Another month, another ambience…

European stock markets moved more than 5% for the fifth consecutive month. During October this was a positive move, which coincidently is only one of three times that markets have closed the month in positive territory in 2022.

Fund Commentary
11 Nov 2022

European stock markets moved more than 5% for the fifth consecutive month. During October this was a positive move, which coincidently is only one of three times that markets have closed the month in positive territory in 2022.

Once again financial markets have however proved extremely nervous, with the CPI continuing to be the main concern. Inflation figures, published at the end of September, have further condemned central banks to target the neutral rate level as soon as possible.

Inflation is also impacting the Q3 reporting season with profit warnings, because of the inflationary environment impacting costs and consumer demand, one of the main themes so far. European stocks however have a silver lining; lower valuations and earnings outperformance versus their US peers.

Furthermore, the Euro’s weakness has mostly been a tailwind for the region’s earnings and was largely underestimated in consensus numbers prior to release.

Rates are still dictating the trajectory of travel for equities and showing no sign of a peak yet, implying there may not be an absolute rally for European equities towards year-end. However, October’s rebound has sent a clear signal that some sectors have been massively oversold.

There are a few examples from the Strategic European Silver Stars Fund ’s portfolio that illustrate this point well, comparing the current stock price versus the 30 day low hit during the month of September.

Our regular readers will recognise many of these names as we have regularly discussed these stocks during the year because of the massive differences between our fundamental valuations and the ridiculously low valuation levels the market was placing on them.

Boozt’s stock price is up 61% compared to the low point of the past 30 trading days, Just Eat Takeaway up 45%, Trigano up 43%, TeamViewer up 36%, Byggmax up 30%, Verallia up 29%, RVRC up 27%, to name the most relevant ones.

Many of these companies are perceived as being exposed to European consumer discretionary spending, and for this reason, only, passive flows had pushed their stock prices to such low levels that they often had FCF yields higher than 20%. We are happy that there still exists a level that proves too oversold and tempting to be ignored, even in the context of the environment that we find ourselves.

The Strategic European Silver Stars Fund returned +7.31% in October, versus +7.04% for the benchmark, with the Fund delivering an outperformance on a YTD basis of 6.17% (-17.31%, in absolute terms). October’s performance was achieved despite the 26.3% cash cushion in the portfolio at the end of September, showing how undervalued the invested part of the portfolio was back then.

The largest contributors to October’s performance were: Verallia (+1.15%), TeamViewer (+0.93%) and Trigano (+0.84%). LDLC was the largest detractor (-0.17%) during the month, followed by Barco (-0.03%) and Piovan (-0.02%).

Verallia released another positive set of results, printing a strong beat vs consensus, and another guidance upgrade for FY22 EBITDA (c6% upgrade to the previous mid-range guidance, given in Q2 2022). The original “more than €700m EBITDA for 2022” was upgraded to €750-€780m in July and was upgraded a second time in October to more than €820m.

Despite this 17% upgrade in EBITDA guidance, a massive deleveraging and a strategic acquisition announced in the UK in early October, the stock price is still down 9% YTD as we speak, trading around 5x EBITDA 2023 with a 12% FCF yield, still leaving ample room for re-rating.

The same pattern materialised for TeamViewer, with the stock rebounding strongly from the low point in September. In early October the company released its Q3 report with billings in line and a fourth consecutive beat on profitability, enabling them to reiterate their full-year guidance.

Finally, Trigano’s strong run continued in October post the release of their full-year 21/22 revenues in September. This week, a sell-side broker sizeably increased its target price, highlighting the valuation that is “out of touch with fundamentals”, even post the 43% strong stock price increase in recent weeks.

On the detractor side, there is little to be mentioned given the minor impact on performance.

The Fund initiated a new investment in October and we are still currently building the position. We shall come back to you with more details once the position has reached the desired weighting.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Download the latest factsheet. 

Please do not hesitate to contact us or visit the Strategic European Silver Stars Fund Page.

Adam TurbervilleAdam Turberville
+44 1481 742380

The views and statements contained herein, including those pertaining to contribution analysis, are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 04/11/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.

Morningstar™ Ratings Disclaimer
The Strategic European Silver Stars Fund – A EUR share class has a Morningstar rating of 4 stars overall and 5 stars over 3 Years. Morningstar Rating™ as of 31/05/2022. Past performance may not be a reliable guide to future performance. Returns could be reduced, or losses incurred, due to currency fluctuations. The Strategic European Silver Stars Fund received a Morningstar 3 Globe Sustainability Award. Sustainability Rating as of 30/04/2022. Out of 789 Europe Equity Mid/Small Cap funds as of 30/04/2022. Based on 98.92% of AUM.  Historical Sustainability Score as of 31/03/2022. Sustainalytics provides company-level analysis used in the calculation of Morningstar’s Historical Sustainability Score. Data is based on long positions only.