The following texts refer to the first quarter of 2022

Performance
In the first quarter of 2022, KOP’s Net Asset Value (NAV) declined from €308.35 to €284.48 per participation, bringing the return over the quarter to -7.7%. KOP has averaged a return of 17.5% per year over the past three years and 12.7% per year over the past five years, resulting in a performance above our target of an average of 10% per year in the long term.

Trading
As of 1 April 2022, the trading price was €285.90, based on the NAV of that date plus a premium of 0.5% caused by net inflow into the fund. As of the start of the second quarter, the fund’s size is €1.2 billion. For the next trading date of 1 July 2022, an instruction deadline of 4pm on 31 May 2022 applies for orders in KOP (via Euronext) and a few days before that for the holding companies (via the Van Lanschot Kempen transfer agent).

Market review
The MSCI Europe Index fell by 6.0% in the first quarter of 2022 and in doing so did much better than the MSCI Europe small cap index, which was down by 9.8%. Three obvious themes dominated the markets: soaring inflation, new lockdowns in China and Russia’s invasion of Ukraine. The latter is pushing up energy prices, which in turn is affecting the first theme, while the lockdowns in China may well create additional logistic challenges for a variety of industries, which could in turn lead to shortages and price increases. Ultimately the high inflation and clear signals from the US central bank that it intends to get tough on inflation by implementing several interest rate hikes are the main reasons for the weak market price trends of the past few months. A combination of high inflation and higher interest rates could potentially trigger a recession in the US and Europe as these reduce purchasing power and push down house prices. It’s therefore not surprising that prices of relatively economically-sensitive European small caps in particular have dropped in the last few months.

Portfolio
Nor will it come as a surprise that the best-performing equities in the KOP portfolio have a relatively defensive profile, such as Avon Protection (+17%), Coats (+10%), AlliancePharma (+5%), Premier Foods (+1%) and Acomo (0%). The companies with the weakest price growth were industrial names, such as SAF Holland (-38%), XP Power (-31%) and DiscoverIE (-26%).

An important theme at industrial companies is the difficulties they are experiencing in converting their growing order books into revenue growth due to a global shortage of essential components. Companies such as XP Power, Kardex, DiscoverIE, Kendrion and Suss Microtec are working hard to procure sufficient quantities of computer chips, electronics, cables and other essential semi-manufactured goods (in time), with enormous price increases being the rule rather than the exception. Demand from customers is so strong, however, that passing on the higher procurement costs is not generally much of a problem. The creation of buffer stocks is temporarily increasing the amount of working capital and leading to weak free cashflows at some industrial companies.

Noteworthy news came from XP Power, which received a US$40 million fine for corporate espionage in the US. Two employees who joined the company from competitor Comet had, without the knowledge of XP Power, brought with them trade secrets from their former employer. The employees were immediately dismissed, yet Comet still brought charges against XP Power and a jury found in the former’s favour. The case has now gone to appeal and we expect a final verdict in the next few weeks. As XP Power does not use any Comet technology in existing or new products, we envisage no negative impact on the company’s future revenue growth.

Two names were removed from the portfolio in the first quarter and two new ones added. We have sold Italian company La Doria after a private equity company launched a takeover bid for it in the second half of 2021. It is a fair offer price and at an average annual return of 9% since we bought the stocks in 2015, we are satisfied with the return yielded by this defensive participation.

We also sold our last few shares in Interroll last quarter. As we had only held a fraction of the company’s nominal value for some time now, this former participation had become a taxed position for KOP. Interroll has been a successful investment for us but the market capitalisation of this growth company simply became too big to be able to retain a participation in it in the long term. The industry for automated warehouse solutions remains a highly interesting one, however, and we were therefore pleased to be able to announce a new participation in Kardex in the first quarter.

Swiss company Kardex is a leading manufacturer of automated warehouse solutions for efficient storage and order picking of goods by customers in a range of end markets, such as e-commerce, industry, healthcare, public authorities and logistics. Kardex manufactures individual systems under the brand Remstar and also supplies project solutions via its Mlog division. The company is highly profitable, with an operating margin of 14% and a return on invested capital of 33%. In addition to its own systems, Kardex supplies the solutions of its partner Autostore, a high-end warehouse solution for mainly wholesale and retail markets (e-commerce).

Intralogistics is a structural growth market that enjoys annual growth of 5-7%. Kardex operates primarily in Europe but its recently-opened US factory could enable it to conquer the underdeveloped North American market as well. Markets in the Far East are also reaching the stage of being ready for automated warehouse solutions. In the course of 2021 we accrued a participation in Kardex that currently represents about 7% of the KOP portfolio.

The second new participation we announced is in Finland’s Harvia. This company is global market leader in the manufacture of saunas and sauna equipment, such as stoves, control units, steam generators, thermometers, lighting solutions, cleaning products etc. Harvia sells its products worldwide in over 80 countries and has a market share of 17% in stoves and 4% in complete saunas.

Driven by lifestyle trends, the global market for saunas and spas is averaging structural growth of about 5% a year. An increase in the value per order (premiumisation), geographical expansion and improvements to productivity will in our view lead to average autonomous earnings growth of approximately 8% in the coming years. A robust balance sheet that contains a small amount of debt also gives the company the capacity to make attractive acquisitions in a fragmented industry. The participation in Harvia currently represents about 3% of the KOP portfolio.

The KOP portfolio also witnessed the long-awaited split of Momentum Group AB from its parent company Alligo AB. We have written in previous reports about how the growth formula of Swedish conglomerate Bergman & Beving has led in the past few years to the hiving-off of a number of successful listed Swedish small caps, such as Addtech, Addlife, Lagercranz, Alligo and now also Momentum Group. The successful formula is based on growth in fragmented markets by means of acquisitions and the subsequent splitting-off (and separate market listing) of a business unit once it has acquired sufficient scale. The company then continues to grow as an independent business by means of further acquisitions and hives off another business unit, and so on. Momentum Group was given a separate listing at the end of the first quarter and Alligo paid us a dividend in the form of Momentum stocks. Alligo can now continue as a distributor of tools, protective clothing etc. and concentrate on autonomous revenue growth and cutting costs in the wake of its acquisition of Swedol. Momentum will focus on further consolidating the fragmented Scandinavian market for components and maintenance services for industrial customers. Alligo represents 4% of the KOP portfolio and the smaller Momentum 2%.

The KOP portfolio contains 21 tax-exempt participations, with our position in BESI having stood at well below 5% of the nominal capital for some time now, as a result of which it will no longer come under the participation exemption for holdings that drop below 5% from January 2023. As always, we have a number of positions under accrual; however, it is still unclear whether they will continue to grow into fully tax-exempt participations.

Valuations
The value of the KOP portfolio increased across the quarter. The portfolio’s cash-adjusted price/earnings ratio (EV/EBIT 2023E) stands at 15. This is high from a historic perspective but given the low interest rates we continue to believe that our portfolio enjoys long-term price potential.