Dear partner,

Let’s start with our best wishes for the new year. Wishing you and your loved ones good health, professional success, and plenty of stock market gains.

Let’s cut straight to the chase: 2024 was not a good year for our fund. Throughout the year, we’ve explained several times what we believe to be the causes of this. However, you’re not looking for excuses. Simply put: there’s insufficient demand for the shares of the companies we’ve invested in.

In the previous quarter, we used a challenging title and letter to emphasize our belief that we’ve done our job well. Yet the confirmation of this, in the form of price gains, remains absent. We remain convinced of our choices: the companies we’ve invested in are, in our view, good to excellent, and we purchased them at excellent to good prices.

However, the question that lingered after the last quarterly meeting is:

“All well and good, our companies are high quality and undervalued, but who says the market will ever recognize this? What could be the catalyst?”

What do we see today?

Today, American stocks dominate the markets. The global index consists of 74% American stocks. Capital flows into the U.S. for several reasons:

• The stock market there is rising (yes, sometimes it really is that simple).
• A booming tech sector (fueled by the AI hype).
• Higher liquidity.
• Less regulation.
• A unified financial market with just two exchanges, compared to the fragmented landscape in Europe.
• A significant increase in government debt, which has stimulated growth. (For example, U.S. government debt grew from 63.82% of GDP in 2008 to 123.1%. By comparison, in the same period, EU government debt grew from 58.9% to 88.1%.)

Additionally, passive investing (i.e., investing in ETFs) has strongly amplified this trend.

For those interested, there’s an excellent lecture by Michael Green, presented at a CFA (Chartered Financial Analysts) dinner, where he discusses the risks of excessive dominance by passive investing. The title of the presentation already says a lot: “The Greatest Story Ever Sold.”

Here’s a snippet from the organizer’s announcement:

“His studies and messaging is somewhat like taking the red pill in The Matrix. Once you’ve listened to his thesis, there is no going back. The world is going to look a little different to you.”

This talk is worth spending an hour on. It will help you better understand current developments in the stock market.

According to Michael Green (and we share his conviction), the current overvalued U.S. market—particularly the inflated valuations of the largest stocks—is largely driven by passive investing.

In Green’s view, passive investing is the simplest algorithm in existence: you give me money, I buy. The mechanism is purely about “buying the market,” without distinguishing between overpriced stocks and those that are not. In other words, no rational or informed decisions are being made. As long as money keeps flowing into ETFs, the party in the U.S. will continue.

When Will Our Portfolio Revive?

The answer to this question is, at its core, simple: when demand for European stocks returns.

We don’t need to expect the rest of the world to suddenly start investing en masse in Europe. Certainly not Americans, with their “greatest-country-in-the-world” mentality. And that’s not necessary either. It would be enough if Europeans started investing more in their own region again, rather than channeling all their savings to the U.S.

To illustrate the scale of this issue: according to a study by former Italian Prime Minister Enrico Letta, a staggering €300 billion of European savings flows to the U.S. annually. For comparison, the total value of all Belgian publicly listed companies combined is €373 billion. If we exclude AB InBev, it drops to just €273 billion. This shows how significant the impact would be if even a portion of this capital remained in Europe.

Knowing why money flows to the U.S., it’s theoretically easy to outline what’s needed to bring European investors back to their home markets:

• A unified stock exchange.
• Increased liquidity through incentives for investing, rather than punishing it through taxation.
• Less regulation, both for companies and financial markets.

Another critical factor is Europe’s high energy costs, which are putting enormous pressure on its industries. On this front, policymakers will need to develop a more realistic scenario than the current green dogma to prevent our companies and economies from collapsing.

One possible catalyst for a shift of capital to Europe would be a crash in U.S. stock markets. In the past, markets could collapse simply because they became too expensive. However, based on Michael Green’s thesis about passive investing, that likelihood is much lower today. Passive investors don’t care about valuations, and more importantly: they don’t sell.

A crash would only occur when passive investors are forced to sell. But when would that happen? Only when they need cash. In other words, an economic recession in the U.S. alone wouldn’t be enough. Significant job losses would need to occur first, forcing passive investors to liquidate.

This may not be the news we were hoping for. As long as the party in the U.S. continues, our gains will largely remain limited to the actual earnings of the companies we invest in. A revaluation will have to wait.

That the U.S. markets are overvalued likely needs no further proof. And after watching Michael Green’s speech, you’ll likely understand the risks at play there.

What we do need to convince you of is this: the companies we invest in have at least the conservatively estimated value we assign to them (see the orange intrinsic value line below). If you’re as convinced of this as we are, you’ll see the Chess Capital fund as a crucial diversification for your portfolio—especially when compared to your other investments, which are likely heavily U.S.-focused, such as pension savings, insurance, and wealth management.

To reinforce this conviction, we’ll discuss the ten companies that make up the largest part of our portfolio below. We’ll briefly explain what they do, why we selected them, and how we arrived at their valuation. We think it’s important for you to fully understand our choices.

The Fund

Our fund experienced a decline of 3.79% in 2024. Naturally, this is disappointing, especially when compared to the very high returns achieved by investors simply following the U.S. stock market.

You’ll notice that this letter differs from last year’s. For example, the ratios we previously used to illustrate the value creation, safety, and low valuation of our portfolio companies are absent this time. The reason for this is that the available data is often outdated, lagging behind by three to six months. Additionally, we want to place more emphasis on our companies themselves, rather than focusing on broader market dynamics.

To strengthen this focus, we’ve decided to change how we communicate going forward. From now on, we will provide a short monthly overview of the portfolio. The detailed quarterly letters will follow later, once we’ve received the most up-to-date figures from our companies.

The in-depth analysis of ratios will be shared with you once we have the complete annual reports from our companies.

Results T-Class

Results A-class

We are, of course, not satisfied with these results. In fact, that’s putting it too mildly—we are deeply disappointed. Five years ago, when we first spoke to potential investors, we envisioned things unfolding very differently.

We’re not going to offer excuses again—you’re already familiar with those. What we do want to emphasize once more is that we have no control over the fund’s market price increase. The only thing we can control is the growth of its intrinsic value.

By that measure, we performed better this year than last. In 2023, we managed to add only 1.9% to intrinsic value, whereas in 2024, this growth reached 13.1%.

We understand that you focus on the results and not on what you might see as the perhaps “fictional” intrinsic value. If we weren’t the ones managing the fund ourselves, we’d probably do the same.

That’s precisely why, after sharing these figures, we will take a closer look at the largest positions in our portfolio based on intrinsic value. By doing so, we aim to bring you along in our conviction and demonstrate why we have confidence in our approach.

Our Five Largest Positions Are:

The following positions, which remain in the portfolio, had the greatest negative impact on our 2024 results. Please note that this is based solely on stock price performance; dividends are not included in this calculation.

And the following positions contributed the most to our results:

The fact that there are losers in the portfolio is not abnormal. We expect that about one in three companies in our portfolio will underperform.

Looking at the closed positions below, we see 22 stocks, of which 5 were loss-making. That is actually slightly fewer than we had anticipated.

As of December 31, 2024, our portfolio contained 29 stocks, of which 12 have been loss-making since their purchase (including dividends). This is slightly more than one in three. However, when we combine the closed positions with the current portfolio, we arrive at the exact one-in-three ratio.

Why, then, the modest performance?

The losers in our portfolio and their losses do not surprise us. We are confident that these losses are either temporary or will diminish significantly over time, as we’ve already seen with companies like Argentex.

The underperformance of the fund is primarily due to the absence of strong outperformers at the top end. While we have enough winners, their gains remain too modest. In our view, this is largely a result of the current sentiment surrounding Europe. It’s a matter of waiting for a revaluation.

Below is an overview of all positions closed to date:

These results are inclusive of net dividends and after transaction costs

Transactions

In 2024, we executed a relatively high number of transactions. One example is Cloetta, which was only in the portfolio for a few months before we took profits. Cloetta was one of eleven new stocks we added to the portfolio. Two of these eleven were familiar names on which we had previously made gains: X-Fab and Hornbach Holding.

Among the new positions, we also have two very small investments: Magnera (formerly Glatfelter) and Anexo. These are so-called net-net stocks, where the net current assets (cash, inventories, and receivables minus all liabilities) exceed the market value. While these stocks generally carry slightly higher risk, they often deliver highly attractive long-term returns when spread across a diversified portfolio.

Additionally, we acquired several cyclical stocks, including Vicat, Manitou, and Keller Group. These companies are market leaders in specific niches and have the potential to benefit significantly from a recovery in the construction sector.

Another interesting addition is K+S, a commodities company focused on potassium. We were able to purchase this stock at one-third of its book value. If potassium prices rise, the stock could see significant value appreciation due to leverage effects.

A unique story is F.I.L.A., whose Indian subsidiary is worth more than the parent company as a whole. This is happening in the relatively stable sector of stationery products, such as pencils and related items.

We also expanded several existing positions. Some stocks simply became too cheap to ignore, including Bonava, Sipef, Stellantis, Focusrite, and even Tessenderlo.

Below, you’ll find an overview of all the purchases and sales we made in 2024.

On the other hand, we also sold a relatively large number of stocks in 2024.

One example is Nobia, the kitchen manufacturer, which we sold at a significant loss. The collapse of the construction sector in Sweden weighed heavily on the company, and with limited visibility for recovery, combined with substantial investments in a new factory, the risk became too great. In hindsight, we could have—or even should have—acted more quickly.

We also sold Marinemax due to the management’s aggressive acquisition strategy during a period of rising interest rates. While this was the right decision from a risk management perspective, it unfortunately proved to be premature: shortly after our sale, Marinemax was acquired at a significant premium. This is a case of bad luck, but the decision itself was sound.

The remaining companies were sold at a profit. These sales stemmed from three reasons: our original thesis played out, prices rose too quickly, or we identified better alternatives.

Key Companies by Intrinsic Value

When we look at the intrinsic value of our companies, we get a different ranking than when we consider only their current market value. Intrinsic value combines the current value with the upside potential we estimate.

To help you become as confident as we are, it’s valuable to delve deeper into the most important companies measured by our estimated intrinsic value. This will give you insight into how the orange line at the top of the chart is constructed.

The top ten companies in our portfolio make up 60% of the total intrinsic value. To exceed 80%, we need 17 stocks. To account for the full 100%, an additional 12 stocks are required.

In this report, we’ll focus on the top ten. In the next report, we’ll discuss some of the other companies in the same way, so you’ll gain a complete understanding of our portfolio.

Cake Box

Brief Description

Cake Box is a franchise of patisseries, specifically specializing in egg-free baked goods. An egg-free diet can be a choice for health reasons or due to religious beliefs. Before analyzing Cake Box, I was unaware of this, but certain sects within Hinduism apparently avoid eating eggs.

Of course, the company has outgrown this niche of specific communities. Their egg-free cakes are gaining popularity with the general public; they are also a hit with vegans. It’s also very convenient that, for a wedding or birthday, you don’t need different cakes for those who are vegan or not—you can simply use one large cake for everyone.

Why We Chose Cake Box

Regardless of the economic situation, there will always be birthdays, weddings, and other events, big or small, that we want to celebrate. And cake is naturally a part of such celebrations.

The market competition is either small and local or comes from large industrial chains, which are less flexible and fresh. Furthermore, their egg-free concept is relatively unique.

As a franchise group, Cake Box is not as capital-intensive as it would be if it operated all stores itself. Moreover, franchisees tend to be much more active and entrepreneurial than regular employees, which will certainly help growth at the individual store level.

Cake Box is a small company that can continue growing at a nice pace for several years. Major expenses for their third location, IT professionalization, and management are now behind them. These challenges weighed on cash flow in recent years, although it remained highly attractive. After these growing pains, the company has entered the next phase of maturity.

Our Valuation

Cake Box has ambitious growth plans. The company wants to expand to 400 stores in the United Kingdom and is testing the European market with a pilot store in Paris. If this test proves successful, there is potential for further growth in Europe.

For our calculations, we assume their target of 400 stores will be achieved. With an average revenue of £370,000 per store, total revenue would amount to £148 million. Of this revenue, 46-48% flows to Cake Box, which at a net margin of 18% results in earnings of approximately £0.31 per share.

If we then project growth in line with inflation, we would value Cake Box at around £3 per share. This excludes additional cash the company generates in the meantime, which could increase the total value to approximately £3.50 per share.

If the concept also succeeds in Paris, we would need to revise this calculation, as further European expansion would significantly increase growth potential.

River Capital, the owner of The Cheesecake Shop in Australia, also recognizes the undervaluation of Cake Box. In 2023, they purchased additional shares after their offer of £1.60 per share was clearly deemed too low. The question remains whether another bid might follow in the future, which could accelerate Cake Box’s valuation.

Tessenderlo

Brief Description

Tessenderlo Group is a diversified industrial group active in machinery, agriculture, food, energy, water management, and more. Tessenderlo operates globally with over 7,000 employees divided across five segments. Let’s first get to know these diverse segments:

• Machines & Technologies: This includes the former Picanol division with its weaving machines, the Proferro foundry, and Psi-Control, which produces controllers. Picanol’s weaving machines are recognized globally as top-tier.
• Agro: This segment focuses on the production, trade, and marketing of crop nutrients and crop protection products. The companies in this division are global leaders in specialized fertilizers, such as liquid and solid soluble fertilizers based on potassium or sulfur. This segment aligns with the broader concept of precision agriculture.
• Bio-Valorization: This includes the processing of animal by-products into products used in the pharmaceutical, food, animal feed, fish feed, biodiesel, and energy industries. Examples include gelatin, high-quality proteins, and fats.
• Industrial Solutions: This division offers products, systems, and solutions for water treatment and management. This includes drinking water purification, wastewater treatment, and plastic piping systems.
• T-Power: This segment is involved in power and gas turbines, currently operating one gas power plant. They have received approval for a second plant, but whether it will be built depends on its financial viability, particularly the subsidies currently being offered.

Why We Chose Tessenderlo

There is no doubt that Luc Tack, the CEO, is an excellent capital allocator. The growth in book value for Picanol under his leadership (up until the merger) amounted to no less than 24% per year. At Tessenderlo, book value grew by 15% annually since its acquisition until the merger.

Unfortunately, following the merger, the company found itself in a challenging economic climate. The two main profit drivers—Picanol’s weaving machines and fertilizers—are in a global downturn. This is not a company-specific issue but rather an economic one.

When we take a step back and look at the longer term, we see:

• A strong growth strategy with a focus on sustainable and innovative products and services. The company has demonstrated strong growth in recent years, both in revenue and profits.
• A solid financial position with low debt and healthy cash flow, providing the means to invest in further growth.
• A diversified portfolio of activities.

While book value and profits grew, the stock price has declined.

Our Valuation

The reproduction value, or the amount it would cost to build a similar company from scratch (excluding brand goodwill and full patent value), is estimated at €35 per share.

Using other valuation methods, we arrive at much higher figures.

For example, using a discounted cash flow (DCF) model with normalized cash flows, we calculate a value of €56 per share.

Currently, the company is experiencing a steep downturn, which might create the impression that recovery is unlikely. However, it’s worth remembering that Picanol was able to acquire a majority stake in Tessenderlo using only its free cash flow. If better times return for Picanol’s weaving machines and coincide with a recovery in the fertilizer market, the situation could look very different.

We estimate Tessenderlo’s intrinsic value at €45 per share. While we believe this estimate is conservative, we must account for the market’s sentiment regarding Luc Tack, which could mean this value may take a very long time to be realized.

However, the book value of €32 per share serves as a clear lower boundary, especially given the significant share buybacks. The gap between our fair value of €45 and the €32 book value impacts our fund’s intrinsic value by approximately 2.6%.

From the current price to the book value of €32, Tessenderlo offers a potential gain of 63.6%. For this reason, we increased our position during the recent dip at €19.46 per share.

Stellantis

Brief Description

Stellantis was formed through the merger of Peugeot and Fiat Chrysler. It is a manufacturer and seller of cars and related products and services. Stellantis is the third-largest car manufacturer in the world by production and revenue. However, in terms of market capitalization, it ranks only seventh or eighth.

The company owns 14 well-known brands, including Maserati, Alfa Romeo, DS, Lancia, Opel/Vauxhall, Peugeot, Jeep, and RAM. It is also known as a holding of Exor, which owns a stake in Stellantis.

Why We Chose Stellantis

First and foremost, the company is cheap. We don’t believe that only Tesla and Chinese automakers will survive; there’s room for other players in the market.

Stellantis benefits from having two strong European automotive families as its main shareholders: the Agnelli family (Fiat, Ferrari) and the Peugeot family. Their expertise and networks should not be underestimated.

The company also has a clear vision for the future, recognizing the importance of software. Stellantis collaborates with Foxconn, Amazon, and Google on software and full self-driving technology.

Rather than seeing Chinese automakers as a threat, Stellantis has turned it into an opportunity by partnering with LeapMotor. Through a joint venture, Stellantis will handle distribution outside of China.

The question is not whether Stellantis will falter due to competition, but rather where the entire automotive sector is headed—including Tesla. This overarching question is our main concern with Stellantis. However, if you assume the auto sector will continue to exist in some form, it’s hard to conclude anything other than that Stellantis, at its current price, is a must-own company.

Our Valuation

We won’t claim that Stellantis should have a P/E ratio of 12 (its current ratio is 2.92). Even accounting for restructuring costs, a P/E ratio of 8 doesn’t seem excessive, giving us a valuation of €33 per share.

In our discounted cash flow (DCF) valuation, we assumed no growth for Stellantis beyond inflation. We also used normalized cash flows instead of focusing solely on the current challenging period. Applying 2% growth and a 12% discount rate (the minimum return we require), we calculate a fair value of €31 per share.

Lastly, the reproduction value—the cost of building a similar company from scratch—is estimated at €33 per share.

With a fair value of €31 per share, we believe our valuation is reasonable. Whether we hold the stock until it reaches this value is another question, given that we also have exposure to Stellantis through Exor. If we replace Stellantis, it will only be with a company offering greater potential at that time.

Kamux

Brief Description

The Finnish company Kamux specializes in selling used cars. Kamux’s concept is to offer customers second-hand vehicles at attractive prices with top-notch service, focusing on being a reliable partner. At Kamux, there’s no need for price negotiations—the price is fixed and the same for everyone.

Additionally, Kamux offers financial products from third parties, such as financing and insurance. There’s also Kamux Plus, a maintenance contract where Kamux assumes full responsibility for the care and protection of the vehicle. In financial reports, these services are categorized as Integrated Services.

What distinguishes Kamux is its omnichannel strategy, combining physical showrooms with a strong digital presence and even home delivery of vehicles.

Why We Chose Kamux

The title of the full analysis of Kamux was: “Best Company in a Bad Sector.” That alone indicates that this investment was not expected to be an easy ride.

Arguments in favor of Kamux include the fact that it is the fourth largest seller of used cars in Europe, signaling a highly fragmented market and creating opportunities for further sector professionalization, which would drive growth.

Kamux’s competitive position, strong financial performance, and strategic focus on digital trade and customer experience are key strengths.

One of Kamux’s biggest advantages is its ability to grow profitably, a distinguishing factor compared to its competitors.

Our Valuation

The mistake we made with Kamux was not selling it in 2021 when its stock price had doubled compared to our purchase price. A lack of alternative investments led us to hold on at the time, especially since Kamux was still growing. That growth potential remains today.

However, market conditions have become more challenging. First, procurement issues in Germany cost the company millions. This was followed by misconduct by the sales team in Sweden. At the same time, the car market tightened, which significantly pressured margins.

Do we still believe in Kamux? Yes, we certainly do. However, if we had sold in 2021, we could have owned three to four times more shares in the company today.

Despite the accumulating challenges, we still view Kamux as a solid company capable of profitable growth in this difficult sector. In other words, if Kamux were not a solid company, it wouldn’t have survived these obstacles.

That said, we won’t be completely reassured until the issues in Sweden are definitively resolved, with improvements reflected in the financial figures. We would also like to see clearer growth in Germany, though we fear this may not be realistic until 2026.

As you can tell, we have more doubts about Kamux compared to other investments. A decline in new car sales has a significant impact on the second-hand market. Additionally, consumers are hesitant to buy electric vehicles, which complicates the situation further. For this reason, we substantially lowered our fair value for Kamux at the end of last year.

To reach the current fair value of €10, we assume:

• A recovery in margins once the Swedish issues are resolved and the market for car purchases becomes more favorable.
• Further growth in showrooms, particularly in Germany.
• Normalized earnings per share of €0.76 (equating to a 3% net margin).
• 6% growth with a 12% discount rate applied.

Exor

Brief Description

Exor is the holding company of the Italian Agnelli family. It originated from FIAT, founded by Giovanni Agnelli in the 19th century, and still indirectly forms part of the portfolio today. The Agnelli family owns 53.6% of Exor’s shares. John Elkann, the current leader of the company, carries the family legacy through his maternal lineage.

It is precisely Elkann who caught our attention. He initiated Exor’s transformation over the past decade, with his masterstroke being the appointment of Sergio Marchionne. Marchionne was the driving force behind the Fiat-Chrysler merger, the spin-off of Ferrari, and improving Fiat’s profitability.

Exor’s investments are divided into three main categories:

Companies: This is the largest block, representing about 80% of Exor’s value. It consists of companies where Exor is an active or lead shareholder, such as:

• • Ferrari (39.3% of total value)
  • Stellantis (19.3%)
  • Philips (9%)
  • CNH Industrial (8.1%)

Additionally, Exor holds stakes in companies like Iveco, Juventus, Christian Louboutin, Institut Mérieux, The Economist, Gedi, Shang Xia, and more.

Lingotto: Exor’s fully-owned asset management company.

Ventures: This segment focuses on smaller investments, primarily in Consumer, Healthcare, Fintech, Mobility, and Deeptech sectors.

Why We Chose Exor

When we bought Exor in October 2020 at €46 per share, the company was significantly undervalued relative to our fair value estimate of around €100 per share.

Nearly five years later, Exor remains undervalued, even though its stock price has nearly doubled.

These are the best kinds of investment stories.

Our Valuation

Holdings like Exor provide their own estimates of net asset value (NAV). For Exor, this figure is €178 per share.

It’s relatively easy to verify Exor’s NAV because its portfolio is heavily concentrated in a few publicly traded companies. Holdings are required to value these companies at their market prices, but we can calculate their fair value ourselves.

Without going into excessive detail, we see an overvaluation for Ferrari but undervaluations for Stellantis (see above), CNH Industrial, and Iveco. Philips is harder to evaluate. Due to theis uncertainty, we apply an additional safety margin and estimate Exor’s fair value at €150 per share.

X-Fab

Brief Description

X-Fab is a Belgian semiconductor company listed on the Paris stock exchange. It has grown into a significant player in the semiconductor industry, with production facilities in Europe (one in France and three in Germany), the United States (Lubbock, Texas), and Malaysia.

X-Fab provides a wide range of services and solutions for the development and production of advanced semiconductor products. The company specializes in analog and mixed-signal designs, which integrate analog and digital circuits on a single chip. This allows customers to implement complex functions that require both analog and digital components.

Their services cover the entire production process, from design and manufacturing to testing and packaging of integrated circuits (ICs). X-Fab also offers technical support and advice to help customers optimize their designs and achieve desired performance levels. The company has expertise in various technology platforms, such as CMOS (Complementary Metal-Oxide-Semiconductor), bipolar, and BCD (Bipolar-CMOS-DMOS).

X-Fab’s primary markets are the automotive, industrial, and medical sectors, which together accounted for 93% of its revenue last year.

Why We Chose X-Fab

X-Fab is a cyclical company, which creates opportunities for long-term investors. For contrarian investors, it’s possible to repeatedly buy and sell such companies during different phases of the cycle.

When you can buy a company at 0.66 times its tangible book value, with a solid balance sheet, capable management, and exposure to growth markets, it’s not always necessary to know exactly where the company is in the cycle—especially when investor sentiment is already highly negative.

Our Valuation

As investors, we need to look beyond short-term fluctuations. The challenge with companies like X-Fab is that they are at the end of the supply chain. A minor disruption at the beginning of the chain amplifies as it moves downstream, eventually hitting X-Fab hard. CEO Rudi De Winter once compared this phenomenon to a whip: a small wrist movement causes the whip to snap, with the tip making a large motion. X-Fab is at the tip of that whip. However, this effect works both ways—during good times, the movement can quickly swing in the opposite direction.

That’s why it’s essential to focus on the long-term outlook, which remains promising. Increasingly more chips are being used in sectors like:

• Automotive: Electric vehicles and advanced driver assistance systems (ADAS).
• Industry: Renewable energy, connected factories, smart buildings, and smart cities.
• Medical: Thermometers, hearing aids, implants, scanners, and lab-on-a-chip technologies.

Although the medical division’s growth has been slower than expected during the seven years we’ve been following X-Fab, innovation often progresses step by step—and then accelerates suddenly.

We can benefit from X-Fab’s cyclical nature as long as we understand that the “whip effect” can create significant volatility. We have previously bought and sold X-Fab with a profit of 229%. The difficulties in the automotive sector gave us another opportunity to buy at a low price.

The reproduction value—the amount a competitor would need to invest to build a similar business—is estimated at €11.50 per share, which we conservatively consider to be X-Fab’s fair value.

Due to X-Fab’s extreme volatility, a discounted cash flow (DCF) analysis is less suitable. However, in various DCF scenarios, the valuation ranges between €8 and €36 per share. This wide range leads us to believe our €11.50 estimate is conservative.

Luceco

Brief Description

Luceco is a UK-based company active in electrical materials, ranging from sockets, switches, clamps, and cable ducts to extension cords, timers, and fuse boxes.

In 2000, British General merged with Masterplug, which operates in what they call “Portable Power.” This includes extension cables, travel adapters, and similar items. Since 2013, Luceco has also been active in LED lighting under its Luceco brand. Over time, the company has significantly expanded its product range through various acquisitions, including DW Windsor for lighting and SyncEV for EV charging stations.

Luceco is fully vertically integrated, handling everything from design and development to its own production facilities in China.

In its product categories, Luceco is a market leader. With brands like Nexus and British General, the Wiring Accessories division is the second largest in the UK. Their product range covers nearly everything an electrician installs, from basic sockets and switches to smoke detectors and Wi-Fi extenders. One in ten switches and sockets installed in the UK comes from Luceco.

Luceco also leads the market in Portable Power, with a 40% share for portable charging cables in the UK under brands like Masterplug, Ross, and the recently introduced SyncEV for charging stations.

Why We Chose Luceco

Luceco is well-positioned to benefit from the green energy trend. LED lighting is highly efficient, converting 95% of energy into light, and the UK LED market is estimated at £800 million annually (although margins are relatively low).

Beyond LED lighting, Luceco has significant opportunities in electric vehicle charging stations. The UK plans to ban the sale of petrol and diesel cars by 2030, and the EV market is expected to grow 20% annually for the next nine years. This will require the installation of millions of charging stations.

Electricians, who are already familiar with Luceco’s products, will likely play a significant role in these installations. Their trust in Luceco’s quality and the convenience of sourcing EV chargers through their usual suppliers give the company a competitive edge in this market.

Luceco operates in an attractive, easy-to-understand market with rapid growth and less cyclicality compared to other construction products. Additionally, the aging housing stock in the UK will require substantial electrical upgrades.

Our Valuation

We consider Luceco’s growth to be more stable than many of our other portfolio companies, so we use a lower discount rate of 10% instead of 12%. Assuming growth of about 10% annually (compared to 13.7% over the past five years), we calculate an intrinsic value of £2.40 per share (GBX 240).

Luceco has been part of our portfolio since 2022. While growth has slowed due to the post-pandemic dip in DIY activity and increased costs from inflation and higher transport fees, the company has still delivered a satisfactory performance.

Somero Enterprises

Brief Description

Somero Enterprises produces laser-guided machines used to create perfectly flat concrete floors in buildings. These machines, called “Screeds,” come in various sizes and weights, ranging from small hand-operated machines to ride-on models. They also offer remote-controlled machines capable of pouring concrete in the right place when needed.

Somero’s machines are used for leveling concrete floors in a wide range of environments, including warehouses, factories, parking garages, shopping centers, schools, and hospitals. Recently, they introduced the Skyscreeds family of machines, which are specifically designed for high-rise construction.

Somero’s machines offer significant advantages to their customers, especially builders. They work faster, more precisely, and require less manpower, resulting in increased productivity and profitability.

The benefits of Somero’s laser-guided machines also extend to end users, such as companies like Coca-Cola and Ikea, who ultimately use the concrete floors. Not only do these floors look better aesthetically, but they are also operationally efficient and require lower maintenance costs. Flat floors reduce wear and tear on forklifts, which is especially beneficial for large warehouses. In fact, specifications for warehouses built for companies like Ikea often require concrete floors leveled with laser-guided machines.

In the context of high-rise buildings, these machines bring additional benefits, particularly in terms of uniformity. This results in more standardized kitchens, bathrooms, and other components that are easier to install. In a three-unit apartment building, the adjustments required for each unit may not differ significantly. However, in a 100-unit building, minimizing adjustments can significantly reduce material costs and labor hours.

Why We Chose Somero Enterprises

Somero’s patents, years of experience, and global support network create significant barriers for new entrants in the market.

Moreover, Somero operates in a true niche market, where it essentially creates demand for its machines. Customers are not naturally looking for these specific products; even when aware of their existence, they need to be convinced of their value through demonstrations.

A global shortage of skilled construction workers, not just in Belgium or the Netherlands but worldwide, is perhaps the strongest argument for the adoption of Somero’s machines. The fact that these machines deliver superior results makes them a win for Somero, a win for its customers, and indirectly a win for the customers of those customers.

Our Valuation

We see Somero as a solid company with attractive products and margins, though it is currently overlooked by the market due to its modest size and its listing on the London Stock Exchange despite being an American company. Concerns about a slowdown in the construction sector also weigh on the stock, making it undervalued.

At 9.6x earnings and with a 7% dividend yield, we own a growing company that can weather a downturn in its cycle. The dividend alone accounts for two-thirds of the 27% profit we’ve made on this position so far.

We take a very conservative approach to Somero, given its niche product and the high costs involved, which can lead customers to delay new purchases in difficult times.

We assume only 5% growth (compared to 7.8% over the past ten years) and apply a 10% discount rate. Based on these assumptions, we calculate an intrinsic value of £5.10 per share.

Deceuninck

Brief Description

Deceuninck, a Belgian company, is a producer of PVC window and door profiles. While they also produce aluminum and wood composite profiles on customer request, the focus remains on PVC due to its superior insulation properties and full recyclability. These profiles also include solutions for sun shading, shutters, and ventilation. The windows and doors division accounts for 90.7% of revenue.

The second division, Home Protection (4.8% of revenue), includes exterior roof and wall cladding, interior ceiling and wall cladding, and other products such as window sills. These products serve to protect or enhance the appearance of homes and are made from durable, easy-to-maintain materials.

The third division, Outdoor Living (4.5% of revenue), offers PVC solutions for fences and decking, which share the same durable and low-maintenance characteristics.

Why We Chose Deceuninck

Deceuninck is a global leader in its niche and is well-positioned to benefit from the many investments needed by both companies and individuals to meet climate targets.

With its own sustainable production process that increasingly relies on recycled materials (which are also much cheaper) and its innovative products, Deceuninck is setting new standards in the industry.

Most importantly, we are paying less for this company than the value of its stake in its publicly traded Turkish subsidiary.

Our Valuation

The reproduction value—the cost someone would incur to build a similar company—is €3.35 per share. As a precaution, given the expected weaker results due to a slowdown in the construction market, we’ve used this figure as the fair value.

Another way to view this is that you get the European and American operations for free, while the Turkish operations are valued slightly below what we consider a fair price.

Deceuninck is a textbook example of a “heads I don’t lose much, tails I win a lot” situation, where we deliberately place little value on the “win a lot” aspect.

Sipef

Brief Description

The 103-year-old company Sipef, based in Schoten, Belgium, engages in agro-industrial activities, primarily focusing on palm oil and bananas. After selling its tea operations and part of its rubber plantations, the company now concentrates almost entirely on these two products. The remaining rubber plantations are being converted to palm oil. Sipef also has a small flower business, but its financial impact is negligible.

Of the two main activities, palm oil is by far the most important. Measured by cultivated land area, bananas (and flowers) account for just 1.2% of the total, while palm oil (including converted rubber plantations) makes up the rest. Regionally, 82.1% of the hectares are in Indonesia, 16.7% in Papua New Guinea (both for palm oil), and 1.2% in Ivory Coast (for bananas).

Why We Chose Sipef

When a company operates in a disliked sector, its stock price can remain low for an extended period—and sometimes for good reason. However, if a company within such a sector is unjustly grouped into this perception, it presents a different story.

The sector in question is palm oil. If we look at palm oil objectively and without emotion, we see how indispensable it is. According to the WWF, palm oil accounts for 60% of all traded vegetable oils. It is found in 50% of processed products, including frozen pizza, noodles, chocolate, personal care items, and cleaning products. Additionally, 70% of cosmetics contain palm oil derivatives.

The WWF also states that palm oil is the most efficient vegetable oil to produce per hectare of land, yielding 4 to 10 times more than alternatives. Palm oil generally requires less water and fewer fertilizers as well. In other words, perhaps palm oil deserves a more nuanced view.

Why do we believe Sipef is better than its equally cheap competitors?

• Leadership in sustainability standards.
• Efficiency in harvesting and extraction.
• Young plantations that still need to mature, in other words, growth without additional capex.
• Promising seed development.

Our Valuation

Sipef plans to expand its cultivated land to 100,000 hectares by the end of 2025, which could double palm oil production over the next ten years. This growth will come from new plantings, replantings, maturing plantations, and the conversion of rubber plantations to palm oil.

The price of palm oil is the primary determinant of Sipef’s annual profitability. Short-term factors suggest palm oil prices could remain high, driven by strong demand for vegetable oils and limited supply due to restricted agricultural land.

Given the high volatility in palm oil prices, traditional valuation methods like discounted cash flow (DCF) or price-to-earnings ratios can be misleading. If we apply DCF, we estimate a broad fair value range of €70 to €145 per share, depending on our assumptions about palm oil prices.

The reproduction value, which we also consider fair value, is €80 per share. However, this too depends on the valuation of biological assets and, thus, palm oil prices.

Next Meeting

If you have any questions about this letter, please don’t hesitate to ask so we can address them during our next meeting.

We look forward to seeing you at our physical annual meeting on Thursday, February 13. A meeting invite will follow, but you can already note that it will take place at PUUR Interior Architects, Slachthuizenlaan 25B, Antwerp. This is near the Sportpaleis, and there is ample parking available.

With kind regards and thanks,

Sam & Joël