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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 October 2023 (I USD)
1) Share Class I USD
The Coeli Renewable Opportunity fund lost 6.3% net of fees and expenses in October. It is down 8.4% since the inception on February 6, 2023.
Even with October's steep drawdown, the fund’s outperformance keeps growing. Relative to the two most comparable indices, the Wilderhill New Energy Global index (NEX) and the iShares Global Clean Energy (ICLN), the fund expanded its margin of outperformance by 7.3% and 4.8%, respectively. As these indices are down by about 30% over the last three months, booking their worst 3-month period for more than 10 years, the fund has successfully bolstered its cumulative outperformance since inception to 29% against the NEX and 27% versus the ICLN.
Last month we argued that certain companies in the renewable universe were about to find a bottom, and in early October we increased our net exposure from the low 40% to the low 70%. As the fund aims to have a net exposure in the 40-80% range, it means we went from bearish to bullish within a week. In hindsight, this was clearly wrong or at least too early. Despite the dismal sentiment and bearish market positioning at the time, it seems like the market’s concerns can always get worse.
Nevertheless, we still believe the sector could experience some relief into the year-end. First, seasonality is strong with November and December historically the best 2-month period of the year. Second, while sentiment and positioning are still negative, valuations have become less challenging as share prices have slumped significantly the last months. Third, earnings estimates for many companies have been reset lower while sell-side analysts’ have finally slashed their price targets.
Finally, there is a consensus among economists that long-term interest rates may have reached their zenith. Should rates begin to stabilize or even recede, sectors that have been hardest hit in recent months could see renewed investor interest. Morgan Stanley's thematic strategies analysis indicates that the Renewable theme has been the worst performer since long-term rates began their sharp ascent in August.
MARKET COMMENT – IT IS ALL ABOUT LONG-TERM YIELDS
The S&P 500 experienced a 2.2% decline in October, marking its third consecutive monthly fall—a rarity observed just once in the past decade during the COVID-19 pandemic. Such an event normally occurs with major macroeconomic events, last time coinciding with the Eurozone crisis in 2011 and the global financial crisis in 2008.
The main culprit this time is increasing long term government rates. The US 10-year Treasury bond briefly traded above 5% yield and ended October at 4.9%. As outlined in our last monthly report, numerous factors are driving this uptick in rates. A key one is the unexpectedly robust performance of the US economy, which reported an almost incredible 4.9% GDP growth in the third quarter, coupled with strong job creation while inflation is concurrently receding towards FEDs target of 2%.
Although higher interest rates mechanically lower valuation of all assets, the ‘good news’ for the stock market, assuming that the high rates does not cause a recession, is that the higher long-term rates have tighten financial conditions to a point that the bond market no longer expect further FED hikes. Historically, the S&P 500 has gained on average 16.8% in the 12 months following the prior six conclusions to FED tightening cycles – far outperforming the index’s historical return.
RENEWABLE ENERGY – LONG TERM CASE FOR RENEWABLES IS INTACT
Last month we wrote “there is blood in the streets” and we tactically increased our net exposure. We may be wrong, or just early, but for the first time in many years, there is strong valuation support in many of the great companies involved in the energy transition.
Nevertheless, this year has presented a complex narrative for investors. Are renewable energy investments something that only works when interest rates are zero? Or is the energy transition just a big hoax? The answer to both questions is no.
In the last monthly, we explained why renewable developers would be able to incorporate the higher cost of capital and still make good returns on their investments. In this report, we will discuss the longer-term structural opportunity which is unique to the energy sector.
Even though fighting climate change and ESG are important factors to mention, they pale in comparison to the need to grow energy supply to meet increasing demand. We need more gigawatts of energy, period.
The year 2022 marked a critical inflection point in the global energy landscape, revealing the vulnerability of our energy systems, in particular to geopolitical shocks. Primary energy consumption, a measure of the total energy consumed across all energy sources, surged to over 12% of global GDP, according to Goldman Sachs, and even higher in Europe, from a 5-6% average since the mid 1980’s. This signalled not just a post-pandemic economic reboot or supply chain anomalies, but more importantly an underlying chronic underinvestment in energy infrastructure.
ThunderSaid Energy, a leading energy consultancy firm, estimates that energy markets could be undersupplied by 2.5-5% between 2025 and 2030, translating to a shortfall of about 2,500 to 5,000 terawatt-hours or a staggering USD 1 trillion of underinvestment per annum. Note that this is predicated on conservative energy per capita growth assumptions. It is this growing mismatch between supply and demand for energy which is one of the key reasons why we are long term optimistic to renewable energy.
The undersupply will cause energy costs as percentage of GDP to stay structurally higher in the second half of this decade, according to ThunderSaid Energy. This will likely put significant strain on the global economy.
The solution is more investments in energy, but due to ESG and the fight against climate change, many investors find it difficult to invest in fossil fuels. Others see fossil fuel investments as too risky since carbon taxes will only become a more fervent topic as the planet warms. We therefore anticipate that investments in renewable energy will only accelerate to cover the impending energy supply shortfall. This trend will likely result in structurally higher power prices over the next decade, hurting the global economy, but growing the total addressable market (TAM) for renewable companies while boosting their financial returns.
Moreover, historically, in periods with high energy prices, real economic growth has been relatively weak and brought about a challenging investment environment. In these instances, investing in energy companies has been an effective hedge as they benefit from the higher power prices.
The quicker the shift away from fossil fuels, the greater the returns for renewable investments as they stand to fill an ever-widening gap. This transition is not only about adhering to environmental imperatives but also about pragmatic economic planning.
FUND PERFORMANCE – ANOTHER TOUGH MONTH IN RENEWABLES
The fund lost 6.3% (I USD) in October as long positions lost 12.3% and shorts only made 6.0%. Half of the themes were positive or flat on the month, but the losing themes all incurred relatively large drawdowns. The net exposure was in the high 60% to low 70% for most of October, which clearly contributed to the loss as the key renewable indices fell between 11 and 14%. We ended the month with a net exposure of 65%, having pared down some positions in anticipation of early November earnings reports, but they were added back as soon as earnings-report-risk had passed. Gross exposure was in the 110-120% range most of the month.
Not surprisingly, the largest losing theme drawing down 3.7% of NAV was “Solar”. It has the highest gross capital, it is skewed long, and it contains three of our largest long positions, the utility scale companies
Array Technologies (ARRY),
Shoals Technologies (SHLS) and
First Solar (FSLR). All were down double digits in October, similar to their decline in September. The stocks sold off partly due the higher long-term rates and in sympathy with the ongoing sell-off in the residential solar stocks.
However, the stock market is also fearing
and pricing in a significant slowdown in the utility scale market. Indeed, there is a noticeable deferral of some projects, with the most significant factor being the anticipation of detailed Inflation Reduction Act (IRA) tax credits guidelines. This uncertainty is causing a holdup in financing, as banks and investors seek complete clarity on the potential returns and associated risks before committing their funds. Finally, some projects are rumored to be held up due to interconnection permitting issues.
These worries are legitimate, but the real issue is whether we are looking at a temporary setback or the start of a longer slump. We remain confident that the utility scale market's growth trajectory for the coming years remains intact. Once the specifics of the IRA are unveiled, we expect project approvals to accelerate and financing to resume. As highlighted in our report last month, utility-scale solar remains the most cost-effective energy source in many markets, with a U.S. project pipeline that is nearly 30 times the capacity installed this year.
When
Nextera Energy (NEE US), the world largest developer, reported its third quarter earnings they confirmed that they are not slowing down investments and that higher financing costs did not hamper their ability or willingness to invest. Also,
Nextracker (NXT), the main peer of
ARRY reported strong Q3 results, order intake and outlook for 2024. Finally,
Quanta Services(PWR), the largest service contractor of grid transmission and interconnection in the US, confirmed its guidance and 2024 outlook.
Nevertheless, the market is unforgiving these days and as we are writing this report in early November,
SHLS and
ARRY just reported their third quarter results that were punished by double digit declines the next day.
SHLS delivered strong Q3 results, meeting revenue targets and surpassing earnings expectations. While there was a slight reduction in the full-year revenue outlook, earnings projections have increased. Despite these positives,
SHLS shares took a hit due to an expected warranty issue that turned out to be more costly than the market anticipated. However, SHLS plans to seek partial reimbursement from the supplier, and its record order intake suggests customers are not holding SHLS responsible for the warranty mishap
.
Moreover, the market value of the shares has declined by about 10 times the size of the maximum warranty loss since it was first announced three months ago. We believe this is an overreaction. While this issue may weigh on the company in the near term, EBITDA forecasts for 2023 have been raised, with 2024 expectations remaining stable.
ARRY's Q3 report presented a more mixed picture with revenue falling short of expectations but offset by higher-than-anticipated margins, leading to better EBITDA and EPS figures. However, the company trimmed its full-year outlook, indicating a weaker fourth quarter, citing project delays from financing hurdles and permitting issues as we discussed above. Initial order intake seemed low at USD 250 million, yet there's a significant USD 300 million in orders on hold, awaiting IRA guidelines—a substantial amount that could boost future intake figures. Additionally,
ARRY secured 3GW in volume commitments not yet reflected in the backlog, potentially adding another USD 300 million. The company also reported a doubling of its potential U.S. project pipeline from the second to the third quarter, pointing to strong 2024 order intake. Despite these developments, the market reduced its EBITDA forecast for 2024 by about 3% following the third-quarter report, and the stock price saw an 18% drop
.
It has clearly been a mistake holding on to and growing these two large positions. Although, we are still optimistic to growth in the utility scale solar market and continue to see
ARRY and
SHLS as two of the best positioned companies in this space, we will tread carefully into year-end.
If we should have one concern for the growth in utility scale solar, it would be grid connection bottlenecks. Speeding up permitting helps, but you still need to expand the grid. This is one of the reasons why the ‘Grid’ theme has become our second largest theme.
However, the “Grid” theme lost 1.5% of NAV in October, pulled down by risk-off in renewables but also impacted by the growing uncertainty in the utility scale market. Not only did
Quanta sell off into its strong earnings report, but the European grid companies took a beating following offshore wind cancellations in the US. Our largest position,
NKT (NKT DC), has substantial exposure to HVDC cables, which is why we like the company but is has zero exposure to the US offshore wind space. The company issued a positive profit warning in early November and reported continued strong order intake. Since 2019 the company has grown its backlog from about EUR 1bn to EUR 11bn.
Another theme that did poorly in October was “Diversified Renewables” which lost 1.8% of NAV. The only stock in the theme,
Chart Industries (GTLS), declined by 31% during the month and fell 25% on the day it reported Q3 earnings. The report was on the weaker side due to projects delayed into Q4, but full year guidance and EBITDA for 2024 were confirmed.
GTLS was our largest position earlier in the year, but we more than halved it as the stock returned almost 50% during the spring and summer. We still believe
GTLS is a great energy transition company, and we anticipate a rebound in its share price, likely triggered by a strong free cash flow report in Q4.
The only large winning theme in October was “European Hydrogen”, which contributed a 2% gain to the NAV. This success was not just a result of the wider sell-off in renewables; it was also driven by underwhelming order intakes for our shorted companies, which is impactful as they are all trading on EV/Sales multiples. We had tactically dialed back our net short position in the US Hydrogen theme as we increased our net exposure at the start of the month. In retrospect, this was clearly wrong.
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
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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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