Switched Castellum with Sagax

Switch from lower risk Castellum AB to more opportunistic AB Sagax

Castellum AB may be a safer real estate play, but AB Sagax has far superior returns on equity, higher yield spread and a tilt towards warehouses which I find more interesting going forward with increasing E-commerce and possible less demand for office rental.

Today I sold all holdings in Castellum (177.6 SEK per share) and initiated a position in Sagax (109,2 SEK per share).

Sagax

AB Sagax is a property company whose business concept is to invest in commercial properties, primarily in the warehouse and light industry segment. Sagax has exposure to industrial/mixed-use properties in Sweden, Finland, Paris and the Netherlands as well as Spain, Germany and Denmark.

Current yield spread of 4.5%, average Return on Equity the past 10 years has been ~20 % and a revenue CAGR ~ 13%. The company has an impressive track record with highest return on capital in the industry.

In Q1 2020:

  • Rental revenue increased 13% to SEK 703 M (622 for the preceding year)
  • Profit from property management increased 22% to SEK 565 M (464)
  • Profit after tax for the period amounted to SEK 749 M (854)
  • Cash flow from operating activities before changes in working capital rose 29% to SEK 416 M (323)

Authors own calculations (data from Borsdata.se)

Castellum

Investment in, and development and administration of commercial premises, as well as service offerings in a decentralized and customer-centric organization. Current yield spread 3.1%, average Return on Equity the past 10 years has been 13.5 % and a revenue CAGR ~ 7 %.

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.

Authors own calculations (data from Borsdata.se)

Some background info: Mapping the Swedish real estate universe (Pareto)

Core: Those companies with a low-risk/low-potential return strategy with low leverage and stable cash flows. Companies using this strategy focus on fully leased prime real estate in growing and varied urban areas.

Core+: The strategy Core+ originates from Core but includes leverage. In
general, Core+ is mistaken for value-added property allocation strategies.

Value-add: A medium/high-risk and medium/high-return strategy. Broadly
associated with the repositioning of properties and acquisitions of building
rights, for example not fully leased and/or those that require physical
enhancement. Value-added strategies are typically leveraged between 40%
and 60%.

Opportunistic: This is a high-risk/high-return strategy and the properties will require a great degree of enhancement. The strategy can additionally include investments in raw land, property development and niche sectors.
Opportunistic strategies may operate with leverage levels of 50% or more.

Monthly report 4-2020

Summary:

  • Corona-virus was still the most debatted topic this month, but the stock market stabilized and much of the downturn evaporated
  • Many good buy opportunities are now gone
  • Cash position at 24 %
  • Current portfolio is comprised of 19 companies, which is down from 29 companies
  • I’m still working on the “Edd Invest 2.0”-investment strategy
  • Current watchlist is now comprised of 51 companies
Current portfolio

The portfolio return for April ended at 9.43 % and turned green YTD after the turmoil in March.

Performance as per 30 April 2020

So, even though the portfolio has outperformed the benchmark and is positive for the year I’m amending my investment strategy.

Why? I don’t believe the current turmoil is over and I expect a second downturn in the market. The decline we experienced in March and partly in April gave great insight into how the indiviual holdings performed during a downturn, shortfalls in my current strategy and a hope for a even more robust portfolio of quality companies going forward.

On the basis of the Covid market drop I have come to realise that I was not ready for such a sharp decline over a short time period and made some transactions, in hindsight, that was based on irrational behaviour. I want to reduce subjectivity as much as possible and be even more in control of what I own and why I own it. Not an entirely new strategy, but redefining it a bit.

Investment Journal:

Many transactions took place in April as well, but I don’t expect to be as active in May. There are several reasons for this. In April I tossed out all non-Nordic holdings (Transalta Renewables, Abbvie, Brookfield Renewable Partners and Visa) as well as Equinor and Cloetta. Even though I would rate the companies sold as high-quality companies I chose to divest non-Nordic holdings since I want to have greater control of the companies in my portfolio, and because I want a greater portfolio concentration.

Cloetta AB was sold due to their poor relative performance in a weak market (Consumer Defensive), profit warning and dividend cut. Equinor was sold due to the weak oil market outlook for months to come. The proceeds from my sales means I’m now holding a cash position of 24 %.

I increased my stakes in Bakkafrost, UPM-Kymmene and Beijer Ref, and reduced my position in Tomra by 1/5.

Short write-ups for Bakkafrost and Beijer Ref can be found here:

Bakkafrost ASA – The cost leader in salmon farming

Beijer Ref AB – global refrigeration wholesaler

Tomra – downsizing position

Dividends in April:

Dividends received this month was down from last year due to a lot of dividend cuts, witheld dividend tax was received in April 2019, and because I’ve sold Sparebanken Midt-Norge, Sparebanken Nord-Norge and Nordea since last year.

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Monthly report 3-2020

The impact of Covid-19 on the market began in February and continued with full force in March. Year to date the portfolio is down 8.9% and 5% in March. The lessons I’ve learned and the experience gained this past month is far more valuable in the long run than the value my portfolio has been reduced by in the past month. This monthly report will be less detailed, since there are some ongoing changes in my investment strategy, which I will explain in detail in another post.

Last month I wrote that the market decline should act as a reminder that there is risk involved when investing in the stock market and an opportunity to learn more about yourself as an investor. This month the first lesson is that market timing is extremely difficult, e.g. US stock indices up 20% in three trading days and theoretically the bear market ended, and a bull market began. The second lesson is that the Norwegian Krone is a shit currency in turbulent times which is a plus for Norwegian based investors, but also a minus since the additional purchases becomes less attractive due to the weaker Krone. The third lesson is to not jump on the buy wagon too soon and instead hold on to the cash. The final lesson is dividends are not as safe as they appear to be!

In March I added to my positions in high quality companies, sold weaker ones and made a switch between Wartsila (out) and NetEnt (in).

The investment thesis in Wartsila Corp did not play out, hence I sold the company with a loss and moved on to the next one: NetEnt AB.

NetEnt is an exciting new addition to my portfolio and checks almost all of the boxes in my investment checklist. The only drawback is the debt which the company added after they acquired Red Tiger, but I believe the company will continue to reduce the debt load.

Short about the company: the company operates in the gaming sector by development of gaming and system solutions for casino operators. Today, development is driven through the company’s technical platform and the games come in varying forms, from classic casino games to entertainment games. In addition, additional services are offered in the form of marketing, training and technical support.

I made a total of 13 purchases in March and 4 sells. Sysco Corp was added on 18 March and sold four days later with a 35 % gain due to a weaker Norwegian Krone and a revaluation of the stock. The great return in a short period of time was too tempting to ignore.

Going into April I have a 5 % cash position due to offloading Aker and AkerBP, and going forward I will keep adding to my positions, improve my investment processes and keep reading annual reports.

Investment Journal:

Dividends in March:

Last month I reported the organic dividend growth, but the market turmoil in March gave me a valuable lesson: Dividend safety. Many of my companies postponed or cancelled their dividend due to the increased uncertainty. There is no value today to keep tabs on the organic growth number!

The dividends in March was paid out by Transalta Renewables, Castellum, Mowi and Visa. Total dividends received was NOK 1.197, up from NOK 1.172 last year, but this is non-comparable since last year also included return of withheld tax on dividends of NOK 358. The actual increase is therefore approximately 32%.

Dividend overview

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Monthly report 2-2020

The focus in February was on the quarterly reports for my remaining holdings which did not report in January. I love this time of the year as most dividend hikes and payments are announced in this period. But there was something else that made the headlines this month; COVID-19 (or the Corona-virus). February started out great, but when the longer-term effects on the economy became clearer the stock market was suddenly reminded that there is risk involved when investing in stocks. My portfolio took a hit during the “Corona-week” and lost over 100.000 NOK in value and is now down 3.2% year to date.

I’ll not dwell much more about this topic in this report, since it is well covered elsewhere, but I believe that the decline in the stock market last week should act as a reminder and a chance to learn more about yourself as an investor.

Are we heading into a storm?

If an investor is starting to panic when the market declines a little over 10% the investor’s risk tolerance is not in line with investing in the stock market, the portfolio is to heavily leveraged or the amount of experience does not match the holdings in your portfolio. Harsh words, but the reality is that most investors is not suited for investing in individual stocks and are better of purchasing index funds. For an investor the most important organ is not the brain, but the stomach!

Inexperience will cause you to doubt yourself and your decisions, and that is why I strongly recommend that you stick to your investment strategy instead of follow the headlines in the financial press! If you do not have a defined investment strategy you have to do your homework and start defining who you are in the stock market.

Here you can find more information about my strategy: Part 1 – The Investment Strategy

I do not focus so much on the panic in the media, but I try to exploit the increased uncertainty by increasing my positions in companies on my watchlist and adding to my holdings. Will the stock market continue to decline? I don’t know and anyone that claims they know should be disregarded as false prophets. What I do know is that I will keep purchasing high-quality companies with increasing earnings, profitability and dividends. In the long run I believe that the stock market is the best vehicle for highest value creation over time.

See comments at the end for transactions made in February.

Dividends in February:

Since all my holdings has reported at the end of February I can now review my organic dividend growth for the year. Organic dividend growth for the portfolio is the sum of changes in announced dividends multiplied with the holding’s share in the portfolio. Five companies did not announce a dividend increase, where of three was unexpected (UPM-Kymmene, Mowi and Cloetta), while Wartsila and Transalta did not change as expected. Currently the organic dividend growth is 8.7 %.

The dividends in February was paid out by Transalta Renewables, AbbVie, Aker BP and Equinor. Total dividends received was NOK 1.628, up from NOK 911 last year (increase of 79%). This is partly due to increases in company dividends, but the largest effect is due to higher yielding stocks paying out dividends in February compared to last year and a favourable USD / NOK. Currently I’m on track to receive NOK 31.000 in dividends this year, but as I keep adding cash into my portfolio and buying more assets this amount will increase.

Dividends per month increases year over year

Investment Journal:

Transactions in 2020

I sold Elkem ASA at an average price of NOK 23 per share since I wanted to reduce my exposure to cyclical businesses with a high exposure to China. They also announced a dividend cut of 76% and my patience with the company had worn out.

Lerøy Seafood was sold at NOK 62 following a good report, but the company has the highest costs per produced kilo in the industry and I already own Bakkafrost and Mowi, which in my opinion is of a higher quality than Lerøy.

Slide from Pareto Equity Research

Purchases:

Two companies within the MedTech-sector was included this month. I also bought more in eight companies already in my portfolio during the “Corona-week”.

Vitrolife:

The company reported a solid Q4, but their guidance for 2020 was weak (i.e. Corona) and there was a lot of insider selling this month. I therefore initiated a position in the company.

Read my short write-up here: Vitrolife – profitable growth, but skyhigh valuation

Medistim:

Bilderesultat for medistim

About the company:  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

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Valmet Corporation – Out of the woods

I’ve been looking at the company for a while now and today I initiated a position in an industrial I argue has a conservative pricing.

Summary: I find the current share price to be too conservative for this quality company and expect that the return in the coming year will come from multiples expansion (from PE 16.6 to 18), dividend of 3.5% (EUR 0.75 / 21 EUR per share) and future earnings growth (5 year historic earnings growth of CAGR 33%).

About the company: Valmet Oyj is a Finnish company with an industrial history over 200 years. As a standalone listed company, the history stretches only back to 2013, when it was spun off from Metso Corporation. Valmet is the leading global developer and supplier of technologies, automation and services for the pulp, paper and energy industries.

Business overview:

The company has four segments:

  • Services
  • Automation
  • Pulp and Energy
  • Paper
Valmet segment overview

At Valmet, Services and Automation are considered to be “stable” businesses, as they represent rather stable and slightly growing markets that are driven by the size of the installed base and mill operating rates. Currently, the increasing consumption of board, tissue and pulp in particular, as well as demand for bioenergy, are boosting production growth, which is creating new demand for Valmet’s services and automation (source: Valmet Investor Relations)

Pulp and Energy and Paper business, such as board, paper and tissue machines, pulp mills, and biomass power boilers are referred to as “capital” businesses. They are driven by new investments in machinery and mills, which makes these businesses more cyclical and volatile compared to the more stable services and automation businesses (source: Valmet Investor Relations)

Market leader in the growing market of converting renewables

Pulp & Paper industry: Paper and packaging experiencing several “megatrends”, which are important demand drivers for new packaging and consumer board products.

  • Urbanisation,
  • Digitalisation (headwind for traditional paper and print industry)
  • A rapidly growing global middle class,
  • Eco awareness
  • Population growth
  • Booming e-commerce

Dividend

The current dividend yield is ~3.0 % and has increased since the IPO in 2013. The current payout ratio is 50.2% and the ratio has declined since the IPO, which is a result of increased earnings and growth. Net debt / EBITDA is 0,69 and the net debt is 7.7 % ( Net debt shows how much net interest-bearing liabilities in the company in relation to total assets ). The dividend safety is satisfactory, and I expect an increase for 2019 to EUR 0.75 per share (increase of 15%).

Valmet dividend history and payout ratio

Valuation

The stock is currently trading at P/E 16.6 (P/E 2020E is 13.7 Source: Bloomberg consensus) which is fairly conservative for this company on a historical basis and compared to peers (e.g. ABB, Honeywell and other industrials). I expect a return on my investment of ~45 % and a share price of EUR 30. This is based on the current conservative pricing, which gives room for multiples expansion (based on historic multiples and peers), combined with expected earnings growth and a dividend yield of 3%.

Investment Checklist:

Valmet scores 86 points in my investment checklist, which is above my treshold of 80 points.

Investment Checklist Valmet

Risks:

  • Lower pulp prices may reduce the willingness to invest in Valmet’s products
  • Weaker economic outlook in the overall economy
  • Climate change may cause increased damage to the forest from the bark beetle in Central Europe.
  • Project-specific risk (project cost estimation, scheduling, quality and performance)

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Visa Inc. – Future Dividend Aristocrat?

Not overlooked, nor undervalued. This is not a case for value investors, but a perfect match for dividend growth investors. I purchased my first shares in the company on 2 December 2019 for USD 184.15 per share.

About the company:

Visa, Inc. is a global payments technology company working to enable consumers, businesses, banks and governments to use digital currency. Visa operates in a four party model, which includes card issuing financial institutions, acquirers and merchants. We are not a bank and do not issue cards, extend credit or set rates and fees for account holders on Visa products (Source: Visa Inc. 10-K filing 2018).

Visa has a current market cap of USD 394 billion and is traded on NYSE. In the latest quarter released on 24 October 2019 the growth in underlying business drivers remained strong, primarly driven by growth in payment volumes and processed transactions. The company’s growth prospects are good in the coming years and the expected growth in EPS per share in 2020 is in the mid-teens.

Source: Visa Inc company presentation 24 October 2019

Megatrend:

The company benefits from the ongoing shift away from cash payments and over to digital payments. Digital payments continue to grow as a percentage of all payments world-wide and Visa is one of the key beneficiaries. Societies become more and more cashless and with an increasing standard of living the growth in years to come will be substantial.

Hard to use cash when shopping online
Shift from cash to digital payments is ongoing

Dividend:

Visa has increased its dividend since the IPO in 2008 making it a Dividend Contender. The current dividend yield is 0.65%, but the latest dividend hike was 20 % and it is expected that the dividend will increase by double digits in the coming years. Current pay-out ratio of ~20 % and strong growth in earnings per share will eventually materialise in future dividend hikes.

Source: The Motley Fool

Valuation:

Both Visa and its closest peer, Mastercard Inc, has experienced a strong share price performance the past five years, with Mastercard leading the way. Because of the strong share price performance, the company trades at a premium relative to its historical multiples. During the past decade, the highest EV / EBITDA of Visa was 27, the lowest was 8.8 and the median was 17.1. The current EV / EBITDA is around 26. I believe the valuation is justified due to the strong track-record of the company

Comparing Visa and Mastercard share price performace
Both Visa Inc and Mastercard Inc has solid share price performance the past five years

Risks:

  • When profitability is high in a industry with few competitors it attracts unwanted attention from others who want a piece of the action. New competition will press volume and margins down until the superprofit is gone. Cryptocurrencies and e.g. ApplePay has entered the market and tries to shift volumes from traditional payment methods to the digital sphere. This shift will in the years to come be faster and the continuous evolution of new technologies and business models may pose a risk to the company.
  • Regulatory risk: Regulatory risk is the first risk factor presented by the company in their annual report and the increased focus on compliance, anti-money laundering and regulation may pose a threat to the company. Lack of competition in the industry (i.e. duopoly with MasterCard) may pose a risk to the company due to increased oversight and regulation of the global payments industry.

Disclaimer: I am long Visa Inc

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Kitron ASA – strong revenue growth and improving margins

Established in Arendal in 1962, Kitron has a long track record within the manufacturing of high-complexity, high-reliability electronic products. It is expanding its global presence with manufacturing facilities in Norway, Sweden, Lithuania, Germany, Poland, China and the U.S. Its customers outsource manufacturing of electronic circuit boards and related services to improve flexibility, cost efficiency, accuracy and innovation. The company has a reputable customer base, including companies like Kongsberg Gruppen, Northrop Grumman, Saab, Volvo, Lockheed Martin, ABB.

Segment overview

The company operates within five different segments; Defence/aerospace, Energy/telecoms, Industry, Medical devices and Offshore/marine. Below is an overview of split in revenues per segment.

Source: Company presentation Q3

Dividends

The company’s dividend history is not too long, but they have paid a consecutive dividend the past five years and has a high dividend growth rate (extraordinary dividend of 0.2 NOK paid out in 2018 based on 2017 financials). Kitron’s dividend policy is to pay out an annual dividend of at least 50 % of the company’s consolidated net profit before non-recurring items. The EPS as per 30 September 2019 is 0.55 NOK and it is estimated that the full-year EPS will be around 0.8 NOK.

Today the current yield is around 4.3% (share price 9.38 NOK), but I expect that the dividend for the fiscal year 2019 to be 0.50 NOK; implying a forward yield of 5.3%. The payout ratio is approximately 55%, which I believe is OK for this type of company.

Source: Borsdata.se

Growth and EBIT-margin

On the latest Capital Markets Day (CMD) the company launched a revenue target for 2025 of NOK 5 billion and EBIT margin of 7%, with potential M&A adding upside. This implies an EBIT’25e of NOK 350m, representing a solid CAGR’19-25e of 10% (Source: Kitron CMD and Pareto Equity Research).

Source: Kitron CMD
Source: Kitron CMD

Valuation

The stock price for Kitron ASA has since a low of 1.51 NOK per share increased to today’s price of 9.38 NOK per share. This increase is well justified due to the strong revenue growth and improving EBIT-margin, and there isupside potential if the company’s targets are reached. These are the key drivers for value creation for shareholders and one should expect accretive acquisitions going forward based upon the communication to the market by the management on the Capital Market Day.

Comparing EV/EBIT to its closest Nordic Competitors; NOTE AB and Scanfil Oyj, it is trading at a premium. EV/EBIT for Note is 11.6, while Scanfil trades at 10.3.

Source: Borsdata.se

Disclaimer: I hold a position in Kitron ASA.

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Sparebank Vest – Selldown of Equity Capital Certificates

Sparebanken Vest is a Norwegian Savings Bank located on the west coast of Norway and is the third largest savings bank in Norway. It operates as an independent financial services group (not part of the Sparebank 1 – alliance) and it has a market cap of approximately NOK 6.4 billion and a strong focus on digital transformation.

Sparebanken Vest announced its intention to convert about NOK 2.4 billion of the primary capital to ECCs (equity capital certificates) that will be transferred to a newly established foundation. The offering to private investors included 10% bonus certificates (5% the first year and additional 5% the second year), which in my view made this offering a no-brainer to participate in. The only downturn was that the offering was oversubscribed and participants did not receive full-subscription.

Source: Managment presentation

The savings bank has the most desirable “Price to Book vs Return on Equity”-combination and I believe the management decision to focus on introducing customer dividends, improving liquidity in the trading of the ECCs and to continue their digital transformation from a boring savings bank to a digital financial services provider will cause a multiple expansion and hence increase the market cap. The low P/B compared to peers are unjustified and the gap will most likely narrow over time.

Source: Pareto Equity Research

Expected returns:

Expected total returns from holding the ECCs will consist of:

  • Earnings growth
  • Dividends (current yield of 5%)
  • Multiple expansion (higher PB)
  • Bonus ECCs of 10% for participants in the offering (over 2 years).

Risks:

  • Increased capital regulation
  • Regional risk, e.g. focused on the west coast of Norway

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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”

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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