By the Quaero Capital European Smaller Companies team.
Recovery in southern Europe’s markets and stronger performance by manufacturing exporters have delivered for Quaero Capital’s value-driven European Smaller Companies strategy in recent months.
Corporate confidence indicators have continued to improve across Europe as the fears of political risk have given way to the resurgence of the political mainstream, supporting manufacturing exporters which are more sensitive to the economic environment.
With family ownership being particularly prevalent in the ‘Mittelstand’ exporters of Europe, the strategy’s sectoral exposure is well suited to this ‘Goldilocks’ scenario of firmer growth without inflation, according to the managers.
The strongest performance came from German foundations specialist Bauer, whose shares rose 49% after strong figures for Q1. Sales rose 19% and operating profits nearly doubled as world construction markets improved. We consider the share is still at an unjustified discount to book value and a PE ratio of less than 15 times estimates for this year’s net profits.
German industrial automation specialist Duerr AG has also published strong figures, with sales up by 8% and operating profits 20% higher in Q1. The company’s core business is automated paint stations for the automobile sector, but the real growth and profit improvement driver was the woodworking equipment maker Homag which reports strong sales and rising orders.
Homag was acquired by Duerr in 2014. Our profitable investment in competitor Biesse in Italy, suggested Homag would become a growth and turnaround engine for Duerr. We have used the rally in Biesse (+66% since the start of the year) to take partial profits, whilst reinvesting in Duerr.
Elsewhere, our investments in the Iberian Peninsula have continued to rise in importance and now represent a 17% weighting in the portfolio, evenly spread between Spain and Portugal. A recent trip to Madrid confirmed a buoyant local economy and less worries from Latin American subsidiaries.
Among many company meetings there, our investment in swimming pool equipment maker Fluidra was one of the most productive. The share is surprisingly ignored and under-held by the local investment community. It rose 29% in Q2 after publishing organic growth of 13% and substantial net profits in what is seasonally a loss-making first quarter.
A visit to the company’s headquarters, factory and logistics hub close to Barcelona reinforced our conviction and encouraged us to increase our position. The company is still 49% owned by four local families and we spent time with the CEO Eloy Planes who is the son of the founder.
We expect the company to go on to generate results for the 2017 that will be ahead of their estimates for 2018. It may also become an attractive target for a large US player. We usually perceive family ownership as a barrier for takeover, but when a bid is eventually accepted by the family, the premiums tend to be substantially higher.
In Portugal, diversified holding company Sonae Capital generated a return of 19% over the quarter as the company once again distributed a bumper dividend to investors equating to a yield of 11%. It is continuing to sell assets to reduce debt levels, with an overall aim to become the private equity arm of the Azevedo family’s Sonae, and focus on Portuguese exporters.
We believe the value of the company’s assets are continuing to rise as the property recovery which started in Lisbon and the Algarve is starting to move north to Porto where the company is more firmly based. With this more positive backdrop, it is surprising that the share is still trading at such a large discount to the value of its net assets.
Further good news from the south is that Greece was the best performing market in Europe in the first six months of the year, with a rise of 28%. The country now has a budget surplus, with a strong tourism season ahead.
We like Greek household and consumer goods company Sarantis, which has now been multiplied by 10 since we invested in the depths of the Euro crisis in January 2012, and industrial holding company Mytilineos, up by 34% since the beginning of the year. The company has bought out minority shareholders to form a larger entity more attractive to investors.
We expect a new strategic plan, which will include the intention to pay dividends, to be announced, alongside a new name for the company, which is still trading at a valuation barely above accounting book value and on a single digit PE ratio.
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Notes to Editors
About QUAERO Capital
QUAERO Capital is an independent, specialist fund management firm which brings together independently minded investment managers who use original research to provide highly actively managed strategies for clients in the institutional and wholesale markets. QUAERO Capital was founded in 2005 in Geneva as “Argos Investment Managers S.A." It is a 100% employee-owned company with its founding partners taking an active role in its investment processes. The firm is a team of 29 individuals including 17 experienced investors who enjoy working in an investment focused environment.
QUAERO Capital is regulated by the FINMA, the Swiss Financial Markets Authority. It offers a range of high conviction investment strategies spread across 12 funds in two Luxembourg SICAVs (a Part I-UCITS and a Part II) If you would like more information about QUAERO Capital then please go to www.QUAEROcapital.com