Bellevue Sustainable Entrepreneur Europe (Lux)

European equities, as measured by the SXXR, fell 3.6% in October, impacted by the strength of the US economy and further rising LT rates giving further credit to the “higher for longer” Fed narrative. The oil price rose – although moderately – on the back of the tensions in Israel. The Q3 reporting season started with too lofty expectations, resulting in negative top line surprises and high volatility. Inflation in the Euro Area cooled to 2.9% yoy in October 2023 (4.3% in Sept.), falling slightly below the market consensus of 3.1%. Meanwhile, the core rate also fell to 4.2% (4.5% in Sept., 5.5% in Aug.), marking its lowest point since July 2022. Eurozone provisional PMI survey data for October was weak, hitting 46.5 (47.2 in Sept.), with both services (47.8) and manufacturing (43) indexes slowing down sequentially. In term of sector performances, media (+1.3%), utilities (+0.6%) and insurance (-0.0%) performed best while automobiles and parts (-7.9%), retail (-6.9%) and industrial goods and services (-6.1%) lagged the most.

Against this backdrop, the fund declined 4.9% (EUR / B shares), underperforming its benchmark by 133 bps.

Main detractors in the month were Worldline (-55.1%), Kion (-20.8%) and Metso (-15%). Worldline collapsed 60% after having reduced both 2023 and 2024 guidance. While disappointing, the share price reaction was completely disconnected from the financial impact of the profit warning, as 2023 and 2024 EPS should be reduced by -15% resp. -20%. This left Worldline trading on an EV/EBITDA multiple of less than 6x, a very cheap level for a company absolutely central in the European payment system while recent M&A operations in the sector have been done between 9x and 13x. At the time we write, Worldline share price has recovered ca. 40% from its trough. Kion’s Q3 orders, sales, EBIT and cash flow figures were in line with the recent pre-announcement. However higher interest and tax led to a 32% miss to Q3 net income forecast. Finnish mining equipment provider Metso reported 6% yoy organic order decline, -21% for aggregates and -1% for minerals. Medium-term outlook is positive as the order pipeline has increased substantially during 2023, however investment decision-making among its mining customers is slow due to higher rates and cost inflation.

Top 3 contributors in the month were Pernod Ricard (+6.1%), BE Semiconductor (+4.6%) and Essity (+5%). Despite the release of a lackluster set of Q1 results, Pernod shares rebounded. The market was reassured by the reiteration of the FY guidance. Also, the company commented on short term trading improvements in China and a normalization in the US. Finally the management also highlighted a strong outlook for India and Travel retail. All these comments bode well for a further rerating of the shares in the coming quarters. BESI reported better than expected Q3 results marked once again by very strong profitability underpinned by its best in class gross margin and strong costs management. Q4 revenue guidance of 15% to 25% q/q suggested that BESI has likely passed the trough of this downcycle while 2024 is shaping up to be a growth year. Future announcement of additional hybrid bonding orders and the broadening of the clients base should gradually dispel concerns over the adoption of this technology. Essity performed well following a good 13% EBIT beat at Q3, driven by a strong margin recovery at professional hygiene and health & medical. This positive surprise bodes well for a further margin recovery, driven by product mix improvements and continued restructuring. We continue to believe that the shares are attractively valued at only 7.5x EV/EBITDA 2024E, a strong discount to peers.

The softening of macro data and the well engaged disinflationary trends together with the recent more dovish central bank messages cement expectations that the Fed and the ECB are now done hiking. The market is only starting to appreciate the higher costs of aggressive debt financed corporate expansion of the past decade and some overstretched companies may even struggle to stay afloat. We deem balance sheet strength more important than ever in an environment of higher-for-longer interest rates. With the Bellevue Sustainable Entrepreneur Europe Fund we select high quality, low debt companies mostly family-owned or controlled by a long term anchor investor with an intact ESG profile.