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Nekkar ASA – Time to unveild value

This company is not what you would expect to find in my portfolio, nevertheless I bought a small holding in the company following a write-up by Focused Compunding and Vetle Forsland. I bought into the company at 3.05 NOK per share, subsequent to the company distributing a dividend of 4 NOK per share.

A little summary of what has happened in Nekkar (formerly know as TTS Group) in the past months. Currently the company is undergoing a major transformation as they have sold the majority of their former business to Cargotech, returned 4 NOK per share to equity holders (~55% of enterprise value), acquired Intellilift, changed name from TTS Group to Nekkar, and are now building a more diversified company from the ground.

The company is a micro cap with a total capitalisation of approximately 300 million NOK (~ 30 MUSD) and there is, in my opinion, a lot of uncertainty in their future business areas. Usually I buy solid companies with increasing dividends and a strong track-record, but this company does not tick the boxes in my dividend growth investment strategy. So, why did I buy into this company? In short, the company holds ~3 NOK per share in cash and the stock trades at 3 NOK. Basically, you get Syncrolift for free and access to their other business areas, even though I would argue that only focusing on the highly profitable company, Syncrolift, would be the best way going forward.

I’ll shortly go through the company’s business areas before looking at the financials.

Three business areas

Syncrolift – supplier of ship-handling solutions for shipyards. This is the gem in their portfolio, with stabile margins, 75% market share worldwide, upfront payments by customers totalling 2NOK per share and a all time high order backlog. The company operates in a highly cyclical industry, but the order backlog will ensure that the company is operational and recording revenues until end of 2022.

New Business Areas:

The new business areas will probably be given the most attention from the management in the upcoming years. Some segments will be financed by the profit and float from Syncrolift, but if Nekkar decides to aggressively pursue opportunities in these segments I do believe that the company will have to raise capital, and then most probable through the equity markets.

Aquaculture – this segment may be a drain on the company’s cash flow going forward, since they will be developing solutions for closed cage salmon farming. Their concept is developed in close cooperation with one of the industry’s largest, most successful and reputable companies but they have not yet disclosed the name of their partner.

Currently, this segment does not have any earnings to report and the info on their site is full of popular buzzwords such as “sustainable solutions”, “circular economy” and “digitalization”.

Digital: Intellilift – a 51% share was acquired in Q2 2019. Intellilift is a software company which develops control systems, data software and visualization tools for remote operations in the offshore energy business. The company is cash break-even on a running basis, but it is not showing positive earnings. Examples of present customers are top-tier end customers like AkerBP (drilling operations) and Ørsted (offshore wind).

Offshore Energy & Renewables – from their company presentation at the Pareto Conference on they have listed this as a new business area. Due to the net cash position, I believe the next acquisition by Nekkar will be in this segment. 100 million NOK is at the parent company level, which doesn’t present a opportunity to make a major purchase.

Financials:

I will only focus on the continued business, as the discontinued business is no longer relevant for the company. To review the Q2 – report there will be a lot of factors that disturbs the comparisons with previous periods (changes to IFRS 15 / 16, acquisitions and discontinued business). To explain all changes would be very messy, hence only focusing on status quo and Nekkar going forward will give you enough information to make an investment decision.

The profitable part of Nekkar has a solid platform with good margins and the possibility to grow in the aftersales market (services and upgrades). We see that the other segments does not contribute to an increasing EPS for the company at the moment and I’m hoping that the company will limit its acquisitions going forward, focus on Syncrolift and distribute remaining cash to shareholders. Though, I do not expect this to happen – especially not in the short run.

Source: Interim report Q2 – Nekkar ASA
Source: Interim report Q2 – Nekkar ASA

I finish this write-up with an exctract from the write-up by Focused Compounding “The company (Syncrolift) has a backlog that should keep them busy for the next 3-4 years. Some of that backlog is paid for in cash up front. So, here we had a company trading for less than net cash (though some of the cash was unearned revenue – also known as “float” – provided by customers) with no further needs for capital. Since Syncrolift is paid partially up front and has very little need for PP&E and things like that it would normally have negative invested capital in the business. This means that if Syncrolift were to grow revenue, earnings, free cash flow, etc. by about 6% a year – which is about what it probably has done over the last 25 years – it would be able to pay shareholders a dividend of literally everything it reported in earnings and that dividend would also increase at 6% a year. That’s the beauty of a business with no need for additional capital as it grows. As a shareholder, you get to have your cake and eat it too. Cake here being “free cash flow”

Boule Diagnostics – Adding a MedTech-company to the portfolio

Initiated a position in Boule Diagnostics at 49.50 SEK on 1 October 2019. In this post you’ll find a short intro to the company and the reason why I added a MedTech company to my portfolio.

About the company: Boule Diagnostics AB is a global diagnostics company that develops, manufactures and markets instruments and consumable products for blood diagnostics. The company serves hospitals, clinics, laboratories and companies within blood diagnostics, in both human and veterinary haematology. Haematology (first difficult word) is the study of the physiology of the blood.

Boule operates mainly in the decentralised haematology segment, which consists of smaller hospitals, clinics, laboratories and healthcare centres.

Megatrend: Growing total world population, increased age of world population (geriatric, second difficult word), increased digital analysis of blood tests (accuracy and speed of analysis) and humanisation of pets are all megatrends in which the company will benefit from.

The video below is from a company presentation in September, and gives a lot of information about the company, future prospects and their products.

Dividend: Currenctly trading at a low yield, 1.2 % as per 1 October, but the past dividend growth and expected future dividend growth is great. I did not invest in the company solely based on the dividend prospects, as I believe most of the expected total annual returns will come from earnings growth (expect 7% CAGR going forward) and a multiple expansion due to the depressed share price the past year.

Source: Borsdata.se

Share price: The share price has plummeted due to the american FDA putting their production under scrutiny back in 2018. There has not been any news recently regarding this issue, but there is expected that a clarification will come in Q4 2019. Nevertheless, the share price seems to have bottomed out.

Source: TradingView

Eolus Vind – Nordic Wind Power developer

I bought my first shares on 25 January 2019 at 56.50 SEK per share. In this post you’ll find my investment thesis and the reason why I sold 25 % of my holdings in the company on 25 September 2019.

Updated 16 October 2019: Sold an additional 25 % of my original holdings in Eolus Vind at 122.6 SEK per share. My holdings in the company is now 50% of my initial position, and is now the third smallest holding in my portfolio.

Updated 17 January 2020: Sold remaining position in Eolus Vind AB at 113 SEK per share. Holding period 1 year and it became a double-bagger in my portfolio. I sold my position to make room for a new company in my portfolio, upside potential in Eolus is now limited with few projects in pipeline (primarily Wind Wall project and Øyfjellet), cost over-runs on latest projects delivered, increased scrutiny for wind parks in the Nordic regions and last but not least, my opinion is that the company announced a dividend that is not in line with the capital needs of the company. Their big net cash position should be distributed to shareholders of the company as there are no need to witheld this amount of cash (few projects in pipeline and Øyfjellet is sold to Aquila Capital).

Nevertheless, I will keep an eye on the company going forward and may initiate a new position at more desirable prices.

Introduction: Eolus Vind is Sweden’s first commercial wind power developer. Since inception in 1990, the company has become a leading Nordic wind power developer and has installed and delivered more than 540 wind turbines. The core business is to construct wind power facilities in favorable wind locations and transfer them to customers. The company operates in the Nordics, Baltics and the US and the company is listed on Nasdaq Stockholm Small Cap.

Investment thesis: Demand for electricity and wind power is expected to increase over the next decades at a 7 % CAGR. The shift to renewable energy will require investments in wind power parks, as there is little room for more hydro power and solar power is less competitive in the Nordic region due to the climate. For more details see analysis by Introduce.


Why did I choose to sell 25% of my holdings?

When I decide to part with an investment it is mostly because the investment thesis did not play out as I thought, the investment case changed or the company announced a dividend cut. In this case, I actually violate my own rules, but I’ll try to justify my reasoning below.

First, I only sold a quarter of my holdings, hence I still have a great exposure to the company. The shares I sold has been held for 9 months and gave me a return of ~83% (including dividends), which is greatly above what I expected in January.

  • Secondly, I see limited triggers in the company the next couple of years since there are less projects under development.
  • Increased controversy surrounding wind power, especially in Norway, might increase the project risk at Öyfjellet and other ongoing and future project.
  • I bought the shares at 56.50 SEK, with an implied yield of 2.7% (1.5 SEK per year). With a share price of 102 SEK the yield is around 1.5%. I do expect though that the company will announce an extraordinary dividend due to their strong cash position (expectations in the market of 10 SEK per share), but this is a one-time occurence.
  • The company became my largest holding and I wanted to reduce my exposure to a small cap company.
  • My exposure to the green economy is too high at the moment (e.g. Brookfield Renewable Partners, TransAlta Renewables, Scatec Solar to name a few).

Will I sell future holdings in the company? It depends on the performance going forward, but I’m definitely in it for the long run.

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Dividend Income Update – September 2019

9 out of 12 months are over and it’s time to sum up the dividends for September. Last year the dividens for September ended on 312 NOK, while this year I recorded dividends of in total 1 340 NOK.

I received the monthly dividend from TransAlta Renewables, quarterly dividend from Mowi and semi-annual dividends from Castellum and Wärtsilä.

The current dividend yield for my portfolio is 4.1%.

I purchased Equinor last month, and subsequent to my buy the company announced a program for repurchase of own shares, which is another way to distribute cash to its shareholders. Read the journal entry here!

I added some shares in Castellum AB after the real estate sector was downgraded by Pareto Securities. The company has increased their dividends the past 22 years, and I expect them to announce a dividend increase for 2019 as well, since their property management income is up 9% as per end of Q2. Read more here

I bought my first shares in Securitas at 147 SEK on the 10 September 2019. The share price reacted very negative on Q2 2019 – figures. I believe the company is well managed, has a stabile growth outlook due to increased urbanisation, promising acquisitions and necessary investments in security technology. Read more here.

On the 11 September I almost doubled my post in TransAlta Renewables, which is a monthly dividend payer.

Finally, I decided to sell 25 % of my holdings in Eolus Vind, find out why I violated my own rules for when to sell a stock.

Every month I will post an update on my monthly dividends. Here you can find last the update for August. Subscribe below to receive a notification when a new post is out.

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Do you know of all the hidden transaction costs?

Transaction costs are a frequent discussion point among retail investors and I will in this post explain some of the hidden transactions costs that most retail investors forget and why, as a dividend investor, it is important to keep costs at a minimum.

The ordinary brokerage fee is easy to calculate and is often a minimum fee or a percentage of the transaction.

Do you have an overview of the price of the products in your shopping cart?

One of the costs that are easy to forget is the cost arising from the “Bid/Ask – spread”. For the most liquid stocks, the bid/ask-spread can be extremely small, but for the more illiquid stocks the cost will have a greater impact on your return. Let’s say you consider purchasing Equinor ASA, which is a quite liquid stock. The shares last recorded price is NOK 150. The current ASK-price in the market is NOK 151, while the current BID-price is NOK 149. To purchase the stock you have to pay NOK 151 and you will incur a transaction cost immediately of NOK 1, or ~0.6 %. If you decide to sell your shares in the future you’ll once more pay this bid/ask-cost. The power of dividend investing stems from reinvesting your dividends. The effect of interest compounding goes down due to this liquidity cost and is also one of the cons of dividend investing.

Have you ever made an currency exchange at an airport? If you have, you know the bank screws you over big time. Brokers also knows how to milk their customers when it comes to currency exchanges. When purchasing stocks in foreign currencies they charge you a currency mark-up. This foreign exchange transaction cost will often be as large or larger than the ordinary brokerage fee! For stocks that doesn’t distribute dividends to their shareholders this will mostly be a one-time transaction fee, but for dividend investors this fee will be “charged” every time you receive a dividend. The mark-up ranges from 0.075% to 0.25% per transaction. Every time you receive a dividend, your broker can record an income in their books.

So, even though the most quoted transaction costs is the ordinary brokerage fee, this is not the cost that you should pay to much attention to. It is the liquidity cost (bid/ask spread) and the currency mark-up by your broker that robs you in the long run!

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TransAlta Renewables – monthly dividend income machine

I increased my holdings in this monthly dividend paying company on 11 September 2019. TransAlta Renewables is a renewable energy infrastructure company headquartered in Calgary, Alberta and is traded in Canadian Dollars. TransAlta renewables is the renewable energy subsidiary of TransAlta Corporation. The parent company owns roughly 61% of TransAlta renewable’s stock.

Majority of the company’s revenues comes from power generation from wind turbines (46%) and natural gas (47%). It has access to growth capital through the capital markets as well as their parent company; TransAlta Corporation. Find enclosed an investor presentation from May 2019.

Dividend: As mentioned the company pays out a monthly dividend and the current yield is ~7 %. I don’t believe the dividend will increase in the coming periods, but due to the contract length of their assets I believe that the current dividend is sustainable and attractive at these levels. The monthly dividends, stable income and low volatility gives the stock characteristics of a fixed income security, which is a great component for any portfolio.

Historically, the dividend has a 5 % annual CAGR, but the dividend did not increase from 2017 to 2019 suggesting that the future increases will be as great as in the past.

Securitas – stabile growth outlook

I bought my first shares in Securitas at 147 SEK on the 10 September 2019. The share price reacted very negative on Q2 2019 – figures. I believe the company is well managed, has a stabile growth outlook due to increased urbanisation, promising acquisitions and necessary investments in security technology.

The company was established back in 1934 as Hälsingborgs Nattvakt and has since then grown to become a world leader in security services. Investment AB Latour entered as owners of the company in 1985 and under their ownership the company developed into a multinational corporation. The market for Securitas’ services benefits from the megatrend of urbanisation which support the companies growth outlook. Securitas is investing heavily in security technology and are making acquisitions in order to meet the rapid pace of transition to security solutions that combine on-site and mobile guarding with various forms of electronic security.

Megatrend: Urbanisation. Rapid urbanisation will most likely have the greatest impact on how and where humans live. People leave the countryside and migrate to cities. Combining urbanisation with increasing demand for improved standard of living for emerging economies and an increase in the world’s population results in megacities and the need to rethink how cities are built. Securitas will benefit from this megatrend since there are higher crime rates in cities than in rural areas.

Dividend: The company has increased its dividend the past four years and their dividend policy is to distribute 50-60 % of annual net income to its shareholders. Historically, the company has paid a steady dividend and has also distributed shares in Loomis and Assa Abloy.

  • Current dividend yield: 3.0 %
  • Dividend payout ratio: ~50
  • Return on equity: ~17 %
  • Equity ratio: ~29%
  • Net debt / EBITDA: 3.0
Securitas security Las Vegas

Top 5 Nordic healthcare – companies

Healthcare is a broad description for many industries, and for retail investors it is sometimes hard to understand what a healthcare company is actually selling, producing or developing. Companies in this sector are also in various business cycle stages. From mature companies with stable income and broad products or services to companies with no income and a single product under development. But overall; healthcare is considered a defensiv sector, and this is what’s making the sector attractive for many investors.

I will in this article present 5 Nordic Healthcare companies worth taking a closer look at! A common feature for these five companies is that they are all highly profitable companies, and all will benefit from structural growth and megatrends in years to come. Declining global fertility rates, rapidly aging world population and increased spending on technology in the healthcare sector are structural changes that affects us very slowly but will change our society the most in the coming decades.

Source: visualcapitalist.com

But first, how did I select the five companies?

I started out screening Nordic companies within the healthcare sector on various financial ratios such as dividend growth, payout ratio, net debt / EBITDA and EV / EBITDA. By doing so I eliminated every non-profitable healthcare – company and found the companies that are worth spending anymore time on. Below is a table of the financial ratios extracted from borsdata.se and Yahoo Finance.

Company Dividend growth 5yDividend payout ratioNet debt / EBITDAEV / EBITDA
Boule Diagnostics 29.7 %50 %3.523.0
Vitrolife 23.2 %27 %(0.9)35.5
Biotage14.9 %56 %0.828.4
Novo Nordisk 10.3 %52 %(0.2)15.3
Medistim 10.0 %56 %(0.2)28.1

#1. Boule Diagnostics

(disclaimer: I hold a position in the company)

About the company: Boule Diagnostics AB, founded in 1956, is a global diagnostics company that develops, manufactures and markets instruments and consumable products for blood diagnostics. The company serves hospitals, clinics, laboratories and companies within blood diagnostics, in both human and veterinary haematology. 

Boule operates mainly in the decentralised haematology segment, which consists of smaller hospitals, clinics, laboratories and healthcare centres. The company sells its products directly in Sweden and the United States, as well as through distributors internationally.

Bilderesultat for boule diagnostics

Link to my past write-up on the company can be found here: Boule – adding a MedTech-company to my portfolio.

#2. Vitrolife

About the company: Vitrolife, founded in 1981, is an international medtech group that develops, produces and markets fertility treatment products as well as cell therapy and tissue engineering, organ transplantation systems, and products based on hyaluronic acid. It operates in Europe, the Middle East, and Africa; Asia; Japan and Pacific; and North and South America.

The company benefits from a societal trend of postponing childbearing, both in Western countries as well as Emerging countries. Global market growth in the IVF area, measured in monetary terms, is estimated to 5-10% per annum. Growth is driven by the growing middle class, the fact that parents-to-be choose to try to have children later in life, greater social acceptance of IVF and increased use of technology in IVF treatments.

Bilderesultat for vitrolife product

Link to my past write-up on the company can be found here: Vitrolife – profitable growth, but skyhigh valuation

# 3. Novo Nordisk

Relatert bilde

Novo Nordisk, founded in 1925, is a Danish healthcare company with a global presence within diabetes care, haemophilia, growth disorders and obesity. It is the largest listed company in the Nordic equity markets, in terms of market capitalisation.

The company will benefit from an ageing population, since nearly all type 2 diabetes patients are diagnosed after the age of 45 and many after 65, as well as lifestyle changes that translate into higher rates of the conditions of overweight, obesity, pre-diabetes and diabetes (type 2).

Bilderesultat for novo nordisk

The company operates in two segments, Diabetes Care and Obesity, and Biopharmaceuticals. The Diabetes Care and Obesity segment provides products in the areas of insulins, GLP-1 and related delivery systems, oral anti-diabetic products, obesity, and other chronic diseases. The Biopharmaceuticals segment offers products in the areas of haemophilia, growth disorders, and hormone replacement therapy.

#4. Biotage

Bilderesultat for biotage

About the company: Biotage is a global Life Science company that develops instruments and consumables solutions for analytical, organic and peptide chemistry. It sells its products to government authorities, academic institutions, contract research and contract manufacturing companies, pharmaceutical and food companies. They have developed a lot of products and software for their three segments; Organic chemistry, analytical chemistry and industrial products.

The company has recently acquired PhyNexus, which will add competence and a product portfolio of equipment within the high growth niche; biomolecules (pharmaceutical industry).

Bilderesultat for biotage

Biotage Organic Chemistry products are used in research to effectively produce and purify the base substances of new pharmaceuticals. Biotage Analytical Chemistry products are used by organizations such as hospitals and commercial research labs to purify, for example, blood, soil or foodstuff samples before they are sent for final analysis. Biotage Industrial Products are used to purify or separate substances on an industrial scale, for example, in the pharmaceutical and food manufacturing industries. They are used in manufacturing processes as well as process development. An example of this is the purification of citric acid from pesticide residues. (Source: annual report 2018)

#5. Medistim:

Bilderesultat for medistim

About the company: Medistim ASA is the only Norwegian company on this list. The company develops, produces, services, leases, and distributes medical devices for cardio-vascular surgery in the United States, Europe, Asia, and internationally. It operates through three segments: Lease of Equipment, Capital and Consumable Sales, and Distribution and Sales of Third Party Products.

The company will benefit from an ageing population, since most cardiac surgeries are performed on the elderly population, but they will also benefit from lifestyle changes that translate into higher rates of the conditions of overweight and obesity.

Bilderesultat for medistim

The company offers MiraQ Cardiac, a system that combines ultrasound imaging and transit time flow measurement (TTFM) in a single system for cardiac surgery; MiraQ Vascular, a system that combines ultrasound imaging and transit TTFM in a single system for vascular surgery; imaging probes for intraoperative use; VeriQ C, a system that combines ultrasound imaging and TTFM in a single system for cardiovascular procedures; and VeriQ that offers TTFM and doppler velocity measurements for intraoperative blood flow and graft patency verification. The company also provides various flow probes, such as QuickFit TTFM probes to accurately measure blood volume flow intraoperatively in various range of surgical applications; Vascular TTFM probes for enhancing surgical outcomes; and doppler probes that are used on the surface of the heart/vessel to search for intramural coronary arteries or to locate the position and quantify the degree of a stenosis.

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Vitrolife – profitable growth, but skyhigh valuation

In this post I will share my initial thoughts on Vitrolife and my investment thesis. I’m currently on the sideline due to the high valuation.

Vitrolife is an international medtech group that develops, produces and markets fertility treatment products as well as cell therapy and tissue engineering, organ transplantation systems, and products based on hyaluronic acid.

Vitrolife is listed on Nasdaq Stockholm Large Cap and the current market cap is around 18 billion SEK.

Megatrend: The company benefits from a societal trend of postponing childbearing, both in Western countries as well as Emerging countries.

Global market growth in the IVF area, measured in monetary terms, is estimated to 5-10% per annum. Growth is driven by the growing middle class, the fact that parents-to-be choose to try to have children later in life, greater social acceptance of IVF and increased use of technology in IVF treatments.

Dividend history:

Vitrolife has increased their dividends at a high rate the past couple of years, but the share price has also increased from very low levels which results in a dividend yield of only 0.5 %. On the other hand, I expect the dividend growth over the coming years to offset the low dividend yield today. I expect the dividend for the fiscal year 2019 to be 1 SEK (30% of EPS 3.3 SEK) resulting in a dividend yield of 0.63 % (increase of 17.6%). Key measures support the room for increasing dividends, but also allows the company to grow through organic growth and acquisitions.

  • Payout ratio: ~30%
  • Equity ratio: ~80 %
  • Negative Net debt / EBITDA

Valuation: Trades at EV / EBITDA of 36.4 and PE of 52 which is skyhigh, but the average return on equity the past five years is ~20%! But, given an reinvestment rate by the company of 70% and a return on equity of 20 % I believe that the company can defend this valuation.

TA: The stock is a sales candidate (downwards trend). 10 and 50 days MA has crossed 200 days MA and 100 days will soon also cross 200 MA. The stock has support around 160 SEK and 145 SEK. A break through 160 signals further decline.

https://www.tradingview.com/x/8jM7TDID

A final remark is the possibility that William Demant A/S has increased their shareholdings in the company and now owns 22.6% of the company and rumour has it they are willing to make a bid on the entire company.

Castellum – sector downgrade, buy opportunity?

The real estate sector was downgraded by Pareto Securities today which resulted in a selloff in real estate companies.

I decided to increase my holdings in Castellum today at SEK 206.4 per share. The company has increased its dividends every year since its IPO in 1997 and will most likely keep on increasing its dividends, though not at the same pace as previous years. In their Q2 2019 report they reported an increase in property management income of 9 % and they have historically increased their dividends at the same pace as their increase in property management income.

Latest reported Net Asset Value was 184 SEK and current share price is ~205 SEK resulting in a premium of around 11.5%

The current dividend yield is 2.9% and next ex dividend date is 20 September 2019 (3.05 SEK per share).