The Board of Montanaro European Smaller Companies Trust plc (the 'Company' or 'MESCT') announces the unaudited half-yearly results of the Company for the six months ended 30 September 2024.

Highlights

Performance

Sources: Morningstar Direct, Association of Investment Companies ('AIC'), Montanaro Asset Management Limited ('MAM').

*From 5 September 2006, when MAM was appointed as Investment Manager.

**Details provided in the Glossary below.

¹From 5 September 2006, the benchmark was the MSCI Europe SmallCap Index. The benchmark was changed on 1 June 2009 to the MSCI Europe SmallCap (ex-UK) Index (in sterling terms).

²Refer to Alternative Performance Measures below.

Chairman's Statement

Performance

In the first six months of the financial year the Net Asset Value of your Company rose by 0.1% to 165.2p per share. The Benchmark (MSCI Europe SmallCap (ex-UK) Index) fell by 0.9%.

During the period, the discount narrowed from 13.7% to 12.2%. The share price increased by 1.8%, leading to a share price total return of 2.4%. The Board continues to monitor the level of the discount closely and stands ready to act should it be deemed to be in the best interest of shareholders.

Montanaro take a long-term approach to investing and over 5 and 10 years your Company has delivered NAV per share total returns of 55.8% and 243.4% respectively, outperforming the Benchmark by 17.7% and 94.6% respectively. It is encouraging that performance has returned to form over the past year after a hiatus for a couple of years. Since Montanaro were appointed in September 2006, the annualised NAV total return has been 10.2%, 2.2% p.a. ahead of the Benchmark.

Earnings and Dividends

Revenue earnings per share rose to 1.56p in the period (2023: 1.37p). The Board has declared an interim dividend of 0.3p per share (2023: 0.225p per share) payable on 22 January 2025 to shareholders on the register on 20 December 2024. This increase is being proposed both to reflect the timing of when revenues are received and to provide a better balance between the interim and final dividends.

Borrowings

At the end of the period, the Company had gearing, net of cash, of 1.7% compared to 2.9% at 31 March 2024. The Company's borrowing facilities are due to mature on 13 September 2026.

The Board

We are very pleased to welcome Hillary Williams as a non-executive Director of the Company. Her appointment was with effect from 6 September 2024 and she has also been appointed as a member of the Audit, Remuneration and Nomination Committees from this date. Ms Williams brings extensive experience as a senior financial services marketing leader to the Board. 

Outlook

We have previously commented on the outperformance of large companies versus their smaller counterparts in the last few years. This contrasts with the longer-term historical trend - termed the "SmallCap Effect" by academics - whereby smaller companies delivered higher returns than large ones (the excess return averaged 4.2% per annum in Continental Europe since December 2000).  It is too early to say whether the recent underperformance of smaller companies has ended, but the headwind has certainly abated: in the six-month period to 30 September 2024, smaller companies in Europe outperformed their larger counterparts by 2%.

Perhaps we should not be surprised. Confirmation that inflation is back to a "normal" level has allowed the European Central Bank to start cutting interest rates once again, which is typically positive for smaller companies. In addition, as we have highlighted before, the valuation of smaller companies on the Continent looks cheap compared to its own history: at 12.3x, the forward P/E ratio is more than one standard deviation below its long-term average and at a record discount (13%) to the forward P/E of the broad European market.  The backdrop of disinflation coupled with attractive valuations is in turn boosting M&A activity in the smaller companies space.

Not everything is rosy, however. The economies within Europe remain shaky and it is clear from speaking to companies that Germany in particular is grappling with a significant cyclical downturn, partly fuelled by the challenges faced by China, one of its key export markets. In these circumstances we get comfort from the high quality and structural growth focus of the companies in your portfolio. We also note that while the three largest holdings in the portfolio at the quarter end are listed in Germany, they have extremely strong positions in structurally growing end markets. Their financial performance continues to reflect this.

If SmallCap is entering a new, multi-year cycle of outperformance, MESCT stands to benefit. The companies in your portfolio continue to deliver high returns on equity, far in excess of their cost of capital, and they have strong balance sheets. Moreover, consensus expectations suggest they will grow their earnings at double digit rates in 2025. Their continued progress and the constant oversight by Montanaro mean we look forward to the future with confidence.

Portfolio Summary

Twenty Largest Holdings

As at 30 September 2024

Geographical Analysis

As at 30 September 2024

Source: Juniper Partners Limited

Sector Analysis

As at 30 September 2024

Source: Juniper Partners Limited

Interim Management Report

The important events that have occurred during the period under review and the key factors influencing the financial statements are set out in the Chairman's Statement above.

Statement of Principal Risks and Uncertainties:

Most of the principal risks that could threaten the Company's objective, strategy, future returns and solvency are market related and comparable to those of other investment trusts investing primarily in quoted securities. The principal risks faced by the Company are investment and strategic, gearing, financial, discount volatility, regulatory, operational, cyber security, ESG and manager risks. These risks and the way in which they are mitigated are described in more detail under the heading 'Principal and Emerging Risks and Uncertainties and Risk Mitigation' within the Business Model and Strategy section on pages 16 to 19 of the Company's Annual Report for the year ended 31 March 2024. The Company's principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Company's financial year.

Related Party Transactions:

Related party transactions are disclosed in note 13 below. There have been no material changes to the related party transactions described in the last Annual Report.

Going Concern:

The Directors are satisfied that the Company has sufficient resources to continue in operation for the foreseeable future and for a period of at least 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

Directors' Responsibility Statement in respect of the Half-Yearly Report

We confirm that to the best of our knowledge:

·      the condensed set of financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

·      the Interim Management Report includes a fair review of the information required by the Disclosure Guidance and Transparency Rule ('DTR') 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the financial statements;

·      the Statement of Principal Risks and Uncertainties shown above is a fair review of the information required by DTR 4.2.7R; and

·      the Chairman's Statement, together with the condensed set of financial statements, include a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position or performance of the Company during the period, and any changes in the related party transactions described in the last Annual Report that could do so.

The Half-Yearly Report and Accounts were approved by the Board and the above responsibility statement was signed on its behalf by:

R M CURLING

Chairman

11 December 2024