Blackrock Greater Europe Investment Trust plc (LON:BRGE) has announced its half yearly financial announcement of results in respect of the six months ended 28 February 2021.
To discover more about the BlackRock Greater Europe Investment Trust click here.
|As at |
|As at |
|Net assets (£’000)1||443,404||387,861||14.3|
|Net asset value per ordinary share (pence)||519.22||459.97||12.9|
|Ordinary share price (mid-market) (pence)||526.00||447.00||17.7|
|Premium/(discount) to cum income net asset value2||1.3%||-2.8%|
|FTSE World Europe ex UK Index||1,583.05||1,467.97||7.8|
|Performance (with dividends reinvested)|
|Net asset value per share2||14.0%||16.9%|
|Ordinary share price2||18.8%||18.0%|
|FTSE World Europe ex UK Index||7.8%||0.7%|
|For the six |
|For the six |
|Net profit after taxation (£’000)||460||473||-2.7|
|Revenue profit per ordinary share (pence)3||0.54||0.56||-3.6|
1 The change in net assets reflects the ordinary shares issued from treasury, buyback of shares into treasury, market movements and dividends paid.
2 Alternative Performance Measures, see Glossary in the Half Yearly Financial Report.
3 Further details are given in the Glossary in the Half Yearly Financial Report.
The past six months has been a very successful period for your Company. This is so notwithstanding that the enormous disruption brought on by the COVID-19 pandemic in 2020 continued throughout the six-month period. Following a relaxation of lockdowns over the summer, European countries struggled to contain outbreaks of the virus and rising infection rates resulted in continued, new or tightened lockdowns since autumn, with a negative impact on economic growth. However, in November 2020 markets rose significantly, primarily driven by positive data on the effectiveness of vaccines against the COVID-19 infection. Since then, world equities appear to have been on a firmer footing with the distribution of vaccines providing hope for some return to normality, although the rollout of vaccines in Europe has been slow and lockdowns remain in place.
With the pandemic delivering a significant test for portfolio managers, it is very pleasing to report that over the six months to 28 February 2021, the Company’s net asset value per share (NAV) returned 14.0%, again outperforming the FTSE World Europe ex UK Index which returned 7.8%. Over the same period, the Company’s share price returned 18.8% (all percentages calculated in sterling terms with dividends reinvested). This was achieved notwithstanding a strengthening of sterling against most currencies in the markets in which investments are held. Further information on investment performance is given in the Investment Manager’s Report.
Since the period end to 21 April 2021, the Company’s NAV has increased by 9.5% compared with a rise in the FTSE World Europe ex UK Index of 8.1% over the same period.
REVENUE EARNINGS AND DIVIDENDS
The Company’s revenue return per share for the six-month period ended 28 February 2021 amounted to 0.54p compared with 0.56p for the corresponding period in 2020, a decrease of 3.6%. Due to the COVID-19 pandemic and its economic effects, some companies have cut or cancelled their dividend payments and this is likely to continue while economic activity resumes and balance sheets are mended. Accordingly, the Board’s intention is to pay a flat dividend at the half year stage, utilising its revenue reserve where necessary. The majority of the Company’s income typically is generated in the second half of the year.
The Board has declared an interim dividend of 1.75p (2020: 1.75p) per share. The dividend will be paid on 4 June 2021 to shareholders on the Company’s register on 7 May 2021, the ex-dividend date being 6 May 2021.
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 15 September 2020 that it had decided not to proceed with a tender offer in November 2020 and on 24 March 2021 that the tender offer in May 2021 would not be implemented.
Over the six-month period ended 28 February 2021, the Company’s shares traded at an average discount to NAV of 1.7% compared to a discount of 2.0% to NAV, the price at which any tender offer would be made. More recently the shares have typically traded at a premium to NAV. The Board therefore concluded that it was not in the interests of shareholders as a whole to implement the latest semi-annual tender offer. At 28 February 2021, the shares were trading at a premium of 1.3%.
I am pleased to report, as I indicated above, that since the end of December the Company’s shares have, for the most part, traded at a premium rating and in the period to 28 February 2021, 1,075,000 shares were reissued from treasury at an average price of 542.42p per share for a total gross consideration of £5,831,000. Since the period end, and up to the date of this report, the Company has reissued a further 1,910,000 shares at an average price of 556.94p per share. All share issuance was carried out at a premium to NAV. The prices at which these shares have been issued also represent a substantial premium to the prices originally paid for them by the Company.
The distribution of vaccines is critical to supporting economic recovery in Europe. If European Union (EU) countries are able to ensure a faster rollout of vaccinations, a better control of the pandemic and an easing of lockdown measures, the EU economy is likely to rebound, driven by pent-up consumer demand. European household savings have increased sharply in 2020 following stay-at-home directives and furlough schemes and, as some degree of normalcy returns, a boost to consumer spending is likely to follow.
Continued monetary and fiscal support is also important and the European Central Bank has recently provided a commitment to maintain easy financing conditions. The EU Recovery Fund should also deliver an unprecedented level of investment in the coming years. Around €750 billion in funds will be released to member nations, including a significant portion earmarked to help Europe transition to a net-zero emission economy.
Active management has been crucial in the period under review and our Portfolio Managers have served investors well. The key has been to invest in resilient companies that can thrive not only in a crisis, but in all market conditions. The Portfolio Managers’ view is long term and they will continue to look for companies with specific characteristics that enable them to deliver long-term growth whatever the economic weather.
23 April 2021
INVESTMENT MANAGER’S REPORT
The Company’s share price and underlying NAV rose over the last six months to 28 February 2021. In this period, the Company’s share price increased by 18.8% and the underlying NAV by 14.0%. By way of comparison, the FTSE World Europe ex UK Index returned 7.8% during the same period.
The beginning of the period experienced renewed fears of another COVID-19 wave as infection rates rose following the summer. However, European equities rallied sharply following positive vaccine data releases in November from Pfizer, Moderna and AstraZeneca, as well as the promise that vaccination programmes would start at the end of the year.
Since then we have seen the market largely trading around high level macro narratives regarding the re-opening of economies, vaccine rollouts and efficacy data, a likely earnings recovery, as well as inflationary pressures and interest rate moves. In particular, more cyclical, operationally levered parts of the market such as banks, airlines, auto manufacturers and oil & gas have performed strongly in light of increasing confidence in the re-opening and in anticipation of a substantial earnings recovery. On the flip side, previous ‘COVID-19 beneficiaries’ were used as a funding source by investors.
The Company outperformed the reference index over the six-month period, driven by strong stock selection, while sector allocation was also positive. In particular, the Company’s underweight to defensive areas of the market, as well as select opportunities within ‘value’ areas such as banks, and the positioning within both consumer areas and the semiconductor space proved successful. The most recent earnings season has been positive for the majority of stocks in the Company’s portfolio and we remain optimistic that we can see some solid upgrades this year driven by the re-opening of economies, a strong global consumer and weaker comparative bases over the next few quarters.
The technology sector was the largest contributor to relative returns. The Company’s holdings in the semiconductor market, including ASML, BE Semiconductor and Infineon Technologies, drove strong outperformance as we witnessed end market acceleration through trends such as the growing penetration of electric vehicles and a stronger than expected smart phone cycle. Especially within the automotive end market, several clients have noted shortages in semiconductor components, confirming a real tightness in the market.
Also, within the technology sector, a positive contribution came from industrial and software conglomerate Hexagon, which specialises in the provision of geo-mapping and monitoring software and sensors, as well as plant management and automation systems. Management feedback remains encouraging as the company continues to see strength across the board in China, as well as a speedy recovery in the North American market.
The Company saw a positive contribution from a number of stocks exposed to continued strength in consumer spending. A holding in Allegro aided returns. This Polish e-commerce platform, selling both international and local brands, enjoyed a strong share price performance after going public in early October. While the stock has seen volatility in recent weeks due to threats of Amazon entering the Polish market, we believe the group’s growth prospects remain strong over the medium to long-term as online penetration in the Polish retail market remains relatively low.
Similarly, our holding in Russian e-commerce company Ozon Holdings contributed positively. Ozon Holdings is the most recognised e-commerce brand in what is still an under-developed e-commerce market. We believe that as the infrastructure is rolled out, the Russian e-commerce market has potential to follow a similar growth path that we have seen in other markets. The most recent Q4 and 2020 full-year numbers were extremely strong, showing growth accelerating across all business segments. Elsewhere within the consumer space, luxury brand Hermès International, which continued to benefit from the outstanding resilience of the high-end consumer, aided returns.
Whilst a lower allocation to financials was negative, this was more than offset by strong stock selection. In particular, our position in Russian Sberbank rose strongly against the backdrop of a healthy risk environment, benefiting from the strength of more cyclical sectors. This stock was held for its fundamental attractions, including the potential for earnings upgrades, its cheap valuation and a high dividend yield. Following its rally in December, the stock hit our price target and we exited the position. KBC Groep also participated in the financials rally, which led us to trim our position size as we were left with less upside to fair value. Finally, not owning large defensive benchmark constituents like Nestlé, Roche, Novartis and Sanofi also contributed positively to returns.
Negative attribution came from a number of stocks that saw a degree of profit taking after having been unaffected by the COVID-19 crisis or benefiting from it earlier in the year and now sold off in the recovery and re-opening trade. Other detractors included stocks where the investment case has not played out yet. The first bucket includes Danish listed beverage provider Royal Unibrew, which performed strongly during the crisis but experienced some profit taking towards the end of the period despite posting solid results. The company highlighted share gains made across most regions and categories, as well as its disciplined cost control, which had been highly beneficial in COVID-19 times. We would highlight that while this stock did not participate in the market rally in recent months, it is also likely to benefit from the vaccine rollout given its exposure to consumers, restaurants and festivals, which are all likely to pick up with economies normalising. Elsewhere, shares in Lonza Group fell, suffering profit taking after having seen strong performance throughout most of 2020.
Other detractors included the Company’s investment in software group SAP. The company published weaker than expected results and cut its revenue and profit forecasts for this year in response to depressed business spending due to the virus. Importantly, SAP updated medium-term targets, essentially pushing them out by circa two years in part to reflect the disruption caused by COVID-19. We had been expecting the management team to update its strategic targets in light of COVID-19 but were left surprised by the extent of the revision to forecasts. As a result, we reduced our position in SAP to reflect slightly lower levels of conviction near-term.
While our overall positioning in the industrials sector was successful, a holding in Kingspan detracted from returns. Shares fell as one of Kingspan’s insulation products was found to have been used on Grenfell Tower, which tragically burned down in London in June 2017. Kingspan’s product accounted for less than 5% of insulation material on the tower, however Kingspan had no involvement in the construction, nor did they recommend use of its product during construction. While the official inquiry into the event led to weakness in Kingspan shares, we take comfort from the fact that Kingspan has introduced a set of changes tightening control of product testing, marketing and distribution by establishing a new code of conduct, a newly created role of Head of Compliance and Certification and other divisional management changes. Importantly, this incident also appeared to have no impact on operations outside of the UK.
Elsewhere, not owning a number of cyclical stocks such as Siemens, Daimler, Banco Santander or BBVA also detracted. Whilst a number of these lower quality businesses have seen earnings upgrades and a degree of rerating, we see little fundamental reason to own these companies over any meaningful timeframe.
While the portfolio’s turnover remained low, the industrials sector saw the highest allocation increase during the period. For example, we added Switzerland-based VAT Group to the Company, which focuses on designing and producing vacuum valves for semiconductor, display and solar panel manufacturing. We believe this company will benefit from its growing end markets, best in class returns and the potential for continued market share gains.
We also started a new position in Epiroc, a leading provider of equipment and services for the mining and infrastructure industries. This business appears well-positioned to capitalise on the strong recovery in mining capex expected to come through over the next three to five years. Its services enable mining operations to become more sustainable, as more and more of its products become battery powered over time. With demand levels high, strong momentum in orders and a management team focused on executing its well-defined strategy, we see Epiroc continuing to do well in a recovery environment.
Also, within industrials, we added Marel which manufactures and services advanced processing systems for the poultry, meat and fish industries. As the clear market leader, Marel’s strategy is to consolidate and standardise a highly fragmented food processing industry. Demand for its solutions appears well under-pinned, not just by rapidly increasing demand for higher protein food sources in developing countries, but also by strong underlying trends towards higher automation and greater food safety. With close to 25% of the business owned by the CEO, we see our shareholders’ interests well aligned with those of the business.
Within health care, we moved capital to ChemoMetec which is a Danish capital equipment company specialising in the development, production and sale of high-quality equipment used for counting and analysing cells in a broad range of settings. This investment case is supported by a large addressable market, offering opportunities for rapid revenue growth at a high gross margin whilst being run by a very competent management team.
Over the period we also added to positions in some of our favoured companies where we see increased opportunity for upside. For example, we topped up our position in Amadeus IT Group, the travel and tourism industry’s leading transaction systems provider, as we now have greater confidence that we should see a return of travel to more normal levels sooner than consensus is currently pricing in. Our allocation to financials decreased slightly as we sold out of Sberbank and reduced KBC Groep following a strong rally in the financials sector, as mentioned above.
Our exposure to Emerging Europe increased over the period. At one point it represented 9.6% of the portfolio and currently stands at 7.9%.
We see recent market strength persisting over the coming months, as vaccine rollouts progress and the strength of the global consumer shines through. Higher inflation may be on the horizon in the near term, but we expect these effects to be transitory and for central banks to remain accommodative.
Whilst we see this as being a supportive backdrop for equities overall, a high degree of selectivity remains warranted for the long-term investor given the lack of pricing power in many areas of the market. We remain focused on the fundamentals and retain our core exposure to companies with predictable business models, higher than average returns on capital, strong cash flow conversions and opportunities to reinvest that cash flow into future growth projects at high incremental returns.
STEFAN GRIES AND SAM VECHT
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
23 April 2021
To discover more about the BlackRock Greater Europe Investment Trust click here.
TEN LARGEST INVESTMENTS
1 + ASML (2020: 2nd)
Market value: £35,577,000
Share of investments: 7.5%
ASML is a Dutch company which specialises in the supply of photolithography systems for the semiconductor industry. The company is at the forefront of technological change and invests in leading research and development to capture the structural growth opportunity supported by growth in mobile devices and microchip components. The high barriers to entry within the industry give ASML a protected position with strong pricing power allowing growth in margins whilst they continue to innovate. The company has strong management who aim to create long-term value for the business whilst returning excess cash to shareholders.
2 – Sika (2020: 1st)
Market value: £25,227,000
Share of investments: 5.3%
Sika is a Swiss speciality chemical company with a leading position in both construction chemicals and in bonding agents for the automotive industry. Sika has proprietary technology within adhesives, which has an increasing array of applications as technology advances. The company benefits from structural drivers of urbanisation and has exposure to multiple points in the construction cycle including new infrastructure projects, as well as maintenance or refurbishment of existing buildings. It is also likely to benefit from the EU Recovery Fund which will channel funds towards sustainable infrastructure projects. Sika’s decentralised structure of subsidiaries and strong culture of new product innovation continues to drive pricing power.
3 + Kering (2020: 5th)
Consumer services company
Market value: £23,943,000
Share of investments: 5.0%
Kering is a French luxury group owning brands such as Gucci, Yves Saint Laurent and Bottega Veneta. We believe Kering is one of the winners in a ‘winner takes all’ market given the strength and resilience of its brands. This position is cemented by its best in class e-commerce offering, which in combination with a rejuvenated product portfolio has enabled Kering to capture the imagination of global millennials. We believe Kering remains an extremely well-positioned company with a strong balance sheet that offers optionality for both increased shareholder returns, as well as value accretive deals. In the near term, we think the brand can benefit from a few new launches around its 100th anniversary this year.
4 = Lonza Group (2020: 4th)
Health care company
Market value: £23,096,000
Share of investments: 4.9%
Lonza Group is a Swiss biotechnology and speciality chemicals company. Lonza Group has established itself as one of the leading contract manufacturers of high-end biological drugs, as well as cell and gene therapy. Overall, we see those end markets growing at double digit rates well into 2025 and beyond, which leaves Lonza Group well placed to deliver attractive growth in earnings and cash flows regardless of the prevailing macro-economic environment.
5 + DSV Panalpina (2020: 8th)
Market value: £22,569,000
Share of investments: 4.8%
DSV Panalpina is a Danish freight forwarding company with a strong acquisitive history and an excellent management team and company culture. Their success in making acquisitions has been facilitated by their strong IT platform which drives operational efficiencies leading to high conversion margins. In 2019 DSV took over Swiss peer Panalpina in its largest ever acquisition which they have been integrating successfully.
6 = Novo Nordisk (2020: 6th)
Health care company
Market value: £21,624,000
Share of investments: 4.6%
Novo Nordisk is a Danish multinational pharmaceutical company which is a leader in diabetes care. We expect growth in earnings and cash flows driven by demand for ‘Ozempic’ which treats Diabetes type 2 and there is potential for their products to help tackle obesity. Overall, we believe Novo Nordisk offers attractive long-term growth potential at high returns and sector leading cash flow conversion with any excess cash being returned to shareholders.
7 = Royal Unibrew (2020: 7th)
Consumer goods company
Market value: £19,506,000
Share of investments: 4.1%
Royal Unibrew is a brewing and beverage company based in Denmark. Through a number of well-timed acquisitions, the group has transformed itself into a multi-beverage company offering attractive growth in soft drink niches at high returns, with significant potential to export their brands with strong European heritage into international markets.
8 + Safran (2020: 11th)
Market value: £15,739,000
Share of investments: 3.3%
Safran is a French multinational supplier of systems and equipment for aerospace, defence and security. The industry is emerging from a heavy investment period in new planes and engines and we see Safran as well placed to benefit from continued strength in its best in class after-market business, as well as strong execution in its LEAP engine programme which should drive growth for the next five to ten years. In the near term, we think the shares can benefit from a rerating as and when restrictions for travel lift.
9 = RELX (2020: 9th)
Consumer services company
Market value: £15,572,000
Share of investments: 3.3%
RELX is a multinational information and analytics company which has high barriers to entry in most of its divisions, including scientific publishing. The capital light business model allows for a high rate of cash flow conversion with repeatable revenues built on subscription-based models. The business also benefits from the structurally increasing usage of data globally, which supports their data analytics business.
10 = Hexagon (2020: 10th)
Market value: £14,763,000
Share of investments: 3.1%
Hexagon is a Swedish industrial and software conglomerate. The business specialises in the provision of geo-mapping and monitoring software and sensors, as well as plant management and automation systems. Its products have applications in diverse end markets including smart phones, mining automation, construction surveying and agriculture optimisation.
All percentages reflect the value of the holding as a percentage of total investments.
Together, the ten largest investments represent 45.9% of the Company’s portfolio (31 August 2020: 50.5%).
PORTFOLIO ANALYSIS AS AT 28 FEBRUARY 2021
|Oil & Gas||–||–||–||–||–||–||–||–||2.3||–||–||1.9||4.2||3.8||4.2|
|% Portfolio 28.02.21||13.3||16.2||1.5||6.0||6.3||15.8||18.3||1.1||2.3||2.6||5.4||11.2||100.0||–||–|
|% Portfolio 31.08.20||12.2||14.5||2.2||10.0||5.6||12.2||18.8||2.3||2.3||2.5||5.9||11.5||–||100.0||–|
|FTSE World Europe ex UK 28.02.21||21.2||19.0||0.4||19.1||7.3||9.3||4.8||1.9||2.9||5.2||4.4||4.5||–||–||100.0|
Percentages in the table above are a % of total investments.
INVESTMENTS AS AT 28 FEBRUARY 2021
|Market value |
|% of |
|Amadeus IT Group||Spain||9,431||2.0|
|Oil & Gas|
All investments are in ordinary shares unless otherwise stated. The total number of investments held at 28 February 2021 was 42 (31 August 2020: 38).
Industry classifications in the table above are based on the Industrial Classification Benchmark standard for categorisation of companies by industry and sector.
As at 28 February 2021, the Company did not hold any equity interests comprising more than 3% of any company’s share capital.
INTERIM MANAGEMENT REPORT AND RESPONSIBILITY STATEMENT
The Chairman’s Statement and the Investment Manager’s Report give details of the important events which have occurred during the period and their impact on the financial statements.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks faced by the Company can be divided into various areas as follows:
· Investment performance;
· Legal & Compliance;
· Financial; and
The Board reported on the principal risks and uncertainties faced by the Company in the Annual Report and Financial Statements for the year ended 31 August 2020. A detailed explanation can be found in the Strategic Report on pages 29 to 32 and in note 15 on pages 86 to 92 of the Annual Report and Financial Statements which are available on the website maintained by BlackRock at blackrock.com/uk/brge.
The Board is mindful of the uncertainty surrounding the potential duration of the COVID-19 pandemic and its impact on the global economy, the Company’s assets and the potential for the level of revenue derived from the portfolio to reduce versus the prior year. The Portfolio Managers will continue to review the composition of the Company’s portfolio and to be pro-active in taking investment decisions.
The Directors, having considered the nature and liquidity of the portfolio, the Company’s investment objective and the Company’s projected income and expenditure, are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future and is financially sound. The Board believes that the Company and its key third-party service providers have in place appropriate business continuity plans and these services have continued to be supplied without interruption throughout the COVID-19 pandemic.
The Company has a portfolio of investments which are predominantly readily realisable and is able to meet all its assets and income generated from these assets. Accounting revenue and expense forecasts are maintained and reported to the Board regularly and it is expected that the Company will be able to meet all its obligations. Borrowings under the overdraft facility shall at no time exceed £52 million or 15% of the Company’s net asset value (whichever is the lower) and this covenant was complied with during the period.
Based on the above, the Board is satisfied that it is appropriate to continue to adopt the going concern basis in preparing the financial statements. Ongoing charges for the year ended 31 August 2020 were 1.01% of net assets and it is expected that this is unlikely to change significantly going forward.
RELATED PARTY DISCLOSURE AND TRANSACTIONS WITH THE MANAGER
BlackRock Fund Managers Limited (BFM) was appointed as the Company’s Alternative Investment Fund Manager (AIFM) with effect from 2 July 2014. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Both BFM and BIM (UK) are regarded as related parties under the Listing Rules. Details of the fees payable are set out in notes 4 and 11 below. The related party transactions with the Directors are set out in note 10 below.
DIRECTORS’ RESPONSIBILITY STATEMENT
The Disclosure Guidance and Transparency Rules (DTR) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.
The Directors confirm to the best of their knowledge that:
· the condensed set of financial statements contained within the Half Yearly Financial Report has been prepared in accordance with applicable UK Accounting Standards and the Accounting Standards Board’s Statement ‘Half Yearly Financial Reports’; and
· the Interim Management Report, together with the Chairman’s Statement and Investment Manager’s Report, include a fair review of the information required by 4.2.7R and 4.2.8R of the FCA’s Disclosure Guidance and Transparency Rules.
This Half Yearly Financial Report has not been audited or reviewed by the Company’s auditor.
The Half Yearly Financial Report was approved by the Board on 23 April 2021 and the above responsibility statement was signed on its behalf by the Chairman.
FOR AND ON BEHALF OF THE BOARD
23 April 2021
To discover more about the BlackRock Greater Europe Investment Trust click here.