The following texts refer to the first quarter of 2021

Performance
In the first quarter of 2021, KOP’s Net Asset Value (NAV) increased from €244.14 to €274.90 per share, which translates into a return of +12.6%. KOP has averaged a total return of +11.0% per year over the past three years and +19.1% 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
On 1 April 2021, the trading price was €276.26, 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 had surpassed the milestone of €1 billion. For the next trading date of 1 July 2021, an instruction deadline of 4pm on 31 May 2021 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 view
Equity markets got off to a positive start this year thanks to a combination of an upturn in the global economy, persisting low interest rates and relative political tranquillity. The UK and US are leading the way on easing lockdowns, with the Biden administration’s enormous US$2,000 billion investment programme expected to boost the economic recovery further over the next few months. China is also displaying clear economic growth, partly thanks to the almost total absence of new Coronavirus cases. The recovery is occurring more slowly in continental Europe due to the ongoing lockdowns caused by the slow start to the vaccination programmes. The financial markets are anticipating (temporarily) higher inflation, which should lead to equity markets performing relatively well versus bond markets. The MSCI World Index was up by 7.0% in the first quarter of 2021 and the MSCI European small cap index by 9.1%.

Portfolio
KOP started the year well with a double-digit return over the first quarter. The companies in the portfolio have published their annual results over the past couple of months and these were generally good. One interesting phenomenon in the results of the companies in our portfolio as well as others is the exceedingly strong cash generation in 2020. In addition to limited capital investments throughout the year, businesses had generally greatly reduced their working capital by the end of the year, leading to high cashflows and a boost to their year-end balance sheets. For instance, the two portfolio companies with the highest debt ratios, Kendrion and SAF Holland, reported acceptable debt ratios of 2.3 and 2.6 respectively versus their operational cashflows.

Another clear trend is the persisting enthusiasm among investors for the semiconductor industry. The equity prices of major companies such as ASML, Applied Materials and TSMC reached new all-time highs in the first quarter, as did our semiconductor players BESI and Suss Microtec.

BESI (+44%) published robust fourth-quarter results, with the company forecasting a revenue increase of 30-40% in the first quarter of 2021 compared to the fourth quarter of 2020, combined with persisting high profit margins. In the first week of April, BESI also announced that its order intake grew by as much as 176% in the first quarter of 2021, which will further boost its results in the short term. The recently announced alliance with Applied Materials seems to have got off to a flying start. Moreover, the excellent outlook for machine manufacturers like BESI was confirmed by announcements of major investment programmes by clients such as Intel and TSMC.

Suss Microtec (+41%) also noted in a press release that its order intake grew at a higher-than-expected rate after it increased by over 10% in the first quarter versus last year. In addition, the company announced the appointment of a new CEO and new COO, both of whom will take up their posts in May. The two managers have many years of experience and excellent track records in improving operational efficiency at businesses, something Suss Microtec sorely needs.

Important news came from Lectra (+13%), which announced the acquisition of its biggest competitor Gerber in February. While Lectra is primarily successful in the automotive and European fashion markets, Gerber occupies a strong position in the US fashion market and in terms of software is ten times larger than Lectra in the US. Under the management by its private equity owner, Gerber has undergone a remarkable transformation in the past few years that has led to a sharp improvement in profitability and product innovation. This €295 million acquisition (in cash and new Lectra shares) will increase Lectra’s revenue by 70% and we expect the merger of the two companies plus the economic recovery to push up Lectra’s operating profits from €25 million in 2020 to nearly €70 million in 2022. The acquisition of Gerber will also enable Lectra to have its machines manufactured by external parties in future (including at the Chinese facility owned by Dutch company VDL).

In addition to BESI and Suss Microtec, other strong climbers across the quarter included Kendrion (+32%) and our Italian names La Doria (+32%) and El.En (+32%). Kendrion’s equity price rallied after lagging behind in relative terms last year, partly aided by the strong results from its industrial operations in particular and the improvement in its balance sheet prompted by the sound cashflows mentioned earlier. The company views the future with great confidence and identifies growth opportunities in areas such as the automation of logistics, robotics and wind energy. In order to keep up with the growth in demand, Kendrion has decided to substantially expand its production capacity in China.

La Doria’s results demonstrate the expected positive effect of the lockdowns caused by the COVID-19 crisis. Consumption of preserved Italian foodstuffs soared last year and La Doria noted a revenue increase of 18% in 2020. Following a normalisation of demand in 2021, the company anticipates further growth in the years to follow. Profitability in particular should move to a structurally higher level as a result of the increased scale, benefits deriving from the investment programme and new customers for the most profitable pasta sauce activities. La Doria has therefore raised its dividend, bringing the dividend yield to 3.4%. El.En reported a surprisingly robust recovery in revenue in the second half of the year after its factories in Wuhan and northern Italy were hit hard by the COVID-19 crisis last year. Its Chinese industrial operations are displaying especially sharp growth, but the medical laser activities are also profiting from an upturn in demand combined with successful innovations (new machines for hair removal, breaking down kidney stones, body fat treatments). El.En forecasts double-digit earnings growth for 2021, driven by growth in both these divisions.

We witnessed relatively weak equity price growth at Acomo (+2%), DiscoverIE (+1%) and Coats (-11%), with DiscoverIE reporting sound results but its shares mainly having to compete with last year’s strong price performance. COVID-19 squeezed Acomo’s results last year (operating profit -4%) due to lower prices for traded goods such as tea and pepper, as well as higher logistics costs. Furthermore, the company incurred one-off expenses for the acquisition of Tradin. The equity price of Coats continues to trail the general equity market just as it did last year. There is ongoing pressure on global clothing sales, with trends such as digitisation, sustainability and the transfer of clothing manufacture to countries outside China continuing. Coats is well-positioned in this respect and its activities in Vietnam in particular are displaying growth. Its results contained lower-than-expected revenue from specialist threads for e.g. the oil and gas industries and industrial and military protective clothing, while products for the automotive industry performed relatively well. Coats will make additional payments into its pension fund over the next two years, after which the free cashflow for shareholders will rise again.

After selling two entire participations (Oeneo and Sligro) and adding three new participations (DiscoverIE, AlliancePharma and Momentum Group) last year, in the first quarter of 2021 we were again able to announce a new participation, namely in the UK’s SThree Plc. This brings the total number of participations to 18, within our target range of 15-20.

SThree is the world’s largest international staffing company in what are known as STEM markets (Science, Technology, Engineering, Mathematics). The company recruits specialist permanent or contract staff on behalf of clients for projects in the fields of e.g. IT infrastructure, cloud and cybersecurity. SThree has offices in Europe, North America and Asia, under brands such as Computer Futures, Huxley and Progressive (www.progressiverecruitment.com/nl-nl/). The company supplies technical experts to clients in a wide range of sectors, including IT, financial institutions, medical and food technology, engineering and (renewable) energy.

The ongoing global digital transition means that demand will grow for personnel in STEM markets and SThree also anticipates increasing its market share by 50% over the next four years. The company likewise expects to be able to increase its profit margins and free cashflows through improved use of its scale.

We have monitored SThree for many years and are impressed by its operational performance and strategic progress. It is our belief that SThree offers us interesting growth characteristics at an attractive valuation of 15 times its 2022 operating profits. As of the end of the first quarter, the participation in SThree represented about 4% of the KOP portfolio.

As usual, we have a number of new participations under construction, in relation to which we are keen not to disturb share prices in case of limited liquidity in their shares. We hope to be able to announce new participations in the coming quarters. If the next few quarters see an increase in price volatility on the markets, we will be able to use our substantial cash position in order to create further value in the KOP portfolio.

Valuations
The value of the KOP portfolio increased across the quarter. The portfolio’s cash-adjusted price/earnings ratio (EV/EBIT 2022E) 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.