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Before making any final investment decisions, please read the prospectus, its Annual Report, and the PRIIP of the relevant Sub-Fund here
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This material is marketing communication
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Coeli Renewable Opportunities Monthly Report November 2023 (I USD)
1) Share Class I USD
The Coeli Renewable Opportunity fund gained 4.8% net of fees and expenses in November. It is down 3.9% since the inception on February 6, 2023.
November was the fund’s second-best month since inception in February. Although the outperformance to the two most comparable indices, the Wilderhill New Energy Global index (NEX) and the iShares Global Clean Energy (ICLN) was reduced, the fund is still ahead since inception by 26% and 27%, respectively.
We were too early calling for a bottom in early October, but we thankfully stuck to the view that the market and the renewable energy sector were likely set up for some relief into year end. In early November, sentiment and positioning were notably bearish, just ahead of what is traditionally the strongest two-month period of the year. Valuations had become more attractive, and earnings expectations had been reset lower. Supported by macroeconomic tailwinds, including declining inflation and interest rate expectations, the markets experienced one of their best November’s so far this century.
In such a strong rally, most of the performance came from the long side, but it is notable that our short positions only lost 0.4% in November.
MARKET COMMENT – GOLDILOCKS IS BACK!
As the S&P 500 rallied 9% in November, it recovered just about the loss over the prior three months. The main driver was the same as on the way down, i.e. long-term interest rates. Notably, the yield on the US 10-year government bond saw a decrease of 60 basis points during November, marking the steepest absolute monthly decline this century, second only to the drops in November and December of 2008 during the great financial crisis.
Long term rates are plunging due to a combination of rapidly decreasing inflation and a labor market that is only gradually slowing. Most market commentators are confident that not only has the FED hiking cycle ended, but the focus is squarely on the timing of the first cut and the pace thereafter. Goldilocks is back and seemingly stronger than ever.
The market is currently pricing in a more than 50% probability that the FED will cut rates as early as in March next year followed by four more cuts in 2024. As we wrote last month, the S&P 500 has on average gained 16.8% in the 12 months following the last hike, which means that if July 2023 proves to be the last increase, there could be more than 10% upside to the S&P over the next 7-8 months.
While the S&P 500 recovered the previous three-month loss in November, the small cap index, Russel 2000, only recovered about half of its decline. In a scenario of continued S&P 500 gains, we believe it is likely that small caps will do even better and in particular renewable energy stocks as the Wilderhill Index has underperformed the S&P 500 by as much as 40% year to date.
RENEWABLE ENERGY – ARE WE AT THE PRECIPICE OF A NUCLEAR RENAISSANCE?
World leaders are currently gathered at the COP28 summit in Dubai to discuss and improve on measures agreed in previous COP conferences. Of particular importance to us is the commitment made by 118 countries to aim for a threefold increase in the global capacity of renewable energy generation, targeting at least 11,000GW by 2030. Bloomberg New Energy Finance (BNEF) suggests that this ambition would require more than a doubling of annual investments from 2024 to 2030, amounting to a staggering USD 9.4 trillion, which is approximately 10% of the global GDP of 2022. Additionally, BNEF projects that 96% of this investment will be channelled into wind and solar energy, requiring a quadrupling of their combined capacity compared to last year's levels. Obviously, this pledge is not an agreement written in stone, but at a time when many investors question the future of offshore wind and expect limited growth in utility scale solar in western markets, we believe this is a good reminder of the wall of capital about to hit these industries.
Another interesting development, one that probably caught more people’s attention in Sweden, was an ambitious plan among 22 countries, of which Sweden was one of five from western Europe, stating the importance of nuclear energy in achieving global net-zero, and declaring to work for a tripling of nuclear energy capacity by 2050. No doubt an ambitious goal, but it deserves some closer scrutiny and is an opportunity to review the risks and opportunities of nuclear newbuilds for the Coeli Renewable Opportunities fund.
Currently, the world is home to approximately 445 nuclear reactors, collectively generating around 400GW of electricity. The average nuclear reactor has been operational for about 36 years, with some even surpassing the 60-year mark.
Focusing on the future, tripling the global capacity would take us to 1,200 GW by 2050, nearly 9,000 Terawatt hours (TWh) a year at 85% utilization, i.e. almost three times the EU’s current annual electricity consumption. However, what matter is global consumption and its expected total in 2050. According to ThunderSaid Energy, an energy consultancy, the world will consume about 120,000TWh of usable energy in 2050, which means that nuclear energy, if it hits these targets, would account for about 7.5% of total energy supply. This is significant and it would help the decarbonization journey, however it is a journey clearly led by renewable energy.
In any case, nuclear will be an interesting investment opportunity, one that has been on our radar for a while. However, it warrants a cautious approach. The journey towards nuclear development has historically been fraught with financial risks, as evidenced by several stalled or over-budget projects in the Western world.
The Vogtle project in the US, originally budgeted at USD 6.1 billion for a 2016 startup, has been plagued by delays and cost overruns, now expected to be finalized in 2024 with a ballooned budget well in excess of USD 30 billion. Similarly, the UK's Hinkley Point C, the first new British nuclear reactor in over three decades, has encountered its share of hurdles. Starting in 2012 with an estimated cost of GBP 16 billion, its latest completion timeline has been pushed to 2027, with costs likely reaching GBP 33 billion. Few would be surprised if the total cost ends even higher.
Lastly, France's EDF Flamanville EPR project and Finland's OL3 project were both more than a decade delayed and saw costs four and three times higher respectively than in the original budget. Building nuclear plants in the west have plainly been a high-risk activity for everyone involved over the last 20 years.
Advocates of nuclear energy however point to a number of different reasons why each project failed and that countries like South Korea do in fact manage to construct power plants on time and on budget. Why should not the west be able to do the same? Maybe it will with time, but historical evidence points squarely in one direction for now. We do hope this will change.
Digging a little bit deeper, an interesting new development is the advent of Small Modular Reactors (SMRs). Many experts claim they will be less expensive as the modules can be manufactured in factories where learning curves will be steeper. It certainly seems reasonable that the reactor pressure vessel could become cheaper over time if many identical units were produced.
However, a 2018 study by the Massachusetts Institute of Technology (MIT) sheds light on a critical aspect: the nuclear island, comprising the reactor pressure vessel, piping, steam generator etc, accounts for merely 13% of a nuclear power plant's capital cost (AP1000 reactor). The bulk of the expenses are tied up in the yard, cooling, and installation work. This could imply that a shift to numerous smaller reactors might inadvertently hike overall costs due to the proliferation of facilities and more yard work. See below for MIT’s overview of common reactor designs and costs breakdown.
Source: The Future of Nuclear Energy in a Carbon-Constrained World – MIT 2018
SMRs will surely have their share of teething problems but hopefully the standardized module design can over time also streamline the more important yard, cooling, and installation work.
While nuclear power undoubtedly offers a carbon free energy solution, the high stakes involved in nuclear projects call for a thoughtful approach. Beyond the financial implications, the spectre of nuclear accidents, like the infamous Chernobyl disaster of 1986 and the Fukushima Daiichi crisis of 2011, looms large, highlighting the potential hazards of this technology. Newer designs with better passive safety systems are showing promise, though.
Moreover, nuclear power remains a polarizing issue, with critics pointing to its high costs, safety concerns, and the unresolved dilemma of radioactive waste disposal. In contrast, renewable energy presents a safer alternative with better track record of cost reductions along with more straightforward financing options.
However, the prospect of developing nuclear energy in colder countries like Sweden could be rational. In these regions, nuclear power can provide a stable, reliable source of energy to cope with the high energy demands during long, cold winters. This is particularly relevant when renewable sources like solar and wind may at times be less reliable or efficient due to weather conditions. Additionally, the geographical stability, the public support, and the advanced technological infrastructure of countries like Sweden could mitigate some of the safety and logistical concerns associated with nuclear energy.
While we are optimistic about nuclear energy being part of the carbon-free energy mix and hope that it will be feasible to construct nuclear plants in Europe on time and within budget, the historical evidence suggests caution. As investors, we plan to observe these developments with keen interest from the sidelines, at least in the initial stages.
FUND PERFORMANCE – SECOND BEST MONTH ON RECORD
The fund gained 4.9% (I USD) in November as two thirds of the themes contributed positively, long positions made 5.3% and shorts lost 0.4%. Considering the strong market rally, we are pleased to have limited the losses in the short book, especially since net exposure was in the 60-65% range most of the month. The month ended with a net exposure of 60% and a gross exposure of 118%.
The two best performing themes in November were not surprisingly the largest losers from the last month. The “Grid” theme added 1.8% to NAV as all 5 stocks made a positive contribution, but in particular
NKT A/S (NKT) which was up 20% in November and ended the month on an all-time high. In several past monthly reports, we have highlighted the especially favorable risk-reward profile we perceive in suppliers of transmission and distribution networks.
The “Solar” theme contributed 1.3% to NAV, clawing back only about a third of the large loss from October. The culprits were our two large utility scale positions in
Array Technologies (ARRY) and
Shoals Technologies (SHLS). Both companies reported earnings early in November and took a double digit hit on the day. The stocks had by the end of November only recovered about half of their losses, despite the rally and the fact that 2024 EBITDA estimates declined only by low single digits.
Shoals’ 2023 EBITDA is even 10% higher than prior to the Q3 results, which means that the stock trades at half the multiple it did as late as in July this year. We detailed in the last monthly why we are still positive to the long-term growth in the utility scale solar sector and why we find the valuations of
ARRY and
SHLS in particular to be attractive.
The “Wind” theme also had a good month as it added 0.8% to the NAV. We have consistently appreciated
Vestas Wind Systems'(VWS) strong competitive standing, but we have been reluctant to size the position as the company navigates through low-margin legacy projects. Despite the stock’s relatively high valuation,
Vestas stands out in the broad renewable energy sector with a very strong market position. Furthermore, we anticipate a surge in US onshore wind order intake in the upcoming quarters and with
Siemens Energy (ENR) temporarily out of the picture, Vestas is likely to expand its market share.
Moreover,
Nordex (NDX1), a smaller German competitor that we also own, will likely also gain from the pickup in US onshore wind activity. However,
Nordex is not involved in offshore wind, where
Vestas maintains a leading role together with
General Electric (GE), especially as
ENR grapples with its legacy projects and technology development challenges. Both
VWS and
NDX1 still have a couple of quarters ahead of them with weaker margins as the largest and most difficult legacy projects initiated at lower prices during the pandemic are coming to an end. Nevertheless, by the end of 2024 and moving into 2025, we foresee both companies approaching their ambitious margin goals.
The “US Renewable Development” theme which consists of only
Nextera Energy (NEE) and
AES, contributed 0.7% to NAV as both stocks continue to recover after the massive interest rate induced sell-off in the third quarter. We maintain that both companies are among the best positioned renewable development companies in the US and in the world.
AES has recovered about two thirds of its losses since the US 10y Treasury yield rose above 4% in early August while
NEE still has only recovered about half. We are staying long and have increased both positions.
The two most significant detractors in our portfolio were, as expected, the hydrogen-focused themes “US Hydrogen” and “European Hydrogen,” which reduced the NAV by 0.4% and 0.3%, respectively. Given the surge in renewable stocks and considering that both themes consist exclusively of short positions, we are satisfied that only one short position outperformed slightly the NEX index. Additionally, two stocks actually declined over the month, despite the short squeeze driven rally.
Our outlook on the hydrogen sector remains cautious. We believe that the long-term demand projections are increasingly uncertain, showing a noticeable retreat from last years’ optimistic forecasts. The industry is also coming to terms with the high risks associated with pioneering 100MW+ systems – risks that neither buyers nor sellers seem willing or, in many cases, capable of shouldering, particularly in terms of construction and startup. Consequently, we continue to anticipate a downward adjustment in revenue projections and correspondingly, a reduction in valuation multiples.
We look forward to updating you again next month.
Sincerely
Vidar Kalvoy & Joel Etzler
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Coeli Nordic Corporate Bond Fund
| Performance in Share Class Currency | 1 Mth | YTD | 3 yrs | Since incep |
| Coeli Nordic Corporate Bond Fund - R SEK | 1.30% | -0.93% | 3.38% | 14.52% |
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Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund
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Alexander Wahlman
Senior Analyst
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Top Holdings (%)
| LANSBK 1.25% 18-17.09.25 | 4.1% |
| NORDEA HYP 1.0% 19-17.09.25 | 4.1% |
| SWEDBK 1.0% 19-18.06.25 | 4.1% |
| WHITE MOUNT FRN 17-22.09.47 | 3.9% |
| B2 HOLDING FRN 19-28.05.24 | 2.9% |
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Joel
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Joel Etzler
Portfolio Manager Coeli Renewable Opportunities
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Christofer Halldin
Fondförvaltare Coeli Circulus
Christofer förvaltar Coeli Circulus sedan starten augusti 2022. Innan det arbetade han som chef för den aktiva aktie- & ränteförvaltningen hos Handelsbanken (HB) Fonder. Där var han med och utvecklade Handelsbanken Fonder till en av Sveriges mest framgångsrika aktie- och ränteförvaltare under slutet av 2010-talet, då HB Fonder hade störst nettoinflöden på den svenska fondmarknaden flera år i rad. HB Fonder utsågs även under den tiden till både årets förvaltare och årets hållbara förvaltare av aktörer som Prospera, Privata Affärer, Söderberg & Partner, Länsförsäkringar m fl. Innan Christofer utsågs till chef för den aktiva förvaltningen förvaltade han under flera år olika globalmandat. Han har också arbetat sju år, 2007-2013, som förvaltare i USA av både Amerika-, Brasilien- och Latinamerikafonden på HB Fonder.➜ Kontakt:christofer.halldin@coeli.se➜ LinkedIn➜ Twitter➜ Instagram
[/et_pb_text][/et_pb_column][et_pb_column type="1_3"][et_pb_blurb admin_label="Vidar" _builder_version="3.0.89" url_new_window="off" use_icon="off" use_circle="off" use_circle_border="off" icon_placement="top" use_icon_font_size="off" background_layout="light" border_style="solid" image="https://coeli.se/wp-content/uploads/2019/10/Vidar-Kalvoy.jpg" animation="off" text_orientation="center" header_text_align="center" body_text_align="center" alt="Portfolio Manager Vidar Kalvoy" border_style_all="solid"]
Vidar
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Vidar Kalvoy
Portfolio Manager Coeli Renewable Opportunities
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Joakim By
Fondförvaltare Coeli Circulus
Joakim förvaltar Coeli Circulus sedan starten augusti 2022. Innan det arbetade han som förvaltare av Amerika Småbolag hos Handelsbanken Fonder. Han förvaltade Amerika Småbolag från 2015 och vann flera utmärkelser för den goda avkastningen i fonden som också växte kraftigt under hans tid som förvaltare. När Joakim lämnade fonden i början på 2022 hade den över 20 miljarder kronor i förvaltat kapital. Innan han förvaltade Amerika Småbolag ansvarade han bland annat för den bredare fonden Amerika Tema, 2013-2017, och globalfonden Global Tema, 2009-2013, hos Handelsbanken Fonder.➜ Kontakt: joakim.by@coeli.se➜ LinkedIn➜ Twitter➜ Instagram
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Joel
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Joel Etzler
Portfolio Manager Coeli Renewable Opportunities
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Joel Etzler
Portfolio Manager Coeli Renewable Opportunities
- Portfolio Manager Coeli Renewable Opportunities
- Joined Coeli in 2019
- More than 13 years of experience from the financial industry
- MSc from the Royal Institute of Technology
Joel Etzler is Portfolio Manager and Founder of the Coeli Renewable Opportunities fund and has more than 13 years in the industry, with investment experience from both the public and private equity side. Etzler joined Kalvoy at Horizon Asset in London in 2012 and spent five years before that within Private Equity at Morgan Stanley. Etzler started his investment career within the technology sector at Swedbank Robur in Stockholm, 2006.
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Vidar
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Vidar Kalvoy
Portfolio Manager Coeli Renewable Opportunities
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Vidar Kalvoy
Portfolio Manager Coeli Renewable Opportunities
- Portfolio Manager Coeli Renewable Opportunities
- Joined Coeli in 2019
- 25 years of experience from the financial industry
- MBA from IESE, MSc from Norwegian School of Economics and Business Adm.
Vidar Kalvoy is the lead Portfolio Manager and Founder of Coeli Renewable Opportunities fund. He has 25 years of experience from portfolio management and equity research. For nine years he was responsible for the energy investments at Horizon Asset in London, a market neutral hedge fund. Kalvoy also did energy investments at MKM Longboat, another hedge fund in London. He started his financial career as a sell side equity research analyst focusing on the technology and telecom sector, working six years in Oslo and Frankfurt. Prior to working in finance, he was a second lieutenant in the Norwegian Navy.
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Note that the information below describes the share class (I SEK), which is a share class reserved for institutional investors. Investments in other share classes generally have other conditions regarding, among other things, fees, which affects the share class' return. The information below regarding returns therefore differs from the returns in other share classes.
Return to Fund page
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Utveckling september
Fondens värde sjönk -5,1 procent i september (andelsklass I SEK). Stoxx600 (brett Europaindex) sjönk under samma period med -3,4 procent och HedgeNordics NHX Equities var preliminärt oförändrat. Motsvarande siffror för 2021 är en ökning om +21,6 procent för fonden, +14,0 procent för Stoxx600 och +6,4 procent för NHX Equities.
Equity markets / Macro environment
After seven consecutive months of positive performance the world’s stock markets were poised for some degree of turbulence. Volatility was especially high in some equities and on Monday, September 20, the highest nominal volume ever traded was reached in options on the S&P500 (!) The broad European index fell by 3.4 percent in September compared to the S&P500 which fell by 4.8 percent. The fund also had its first negative performance since October last year with a decline of 5,1 percent. More about that later.
Despite high levels for many stock indices, sentiment among investors has been relatively gloomy. Bank of America's monthly survey recently showed that only 13 percent of managers expect a positive market in the future, which is the lowest figure since April 2020 (and that was clearly wrong). The reasons cited are China's growth problems, the crisis-stricken Chinese real estate giant Evergrande, the development of the delta variant, declining profit growth and, of course, rising inflation. However, they are still overweight equities which is perhaps not so strange when you have to pay to lend your capital to countries. As interest rates rose at the end of the month, the German 10-year interest rate followed with a giant step from - 0.25 percent to - 0.17 percent… The picture below is an overall risk indicator, and we are around zero (neutral).
The news flow in September began with record high inflation figures in Europe at +3.0 which exceeded market expectations. The corresponding figure in July was + 2.2 percent. It was the fastest growth rate since November 2011 and several countries recorded up to five percent in inflation rate. The pressure on the ECB to reduce its support measures is increasing. On Friday, October 1, new inflation figures came in for September, which showed a further acceleration in the inflation rate by +3.4 per cent.
The rate of change can be mostly attributed to rising energy prices that are starting to create real problems in the world's economies as well as agricultural shifts. The picture below shows that food prices are at record high levels over the past 60 years. The biggest losers are the poorest part of the population.
In the slightly longer term it is forecasted that it is not excessive demand that will drive inflation, but rather a limited supply, and then both in terms of products and labour. At the end of September, long queues were reported at petrol stations across the UK when fuel ran out and there were not enough truck drivers to refuel. Prime Minister Boris Johnson urges his citizens to refuel sensibly and at a normal rate. You wanted Brexit, so there you go. In sheer desperation, Johnson has now issued 5,000 temporary short-term visas for temporary drivers. Good luck.
M25 spring 2022?
Below are European gas prices which have risen in a seemingly uncontrolled fashion and recorded the highest September prices ever. A silent prayer for the mild winter. We guess that this development will soon be a major topic in the media, and it will undoubtedly create various problems and somewhat reduce next year's expected growth. It feels reassuring that Per Bolund (Swedish Green Party MP) claims that there is no electricity shortage in Sweden because then the costs for ordinary people would be unbearably high during the winter (which of course they will be). Rising gas and electricity prices have led European politicians to start discussing billion-dollar subsidies (in euros) to households and manufacturers who will experience sharply rising electricity bills over the winter.
Source: Bloomberg
Henrik Svensson, site manager at the oil-fired power plant in Karlshamn (south Sweden), does not agree with Per Bolund that we have a surplus of electricity in the country. For large parts of September, the power plant ran at full capacity and burned 240k liters of oil per hour. Henrik Svensson believes that it is electricity shortages and high electricity prices that are behind the high production. He also says that there is a lack of planned power production in southern Sweden and that it will take many years before the electricity grid is strengthened and new electricity production is in place. Sweden today burns more oil than we have done in 10 years. A gigantic energy policy and climate policy failure signed by the Green Party.
Source: Steget efter
Winning candidate for this year's Christmas presents below.
The change in the US 10-year interest rate created considerable pressure on, primarily, growth stocks at the end of the month. The performance dispersion for different sectors was very large in September with oil shares as a clear winner. This was also felt in the last days of September.
Source: Bloomberg
Below is the development for the US 10-year interest rate. The turbulence in the stock market was caused by the change in interest rate level breaking through on the upside, as can be seen in the chart.
There have been countless attempts to explain the turbulence in recent weeks. The recent and significant amount of options being exercised, Evergrande, interventions by the Chinese government, Fed tapering, Bank of England expected to raise interest rates, delta variant, inflation, bottlenecks in production, difficulties in finding staff, rising energy prices and declining growth rates. We think it is enough to look at the picture below. Rising interest rates hit hard at growth companies' valuations.
Goodbye Mutti and thank you for an extraordinary effort for Europe!
Source: Nyhetsbyrån TT
She was politically in a class of her own during the euro crisis ten years ago and Sweden also has her to thank for a lot. Despite a somewhat weaker performance in recent years, German citizens have experienced significantly better economic development than many others.
On September 29, the covid-19 restrictions in Sweden were finally removed and we can now, in principle, start living a normal life again. The number of bookings for winter holidays skyrocketed to the great joy of the tourist and transport industry. In recent months, tourism activity in the Mediterranean has been "extraordinary" and much better than forecasted before the summer. Luxury travel is also reaching new heights. Private jet passengers to Mallorca increased by +70 percent in July compared to July 2019 with an average of 83 private jets per day landing in Palma. If you want to rent a yacht, you are being referred to next year as basically everything has already been fully booked.
We now belong to a minority group. Passively managed capital exceeds actively managed capital for the first time ever. This will give us more opportunities as mispricing increases.
In addition to being one of the world's best stock markets this year, Sweden also has the most listed companies in the entire EU. Bloomberg drew attention to the fact that there are now around 1,000 listed companies on the various trading platforms in Stockholm. More than 80 percent are smaller companies, and the list is filled with new listings every day until Christmas! For us, it is interesting as we are constantly looking for new potential core holdings. In recent weeks, we have identified one which we write about under Long Positions.
We end this section with a picture that well reflects today's political level.
Source: Kluddniklas
Long positions
Truecaller
During September, we did a lot of work on the Swedish company Truecaller which will go public on October 8th. Truecaller is one of the most interesting companies we’ve seen in recent years. Truecaller has developed a phone application that can, among other things, identify unwanted calls from, for example, telemarketers. The app is one of the top ten most downloaded applications globally, and in some of the main markets such as India, Nigeria and Indonesia, it is one of the three most downloaded apps. As a Swedish company with headquarters in Stockholm, the firm has chosen to list on the Swedish stock exchange, which we are very happy about.
Truecaller was founded in 2009 by Alan Mamedi and Nami Zarringhalam. They met at the Royal Technical University in Stockholm, and they continue to be active in the company as the CEO and Chief Strategic Officer (CSO), respectively. When they released the first version of the app, they received 10,000 downloads within one week. By 2013 they had reached over 10 million users globally and in Q2 2021 they had reached 278 million monthly users. Throughout their journey, Truecaller has attracted several well-known investors such as Sequoia Capital (early investors in Apple, Whatsapp, and Zoom among others), Atomica (Skype-founder Niklas Zennström’s investment company), and Kleiner Perkins (early investors in Google, Amazon, and Spotify among others).
Until recently, revenue streams have mainly consisted of income from in-app advertising. In addition to this, there is a premium version where paying users can get additional functionalities. That business accounted for around 20 percent of revenues in 2020. During the fall of 2020, Truecaller launched a corresponding offering that targets corporates. This part of the business allows B2B customers to be listed as verified callers when they call private people. It can for example be a security company that calls about an alarm or a courier company that needs to get in contact with a receiving customer. It is a common problem that these types of companies get rejected when the call-receiver doesn’t recognize the number.
Truecaller declares that their product benefits from network effects. i.e., the product gets better the more people who use it (think Facebook). This can be relatively easy to appreciate since phone number identification inherently evolves from reporting of unwanted calls by the users, i.e., when enough people have reported an unwanted call Truecaller flags for this in the app). Over time, Truecaller has built a database containing 5.7 billion unique phone-identities. Network effects doesn’t just build a better product over time, they also increase the entry-barriers for potential competition.
The majority of Truecaller’s income comes from developing countries. The company explains that the problems related to spam emails, harassment, unwanted calls, and messages are more common there than in the western world. India is Truecaller’s largest market where these types of problems are significant. One positive aspect of the geographical exposure is that it allows for a nice structural tailwind: the population growth in developed markets is much higher than in the west (driven by an increasing average age) and the smartphone penetration is growing fast.
Historically, 97 percent of all app downloads have been organic. However, management has begun to experiment with user acquisitions by the way of advertisements through, for example, Facebook. The returns on user acquisition looks extremely attractive. In some markets, such as India, Truecaller could achieve a return on investment of up to 20x on every spent dollar. In more mature markets, such as the USA, the same multiple amounts to 4x, still very attractive. Indonesia, which is a relatively new market to the company, has a multiple of 0.8x. This means any user acquisition spend in Indonesia is unprofitable at this point. However, management is confident that the return profile will wander above the 1x as more users join and the network effects take place. In summary, the investment opportunities are plentiful and attractive – and unique.
In summary, several things speak for significant growth in the future. The investment in paid user acquisition, a sharpened premium-offer, the newly launched B2B product and continued growth of the advertising business. In addition to this, acquisitions may likely follow.
Growth has been prioritized over profitability and it is only recently that the company began to report profits. In 2019 sales grew by 57 percent. In 2020 the corresponding figure was 64 percent, and during the first half of 2021 the company’s sales grew with as much as 151 percent in comparison to the same period last year (which was partly affected by the pandemic). During the first half of this year, the company’s operating margin was 32 percent. As you can imagine, Truecaller is very capital-efficient. Working capital is very low which gives a nice cash conversion and a very high return on capital employed – all attributes that are required to create a very successful and valuable company over time.
Truecaller targets a revenue growth of at least 45 percent between 2021-2024e. After 2024 the EBITDA-margin should be at least 35 percent. The sum of the year-on-year growth and the EBITDA-margin should amount to at least 70 percent (a variant of the rule of 40 that tries to balance growth and profitability). We don’t think it will be difficult to reach these targets and the analyst estimates we have looked at are cautious, especially regarding profitability. In our preliminary prognosis for 2023, our EBITDA-estimate is around 16 percent ahead of the analyst estimates that we’ve studied. This is based on that Truecaller can continue to grow sales much faster than hiring new people while the gross margin improves slightly in coming years.
The gross margin is an interesting aspect of the equity story. Truecaller’s gross margin amounts to approximately 70 percent. Most of the cost of sales consists of platform fees to Apple and Google. Since Apple and Google practically control the distribution channels for apps together, a duopoly has occurred and prices for app-developers such as Truecaller have remained high around 25-30 percent of sales. This situation is now heavily criticized from all parts of the world since the situation is not considered competitive, for example
look at this analysis about an American court ruling concerning a twist between Epic Games and Apple. We believe Google and Apple’s fees will decrease over time – which would be a positive event for Truecaller. Furthermore, Truecaller’s new business deal bypasses Goggle and Apple, which gives a gross margin of close to 100 percent. This will strengthen the profitability even more.
There are of course risks associated with the dependence on Google/Apple (which is the case for every company in the application business); the geographical exposure and one should never write off the threat of competition even if it seems far away at this stage. However, we do believe the benefits outweighs the negatives. Truecaller has excellent financial characteristics, operational founders with large shareholdings who will remain active in the business and some of the world’s most well-known investors behind it. We therefore look forward to being included as an anchor investor ahead of the stock exchange listing on October 8th. We are even more excited to follow the company’s successes in current and new markets in the coming years.
CVS Group
One of the happiest days of the month was when our veterinarian company CVS Group released their interim numbers. Once again, the company beat analysts’ expectations which have been raised several times over the course of the year. In the first two months of the new financial year (which begins in July), the company has grown by 17 percent. This can be compared with the growth expectations for the full year which, before the report release, were 7 percent. Once again, analysts have thus far been “forced” to upgrade their assumptions. In a sour September stock market, the share fell 3 percent.
It becomes clear that the positive effect of the pandemic on pet ownership is more tenacious than ever. Pets live for many years, and we believe many underestimated the importance of the large number of new customers during the pandemic. Below is a graph of Google searches for veterinarians in the UK as well as data from the Swedish Board of Agriculture regarding the number of newly registered dogs. We speculate that the UK has similar trends as Sweden. The data points are also positive for our other pet company Swedencare. Pet companies are obviously still hot; right now there’s a bidding war going on over the German pet company Zooplus, where EQT is currently in the lead with the highest bid. We also note that there have been several venture capital-led acquisitions of veterinary companies at higher multiples than CVS is valued at.
Source: Jordbruksverket, Coeli
Source: Google Trends, Coeli
Lindab
Since our first investments in Lindab in the autumn of 2019, the thesis has always been that the building systems business segment did not fit into the business and in September, management finally found a buyer for the company. The transaction entails a write-down of goodwill corresponding to SEK 430 million, but it is cash flow neutral. Lindab took the opportunity to update its financial targets; the company now wants to grow by 10 percent per year (of which approximately two thirds are through acquisitions) and reach an operating margin of at least 10 percent (previously 10 percent over a business cycle). The share responded positively to the message.
We noted broad insider purchases in Lindab during the month, also from CEO Ola Ringdahl himself, which we think bodes well for the report in October. Despite this the share price decreased 8 percent in September.
Victoria
We have written several times about the British flooring company Victoria, which in September had a weak share price development of 17 percent. By all accounts, the company is doing well – during the month it was reported that sales rose 70 percent compared to 2020, and 50 percent compared to 2019. If you only partially extrapolate these figures for the rest of the year, it is obvious that analysts’ expectations are too low. We believe that this month’s decline is related to flows: growth companies and small and mid-cap companies were some of the most affected sectors in September – Victoria was hit from both sides. We have increased our position in recent days.
The Pebble Group
One of the month’s (few) joys was Pebble Group. As we previously wrote, the company is active in the market for gift advertising, i.e. gifts that companies give to customers, employees, and other stakeholders for marketing purposes. In September the company came out with its half-year figures that were better than expected. Pebble’s software division, Facilisgroup, is growing better than our expectations. This is also the part we believe the market is valuing too low. The stock rose 10 percent in September.
Knaus Tabbert
During the last trading day in September, our German motorhome manufacturer Knaus Tabbert announced that the forecasts for 2021 must be lowered due to component shortages. We are not particularly surprised that this has happened given what we have seen from other vehicle manufacturers. If the company can remedy these supplier problems, management believes that 2022 will be unaffected at best, as Knaus still has a bursting order book, increased production capacity and more suppliers from January next year. The share fell 7 percent in September.
Short positions
The short portfolio contributed with a negative result during the month. Our short-term negative positions in the German DAX had the largest negative contribution. Some stock specific short positions that contributed positively to the result were Swedish Dometic, German Henkel and Norwegian NEL.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 76 and 74 percent, respectively.
Summary
September's negative return of x percent also meant the end of the fund's, so far, longest period of positive return (10 months). We are obviously disappointed with that, but we have been in the game long enough to understand that equities sometimes must fall to be able to refuel and continue their upward trajectory. In general, September was the weakest month for many equities since the crisis started 1.5 years ago. September, otherwise, started strong for us and was a continuation of an unusually good performance at the end of August. Our companies presented many good news (except for Knaus Tabbert on the last day of the month) but small-caps and especially those categorized as growth shares, had a very weak performance during September. The main reason for this was, as previously mentioned, the change in the US long-term interest rate and general "risk off".
The picture below shows the development since March last year compared with the corresponding time intervals in the financial crisis in 2009 and onwards. Both periods have shown an unusually strong recovery and the current trend is even stronger than when the financial crisis raged 12 years ago.
Source: Goldman Sachs
Since the crisis started 1.5 years ago, we have had three different phases. The first and shortest, "despair", showed a decline in prices of 33 percent. The second phase, "hope", ended at the beginning of this year and showed a very strong return of 79 percent despite declining earnings. The last, “growth”, where we are now, has shown +11 percent in share prices with sharply rising growth for companies' earnings, but at lower valuations.
Source: Goldman Sachs
The recovery for American companies (below) has been extremely strong and compared to 2019, the 2021 profits will be approximately 36 percent higher. Very impressive.
Source: Goldman Sachs
It is very gratifying that Europe, for once, is keeping up with the United States and showing strong profit growth. Compare this with the non-existent profit growth between 2007–2019 (!)
Despite rising equity prices, valuations have fallen and Europe is now trading around 16x the profit 12 months ahead. It's not very strenuous (we think). For an average commercial property, you can get a return of maybe 3 percent before net financial costs. After financing, this corresponds to at least P/E 50x. And paying to lend to different countries does not feel like an exciting alternative either.
Source: Goldman Sachs
The valuation of global shares in relation to global GDP looks more strained. A major reason for this is the central banks' aggressive policy.
The valuation of the major leading technology companies is at an average level seen from the last five years.
Source: Goldman Sachs
The image below is striking. It shows that Swedish property prices, which have risen by almost 200 percent over the past 15 years, have had the same development as the money supply. In theory, price per m2 and krona is unchanged for the past 15 years. Is there anyone who still doubts that the world's central banks are responsible for the largest wealth creation in human history? It is important to be on the wagon because when it is gone you’ve missed it. And what central banks cannot push, the price of bitcoin for example, rises even more as central banks cannot make more of it. The opportunities for central banks to reverse the band are few. In the long run, this means that the next 10 years will, overall, be a good period for, for example, stock picking. All forms of uniqueness (growth) will be highly valued to compensate for the fact that the value of money decreases at a rapid pace.
If there is anyone who is still not convinced, take a look at the picture below. The market capitalization of the S&P500 divided by the Fed's balance sheet….
Source: Bloomberg
Onwards and upwards. The wealth of American households is accelerating away from the change in GDP.
Thank you Fed and all the world central banks!
Citigroup's surprise index has weighed down and analysts' profit estimates are also starting to soften. Not a good combination and it has undoubtedly contributed to the weak development in the stock markets recently.
It took a full 219 days for the S&P500 to have a decline of 5 percent. We will see how high the next bar will be.
Timing is everything. A fascinating graph that shows the importance of having reasonable timing in decisions.
Source: Goldman Sachs
Despite a difficult month behind us, it feels reasonable to expect a stronger market during the last quarter of the year. Our view is that we are still in a rising market, although we are likely to experience some turbulence for a few more weeks. "Bear markets" are constantly declining with sharp rallies while "bull markets" continue to rise with some strong drawdowns. We therefore believe that we are still in a rising market.
Some statistics to cheer you up. The S&P500 managed to rise by 0.2 percent in the third quarter (Europe -1.9 percent) which means six consecutive positive quarters. This has only happened eight times before and only on one of the (eight) occasions has the following quarter yielded a negative return. Two quarters later, it has in all cases yielded a positive return. In addition, for the past 20 years, October has been the fourth best month, thus much better than its reputation. Having pointed that out, October takes first place in terms of most frequent daily movements that exceed one percent.
The Stockholm Stock Exchange, which is an excellent reference point, had risen by 30 percent at its highest about a month ago, but is currently at 20 percent. Even more important is that measured in USD, OMX has "only" risen by 13 percent, which is in line with the US stock markets. This is hardly excessive given the profit growth among the companies. The risk premium in the market is high.
Investors are reasonably careless, and we are approaching the turn of the year. Global growth is well above average and interest rates are extremely low. Given how cruel the market has been to many investors this year, with sector rotations and a high concentration of companies driving performance, it almost feels obvious that the broad mass of investors will continue to reduce risk in their portfolios and then be short equities at year-end when the market rises. We'll see, but that's our main scenario right now.
We are now closing the books for the third quarter, and we look forward to the end of the year and above all the entrance for Truecaller on the Stockholm Stock Exchange on October 8!
Thank you for this month and we'll hear from you later.
Mikael & Team
Malmö on 5 October
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Coeli Nordic Corporate Bond Fund
| Performance in Share Class Currency | 1 Mth | YTD | 3 yrs | Since incep |
| Coeli Nordic Corporate Bond Fund - R SEK | 1.30% | -0.93% | 3.38% | 14.52% |
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Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund
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Alexander Wahlman
Senior Analyst
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Fund Overview
| Inception Date | 2017-12-20 |
| Investment management fee (share class I SEK) | 1.00% p.a + 20% Performance fee (OMRX T-Bill Index) |
| Performance Fee. Yes | 20% |
| Risk category | 5 of 7 |
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Top Holdings (%)
| LANSBK 1.25% 18-17.09.25 | 4.1% |
| NORDEA HYP 1.0% 19-17.09.25 | 4.1% |
| SWEDBK 1.0% 19-18.06.25 | 4.1% |
| WHITE MOUNT FRN 17-22.09.47 | 3.9% |
| B2 HOLDING FRN 19-28.05.24 | 2.9% |
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IMPORTANT INFORMATION. This is a marketing communication.
Before making any final investment decisions, please refer to the prospectus of Coeli SICAV II, its Annual Report, and the PRIIP of the relevant Sub-Fund. Relevant information documents are available in English at coeli.com. A summary of investor rights will be available at
https://coeli.com/regulatory-information-coeli-asset-management-ab/.
Past performance is not a guarantee of future returns. The price of the investment may go up or down and an investor may not get back the amount originally invested.
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