Europe Stock Writeups

The Dutch construction market has seen two distinct developments. Housing remains buoyant but contracting continues to suffer from bad contracts signed two to three years ago. We believed management's assurances that these bad contracts were coming to an end and that earnings from contracting would pick up dramatically. Coupled with a valuable land bank, a return to a 3% to 4% construction volume made Heijmans look attractive. Unfortunately, it appears that many of the bad contracts on Heijmans' books have continued to get worse as a result of compensation payments for poor workmanship, as well as bad pricing; nor is it clear yet that the problems have been solved. In such a low-margin business, even a small reduction in margin dramatically reduces fair value and with no clear assurance of a return to profitability, there is huge uncertainty over the floor valuation; we therefore sold out of our holding.

Heijmans. The Dutch construction industry has been in a deep funk since the bursting of the housing bubble in the early 1990s. However, the market is now stirring to life, driven by two factors. First, the government has cut red tape in order to incentivise construction companies to build more houses, given the Netherlands' shortage of dwellings; Heijmans' landbank is sufficient for almost ten years' worth of development. Secondly, public sector construction has started to grow as the government adopts PFI schemes, although margins here are unlikely to rebound rapidly. The market is not pricing in any market improvement. The stock has a free cash flow yield of over 10%, and a prospective dividend yield of over 4%.

Sedol	Type	Price	Date
5075036	Sell	EUR 29.46	12/10/2007
5075036	Buy	EUR 41.658	07/03/2007
5075036	Buy	EUR 42.872	25/01/2007

Highlight was sold on valuation grounds. The company's fortunes have improved thanks largely to the success of Constantin, the company's film-making unit. However, after reaching fair value, there were no grounds for material profit upgrades.

Highlight Communications is a Swiss-based, German-listed media company. The main business is movie production and DVD distribution. The unpredictable nature of movie production is smoothed by the more predictable DVD business. Highlight's subsidiary, TEAM, has an exclusive agreement with UEFA, to promote the tournaments. This contributed to 47% of profits last year. UEFA is buying a 20% stake in TEAM, which should secure future contracts. Highlight will also benefit from any pick-up in German consumption.

Sedol	Type	Price	Date
7649967	Sell	EUR 7.842	13/04/2007
7649967	Buy	EUR 5.92	18/05/2006
7649967	Buy	EUR 6.258	30/03/2006
7649967	Buy	EUR 5.52	26/09/2005
7649967	Buy	EUR 5.48	23/09/2005

Henkel. Most famous for its Persil washing powder, Henkel operates across three business lines - home care, personal care and adhesives. Growth at all three has been strong and margins are improving. The strongest growth has come from adhesives where the company is becoming the leading player in Eastern Europe, the Middle East and Latin America. In the other divisions, brand management is the key factor and management have proved adept at cutting losers and backing winners.

Sedol	Type	Price	Date
5076705	Buy	EUR 116.10	30/04/2007