The following texts refer to the second quarter of 2017.

KOP’s Net Asset Value (NAV) increased from €170.45 to €193.78 per participation in the second quarter of 2017, with KOP issuing a dividend of €3.00 per participation in the second quarter. The total return over the second quarter was 15.6%, while the return over the first six months of the year amounts to 27.8%.

As of 3 July 2017, its trading price was €194.75, based on the NAV including a premium of 0.5% as a result of net inflow into KOP. The number of issued KOP shares consequently increased by 4.5%. We were again able to welcome new participants during the quarter and continue to see interest from prospective clients. With a view to satisfying this interest, the number of holding companies has been expanded to include Merwede and Spaarne. For the next trading date of 2 October 2017, an instructions deadline of 4pm on 31 August 2017 applies for orders in KOP (via Euronext) and a few days before that for holding companies (via Kempen’s transfer agent).

The average performance of European and Dutch small-cap indices was 7% to 10% over the second quarter of 2017. Equity markets again performed very well during the second quarter, partly driven by the economy picking up and by better than expected corporate results. Exchange rates saw the GB pound, US dollar and Swiss franc weakening against a stronger euro. Oil prices continue to be capricious and on the weak side, pushing down the already low inflation in Europe. The US President continues to be unpredictable, giving investors less confidence in his proposed economic policies. European politicians, however, are generating greater confidence, headed by the new Macron/Merkel pairing, while Brexit is now entering the next phase. A few southern European countries are now robust enough to tackle a rationalisation of their banking sector, aided by the persisting expansionary monetary policy being pursued by the ECB, in relation to which there are doubts as to the excessively strict targets for inflation and jobs. Some sectors are starting to see a shortage of qualified employees in the stronger European countries.

In the debate on PPG/Akzo Nobel, Dutch politicians wanted to give companies more time and capacity to be able to withstand hostile takeover bids, supported by the Enterprise Division of the Amsterdam Court of Appeal in the case of Akzo Nobel. However, the judge also ruled that a company must be able to explain its aversion to a takeover properly to its shareholders. As a long-term engaged shareholder, we believe that corporate policy needs to be balanced towards shareholders and that a rational explanation to shareholders is essential. US investors are increasingly putting out feelers on acquisitions, divisions and other transactions that create additional shareholder value, including in the short term. We believe this derives from the extremely low interest rate climate, the upturn in the European economy, higher equity valuations and in particular the high specific reward for managers and investors in the event of success.

Within the KOP portfolio 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. Now that the economy is picking up, companies that sell innovative products and/or have made operational improvements to their organisation will profit even more. In the first six months of this year, we have been positively surprised in certain cases at the acceleration in revenue growth and improved earnings forecasts of the companies in the portfolio. The higher euro could compensate slightly negatively for this effect at some companies, given that many companies earn a portion of their profits outside the Eurozone. The positive price trends we have seen can partly be explained by the positive earnings trends at ‘our’ companies, yet equity market valuations are also up. We again took active advantage of this is in the second quarter by adjusting the portfolio and buying new participations that are expected to contribute positively to future returns and result in a balanced composition of the KOP portfolio.

In the second quarter we were able to report a new participation in France’s Oeneo. Oeneo supplies corks, wood chips, wooden stakes, wine barrels and consultancy services to over 7,000 wine and whisky producers in over 60 countries worldwide. The company operates under a number of brands, such as Seguin Moreau, Diam, Piedade and Vivelys. In 2016, Oeneo produced about 2 billion corks and 80,000 wine barrels and in doing so earned revenue of €211 million and operating profits of €38 million. Oeneo employs about 950 staff, mainly in France. The Heriard-Dubreuil family owns 63% of the company’s shares and is responsible for its operational management. It is also a major shareholder in Remy Cointreau. Following an initial meeting with the company in the summer of 2015 and further analysis of the industry, the company and its competitors, we tentatively built up a participation during 2016 and 2017. The participation in Oeneo currently represents 6% of the value of KOP.

Earlier this year we announced the participation in UK company Coats; its price increase of 40% means that this new holding has made a significant contribution to KOP’s performance. Coats is the global market leader in the manufacture of threads and yarns and operates in over 100 countries. In June, we attended Coats’ Annual General Meeting of Shareholders (AGM) in London, our first-ever British shareholder meeting. In the same way as Dutch AGMs often seem to be a platform for the opinions of private shareholders and last year’s AGM of Germany’s Washtec proved to be markedly formal and legal in style, the Coats’ AGM turned out to be a mere formality. Nineteen voting items were adopted in 27 minutes, a record for us as a shareholder. The swift pace of the AGM has its roots in the excellent operational developments at Coats, as was also underlined by the profit upgrade published on the morning of the AGM. The robust price growth of the past few months has caused the position in Coats to increase to 11% of the portfolio and makes it our largest participation.

In the spring of 2017, we also announced a participation in Dutch business ForFarmers, a newcomer to the stock market. ForFarmers is a leading manufacturer of total feed solutions for livestock businesses with strong positions in the Netherlands, Belgium, the United Kingdom and Germany. The company, which started out as a cooperative, was floated on the stock exchange for the first time last year, enabling it to expand (including internationally) and to implement operational improvements. The ForFarmers AGM contained special dynamics for us as many shareholders are also clients and therefore also experience the company from that angle, while the cooperative remains a major shareholder. This is instructive for us as a new shareholder from ‘outside’. At the meeting, we commented on potential improvements (transparency, greater efficiency) to the remuneration policy which has still to be drawn up. We also asked about progress in the UK on investments and/or further acquisitions. As a follow-up to the AGM, we have made an appointment to improve our acquaintance with two Supervisory Board directors, including with a view to learning more about the cooperative’s history and position. The participation in ForFarmers increases diversification in the KOP portfolio.

At Beter Bed’s AGM we again expressed our concern about the company’s German activities. Following previous meetings, the company took measures to improve the focus of the stores (and their formula) and the online proposition. We are convinced that the ‘omnichannel’ model, in which the online and physical stores complement one another, is the right one for this company. Adjustments to the MatratzenConcord stores will take time and energy. Purchasing and stock will be structured more in line with the successful Dutch model. We hope to see the first signs of an improvement in the autumn. The company’s activities in other countries and certainly in the Benelux are doing very well. Beter Bed occupies a weight of 4% in the portfolio.

Talks were held with Sligro on the company’s continued increase in activities in Belgium, the additional growth opportunities in the food service market and the financial ratio for permanent investment in the Emté supermarkets in the Netherlands. As usual, Sligro’s plans rest on solid foundations, whereby the expansion of food service will yield the greatest return for shareholders and we are enthusiastic about the recently-announced strategic partnership with Heineken to acquire its logistics unit and distribution centres for beer, soft drinks and other food service goods to the Dutch hospitality sector. This will enable market leader Sligro to expand its large market share even further. For this expansion, Sligro will be able to take advantage of its very robust financial position and it could help the company make its food retail business more of a separate business unit.

During our visit to Cologne, we held detailed discussions with the full board of QSC. From its telecom network that enjoys stable revenue, QSC is aiming to convert its ICT outsourcing for clients to ‘the cloud’. QSC’s focus here is on medium-sized German businesses. This telecom and ICT services provider also offers consultancy services for SAP solutions. Its diversified portfolio means QSC is capable of developing into an even bigger player in ICT cloud services. It has already achieved its first successes, but greater scale is required for the long term. The company is in the right financial shape to be able to grow towards this. QSC is one of our smaller participations and accounts for over 2% of the portfolio.

At Italy’s El.En we learned more about its range of products and innovations. During our visit to a manufacturing site for industrial lasers near Milan we were told about the new technological lasers and their additional applications. Boosted by its successful joint venture in China, this business unit is set to grow sharply this year. Sales of lasers for medical applications are currently in an interim phase, especially in the US. With the CEO we discussed many new medical applications which could yield additional high sales from 2018. El.En occupies a weight of 5% in the portfolio and enjoys a sound long-term outlook.

In the second quarter, the largest positive contributions to the portfolio’s return came from Coats (+32%), BESI (+27%), ForFarmers (27%) and Lectra (+17%). The only negative contribution came from 2G Energy (-5%).

2G Energy is the only equity in the portfolio that fell in value during the second quarter. Following publication of 2G Energy’s annual figures and in the run-up to the AGM, we talked extensively to the CEO and CFO of this small-scale innovative German company. 2G Energy manufactures highly-efficient Combined Heat & Power (CHP) generators for large-scale professional use in e.g. factories, hospitals or greenhouses. The products are made in Germany, but the company’s operational management could be improved. We have encouraged the CEO to concentrate more on scale, sales and cost efficiency. The company may have learned its lesson from substantial cost overrun on a project caused by an inadequate estimate of the risks involved. If the company can indeed succeed in improving its organisation, it has great opportunities at substantially higher margins.

The further price rise in BESI is due to high demand for its back-end semiconductor machines, high general demand, its successful expansion of the factory in China to include many new customers, persisting demand for ‘older’ but highly-efficient BESI machines and sales of the latest technology, such as for the manufacture of the iPhone 8. We are impressed by the company’s further operational improvements and the successful development of the new machines. Based on a very robust financial position, BESI is pursuing a shareholder-friendly policy encompassing high dividends and share redemption. Our aim is for this equity to occupy a balanced position in our investment portfolio.

Lectra’s share price continued to rise in the second quarter, boosted further by the election of Macron, which had a positive impact on French small-cap equities. In June, the former CEO and current chair of the Supervisory Board sold his 16% block of shares in a secondary offering. The current CEO intends to retain his 17.5% block of shares for the long term. This secondary offering caused the price to drop slightly in June, but this was in the wake of a previous sharp price hike. We continue to be highly enthusiastic about the long-term operational trends at the company, although this global niche market leader is sensitive to a weaker US dollar.

On behalf of KOP, we attend all AGMs in the Netherlands and some abroad. If we do not attend an AGM abroad in person we take as much advantage as possible of proxy voting. We usually hold talks with the company prior to the AGM if there are relevant points for discussion. This year we have again published a report on our attendance of AGMs and any important findings; this can be found on our website via the link at the bottom of this page.

New purchases for the portfolio are financed by adjustments to the portfolio and the entry of new participants. Over the past quarter, we have adjusted the weight of e.g. Washtec and BESI downwards, taking advantage of the sharp increase in their prices. In addition to our active policy on existing participations, we have started to accrue several new positions. We hope to be able to announce a new participation shortly. All the portfolio adjustments listed serve to improve the equilibrium in the portfolio, create a better average valuation and consequently boost future price potential.

Valuations
Based on our earnings forecasts for the next 12 months, the KOP portfolio is trading at a price/earnings (P/E) ratio of over 19. As a large number of the companies in our portfolio hold a net cash position, something not properly reflected in a P/E ratio, we believe the EV/EBITDA ratio to be more relevant. Based on our forecasts, this ratio is about 13 for the next 12 months. The average valuation increased in the first quarter, although this was partly compensated for 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.