TR European Growth Trust — Finding opportunities in European small-caps

The European Smaller Companies Trust (LSE: ESCT)

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TR European Growth Trust — Finding opportunities in European small-caps

TR European Growth Trust (TRG) lead manager Ollie Beckett says he and his team are still finding plenty of investment opportunities, in spite of the global bull market in equities arguably being closer to the end than the beginning. The managers focus on attractively valued smaller companies in continental Europe, where improving returns or management changes have not yet been appreciated by the wider market. After a stellar year of performance in FY17 (NAV and share price total returns of +54.0% and +75.5% respectively), recent returns have been more muted relative to the benchmark and peers, and the trust has moved from a slight premium to NAV to a discount, more in line with long-term averages. Beckett has recently taken profits in holdings where valuations looked stretched, and has increased TRG’s gearing to take advantage of a dip in investor sentiment. The stock list is towards the longer end of the historical range.

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Investment Companies

TR European Growth Trust

Finding opportunities in European small-caps

Investment trusts

2 July 2018

Price

1,020.0p

Market cap

£511.1m

AUM

£594.5m

NAV*

1,102.8p

Discount to NAV

7.5%

NAV**

1,119.8p

Discount to NAV

8.9%

*Excluding income. **Including income. As at 29 June 2018.

Yield (incl. special dividend)

1.4%

Ordinary shares in issue

50.1m

Code

TRG

Primary exchange

LSE

AIC sector

European Smaller Companies

Benchmark

EMIX Smaller Europe ex-UK

Share price/discount performance

Three-year performance vs index

52-week high/low

1,270.0p

1,012.0p

1,247.0p

1,086.1p

**Including income.

Gearing

Gross*

10.0%

Net*

10.0%

*As at 31 May 2018.

Analysts

Sarah Godfrey

+44 (0)20 3681 2519

Mel Jenner

+44 (0)20 3077 5720

TR European Growth Trust is a research client of Edison Investment Research Limited

TR European Growth Trust (TRG) lead manager Ollie Beckett says he and his team are still finding plenty of investment opportunities, in spite of the global bull market in equities arguably being closer to the end than the beginning. The managers focus on attractively valued smaller companies in continental Europe, where improving returns or management changes have not yet been appreciated by the wider market. After a stellar year of performance in FY17 (NAV and share price total returns of +54.0% and +75.5% respectively), recent returns have been more muted relative to the benchmark and peers, and the trust has moved from a slight premium to NAV to a discount, more in line with long-term averages. Beckett has recently taken profits in holdings where valuations looked stretched, and has increased TRG’s gearing to take advantage of a dip in investor sentiment. The stock list is towards the longer end of the historical range.

12 months ending

Share price
(%)

NAV
(%)

EMIX Smaller Europe ex-UK (%)

FTSE World Eur ex-UK (%)

FTSE All-Share (%)

31/05/14

38.8

32.0

24.9

13.4

8.9

31/05/15

15.9

8.3

2.7

4.7

7.5

31/05/16

2.3

6.7

6.3

(3.7)

(6.3)

31/05/17

61.4

55.9

39.9

35.7

24.5

31/05/18

0.7

2.7

6.2

0.9

6.5

Source: Thomson Datastream. Note: All % on a total return basis in pounds sterling.

Investment strategy: Small-cap value and growth

TRG follows a bottom-up investment strategy, with the managers using a range of screens and valuation measures, and meeting hundreds of companies each year in their search for undervalued stocks with attractive growth or recovery characteristics. The trust holds a diversified portfolio of c 120-150 stocks from an investment universe of c 2,000 broadly sub-€4bn companies across continental Europe, and has a bias to the smaller end of the market, with 82% of holdings (including the effect of gearing) having a market cap below €2bn.

Market outlook: Growth at reasonable prices

In spite of a return to more normal levels of volatility after 2017’s historic lows, many global stock markets continue to perform strongly following a sell-off in Q118. European small-caps have outperformed their larger brethren, but still offer higher forecast EPS growth at more favourable forward P/E valuations. While there are undoubtedly risks – from the threat of a global trade war to a potential collapse of Germany’s ruling coalition – long-term investors may still be well rewarded by looking beyond the mainstream to find growing companies at reasonable prices.

Valuation: Return to more normal discount levels

At 29 June 2018, TRG’s shares traded at an 8.9% discount to cum-income NAV. While this represents a substantial widening from a 10-year high premium of 3.2% seen in November 2017, and an average discount of 4.2% over the past 12 months, it is actually slightly narrower than average discounts over three, five and 10 years. TRG’s shares currently yield 1.4% based on the FY17 dividend.

Exhibit 1: Trust at a glance

Investment objective and fund background

Recent developments

TR European Growth Trust’s objective is to achieve capital growth by investing in smaller and medium-sized companies that are quoted, domiciled, listed or have operations in Europe (excluding the UK).

6 March 2018: Half-year report for the period ended 31 December 2017. NAV TR +5.5% and share price TR +14.1% compared with benchmark TR of +6.2%. Interim dividend of 5.0p per share declared.

27 November 2017: All resolutions passed at AGM.

Forthcoming

Capital structure

Fund details

AGM

November 2018

Ongoing charges

0.75% (30 June 2017)

Group

Janus Henderson Investors

Annual results

September 2018

Net gearing

10.0% (31 May 2018)

Manager

Ollie Beckett, Rory Stokes

Year end

30 June

Annual mgmt fee

0.60%

Address

201 Bishopsgate,
London EC2M 3AE

Dividend paid

June, November

Performance fee

Yes (see page 7)

Launch date

1990

Trust life

Indefinite

Phone

+44 (0) 20 7818 6825

Continuation vote

Three-yearly, next 2019

Loan facilities

£80m overdraft

Website

www.treuropeangrowth.com

Dividend policy and history (financial years)

Share buyback policy and history (financial years)

From FY18, an interim and a final dividend will be paid in June and November (previously a final dividend was paid in November). While the primary aim is to achieve capital growth, the board also hopes to maintain and grow the dividend. Special dividends have been paid in each of the last 10 financial years; however, the move to paying two dividends a year may mean this is less likely in future.

TRG has the authority, renewed annually, to buy back up to 14.99% of shares and allot up to 10% of shares to manage a discount or a premium. Buybacks are at the board’s discretion following the removal in 2010 of an obligation to repurchase if the discount exceeded 10%.

Shareholder base (as at 18 May 2018)

Portfolio exposure by market cap (as at 2 July 2018, adjusted for gearing)

Top 10 holdings (as at 31 May 2018)

Portfolio weight %

Company

Country

Sector

31 May 2018

31 May 2017*

Van Lanschot Kempen

Netherlands

Banks

2.3

2.3

Brainlab**

Germany

Tech hardware & equipment

1.8

2.3

Fugro

Netherlands

Support services

1.4

N/A

Soitec

France

Technology

1.3

N/A

TKH Group

Netherlands

Electronic & electrical equipment

1.3

N/A

Dermapharm

Germany

Healthcare

1.3

N/A

Caverion

Finland

Building and industrial services

1.2

N/A

Lenzing

Austria

Chemicals

1.2

1.4

Gaztransport & Technigaz

France

Support services

1.2

N/A

Banca Farmafactoring

Italy

Banks

1.2

N/A

Top 10 (% of portfolio)

14.2

14.8

Source: TR European Growth Trust, Edison Investment Research, Bloomberg, Morningstar. Note: *N/A where not in end-May 2017 top 10. **Unlisted investment.

Market outlook: Look beyond the obvious

The majority of developed global stock markets have bounced back strongly in Q218, in spite of a return to more normal levels of stock market volatility after the historic lows seen in 2017. After a slower recovery from the global financial crisis than seen in the US and UK, Europe’s economies and markets are now on a growth path, with sterling returns of c 57% and 102% respectively from large- and small-cap indices over five years to end-May 2018 (Exhibit 2, left-hand chart). Forecast earnings growth for smaller European companies is better than for large-caps or UK companies (right-hand chart), and arguably only lags the US because of the one-off impact of tax cuts. However, the forward P/E valuation for European small-caps is lower than for US stocks or for European large-caps, suggesting higher return potential for investors in this area. The outlook is not without risk, given the threat of a global trade war and potential political instability at the heart of Europe, but patient investors may still be well rewarded by looking beyond Europe’s household-name companies to find higher forecast growth at more favourable valuations.

Exhibit 2: Market performance and valuation

European small vs large-cap performance (sterling adjusted)

Forecast P/E and EPS growth for small and large-caps

Source: Thomson Datastream, TR European Growth Trust, Edison Investment Research

Fund profile: Diversified European small-cap fund

TR European Growth Trust was launched in 1990 and has been managed since 1992 by Janus Henderson Investors and its predecessor companies. It invests in a diversified portfolio of smaller European (ex-UK) companies that the managers believe to be good value, with the aim of achieving long-term capital growth. The trust has been managed by Ollie Beckett since 2011, assisted since 2013 by Rory Stokes. Julia Scheufler recently joined the management team. While portfolio construction is bottom-up and unconstrained, TRG uses the EMIX (formerly Euromoney) Smaller Europe ex-UK index (in sterling terms) as a performance benchmark, and is a member of the Association of Investment Companies’ European Smaller Companies sector.

The managers are biased to the smaller end of the investment universe, with c 80% of the portfolio in sub-€2bn stocks. Because smaller companies can be illiquid and may carry a higher risk of failure, TRG tends to hold a long list of c 120-150 stocks in order to mitigate stock-specific risk. No more than 7% of the portfolio may be in a single holding. Gearing is used flexibly in a normal working range of up to 15%, and up to 20% of the portfolio may be held in cash or fixed income. Unquoted investments may be held with prior board approval, but there is no current intention to hold any unlisted companies except for second-largest holding Brainlab. While capital growth is TRG’s primary aim, it also has a 13-year record of year-on-year dividend growth, and has recently introduced an interim dividend payment to spread income more evenly through the year.

The fund managers: Ollie Beckett and Rory Stokes

The manager’s view: Look for improving returns

Beckett comments that he and his team remain valuation-aware in a protracted bull market, where many investors seem happy to pay ever-higher valuations for stocks. “There is still value and growth out there – we are not negative – but some of our holdings were looking a bit stale, so we have moved on, sometimes reluctantly,” he says. An example of a recent exit is eye surgery equipment specialist Carl Zeiss Meditec, bought at around €10 a decade ago, and sold in the mid-€50s on a P/E valuation of more than 30x. “We will continue to play the technological change theme, but we are not going to play themes or good companies at any price,” Beckett adds. “We want to find undervalued companies where the perception is wrong.”

Buying good companies that are out of favour is key to the TRG strategy’s success, explains Beckett. While the portfolio’s return on equity (ROE) is currently lower than that of the benchmark, the manager says the absolute level is less relevant; it is the rate of ROE growth that matters. “We are going off the beaten track to find companies where returns are improving,” says Beckett, pointing out that TRG’s exposure to the smaller end of the European small-cap market is higher than any of its peers’. While the managers have bought some companies at IPO recently, such as German medical firm Dermapharm, Beckett argues that IPO valuations are often inflated by brokers and, in aggregate, there are better-value opportunities in less well researched stocks that are already on the market.

Although valuations are higher in many cases than historically, the managers point out that earnings growth in Europe has improved dramatically, following a long period when economic recovery lagged the US and UK. However, in sentiment terms, investors are more nervous now than they were at the start of 2018, when market volatility was still at historic lows. “We have seen extremes of sentiment in quite a short period,” says Beckett, adding that the “weirdly bearish” perspective of many investors is why TRG’s level of gearing is higher now than at the beginning of the year. “We are probably in the fourth quarter of the bull market, but it could last another 18 months,” he adds. “I can’t promise the same kind of growth as the last few years, but I still think we can deliver healthy growth.”

Asset allocation

Investment process: Seeking value in under-researched areas

Beckett, Stokes and Scheufler work together to build a diversified portfolio of small- and mid-cap European stocks from a universe of c 2,000 companies with a market capitalisation below c €4bn. The team first uses quantitative screens to help identify attractive businesses that are undervalued, and meets hundreds of companies each year in order to assess the quality of management, durability of the business model, drivers of growth and catalysts for revaluation. Potential investments are modelled using a range of valuation metrics to ensure the managers understand the relationship between a company’s growth potential and its current valuation. Stock selection is mainly bottom-up, with no constraints on country or sector weightings, and positions are sized by conviction, although given the long stock list of c 120-150 companies, most are below 1% of the total.

Investments may be grouped into three broad headings. The majority are those that offer growth at a reasonable price, with structural growth drivers and high returns on capital. Turnaround situations, where factors such as a new management team have the potential to bring about operating improvements, are also favoured, with the balance of the portfolio in unloved, ‘deep value’ stocks that may be cyclically out of favour. Holdings may be sold when they reach the managers’ assessment of fair value, if worsening fundamentals call the original investment thesis into question, or where there are better-value opportunities elsewhere. Portfolio turnover averages c 50% a year, implying a holding period of two years, although many stocks are held for much longer than this.

Current portfolio positioning

At 31 May 2018, there were 146 holdings in the TRG portfolio, up from 139 a year earlier. Beckett comments that although this is at the high end of the historical range of c 120-150, it is appropriate given the extended nature of the current bull market and TRG’s focus on stocks at the smaller end of the market capitalisation scale. In line with the broad diversification of the portfolio, the top 10 holdings made up only 14.2% of the total at 31 May 2018, down a little from 14.8% a year earlier.

Exhibit 3: Geographic exposure vs EMIX Smaller Europe ex-UK index (% unless stated)

Portfolio end-
May 2018

Portfolio end-
May 2017

Change
(pp)

Index
weight

Active weight
vs index (pp)

Trust weight/
index weight (x)

Germany

17.4

19.8

(2.4)

15.2

2.2

1.1

Netherlands

12.0

9.3

2.7

6.0

6.0

2.0

Finland

11.3

5.3

6.0

4.7

6.6

2.4

France

11.2

13.0

(1.8)

11.2

(0.0)

1.0

Switzerland

9.8

7.7

2.1

10.6

(0.8)

0.9

Sweden

8.6

6.1

2.5

13.0

(4.4)

0.7

Italy

7.0

11.8

(4.8)

11.0

(4.0)

0.6

Norway

6.3

4.7

1.6

5.3

1.0

1.2

Belgium

4.6

3.8

0.8

N/S

N/A

N/A

Denmark

3.1

4.4

(1.3)

N/S

N/A

N/A

Other

8.7

14.1

(5.4)

23.0

(14.3)

0.4

100.0

100.0

100.0

Source: TR European Growth Trust, Edison Investment Research. Note: N/S = not stated; may be included in ‘other’.

Portfolio construction is bottom-up, with geographical and sector weightings (Exhibits 3 & 4) being principally an output of stock selection. Beckett comments that from a macroeconomic perspective he is probably more positive on Spain than Germany, yet he finds many attractive stocks in Germany and relatively few in Spain. The largest country weights relative to the EMIX Smaller Europe ex-UK index are the Netherlands and Finland; three of TRG’s top five holdings are listed in the Netherlands, and the overweight to Finland is partly a result of having added exposure to the market early in its recovery, when there were “a lot of stocks we wanted to buy”. The biggest underweights are in Italy, Sweden and Spain; Beckett comments that the reduction in Italy (the biggest 12-month fall in exposure) was less an attempt to mitigate political risk and more a result of profit-taking in holdings where valuations looked stretched, such as credit information service Cerved and electrical retailer Unieuro, as well as the “slightly disappointing” acquisition of fashion website Yoox Net-a-Porter by luxury goods group Richemont. Sweden is out of favour with many investors because of perceived overheating in the housing market; while he remains underweight, Beckett has bucked the trend by buying JM Group, the country’s largest housebuilder, on a 7x P/E ratio and a 7% dividend yield.

Exhibit 4: Portfolio sector exposure vs EMIX Smaller Europe ex-UK index (% unless stated)

Portfolio end-
May 2018

Portfolio end-
May 2017

Change
(pp)

Index
weight

Active weight
vs index (pp)

Trust weight/
index weight (x)

Industrial goods

21.9

23.0

(1.1)

15.2

6.7

1.4

Basic materials

16.3

12.9

3.5

10.6

5.8

1.5

Financials

14.7

13.6

1.1

22.4

(7.7)

0.7

Technology

13.5

14.9

(1.5)

9.2

4.3

1.5

Consumer goods

13.5

10.3

3.1

16.1

(2.6)

0.8

Business providers

12.5

16.4

(3.9)

18.2

(5.7)

0.7

Retail providers

6.7

8.0

(1.3)

6.5

0.2

1.0

Natural resources

1.0

0.8

0.2

1.9

(1.0)

0.5

100.0

100.0

100.0

Source: TR European Growth Trust, Edison Investment Research

The largest sector overweights are in industrial goods, basic materials and technology. However, Beckett has reduced TRG’s technology weighting on concerns that investors are pushing many tech stocks to “spurious valuations” because of their association with hot themes such as electric vehicles and the Internet of Things. Beckett prefers hardware areas such as silicon carbide crystals (PVA TePla), which will help to facilitate the build-out of 5G networks, and silicon-on-insulator wafers (Soitec), which can handle the increased heat generated by higher processing power.

Performance: Pause after stellar FY17

Exhibit 5: Investment trust performance to 31 May 2018

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Thomson Datastream, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Having performed exceptionally well in FY17 (NAV total return +54.0% and share price total return +75.5% versus a benchmark return of +35.8%), TRG has seen a pause in performance recently, with flat to negative NAV total returns over one year and less, and a sharper decline in the share price as the shares reverted from an unusual premium to a discount (Exhibit 5). The longer-term record of outperforming the EMIX Smaller Europe ex-UK benchmark in both share price and NAV terms remains intact. As shown in Exhibit 6, TRG has also outperformed the broader European and UK indices by a significant degree over three years and longer, but generally underperformed over one year and less. Given the trust’s diversified portfolio, the range of performance drivers is also broad. However, from 30 June 2017 to 28 February 2018, the top negative contributors (including online ad targeting firm Criteo, shopping website Showroomprivé and proton beam therapy stock Ion Beam Applications, together producing a negative return of 2.0pp) had a larger impact on performance than the top positive contributors (including the French Gaztransport & Technigaz, German tech stock S&T and Italian challenger bank Finecobank), which added 1.4pp.

Exhibit 6: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to EMIX Smaller Europe ex-UK

(6.5)

(14.3)

(16.5)

(5.2)

5.3

32.0

6.3

NAV relative to EMIX Smaller Europe ex-UK

(0.9)

(5.8)

(5.3)

(3.3)

8.2

20.6

6.1

Price relative to FTSE World Eur ex-UK

(4.5)

(13.3)

(12.5)

(0.2)

25.9

70.6

44.5

NAV relative to FTSE World Eur ex-UK

1.3

(4.6)

(0.8)

1.8

29.4

55.8

44.2

Price relative to FTSE All-Share

(7.9)

(19.5)

(19.0)

(5.5)

33.7

83.9

32.8

NAV relative to FTSE All-Share

(2.4)

(11.5)

(8.2)

(3.6)

37.4

67.9

32.5

Source: Thomson Datastream, Edison Investment Research. Note: Data to end-May 2018. Geometric calculation.

Exhibit 7: NAV total return performance relative to benchmark over five years

Source: Thomson Datastream, Edison Investment Research

Discount: Wider but in line with long-term averages

Having narrowed steadily during a period of exceptionally strong NAV performance, TRG’s discount has widened since the start of 2018, and stood at 8.9% (cum-income) at 29 June. While this is substantially wider than the one-year average of 4.2%, it is much more in line with the longer-term averages of 9.5%, 10.6% and 12.8% respectively over three, five and 10 years. The board last bought back shares in late 2016, when the discount to cum-income NAV exceeded 15%.

Exhibit 8: Share price premium/discount to NAV (including income) over three years (%)

Source: Thomson Datastream, Edison Investment Research

Capital structure and fees

Structured as a conventional investment trust, TRG has one class of share, with 50.1m ordinary shares in issue at 29 June 2018. The board may buy back or issue shares to manage a discount or a premium, although following the removal of a hard discount control mechanism (set at a discount of 10%) in 2010, there is no set level of discount or premium at which buybacks or issuance would occur. In the past 12 months, 395,000 shares have been issued (raising £5.0m), and no shares have been bought back. Gearing of up to 30% of net assets is permitted, with a working limit of 15% without board approval, via an £80m overdraft facility with HSBC Bank. If fully drawn, this would equate to 13.5% of net assets. Actual net gearing stood at 10% at 31 May 2018.

Janus Henderson Investors is paid an annual management fee of 0.6% of net assets. A performance fee (amounting to 15% of outperformance) may be paid if TRG’s NAV total return outperforms the total return of the benchmark EMIX Smaller Europe ex-UK index by more than 1.0% on a rolling three-year basis. Total fees are capped at 2.0% of net assets. Ongoing charges for FY17 were 0.75%, and a performance fee of 0.70% brought total fees to 1.45%.

Dividend policy and record

TRG invests for capital growth but has historically paid an annual dividend in November (made up of a final plus a special dividend), broadly commensurate with revenue returns. The final dividend has been fully covered by income in each of the last 10 financial years, and the total dividend has been covered in all but one of those years. The final dividend has grown at a compound annual rate of 7.5% over the past five financial years, while the total dividend has grown at a compound 9.1%.

With effect from FY18, TRG is moving towards paying an interim as well as a final dividend, to spread income returns more evenly across the year. So far an interim dividend of 5.0p per share has been paid in respect of H118. The revenue return per share in H118 was 0.69p, but historically income has been hugely weighted to the second half of the year (for example, H117 revenue return per share was 1.00p versus FY17 revenue of 17.09p), so it is not possible at this stage to forecast the likely total dividend for the year. The move to paying an interim as well as a final dividend may make it less likely that TRG will pay special dividends in future. At end-H118 TRG had revenue reserves of 39.5p per share (34.5p after accounting for the interim payment), equivalent to nearly three times the total FY17 payout of 14.5p. Based on FY17 dividends, TRG currently yields 1.4%.

Peer group comparison

There are four funds in the AIC European Smaller Companies sector, with TRG being the second-largest in terms of market capitalisation. The recent underperformance has caused the trust to fall to fourth place in terms of NAV total returns over one year; returns over three and five years are above average (ranking first over five years), while 10-year NAV total returns are a little below average. Ongoing charges are the lowest in the group, although TRG is the only fund with a performance fee. The discount is currently the widest in the sector, and TRG also has the highest level of gearing. Excluding European Assets Trust (which has a high distribution policy set at 6% of NAV per year), TRG’s dividend yield is broadly average.

Exhibit 9: European Smaller Companies peer group as at 15 June 2018*

% unless stated

Market

cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Ongoing charge

Perf.
fee

Discount
(ex-par)

Net gearing

Dividend yield

TR European Growth

526.1

1.9

77.4

157.8

180.0

0.8

Yes

(9.2)

110

1.4

European Assets Trust

447.7

2.7

38.9

98.5

165.5

1.1

No

(1.2)

100

6.3

JPMorgan European Smaller Cos

681.5

14.8

81.0

150.9

215.2

1.0

No

(7.1)

100

1.6

Montanaro European Smaller

153.1

14.5

85.6

103.7

188.0

1.3

No

(8.9)

101

0.9

Average

452.1

8.4

70.7

127.7

187.2

1.0

(6.6)

103

2.5

TRG rank in peer group

2

4

3

1

3

4

4

1

3

Source: Morningstar, Edison Investment Research. Note: *Performance data to 14 June 2018. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared).

The board

TRG has five independent, non-executive directors. Audley Twiston-Davies joined the board in 2000 and has been chairman since 2002. Andrew Martin Smith was appointed in 2008, while Christopher Casey became a director in 2010 and is chairman of the audit committee. Alexander Mettenheimer and Simona Heidempergher were appointed in 2011 and 2014 respectively, and are both resident in continental Europe. The directors have professional backgrounds in investment management, accountancy and banking.

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Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by TR European Growth Trust and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable; however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority (Financial Conduct Authority). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by TR European Growth Trust and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable; however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Ultra Electronics — Herley investment masks underlying progress

Ultra’s pre-close trading statement certainly contains reasons for optimism, especially better than expected order development. However, the continuing issues at Herley have led to a reduction of up to £6m in operating profit expectations for the group as a whole in FY18. The problems are no longer attributable solely to the larger than anticipated number of development contracts won, but clearly indicate unexpectedly high costs. The impact reduces FY18 EPS expectations by 6.7%, but should be contained to this year, with still good prospects for the production phases. Our fair value remains relatively unchanged at 1,811p from 1,816p previously.

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