The following texts refer to the first quarter of 2020.

Performance
In the first quarter of 2020, KOP’s Net Asset Value (NAV) decreased from €209.03 to €163.08 per share, resulting in a return of -22.0%. The fund has reported an average return of +0.3% pa over the past three years and +8.7% pa over the past five years, resulting in a performance below the target average return of 10% per year.

Trading
As of 1 April 2020, the trading price was €163.90, based on the NAV of that date plus a premium of 0.5% as a result of net inflow into KOP. The number of issued shares in KOP increased by 3%, bringing the size of the fund to about €610 million. For the next trading date of 1 July 2020, an instruction deadline of 4pm on 29 May 2020 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
It would be an understatement to say that the year got off to an eventful start. Over the past few weeks the COVID-19-pandemic and subsequent global lockdowns have quickly pushed a global economy that had been growing at a sound rate into a deep crisis, one which is likely to be more severe than the 2008/09 financial crisis. Moreover, the oil price dropped to record lows in the wake of the collapse of talks between Russia and Saudi Arabia, generating even greater pessimism. The correction took just 24 trading days on the financial markets: between 19 February and 23 March, the global MSCI index lost an unbelievable 33%, while European small caps were hit even harder as the MSCI Europe Small-cap Index declined by 42%.

Looking back at the past few weeks, the response from the financial markets is similar to the reaction to the virus itself. The sense of shock is enormous. COVID-19 is not fatal to the vast majority of the global population, but those with weak immune systems are especially vulnerable. In the first quarter of 2020, it was mainly weak companies that were hit hard by the economic crisis triggered by COVID-19. The KOP portfolio contains companies with strong immune systems in the shape of robust business models, solid balance sheets and strong management teams. A handful are barely noting an impact on their current situation, but most of our companies are being confronted with a sudden and sometimes total drop in demand caused by the lockdowns, which translates into enormous pressure on short-term revenues and profitability.

We reported no new participations in the first quarter, but we were well on our way to accruing a participation in the UK’s Huntsworth until in February private equity party CD&R made an offer on all outstanding shares including a premium of 50% on the equity price. At that time, KOP held a capital interest of approximately 3% of the company. Huntsworth provides marketing and communications services to the global pharmaceutical industry.

In the first quarter, KOP sold its participation in Oeneo to the family that holds the controlling interest in the company after it launched an offer for all those shares not yet in its possession in November 2019. The position in Oeneo represented slightly more than 6% of the portfolio as of year-end 2019. We had already sold a large portion of our interest at above the offer price on the open market during the application period. This brings the Oeneo chapter to a successful conclusion for us. Including dividends, since 2016 the investment in Oeneo has yielded an average annual return for KOP of about 19% and in doing so made a significant contribution to our target return of 10% per year.

The combination of a large cash position and falling equity prices has prompted KOP to start building a number of new participations, and we hope to be able to announce a new participation in the second quarter.

We are pleased with the annual results published by almost all our companies. As mentioned above, KOP’s NAV has fallen by 22% as a result of the lower equity prices in the first quarter. As is often the case, this total portfolio return is the aggregate result of very volatile share prices for individual companies. Firstly, it’s important to stress that our companies are strong enough to withstand the current crisis. Over half hold a net cash position on their balance sheets and as things stand we believe the vast majority of the portfolio to be in the safe zone. We are monitoring events closely and in active dialogue with all our companies, especially those that will experience mounting pressure on their levels of profitability in the coming weeks and months. The recent share prices are mainly a reflection of the sensitivity of their levels of profitability to the short term during the current economic crisis. The short-term investment horizon of investors in listed companies continues to amaze us. Emotions are driving trading, which is generating price volatility, which is in turn triggering emotions, which are driving trading and so on. If a company’s valuation represents all future cashflows, a halving of the earnings over a year followed by a recovery to normal levels should only lower the share price by a few percent.

The best performers in the first quarter were Avon Rubber (+6%), Forfarmers (-2%) and La Doria (-6%), for the simple reason that these companies are barely being affected by the current economic crisis. Avon Rubber sells gasmasks to the military, police and fire departments, as well as rubber components for milking machines to farmers. Forfarmers produces animal feed for North Western European farmers and La Doria makes canned Italian food products for supermarkets, mainly in Europe. This company is even profiting to a certain extent from consumers bulk buying during the pandemic.

The share prices of our industrial companies have come under severe pressure over the past few weeks, in line with the broader stock market. XP Power fell by 18%, BESI by 19%, Interroll by 24%, Nedap by 26%, Washtec by 32%, while the price of Lectra dropped by as much as 35%. This group of suppliers of high-quality (components for) machines is dependent on the investment climate at their customers. The current crisis means that investments by carwash companies (Washtec), clothing manufacturers (Lectra) and computer chip manufacturers (BESI) have been reduced to a minimum, on the one hand because of the drop in consumer demand and on the other hand because of e focus on maximum cash generation. We are therefore anticipating significantly lower short-term revenues and profitability at these companies. One remarkable share price decline was that of Acomo (-22%), the trader in tea, spices, nuts and dried fruits. We believe that this company’s short-term profitability will remain largely unaffected by the crisis and we have therefore taken advantage of the depressed share price to enlarge our position, liquidity permitting. Incidentally, this also applies to a number of other existing holdings in KOP that are currently at interesting valuation levels. For example, there is a strong chance of XP Power will see earnings growth this year, especially due to the enormous increase in demand for power converters for medical equipment.

In the first quarter we saw the largest amount of share price pressure at Coats (-45%), SUSS Microtec (-45%), SAF Holland (-50%), El.En (-51%) and Kendrion (-53%), with Coats standing out in particular. This manufacturer of threads and yarns was hit by the COVID-19 outbreak at an early stage as it has sizeable operations in Asia, including China. As global clothing and footwear sales are under pressure, Coats will probably report a considerable drop in earnings this year as well. However, the company’s balance sheet is robust and its management is implementing measures to shield earnings and cashflows as much as possible in the downward market. One such measure is suspending the dividend.

As a Northern Italian company with operations in Italy and China, El.En has found itself at the eye of the storm. By its own account it was heading for its best year ever when the COVID-19 outbreak hit it full-on in February. Its Chinese factories have since resumed operations, but their Italian counterparts remain largely at a standstill sofar. El.En has a balance sheet with a net cash position, continues to innovate and in our view will come out of this crisis even stronger.

Most of our attention has been focused on our automotive players SAF Holland and Kendrion over the past few weeks. The two companies closed 2019 with relatively high amounts of debt on their balance sheets as a result of acquisitions, and their declining profitability could make these debts excessive. Luckily SAF Holland restructured its debt in February, the upshot of which is that it faces no repayments in the short term and has sufficient levels of liquidity at its disposal. We are impressed with the decisiveness and speed at which the new CEO is tackling the current crisis. Around the world, the company is slashing expenses, stocks and accounts receivable balances in order to safeguard profitability and cashflows. Moreover, preparations are under way to profit as much as possible once the truck and trailer market recovers. In spite of a share issue in November 2019, Kendrion holds an above-average debt position resulting from the acquisition of Intorq (magnets for robotics). The company is in talks with its banks, which are being accommodating and have already promised to give Kendrion plenty of time to restore its balance sheet, also because it is still generating sound cashflows.

Over the quarter we have conducted several meetings with the prospective new supervisory board members for SUSS Microtec. Along with a number of other shareholders, we are of the opinion that SUSS Microtec’s board needs to be strengthened. The company’s profitability and cashflows are substandard and its operational and strategic management requires improvement. The SUSS technology and machines are promising, but this is simply not reflected in its levels of profitability.

All our participations are currently implementing their emergency plans in order to safeguard their profitability and cashflows. Many are taking advantage of the assistance offered by governments, particularly when it comes to covering wage costs (such as the “Kurzarbeit” scheme in Germany). However, the unprecedented uncertainty surrounding the extent and duration of the drop in demand has prompted many of the companies (including Coats, Washtec, Nedap, Kendrion, SAF Holland) to cancel or postpone (final) dividends over 2019. KOP’s long-term focus means that we can only applaud such steps. The extra liquidity at companies will not only create an additional buffer for unforeseen circumstances, it will also yield opportunities that will enable companies to emerge from this crisis even stronger. There is a possibility that these dividends will be paid later in 2020, depending on the economic impact of COVID-19 on the companies’ profitability and balance sheets.

Valuations
The value of the KOP portfolio declined across the quarter. Given the enormous uncertainty surrounding the short-term profitability of our companies, we have limited ourselves here to examining the reported earnings over 2019. The portfolio’s cash-adjusted price/earnings ratio (EV/EBIT 2019) stands at 10. Based on the assumption that our companies will revert to normal (2019) earnings levels in the medium term, we continue to believe that the portfolio allows for attractive long-term share price potential.