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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.
Before making any final investment decisions, please read the prospectus, its Annual Report, and the KIID of the relevant Sub-Fund here
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This material is marketing communication
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Monthly Newsletter Coeli Absolute European Equity – April 2022
APRIL PERFORMANCE
The fund's value decreased 0.9% in April (share class I SEK). The Stoxx600 (broad European index) decreased during the same period by 1.2% and HedgeNordic's NHX Equities decreased provisionally by 0.8%. The corresponding figures for 2022 are a decrease of 15.3% for the fund, -7.7% for Stoxx600 and -4.8% for NHX Equities.
EQUITY MARKETS / MACRO ENVIRONMENT
After a strong finish last month, April began relatively hesitant, waiting for the reporting season to start. The terrors of the war had a limited direct impact on the stock market, but the indirect consequences increase with each passing week. Food prices continue to rise, while oil prices, at least temporarily, have stabilized. What caused the stock market to turn downwards in the second half of the month was partly the headless and failed full force action in China to fight covid, and partly a continued upward pressure both in terms of inflation and rising interest rates.
The European stock market developed significantly better than the US stock market in April, measured in local currencies. It was above all technology companies that were the big losers during the past month and which the USA has significantly more of. The explanation for this, in turn, is that rising interest rates put pressure on company valuations, but the fact that Amazon made a loss during the first quarter for the first time in seven years did not help. With a decline of 13.3% in April, it was the worst development for Nasdaq since 2008. The S&P500 fell by as much as 8.8%, which was the worst month of April since 1970 (when the index closed at 85.71 (!) against today's 4131,9).
Note, however, that measured in euros, the decline for the S&P500 was only 4.2% as the USD strengthened significantly (which tends to happen when markets are worried). The broad European index fell by a more modest 1.2% measured in local currency, but 6% in USD.
The worst month for Nasdaq since 2008!
Source: Bloomberg
The political and economic weakness in Europe combined with a more troubled world becomes painfully clear by studying the development of the euro against the USD over the past year. The value of the euro against the USD has reduced by 15%.
Source: Bloomberg
China is failing with its covid strategy and causing major problems worldwide with delivery issues when it locks people in. China also fails to control its exchange rate, see the development against the USD below and above all how the currency moved when the covid problems became clear a few weeks ago. China is now experiencing its worst period (if not the worst) since the 2008 financial crisis.
Source: Bloomberg
It’s a ghastly sight when you realise that the Russian rouble is now at a higher level than before the outbreak of war. Clearly the economic sanctions have, so far, not been powerful enough, which is also signalled by the oil price. It is the people of Russia who have, until now, taken the biggest blow and not the Russian state. BUT, with each passing week, sanctions are gaining more traction in the Russian economy. Russia's central bank reserve has shrunk by at least two-thirds and Russia can in principle no longer import anything, which means that soon nothing will be produced in the country. The EU has stopped imports of Russian coal. Europe's oil imports will also soon likely decrease, followed by gas imports. Russia is storming towards bankruptcy, and everything is orchestrated by only one person - Putin. It must be the pinnacle of human insanity?
Source: Bloomberg
During the last week of the month, Putin played the gas card and shut down gas supplies to Poland and Bulgaria when they refused to pay in roubles. It had no major impact on the financial markets, although the price of gas rose sharply that day. Below is a picture that shows different countries' dependence on Russian gas. Germany and Italy are worst placed of the large economies. We'll see how it ends. Putin is in desperate need of capital as the Western world now begins to supply heavier weapons and equipment to Ukraine. We take the liberty and quote Estonia's Prime Minister Kaja Kallas from last week: "Gas might be expensive, but freedom is priceless"
Ronald Reagan and Margaret Thatcher contributed to the collapse of the Soviet Union as military armaments increased markedly in the 1980s. We look forward to the replay now that the whole Western world is supporting Ukraine.
Source: Bloomberg
Rising inflation and interest rates have been controlling the financial markets with an iron fist for almost six months. Politicians and central banks have continued in an unimaginably aggressive way with expansive policies, even though the economy has been at its peak in and in several cases has shown clear signs of overheating. When even the Riksbank (Swedish Central Bank) turns around and raises the interest rate, then you know that the last man at the back of the line understood what was happening. Two months ago, Stefan Ingves (Governor of the Riksbank) announced that the interest rate would be raised in the second half of 2024, and now there is talk of several increases already this year. How is it possible to be so tone deaf on that level? And it is unfortunately not the case that the Riksbank's track record has been brilliant over the past 15 years. The Swedish krona exchange rate goes up and down in tandem with each press conference they hold. Incredible.
Source: Twitter
If you think the criticism is harsh against the central banks, look at the attached clips.
Watch the whole sequence. If you must formulate yourself kindly, there is potential for improvement.
The biggest problem with rising prices is in food, and here the war in Ukraine is a clear contributing factor. The most disadvantaged have to take the biggest blow and there have already been riots and similar events in different parts of the world.
All central banks have major challenges, but they operate under different conditions. In Europe, energy is the largest component of inflation. In the UK and the US, it looks different, see picture below. Europe's total cost of energy is currently about nine percent of GDP, compared to only about 4.5% for the United States.
Source: Bloomberg
Below is a graph of German producer prices. The rate of increase is now 30.9% (!), which is the highest level in 73 years. Note that the interest rate in Germany right now is about 0, 9%. Is it just a temporary hump ECB? The ECB is still buying assets in the market!
Source: Bloomberg
Note the correlation between the oil price and German inflation expectations. If the world enters a slower growth, the textbook says that the oil price will go down and thus inflation. Important graph.
Source: Bloomberg, Holger Zschaepitz
The real debt burden is also declining at a rapid pace. Below a 70-year timeline of the German real interest rate which right now is almost -8%!
The Germans set a record with money in the bank. With the current inflation rate of around seven percent, this means EUR 185 billion in reduced purchasing power.
Source: Bloomberg
It is perhaps not so strange that the world's investors are gloomiest on record in terms of the world's growth prospects. We are now at the same level as the lowest point during the financial crisis. A big difference from 2008 is that the banking system is in a much better condition. Other companies and households are also at high levels in terms of financial preparedness. However, we did not have a war in Europe at that time. One conclusion is that the difference between economic activity in the world and allocation to shares is very large. Will we see continued reduced exposure to equities? Bonds and cash are not particularly attractive. Companies with "pricing power" will come out of this stronger.
Rising interest rates are making their mark on the bond market. The picture below shows the development of corporate bonds over the past 30 years for 24 different markets. The beginning of 2022 shows the worst development ever. Is there a level where we are starting to think about whether a declining collateral pool will affect any loans? We hear nothing about it for now at least.
Source: Bloomberg, Goldman Sachs
Elon Musk has placed a bid on Twitter. His tweet below is the second most liked in Twitter's history.
Source: Twitter
Sweden made a fool of themselves during the Easter weekend.
Source: Steget efter
Emmanuel Macron won the French presidential election. Marie Le Pen lost.
Source: Twitter
Long positionsLindab
We once again experienced a positive surprise from Lindab, which beat earnings expectations by as much as 28% for the first quarter of 2022. Several construction-related subcontractors seemed to experience a good first quarter and we therefore increased our position ahead of the report release. In our opinion, the share is trading at low multiples even though it is a significantly better company today than just a couple of years ago and despite having positively surprised many quarters in the last three years. In our estimates, the share is traded at only 13x and 12x free cash flow in 2022e and 2023e. Despite the good report, the share price fell by 4% in April. We are taking advantage of the situation and have continued to increase our holdings after the report.
ArcticZymes
Another source of joy in April was Norwegian ArcticZymes. Sales and earnings were far better than expected and the share rose by 18% on the reporting day. We have become accustomed to the company alternating good and bad quarters, but now they managed to perform two quarters in a row. Will it be a third, maybe we can call it a trend? ArcticZymes continues to impress with high organic growth, sky-high margins, and low capital intensity. The stock rose 12% in April.
Wincanton, Tate & Lyle & Victoria
A couple of our British companies, more specifically the logistics company Wincanton and the ingredients company Tate & Lyle, had rising share prices without significant news in April and thus contributed to the monthly result.
However, the British carpet company Victoria continued its roller coaster. After a good March when the share rose by 25%, the share fell by 29% in April (crazy). Our assessment was and is that there has been a large and stressed institutional seller in the company who has had to sell since the end of February due to significant outflows. We gradually increased our position and the most recent shares we bought were a large block of 610 pence on April 28
th. We hope this was the last to be shovelled out from this seller. The stock is trading as of this writing a few days later around 670 pence.
Sedana Medical
The problem child of the month is called Sedana Medical. The company communicated sales that were slightly below expectations, while gross margins were clearly better than expected. What caused significant turbulence was the company's announcement to move out the financial target for Europe by one year to 2025 and the mentioning of a Russian supplier (but this was a minor matter). All in one report was too much for the market, which on the reporting day sank the share by 31%. Our projected guess was a decline of between 10-15% and we were therefore surprised by the price reaction. It is clear that we are in a market where disappointments are severely punished.
We do not find it particularly worrying that Sedana is moving forward a financial goal that was set in 2017 when a new CEO was recently appointed. The Russian supplier problem seems to be solvable, and the company have stock of that particular component which covers sales for about a year. The market capitalization is low in relation to our projected sales for the next few years, where we see gradually increasing sales from Europe. At the same time, there is great value in the US, where Sedana is expected to commercialize its product in 2025. The share price fell as much as 44% in April.
Short positions
The short portfolio contributed with a positive result during the month. Our futures on a Swedish small-cap index were the largest contributors on the short side. Some stock-specific short positions that contributed positively to the result were
Catena,
Vestum and the wind power companies
Nordex and
Vestas.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 62 and 63%, respectively.
Summary
April was a frustrating month when the value of some of the fund's core holdings fell significantly and, in our opinion, unjustified. Victoria, Sedana and Truecaller had the largest negative impact. At the other end of the spectrum, the fund's largest positive contributors were Arcticzymes, Wincanton, Pebble Group, Tate & Lyle and Sampo. In addition, our short positions produced good returns and our negative position in the SEB Small Cap index accounted for one of the month's larger positive results. The largest impact overall was our unlisted holding in Swiss Rejuveron, which we invested in just over two years ago and which, in connection with a new capital raising round, saw its valuation rise. The fund had only about one percent position but given that the valuation rose from CHF 30 to 120, it had a good impact on the fund's results in April. The fund invested at CHF 19 per share.
For many stocks and their owners, it has already been a significant crash and we are 8-9 months into the correction. The mood among investors is at historically very low levels and the war in Ukraine puts an extra muffler on the mood. Below Goldman Sachs sentiment indicator. It usually pays to increase the risk at current low levels.
Source: Goldman Sachs
One who is clearly going against the flow is Warren Buffett, who in the last two months has put Berkshire's cash at work and bought more shares than probably ever before. He is usually right, to put it mildly.
Below is the development of energy shares compared with technology shares. It is interesting to note that Berkshire's purchases this year mostly consist of Chevron, which is now their fourth largest holding in total.
The challenge for central banks is greater than ever before as they must curb inflation, which is a poison to all involved, while not wanting to create a recession. The difference this interest rate hike period compared to other occasions when the Fed has not created a recession, is that the labour market is stronger, inflation is higher and real interest rates more negative.
It may be difficult for us here in Europe to understand the power of the US economy, but the labour market is very strong. The difference between the demand for labour (blue line) and the labour supply is illustrated below. The difference is the largest in the entire post-war period. That is hardly the case at home. In our opinion, the risk of a recession in the US this year must be assessed as low. Next year is more open.
Source: Goldman Sachs
The picture below shows the relationship between expected economic activity in the eurozone over the next 6 months and the change in the operating margin this year compared to last year for Germany's 40 largest listed companies. The ZEW indicator for economic activity now shows -43, which is the same level as during the financial crisis of 2008/2009, the debt crisis in Europe 2011/2012 and the covid-19 crisis two years ago. If the correlation is correct this time, German companies will have a real headwind in terms of profitability in the coming months. To be continued.
The interest rate level has caught up with the global purchasing index after being well below historical covariations in the last two years. The rising interest rate last month created significant economic and financial stress in the system, which leads us to believe that (US) interest rates will peak at approximately current levels while economic activity will continue to decline. The current quarter may also be the quarter when inflation peaks but no promises. After the summer, at least the comparative figures will start to look simpler, which, all other things being equal, will reduce the inflationary pressure upwards.
Below the American 10-year-old against his moving historical average value.
Kepler Cheuvreux has estimated the cost of capital for companies in the United States. The last few years have been at extremely low levels, and we are now moving towards somewhat more normal levels.
It is quite clear that central banks have contributed to excess valuations in recent years. The figure below shows the proportion of shares valued at more than 20 times the operating profit in relation to the central banks' accumulated assets.
The breadth of the market has stabilized, which indicates that a lot of bad news has been discounted.
Development for European small companies have also stabilized. Either the sellers are ready, or the valuations have reached sufficiently attractive levels for buyers to start considering.
Our market view has remained unchanged since last month. We believe that this year's minimum level was set in March and that we will trade around current levels for several months. In a few days, the US Federal Reserve will issue its interest rate announcement and an increase of 0.5% will be on the cards. Only in July can we expect to hear something about how the ECB views any interest rate hikes.
In conclusion, I had fun during Valborg (Walpurgis) out on Österlen (southern Sweden) watching Berkshire Hathaway's general meeting where 91-year-old Warren Buffett and 98-year-old Charlie Munger for several hours entertained shareholders who had travelled to Omaha from all over the world. It was, as usual, oceans of wisdom that were communicated by these two unique personalities.
A story worth sharing is when Buffett tells with great surprise that for two weeks at the end of February, they bought 14% of Occidential Petroleum. He wondered how it is possible to buy 14% of a large oil company in just two weeks. Imagine being able to buy 14% of all farms in the country in two weeks. Or 14% of all car dealers and so on. Their conclusion was that the stock market over the past two years has turned into a casino where algorithms run stock prices up and down and many of the owners of flesh and blood have no idea what they own.
We recognized ourselves in that description when certain days in April offered very large volatility in various shares. It is more important than ever to be confident in your company analysis and know why you own certain companies. In the short term, it is impossible to predict how different stocks will be traded. We invest and allocate your capital with a long-term view, and we are convinced that current volatility will reward us in the future in the form of rising share prices. The only thing that is absolutely certain is that you never get bored in this profession. Written one hour after some thug pressed the wrong button and plummed the Stockholm Stock Exchange by 8% in two minutes…
Enjoy May!
Mikael & Team
Malmö, 5th of May 2022
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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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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 KIID 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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