Hemfosa – takeover bid

Updated 21 November 2019:

Sold my shares at 117.4 SEK on the 21 November 2019. The price of SBB AB B-shares was trading at 23.5 SEK, implying a discount of ~6.5 % if I held my shares until the offer had gone through (beginning of January 2020). Even though a bid for one of my companies is welcome in the short-run I believe shareholders of Hemfosa would have been better of as a standalone company.

Why did I choose to sell now?

I have no interest in becoming a shareholder in SBB since I don’t know mcuh about the company, its management or its properties

There is a risk that the deal will not go through (risk inherent in takeovers)

SBB AB is currently trading at a premium of 80% compared to its NAV, while Hemfosa is trading at a premium of 40%

One year ago I purchased my first shares in Hemfosa Fastigheter following the spinoff of Nyfosa. Spinoff-situations are usually a great way for investors to achieve superior returns, and this was one of the reasons why I invested in the company in the first place (read more about spinoff situations here). Since then the shares has returned great value to its shareholders, and with the recent takeover announcement by SBB I have a total return on my holdings of ~100%.

On Friday 15 November Samhällsbyggnadsbolaget i Norden AB (Ticker: SBB) made a public offer on Hemfosa Fastigheter, with a mix between shares in SBB and a cash offer. Hence, the correct price for HEMF will now be a function of SBB’s share price going forward.

Pre-bid, the shares in Hemfosa traded around 102 SEK, and SBB traded around 24 SEK. The bid presented therefore a premium of approximately 22% and priced Hemfosa at 126 SEK. Following the announcement, shares in SBB dropped 8% and therefore lowering the value of the takeover bid (this is normal when a company announces its intent to acquire another company).

Source: Google Finance

The offer

SBB offers each shareholder in Hemfosa the following consideration alternatives. Offer for Hemfosa common shares (the “Common Base Case Consideration”)

  • In respect of 55 percent of the number of Hemfosa common shares tendered by such shareholder: 5.5 SBB Class B common shares per Hemfosa common share, and
  • in respect of the remaining 45 percent of the number of Hemfosa common shares tendered by such shareholder: SEK 120.00 in cash per Hemfosa common share.

The acceptance period will commence on 19 November and end on 20 December. The deal will most likely go through as the board of directors recommend the offer and large shareholders has indicated that they will accept the offer.

What is the correct price of Hemfosa’s shares today?

As mentioned above, the share price going forward will be a function of the share price in SBB. Therefore, the final premium might be higher or lower than the premium at announcement. Shareholders in Hemfosa should therefore closely monitor the share price in SBB. As per close on Friday 16 November the calculation is therefore as follows:

Author’s own calculations

Based on closing prices on Friday the shares in Hemfosa is trading at a discount of ~3.5%

Under the «Mix & Match Facility» presented, the shareholders can choose between a pure cash offer, shares in SBB or to accept a partial cash offer and shares in SBB. The result of this depends on the choices made by other Hemfosa shareholders, as there are limitations set by SBB. If you choose to wait, the announcement will be made on or around 20 December.

If you have less than 50 shares you will receive an all-cash-offer at closing of acquisition.

Should you sell your shares in Hemfosa in the market or accept the offer from SBB?

It depends.

It depends on:

  • whether you are interested in becoming a shareholder in SBB
  • how many shares in Hemfosa you own
  • choices made by other investors under the “Mix & Match Facility”
  • share price development of Hemfosa and SBB in the coming days / weeks.
  • the probability of the deal going through

Should you buy shares in Hemfosa to collect the current discount?

This is called “Risk-Merger Arbitrage”, and it is not recommended for private investors to try to exploit anomalies or mispricing in securities. There are several risk factors you have to consider:

  • The probability of the deal going through
  • Time value of money (time until the deal is completed)
  • Declining share price in SBB (usually a risk-merger arbitrage also includes a short position in the acquiring company).

Disclaimer: I own stocks in Hemfosa Fastigheter.

20 Nordic companies which will benefit from 7 Megatrends

It goes without saying that the world tomorrow will not be the same as the world yesterday. Changes happen constantly, and the changes may be of a temporary character, but others are so powerful that they will result in changes for the society on a fundamental level.

I have written a short article describing 7 Megatrends and presents 20 Nordic companies which will benefit from these seven megatrends.

Enter your email on my subscription list and receive a free copy of the PDF (link enclosed in welcome message). I will not bombard you with emails but send you regular updates once a month with past write-ups, dividend income updates and other articles on my blog.

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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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Part 2 – The Holding Period

In part 1 I wrote about the importance of having an investment strategy and I explained the reasoning behind my own investment strategy, and I gave a step-by-step guide on how my investment process was. In this part I will write more about what happens after the decision to purchase a stock has been made and the wild emotional ride that follows.

I state that, besides not having a well-defined investment strategy, the error most investors do when they decide to invest in the stock market is to not reflect upon the length of the holding period. What do I mean about the “holding period” and what is “the length of the holding period”? A holding period, in short, is the time from you buy the stock until you sell the stock. As for the second question I have no exact number of days, but I will try to explain my reasoning for why private investors tend to have a too short holding period. At the end you will find my checklist I use for my companies during the holding period. In part 1 you can find my checklist for the investment decision.    

For long-term investors the focus should not be on reported earnings the next quarter, daily news in the financial press or the everyday market fluctuations, but on the long-term value creation of the company. Private investors tend to not focus on how the company develops in the long run and in return they receive returns, which on average, are below market returns.

To become a long-term investor, and to focus on the aspects which you can control, you must control your mindset and have discipline to follow your investment strategy. If not, you are bound to make the wrong short-term decisions that probably will hurt your long-term returns. By experience I know that the mindset is the hardest to improve for most investors and I have fallen in most of the behavioural pitfalls there is (and I’m pretty sure that I will do some of the same mistakes again). The field of behavioural economics tries to explain how humans make decisions and that people are irrational. I’ve listed two books which I’m currently reading from two psychologist that have won the Nobel Memorial Price in Economics on my book list. (list opp Kahneman og Thaler).

So, what are the common mistakes that investors do and how can you avoid them?

Anchoring: What investors tend to do is to anchor their decision to the price they purchased the stock (the anchoring effect). This fallacy of the mind misleads you from making good investment decisions. Have you heard the saying; “when in trouble, double”? This is an action that stems directly from your initial position being deep in the red and instead of closing the position you choose to add on your position in order to lower your average cost price.      

Tips: View your initial cost price as a sunk cost. You can’t force the direction of the share price and hence it should not be part of your decision. Get rid of positions that makes you act irrational.

Fear: Investors overreact. Period. Emotions causes irrational behaviour and investors today has all the «help» in the world to overreact to news through their mobile phones and other electronic devices. Acting based on fear reduces your average holding period and destroy your potential stock returns!

Tips: Do not act based on headlines in the newspaper, forums or your neighbour telling you to get out of the stock market. It’s probably too late to act on the news and you miss out on the upside when the market is about to recover.

Greed: Investors doesn’t only overreact to bad news. Investors extrapolate the given data they have at hand into the future, which in turn may lead to biased estimates. This recency bias may lure you into taking on more risk than you should and may trick you into “get rich quick”-schemes, e.g. penny stocks or wildly overpriced stocks. If you are aware and recognise the greed in human nature you have come a long way.   

Tips: Do not buy volatile penny stocks and don’t be lured into investments based on lofty prospects. Buy high quality companies with proven track record.

So, what do I do? In the holding period I try to act as rational as possible, keep the number of transactions to a minimum and focus on the long-term prospects of a company. In an ideal world the initial work you put into the initial investment process was enough for you to “forget” about your position and move on to the next one. I’ve come to realise that I cannot force myself to forget about the stocks in my portfolio, hence I try to add to my knowledge about the company, its’ industry etc. and make rational decision based on the new information. I ensure that I check off all the five objects in “The Holding Period Checklist” for every investment I make, and I keep an eye out for any red flags in my companies.  

This concludes part 2 of the blog series and part 3 will be published next week. If you would like to get an update when the next part is uploaded, please subscribe below.

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Part 1 – The Investment Strategy

The investment decision

I will in this blog post series explain my investment strategy and give a step-by-step guide on how I apply my set of rules to the investment decisions that I make. Without a strategy most investors will follow their gut feeling, advice from other people or news in the financial press when investing and will therefore receive below average stock market returns. Every active private investor should therefore, in my opinion, write down their own investment strategy on a piece of paper and define who they are in the financial markets. The strategy that I follow is a blend of dividend growth investing, investing in spinoffs and investing in megatrends. This way will not suite everyone, and should not serve as an investment advice, but hopefully inspire and be a help on the way to increase returns and boost the interest in stocks. At the end of part 1, you’ll find my investment checklist…

Nordic Focus: I have a Nordic focus in my portfolio since the Nordic countries are a very exciting investment universe with solid international companies, which has resulted in high value creation over time. This focus does not exclude investments in companies listed on other stock exchanges since I do not want to constrain myself too much. 

Megatrends: To manage high valuation of assets, one can take advantage of thematic investments that benefit from long-term societal trends. Since it is expected that such investments will not depend so much on the daily ups and downs of the financial markets but try to take advantage of the predictability and sustainability of multi-year trends.

Step 1: Top-down approach

I begin with identifying macro trends and thematic investments (a top-down approach) and I ask myself the following questions:

  • What changes is the world undergoing?
  • What does this mean for different sectors?
  • Which stocks are relevant in the most popular sectors?

Step 2: The quantitative assessment

A quantitative assessment of the company is performed, and I simultaneously fill in my investment checklist. The checklist is my tool to control myself and my way of controlling that I’m true to my investment strategy. There is no reason to own a mediocre business when you can own a high-quality business that have a proven long-term record of stability, growth, and profitability. The quantitative assesment is based on five criteria:

  • Quality
  • Profitability
  • Dividend
  • Valuation
  • Other

A company does not have to tick all the boxes, but the checklist will, in my opinion, increase the probability that the investment will turn out to be profitable and reduce the subjectivity of an investment.

“Part 2 – The Holding Period” will be published next week. Subsribe below if you want to receive a mail when this is published.

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The road to full-time investing

This site will document my journey from being a pay check-receiver to a full-time investor.

Today I’m an ordinary pay-check receiver with a goal to quit my day job and become a full-time investor.

My focus on this site will be to document all my stock holdings, choices I make when buying or selling and displaying my dividend income. I believe that the combination of companies in the Nordic markets and the North-American companies provides the most exciting investment opportunities and risk-adjusted returns.

I will go much deeper into my investment strategy and the companies that I currently hold in coming blogposts.

Edd – NordicDGI