European Opportunities Trust Plc (LON:EOT) has announced its Half Yearly Financial Report for the six months to 30 November 2024.
Financial Highlights
· Net asset value total return (with dividends reinvested) of (8.4)% and share price total return of (10.6)% for the period, compared with a total return of (3.3)% for the Company’s Benchmark, the MSCI Europe Total Return Index in GBP.
· Net asset value total return (with dividends reinvested) of 988.5% since launch on 20 November 2000 (equivalent to 10.5% compound per year), outperforming the total return of the Benchmark of 287.3% over the same period (equivalent to 5.8% compound per year).
· Continued buy back activity during the period, with a total of 2.9 million shares repurchased at a cost of £24.5 million since the beginning of the financial year (as at 31 January).
· The Company’s discount to NAV was 12.3% at the period end. The Board proposes to make an additional tender offer for up to 25% of the issued share capital of the Company, which is expected to take place in Q2 2025.
Summary of returns for the six months to 30 November 2024
| 30 November2024 | 31 May2024 | % change | |
| Net asset value per share (pence) | 921.66 | 1008.48 | (8.6) |
| Net asset value total return (with dividends reinvested)* | (8.4) | ||
| Middle market share price (pence) | 808.00 | 906.00 | (10.8) |
| Share price total return (with dividends reinvested)* | (10.6) | ||
| MSCI Europe Total Return Index in GBP (Benchmark) | (3.3) | ||
| Discount to net asset value at period end (%) | (12.3) | (10.2) |
* A dividend of 2.0p was paid on 2 November 2024.
Source: MSCI & Devon Equity Management Limited. Past performance is no guide to the future.
Long term track record
| To 30 November 2024 | 3 years% | 5 years% | 10 years% | Since launch on 20.11.2000% | Annualised return since launch% |
| Net asset value total return (with dividends reinvested) | 0.1 | 10.6 | 108.3 | 988.5 | 10.5 |
| Share price total return (with dividends reinvested) | (0.8) | (0.8) | 84.8 | 804.9 | 9.6 |
| MSCI Europe Total Return Index in GBP (Benchmark) | 19.7 | 41.8 | 107.9 | 287.3 | 5.8 |
Source: MSCI & Devon Equity Management Limited. Past performance is no guide to the future.
Chair’s Statement
I present the Company’s interim results covering the six months ended 30 November 2024.
Performance overview
During the period under review the total return on the net asset value was -8.4% (with the annual dividend reinvested), which compares with a total return of -3.3% from our Benchmark, the MSCI Europe Total Return Index in GBP. The total return on the market price of the Company’s shares was -10.6% (again, with the annual dividend reinvested).
Since launch, the Company has generated an annualised NAV total return of 10.5% and an annualised share price total return of 9.6% as at 30 November 2024, compared with 5.8% annualised for the Benchmark over the same period. However the results and our returns in recent years are clearly disappointing.
Our Investment Manager pursues a differentiated, high conviction approach to investment and we, as a Board, along with the team at Devon are fully committed to returning the Company to its former ranking at the head of its peer group.
Discount Management
The discount to NAV on the Company’s shares was 12.3% on 30 November 2024, widening from 10.2% on 31 May 2024, the Company’s financial year end. This compares with the 10.7% weighted-average discount on 30 November 2024 for the Company’s peers in the AIC Europe sector.
The Board has an active discount management policy, the primary purpose of which is to reduce discount volatility. It seeks to maintain the discount in single digits in normal market conditions through an active share buy back programme. Reflecting this, a total of 2.9 million shares have been repurchased into treasury at a cost of £24.5 million since the beginning of the financial year (as at 31 January 2025).
This has followed on from the implementation in January 2024 of a tender offer at close to NAV for up to 25% of the shares in issue, which was fully subscribed. The Board also announced at that time proposals for a further performance-related tender offer for up to 25% of the shares in issue in the event that the Company’s net asset value total return does not equal or exceed the Benchmark total return over the three-year period ending on 31 May 2026. The Company is also committed to putting a continuation vote to shareholders at the 2026 AGM in accordance with its three-yearly continuation vote cycle.
Proposal for Additional Tender Offer
While the Board continues to place confidence in the people, process and philosophy of our Investment Manager, we are mindful of the persistence of the double-digit discount and the recently disappointing performance of the Company’s portfolio. Accordingly, to supplement the Board’s continuing use of share buy backs and to its existing commitments described above, the Board proposes to make an additional tender offer in 2025 for up to 25% of the issued share capital of the Company (the ‘Tender Offer‘).
The Tender Offer, expected to take place in Q2 2025, will be priced at a two per cent. discount to the prevailing net asset value at the time of repurchase, less the costs of implementing the Tender Offer. The Tender Offer will be subject to shareholder approval. A circular setting out the full details of the Tender Offer and convening the necessary general meeting will be sent to shareholders in due course.
Gearing
As of 30 November 2024, the net gearing level on our portfolio was 11.5%, a notable increase from 1.3% on 30 November 2023. We believe that strategic borrowing can play an important role in enhancing long-term returns and the current level of gearing reflects our Investment Manager’s confidence in the outlook for our portfolio. The Company has a £85 million secured multi-currency revolving credit facility with The Bank of Nova Scotia, London Branch.
Shareholder engagement
Engagement with our shareholders is a top priority. Over the past year we have interacted with a majority of our share register, gaining valuable insights and feedback. We remain committed to maintaining an open dialogue with all shareholders.
Outlook
Despite the current challenges, we and our Investment Manager continue to note the superior characteristics and earnings growth of our portfolio and we believe the Company is well-positioned to deliver attractive returns for our shareholders.
I would like to express my sincere thanks to all of our shareholders and stakeholders for their continuing support.
Matthew Dobbs
Chair, European Opportunities Trust
6 February 2025
Investment Manager’s Review
Our positioning of the portfolio during the period under review recognises the broad spectrum of challenges in Europe: slow growth, high costs and political turmoil and is well positioned for a range of economic eventualities. It also recognises the tremendous growth opportunities available to be exploited by the best companies. Our investee companies are typically high margin, intellectual property and technology based (as distinct from energy or capital-intensive) service businesses that have significant revenues in the US and elsewhere in the world,
There are identifiable themes in our portfolio: Artificial Intelligence (AI) winners, technology leaders, electrification and disruptive business models.
As regards AI, we deem RELX, Experian and Deutsche Boerse to be beneficiaries, irrespective of which AI technologies prevail. In all cases, owning the data and flow of business is key. These companies enhance the quality of existing services with the use of AI in a way that competitors which lack the data and flows cannot. Our technology leaders span healthcare, with companies like Camurus, payments companies like Edenred, and information technology companies like Dassault Systèmes. As for electrification, we invest in Prysmian, which is the world’s leading cable company and an obvious beneficiary of the electrification trend, and GTT which is a prime winner from the increasing use of liquified natural gas, which is needed to satisfy growing electricity demand, itself driven by demand from energy intensive data centres and AI. Ryanair, Wise, and Genus are also strong examples of disruptive business models in their respective sectors. Novo Nordisk, our biggest holding, is also a disruptor, expanding into the prediabetic space, and blazing a trail with new therapies to tackle obesity.
Performance
Notwithstanding our strategy to avoid the challenges of Europe and tap into the faster growing global opportunities, our portfolio’s performance fell behind the Benchmark during the period under review. We discuss the key contributors and detractors to this result below.
The following tables detail which stock positions in the Company’s portfolio had the greatest impact on performance during the six months under review, both positive and negative. The impact is the result of price performance of each stock over the period, calculated on a transaction basis and including the impact of foreign currency:
Positive Contributors
| Security | Portfolio weight at 30.11.2024% | Benchmark weight at 30.11.2024% | 6 month priceperformance% | 6 month contributionto portfolio return% |
| Deutsche Boerse | 7.4 | 0.4 | 18.0 | 1.1 |
| RELX | 7.7 | 0.8 | 9.0 | 0.6 |
| Experian | 8.1 | 0.4 | 4.8 | 0.3 |
| Gaztransport & Technigaz (GTT) | 3.9 | 0.0 | 2.3 | 0.1 |
| Grenke* | 0.0 | 0.0 | (12.4) | 0.1 |
*Sold during the period under review.
Negative Contributors
| Security | Portfolio weight at 30.11.2024% | Benchmark weight at 30.11.2024% | 6 month priceperformance% | 6 month contributionto portfolio return% |
| Novo Nordisk | 11.4 | 3.2 | (20.1) | (2.6) |
| Edenred | 4.7 | 0.1 | (27.7) | (1.4) |
| Dassault Systèmes | 6.9 | 0.2 | (14.2) | (1.0) |
| Infineon Technologies | 4.2 | 0.4 | (18.5) | (0.9) |
| Worldline | 1.2 | – | (47.7) | (0.6) |
The biggest positive contributor to our performance in the period under review was Deutsche Boerse. The combination of leading technology capabilities, the increase in exchange traded financial instruments and volatile energy and interest rates, has driven the strong performance.
The next biggest contributors to our performance were RELX and Experian. Both companies have strong proprietary data assets and have improved their offers with the use of AI. RELX’s legal information business is a clear beneficiary in this respect. Indeed, the company raised its growth expectations on the back of AI. Experian’s core credit and analytics businesses have, too, leveraged AI to buoy their offer. Whereas AI can be a disruption, we believe that our companies, where relevant, gain from the use of this technology both in improving their internal operations and in improving the quality of their offerings.
GTT also performed well. It provides services to Liquified Natural Gas (LNG) carriers. As a ‘transition’ fuel, LNG is an important element in the move to more renewables in the energy mix.
Detractors
Whereas we believe the direction of politics in America is generally favourable for our companies, this is not necessarily the case for a couple of our holdings, notably Novo Nordisk, our biggest holding, and Genus. Both detracted from our performance in the period under review. The nomination of Robert F Kennedy Jr to be the next US health secretary has alarmed investors. The nominee is deemed to have eccentric views which could disturb current practices in healthcare and, in the case of Genus, animal husbandry.
The share price of Edenred, which offers specific-purpose payment solutions, fell sharply. Notwithstanding the record of excellent results, investors worried that politicians in France and Italy will seek to restrict returns through new regulations. We recognise these regulatory threats. However, we believe that Edenred can operate successfully even as regulations change.
Another detractor was Dassault Systèmes. The company has an excellent long-term record. However, the shares performed badly over the last six months as the rate of growth slowed. The main explanation is that European car manufacturers are grappling with high costs, especially the costs of producing electrical vehicles, and weak demand for those same electric vehicles. Their competitive position versus the Asian players has deteriorated. Nevertheless, we remain confident that Dassault Systèmes is an excellent company which will again capitalise on its strong technology platforms.
Even if individual stocks explain much, we also acknowledge the impact of our ‘style bias’. The best performing sector in the index was Financials, notably the mainstream banks, a sector to which we have never had significant exposure. Our rationale is that we find better long-term value from innovative, world-leading companies in other sectors. However, in recent times the European-based banks have delivered better returns thanks to high-interest rate spreads, low loan losses and regulatory protection which keeps out new entrants. Central banks’ money printing policies (‘quantitative easing’) has had the effect of extending the normal business cycle, supporting the banks’ asset quality. In due course, we are confident that the cycle will turn down, vindicating our strategy.
Our strategy has also suffered from outflows from European equities. Private sector savings have been squeezed by higher taxes, levied to help straitened public finances. In addition, global asset allocators have avoided Europe, disproportionately hurting big (as distinct from mega-sized) and mid-sized stocks, parts of the market to which our portfolio has a greater than average exposure.
Portfolio activity
Portfolio turnover in the six months was 22.7% annualised (defined as purchases as a percentage of net assets). Sales in the period totalled £76.5m, almost half of which was the sale of Darktrace, following an agreed offer for the company by a private equity firm. The next biggest sale was that of Soitec, as better opportunities were found elsewhere. The silicon carbide ‘story’ Soitec has stalled in line with the slowing growth in sales of Electric Vehicles (EVs). We also exited the position in Grenke. Having started selling on the back of good results earlier in the year as asset quality deteriorated, we accelerated selling. The lightening of holdings in Novo Nordisk and RELX was because of the size of the weightings, rather than any concern about the quality of the respective businesses.
Significant new investments included Universal Music Group (UMG), the world’s leading music company. It is the owner of a huge catalogue of recorded music. Digital technology allows UMG to develop new services, platforms and business models and thereby better monetise their catalogue. We also established positions in BE Semiconductor Industries (Besi) and Yubico. Besi is a Dutch technology company, a world leader in packaging processes and hybrid bonding for the semi- conductor industry. Swedish-listed Yubico, is a world leader in multi-factor authentication, a hardware solution widely regarded as being the best way to foil cyber-attacks. Other smaller purchases included the French company, Exosens, which is the world leader in the manufacture of image intensifier tubes, the key component of night vision goggles. Finally, we bought shares in Wise, a London based global payments technology company.
Outlook
We believe that the European Opportunities Trust portfolio is better value than at any time since 2017. Our earnings forecasts for the portfolio companies are markedly higher than those projected for the wider market. Yet the valuation premium on our portfolio is modest. We project that our portfolio will grow earnings at 9.9% and 20.7% in 2025 and 2026 respectively (as at 31 January 2025). The current year valuation premium for this earnings growth is low by historic standards. Moreover, we expect earnings momentum for our companies to continue in 2027.
It is worth noting that the reduction in the valuation premium of the portfolio relative to the Benchmark since 2022 has been achieved without compromising our investment approach. Typically, our companies also have less debt than most European listed companies, which we regard as prudent. The portfolio also has higher returns on invested capital than the Benchmark.
At a macro level, slower economic growth in Europe will stymie the banks’ earnings. Our strategy is to identify ‘winners through the cycle’, a strategy that has been thwarted somewhat by the huge money printing programmes of the COVID era. The extended business cycle will turn down at which point our companies’ earnings resilience will be clear. Typically, our investee companies have high recurrent revenues and benefit from exposure to faster growing economies like the US.
Despite the direction of fund flows and Europe’s intractable problems, within this portfolio we do see numerous potential catalysts from our companies this year which would drive share prices. Although December 2024 saw disappointing phase three trial results for Novo Nordisk’s next generation drug Cagrisema, the company has a bright future as a global leader in treating diabetes and obesity. Our healthcare, technology and payments companies should all make good progress. We remain confident that our strategy of picking companies that compete and succeed on the world stage will be vindicated.
Alexander Darwall
CIO, Devon Equity Management Limited
6 February 2025
