Montanaro European Smaller Companies Trust PLC

213800CWSC5B8BG3RS21

Final Results

2025 Annual Results and notice of annual general meeting

Montanaro European Smaller Companies Trust plc announces its annual results for the year ended 31 March 2025 and the publication of its annual report and accounts for the same period, which includes the notice of its 2025 annual general meeting.

HIGHLIGHTS

for the year ended 31 March 2025

Performance

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

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

** Details provided in the Glossary on pages 70 and 71 of the Annual Report.

(1) Refer to Alternative Performance Measures on page 68 of the Annual Report.

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

Chairman's Statement

For the year ended 31 March 2025

Results

The year saw a continuation of the trend seen since the end of 2021, namely a significant style headwind partially offset by the positive influence of stock selection. Montanaro Asset Management ("Montanaro", "MAM" or the "Manager") seeks to invest exclusively in high quality growing companies based on the belief that over the long term, a company's ability to compound earnings and cash flows is the primary driver of investment returns. However, in the short term, factors such as investor flows, political developments and macroeconomic fluctuations can temporarily overshadow underlying fundamentals.

The Net Asset Value ("NAV") declined by 1.9% to 162.0p per share during the financial year ended 31 March 2025. In comparison, the benchmark (the MSCI Europe ex-UK Small Cap Index) rose by 1.3% (in Sterling terms). The share price (with dividends reinvested) gained 5.1% as the discount to NAV tightened from -13.7% to -8.3%.

Whilst shorter term performance has been somewhat disappointing, Montanaro have a long-term investment approach. Over 5 and

10 years, your Company has delivered NAV total returns of 74.7% and 208.3%, outperforming the benchmark by 4.5% and 87.6%

respectively. Since Montanaro were appointed in September 2006, the NAV total return has been 473.0%, 166.8% ahead of the

benchmark (equivalent to an average annual outperformance of 2.0%).

Earnings and Dividends

Revenue earnings per share rose to 1.50p in the year (2024: 1.42p).

A first interim dividend of 0.3p per share was paid on 22 January 2025. A second interim dividend of 0.96p will be paid on 7 August 2025 to shareholders on the register on 27 June 2025. This will bring total dividends for the year to 1.26p per share, an increase of 12.0%.

The Company holds substantial reserves available for distribution, which gives the Board the ability to smooth any short-term income volatility.

Strategic Initiatives

On 27 March 2025, the Board announced three strategic initiatives designed to strengthen the investment proposition and deliver value for all shareholders:

1. Regular tender offers targeted at improving liquidity;

2. An active share buyback policy aimed at reducing the volatility of the discount; and

3. A reduction in the management fee.

Further details of each of the initiatives are set out in the Business Model and Strategy Section of the Annual Report.

Introduction of Regular Tenders

Conscious of shareholders' desire to improve liquidity, the Board has proposed a new initiative to offer shareholders the opportunity to tender shares to the Company twice a year, around the Interim and Final Results announcements. Shares will be bought back at a 5% discount to NAV, reflecting the higher transaction costs associated with smaller companies. Each tender will be capped at 5% of shares in issue to protect existing shareholders and manage portfolio liquidity. Shareholder approval for the first tender offer was granted on 15 May 2025 and the first tender offer is expected to take place in Autumn 2025.

Share Buybacks and Treasury Shares

During the year, the Company bought back 9,502,921 Ordinary Shares. As a result, the Company held 9,502,921 Ordinary shares in Treasury as at 31 March 2025.

Buying back Ordinary shares at a discount is accretive to the NAV per share. As such, the buybacks conducted during the year contributed an uplift of 0.45% to the NAV per share.

Since the end of the year, the Company continued to buy back Ordinary shares and substantially utilised the authority granted at the 2024 AGM. Accordingly, the Board secured additional authority at the General Meeting convened in May 2025 to cover the period until the next AGM.

Our stated policies on share buybacks and share issuances are set out on pages 18 and 32 of the Annual Reprt. The Board is seeking to renew the Company's share buyback and issuance authorities at the forthcoming AGM.

Management Fee

The Manager has agreed to a reduction in management fees from 0.90% per annum to 0.825% per annum of the market capitalisation of the Company up to £500 million and from 0.75% to 0.70% per annum between £500 million and £750 million. Above £750 million, the fee remains unchanged at 0.65% per annum.

This reduction in fees took effect on 1 April 2025, and is the second fee reduction which we have negotiated in the past four years.

As a demonstration of their confidence in the Trust, Montanaro has continued to invest in the Company and now hold 8.0% of the Company's shares.

Environmental, Social and Corporate Governance ("ESG")

Montanaro believe that strong ESG practices are closely linked to a company's ability to create long-term value for its shareholders. ESG considerations are therefore embedded within their definition of "Quality" and have been a fundamental part of their investment process for many years.

The ESG Report can be found on pages 10 and 11 of the Annual Report. It outlines developments in Montanaro's approach to ESG, their ongoing commitment and their engagement with investee companies.

Borrowings

The Board, in consultation with the Manager regularly reviews the gearing strategy of the Company and approves any gearing facility. Gearing amplifies the returns from underlying profits or losses generated by the investment portfolio.

The Board has set a maximum limit on borrowing (net of cash) of 30% of shareholders' funds at the time of borrowing. At the end of the financial year, the Company had borrowings (net of cash) of 2.1% compared to 2.9% at the beginning of the year.

Board Succession

As part of our normal succession planning process, I intend to retire as Chairman and from the Board on 31 December 2025. This will be after we have conducted our first bi-annual tender. We are very fortunate that Gordon Neilly has agreed to step into the role of Chairman and with his extensive experience of the investment trust sector there can be no better person to lead our Trust in the future.

Communication with Shareholders

Over the past few years, the composition of our shareholder base has changed significantly with an increasing number of individual investors coming onto the register via investment platforms. We are keen to encourage an open dialogue to keep all shareholders up to date with key developments. Our website - www.montanaro.co.uk/trust/mesct - is continually updated with factsheets, reports, presentations, webinar recordings and commentaries as well as more details about the Manager, investment philosophy and process. We encourage shareholders to visit regularly and welcome any feedback and suggestions.

We would also encourage shareholders to sign up to receive regular updates by email.

Dividend Policy

Following discussion on the timing of dividend payments to shareholders with the Company's broker Cavendish, the Board has decided to move to a cycle of paying two interim dividends per annum in or around January and August. This represents a change from the previous dividend payment cycle of paying an interim and final dividend. As the Company will no longer put a final dividend to shareholders for approval, in accordance with recommended corporate governance best practice, the new dividend policy will be put to shareholders approval at the upcoming Annual General Meeting. The new dividend policy can be found on page 18 of the Annual Report.

Annual General Meeting

The AGM will be held at the offices of Montanaro Asset Management, 53 Threadneedle Street, London EC2R 8AR, on 4 September 2025 at 11.00 a.m. Shareholders are encouraged to attend the Meeting where there will be an opportunity to meet and ask questions of the Board and the Manager.

Detailed instructions on how to vote on the AGM resolutions are provided on pages 79 to 81 of the Annual Report. We encourage all shareholders to review this guidance and ensure their votes are submitted.

Additionally, the AIC has prepared information on how to vote across the most common investment platforms, this guidance is available at - www.theaic.co.uk/how-to-vote-your-shares.

Outlook

As 2024 drew to a close, the prevailing investment consensus - that US mega-caps were the only place to be - reached a crescendo following the election of Donald Trump as President. However, events since then have cast doubt over this view. The tariffs announced on "Liberation Day" shocked the world. The United States has made it increasingly clear that they now view its relationships with the rest of the world - including Europe - as adversarial or, at best, purely transactional.

Yet with change comes opportunity. Investor sentiment has shifted towards European equities this year as they have seen improved performance. They remain under-owned and still appear attractively valued.

Since the peak in August 2020, the forward P/E of SmallCaps in Continental Europe has fallen from over 23x to around 13x at the end of March 2025. This substantial de-rating leaves them trading at a discount to their long-term historical average.

Moreover, European SmallCaps are valued at a discount to the wider market, which is unusual. Indeed, the discount is at a level last seen in the depths of the Global Financial Crisis of 2008.

We must, however, acknowledge that increasing global trade barriers and indeed policy uncertainty are likely to hinder rather than support economic growth. In this environment, owning a portfolio of very high quality, structurally growing companies provides us with a strong degree of comfort. One of the defining features of such quality companies is their ability to invest for the future and capture market share in more challenging economic environments, while weaker competitors have to focus on day-to-day survival.

In summary: European smaller companies have a long track record of delivering strong returns to investors. Today, they are trading at a significant discount to both their own history and to their larger counterparts. The previous overwhelming investment consensus favouring the US over Europe has been challenged and investor sentiment has shifted towards European equities. Meanwhile, the companies in your portfolio are well positioned to invest and grow even through difficult times, supported by strong balance sheets, high returns on capital, and clear structural growth opportunities. The portfolio continues to be managed by an exceptionally well-resourced and experienced team at Montanaro. In addition, the Board has implemented a series of measures aimed at improving liquidity, reducing discount volatility and further reducing costs.

Against this backdrop, we continue to look forward to the future with confidence.

R M CURLING

Chairman

18 June 2025

Manager's Report

The Attractions of Quoted European Smaller Companies ('SmallCap')

The key attraction of investing in smaller companies is their long-term record of delivering higher returns to investors than large companies. In the UK, over the last 70 years, this has amounted to an average of 3.1% per annum (the "SmallCap Effect"). £1 invested in UK large companies on 1 January 1955 would now be worth £1,503 whereas the same £1 invested in smaller companies would now be worth £10,040 - almost seven times more.

There is less comprehensive data on Europe - it only goes back to 2000. However, it suggests that the SmallCap Effect is even more pronounced on the Continent: as the chart above illustrates, European 'small' companies have outperformed 'large' companies by 4% per annum.

Remarkably, European SmallCaps have returned 9.2% p.a. (in Sterling terms) since the turn of the century, thereby outperforming the vast majority of SmallCap markets around the world including the UK, Japan, Australia the BRICs and even the USA (based on the Russell 2000 Index).

The market for European smaller companies is inefficient. While some large companies are analysed by more than 50 brokers, many smaller companies in Europe have little or no coverage. We believe that this makes it easier for those with a high level of internal resources to identify attractive, undervalued and overlooked investment opportunities. This in turn makes it possible to deliver long-term performance over and above that of the benchmark.

Montanaro Asset Management

Montanaro was established in 1991. We have one of the largest and most experienced specialist teams in the UK dedicated exclusively to researching and investing in quoted small companies. Our large team of analysts and portfolio managers gives us the breadth of resources to conduct thorough in-house research.

At 31 March 2025, we were looking after around £3 billion of client assets. We have been the Manager of your Company since September 2006.

Investment Philosophy and Approach

We specialise in researching and investing in quoted smaller companies. We have a disciplined, two-stage investment process.

In the first stage, we identify "good businesses" within our investable universe. We look for high quality companies in markets that are growing. They must be profitable; have good and experienced management; deliver sustainably high returns on capital employed; enjoy high and ideally growing profit margins reflecting pricing power and a strong market position; and provide goods and services that are in demand and likely to remain so. We prefer companies that can deliver self-funded organic growth and remain focused on their core areas of expertise, rather than businesses that spend a lot of time on acquisitions.

Conversely, we avoid those with stretched balance sheets; poor free cash flow generation; incomprehensible or heavily adjusted accounts; unproven or unreliable management; or that face structurally challenged business models with stiff competition.

A company must also pass our stringent quality and ESG checklists. ESG has been integrated into our disciplined investment process for almost two decades.

When we have identified a company that we believe is high quality, has structural growth and is well managed from a business and ESG perspective, it is reviewed by our Investment Committee before it can proceed to the next stage. Companies that do not possess these attributes are rejected.

Companies that pass the first stage then undergo a valuation & risk assessment. We determine their intrinsic value, typically through a proprietary discounted cashflow analysis, to ensure they will make a "good investment" ("good businesses" and "good investments" are not always the same). The Investment Committee scrutinises the forecasts and assumptions made for each business. While the biggest risk - that we invest in poor or declining businesses - is addressed in the first stage, in stage two we take a more quantitative approach, with in-depth analysis of liquidity, factor risk and correlations and how these might affect position sizing and the subsequent portfolio characteristics. Only once this is complete will we add it to our Approved List.

Companies that are on the Approved List and which we also believe are attractively valued are then eligible for inclusion in your portfolio.

Our Investment Team use their industry knowledge and a range of proprietary screens to continually search for new ideas. With thousands of quoted companies from which to choose, we are spoiled for choice.

We believe that a deep understanding of a company's business model and the way it is managed are essential. We visit our investee companies on a regular basis. We examine management's past track record in detail as we seek to understand their goals and aspirations. In smaller companies, the decisions and motivation of the entrepreneurial management can make or break a company, which is why meeting them is so important. We look closely at the board structure; the level of insider ownership; and examine remuneration and corporate governance policies carefully.

Once a company has been added to the portfolio, our investment team conducts ongoing analysis. We will sell a holding if we believe that the company's underlying quality is deteriorating or if there has been a fundamental change to the investment case or management. We will get things wrong and make mistakes, but we try to learn from them.

In summary, we invest in well managed, high quality, growing companies bought at sensible valuations. We keep turnover and transaction costs low and follow our companies closely over many years. We would rather pay more for a higher quality, more predictable company that can be valued with greater certainty. Finally, we align our interests with our investors by investing meaningful amounts of our own money alongside yours. We are significant shareholders in the Trust.

The Portfolio

At 31 March 2025, the portfolio consisted of 49 companies of which the top ten holdings represented 38.3% of net assets. Sector and country distributions within the portfolio are driven by stock selection. Although weightings relative to the market are monitored, overweight and underweight positions are based on where the greatest value and upside are perceived to be.

Performance Attribution

The largest positive contributors over the period were:

Plejd is a Swedish developer of smart lighting, heating and other electrical products, which are sold to professional electricians. The company had an excellent year, with operating profit more than doubling thanks to both significant revenue growth and a well invested cost base that allowed for significant operating leverage.

VZ Holding is a Swiss independent financial consultant and wealth manager. The company was a top three contributor last year too - another demonstration that "running your winners" is often a fruitful strategy. The company had a good year thanks to continued demand for financial advice and an independent approach which continues to appeal to customers.

MTU Aero Engines manufacture and maintain aircraft engines and components. The company successfully improved efficiency in the Geared Turbofan fleet management plan, while continuing to deliver growth elsewhere in the business.

Inevitably the year was not without some stock price declines as well. The largest detractors were:

Tecan develop automated instruments and solutions that are used in laboratories. The company endured a difficult year as biopharma companies pulled back spending and research budgets in the US in particular came under threat from the new administration.

Bachem is a leading manufacturer of peptides. The share price declined as the timing for the new manufacturing facility (and, therefore, the associated revenues) was pushed out.

IMCD is one of the world's largest specialty chemical distributors. Hopes of a volume recovery in 2024 proved to be premature, with investors de-rating the stock through the year.

Portfolio Changes

We try to keep portfolio turnover as low as possible. However, we typically make a few changes each year as we identify new investment ideas that we expect will provide stronger long-term returns than existing holdings. Companies that become too large, are acquired or where the investment case deteriorates are also replaced with new ideas from our Approved List.

The year to 31 March 2025 was notable for its M&A activity: we are clearly not the only ones who believe these companies are attractively valued and have strong growth prospects.

Esker and Epsilon Net, both niche software providers, were bought out. The merger of Chr. Hansen, the probiotic developer, and Novozymes was completed and we subsequently sold our holding in the combined company on size grounds. Esker and Chr. Hansen both exited the portfolio having risen by multiple times their initial purchase price. Epsilon Net was sold at a premium to our purchase price and made a respectable return for the portfolio, but did not achieve the same feat due to being taken over less than a year after we bought the stock.

Dynavox, the supplier of augmentative and alternative communication devices used by people with disabilities to communicate more effectively, and cBrain, which develops modular software primarily for government and state departments, were added to the portfolio.

Continual Improvement

Each year we take time to look back at our successes and mistakes to assess how our systems and processes can be improved.

We have made significant strides in our ability to dynamically quantify and monitor our risk profile, especially with respect to factor risks. Our objective - as with all our risk management processes - is not to eliminate risk entirely; rather, it is to take risk selectively and thoughtfully where we believe it is well rewarded. Our focus is on ensuring that we are exposed to the right risks while actively minimising our exposure to those factor risks on which we have either a negative view or no conviction at all.

We have been systematically collecting data on the companies we research - from new idea fruition to exit - for many years. We have now reached a point where the dataset is sufficient to extract meaningful patterns and insights. Our analysis has already revealed several interesting findings, leading to refinements in both our idea generation process and the way we conduct Investment Committee meetings.

How to Invest

We have invested a great deal of time and effort to make the Company readily available to all investors. We have continued to grow our presence across the UK's investment platforms and are delighted to see a steady increase, year after year, in the Trust's retail following. With the Board, we have appointed Marten & Co to provide sponsored research - you can find the initiation report, here: https://www.montanaro.co.uk/mesct-quality-business/ and update reports on our website: www.montanaro.co.uk/trust/mesct.

MONTANARO ASSET MANAGEMENT

Lead Porfolio Manager, George Cooke

18 June 2025

Top 10 Holdings

as at 31 March 2025

1.     VZ Holding - A Swiss financial consultancy and wealth manager with a tech-enabled platform. Its focus on fee-based advice and recurring revenues makes it a standout in a traditionally commission-driven industry.

2.     Kitron - An electronics manufacturing services (EMS) provider for defence, healthcare, and electrification markets. Kitron offers resilient growth through long-term contracts, reshoring trends, and rising demand for high-reliability electronics.

3.     ATOSS Software - A leader in workforce management software. Its scalable cloud solutions help companies optimise labour costs, with a high-margin SaaS model driving recurring revenue and impressive long-term growth.

4.     MTU Aero Engines - A key player in aircraft engine manufacturing and maintenance. Benefiting from global air travel recovery and a strong order book, MTU offers a powerful combination of engineering excellence and after-market revenue.

5.     CTS Eventim - Europe's leading ticketing and live events platform. Its dominant digital position, asset-light model and the return of large scale events has delivered strong earnings growth.

6.     Reply - An IT consultancy focused on AI, cloud and digital innovation. Reply's decentralised model and blue-chip client base drive consistent growth and strong returns in the fast-evolving tech landscape

7.     Fortnox - Cloud-based accounting and admin software for SMEs. With a near-monopoly in Sweden, high switching costs and expanding product suite, Fortnox is a classic high-margin compounder. The company received a takeover offer on 31 March 2025.

8.     NCAB - A global printed circuit board supplier offering premium service and logistics. With an asset-light model and consolidation strategy, NCAB delivers reliable cashflows and market share growth.

9.     Plejd - Develops smart lighting control systems for homes and businesses. Its intuitive products and strong network of electricians make it a high-growth disruptor in Nordic smart homes

10.   Brunello Cucinelli - The Italian luxury brand known for "humanistic capitalism" and timeless craftsmanship. Its focus on sustainable growth, exclusivity and global demand for quiet luxury support premium positioning and pricing power.

Twenty Largest Holdings

as at 31 March 2025

FURTHER INFORMATION

Montanaro European Smaller Companies Trust plc's annual report and accounts for the year ended 31 March 2025 (which includes the notice of meeting for the Company's AGM) will be available today on https://montanaro.co.uk/trust/montanaro-european-smaller-companies-trust/ .

It has also been submitted in full unedited text to the Financial Conduct Authority's National Storage Mechanism and is available for inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.