persistently low interest rates, which should be positive for equity prices. The MSCI World Index rose by 15.0% in the fourth quarter of 2020 and the MSCI European small cap index by 16.8%.

Portfolio
A great deal has already been written about the financial markets in 2020. We prefer to leave detailed economic and political analyses of the impact of the COVID-19 crisis to other commentators and concentrate instead on how things are at the 18 companies that we co-own.

For KOP, the year had two faces. In February and March we saw panic erupt on the markets, severely squeezing the equities of our cyclical companies such as BESI, Suss Microtec, Kendrion, Coats, Lectra and SAF Holland (semiconductors, clothing and automotive) but with defensive names such as ForFarmers, La Doria, Acomo and Avon Rubber performing relatively well.

A sharp upturn occurred on the market after governments and central banks announced enormous support packages at the end of March, and this was further boosted by the news in November that vaccines would quickly become available. The cyclical names in particular underwent a recovery after the summer, partly aided by better-than-feared second and third-quarter earnings. SAF Holland (+62%), BESI (+35%), Nedap (+26%) and Lectra (+24%) noted the largest price gains in the fourth quarter. SAF Holland’s equity price rallied strongly from a weak level following the outbreak of the COVID-19 crisis. Demand for trucks and trailers appears to be recovering well (partly due to e-commerce) and the measures the new CEO has introduced to improve efficiency are having a clear positive impact on margins. The focus on cash has also ensured that the company’s debt ratios have remained within the limits agreed with the banks.

BESI’s equity price profited from the further recovery in the semiconductor industry as part of the accelerated digitisation of our society. The company continues to seek improvements to its internal and cost structures, as a result of which it’s expected to achieve record earnings in the coming upcycle. BESI also announced a partnership with US company Applied Materials (AMAT). The ongoing miniaturisation van chips, known as Moore’s Law, is increasingly dependent on back-end operations in the chip industry, in which BESI operates. The partnership with AMAT underlines BESI’s position as a leader in the advanced packaging market.

There was significant corporate news on Acomo as it announced the acquisition of Tradin, an international merchant of organic ingredients (including dried products, fruit, cocoa, oils, coffee and high-end juices). Tradin’s global network and focus on fast-growing organic products will serve to boost the scale, diversification and growth potential of Acomo. The acquisition will increase the size of Acomo by about one third. It has partly been funded by a new share issue worth €96 million. As one of the largest shareholders in Acomo we were involved in the acquisition of Tradin before it was made public. We believe that this step will improve both the growth profile of the company and share liquidity and could ultimately lead to a higher market valuation. We have therefore subscribed to the new Acomo share issue and maintained our capital interest in the company at the same level.

Other positive news came from Alliance Pharma, which announced its acquisition of US company Biogix, which focuses on the relief of menopause symptoms via its vitamin & mineral product Amberen. With revenue of US$27 million it will be the second largest brand in the Alliance Pharma portfolio and boost the company’s position on the all-important US market. We expect the company to make a number of further attractive acquisitions in 2021.

The equity prices of Avon Rubber (-24%), ForFarmers (+2%) and XP Power (+8%) lagged behind in relative terms, with there being no significant company news on the latter.

Avon Rubber saw its equity price drop sharply in the fourth quarter. The company reported a delay to the start of the manufacture and sale of new generation bulletproof vests (via the acquisition of Ceradyne announced in 2020). During what is known as a First Article Test, the impact of a bullet on one of the tested vests was outside the margin of error, leading to the product’s structure requiring adjustment and resulting in an expected delay to delivery of about six months. In the wake of a price gain of 94% in the first nine months of the year, its price fell by 24% in the fourth quarter.

ForFarmers reported weak results over the third quarter. The company also announced the acquisition of De Hoop Mengvoeders. De Hoop earned revenue of €110 million in 2019, primarily in the Dutch broiler chicken market. This is the company’s first acquisition since it announced its new strategy at the Capital Markets Day in September 2020, which contained a greater focus on acquisitions. We talked to the Forfarmers Supervisory Board in the fourth quarter. During this meeting, we again expressed our concern about the company’s track record on acquisitions and also on its operational management. An improvement in both elements combined with a solid balance sheet and the attractive valuation of ForFarmers’ equities should contribute positively to KOP’s future performance.

In addition to our new stakes in DiscoverIE and Alliance Pharma, we accrued another position in 2020, this time in Sweden’s Momentum Group AB. The company is a leading reseller of industrial consumables and components, such as tools, spare parts, screws and protective clothing. Its products are sold via direct (online) sales and over 100 of its own stores, mainly to industrial customers but also to forestry, construction and installation companies as well as government bodies. Momentum also provides related services such as stock management, automation and maintenance of industrial motors.

Momentum primarily operates in Sweden, Norway and Finland. In 2020, Momentum acquired the listed Swedish player Swedol, which over the next few years will lead to an acceleration in revenue growth and considerable cost savings. Its high cashflows and robust balance sheet mean there is capacity for more acquisitions that could further consolidate Momentum’s position on the Scandinavian market.

We’ve been monitoring Momentum since it split from industrial conglomerate Bergman & Beving in 2017 and accrued a position in the company over the past few quarters after it announced its acquisition of Swedol. The participation in Momentum AB represents about 4% of the KOP portfolio.

Even after completing three new participations in 2020, the KOP portfolio still contains a number of new participations under construction. We hope to be able to announce a new participation in 2021.

Looking back over the past few years, a large part of KOP’s success lies in the fact that we have managed to identify a small number of overlooked companies with principled and rational management teams that operate in fundamentally-sound industries. We subsequently hold these companies for the long term and attempt to add value to them in our capacity as an engaged shareholder.

Success at identifying overlooked equities derives from our investment universe of European micro caps that are often barely monitored by institutional investors or analysts. It’s rare for research to be published on the majority of the companies we hold in the portfolio and that are on our radar. One disadvantage is that these equities sometimes have low trading liquidity, but the advantage is that they can be incorrectly priced, which generates opportunities for us.

As we‘ve often said in previous quarterly reports, as a long-term engaged shareholder we seek fundamentally-sound companies. They need to operate in a healthy industry, be profitable, occupy a solid market position, be well-managed and possess a robust balance sheet. In a year such as 2020 these quality criteria have been particularly essential to the portfolio’s success.

As a long-term engaged shareholder we regularly witness fundamental and/or cyclical changes at the companies and, if these are positive, we profit from them. It’s often precisely after such events that the shares’ valuation undergo a correction, which can in turn make a significant contribution to KOP’s performance. Such fundamental changes might include divestments, acquisitions, product launches or the appointment of new management members.

At El.En, for instance, we saw the sale of its interest in subsidiary Cynosure and Avon Rubber sold Avon Engineered, both of which improved their respective company profiles and helped their share prices. The fact that we know the company through and through enabled us to reduce our position in BESI at the right moments in the multi-year cycle and buy back it later, while we bought XP Power just before the cyclical upturn in the semiconductor industry. We bought unknown Coats after it moved its listing from Australia to the UK, bought Kendrion after its current management team took up their posts and Momentum after it doubled in size due to the acquisition of industry peer Swedol.

Finally, as a shareholder it’s sometimes necessary to initiate a positive change ourselves by exerting pressure on our companies’ management teams. The appointment of new management teams at SAF Holland and Suss Microtec are good examples of this.

Valuations
The value of the KOP portfolio increased across the quarter. The portfolio’s cash-adjusted price/earnings ratio (EV/EBIT 2021E) stands at 15. This is high from a historic perspective but given the persisting low interest rates we continue to believe that our portfolio enjoys long-term price potential.