European Investment Trust rebounds with 30% return – European Investment Trust says that, for the year ended 30 September 2017, its net asset value total return was 29.9%, compared with 22.6% for the All-World Europe ex UK Index. This outperformance was welcome after a period of underperformance last year. The discount narrowed from 13.4% to 12.3% leading to a share price total return of 32.2%. The total dividend for the year is 23.0p, a 4.5% increase on the prior year. For the year ending 30 September 2018 and future years, they will charge two-thirds of management fees and finance costs to capital. This should lead to an increase in the revenue available for distribution by way of dividend.
Significant contributions to absolute performance – year to 30 September 2017
In terms of sectors: Banks +8.9%, Industrials +7.1%, Oil & Gas +2.4%, Retail -0.6%, Technology -0.6%
In terms of stocks: BNP Paribas +2.0%, Commerzbank +2.0%, Ubisoft Entertainment +1.8%, Leoni +1.7%, Stora Enso +1.5%, DIA -0.2%, Ahold Delhaize -0.4% and Gemalto -0.6%
The manager said “The largest contribution from an individual sector came from our banking stocks and I comment on BNP Paribas and Commerzbank below. Much has been written about the issues faced by the banks since the financial crisis and the ongoing challenges from regulation and competition in the digital age. However, we believe that banks in general have now rebuilt their capital, adjusted their cost base and, to different degrees, embraced the challenges and opportunities of digital distribution. That said, banks’ main revenue source is net interest income, which comes under pressure when interest rates are very low. The rise in bond yields, signalling a retreat from the fears of deflation and a path towards the end of monetary easing, has been a catalyst for the recovery in the share prices of many banks.
The contribution from industrials was spread across a number of stocks, including Leoni, which is covered specifically below. Notable contributions came from mining equipment supplier Outotec, airplane manufacturer Airbus and staffing specialist Adecco. To varying degrees these stocks are cyclical and have benefitted from the improving economic sentiment.
Our oil and gas holdings also contributed positively to performance. News flow from the energy sector has been dominated by the fall in the price of oil, the impact of shale gas and the shift to renewables. Our view is that demand continues to rise, particularly in the developing world, and that at around $50 a barrel, the market is now broadly in balance, subject to geopolitical events and supply discipline. After several years of cost-cutting, both operating costs and capital expenditure, many energy companies are now earning margins and returns which allow them to maintain their dividends and reinvest in their businesses.
The only sectors which recorded negative contributions were retail and technology. This was largely due to Ahold Delhaize and Gemalto respectively, which I cover below in my analysis of significant stock contributions.
BNP Paribas is based in France but operates in numerous other markets, including Belgium, Luxembourg and Italy. A fundraising in 2015 strengthened its capital position following an adverse US litigation settlement and it has benefited from the ongoing economic recovery across the Eurozone.
Commerzbank is one of the largest banks in Germany. The large number of local savings banks with subsidised funding in the German market suppresses returns compared to other developed markets. However, Commerzbank has initiated a cost-cutting programme and there are signs that the savings banks are starting to close branches, allowing Commerzbank to gain market share. The outlook for Commerzbank’s profitability is improving, aided by the firming of German bond yields. The shares have performed well yet still trade at a substantial discount to book value.
Ubisoft Entertainment is a computer games developer. When we first invested in the company in early 2016, we believed that the shift from physical to online distribution of games would result in significant margin improvement over time. With each reporting cycle, the potential scale of the profit uplift has become more evident and the shares have reacted accordingly.
Leoni is the leading European provider of wiring harnesses for the automobile sector. The company is recovering from difficulties with new projects and margins are recovering from a depressed level. The long-term demand for electronics within cars is rising and will be boosted by the growth of electric and hybrid vehicles, which require more complex systems. Autonomous vehicles could represent an even bigger opportunity in the future. The valuation is still reasonable for a business which has a positive structural tailwind.
Ahold Delhaize is a leading food retailer which, following the takeover of Delhaize, has high market shares in Benelux and the east coast of the US. This transaction creates significant cost-cutting opportunities which should support margins over the next three years. The takeover of organic specialist Whole Foods Market by Amazon led to significant falls in the valuations of US food retailers. While Ahold Delhaize is certainly not immune to price competition, the company has the operational skills and market positions to continue to deliver robust earnings and cash flow.
Gemalto is a leading financial technology company focused on transaction processing software and data encryption. Its software is embedded in bank cards, credit cards and SIM cards to authenticate user identity and network access. It also provides government and corporate clients with products for security passes, passports etc. While the company appears to be well positioned for trends in data encryption and network security, the demand for SIM cards is declining and the demand for bank cards is volatile. There has been some bid speculation surrounding the company and, while we have concerns about certain parts of the business, we consider that the valuation is still reasonable despite the recent lowering of our profit forecasts.”
EUT : European Investment Trust rebounds with 30% return