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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 KID of the relevant Sub-Fund here
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Source: Goldman Sachs
Source: Holger Zschaepitz, X
In Europe, the SXXP600 rose in July by 2%, while the MSCI Europe Smallcap increased by 3.2%. In general, smaller companies had a stronger price development than the larger companies. By far the worst was OMX, which fell by 2.6%. However, measured in euros the decline for OMX was -0.8% (yes, that's true, the Swedish krona strengthened in July).
In the middle of the intensive reporting period, the fund performed well and generated a positive return of 4.9%, adjusted for the spin-off of Rejuveron which we told you about in last month's newsletter. For the third time in a row, our companies offered a very good price development in connection with their reports, which led to significant excess return. As a backdrop and to put into context, the companies that did not meet expectations saw their shares come under heavy price pressure. Some well-known Swedish companies' price movements at the reporting date were Hexagon -10%, SSAB -14%, Electrolux -20%, Ericsson -9%, Viaplay -49% and Essity -9%.
The image below shows the price development of our core holdings from the reporting date until the end of July. As clearly illustrated the outcome for our companies in relation to the market's expectations was clearly positive, which for many holdings gave a very strong price development. The only one of our companies that was worse than expected was LVMH with -2.5% in negative deviation and where the share fell by 5% on the day of the report, only to rebound the next day with a rise of 4%.
Source: Coeli European
The corresponding outcome for the American stock market at the end of July was as follows.
Source: Goldman Sachs
Source: St. Louis Fed, chartr
Source: BloombergLong positionsAccelleron
We last wrote about Swiss Accelleron in our monthly newsletter in November 2022. At that time, the company had just been spun off from ABB. In connection with the spin-off, we saw an opportunity to buy the shares at a discount. Since Accelleron is Swiss and small compared to ABB, there were probably many ABB owners who, due to fund restrictions and other reasons, did not want and/or were able to own Accelleron shares. This created initial selling pressure which we used to buy our first shares at a price of 16-17 Swiss francs, compared to today's rates of around 22.80.
The business consists of selling and maintaining turbochargers for large engines with applications for ships and in certain industrial applications. The company is the industry leader with a high market share. About 25% of the revenue consists of product revenue, while the other 75% consists of stable aftermarket revenue consisting of service and the sale of spare parts. The service revenue has very good profitability, and in the long run Accelleron should reach an operating margin of around 25%.
In July, Accelleron came out with some welcomed news: They raised this year's sales forecast to 15%, compared to the previous guidance of 2-4%. This is a substantial increase in forecasts motivated by strong end customer segments. In addition to a strong marine market, we already know that Accelleron has exposure to US natural gas infrastructure. This is likely to be very strong after Russia's invasion of Ukraine, which has meant that Europe needs to import energy from elsewhere, which in turn has led to a strong expansion of American LNG infrastructure.
The new forecast for 2023 implies an organic growth of 6% for the second half of the year, to be compared with 20% in the first half of the year. This appears conservative, and we believe there are good opportunities for Accelleron to beat its forecast once more before the turn of the year.
After a 7% rise in July (9% in euros), Accelleron still trades at a P/E ratio of 12-13x for 2024 on our estimates. We think that is far too low for a market leader with predictable revenues and a high return on capital employed of over 30%. The company's high cash conversion should allow a dividend yield of 7–8% for the profit in 2024.
Lindab
It is hardly a secret that the construction industry is having a tough time right now. In a European context, the Nordic region is particularly negatively affected. So far in the cycle, it is primarily housing construction that has taken a serious hit in relation to previous years. Commercial and industrial construction has been more stable. As so often in a downturn in the construction industry, it is new construction that has taken the biggest hit compared to renovation activity, which is typically more stable.
At group level, Lindab generates most of its revenue from the commercial sector and approximately half of the revenue is of a renovation nature.
Ahead of Lindab's Q2 report, we noted several things that made us increase our position:
Source: BloombergKion
We last wrote about the company a month ago, when Kion was a strong contributor to the fund's results in June. It was followed up in July when the share rose by another 3% after a quarterly report that was better than the market's expectations. Despite the company being cyclical, with all that it entails, where we are now in the economic cycle the investment thesis is about restructuring the company after a very difficult 2022. With two good quarters behind it, the risk premium is now decreasing which, in this case and on good grounds, has been very high.
At the current share price (38 euros) and after a 17% increase in June/July, the stock is trading around 12x, 10x and 7x net earnings for 2023-2025e respectively. About 1.5 years ago, the share price cost was approximately 100 euros.
Short positions
Corresponding development in Europe during the same period more moderate +2.5% for cyclical companies, while defensive companies have fallen by 2.5%. It becomes very clear that cyclical companies are dependent on positive financial data to develop strongly (and the opposite is also true).
When a majority of the companies have now reported, it can be stated that the expectations going forward are a significant improvement in profits. Below you can see the expectations for the American market (S&P500). After declining profits in the first half of the year, the forecasts are now profit growth of 5.4% in the third and 8.1% in the fourth quarter.
Source: SoFi, Refinitiv
If you adjust for the largest American technology companies, the valuation still looks attractive in many places. Below S&P500, MSCI China and MSCI World excluding the USA.
Source: Kepler Cheuvreux
After the AI hype of the last few months, the American stock market has developed significantly better than the European one. Over the past three months, the S&P500 has risen by 10%, while the SXXP has only risen by one percent. However, the annual return so far this year is very similar, see picture below with current data as of August 7th. On the far right is the yield measured in euros and Sweden's weaker development is clear.
Source: Bloomberg
The latest development has in turn created the biggest value difference ever between the US and Europe.
Source: Kepler Cheuvreux
Below the difference in P/E between the US and Europe.
Source: Kepler Cheuvreux
The relatively record-expensive US stock market is also record-expensive in relation to the 10-year Treasury yield. Currently, not much compensation is offered relative to the risk associated with owning shares.
Source: @soberlook
Europe exhibits completely different relationships where the profit level in relation to the 10-year bond yield is five percent compared to the US's one percent.
Source: Kepler Cheuvreux
Below is a current picture showing the valuation for several important stock markets.
Source: Goldman Sachs
So how do we see the development from here? At the time of this writing, the first days of August have started with a downward recoil of around three percent. The US downgrading by Fitch can probably be considered the catalyst and a reason to take home profits in the short term. A strong development in July combined with the fact that European and American investors are now going on vacation means that the conditions in the short term (weeks) are moderate.
Outflows from equity funds have historically been significant in August, which has historically had an impact on the current month's return.
Source: Goldman Sachs
CTAs (trend-following strategies) have increased their equity exposure over the summer and are predicted by Goldman Sachs to lead to sales in August regardless of price performance.
Risk appetite has increased significantly, and investors are now more exposed.
Source: Goldman Sachs
There have been very high volumes (see picture below) in terms of covering short positions and is now largely settled.
Source: Goldman Sachs
On the positive side and if we zoom out, the companies' earnings have continued to be higher than expected. Now the giant buyback programs are also starting up again, which support the share prices and, in many cases, create significant shareholder value.
Although the impact has diminished in recent months, it is still the central banks' fight against inflation and, by extension, interest rates, which largely dictates the development of the world's equity markets. Here, our view continues that they have been too aggressive this time as well, which in turn, if we are right, will lead to a reversal and a significant fuel for the global risk appetite. When Jerome Powell held his press conference in connection with the Fed's interest rate announcement on July 26th, he said, among other things: "You'd start cutting before you go to 2% inflation". When the ECB held the corresponding press conference the following day, Christine Lagarde was asked if the ECB had more work ahead: "At this point I wouldn't say so".
Thank you for your trust and interest.
Mikael & Team
Malmö on August 9th, 2023
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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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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
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.
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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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 KID 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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This material is marketing communication
[/et_pb_text][et_pb_text admin_label="Datum / Skriv ut" _builder_version="3.0.89" background_layout="light" border_style="solid" custom_margin_tablet="||17px|" custom_margin_last_edited="on|desktop" module_class="gen-single-news-date-module gen-trustee-print-module hide-in-print" locked="on" border_style_all="solid"] [blog_post_date]Monthly Newsletter Coeli Absolute European Equity – July 2023
JULY PERFORMANCE
The fund's value increased by 4.9% in July (share class I SEK), adjusted for the spin-off of Rejuveron. Unadjusted, the fund's value decreased by -3.1%. The Stoxx600 (broad European index) increased during the same period by 2.0% and HedgeNordic's NHX Equities increased provisionally by 1.0%. For 2023, the fund has risen by 6.7%, adjusted for the spin-off of Rejuveron. Unadjusted, the fund's value has decreased by 1.5%. The Stoxx600 and NHX Equities have risen by 10.9% and 3.2% respectively during the year.EQUITY MARKETS / MACRO ENVIRONMENT
The month of July got off to a weak start with the broad European indices down 3-4%. On July 6th we recorded the weakest exchange rate development since the banking turmoil in March and, as a law of nature, the Swedish krona simultaneously dropped to a new low against the euro at 11.95. In a thinly traded summer market, we were presented with several different data points that showed a continued strong economy in the US and thus an interpretation by the market that interest rate increases are continuing more than feared. The US two-year-old also reached its highest level since 2007. The European stock markets were significantly weaker than that of the US. The explanation for that was a combination of profit warnings from mainly cyclical chemical companies, as well as the large difference in economic data points. The US surprised positively, while Europe surprised negatively. Below image clearly illustrates the difference in the form of the Goldman Sachs Economic Surprise Index.
Source: Goldman SachsAfter the first week was over, there was a remarkable turnaround in investor sentiment and stock prices rose across the board. The Nasdaq, once again, rose the most (in local currency) during the month by 4% and thus has, in July, alone risen for 16 years in a row. The Dow Jones rose for 13 consecutive days which was the longest period of positive days since 1987. The picture below is missing the thirteenth day (far right bar) but note that in 123 years it has only happened twice! Also interesting was those American regional banks (which started the banking crisis in March) rose by 19% in July. European banking shares rose 5.5% over the same period, marking the best month for banking stocks since November 2016.
Source: Holger Zschaepitz, X
In Europe, the SXXP600 rose in July by 2%, while the MSCI Europe Smallcap increased by 3.2%. In general, smaller companies had a stronger price development than the larger companies. By far the worst was OMX, which fell by 2.6%. However, measured in euros the decline for OMX was -0.8% (yes, that's true, the Swedish krona strengthened in July).
In the middle of the intensive reporting period, the fund performed well and generated a positive return of 4.9%, adjusted for the spin-off of Rejuveron which we told you about in last month's newsletter. For the third time in a row, our companies offered a very good price development in connection with their reports, which led to significant excess return. As a backdrop and to put into context, the companies that did not meet expectations saw their shares come under heavy price pressure. Some well-known Swedish companies' price movements at the reporting date were Hexagon -10%, SSAB -14%, Electrolux -20%, Ericsson -9%, Viaplay -49% and Essity -9%.
The image below shows the price development of our core holdings from the reporting date until the end of July. As clearly illustrated the outcome for our companies in relation to the market's expectations was clearly positive, which for many holdings gave a very strong price development. The only one of our companies that was worse than expected was LVMH with -2.5% in negative deviation and where the share fell by 5% on the day of the report, only to rebound the next day with a rise of 4%.
Source: Coeli EuropeanUp until July 31st, the results among the European sectors were as follows. Banks at the top and telecom at the bottom. Real estate stood out positively and oil and mining companies negatively. So far, 46% of the companies have had their profit forecasts adjusted upwards compared to 54% for downward adjustments. It is worse than it has historically been, and real estate, banks and automotive companies contribute to the biggest upward adjustments. The largest share of downward adjustments comes from mining and oil companies and technology companies.
The percentage of companies that exceed the market's expectations is significantly lower in the current quarter compared to the first of the year and compared to the entire Covid period. Compared to the period before Covid; however, it still looks solid.
The corresponding outcome for the American stock market at the end of July was as follows.
Expectations were low with a combined profit decline of 9% for the second quarter. With 81% of the companies reported, the decline is only 6%. The last quarter was also better than feared.
Source: Goldman SachsInflation continues to fall in most countries. The USA is also at the forefront here, and forward-looking core inflation based on the latest monthly data is now below two percent! This then provided good fuel for July's share price development. Will there be more interest rate hikes? Possibly one more is our guess, then it reverses.
Will we see a significant drop in European inflation after the summer? There are many indications of that, and we feel somewhat reassured for the future.
American wage growth now exceeds inflation, see intersection on the right of the image. It is of course very gratifying for the consumer and thus for the economy as a whole. Here, Europe is probably 6–9 months behind in development (and Sweden most likely at the back of the queue).
Source: St. Louis Fed, chartrThe Fed continues to dismantle its gigantic balance sheet. The temporary bump in March was when the banking crisis was in full swing, and they were forced to increase liquidity in the market. The Fed's balance sheet now corresponds to 31% of US GDP compared to the ECB's 53% and the Bank of Japan's 128%. The Riksbank's balance sheet corresponds to approximately 30% of Sweden's GDP.
Source: BloombergLong positionsAccelleron
We last wrote about Swiss Accelleron in our monthly newsletter in November 2022. At that time, the company had just been spun off from ABB. In connection with the spin-off, we saw an opportunity to buy the shares at a discount. Since Accelleron is Swiss and small compared to ABB, there were probably many ABB owners who, due to fund restrictions and other reasons, did not want and/or were able to own Accelleron shares. This created initial selling pressure which we used to buy our first shares at a price of 16-17 Swiss francs, compared to today's rates of around 22.80.
The business consists of selling and maintaining turbochargers for large engines with applications for ships and in certain industrial applications. The company is the industry leader with a high market share. About 25% of the revenue consists of product revenue, while the other 75% consists of stable aftermarket revenue consisting of service and the sale of spare parts. The service revenue has very good profitability, and in the long run Accelleron should reach an operating margin of around 25%.
In July, Accelleron came out with some welcomed news: They raised this year's sales forecast to 15%, compared to the previous guidance of 2-4%. This is a substantial increase in forecasts motivated by strong end customer segments. In addition to a strong marine market, we already know that Accelleron has exposure to US natural gas infrastructure. This is likely to be very strong after Russia's invasion of Ukraine, which has meant that Europe needs to import energy from elsewhere, which in turn has led to a strong expansion of American LNG infrastructure.
The new forecast for 2023 implies an organic growth of 6% for the second half of the year, to be compared with 20% in the first half of the year. This appears conservative, and we believe there are good opportunities for Accelleron to beat its forecast once more before the turn of the year.
After a 7% rise in July (9% in euros), Accelleron still trades at a P/E ratio of 12-13x for 2024 on our estimates. We think that is far too low for a market leader with predictable revenues and a high return on capital employed of over 30%. The company's high cash conversion should allow a dividend yield of 7–8% for the profit in 2024.
Lindab
It is hardly a secret that the construction industry is having a tough time right now. In a European context, the Nordic region is particularly negatively affected. So far in the cycle, it is primarily housing construction that has taken a serious hit in relation to previous years. Commercial and industrial construction has been more stable. As so often in a downturn in the construction industry, it is new construction that has taken the biggest hit compared to renovation activity, which is typically more stable.
At group level, Lindab generates most of its revenue from the commercial sector and approximately half of the revenue is of a renovation nature.
Ahead of Lindab's Q2 report, we noted several things that made us increase our position:
- British cement and brick maker, Forterra, saw its shares rise on a profit warning that indicated analysts' expectations needed to be revised down by about 20-30%. Sector colleague, Ibstock's share rose at the same time out of sympathy.
- The British construction-related company, Kingspan, delivered good results given the conditions and the share price reached its highest level seen in the last year.
- We have also noted that companies in completely different “bombed out" industries, such as the European chemical sector, have seen rising share prices on profit warnings. It could possibly indicate that we would see similar reactions in other sectors with poor sentiment.
- Analysts' estimates had been adjusted down considerably before the report was released.
Source: BloombergKion
We last wrote about the company a month ago, when Kion was a strong contributor to the fund's results in June. It was followed up in July when the share rose by another 3% after a quarterly report that was better than the market's expectations. Despite the company being cyclical, with all that it entails, where we are now in the economic cycle the investment thesis is about restructuring the company after a very difficult 2022. With two good quarters behind it, the risk premium is now decreasing which, in this case and on good grounds, has been very high.
At the current share price (38 euros) and after a 17% increase in June/July, the stock is trading around 12x, 10x and 7x net earnings for 2023-2025e respectively. About 1.5 years ago, the share price cost was approximately 100 euros.
Short positionsThe short portfolio contributed with a minor negative result during the month.
ExposureThe net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 73% and 85% respectively.
New strategy for Coeli Absolute European Equity Since inception of Coeli Absolute European Equity at the beginning of 2018, the focus has been to create an attractive excess return with a limited number of holdings. Simplified and except 2022, that objective has been achieved. With six years now behind us, we have decided to focus exclusively on long positions. Why do we do this? • If you study historical returns data in detail, it is clear that a few stocks in our long portfolio have made a very strong contribution to performance over long periods. It was also the main reason that last year, in global competition, we won a large mandate for Norway's sovereign wealth fund, with a focus on small and medium-sized companies in Europe. • Historically, we have been better at generating excess returns in the long portfolio compared to the short side. • When we today look at Coeli European AB's total managed capital, Coeli Absolute European Equity accounts for around 15%. The short positions in relation to total capital represent only about 3% but require significantly more resources. Time that has a high opportunity cost when we look for interesting long investments. The logical consequence is to change the strategy to an actively managed European equity fund which frees up analytical capacity to focus on our long holdings, likely benefitting all of us invested in Coeli Absolute European Equity. What does this mean for investors? • Typically, the policy change will be implemented 30 days after this announcement. It is therefore estimated to be at the beginning of September. • In practical terms, at that point we will close our short positions and then be fully invested with existing long holdings. This is expected to take place over one day. • The performance fee of 20% will be replaced by a relative performance fee of 15% in benchmarked to the MSCI Europe SMID Cap Net Total Return Index. • No performance fee will be charged to existing or new investors in existing share classes until the unit value reaches its high watermark. That level is approximately 40% higher than what the share value is today. For any future investments in a newly opened share class, a performance fee according to the new method will be charged. • The name of the fund changes 30 days after this announcement to Coeli European. As significant co-investors and as managers of the fund, we ourselves are very much looking forward to this change in strategy. This is because we are convinced that it provides better conditions for creating long-term value for our investors. We hope and believe that you too see this as a positive change. Summary A summation of the summer so far is better than expected economic data from the US which in turn increased investors' hopes for an economic soft landing. Europe has displayed the opposite, where the manufacturing industry in many places now shows clear signs of lower activity. China's economic development has so far been disappointing and now the government's incentives are increasing to try to jump-start the economy. Investors latched onto it and over the summer the Chinese stock market has seen large net investments from foreign capital. The combination of the above produced a positive return on the European and American stock markets in July. A significant contribution came from investors largely closing their short positions. Strong economic data has meant that US cyclical companies have performed significantly better than defensive companies, measured in the last three months. In the period May to July, cyclical companies have risen by around 18%, while defensive companies have risen by a more moderate two percent. The image below also shows the Goldman Sachs Surprise Index (yellow line) together with Cyclical/Defensive Development (white line).
Corresponding development in Europe during the same period more moderate +2.5% for cyclical companies, while defensive companies have fallen by 2.5%. It becomes very clear that cyclical companies are dependent on positive financial data to develop strongly (and the opposite is also true).
Source: Goldman Sachs
A strong euro indicates increased risk-taking, which can be seen in the share price development of cyclical companies and a falling volatility index.
When a majority of the companies have now reported, it can be stated that the expectations going forward are a significant improvement in profits. Below you can see the expectations for the American market (S&P500). After declining profits in the first half of the year, the forecasts are now profit growth of 5.4% in the third and 8.1% in the fourth quarter.
Source: SoFi, Refinitiv
If you adjust for the largest American technology companies, the valuation still looks attractive in many places. Below S&P500, MSCI China and MSCI World excluding the USA.
Source: Kepler Cheuvreux
After the AI hype of the last few months, the American stock market has developed significantly better than the European one. Over the past three months, the S&P500 has risen by 10%, while the SXXP has only risen by one percent. However, the annual return so far this year is very similar, see picture below with current data as of August 7th. On the far right is the yield measured in euros and Sweden's weaker development is clear.
Source: Bloomberg
The latest development has in turn created the biggest value difference ever between the US and Europe.
Source: Kepler Cheuvreux
Below the difference in P/E between the US and Europe.
Source: Kepler Cheuvreux
The relatively record-expensive US stock market is also record-expensive in relation to the 10-year Treasury yield. Currently, not much compensation is offered relative to the risk associated with owning shares.
Source: @soberlook
Europe exhibits completely different relationships where the profit level in relation to the 10-year bond yield is five percent compared to the US's one percent.
Source: Kepler Cheuvreux
Below is a current picture showing the valuation for several important stock markets.
Source: Goldman Sachs
So how do we see the development from here? At the time of this writing, the first days of August have started with a downward recoil of around three percent. The US downgrading by Fitch can probably be considered the catalyst and a reason to take home profits in the short term. A strong development in July combined with the fact that European and American investors are now going on vacation means that the conditions in the short term (weeks) are moderate.
Outflows from equity funds have historically been significant in August, which has historically had an impact on the current month's return.
Source: Goldman Sachs
CTAs (trend-following strategies) have increased their equity exposure over the summer and are predicted by Goldman Sachs to lead to sales in August regardless of price performance.
Risk appetite has increased significantly, and investors are now more exposed.
Source: Goldman Sachs
There have been very high volumes (see picture below) in terms of covering short positions and is now largely settled.
Source: Goldman Sachs
On the positive side and if we zoom out, the companies' earnings have continued to be higher than expected. Now the giant buyback programs are also starting up again, which support the share prices and, in many cases, create significant shareholder value.
Although the impact has diminished in recent months, it is still the central banks' fight against inflation and, by extension, interest rates, which largely dictates the development of the world's equity markets. Here, our view continues that they have been too aggressive this time as well, which in turn, if we are right, will lead to a reversal and a significant fuel for the global risk appetite. When Jerome Powell held his press conference in connection with the Fed's interest rate announcement on July 26th, he said, among other things: "You'd start cutting before you go to 2% inflation". When the ECB held the corresponding press conference the following day, Christine Lagarde was asked if the ECB had more work ahead: "At this point I wouldn't say so".
Thank you for your trust and interest.
Mikael & Team
Malmö on August 9th, 2023
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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% |
Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund [/et_pb_text][et_pb_image _builder_version="3.0.89" src="https://coeli.com/wp-content/uploads/2018/10/Alexander-Larsson-Vahlman.jpg" show_in_lightbox="off" url_new_window="off" use_overlay="off" always_center_on_mobile="on" force_fullwidth="off" show_bottom_space="on" custom_margin="||21px|" disabled_on="on|on|on" disabled="on" /][et_pb_text admin_label="Namn och title" _builder_version="3.0.89" background_layout="light" module_class="gen-single-ingress-module" custom_margin="||40px|" disabled_on="on|on|on" disabled="on"]Alexander Wahlman
Senior Analyst [/et_pb_text][et_pb_text admin_label="Top Holdings (%)" _builder_version="3.0.89" background_layout="light" custom_margin="||20px|" module_class="gen-trustee-single-table" disabled_on="on|on|on" disabled="on"]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% |
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.
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% |
Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund [/et_pb_text][et_pb_image _builder_version="3.0.89" src="https://coeli.com/wp-content/uploads/2018/10/Alexander-Larsson-Vahlman.jpg" show_in_lightbox="off" url_new_window="off" use_overlay="off" always_center_on_mobile="on" force_fullwidth="off" show_bottom_space="on" custom_margin="||21px|" disabled_on="on|on|on" disabled="on" /][et_pb_text admin_label="Namn och title" _builder_version="3.0.89" background_layout="light" module_class="gen-single-ingress-module" custom_margin="||40px|" disabled_on="on|on|on" disabled="on"]Alexander Wahlman
Senior Analyst [/et_pb_text][et_pb_text admin_label="Fund Overview" _builder_version="3.0.89" background_layout="light" custom_margin="||20px|" module_class="gen-trustee-single-table"]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 |
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% |