The following texts refer to the third quarter of 2021

Performance
In the third quarter of 2021, KOP’s Net Asset Value (NAV) increased from €293.99 to €300.85 per participation, bringing the return to +2.3% and +24.9% over the first nine months of 2021. KOP has averaged a return of +17.3% per year over the past three years and +17.9% per year over the past five years, resulting in a performance far above our target of an average of 10% per year in the long term.

Trading
As of 1 October 2021, the trading price was €302.35, based on the NAV of that date plus a premium of 0.5% caused by net inflow into KOP. As of the start of the fourth quarter, the fund’s size is €1.2 billion. For the next trading date of 3 January 2022, an instruction deadline of 4pm on 30 November 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 review
The MSCI Europe Index remained largely unchanged in the third quarter of 2021, while the MSCI Europe small cap index climbed by 1.9% and in doing so outperformed US small caps (-2.4%). Following a period of relative optimism in the summer months, sentiment underwent a reversal in the last weeks of September. Market prices are driven by trends in corporate earnings and interest rates (the discount rate for corporate earnings) and in the short term both variables are evolving negatively, namely (expected) corporate earnings downwards and interest rates upwards. The main reason is rising inflation owing to higher energy prices and logistics costs and shortages of all kinds of commodities, components and especially computer chips. Moreover, worker shortages in many industries are causing perceptible wage inflation. The US central bank’s assertion that the current above-average rate of inflation might be less temporary than it had previously supposed pushed US bond yields higher and caused global equity markets to slump. Finally, fresh lockdowns have been imposed in countries such as Vietnam and Australia over the past few weeks and economic growth is slowing considerably in China (partly due to the Evergrande debacle and power shortages). There is consequently enormous uncertainty as to whether businesses will be able to meet their earnings expectations for 2021 and September saw listed companies issue their first profit warnings. Most of the shortages are expected to be resolved in the course of 2022 and – combined with persisting robust consumer demand – the profitability of companies will then improve further.

Portfolio
Within the KOP portfolio, the strongest climbers in the third quarter were El.En (+30.2%), Sthree (+25.5%) and DiscoverIE (+20.7%), while the laggards comprised Avon Protection (-25.6%), Suess Microtec (-19.5%) and ForFarmers (-13.1%).

ForFarmers has been a source of concern to us for some time now. The Western European market for animal feed is under pressure and on top of this the weak operational situation at the company has led to disappointing earnings growth over the past few years. Via its Horizon 2025 programme the management has formulated a growth strategy that is partly based on acquisitions in growth markets in Europe and beyond.

From a risk/return perspective, it has so far been impossible to ascertain whether the acquisition of activities in a new country creates shareholder value. ForFarmers’ acquisition track record in the United Kingdom and Poland does not inspire confidence on this. Furthermore, ForFarmers has no M&A experience in markets outside its existing geographical clusters. In searching for likely acquisition candidates with a leading position in a structural growth market, there is a high risk of ForFarmers paying an unattractive price. The size of the company is growing but doubts persist as to whether this will create shareholder value as well. An acquisition costing €100 million could perhaps add €10-15 million in operating profits, too small an amount to give ForFarmers as a group a structural growth profile.

We advocate strengthening the company’s operational management, divesting poorly-performing foreign activities (particularly the UK) and reimbursing capital to the owners of the company alongside selective acquisitions in existing key markets in which synergies can be achieved (Benelux). Given ForFarmers’ limited knowledge of overseas markets combined with the probability of it having to pay high prices for feed companies in structural growth markets, we view the company’s current growth strategy as too risky for shareholders as well as for Dutch farmers who are both shareholders (via the FromFarmers cooperative) and customers of ForFarmers. We have shared our opinion with the management and supervisory board members and asked them to reconsider the current strategy. We have likewise sought contact with the FromFarmers cooperative. For us a successful outcome to these talks is a precondition for remaining long-term engaged shareholders in ForFarmers. The company’s attractive equity valuation and robust balance sheet help to counterbalance the above and we will of course also take both of these into account in any future decisions regarding our position in ForFarmers. We therefore hope that ForFarmers will be flexible about its strategy and follow the example set by a number of other Dutch companies, such as SBM Offshore and Intertrust, in using the current price weakness to create value by buying back a portion of the company at a low price. This is a much less risky option.

On 27 September, Italian private equity investor Investindustrial announced its intention to offer a price of €16.50 for all La Doria shares in circulation, with it already having concluded an agreement in principle with the Ferraioli family, the majority shareholder of 63% of the shares. The bid represents a discount of nearly 7% on the closing price on 23 September when rumours of a takeover had not yet affected the equity price. This is remarkable, even if an agreement has already been agreed with a 63% shareholder. Normally, a premium is offered to persuade the (minority) shareholders to agree to the offer. The investor has been granted a period of exclusivity until 20 October to complete its due diligence, after which a formal bid will probably be submitted. We are still deliberating on our position on this offer.

Avon Protection (formerly Avon Rubber) initially published a profit warning in August and then reported positive news after all in September when two delayed contracts (for helmets and bulletproof vests) were finally signed with the US Department of Defense. The contract for second generation helmets had previously been disputed by a competitor and has now been restructured without any negative impact on Avon. Following a delay caused by a failed First Article Test at the end of 2020 (the impact of a bullet had exceeded the margin of error on one of the vests) and an adjustment to the product structure, Avon was given the go-ahead and signed a contract to deliver the new generation bulletproof vests. The profit warning dented investor confidence in Avon and it will be some time until this is restored. We have used the equity price weakness to increase our position in Avon Protection.

Acomo intends to appoint American Kathy Fortmann as its new CEO. Her background is in food ingredients at Dupont, Cargill and Friesland Campina. This subsector within Acomo will be her primary focus. In addition to its trade activities (spices, tea, nuts), Acomo has spent the past few years building up a portfolio of food ingredients in international niche markets, partly via acquisitions. Acomo already owns industrial food operations such as Snick and Red River and will further expand these companies over the next few years. Current CEO Allard Goldschmeding will resume his former post of CFO. We welcome this strengthening and expansion of Acomo’s management board and look forward to the rollout of the growth strategy in the wake of the company’s successful acquisition of Tradin last year.

Our participations Kendrion and DiscoverIE both announced small-scale but interesting acquisitions in the past quarter. Kendrion has bought Dutch company 3T, a software developer primarily for ASML, with offices at the technical universities in Twente and Eindhoven. DiscoverIE has acquired Beacon (a US developer of System on Module embedded computing boards for the medical, industrial and aerospace sectors) as well as Antenova (a UK developer of antennas and radio frequency modules for industrial connectivity applications). Prior to the acquisitions, DiscoverIE also held a share issue in which we participated and in doing so maintained our capital interest at the same level.

As usual, we have a number of new participations under accrual. 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.

Valuations
The value of the KOP portfolio increased across the quarter. The portfolio’s cash-adjusted price/earnings ratio (EV/EBIT 2022E) stands at 17. 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.