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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: Sven Henrich, Twitter
Another way to illustrate recent developments: https://twitter.com/wallstmemes/status/1661478278841126912
Source: Goldman Sachs
Source: Bloomberg, Coeli European
There was supposed to be a picture of CHF/SEK her, but it's too sad so we skip it.
Inflation continues to fall in many areas, while the resilience of many economies surprised positively. What has surprised the most this year is the companies' ability to handle inflation, which in May dropped to 6.1% against the expected 6.3%. The decline was broad-based with food, energy and core inflation falling. The central banks will probably turn around within a few quarters and start lowering policy rates (our view). Worth mentioning is inflation in Spain. It has been seen as a drag on the eurozone and came in at a low 2.9% in May against an expected 3.3%. Good!
Source: TrueInsights, Eurostat
Source: Bloomberg
Several prices at the producer level are also now falling, including prices for many raw materials. A good example is the European gas price which exploded upwards in August, and which led to major problems. Since the top in August, the price has fallen by a not insignificant 90% .
Source: Bloomberg
It is darkest before the sun rises. This year's development up until now in various asset classes is in many cases the opposite of last year.
Source: Creative Planning, @CharlieBilello
Source: Bloomberg
At least it's less uncertain now compared to a few years ago.
The world's second largest economy is having a hard time getting out of the starting blocks. After a strong start following Covid restrictions being lifted, the economy has weakened again. Expect the Chinese state apparatus to inject something strong into the system soon.
Source: Kepler Cheuvreux
JP Morgan warns investors that the bank currently has enough capital to be able to absorb the equivalent of all US bank losses during the financial crisis. We take our hats off to Jamie Dimon, who has been the bank's CEO since 2005.
Source: Twitter, Marc Rubinstein
Senator Kennedy was liberatingly clear at the hearing of Silicon Valley Bank CEO, Greg Becker. Will we see something similar regarding SBB's board? Probably not is likely the answer.
https://twitter.com/unusual_whales/status/1658709178859540480
Long positionsSurgical science
Since January this year, we are once again owners of Surgical Science. We have long liked the company, which deals with surgical simulation, but have sometimes struggled with the high valuation of the stock. At levels around SEK 150–160 per share, we again thought that the valuation had come down to a good level given the quality of the company. There's a lot to like here:
• A monopoly-like position in a fast-growing market, where Surgical Science's product is implemented by most of the companies dealing with robot-assisted surgery.
• The simulation market is still relatively small in a larger context, which should reduce the appetite for competition and, as such, is a barrier to entry.
• Leading technology. Around 20% of the company's sales are reinvested in research and development. This provides good conditions for maintaining the current lead.
• Expanded gross margins and strong operational leverage, with very high return on capital employed.
• An extremely talented management team.
In May, Surgical Science released one of the better reports we've seen this reporting period. Organic growth was 38% (30% adjusted for certain one-off effects related to the order book). In addition, the sales mix was good, as the highly profitable license revenues almost doubled to make up about 31% of sales (22% in the corresponding quarter of 2022). This helped to strengthen the operating margin significantly. Of the sales increase of around SEK 70 million, around half was converted into operating profit, which beat advance expectations by around 55%. Cash flow, which was at times questioned by the market last year, was very strong. Surgical Science has a strong balance sheet with a net cash of almost half a billion kroner.
During the month of May, the Surgical Science share rose by 22% and made a strong contribution to the fund's development, even though our initial position was relatively small. To buy the share at today's prices of around SEK 230 per share, you need to believe in the company's long-term goal; To reach a turnover of around SEK 1.5 billion in 2026 and this at an operating margin of 40%. After the company's two most recent reports, we feel ever so convinced that the company will succeed in this.
Storskogen
During the past 12 months, few stocks have been as hotly debated as Storskogen. And it has mostly been in negative terms; Rightfully so, we think. After several years of an extremely high acquisition rate, Storskogen had problems with cash flow generation last year, which in combination with a strained balance sheet, declining economy and a general skepticism towards the company's strategy caused the share to fall by 88% in 2022. We ourselves have been doubtful about Storskogen and understood the price drop.
During the autumn, we noted a change in tone from the company's management, which reduced the pace of acquisitions and placed a greater focus on cash flow conversion and cleaning up the balance sheet. After following up this new communication with a fourth quarter for 2022 that clearly showed improvements on these points, the first quarter numbers of 2023 were released in May. The report, which beat expectations for operating profit by around 15-20%, continued to show that cash flow had improved.
We bought a small observing position in Storskogen in March and despite the small position, the fund received a good contribution from the stock, which rose by 27% in May. This is still a high-risk stock and we retain a small position in the company. If management can follow up on the two most recent reports with continued good cash flow generation, we believe that the upside is large despite this year's price rise.
4Imprint
London-listed 4imprint has been one of the fund's top holdings over the past 12 months. In one year, the share price has risen by almost 80%, including a large one-time dividend. Technically, it's only the share price that has anything to do with the UK as basically all the business is based in the US. 4imprint is a distributor of promotional gifts (give aways), typically products used for marketing purposes, for example at conferences and events.
In May, the company released a brief update for growth in 2023, where order intake rose by 22% during the January-April period. Despite the good growth, the share initially fell by 8%, because the company forecasted for somewhat weaker growth in the coming months (mostly due to complex comparative figures). The stock subsequently recovered and closed the month 2% higher than during the beginning. We believe this is partly due to the stock being included in an important index, and we have taken advantage of the situation by selling off parts of our position.
Wincanton
The British logistics company has been one of the year's worst performing stocks after management was forced to issue a profit warning in March. At that time, the fund bought shares at low levels. In May, Wincanton released a report that confirmed the outlook given at the time of the profit warning, while the company's new CFO spoke positively about the opportunity for Wincanton to stop paying as much in deposits to its pension debt as it has done historically. The absence of a further profit warning was probably enough for the stock to recover. The stock rose by 15% in May and has thus fallen by 27% this year.
Bonesupport
The Bonesupport share continued to gain steam during the month of May and was one of the fund's strongest contributors. We have not noted any news that explains the price rise but believe that the share is still being discovered by the market after several strong quarters in the bag.
Rugvista
At the end of May, Rugvista held a capital markets day. The most interesting news revolved around the new website, which as of the capital market day had been launched in 5 out of 20 countries. In 2023, the website will be rolled out in the remaining geographies. The idea is that the new website will, over time, help the company convert more website visitors into paying customers.
The company has a clear focus on profitability during this period as the consumer market is currently hard hit by inflation, higher interest rates and pressured households. However, it maintains its financial goals, which include an organic growth of 20%. Once the market turns, the company will be ready to invest in growth. Extra focus was also placed on the DACH region (Germany, Switzerland, Austria). In that region, Rugvista sells as much as it does in the Nordics, but the market is several times larger.
Despite a tough market, Rugvista has the ability to control its own destiny. There should be very low-hanging fruit when it comes to, for example, the marketing mix (the company's brand advertising has until recently been basically non-existent). We also received more information about how Rugvista works within different parts of the organization, for example in purchasing, marketing, technology, and sustainability. They also provided an insight into how all parts of the organization work together to achieve both externally and internally set goals.
The Rugvista share rose 17% in May and made a good contribution to the month's results. The stock trades around EV/EBIT 11x/9x 2024/2025e on our estimates.
Corem
Real estate stocks have had a turbulent development this year, to say the least, which also includes Corem. After a strong April, the trend was reversed in May when the real estate index fell by around 10% and Corem by as much as 25%. A clear catalyst for the downward acceleration was when SBB was downgraded by S&P on May 8th.
Since Q4 last year, Corem has sold properties for nearly 9 billion, all around book value, and now owns properties for around 70 billion. The fact that assets were sold is interesting as the share trades at a sky-high 75% discount to NAV. What is even more interesting is that at the closing price on the last day of May the cash flow is valued at around 8x and then you have an average interest rate of a relatively high four percent. Of the total loans of approximately 40 billion, 10 billion are bond loans. The bonds maturing in the current year will be bought back or terminated at maturity, which, other things being equal, will reduce the average interest rate. To be able to do the corresponding exercise with all the bonds maturing in 2024, you need to sell properties for an additional 10 billion, something we believe is doable. What has put extra pressure on the share is the fact that the main owner, Rutger Arnhult, has a high level of leverage, although significantly less than six months ago. The parent company has acted resolutely and in a short time has reduced the loans from 18 billion to 8 billion. Their own properties have a loan-to-value of a low 35%.
Corem will continue to sell properties and release capital. We are impressed so far with the speed of the sales and also the fact that they have done it at book value. The level of risk in this investment is high, but so is the potential. The position size is under four percent and with a number of short real estate positions against it, the net position is half of our holding in Corem. Compared to SBB, if anyone is thinking about it, Corem delivers well with cash flow and has a small part of the loan structure in bonds. For SBB, it is exactly the opposite and, moreover, they very likely have challenges in their book values.
Finally, it is also worth studying the development of Corem's bonds. The price development is significantly stronger than the corresponding development for the share and you can clearly see an improvement since December 2022 when they started announcing large divestitures. Those who lent money to the company are obviously far less concerned about the balance sheet than the shareholders are.
Source: BloombergShort positions
Source: Kepler Cheuvreux
US equity funds' cash positions are now starting to decline, likely forced as US managers generally lag their benchmarks. The main underweight is the technology companies.
The image below also illustrates investor skepticism. Never before have there been so many outstanding put options as now. The last time the volumes were at these levels was in 2011, when the stock market fell by 15-20% in a short time due to problems with raising the debt ceiling in the US.
Source: Goldman Sachs
The market has gone from an extremely cautious positioning a few months ago, to one "commonly" cautious now.
Source: Goldman Sachs
It has been and continues to be relatively easy to paint a gloomy scenario for the world's stock exchanges. Earnings growth for the broad US and European indices is expected to be broadly unchanged in 2023, while the economy shows signs of slowing activity. Values in the US are higher than the historical average, while in Europe it is the opposite. The geopolitical risks remain significant.
The problem with the gloomy market view is that it has now been over a year since the conditions changed and we are approaching the time when the central banks are done with their interest rate increases. Arguably, the cuts will fuel any kind of risk when they come. We do not have a strong view on whether the American economy will enter a recession or not, but if it does, we think it will be relatively modest and the same applies to Europe. And if there is a milder recession, large parts of the economy and various geographic areas will not notice it. After a few quarters, when the recession is over, everyone will wonder what really happened. We note that the US economy continues to create around 300,000 jobs each month and as long as this is the case it is hard to see a recession happening. Our way of attacking this is to have a balanced portfolio and focus on our companies' performance and conditions.
Historically, it has often been costly to exit the stock market in similar situations based solely on valuation. The image below shows the return after different time periods and at times when the market was considered too expensive (ninth and tenth deciles).
Source: Goldman Sachs
This year's rise began with good breadth in the market, i.e., most share prices rose. After the banking crisis in March, this changed and investors turned to the big companies, and then mainly American technology companies. Not since 2000 has the rise been so dependent on so few stocks. Our view here is that it is high time for the smaller companies to step up and make their contribution.
Historically speaking and relative to the market, the valuation for the American technology companies is starting to get strained.
The co-variation between the interest rate and the valuation of the technology companies has been completely decoupled in recent months. Some of it will have to give way and after the summer we will know more.
Source: Themarketear.com
The smaller companies started the year strong, but after the banking turmoil in March have lost significantly, both in the US and Europe.
Illustrated in a different way and since 1995, relative returns of European small companies to larger companies. The time has come to increase allocation to smaller companies (our view).
Source: Kepler Cheuvreux
Below is an interesting picture that shows how small companies that are listed in the UK develop significantly worse than large companies in times when inflation rises and vice versa. It is probably because larger companies typically have an easier time dealing with inflation as they are more often price leaders and have a more diversified product portfolio. Inflation is now on the way down.
The fund has significant exposure to the UK in several companies with strong balance sheets and returns linked to a low valuation. Below FTSE 100 (UK) vs. Dow Jones (US) since 2016. A huge difference in returns.
Source: Kepler Cheuvreux
If, on the other hand, you study the development of earnings per share, the development is roughly the same. This should suggest that the stock market in the UK should be at least partially revalued.
Source: Kepler Cheuvreux
The VIX index, the volatility of the stock market, is at record lows while the MOVE index, the volatility of the bond market, is at high levels. The stock market (at least the broad indices) is currently sailing in surprisingly calm waters.
Source: Kepler Cheuvreux
Below valuation levels from the end of May on some of the major global indices. The USA and the UK stand out with the highest and lowest ratings.
If we zoom in on Europe, the relative valuation for the various countries compared to MSCI Europe looks like below. For example, Denmark is valued a whopping 101% higher than MSCI Europe (Novo Nordisk), while Spain is valued 20% lower. Since 1995, Denmark has been valued 21% higher than MSCI Europe, while Spain has been valued 11% lower. Sweden is currently fairly on par with Europe, which also applies historically.
Source: Kepler Cheuvreux
In conclusion, the reporting season is now over, and we are likely entering a quieter period. We still do not have a strong idea of where the market is going, but right now the pain trade is pointing upwards, i.e., investors have too much cash and are being driven away from the market. The companies' ability to handle all challenges has undoubtedly been underestimated, the debt ceiling has been raised and in June we have interest rate announcements from the Fed, ECB, Bank of England and the Riksbank on June 29th. If either of them pauses, which the Fed seems likely to do, it could increase optimism and risk-taking (and vice versa). A seasonal pattern speaks against this, which usually means a weaker return during the summer months.
We put our focus in June on meetings with our companies as well as completing the analysis work with some new potentially interesting ideas.
We wish you a wonderful June with school graduations, student celebrations and not least midsummer!
Mikael & Team
Malmö on June 7th, 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 – May 2023
MAY PERFORMANCE
The fund’s value increased by 1.6% in May (share class I SEK). The Stoxx600 (broad European index) decreased during the same period by 3.2% and HedgeNordic’s NHX Equities decreased provisionally by 1.4%. The corresponding figures for 2023 are an increase of 3.1% for the fund, +6.3% for the Stoxx600 and +0.8% for NHX Equities.
EQUITY MARKETS / MACRO ENVIRONMENT
The reporting season continued in May with continued strong delivery from the companies. The Fed raised interest rates as planned on May 3rd by another 25 basis points to 5.25% after 10 rate hikes in 14 months. The following day, the ECB raised the key interest rate by 25 basis points to 3.75%.
The broad European index fell in May by 3.2%, while the S&P 500 rose by 0.2%. MSCI Europe Small & MidCap fell by 3.2%, while the Nasdaq rose by as much as 5.8%. The fund's strong momentum that began with LVMH's report on April 13th continued during May and the monthly return ended at +1.6%. Since then, the fund has risen by 4.8% while the Stoxx600 over the same period has fallen by 2.3% (local currency). As a point of reference, the Carnegie small company index fell by 4.4% during the same period. Last reporting season, which was in February, was internally viewed as the best since the fund's inception in January 2018, but this one was even better. More on that in the section on long positions.
The buzz word of the month was undoubtedly AI, which affected technology stocks in an extreme and rare way. The Nasdaq has risen by as much as 23.5% this year. That's the strongest start to a year since 1991. Does anyone remember the Nasdaq's decline last year, which ended at 33.1%? Apple, Microsoft, Google, Amazon, Nvidia and Meta have this year added $3 trillion in market capitalization, which is more than the entire US industrial sector and on par with the entire Eurostoxx50. Unimaginable numbers.
Attached is a clip from Nvidia's Q1 presentation: https://twitter.com/gurgavin/status/1661481398228893696 Below is an unparalleled image that shows the development of the major technology companies YTD in relation to other companies in the S&P500. The clairvoyant notices a certain difference in the development.Source: Goldman SachsFor months, the market has had a rising anxiety about the USA's debt ceiling, which needed to be raised so that the country would not default on its payments. The process was surprisingly painless (compared to 2011 which we have in vivid memory) and on June 1st the Senate voted yes and now life goes on.
The development in May for the 500 companies included in the S&P500:Source: Sven Henrich, Twitter
Another way to illustrate recent developments: https://twitter.com/wallstmemes/status/1661478278841126912The development so far this year is not appreciated by the large investor collective as their positioning has been too cautious. Entering the second quarter, US hedge funds collectively had their highest exposure since Q1 2020 to defensive sectors such as pharmaceuticals and consumer staples. The opposite for technology where they had their lowest exposure since Q3 2007. It didn't turn out well, at least not so far.
The European real estate sector was under pressure after a strong development in April and the Swedish real estate sector was at the epicenter. On Friday, June 2nd, Ilija Batljan finally had to leave the CEO post for SBB, and lenders and bond investors are now taking over. Interesting that Akelius CFO, Leiv Synnes, is jumping ship and joining as the new CEO of SBB. Swedish property shares rose that day by around 6% and SBB rose the most with 53%. In three days, 50% of the shares in SBB were traded. The verdict is clear, and the board has, to put it mildly, a lot to explain to its shareholders (and to the whole of Sweden). What a circus! An interesting development follows.
Source: Goldman SachsThe Swedish krona was exceptionally weak in May, and much is due to the turbulence in the real estate sector. The correlation between SEK and the development in SBB is frightening, see picture below. In three weeks, the Swedish krona weakened a full four percent against the euro and has now fallen by 4% this year, 12% in two years and by nearly 30% in five years. It is particularly gloomy and serious for the Swedish economy and Swedish citizens. We note that the common man thinks the krona is extremely undervalued, while those who trade the krona continue to sell. The fact that the Riksbank (Swedish Central Bank) does not step in and start selling its dollar and euro assets and buy kroner is incomprehensible.
Source: Bloomberg, Coeli EuropeanWe note that the Riksbank, deservedly, a few weeks ago received scathing criticism in an appraisal commissioned by the Riksdag’s (Swedish Government) finance committee. The Riksbank acted too slowly to stop the rising inflation and, moreover, the inflation forecasts were inadequate. Well thank you, there were quite a few people who were out in the real world who told them at Brunkebergstorg that it might be time to stop buying housing bonds in a red-hot real estate market when they simultaneously had negative interest rates in the system. The next Riksbank meeting is on the 29th of June, and it would be extremely appropriate to stop the increases and study the after-effects for a while. Precisely because of that, it will probably be the opposite and a continued increase. So far, the interest rate hikes have affected the krone exchange rate, albeit in the wrong direction with further weakening. Perhaps it is because those who trade the krona are more concerned that the real estate problems increase further and break the systems in Sweden instead of, according to the textbook, buying up the krona as you get 0.25 percentage point more in return? But the Riksbank is certainly aware of that.
Further arguments for holding off on more interest rate increases are the image below. It will take a lot to avoid a recession if historical correlation continues to apply. We recently witnessed the third weakest PMI (purchasing data, black line) figure ever measured, which is likely to lead to production cuts in a few months. Incidentally, notifications are now increasing, not least in the construction industry. Continued interest rate hikes increase the likelihood of serious double mistakes from the Riksbank. Those of us who were there in 2008 when the Riksbank raised the policy rate a few days before Lehmann Brothers went under, tremble before their decisions in the coming months.
There was supposed to be a picture of CHF/SEK her, but it's too sad so we skip it.
Inflation continues to fall in many areas, while the resilience of many economies surprised positively. What has surprised the most this year is the companies' ability to handle inflation, which in May dropped to 6.1% against the expected 6.3%. The decline was broad-based with food, energy and core inflation falling. The central banks will probably turn around within a few quarters and start lowering policy rates (our view). Worth mentioning is inflation in Spain. It has been seen as a drag on the eurozone and came in at a low 2.9% in May against an expected 3.3%. Good!
Source: TrueInsights, EurostatSpanish inflation over two years. From +2.5% up to +11% a year ago and now down to +2.9%. Good job and we look forward to similar developments in several areas during the autumn.
Source: Bloomberg
Several prices at the producer level are also now falling, including prices for many raw materials. A good example is the European gas price which exploded upwards in August, and which led to major problems. Since the top in August, the price has fallen by a not insignificant 90% .
Source: Bloomberg
It is darkest before the sun rises. This year's development up until now in various asset classes is in many cases the opposite of last year.
Source: Creative Planning, @CharlieBilello"So tonight I'm gonna party like it's 1989!" It's a party in Japan. After waiting 34 years for a new ATH and having risen by just over 20% this year, the Nikkei index is now near a new ATH. The one who waits for something good... A bit of a shame that it seems to have taken more than a generation.
Source: Bloomberg
At least it's less uncertain now compared to a few years ago.
The world's second largest economy is having a hard time getting out of the starting blocks. After a strong start following Covid restrictions being lifted, the economy has weakened again. Expect the Chinese state apparatus to inject something strong into the system soon.
Source: Kepler Cheuvreux
JP Morgan warns investors that the bank currently has enough capital to be able to absorb the equivalent of all US bank losses during the financial crisis. We take our hats off to Jamie Dimon, who has been the bank's CEO since 2005.
Source: Twitter, Marc Rubinstein
Senator Kennedy was liberatingly clear at the hearing of Silicon Valley Bank CEO, Greg Becker. Will we see something similar regarding SBB's board? Probably not is likely the answer.
https://twitter.com/unusual_whales/status/1658709178859540480
Long positionsSurgical science
Since January this year, we are once again owners of Surgical Science. We have long liked the company, which deals with surgical simulation, but have sometimes struggled with the high valuation of the stock. At levels around SEK 150–160 per share, we again thought that the valuation had come down to a good level given the quality of the company. There's a lot to like here:
• A monopoly-like position in a fast-growing market, where Surgical Science's product is implemented by most of the companies dealing with robot-assisted surgery.
• The simulation market is still relatively small in a larger context, which should reduce the appetite for competition and, as such, is a barrier to entry.
• Leading technology. Around 20% of the company's sales are reinvested in research and development. This provides good conditions for maintaining the current lead.
• Expanded gross margins and strong operational leverage, with very high return on capital employed.
• An extremely talented management team.
In May, Surgical Science released one of the better reports we've seen this reporting period. Organic growth was 38% (30% adjusted for certain one-off effects related to the order book). In addition, the sales mix was good, as the highly profitable license revenues almost doubled to make up about 31% of sales (22% in the corresponding quarter of 2022). This helped to strengthen the operating margin significantly. Of the sales increase of around SEK 70 million, around half was converted into operating profit, which beat advance expectations by around 55%. Cash flow, which was at times questioned by the market last year, was very strong. Surgical Science has a strong balance sheet with a net cash of almost half a billion kroner.
During the month of May, the Surgical Science share rose by 22% and made a strong contribution to the fund's development, even though our initial position was relatively small. To buy the share at today's prices of around SEK 230 per share, you need to believe in the company's long-term goal; To reach a turnover of around SEK 1.5 billion in 2026 and this at an operating margin of 40%. After the company's two most recent reports, we feel ever so convinced that the company will succeed in this.
Storskogen
During the past 12 months, few stocks have been as hotly debated as Storskogen. And it has mostly been in negative terms; Rightfully so, we think. After several years of an extremely high acquisition rate, Storskogen had problems with cash flow generation last year, which in combination with a strained balance sheet, declining economy and a general skepticism towards the company's strategy caused the share to fall by 88% in 2022. We ourselves have been doubtful about Storskogen and understood the price drop.
During the autumn, we noted a change in tone from the company's management, which reduced the pace of acquisitions and placed a greater focus on cash flow conversion and cleaning up the balance sheet. After following up this new communication with a fourth quarter for 2022 that clearly showed improvements on these points, the first quarter numbers of 2023 were released in May. The report, which beat expectations for operating profit by around 15-20%, continued to show that cash flow had improved.
We bought a small observing position in Storskogen in March and despite the small position, the fund received a good contribution from the stock, which rose by 27% in May. This is still a high-risk stock and we retain a small position in the company. If management can follow up on the two most recent reports with continued good cash flow generation, we believe that the upside is large despite this year's price rise.
4Imprint
London-listed 4imprint has been one of the fund's top holdings over the past 12 months. In one year, the share price has risen by almost 80%, including a large one-time dividend. Technically, it's only the share price that has anything to do with the UK as basically all the business is based in the US. 4imprint is a distributor of promotional gifts (give aways), typically products used for marketing purposes, for example at conferences and events.
In May, the company released a brief update for growth in 2023, where order intake rose by 22% during the January-April period. Despite the good growth, the share initially fell by 8%, because the company forecasted for somewhat weaker growth in the coming months (mostly due to complex comparative figures). The stock subsequently recovered and closed the month 2% higher than during the beginning. We believe this is partly due to the stock being included in an important index, and we have taken advantage of the situation by selling off parts of our position.
Wincanton
The British logistics company has been one of the year's worst performing stocks after management was forced to issue a profit warning in March. At that time, the fund bought shares at low levels. In May, Wincanton released a report that confirmed the outlook given at the time of the profit warning, while the company's new CFO spoke positively about the opportunity for Wincanton to stop paying as much in deposits to its pension debt as it has done historically. The absence of a further profit warning was probably enough for the stock to recover. The stock rose by 15% in May and has thus fallen by 27% this year.
Bonesupport
The Bonesupport share continued to gain steam during the month of May and was one of the fund's strongest contributors. We have not noted any news that explains the price rise but believe that the share is still being discovered by the market after several strong quarters in the bag.
Rugvista
At the end of May, Rugvista held a capital markets day. The most interesting news revolved around the new website, which as of the capital market day had been launched in 5 out of 20 countries. In 2023, the website will be rolled out in the remaining geographies. The idea is that the new website will, over time, help the company convert more website visitors into paying customers.
The company has a clear focus on profitability during this period as the consumer market is currently hard hit by inflation, higher interest rates and pressured households. However, it maintains its financial goals, which include an organic growth of 20%. Once the market turns, the company will be ready to invest in growth. Extra focus was also placed on the DACH region (Germany, Switzerland, Austria). In that region, Rugvista sells as much as it does in the Nordics, but the market is several times larger.
Despite a tough market, Rugvista has the ability to control its own destiny. There should be very low-hanging fruit when it comes to, for example, the marketing mix (the company's brand advertising has until recently been basically non-existent). We also received more information about how Rugvista works within different parts of the organization, for example in purchasing, marketing, technology, and sustainability. They also provided an insight into how all parts of the organization work together to achieve both externally and internally set goals.
The Rugvista share rose 17% in May and made a good contribution to the month's results. The stock trades around EV/EBIT 11x/9x 2024/2025e on our estimates.
Corem
Real estate stocks have had a turbulent development this year, to say the least, which also includes Corem. After a strong April, the trend was reversed in May when the real estate index fell by around 10% and Corem by as much as 25%. A clear catalyst for the downward acceleration was when SBB was downgraded by S&P on May 8th.
Since Q4 last year, Corem has sold properties for nearly 9 billion, all around book value, and now owns properties for around 70 billion. The fact that assets were sold is interesting as the share trades at a sky-high 75% discount to NAV. What is even more interesting is that at the closing price on the last day of May the cash flow is valued at around 8x and then you have an average interest rate of a relatively high four percent. Of the total loans of approximately 40 billion, 10 billion are bond loans. The bonds maturing in the current year will be bought back or terminated at maturity, which, other things being equal, will reduce the average interest rate. To be able to do the corresponding exercise with all the bonds maturing in 2024, you need to sell properties for an additional 10 billion, something we believe is doable. What has put extra pressure on the share is the fact that the main owner, Rutger Arnhult, has a high level of leverage, although significantly less than six months ago. The parent company has acted resolutely and in a short time has reduced the loans from 18 billion to 8 billion. Their own properties have a loan-to-value of a low 35%.
Corem will continue to sell properties and release capital. We are impressed so far with the speed of the sales and also the fact that they have done it at book value. The level of risk in this investment is high, but so is the potential. The position size is under four percent and with a number of short real estate positions against it, the net position is half of our holding in Corem. Compared to SBB, if anyone is thinking about it, Corem delivers well with cash flow and has a small part of the loan structure in bonds. For SBB, it is exactly the opposite and, moreover, they very likely have challenges in their book values.
Finally, it is also worth studying the development of Corem's bonds. The price development is significantly stronger than the corresponding development for the share and you can clearly see an improvement since December 2022 when they started announcing large divestitures. Those who lent money to the company are obviously far less concerned about the balance sheet than the shareholders are.
Source: BloombergShort positionsThe short portfolio contributed to a positive result during the month. The biggest contribution was made by our short positions in Swedish and European small company indices. Among the stock-specific positions, several property shares contributed positively to the month's results.
ExposureThe net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 77% and 73% respectively.
Summary Investors have been waiting for over a year for a recession that has yet to materialize. The chart below shows expectations for a recession since 1960, and the yellow line on the far right means investors see about a 70% chance of a recession within four quarters. The problem with that view so far, has been that it's been over a year since the market swung to this view. This has led to the large collective being far too cautiously positioned, which in turn has led to a worse return than the broad indices.Source: Kepler Cheuvreux
US equity funds' cash positions are now starting to decline, likely forced as US managers generally lag their benchmarks. The main underweight is the technology companies.
The image below also illustrates investor skepticism. Never before have there been so many outstanding put options as now. The last time the volumes were at these levels was in 2011, when the stock market fell by 15-20% in a short time due to problems with raising the debt ceiling in the US.
Source: Goldman Sachs
The market has gone from an extremely cautious positioning a few months ago, to one "commonly" cautious now.
Source: Goldman Sachs
It has been and continues to be relatively easy to paint a gloomy scenario for the world's stock exchanges. Earnings growth for the broad US and European indices is expected to be broadly unchanged in 2023, while the economy shows signs of slowing activity. Values in the US are higher than the historical average, while in Europe it is the opposite. The geopolitical risks remain significant.
The problem with the gloomy market view is that it has now been over a year since the conditions changed and we are approaching the time when the central banks are done with their interest rate increases. Arguably, the cuts will fuel any kind of risk when they come. We do not have a strong view on whether the American economy will enter a recession or not, but if it does, we think it will be relatively modest and the same applies to Europe. And if there is a milder recession, large parts of the economy and various geographic areas will not notice it. After a few quarters, when the recession is over, everyone will wonder what really happened. We note that the US economy continues to create around 300,000 jobs each month and as long as this is the case it is hard to see a recession happening. Our way of attacking this is to have a balanced portfolio and focus on our companies' performance and conditions.
Historically, it has often been costly to exit the stock market in similar situations based solely on valuation. The image below shows the return after different time periods and at times when the market was considered too expensive (ninth and tenth deciles).
Source: Goldman Sachs
This year's rise began with good breadth in the market, i.e., most share prices rose. After the banking crisis in March, this changed and investors turned to the big companies, and then mainly American technology companies. Not since 2000 has the rise been so dependent on so few stocks. Our view here is that it is high time for the smaller companies to step up and make their contribution.
Historically speaking and relative to the market, the valuation for the American technology companies is starting to get strained.
The co-variation between the interest rate and the valuation of the technology companies has been completely decoupled in recent months. Some of it will have to give way and after the summer we will know more.
Source: Themarketear.com
The smaller companies started the year strong, but after the banking turmoil in March have lost significantly, both in the US and Europe.
Illustrated in a different way and since 1995, relative returns of European small companies to larger companies. The time has come to increase allocation to smaller companies (our view).
Source: Kepler Cheuvreux
Below is an interesting picture that shows how small companies that are listed in the UK develop significantly worse than large companies in times when inflation rises and vice versa. It is probably because larger companies typically have an easier time dealing with inflation as they are more often price leaders and have a more diversified product portfolio. Inflation is now on the way down.
The fund has significant exposure to the UK in several companies with strong balance sheets and returns linked to a low valuation. Below FTSE 100 (UK) vs. Dow Jones (US) since 2016. A huge difference in returns.
Source: Kepler Cheuvreux
If, on the other hand, you study the development of earnings per share, the development is roughly the same. This should suggest that the stock market in the UK should be at least partially revalued.
Source: Kepler Cheuvreux
The VIX index, the volatility of the stock market, is at record lows while the MOVE index, the volatility of the bond market, is at high levels. The stock market (at least the broad indices) is currently sailing in surprisingly calm waters.
Source: Kepler Cheuvreux
Below valuation levels from the end of May on some of the major global indices. The USA and the UK stand out with the highest and lowest ratings.
If we zoom in on Europe, the relative valuation for the various countries compared to MSCI Europe looks like below. For example, Denmark is valued a whopping 101% higher than MSCI Europe (Novo Nordisk), while Spain is valued 20% lower. Since 1995, Denmark has been valued 21% higher than MSCI Europe, while Spain has been valued 11% lower. Sweden is currently fairly on par with Europe, which also applies historically.
Source: Kepler Cheuvreux
In conclusion, the reporting season is now over, and we are likely entering a quieter period. We still do not have a strong idea of where the market is going, but right now the pain trade is pointing upwards, i.e., investors have too much cash and are being driven away from the market. The companies' ability to handle all challenges has undoubtedly been underestimated, the debt ceiling has been raised and in June we have interest rate announcements from the Fed, ECB, Bank of England and the Riksbank on June 29th. If either of them pauses, which the Fed seems likely to do, it could increase optimism and risk-taking (and vice versa). A seasonal pattern speaks against this, which usually means a weaker return during the summer months.
We put our focus in June on meetings with our companies as well as completing the analysis work with some new potentially interesting ideas.
We wish you a wonderful June with school graduations, student celebrations and not least midsummer!
Mikael & Team
Malmö on June 7th, 2023
[/et_pb_text][et_pb_post_title _builder_version="3.0.89" title="on" meta="off" author="off" date="off" categories="off" comments="off" featured_image="off" featured_placement="below" text_color="dark" text_background="off" border_style="solid" module_class="gen-single-news-heading-module gen-trustee-single-headline" date_format="d M, Y" border_style_all="solid" disabled_on="on|on|on" disabled="on" /][et_pb_text admin_label="Coeli Nordic Corporate Bond Fund R-SEK" _builder_version="3.0.89" background_layout="light" module_class="gen-table-module" disabled_on="on|on|on" disabled="on"]
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% |