September saw large cap stocks regaining some ground as the bluechip SMI index advanced 1.4% during the month, outperforming the SPI Extra Index, which fell 2.4%.
The current market environment continues to be characterised by an outperforming pharmaceutical sector and the market’s negative sentiment towards industrial stocks has persisted, though September saw a slight recovery in European “value” investment indices that was largely driven by a rising oil price and a consequent recovery in the energy sector.
The strong focus of the managers of our Swiss Small & Mid Caps strategy on the robustness of the balance sheet when valuing companies is well illustrated by the median net cash position of the holdings in the strategy and given the financial markets’ current negative sentiment towards the industrial sector, which represents more than 30% of the strategy’s invested exposure, it should be noted that they currently see median net income growth for the strategy in excess of 15% this year. Whether such a progression in earnings will truly materialise remains to be seen, but it does reflect a fundamentally strong operating environment for the stocks in the portfolio.
The main positive contributor to the strategy’s performance during the month is microelectronics manufacturer Exceet whose share rose +6% during the month and is up +43% since the beginning of the year. After the sale of the AEMtec business for EUR 86m in September, the group is now made up of two businesses: one non-core activity in Germany and a highly value-added microelectronic PCB company based in Lucerne in Switzerland (GS Swiss PCB). The former is no longer deemed a strategic business for the group whilst the latter is doing well in the medtech sector as well as developing in the aeronautic sector and is the core activity of the group. Following the recent disposal, the company now has EUR 105m net cash on its balance sheet with the market only ascribing a value of EUR 135m to the group a whole. Just as the German activity seems likely to be sold, the company will now use its strong balance sheet to develop GS Swiss PCB further with bolt on acquisitions though the right buyer might also derive considerable synergies from acquiring such a business.
Packaging company Vetropack has also contributed positively to performance during the month with the share rising 18% as the market reacted positively to a strong set of results. Sales in the first half of the year grew 5% organically with net income increasing 22% as growing sales and full capacity utilisation in its plants allowed the company to improve its product mix towards higher margin production. The investment managers continue to see value in a share that trades at 17x last year’s earnings with a robust balance sheet and a continuing positive outlook.
Private bank EFG has also contributed positively to performance during the month with the share rising 2% in September. We have been building up our position in the company over the past few months as the share continued to fall following the company’s first half results publication, at the end of the September the stock is down 33% from its January peak. The first phase of the integration of BSI is largely complete and likely to generate important synergies for the group and the announcement of several middle management appointments during the month shows a quick progression in the next stage of the company’s transformation. Despite acquiring BSI at a favourable price and the synergies to be derived from such a deal, the stock is trading on 12.5x last year’s earnings.
Several holdings have nevertheless negatively impacted the strategy’s performance in September. In particular, industrial holding company Conzzeta’s share fell 12% during the month. In the first half of the year, the company saw 20% organic sales growth with profits advancing 66% as all divisions in the group performed strongly. Bystronic Metal continues to take market share and the successful restructuring of Mammut and Bystronic Glass is becoming increasingly evident as the former grew sales by 17% on a greatly reduced cost base and the latter published both topline growth and margin improvement. In September, the company announced a detailed strategy to improve profitability in the Chemical Specialities business for the first time, which along with Bystronic metal, forms one of the two core pillars of the group. This division currently represents more than 20% of group sales where margins are depressed. The group continues to be in a strong position to effect successful profitability improvements with its strong balance sheet as net cash represents 20% of the market capitalisation and the current valuation hardly reflects the positive changes in the underlying business with the share trading on 21x last year’s depressed earnings.
Microelectronics manufacturer Cicor also contributed negatively to performance this month, with the share falling 18% in September. The market has sanctioned the stock despite the company’s flawless execution of a shift in production from two smaller Romanian plants to one larger one (a rare feat for any company) as well as a full order book as demand continues to be strong with the company confirming its expectations for a strong year during the month. The group saw orders grow 16% in the first half, sales growth of 9%, as well as improvements in profitability as operations continue to be streamlined and synergies between the business units are increasingly exploited. The sell-off in the shares during the month reflects neither the strong underlying business trend nor the operational improvements within the group.
Using a very focused and disciplined Value Investment philosophy, the QUAERO CAPITAL Smaller Companies Team aims to invest in smaller European companies that trade at a substantial discount to both their intrinsic value or to their long-term profit potential. The small cap team is one of the most experienced in its field and operates in one of the least researched part of the European markets. This dedication to investing “under the radar screens” and to a very research-intensive process has produced very credible results over the past 15 years.
The Argonaut strategy is one of the few investing exclusively in micro capitalisation stocks and concentrating on the lowest tiers of European stocks.
The Smaller European Companies uses the same investment philosophy and process but with a bias towards companies that have a substantial shareholder that is a family. This additional filter has shown to produce strong results over the long term but is yet widely ignored by most investors.
The New Europe strategy invests in small and medium sized companies across Eastern European according to a broader definition of the region, including countries such as Greece, Turkey and Russia. The strategy focuses particularly on little-known or poorly followed smaller and medium sizes stocks that have been ignored by mainstream investors, sometimes due to their location or their size.
The Swiss Small&Mid Cap strategy aims to achieve capital growth by investing in a diversified portfolio of Swiss-based companies, applying a strictly “Value” bias. The strategy focuses on companies that are undervalued or neglected by investors and analysts because they are less liquid that blue chips. The « Value » philosophy aims to limit the downside risk of selected securities, through a so-called « margin of safety » approach.