The following texts refer to the fourth quarter of 2021

Performance
In the fourth quarter of 2021, the Net Asset Value (NAV) of Kempen Oranje Participaties (KOP) increased from €300.85 to €308.35 per participation, bringing the return over the quarter to +2.5% and over 2021 as a whole to +28.0%. KOP has averaged a return of +24.8% per year over the past three years and +16.9% per year over the past five years, resulting in a performance well above our target of an average of 10% per year in the long term.

Trading
As of 3 January 2022, the trading price was €309.89, 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 first quarter, the fund’s size is over €1.2 billion. For the next trading date of 1 April 2022, an instruction deadline of 4pm on 28 February 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 climbed by 7.7% in the fourth quarter of 2021 and in doing so performed substantially better than the MSCI Europe small cap index, which was up by 4.6%. Momentum returned to the markets in the fourth quarter following the caution that was evident in September. The Omicron variant’s potential symptoms are milder than feared, inflation is high but under control and central banks therefore continue to pursue accommodating interest rate policies, although they are gradually tapering their bond-buying programmes. The monthly amount purchased under the EU’s Pandemic Emergency Purchase Programme has been cut and the programme will end in March 2022. In contrast to the US, as yet no interest rate hikes are anticipated in Europe for 2022. As a result, real interest rates remain negative and when combined with the sizeable financial buffers held by private investors, this will have an upward effect on the financial markets. Inflation-resistant investments such as equities and real estate continue to perform well. The markets got off to an optimistic start in 2022 in the expectation of the global Covid-19 pandemic slowly fizzling out, sustained corporate earnings growth (aided by stimulatory government policies) and low interest rates. In addition to the geopolitical tensions in Ukraine and Taiwan, the main risks for financial markets can be found in these three components. Rising (wage) inflation and central banks responding by introducing interest rate policies that are more aggressive than expected could cause market sentiment to undergo a rapid reversal.

Portfolio
Our companies’ third quarter results were generally in line with expectations. Most are experiencing an ongoing recovery in their revenues and in a position to absorb cost-push inflation by raising prices and cutting costs.

Lectra (+24%) reported solid results and is making clear progress on integrating Gerber. Revenue growth of 23% means that the company expects its results over 2021 to be at the upper end of earlier forecasts.

The third-quarter results of El.En (+10%) displayed persisting robust growth. Its medical division noted revenue growth of 24%, while revenue from its industrial laser activities grew by 25% despite the weakness in China. Its gross margins were also up and El.En repeated its forecasts for 2021 as a whole.

Coats (+6%) caused a positive surprise in the shape of an acceleration in growth in the third quarter versus the first half of the year, despite the lockdowns in its all-important Vietnam market. The company even succeeded in maintaining its profit margins in spite of the higher cost of raw materials.

The results published by Kendrion (-2%) showed a mixed picture, with on the one hand solid revenue growth in both its Automotive and Industrial divisions but on the other also pressure on margins due to the last-minute cancellation of orders caused by component-related production problems at its customers. Margins are expected to be under pressure in the first half of 2022 as well. The component shortages (especially semiconductors) should gradually be resolved over the course of 2022.

Avon Protection (-40%) reported the disappointing findings that one of the 800 tested bulletproof vests failed to meet its customer’s requirements. This came as a surprise to both the company and shareholders and its share price subsequently plummeted. Until shortly before this news the management had expressed confidence that the new generation of bulletproof vests would be accepted by the customer and lead to new orders.

The faulty test prompted Avon’s management to evaluate its vest activities; technical redevelopment of the vests would take a great deal of time and money. The upshot of this detailed evaluation is that the board has decided to spend the next two years winding down the vest activities and concentrate fully on the core activities of masks and helmets instead. In doing so it is keeping the option of selling the vest business in its entirety open but we believe there is little chance of this happening. The bulletproof vest activities came from the 2020 Ceradyne acquisition that was mainly motivated by the company’s helmet activities. The vest activities represented 15% of Avon’s forecast group revenue for 2021/22.

On publication of its annual results in December, Avon gave analysts and investors insight into the financial situation of its core activities as well as the now non-strategic vest activities. From this, we can conclude that Avon’s core activities have been unaffected by the problems with the vests and moreover enjoy an excellent outlook. Avon has launched a new mid-range helmet for use primarily by the police and fire brigade and on top of this the European mask programme is being expanded to include more NATO members.

It will take Avon some time to regain the trust of investors but we believe that Avon’s stocks are currently trading at an extremely attractive price. We therefore took advantage of the lower price to increase our position in the fourth quarter.

Other news came from BESI (+9%) after torrential rain caused flooding at its Malaysian manufacturing facility. The company anticipates one-off costs of €4-6 million and the delivery of about 60 machines (involving revenue of €25 million) has shifted from 2021 to 2022. BESI will make a strong start to the new year thanks to a record order intake worth €180-190 million in the fourth quarter.

In preparation for splitting the company in March 2022, in December Momentum Group AB (-5%) changed its name to Alligo AB. The commercial trading activities (75% of the current group) will continue under this name and listing. The component activities (25% of the current group) will be split off and listed separately under the name Momentum AB. When the split takes place existing shareholders in Alligo AB will receive one Momentum AB share, pro rata, for each Alligo AB share in their possession as of that date. KOP will therefore have an additional participation in the portfolio in the course of the first half of 2022. Alligo will focus on revenue growth and cost-cutting following its acquisition of Swedol, while Momentum will concentrate primarily on conducting takeovers in fragmented markets.

We further reduced our position in ForFarmers (-7%) in the fourth quarter. The company again reported poor quarterly results due to rising raw materials prices and operating costs. In November it was announced that CEO Yoram Knoop’s contract would not be renewed and that he will step down after the 2022 shareholder meeting. ForFarmers launched a share buyback programme in the fourth quarter, which was one of the items on our wish list. However, talks with the management and supervisory boards have failed to give us sufficient confidence that the company’s high-risk international growth strategy will finally be completely abandoned and the value contained in ForFarmers’ current foreign operations released and paid out to the owners of the company. The speed with which the company is adjusting to changing market conditions is also a disappointment. KOP now holds less than 5% of the share capital of ForFarmers.

Our survey of the European Value Added Reseller market brought Dustin (+13%) onto our radar. Following wide-ranging discussions with the management as well as a visit to the company’s Swedish operations, over the course of 2021 we accrued an interest in this company that culminated in us announcing this new participation in December. Dustin is a leading online IT partner in Scandinavia and the Benelux. The company helps about 500,000 customers to find the right IT solutions in the form of 280,000 different hardware and software products. Dustin has a 2,400-strong workforce and revenue of SEK21.6 billion.

Alongside selling the hardware and software of third parties, Dustin is large enough to develop and sell its own brands. When combined with a distinctive business model based on plentiful stock levels and mainly online sales this gives the company a clear competitive edge. Dustin also occupies a leading position on sustainability, with clear reporting and big ambitions that we view as a boost to its financial goals.

Dustin aims to achieve an average of 10% revenue growth per year over the next few years, 8% of which organically and 2-3% via acquisitions. As this growth is not capital intensive, the company will also be in a position to pay attractive dividends. Our participation in Dustin represents about 5% of the KOP portfolio.

We currently have a number of new participations under accrual and hope to be able to announce a new participation in 2022 as well.

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 low interest rates we continue to believe that our portfolio enjoys long-term price potential.