Dear partner,
With the discussion of the results of eight of our top ten companies, this quarterly report is already quite extensive. Therefore, we will keep our introduction shorter this time.
Furthermore, it would largely convey the same message as we have been delivering for several quarters. A limited portion of stocks on the exchanges performs exceptionally well, while a much larger portion remains stagnant or even declines.
Unfortunately, our investment style still doesn’t align with the segment where the rewards are distributed. Nevertheless, we look very optimistically towards the future. Not only because we are 100% convinced that small family value stocks perform better in the long term (you can also read about this in our blog post on ValuingDutchmanl where we cite some studies).
Another reason to be positive is found in the annual figures of our companies. Despite sometimes facing significant headwinds, they manage to present solid figures and gain market share. Not all figures are equally good everywhere, which is why we have a diversified portfolio of 25 stocks.
In addition to these 25 stocks, recent sales have also left 14% of our portfolio in cash. We also see multiple buying opportunities, not only new ones but also within the portfolio, we see opportunities to increase the weight of some companies at attractive prices.
Finally, we also see anecdotal evidence that strengthens our belief that the turning point, where even our small-value stocks will perform better, is near. We see a number of other investors giving up, wondering why they are putting in all that hard work. Searching for these companies, fully analyzing them, and continuously monitoring them is indeed a lot of work, and doing so while index investors achieve better results from their hammocks is very frustrating.
We have already seen funds changing their approach, financial writers quitting, and fund analysts stopping and taking on another job. In the past, such developments were often signs of a bottom in small-value stocks, and unfortunately, also often a peak in what were then the favorites – today, those are the AI companies.
Of course, if those companies fall from their pedestals, the markets as a whole will likely suffer further blows. Fortunately for us, our companies are already lowly valued. Additionally, we keep in mind the book “Joy of Compounding.” In it, Gautam Baid describes that it’s best to have companies in your portfolio like tennis balls rather than eggs. If they fall, they will bounce back and not break.
Though our patience is still being tested, we look optimistically towards the remainder of 2024 and 2025.
The Fund
Over the first three months of the year, the fund remained largely stagnant. The second quarter seems to have started off better for now.
Results T-Class
Results A-Class
The intrinsic value grew slightly. The subscription to the capital increase of Bonava had a positive impact, as well as the sale of Nobia. The three other sales were just below our intrinsic value, which dampened the positive effect. With 14% cash, there is again room to further increase the intrinsic value.
With the publication of the annual figures of most companies, there is no need for adjustments to the intrinsic value of our companies for now. The last thorough recalculations from the end of last year remain valid. Where a possible small positive adjustment was possible, we have not done this yet for precautionary reasons.
Our five largest positions are:
The following positions had the most negative impact on the result since January 1st. 
The following positions had the most positieve impact on the result since January 1st.
Transactions
So far, no new purchases have been made, although we do have some stocks in mind, as well as some expansions of existing positions. Only with Bonava did we subscribe to the capital increase, something that was already anticipated at the original purchase. We had expected this capital increase, and in combination with the renewed credit terms, it gives us complete confidence in the future of Bonava.
We sold four positions: Nobia, MarineMax, Applus, and KoneCranes.
Regarding Nobia, we decided to cut our losses. Nobia, as a kitchen manufacturer, found itself in the perfect storm when inflation erupted and interest rates sharply rose. Nobia was in the process of building an ultra-modern new factory, resulting in significant new debts, which negatively impacted its financials. At the same time, the market for kitchens in their home country came to a complete standstill, as did all construction projects, for that matter. This is one of the reasons why we were able to purchase Bonava so cheaply.
If this surge of inflation had occurred after the completion of the new factory, it would have been a whole different story. Sometimes a company or entrepreneur can simply have bad luck. Because the construction sector has not shown many signs of recovery yet, we decided that the risk-return ratio was no longer balanced and proceeded with the sale. It was proportionally our biggest loser, something we try to avoid but don’t always succeed in.
MarineMax, in which we acquired a small initial position to better understand the company, was also sold. Despite less favorable market conditions, the management continued an aggressive expansion policy and financed it not as we would have liked to see. Therefore, we sold with a minimal loss (including transaction costs) of 4%.
Regarding Applus, which we bought two years ago because it was already clear at the time that an acquisition would take place, we decided to sell. The bidding process did not unfold as we had expected, but given the period and the challenging year 2022, we are not dissatisfied with a net return of 29.83%.
KoneCranes spent a much shorter time in our portfolio. In just six months, it rose by 37.19% and approached our intrinsic value too closely for us to take the risk and wait for the annual figures. As you know, the market can react very unpredictably to future prospects, and the price can decline even with good figures if the outlook is cautious. That was a risk we did not want to take. A return of 37% in six months for a Value Play is acceptable to us.
With these recent sales, we are now exactly at the level we expect in the long term, namely that one out of every three stocks will be closed with a loss. We consider the two significant outliers, Kernel and Nobia, as exceptional situations caused by external circumstances, such as the war in Ukraine and high inflation.
Company news top 10
Our ten largest positions together represent 56% of the fund’s value. Additionally, we have 14% cash, which means the remaining 15 stocks together account for 30% of the total portfolio.
Stellantis
In 2023, Stellantis’ revenue increased by 6% to €189.5 billion, supported by a 7% higher volume. The sales of fully electric cars increased by 21%. For this year, a catch-up is planned in the United States with the launch of 18 additional models.
Adjusted operating profit increased by 1% to €24.3 billion. Compared to the previous year, when there were more negative factors at play, reported operating profit increased by 10.5% to €22.4 billion. Net profit increased by a similar magnitude of 11% to €18.6 billion.
These are again solid figures, keeping the price-earnings ratio at 4.3x despite the already significant increase in the share price. This is probably because Stellantis does not market itself as effectively as other car manufacturers, despite being filled with technological developments, gigafactories, chips, rapid battery swapping, and investments in startups, not to mention the investment in the Chinese Leap Motor.
They are good at what they do, the only point where the car manufacturer with the same four letters in the stock ticker surpasses them is in the area of better software, a focus point for STLA. But when it comes to building better cars, they are already successful in that.
What particularly appeals to me is that they design their new car-building platforms in such a way that they are not only suitable for electric vehicles, but also for hybrid, hydrogen, and traditional combustion engines. It seems prudent not to rely solely on electric cars.
Stellantis is not expensive yet, even considering the less optimistic outlook, especially with the emerging competition from China for European car manufacturers. With a buyback program for 4% of outstanding shares and a 6% dividend, we can patiently await further price increases. However, we will not try to squeeze every last penny out and will take our profits in due time. The automotive sector is too unpredictable for us to wait until fair value is reached.
Deceuninck
The performance of Deceuninck was solid in a challenging market, with few points of criticism. Revenue declined by 11.1% to €866.1 million, primarily due to a 4.1% decrease in volume, with the remainder attributed to exchange rate differences and product mix.
Both in Europe and the United States, the situation was not easy; high inflation and rising interest rates weighed heavily on the entire construction sector. In Europe, revenue decreased by 10.5% to €410.3 million, with a 7% decrease in volume. In America, revenue decreased by 25.5% to €167 million, with a volume decrease of 14.8%.
In America, employee turnover has stabilized, allowing them, according to themselves, to be ready to take advantage when volumes return.
The previously announced closure of a factory in Germany is expected to improve operational efficiency in Europe.
Turkey distinguished itself in 2023 as the stronghold, with volume growth of 6.9%, an increase in market share, and a favorable product mix. Due to extremely high inflation, people there prefer to invest in their homes rather than keep money in the bank. Despite the higher volume and price increases of 48.1%, revenue still decreased by 1% to €288.8 million, due to the exchange rate with the Turkish Lira.
Despite the challenging conditions, the gross margin increased by 5.7 percentage points to 32.5%, the highest since 2003. Operating profit increased by 9.96% to €51.9 million. This was not only due to the higher gross margin but also because there were write-downs on the Russian activities last year.
The accounting rules specific to situations of high inflation had a positive effect this year, unlike last year when they heavily impacted the result. Partly due to this, net profit increased by 79.2% to €13.6 million.
The Turkish subsidiary, which is also listed on the stock exchange, is 87.91% owned by Deceuninck, representing a value of €428 million, while Deceuninck is listed on the stock exchange at €312.2 million. The activities of Deceuninck are positive and not negative €115 million.
Kamux
The revenue of Kamux increased by 3.5% to €1 billion, a significant milestone for the company. The gross margin also slightly improved to 10.2% compared to last year. The number of cars sold reached 68,257, an increase of 8.5% compared to last year, although still less than in 2021.
At the individual showroom level, we saw a like-for-like increase of 2.9%. Especially in Finland and Germany, good results were achieved. The situation was more challenging in Sweden. Market conditions remained challenging everywhere, and consumers continued to be cautious.
However, operating profit decreased by 7.1% to €15.1 million, resulting in a margin of only 1.6%. The opening of two new showrooms in Germany had a negative impact on the results. Especially the last showroom, which opened only at the end of the year, incurred all costs but did not generate any revenue yet. Capacity was also expanded in Sweden, which did not lead to additional income yet.
Earnings per share decreased by 11.1% to €0.24.
Although the numbers were not impressive, they were not surprising given the weak first half of the year. Despite an improvement in profitability, Kamux still has a long way to go to achieve its goals. This will not be easy given the intense competition.
It is understandable that it has been removed from core positions, but it also remains a Value Play; Kamux remains very cheap.
Smartphoto
Smartphoto managed to achieve a slight revenue increase of 1.4%. The revenue of the department for personalized gifts and photos, Smartphoto itself, decreased slightly to €61 million. However, in the B2B department, called NaYan, there was a revenue increase of 8.4% to €16.8 million.
This weak revenue evolution for Smartphoto indicates that the market was indeed challenging. Consumers are tightening their belts due to all the turmoil surrounding wars and the effects of higher interest rates and inflation.
Thanks to cost control and smart price increases, Smartphoto was able to achieve a higher gross margin despite higher production, material, and transportation costs. Labor costs also increased, mainly due to the automatic indexation of wages in Belgium.
Despite this higher gross margin, operating profit still decreased by 6.5% to €9.2 million. Here too, the higher personnel costs for support services, along with higher depreciation and some impairments, weigh on the result.
However, net profit was able to increase by 26.2% to €6.93 million. Last year, a loss was booked on the receivable they had made due to VAT issues with the seller of NaYan. This, together with smaller exchange rate differences and lower taxes, led to this increase in net profit.
While there was a share buyback and a higher dividend, totaling €6.2 million, the cash balance in the account still managed to grow by 6.9% to €19.7 million. This year, they are also increasing the dividend by 5%.
We would have liked to see higher growth in revenue and, of course, in operating profit as well. A company that sets up a factory to double its production certainly does not do so expecting not to see revenue grow. However, market conditions are what they are, and we have no control over them. Unfortunately, it’s another whole year of waiting to see what the evolution will be. As long as the year-end period remains crucial, the interim figures of the next quarters are just small indicators.
Our confidence remains intact, but unfortunately, our patience is being tested.
Somero Enterprises
The revenue of Somero decreased by 9.7% to $120.7 million. To be honest, with all the gloomy reports we’re receiving from the construction sector, I’m not surprised by this. 2022 was, much like 2021, a strong year, so finding only a 10% decline in the current market is quite resilient. We can imagine that contractors are concerned about the future; they won’t order laser screed machines worth tens or hundreds of thousands of dollars if their old machine can still level concrete, albeit perhaps less efficiently.
The decrease in revenue is mainly noticeable in North America, where revenue was down by 13.2% to $88.4 million. Nevertheless, customer activity remained high, with the construction of new factories, data centers, and warehouses. There was also sufficient construction on a smaller scale for retail, schools, and medical centers. However, Somero’s customers do notice that projects are being postponed, although not yet canceled. Additionally, concrete shortages caused delays.
Even the smallest segment, the “rest of the world,” saw a decline in revenue, mainly due to withdrawing from China. Although there are still plenty of opportunities in these countries, Somero, as a small company, cannot seize them all at once.
The expansion of the team in Australia is yielding further results. Revenue there increased by 17.9% to $9.9 million, resulting in a move to a larger building.
Even in Europe, revenue managed to increase – against the market trend – by 1.3% to $15.1 million. Here too, the company is reaping the benefits of additional salespeople and support staff. Many new customers were attracted, although they naturally start with entry-level models. As mentioned earlier in the discussion of Somero, they still need to create their market.
Operating profit decreased by 22.05% to $33.59 million. Despite the lower revenue, costs remained the same. This also indicates the effort made immediately in America because we know that there were larger teams in Australia and Europe, resulting in higher costs.
Net profit decreased by 10.1% to $27.98 million. Exchange rate differences, higher interest income, and some other revenues contributed to this smaller decline compared to operating profit.
Despite this decrease, we are satisfied with these results. We are comparing them with a very strong period, and we must not forget that new technologies such as the Skyscreed for high-rise buildings are substantially changing the way contractors work. During tougher times, this might not be a priority for them, but that doesn’t mean it won’t break through in the long run. For example, no Skyscreed was sold last year.
For the longer term, we can’t express it better ourselves than Somero’s management on why I believe in the company:
“The prolonged and worsening scarcity of skilled personnel has led to the need for automation and work productivity, coupled with strong demand from end-users, such as the reshoring of production, battery factories for electric vehicles, and chip manufacturing, which creates a long-term demand for our products.”
Luceco
The revenue of Luceco, our British specialist in electrical equipment and LEDs, increased by 1.3% to £209 million in 2023. Although this percentage may not seem impressive given price inflation, it is important to note that they are growing in a market that is overall shrinking, allowing them to gain market share.
The construction market as a whole declined by 5.8%, with the DIY market decreasing by 4.7% according to Barclays, and the market for renovation, repair, and improvements decreasing by 8% according to the Construction Products Association. However, this segment increased by 0.8% at Luceco.
In 2022, Luceco faced challenges from customers who had built up excessive inventories after pandemic-related shortages and had to reduce them. This was no longer a problem last year.
Adjusted operating profit for Luceco as a whole increased by 9.1%. Reported operating profit increased by 62% to £22.2 million. However, this included the closure of operations in France and Germany in 2022. The rest of the increase is attributed to lower material and transportation costs, despite higher labor costs.
Net profit increased by 51.8% to £16.7 million, which is less than the operating profit due to increased taxes in the United Kingdom.
Tessenderlo
The figures for Tessenderlo were not good. Especially the fact that everything declined together was somewhat disappointing to us. With the many investments they have made in recent years, we had hoped for some more contrasting movements. Of course, there is an explanation, but let’s first look at the numbers.
Revenue fell by 11.8% to €2.928 billion. To clarify, I am comparing everything as if Picanol already belonged to the company in 2022.
When we look at each department, we see a decrease in revenue of 18.5% in Agro to €739.9 million. The operating profit here decreased by 90.7% to €9.4 million. In Bio-Valorization, the revenue decline was 9.2% to €726.4 million. The operating profit here decreased by 86% to €10.8 million.
Luc Tack also provided a detailed explanation of why these declines are so significant. In addition to pressure on selling prices, inventory write-downs, and start-up costs at Akiolis Iberia, there are also other factors at play.
In 2022, Tack described these two departments as cycling downhill with a tailwind. Customers saw prices rising and stocked up on extra inventory. As a result, Tessenderlo was not only able to smoothly increase its selling prices but also kept the purchase prices for raw materials contractually fixed, keeping them low. The war in Ukraine had not yet had an impact.
In 2023, it became clear that inflation was persistent and that the war would not disappear quickly, contrary to what many believed when it first began. As a result, Tessenderlo was obliged to significantly increase its selling prices, which met resistance from customers. They first worked through their inventories and only purchased what was truly necessary.
Meanwhile, suppliers continued to raise prices. Previously, Tessenderlo could purchase potassium from Russia and Belarus for 40-50 years, about 1,300 km from where it is processed. Due to sanctions against Russia, Tessenderlo is no longer allowed to buy potassium there. Tack flew to Canada and, according to his own account, had to beg to get raw materials delivered. These raw materials then need to be transported here. In other words, very expensive raw materials and transportation.
Furthermore, Tessenderlo also noticed within the Bio-Valorization sector that purchasing raw materials became more difficult. Prices increased fourfold because the number of pigs had to be significantly reduced due to European regulations. As a result, gelatin processors faced a much more limited supply for which they had to compete. Due to these price increases, customers also started looking for alternatives.
Finally, Tessenderlo is also very strong in organic fertilizers. These have always been more expensive, but in these difficult times, the price for the green story becomes too high for many users.
For this year, things don’t look promising either. Initially, potassium indeed did not flow smoothly from Russia due to sanctions, but now the situation has changed. They export worldwide, including to North America, but not to Europe. So now Tessenderlo’s competitors can deliver cheaper products that are also much less expensive to produce. Only due to the excellent quality does Tessenderlo still make sales, but even that has its limits. In other words, Europe is shooting itself in the foot (once again).
In Industrial Solutions, we see what I was looking for. Revenue here decreased by 3.2% to €708.9 million, and operating profit declined by 4.9% to €47.4 million. Here, we observe that the lower figures at DYKA, which sold fewer pipes due to the weaker construction sector, are offset by Kuhlmann. At Moleko, the contract with Barrick Gold ended, but this was internally compensated for.
In Machines & Technologies, formerly Picanol, revenue decreased by 15.2% to €622.4 million. However, operating profit was able to increase by 65.1% to €30.3 million. This is mainly due to the poor year before. This year, the higher prices could be passed on. The decline in revenue is therefore entirely due to a decrease in volume, especially in the second half of the year.
Compared to competition from Japan, these figures are not bad, especially considering that Japanese companies have the advantage of a cheaper Yen. Tack expects that we are at a low point here.
Lastly, T-Power, the gas plant, saw revenue decrease by 4.7% to €76.7 million due to lower prices. Operating profit decreased by 8.4% to €22.2 million. The tolling agreement with RWE expires from 2026 onwards, although this seems to provide sufficient time to adjust by then.
For the entire group, operating profit decreased by 55.7% to €120.1 million. Net profit was able to hold up somewhat better, thanks to lower taxes and the profit from the sale of Rieter shares, with a decrease of 29.2% to €114.4 million.
Free cash flow remained virtually unchanged at €219.2 million thanks to lower working capital requirements. Thanks to this cash flow and the sale of Rieter shares, the net debt of €59.5 million was converted into a net cash position of €10.1 million. This was achieved even while €72.3 million was spent on dividend payments and share buybacks, and €178.5 million was invested.
For 2024, similar results are expected. All in all, Tack declared himself satisfied with these results given the circumstances. This must also be the first time I haven’t managed to talk him down a bit.
With a strong balance sheet, Tessenderlo can withstand a difficult period, but Tack says it’s not the strongest, but the most flexible companies that adapt to changing situations that survive. I wonder if he has something specific in mind with this statement. We share his opinion that the results, given the external circumstances, are still digestible.
After the close of the quarter, it was announced that Tessenderlo is increasing its share buyback program. It will spend up to €69 million over the next three years to repurchase 2.3 million shares. At the current market capitalization (below book value) and with sufficient cash on the balance sheet, this is a good move.
Sofina
The net asset value per share as of December 31st amounted to €273.62. This represented a 2.1% decrease in value, mainly attributable to the Private Funds. However, it was not the battlefield that was expected in the private equity sector, despite all the doomsday predictions.
Sofina has invested 47% of its portfolio in private equity funds, totaling 536 units, many of which are managed by the same managers. Sofina Direct, the other half of the portfolio, is divided among 79 companies, with “Long-Term-Minority investments” accounting for 32% and “Growth” for 21%.
The top ten investments within Direct represent 27% of Sofina’s entire portfolio, which is roughly half of Direct, while the other 69 companies make up the remaining half. No single company in this top ten represents more than 5% of the portfolio. Only Bytedance would qualify for more if you also consider the shares held through the private equity funds, but Sofina has no control over the buying or selling of those shares.
The five largest investments together represent 15% to 20% of the portfolio. So, our portfolio is more concentrated. We continue to find it absurd that Sofina is trading at such a discount to its intrinsic value.
Others
The only ones from the top 10 that weren’t discussed are Exor, which will publish its annual report this month, and Cake Box, whose fiscal year ended on March 31st. These will be addressed next time.
Next Meeting
It was about time that Sam made the pilgrimage to Omaha. Unfortunately, now it’s only to see Warren Buffett, because Charlie Munger passed away last year. As a result, the online quarterly meeting will take place on May 14th at 7:30 PM. The link with the login details will follow in a subsequent email.
Kind regards and thank you,
Sam & Joël