Bellevue Entrepreneur Europe Small (Lux)

European small and mid caps, as measured by the MSCI Europe Small Cap ex-UK, rose by 0.7% in April (broader market SXXP 2.5%, SPX 1.6% in USD), consolidating after the SVB failure and CS rescue. Headline inflation continued to slow to 5% and 6.9% in the US and in Europe respectively, but their core components remained elevated. Encouragingly, the ‘flash’ Eurozone PMI rose for a sixth consecutive month to a 11-month high of 54.4. The services sector accelerated its expansion to 56.6 after 55.0 in March to a 12-month high. Manufacturing output contracted 48.5 vs 50.4, falling back into decline after two months of marginal improvement. In term of sector performances, insurance (+5.5%), retail (+4.4%), and real estate (+3.6%) performed best while energy (-5.2%), chemicals (-3.3%) and telecommunications (-2.2%) lagged the most.

Against this backdrop, the fund increased 1.0% (+11.4% ytd / EUR B shares), outperforming its benchmark by 29 bps (+338 bps ytd).

Top performers in the month were Majorel (+44.7%), Wärtsila (+20.9%) and Arjo (+13.6%). Majorel, the Luxemburg call center company, was the object of a takeover bid by Teleperformance at a price of EUR 30 per share. This represented a premium of 43% and a PE of 16x, more adequate considering the sound financials of the company and its strong growth perspective. Wärtsilä delivered a stronger-than-expected Q1 order intake, up 26%, with the energy division up 47%. Energy storage represented the largest improvement, adding to the EUR 300 mn order recently announced and implying that the activity breakeven is likely to come sooner than expected, a welcome boost that underpinned a ca. 10% consensus EPS upgrade. Arjo delivered strong Q1 results marked by both stronger organic growth and gross margin, leading to a 21% beat at the adjusted EBIT level. Cash conversion also improved, as inventory build-up continues to be reduced. Management reiterated its 2023 organic growth within its mid-term interval of 3-5% underpinning consensus expectations of 3.3%, and highlighted that early indications from its US customers suggest that the challenging regional situation is starting to turn around.

Top detractors in the month were U-Blox (-14.9%), Nexans (-14.9%) and Ipsos (-13.9%). After a strong month of March (+26%), U-Blox was subject to profit taking in a generally mixed semiconductor reporting season. U-Blox released Q1 revenues with an organic growth of 20% yoy and reiterated its 2023 objective of 6% to 16% revenue growth, led by strong demand and increased penetration for IoT products in both the industrial and automotive sectors. U-Blox is trading on an very attractive multiple of 7.5x 23E EBIT. Nexans released Q1 sales up 3.1% missing slightly estimates overall but with a disappointing decline in G&T (-10.7%) due to a drop of the umbilical business and project phasing. Ipsos delivered Q1 organic growth of 0.6%, slightly short of expectations due to a slower start of the year with US tech clients postponing a few large studies and China being still impacted by COVID-19. The company reiterated its FY2023 ca. 5% organic growth target, implying a strong 7% for the rest of the year supported by a good order book, recent contract gains and China’s acceleration. 

In light of a resilient macro, both in the US and in Europe, uncertainties abound around both the timing and the severeness of a recession. While equity markets seem to price a soft landing other segments, like oil have corrected considerably, pricing in a hard landing. Will labor crack and when? SMEs in the US and elsewhere seem to “hoard” employees as workers remain scarce. Jobs are plentiful and US consumption has been accelerating in Q1 versus Q4. M&A is back on the map and it is worth remembering European valuations display record discounts to their US counterparts. In this challenging environment we continue to work on a diversified portfolio, searching for idiosyncratic ideas with attention to quality, moat and financial stability without overpaying.