Montanaro European Smaller Companies has much better second half

230623 MTE

Montanaro European Smaller Companies (MTE) has released its annual results for the year ended 31 March 2023. During the period, the MSCI Europe (ex-UK) Small Cap Index (in sterling terms) fell by -5.5% while, in comparison, MTE’s NAV fell by 7.6% to 158.4p per share. Share price performance was slightly worse as the discount widened from around 2% to 13.1%, leading to a share price total return of -17.6%. The board says that, while it is not out of line with the peer group, this change in discount is significant for shareholders and it continues to monitor it closely. MTE’s chairman, R M Curling, points out that inflationary pressures and subsequent monetary tightening by central banks has increased the cost of capital globally and such increases disproportionately affected quality growth stocks: high quality companies underperformed low quality companies in Europe; and growth companies underperformed ‘value’ companies. These style shifts created headwinds for MTE as it invests exclusively in high quality, growth companies that were out of favour. This was particularly apparent in MTE’s first half of the year, with a marked improvement in the second.

A game of two halves

Reflecting this rotation away from growth, the NAV total return in the first half of the year was -27.3%, versus -19.3% for the benchmark. The second half of the year saw these headwinds fade as bond yields stabilised and inflationary pressures began to lessen and MTE provided strong returns in both absolute and relative terms – the NAV total return was 27.8%, 7.9% ahead of the benchmark. However, Curling points out that, short term fluctuations aside, over 5 and 10 years MTE has delivered NAV total returns of 82.2% and 212.1%, outperforming the benchmark by 50.9% and 35.0% respectively. Since Montanaro was appointed in September 2006 the NAV total return has been 452.5%, 173.9% ahead of the benchmark and 2.5% ahead of the benchmark on a per annum basis.

Earnings and dividends

Revenue earnings per share rose to 1.10p in the period (2022: 0.96p). An interim dividend of 0.20p per share was paid on 5 January 2023 and the board is recommending a final dividend of 0.77p per share (payable on 15 September 2023 to shareholders on the register on 18 August 2023), which brings the total dividends for the year to 0.97p per share. The dividend is fully covered. Curling highlights that MTE has substantial revenue reserves on which it can draw to smooth any short-term income volatility but says that portfolio companies continue to have strong balance sheets and so do not face the prospect of having significant levels of cash flow diverted to cover increased interest payments.


MTE’s board has set a maximum limit on borrowing (net of cash) of 30% of shareholders’ funds at the time of borrowing. At its financial year end, MTE had borrowings (net of cash) of 3.3% compared to 4.6% at the beginning of the year. The trust currently has borrowings in the form of a €10 million fixed rate loan and a partially drawn down €15 million revolving credit facility, both of which are due to mature on 13 September 2023. The board says that it expects to replace these with new borrowings upon maturity.

Administrator and company secretary change

The company has appointed, with effect from 1 July 2023, Juniper Partners Limited as company secretary and administrator, in place of Link Company Matters Limited and Link Alternative Fund Administrators Limited respectively.

Manager’s comments on performance attribution

“The year to 31 March 2023 saw strong performances from some of our largest investments:

“Kitron is an Electronics Manufacturing Services (EMS) business with its headquarters in Norway. The company had an excellent year as supply chain constraints in the electronics industry eased, allowing Kitron to deliver orders that had built up during the pandemic.

“Brunello Cucinelli is an Italian luxury goods company that is particularly famous for its cashmere products. Its focus on “quiet luxury” and a resurgence in luxury sales worldwide led to the company raising its financial guidance repeatedly during the year, buoying the share price as a result.

“Fortnox Fortnox provides cloud-based accounting systems to companies in Sweden. The stock performed well on news of further price increases combined with continued success in attracting new customers. It has now been a top three contributor for three years in a row.

“The year was not without some stock price falls as well. Our three largest detractors are detailed below:

“MIPS develops patented inserts for helmets, which protects the brain against rotational motion in a fall. After many years of strong performance, destocking by helmet retailers led to a weaker year for the company, particularly in the cycling market.

“QT Group is a Finnish company that provides software tools used to design and build graphical user interfaces. The company saw a slowdown in developer license sales as customers pushed out the timing of new projects. We grew concerned that the competitive environment was also worsening and as a result we sold the position.

“ChemoMetec is a globally leading developer of cell counters that are used in the development of cell therapies. The share price declined due to a slowdown in new instrument sales as the funding environment for cell-based therapy R&D became more restrictive. Consumable and service sales nevertheless continued to grow.”

Manager’s comments on 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 2023, we exited positions in companies including Vitrolife, the developer of media and consumables for IVF treatment, after the company made an expensive acquisition and saw the departure of key executives. Endor, which sells hardware used for sim racing, was sold as new competitors entered the market. Nolato, a third-party manufacturer of plastic components, was sold as the company grew its tobacco heat-not-burn sales to levels that we deem to be too high to pass our ethical exclusion tests.

“Technoprobe, the Italian developer of probe cards used in the testing of semiconductors and Bachem, the Swiss peptide contract manufacturer, were additions to the portfolio.”

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