European Small-Caps in the Spotlight: Three Picks for Growth in a Post-Inflation Era

As the European Central Bank (ECB) pivots toward a slower pace of monetary easing—reducing its deposit rate to 2.0% in June 2025 amid easing inflation—small-cap equities are emerging as a compelling opportunity. With headline inflation projected to average 2.0% in 2025, down from earlier highs, and the ECB signaling flexibility to support economic resilience, select small-cap firms with strong fundamentals and strategic advantages are poised to outperform. Among them, Systemair AB, Viohalco, and VIEL & Cie stand out for their undervalued valuations, improved debt dynamics, and growth trajectories that align with sector tailwinds.

1. Systemair AB: Ventilation Solutions with Margin Expansion Power

Stock Ticker: SE:SYSTM
Market Cap: ~€2.7B

Why It's Undervalued:
Systemair, a leader in energy-efficient ventilation systems, trades at a P/E ratio of ~8.7x (based on trailing 12-month EPS of SEK 3.27), well below its five-year average of ~12x. This discount reflects near-term softness in sales (down 2.2% in Q1 2025) but overlooks its structural advantages.

Strengths:
- Improved Margins: Adjusted operating margins rose to 9.1% in 2024–2025 (vs. 8.8% in 2023), driven by cost discipline and automation investments.
- Debt Reduction: Net indebtedness fell to SEK 1.07B (from SEK 1.52B in 2023), with an equity/assets ratio of 57.7%, reflecting strong balance sheet resilience.
- Cash Flow: Operating cash flow of SEK 1.08B (TTM) supports reinvestment in R&D and capacity expansion.

Growth Catalysts:
- Energy Efficiency Mandates: Regulatory pushes across Europe for green buildings are boosting demand for Systemair's low-carbon ventilation systems.
- Global Footprint: With operations in 130+ countries, the firm is well-positioned to capture post-pandemic commercial construction recovery and data center cooling needs.

Risks:
- Construction Cycles: Revenue tied to real estate and infrastructure projects may lag if trade tensions or fiscal austerity slow investment.
- Currency Headwinds: A stronger euro could pressure export margins further (Q1 sales included a -3.0% currency effect).

2. Viohalco: Metals & Energy Transition Play with Improved Leverage

Stock Ticker: GR:VIOHAL
Market Cap: ~€1.8B

Why It's Undervalued:
Viohalco's shares trade at 0.7x P/B, a significant discount to its historical average of ~1.2x, despite a 4.9% revenue rise to €6.6B in 2024 and net debt/EBITDA dropping to 2.5x (from 4.2x in 2023).

Strengths:
- Diversified Operations: Dominates Greece's metals distribution, while subsidiaries like Cenergy Holdings and Noval Property leverage energy transition and real estate demand.
- Debt Management: Reduced net debt by €360M since 2023 via equity raises, lowering financial risk.
- Profitability Surge: a-EBITDA jumped to €604M in 2024, up 12.5% from 2023, with net income nearly tripling to €274M.

Growth Catalysts:
- Energy Transition: Viohalco's focus on renewables infrastructure (e.g., solar panel components) aligns with EU's €1.1T green investment plan.
- Geopolitical Hedges: Exposure to defense and infrastructure sectors insulates it from trade wars.

Risks:
- Commodity Volatility: Metals prices remain tied to global demand cycles, which could fluctuate with China's growth and U.S.-Europe trade policies.
- Regulatory Risks: Stricter environmental norms in construction could raise compliance costs.

3. VIEL & Cie: Financial Services Leader with Strategic Scale

Stock Ticker: FR:VIL
Market Cap: ~€1.16B

Why It's Undervalued:
At a P/E of 8.9x (vs. a five-year average of ~12x), VIEL & Cie is priced for stagnation despite 10.5% revenue growth in Q1 2025 and EBITDA expanding to €272M in 2024.

Strengths:
- Core Business Dominance:
- Compagnie Financière Tradition: The interdealer broking arm saw sales rise 9.2% to €1.1B in 2024, benefiting from market volatility.
- Bourse Direct: Online trading revenues grew 13.2% in 2024, though Q1 2025 dipped to €18.7M amid investor caution.
- Debt Management: Though total debt rose to €527M in 2024, the debt/revenue ratio improved to 40.5% (from 48.7% in 2022), reflecting revenue outpacing debt growth.
- Dividend Stability: A proposed gross dividend of €0.16/share in 2024 signals financial confidence.

Growth Catalysts:
- Digital Transformation: Bourse Direct's expansion into AI-driven trading tools could capture retail investor demand.
- Global Reach: Compagnie Financière Tradition's 30-country presence buffers against regional slowdowns.

Risks:
- Market Volatility: Declines in online trading revenue during calm markets could pressure margins.
- Competitive Pressure: Rivals like NIBC Bank and UBS Group may intensify pricing wars.

Investment Thesis & Risks to Monitor

Buy Signal: All three firms offer compelling valuations (P/E multiples below historical averages) and balance sheet improvements. Systemair's energy efficiency focus, Viohalco's exposure to green infrastructure, and VIEL & Cie's financial services scale align with the ECB's supportive stance and post-inflation recovery.

Risk Management:
- Monitor ECB Policy: Further rate cuts or inflation surprises could shift market sentiment.
- Sector-Specific Risks:
- Systemair: Construction permitting delays in EU member states.
- Viohalco: Metals demand tied to China's manufacturing output.
- VIEL & Cie: Interest rate sensitivity in financial services.

Portfolio Strategy: Consider a 3–5% allocation to each stock in a diversified portfolio, with a 12–18 month horizon. Pair with stop-losses tied to key technical levels (e.g., below 2023 lows) to mitigate sector-specific shocks.

Final Take

The ECB's pivot to a “data-dependent” policy framework favors small-caps with strong fundamentals and defensive cash flows. Systemair, Viohalco, and VIEL & Cie exemplify this profile, offering a mix of valuation upside, debt reduction, and sector tailwinds. While risks persist—from geopolitical tensions to industry-specific cycles—their strategic positioning and financial health make them compelling bets for the next phase of European recovery.

Gary's Verdict: Accumulate these names on dips, but stay nimble—easing inflation doesn't mean all risks are gone.