BlackRock Greater Europe Investment Trust plc (LON:BRGE) has announced it half yearly financial report.
Performance record
| As at 29 February 2024 | As at 31 August 2023 | |
| Net assets (£’000)1 | 662,619 | 565,710 |
| Net asset value per ordinary share (pence) | 658.25 | 560.11 |
| Ordinary share price (mid-market) (pence) | 629.00 | 527.00 |
| Discount to cum income net asset value2 | 4.4% | 5.9% |
| FTSE World Europe ex UK Index | 2,100.60 | 1,916.71 |
| ========= | ========= |
| For the six months ended 29 February 2024 | For the six months ended 28 February 2023 | |
| Performance (with dividends reinvested) | ||
| Net asset value per share2 | 18.6% | 16.6% |
| Ordinary share price2 | 20.5% | 15.9% |
| FTSE World Europe ex UK Index | 9.6% | 14.6% |
| ========= | ========= |
| For the period since inception to 29 February 2024 | For the period since inception to 28 February 2023 | |
| Performance since inception (with dividends reinvested) | ||
| Net asset value per share2 | 814.2% | 654.1% |
| Ordinary share price2 | 784.3% | 626.0% |
| FTSE World Europe ex UK Index | 431.2% | 379.7% |
| ========= | ========= |
| For the six months ended 29 February 2024 | For the six months ended 28 February 2023 | Change % | |
| Revenue | |||
| Net profit on ordinary activities after taxation (£’000) | 63 | 22 | +186.4 |
| Revenue earnings per ordinary share (pence)3 | 0.06 | 0.02 | +200.0 |
| Dividends (pence) | |||
| Interim dividend | 1.75 | 1.75 | – |
| ========= | ========= | ========= |
1 The change in net assets reflects payments for shares repurchased into treasury, portfolio movements and dividends paid.
2 Alternative Performance Measures, see Glossary contained within the Half Yearly Financial Report.
3 Further details are given in the Glossary contained within the Half Yearly Financial Report.
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Chairman’s Statement
Overview
The first six months of this year resulted in a strong performance for European equities and we comfortably exceeded the performance of the FTSE World Europe ex UK Index (the reference index) over this period, maintaining the excellent performance of the Company.
In general, European equities have been strong performers in 2023, defying concerns that the region might slip into recession. In fact, 2023 turned out much better than most market participants had expected despite changes in European Central Bank (ECB) monetary policy. Geopolitical events, although far from resolved, also had a less significant impact than expected and European gas and electricity prices fell back to late 2021 levels and are expected to remain broadly stable. Consequently, growth was far better and inflation much lower than generally anticipated.
Initial weakness in January, following strong markets during the fourth quarter of 2023, was soon replaced by solid earnings reports from European large cap stocks, as well as evidence of a strong underlying economy. The robust corporate earnings, combined with positive outlook statements from companies and support from reasonably resilient macroeconomic data, drove markets higher in February.
Performance
Against this backdrop, I am pleased to report that over the six months ended 29 February 2024, the Company’s net asset value per share (NAV) returned 18.6%, outperforming the reference index which returned 9.6%. Over the same period, the Company’s share price returned 20.5% (all percentages calculated in Pounds Sterling terms with dividends reinvested).
Since the period end to 1 May 2024, the Company’s NAV has decreased by 3.4% compared with a rise in the FTSE World Europe ex UK Index of 2.0% over the same period.
Revenue earnings and dividends
The Company’s revenue return per share for the six-month period ended 29 February 2024 amounted to 0.06p compared with 0.02p for the corresponding period in 2023. The majority of the Company’s income typically is generated in the second half of the year when portfolio companies announce and pay dividends. The Board has taken this into account in considering the interim dividend payment level.
The Board has declared an interim dividend of 1.75p (2023: 1.75p) per share. The dividend will be paid on 19 June 2024 to shareholders on the Company’s register on 24 May 2024, the ex-dividend date being 23 May 2024.
Management of share rating
Investor sentiment and discounts have been influenced by various external factors and uncertainties, including rising interest rates, and discounts have widened generally across the investment trust sector. The average discount for the AIC Europe sector was 9.2% over the six months ended 29 February 2024 and the Company’s discount was not immune to market pressures and also widened, with the shares trading at an average discount of 6.3% over the period under review. The Board monitors the discount closely and, following consultation with the Manager and Company’s corporate broker, Cavendish Securities, it was determined that it was in shareholders’ interests to buy back shares with the objective of ensuring that an excessive discount to NAV did not arise.
As part of this program, the Company bought back 336,310 shares for a total consideration of £1,914,000 over the six months under review. Since 29 February 2024 and up to the latest practicable date of 1 May 2024, a further 519,329 shares have been bought back for a total consideration of £3,298,000. As at this date, the Company’s shares were trading at a discount of 3.6%, a significantly narrower discount than all other companies in our sector reflecting our strong investment performance.
All shares were bought back at a discount to the prevailing NAV and the buy backs were therefore accretive to existing shareholders. All shares bought back have been placed in treasury for future reissue.
Tender offers
The Directors of the Company have the discretion to make semi-annual tender offers at the prevailing NAV less 2%, for up to 20% of the issued share capital in May and November of each year. The Board announced on 20 September 2023 that it had decided not to proceed with a tender offer in November 2023 and on 21 March 2024 that the tender offer in May 2024 would also not be implemented.
Despite a challenging period for discounts, it is pleasing that the Company’s share rating has been relatively stable versus the market and peer group and the Board believes that the buyback activity undertaken has been beneficial in reducing the volatility of the Company’s share rating and in shareholders’ interests. As the Company’s discount was trading at 5.3% on 20 March 2024 and was trading at the narrowest discount within its peer group, the Board concluded that it was not in the interests of shareholders as a whole to implement the May 2024 semi-annual tender offer.
The Board will continue to monitor the Company’s discount and may use the Company’s share buyback powers to ensure that the share price does not go to an excessive discount to the underlying NAV. The Board remains committed to supporting the share price to a narrow discount or premium to its NAV.
Outlook
The outlook for Europe is mixed in 2024 but European equities surprised positively last year and this could be repeated. Stock markets will continue to be dominated by interest rates and European stocks have been boosted by expectations of interest rate cuts but the ECB is likely to be cautious and will presumably take its time in adjusting policy despite Eurozone inflation falling at a brisk pace. There are additional risks, aside from the prospect of recession: operating margins for European stocks hit record highs in 2023 which may not be replicated this year, continued weak growth in China and less exposure to artificial intelligence, a key driver for US stocks.
However, our portfolio managers are cautiously optimistic as the ECB should be able to start cutting interest rates later in the year as inflationary pressures continue to ease. The surge in commodity prices driven by the war in Ukraine and rise in goods prices driven by the supply-chain disruptions during the COVID-19 pandemic are largely in the past. Additionally, the earnings situation of most companies in Europe has significantly improved compared to 2022 and the region’s stocks remain lowly valued versus history and on an international basis, suggesting there could still be scope for share price gains in 2024.
Against this backdrop, our portfolio managers remain positive on the outlook for European equities. The Board is also confident that they will continue to remain selective and focus on issuer fundamentals in a concentrated, high conviction portfolio.
ERIC SANDERSON
2 May 2024
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Investment Manager’s Report
Market review
The Company’s share price and underlying net asset value per share (NAV) rose by 20.5% and 18.6%, respectively, over the six months to 29 February 2024. By way of comparison, the FTSE World Europe ex UK Index returned 9.6% during the same period. (All percentages calculated in Pounds Sterling terms with dividends reinvested.)
European equities delivered very strong returns over the last six months despite a backdrop of cautious sentiment given concerns over a potential recession, weaker China macro data and geopolitical risks. The asset class remains under-owned by investors and we observe a generally defensive positioning.
Our optimism entering the period – reflected in a pro-cyclical portfolio positioning – was rewarded as inflation fell closer to central bank targets and wages began growing in real terms, while corporate earnings came through better than the market had expected. Technology, industrials, financials and consumer discretionary sectors led the strong market rally, while defensive sectors including consumer staples and utilities underperformed.
Portfolio overview
The portfolio’s positioning in the technology sector, semiconductors in particular, delivered the strongest contribution to returns over the period. The industry sells into a range of different end markets and applications including autos, phones, PCs, gaming as well as industrial applications like 5G, cloud infrastructure and Artificial Intelligence (AI).
Over the past six months, there has been increasing evidence of the positive impact from AI on the semiconductor sector as material orders from large technology companies started to come through. We seem to be entering a semiconductor upcycle, which tends to have duration and can produce significant opportunities for growth. The scale of capital expenditure (capex) increases that many technology firms have committed to in order to build out their AI infrastructure and capabilities has been impressive. This is not solely a US phenomenon and we believe we own European stocks that will see significant benefits from this investment spend.
BE Semiconductor was the top contributor to relative returns over the period. Thecompany is one of the leading providers of packaging solutions such as hybrid bonding, which is set to become an increasingly important technology in enabling semiconductor chips to continue getting smaller, yet more powerful and more energy efficient. Other semiconductor businesses in the portfolio including ASM International and ASML were also amongst the best performers.
A positive contribution also came from areas that we consider ‘capex winners’. After a long period of under-investment from many corporates post the global financial crisis, we believe we are at the beginning of significant investment spend to come. Companies enabling the energy transition, the electrification of our economies or that help re-shore supply chains can truly benefit from these transformations. The portfolio’s position in Schneider Electric (Schneider) was amongst the best performers, benefiting from these trends. Around 75% of Schneider’s sales come from their energy management division. Schneider plays a key role in emission reduction initiatives due to their solutions that help make public and private buildings more energy efficient. On the infrastructure side, Schneider holds a leading position in medium voltage solutions that allow for making power grids smarter, more energy efficient and capable to deal with renewable energy. That infrastructure segment is expected to grow at a double-digit rate over the next few years.
Within luxury, concerns around deteriorating demand trends and operating deleverage were disproved by the most established brands selling to high-end consumers. The portfolio’s position in Hermès contributed positively given strong Q4 results and upbeat commentary around 2024 trading so far. Elsewhere in the sector, luxury sportscar maker Ferrari also impressed with strong results as the brand continues to see strong demand worldwide across models. The order book is full, giving investors earnings visibility out to 2026 whilst revenue from personalisation options is hitting record highs.
Finally, Novo Nordisk (Novo), a global leader in the treatment of diabetes and obesity, continued to perform well. Demand for Novo’s obesity drug Wegovy, which was launched two years ago, has been a key driver in moving the share price almost 30% higher over the last six months. We believe the obesity market opportunity is significant. Currently, only a very small percentage of an estimated 800 million people who live with obesity globally receive long-term medical treatment given the severe side effects of older therapies. Wegovy, however, has shown a strong efficacy in weight loss, with a manageable side effect profile alongside a significant reduction in major adverse cardiovascular events. These results will not only help to underpin the validity of this new category of drugs, but they also underwrite future growth of the group at high returns for a long time to come.
Outside of Novo Nordisk, the portfolio’s health care investments were less successful over the period. Regardless of the attractive long-term fundamentals, the life sciences industry experienced continued weakness related to inventory destocking. The interest rate environment also weighed on this part of the market as tighter financial conditions meant less funding for early stage and experimental projects. In this context, shares in Lonza and Sartorius Stedim were amongst the largest detractors from relative returns and we reduced the former and exited the latter given our lower conviction.
Shares in logistics company DSV were the single largest detractor. The main weakness came from the company’s announcement to enter a US$10 billion exclusive logistics joint venture with Saudi’s NEOM city project which led to concerns over the capital intensity of the project, as well as a shift in business strategy. Having discussed these issues with DSV’s management, we are somewhat reassured that the deal is financially solid and DSV have protection mechanisms in place should the project disappoint. We continue to closely monitor the position and run slightly lower weights than we have in the past.
Other changes to the portfolio were limited. We added Linde, a leader in industrial gases with strong pricing power, geared into structural growth in energy transition and capex spend and with diversified end-markets and low financial leverage. Royal Unibrew was sold after a prolonged period of weaker volumes and a disappointing performance from one of its recently acquiredbrands.
Outlook
Looking to the future we remain cautiously optimistic as inflation is trending down and the economy appears resilient, even with interest rates at current levels. Financial conditions have already started to ease and mortgage rates in many European countries are already falling. Leverage in the corporate sector is low, margins are strong and the end of the destocking cycle is in sight with a positive inflection to come.
STEFAN GRIES AND ALEXANDRA DANGOOR
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
2 May 2024
Ten largest investments
Together, the Company’s ten largest investments represented 52.2% of the Company’s portfolio as at 29 February 2024 (31 August 2023: 53.4%)
1 Novo Nordisk (2023: 1st)
Health Care company
Market value: £62,558,000
Share of investments: 8.8%
Novo Nordisk is a Danish multinational pharmaceutical company and a leader in diabetes care. Novo Nordisk is expected to post strong earnings and cash flow growth driven by demand for Ozempic which treats Type 2 diabetes and its weight management drug Wegovy. The latter has recently provided evidence of reducing major adverse cardiovascular events by 20%.
2 ASML (2023: 3rd)
Technology company
Market value: £52,062,000
Share of investments: 7.3%
ASML is a Dutch company specialising in photolithography systems for the semiconductor industry. The company is at the forefront of technological change, investing in leading research and development to capture the structural growth opportunity coming from growth in mobile devices and microchip components. High barriers to entry within the industry give ASML a protected position with strong pricing power allowing growth in margins.
3 LVMH (2023: 2nd)
Consumer Discretionary company
Market value: £44,228,000
Share of investments: 6.2%
LVMH is a French multinational corporation specialising in luxury goods. The group has a strong and well-diversified portfolio of luxury brands ranging from handbags to spirits to cosmetics. LVMH’s business model enjoys high barriers to entry due to the heritage, provenance and exquisite quality of its product offering. Its consistent brand investment through economic cycles has helped to spur brand desirability and allowed for significant pricing power.
4 RELX (2023: 4th)
Consumer Discretionary company
Market value: £43,697,000
Share of investments: 6.2%
RELX is a multinational information and analytics company with high barriers to entry in most of its divisions, including scientific publishing. Their capital light business model enables a high rate of cash conversion with repeat subscription-based revenues. The business benefits from increasing usage of data globally supporting their data analytics business.
5 BE Semiconductor (2023: 9th)
Technology company
Market value: £34,977,000
Share of investments: 4.9%
BE Semiconductor is a Dutch supplier of semiconductor assembly equipment. The company can continue to grow its market share of an overall growing market given its best-in-class position to capture the advanced packaging segment of the assembly market. The chip makers will have to rely on more innovative packaging solutions (e.g. hybrid bonding) to continue to improve chip efficiency (faster processing, lower power consumption) while also keeping control over manufacturing costs.
6 Hermès (2023: 7th)
Consumer Discretionary company
Market value: £30,492,000
Share of investments: 4.3%
Hermès is a French luxury design house specialising in leather goods, lifestyle accessories, home furnishings, perfumery, jewellery, watches and high-end clothing. With good brand management and craftsmanship, Hermès products are supply constrained and the company enjoys strong earnings visibility as some of its most iconic products are sold on allocation via waiting lists. Hermès has been run in a conservative fashion for generations with strategic decisions taken with the longest of timeframes.
7 Ferrari (2023: 11th)
Consumer Discretionary company
Market value: £27,199,000
Share of investments: 3.8%
Ferrari is an Italian luxury sports car manufacturer emphasising exclusivity, performance and quality globally, with a strong focus on innovation and delivering unique driving experiences to its clientele. There is a lot of excitement for 2024 as limited release models are being introduced including the SF90 XX Stradale, followed by the Spider in the second quarter of 2024. Both cars are expected to come at higher price points that will be additive to Ferrari’s overall revenue mix. Demand will remain strong beyond 2024, with the company’s order book already sold out up to 2026.
8 Safran (2023: 10th)
Industrials company
Market value: £26,997,000
Share of investments: 3.8%
Safran is a French multinational supplier of aerospace, defence and security systems. The industry has emerged from a heavy investment period and Safran is well-placed to benefit from continued strength in its best in class after-market business and strong execution in its LEAP engine program which should drive growth for the next decade.
9 ASM International (2023: 13th)
Technology company
Market value: £24,935,000
Share of investments: 3.5%
ASM International is a Dutch international company that designs and manufactures equipment and process solutions to produce semiconductor devices for wafer processing. The company aims to create sustainable, long-term value for their stakeholders and a degree of recovery in logic/foundry. The company is also set to benefit from the increasing importance of power emerging technologies such as Artificial Intelligence (AI), where we’ve seen a step change with the roll out of generative AI tools in 2023.
10 Partners Group (2023: 19th)
Financials company
Market value: £24,126,000
Share of investments: 3.4%
Partners Group is a Swiss-based global private markets firm. Partners Group specialise in private equity, although also offer private debt, private real estate and private infrastructure to clients. Their aim is to provide clients with solutions, providing them with a diverse portfolio of alternatives which suit their needs. With the funding environment easing, Partners Group is well set up to raise assets under management (AUM) in the alternatives space. On top of this, the dividend yield is 4% and the company has an impressive historic dividend payout policy. In the second half of 2023 the company started seeing an uptrend towards more normalised conversion periods, with demand expected to be carried over into the next few years.
All percentages reflect the value of the holding as a percentage of total investments.
Arrows indicate the change in relative ranking of the position in the portfolio compared to its ranking as at 31 August 2023.
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