Carsten Dehn and Ulrik Ellesgaard, fund managers, Lannebo Europe Small Cap
The Europe Small Cap fund was launched 17 October. The return for October since inception was -1,7% which is slightly lower than the market in the similar period. The European Small cap equity market has been soft due to a concern among investors regarding the strength of the overall growth possibilities and future QE from the Central Bank.
The portfolio is fully invested and consists of 30 companies. The highest sector weights are within industrials and financials. On a company level the biggest positions are Arrow Global, Stabilus and Dürr.
Arrow Global is a UK based debt-purchasing and servicing business with a top three market position in the UK and Portugal. The company has a strong track record in terms of top line growth and return due to a very disciplined executions strategy. We believe that the EPS growth will be above 20% per year in the coming years with a Return on Equity of more than 27%. The valuation is very attractive given the high returns and earnings growth.
Stabilus is a German company with a global market leading position within gas springs and dampers. The products are mainly sold to the automotive and industrial industry. The customer base is diversified and the company benefits from strong pricing power and economies of scale combined with structurally growing demand. We believe that earnings will grow significantly going forward and that the market undervalues the high quality of the business.
Dürr is a German company with a global market leading position within paint shop engineering to the automotive industry. Dürr operates mainly in oligopolistic niche markets with limited competition. As the most dominant player, the company is well positioned to benefit from of a sustained catch-up demand in several markets. In the longer term Duerr will also benefit from the expected transformation of the automotive industry towards electrical cars.
The best performer in the portfolio the first three weeks was Alimak. The company has a global presence in hoists, elevators, platforms and spare parts, with a dominant position in the industrial rack -and-pinion based market. The strong performance has been driven by a strong order intake related to the construction industry and due to an acquisition which in total will lead to strong earnings growth in the coming years.
The worst performer in the portfolio was NCC Group. The UK IT security services specialist issued a trading statement saying that the organic growth in the business was very strong. However it was also stated from management that the company has lost some contracts related to the latest acquisitions. This is clearly negative news but we believe that the underlying business is strong and the share price reaction is overdone.
Written by: Ulrik Ellesgaard