Annual Financial Report

Montanaro European Smaller C.TstPLC

21 June 2024

 

Montanaro European Smaller Companies Trust plc

(Incorporated in Scotland)

Company Number: SC074677                                                                                                                                        

ISIN: GB00BM8H3X05           

LEI: 213800CWSC5B8BG3RS21

('Montanaro European Smaller Companies Trust', or the 'Company')

MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

2024 ANNUAL RESULTS ANNOUNCEMENT

AND

NOTICE OF ANNUAL GENERAL MEETING

Montanaro European Smaller Companies Trust plc announces its annual results for the year ended 31 March 2024 and the publication of its annual report and accounts for the same period, which includes the notice of its 2024 annual general meeting.

Highlights

Performance

For the year ended 31 March 2024

Total return%	1 year	3 year	5 year	10 year	MAM*
Net Asset Value ("NAV") per share(1)	4.9%	5.7%	68.6%	203.4%	478.5%
Share Price(1)	4.3%	(9.8%)	65.7%	190.4%	447.4%
Benchmark **(2)	5.9%	6.4%	45.6%	124.7%	301.1%

Capital return%	1 year	3 year	5 year	10 year	MAM*
NAV per share(1)	4.2%	3.7%	63.0%	177.7%	382.0%
Share Price(1)	3.6%	(11.5%)	60.1%	163.9%	346.4%
Benchmark **(2)	3.4%	(0.1%)	32.1%	86.7%	187.5%

Sources: Morningstar Direct, Association of Investment Companies ('AIC'), Montanaro Asset Management ("MAM").

As at 31 March	2024	2023	% change
Ordinary share price	142.5p	137.6p	3.6
NAV per Ordinary share**	165.1p	158.4p	4.2
Discount to NAV(1)	(13.7%)	(13.1%)
Net assets** (£'000s)	312,720	299,975	4.2
Market capitalisation** (£'000s)	269,934	260,652	3.6
Net gearing employed(1)	2.9%	3.3%

Year ended 31 March	2024	2023	% change
Revenue return per Ordinary share	1.42p	1.10p	29.1
Dividend per Ordinary share(1)	1.125p	0.970p	16.0
Ongoing charges(1)	1.0%	1.0%
Portfolio turnover(1)	16%	14%

*   From 5 September 2006, when MAM was appointed as Investment Manager.

** Details provided in the Glossary on pages 65 and 66 of the Annual Report.

⁽¹⁾    Refer to Alternative Performance Measures on page 63 of the Annual Report.

⁽²⁾  From 5 September 2006, the benchmark was the MSCI Europe SmallCap Index. The benchmark was changed on 1 June 2009 to the MSCI Europe ex-UK SmallCap Index (in Sterling terms).

Chairman's Statement

For the year ended 31 March 2024

Results

The Net Asset Value ("NAV") (with dividends reinvested) rose by 4.9% to 165.1p per share during the financial year ended 31 March 2024. In comparison, the benchmark (the MSCI Europe (ex-UK) Small Cap Index) rose by 5.9% (in Sterling terms). The share price (with dividends reinvested) gained 4.3% as the discount to NAV widened from 13.1% to 13.7%.

The first half of the period was characterised by an environment where 'growth' companies underperformed 'value' and high‑quality companies underperformed low quality. As Montanaro Asset Management ("Montanaro", "MAM" or the "Manager") seeks to invest exclusively in high quality, growing companies, these style shifts acted as a headwind. These headwinds subsided around the end of October 2023 which led to better performance in the second half of the year to 31 March 2024.

Whilst recognising that recent short-term performance has been challenging, Montanaro have a long-term investment approach. Over 5 and 10 years, your Trust has delivered NAV total returns of 68.6% and 203.4%, outperforming the benchmark by 23.0% and 78.7% respectively. The Trust's performance compares favourably with the European Smaller Companies peer group, with the NAV total return being second over five years and first over ten years. Since Montanaro were appointed in September 2006, the NAV total return has been 478%, 177% ahead of the benchmark and 2.1% per annum ahead of the benchmark.

Earnings and Dividends

Revenue earnings per share rose to 1.42p in the period (2023: 1.10p).

An interim dividend of 0.225p per share was paid on 26 January 2024. The Board recommends the payment of a final dividend of 0.9p per share payable on 16 September 2024 to shareholders on the register on 16 August 2024. Subject to shareholder approval, this would bring the total dividends for the year to 1.125p per share, an increase of 16%.

The Trust holds substantial revenue reserves available for distribution, which gives the Board the ability to smooth any short-term income volatility.

Environmental, Social and Governance ("ESG")

Montanaro believe there is a clear correlation between how well a business fares on Environmental, Social and Governance grounds and the value it creates for its shareholders. This is why ESG considerations have formed an integral part of their assessment of a company's 'quality' and have been fully integrated into their investment process for many years.

The depth of Montanaro's commitment is perhaps best exemplified by the fact that they are one of the few UK asset managers to be a certified B Corporation.

Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance, public transparency and legal accountability to balance profit and purpose. It is a certification Montanaro have held since 2019 and which was renewed for a further three years in 2022. Montanaro's score rose from 81.8 to 105.5 (classified as 'outstanding'), which demonstrates their commitment to continual improvement. Montanaro's commitment to ESG has been recognised: they have won two awards: one from Ethical Finance for "Best Small & Mid-Cap Sustainable Investment Boutique 2024 - UK" ; and another from Investors' Chronicle and the Financial Times for "ESG Company of the Year 2023".

An ESG Report is included on pages 8 and 9 of the Annual Report. It covers the developments in Montanaro's approach and commitment to ESG as well as how they are interacting with investee companies.

Board Composition

The Board is actively engaged in an independent recruitment process for a fourth non-executive Director. We expect the Board to be comprised of four members going forward following this process.

Borrowings

The Board, regularly reviews the gearing strategy of the Trust and approves any gearing facility. Gearing amplifies the returns from underlying profits or losses generated by the investment portfolio.

The Board has set a maximum limit on borrowing (net of cash) of 30% of shareholders' funds at the time of borrowing. At the end of the financial year, the Trust had borrowings (net of cash) of 2.9% compared to 3.3% at the beginning of the year.

During the year, the Trust's borrowings in the form of a €10 million fixed rate loan and a €15 million revolving credit facility matured. The Board has replaced these facilities with a new €10 million fixed rate loan and a new €15 million revolving credit facility, both of which are due to mature on 13 September 2026.

Authority to Issue and Buyback Shares

Our stated policies on share buybacks and share issuances are set out on page 27 of the Annual Report. The Board will seek to renew the Trust's share buyback and issuance authorities at the forthcoming Annual General Meeting (see page 69 of the Annual Report).

The Board actively monitors the level of NAV discount for the Trust relative to its peers and how it compares with the average discount for the investment trust sector as a whole.

The discount was high by historical standards at the year-end, but in line with the peer group. As a result, no share buybacks were implemented during the period.

Communication with Shareholders

Over the past few years, the composition of our shareholder base has changed significantly with an increasing number of individual investors coming onto the register via investment platforms. We are keen to encourage an open dialogue to keep all shareholders up to date with key developments. Our website - www.montanaro.co.uk/trust/mesct - is continually updated with factsheets, reports, presentations, webinar recordings and commentaries as well as more details about the Manager, investment philosophy and process. We encourage shareholders to visit regularly and welcome any feedback and suggestions.

Annual General Meeting ("AGM")

The AGM will be held at the offices of Montanaro Asset Management Limited, 53 Threadneedle Street, London EC2R 8AR on 5 September 2024 at 11.00 am. Shareholders are encouraged to attend the meeting where there will be an opportunity to meet and ask questions of the Board and the Manager.

Outlook

As reported in our Interim Results, European SmallCap valuation indicators remain at levels significantly below their long-term average. Since the peak in August 2020, the forward P/E of SmallCaps in Continental Europe has fallen from over 23x to around 13x at the end of March 2024. This de-rating means they sit at a discount to their long-term history, as shown in the chart on page 3 of the Annual Report. Moreover, European SmallCap is valued at a discount to the wider market, which is unusual. Indeed, the discount is at a level last seen in the depths of the Global Financial Crisis.

The two charts as shown on page 3 and page 4 of the Annual Report, suggest that European SmallCap is attractive on both an absolute and relative basis. Over the long term, we believe that earnings are the most important driver of share prices. In 2023, the average company in your portfolio grew its earnings by double digits and delivered high returns on capital. This, combined with attractive absolute and relative valuations for the asset class, means that we look forward to the future with confidence.

R M Curling

Chairman

20 June 2024

Manager's Report

The Attractions of Quoted European Smaller Companies ("SmallCap")

The key attraction of investing in smaller companies is their long-term record of delivering higher returns to investors than large companies. In the UK, over the last 69 years, this has amounted to an average of 3.1% per annum (the "SmallCap Effect"). £1 invested in UK large companies on 1 January 1955 would now be worth £1,357 whereas the same £1 invested in smaller companies would now be worth £9,171 - almost seven times more.

There is less comprehensive data on Europe - it only goes back to 2000. However, this suggests that the SmallCap Effect is even more pronounced on the Continent, European 'small' companies have outperformed by 4.2% p.a. Remarkably, European SmallCaps have returned just shy of 10% p.a. since the turn of the century, thereby outperforming the vast majority of SmallCap markets around the world including the UK, Japan, Australia, the BRICs (Brazil, Russia, India and China) and even the USA (based on the Russell 2000 index).

The market for European smaller companies is inefficient. While some large companies are analysed by more than 50 brokers, many smaller companies in Europe have little or no coverage. We believe that this makes it easier for those with a high level of internal resources to identify attractive, undervalued and overlooked investment opportunities. This in turn makes it possible to deliver long-term performance over and above that of the benchmark.

Montanaro Asset Management

Montanaro was established in 1991. We have one of the largest and most experienced specialist teams in the UK dedicated exclusively to researching and investing in quoted small companies. Our team of 39 includes 12 nationalities and 18 Analysts and Portfolio Managers, which gives us the breadth of resources required to conduct thorough in-house research.

At 31 March 2024, we were looking after around £3.3 billion of client assets. We have been the Manager of your Trust since September 2006.

Investment Philosophy and Approach

We specialise in researching and investing in quoted smaller companies. We have a disciplined, two-stage investment process.

In the first stage, we identify 'good businesses' within our investable universe. We look for high quality companies in markets that are growing. They must be profitable; have good and experienced management; deliver sustainably high returns on capital employed; enjoy high and ideally growing profit margins reflecting pricing power and a strong market position; and provide goods and services that are in demand and likely to remain so. We prefer companies that can deliver self-funded organic growth and remain focused on their core areas of expertise, rather than businesses that spend a lot of time on acquisitions.

Conversely, we avoid those with stretched balance sheets; poor free cash flow generation; incomprehensible or heavily adjusted accounts; unproven or unreliable management; or that face structurally challenged business models with stiff competition.

A company must also pass our stringent quality and ESG checklists. ESG has been integrated into our disciplined investment process for almost two decades.

When we have identified a company that we believe is high quality, has structural growth and is well managed from a business and ESG perspective, it is reviewed by our Investment Committee before it can proceed to the next stage. Companies that do not possess all these attributes are rejected.

Companies that pass the first stage then undergo a valuation assessment. We determine their intrinsic value, typically through a proprietary discounted cash flow analysis, to ensure they will make a 'good investment' ('good businesses' and 'good investments' are not always the same). The Investment Committee scrutinises the forecasts and assumptions made for each business and discusses the risk profile with the Analyst for a company before adding it to our Approved List.

Companies that are on the Approved List and which we also believe are attractively valued are then eligible for inclusion in your portfolio.

Our Investment Team use their industry knowledge and a range of proprietary screens to continually search for new ideas. With thousands of quoted companies from which to choose, we are spoiled for choice.

We believe that a deep understanding of a company's business model and the way it is managed are essential. We visit our investee companies on a regular basis. We examine management's past track record in detail as we seek to understand their goals and aspirations. In smaller companies, the decisions and motivation of the entrepreneurial management can make or break a company, which is why meeting them is so important. We look closely at the board structure; the level of insider ownership; and examine remuneration and corporate governance policies carefully.

Once a company has been added to the portfolio, our Investments Team conducts ongoing analysis. We will sell a holding if we believe that the company's underlying quality is deteriorating or if there has been a fundamental change to the investment case or management. We will get things wrong and make mistakes, but we try to learn from them.

In summary, we invest in well managed, high quality, growing companies bought at sensible valuations. We keep turnover and transaction costs low and follow our companies closely over many years. We would rather pay more for a higher quality, more predictable company that can be valued with greater certainty. Finally, we align our interests with our investors by investing meaningful amounts of our own money alongside yours. We are significant shareholders in the Trust.

The Portfolio

At 31 March 2024, the portfolio consisted of 50 companies of which the top ten holdings represented 37%. Sector and country distributions within the portfolio are driven by stock selection. Although weightings relative to the market are monitored, overweight and underweight positions are based on where the greatest value and upside are perceived to be.

Performance Attribution

The largest positive contributors over the period were:

ATOSS Software is a developer of workforce management software, primarily within the DACH region. The company had an excellent year, with strong demand for its products driving continued double-digit revenue and earnings growth.

VZ Holding is a Swiss independent financial consultant and wealth manager. The company had another strong year of underlying growth while higher interest rates on deposits provided an additional boost to profits.

CTS Eventim is the market leading ticketing company in Europe. A few years ago, this was one of the largest detractors as Covid-19 lockdowns meant concert ticket sales disappeared almost entirely. As long-term shareholders, we did not sell our position as we expected concert attendance to rebound once restrictions ended. It is pleasing to see this has happened with the company now posting record results.

Inevitably the year was not without some stock price declines as well. Our largest detractors were:

Melexis develops sensors that are mainly used in cars. The shares fell during the year as investors fretted about the potential impact of destocking among its customers.

Medistim is the global market leader for transit time flow measurement devices used in coronary bypass surgeries. The company struggled in 2023 as constrained hospital budgets and a shift to a direct sales model in China held back revenue growth.

Amadeus FiRe is a German provider of staffing and training services. The stock fell as investors were concerned about the state of the German economy and consequently the employment market, despite the company increasing its revenues and profits. We believe the long term outlook for these businesses continues to be positive and we remain shareholders.

Portfolio Changes

We try to keep portfolio turnover as low as possible. However, we typically make a few changes each year as we identify new investment ideas that we expect will provide stronger long-term returns than existing holdings. Companies that become too large, are acquired or where the investment case deteriorates are also replaced with new ideas from our Approved List.

In the year to 31 March 2024, we exited positions in companies including Photocure, which sells pharmaceuticals used to help in the detection of bladder cancer, as the reimbursement landscape for its procedures deteriorated. Meanwhile, SimCorp, the developer of investment management software, received a takeover offer from Deutsche Boerse at a significant premium to the pre-announcement share price.

Borregaard, the supplier of specialised biochemicals manufactured from renewable sources, and BioGaia, which develops and sells probiotic products, were added to the portfolio.

Continual Improvement

Each year we take time to look back at our successes and mistakes to assess how our systems and processes can be improved.

The IT investments that we wrote about last year continue to bear fruit. One example of this is we are now able to seamlessly record, transcribe and summarise our meetings using AI tools. The output is not perfect but it is rapidly improving and already good enough to materially reduce the amount of time our team spend typing up notes - a necessary but time consuming task. Every minute we save is a minute that can be spent thinking and doing more research.

Montanaro has continued to invest in the wider business as well. For example, our HR function has been improved with the addition of an external consultant; a new cloud-based HR system for employees; and a benchmarking exercise around policies and benefits. We have an extremely low staff turnover both at group level and within the Investments Team. We believe that this is in part due to our employees having the right support and working environment, something that we will continue to develop. We focus on getting the work/life balance right.

MONTANARO ASSET MANAGEMENT LIMITED

20 June 2024

Twenty Largest Holdings

as at 31 March 2024

1.     NCAB

is a global full-service supplier of printed circuit boards (PCBs).

2.     MTU Aero Engines

manufactures and maintains aircraft engines and components.

3.     ATOSS Software

develops and sells workforce management software in Europe.

4.     CTS Eventim

is the market leading ticketing company in Europe, providing an online platform selling tickets to a range of events such as operas and pop concerts.

5.     Fortnox

        is Sweden's leading provider of cloud-based applications for accounting, invoicing and payroll administration.

6.     IMCD

is one of the world's largest speciality chemical distributors.

7.         Esker

offers a cloud-based platform that allows companies to digitise and automate their accounts payable and receivable processes.

8.     Kitron

is a leading Scandinavian Electronics Manufacturing Services (EMS) company.

9.         VZ Holding

is a Swiss independent financial consultant and wealth manager.

10.   Brunello Cucinelli

is a luxury fashion company, particularly famous for its cashmere products.

11.   Tecan

develops automated instruments and solutions that are used in laboratories.

12.      Reply

is an IT services company.

13.      Brembo

is a global leader in the design and production of high end automotive braking systems.

14.      Bachem

is a leading manufacturer of peptides and oligonucleotides.

15.      Melexis

is a leading designer of sensors, with a particular focus on automotive applications.

16.   Amadeus FiRe

is a leading personnel service company in Germany, with integrated training and further education offerings.

17.   Sartorius Stedim

is a world leading supplier of equipment and technologies used to produce biopharmaceuticals.

18.   Rational

is the global market leader in the field of advanced cooking systems for commercial kitchens.

19.      Belimo Holding

develops and manufactures electrical motorised control devices (actuators) for air and water. These are predominantly used in large buildings with sophisticated Heating, Ventilation and Air Conditioning (HVAC) systems.

20.   Thule Group

is a global market leader of niche products and solutions for outdoor activities, including equipment such as bike racks and roof boxes for vehicles.

		31 March 2024	31 March 2023	31 March 2024	31 March 2023	31 March 2024
		Value	Value	% of net	% of net	Market Cap
Holding	Country	£'000	£'000	assets	assets	£m
NCAB	Sweden	14,350	15,643	4.6	5.2	976
MTU Aero Engines	Germany	14,121	14,192	4.5	4.7	10,858
ATOSS Software	Germany	14,058	8,014	4.5	2.7	1,863
CTS Eventim	Germany	13,075	9,356	4.2	3.1	6,785
Fortnox	Sweden	12,493	12,479	4.0	4.2	3,047
IMCD	Netherlands	11,870	11,235	3.8	3.7	7,958
Esker	France	10,344	6,918	3.3	2.3	959
Kitron	Norway	9,964	14,173	3.2	4.7	494
VZ Holding	Switzerland	9,663	9,933	3.1	3.3	3,865
Brunello Cucinelli	Italy	9,518	12,016	3.0	4.0	6,164
Tecan	Switzerland	8,996	7,948	2.9	2.6	4,182
Reply	Italy	8,976	6,951	2.9	2.3	4,197
Brembo	Italy	8,628	9,972	2.7	3.3	3,389
Bachem	Switzerland	8,339	8,091	2.7	2.7	5,686
Melexis	Belgium	8,338	12,144	2.7	4.0	2,591
Amadeus FiRe	Germany	8,182	9,758	2.6	3.3	556
Sartorius Stedim	France	7,907	8,674	2.5	2.9	20,826
Rational	Germany	7,558	5,427	2.4	1.8	7,812
Belimo Holding	Switzerland	7,186	7,222	2.3	2.4	4,778
Thule Group	Sweden	7,177	5,970	2.2	2.0	2,529
Twenty Largest Holdings		200,743		64.2	65.2

FURTHER INFORMATION

Montanaro European Smaller Companies Trust plc's annual report and accounts for the year ended 31 March 2024 (which includes the notice of meeting for the Company's AGM) will be available today on https://montanaro.co.uk/trust/montanaro-european-smaller-companies-trust/

It has also been submitted in full unedited text to the Financial Conduct Authority's National Storage Mechanism and is available for inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

 

END