Nekkar ASA – Time to unveild value

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”

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