Summary:

  • Entered a «kangaroo market», and a possible market top on 8 June
  • Still a high cash position, but exploited some good opportunities
  • Takeover bid for one of my holdings
  • Initiated a position in Evolution Gaming as a hedge in case the bid on NetEnt fails
  • Added to my positions in Bakkafrost, Mowi and Essity and trimmed position in NetEnt. Sold all holdings in Beijer Ref as share price has outrun fundamentals
  • Portfolio performance year to date: 13.31 %

Portfolio: Nordic Compounders

I want a portfolio with high quality Nordic compounders. To be of interest a company has to have:

  • Solid balance sheet,
  • High return on capital,
  • High historic growth,
  • Stabile margins and a long term megatrend in the back.

By constantly focusing on quality compounders over the long run the outperformance against benchmarks will be great.

June has felt as long as a year, and 2020 as long as a decade. I’m still very cautious in this market and maintaining a high cash position of 27.4% at month end, up from 25.6 % in May.

Portfolio as per 30 June 2020

The portfolio is tilted towards Industrials and Healthcare, and the exposure to Finance are at a mimimum. Going forward the focus will be to add companies in the Information Technology and Consumables sectors to further diversify my portfolio

Sector allocation as per 30 June 2020

Beginning of June, the stock market did not lose any steam and is still backed by Central Banks willingness to intervene in the slightest sign of market turmoil. Investors seize the opportunity eagerly, but one can almost sense their willingness to jump on the sidelines at the release of negative market news. Some market commentators have termed it a «kangaroo markets», which is neither a bull market nor a bear market, but a market that hops up and down over a longer period of time without a strong uptrend or downtrend. Perfect for swing traders, but also a signal of increased market uncertainty.

The market narrative for the bulls are:

  • Further stimulus by the Fed will fuel the market to higher highs
  • TINA: there are no alternative to stocks with a low interest-rate environment
  • Re-opening of the economy: A normalisation of business operations when the virus finally fades away
  • Discounting 2021-22 earnings with a lower discount factor

The bear case is explained by Sven Henrich and well worth a read: The secret is out: “The Fed is busted”

Investment Journal:

As I wrote in the May report I would add to existing positions or become aggressive if the right opportunity presents itself. Several opportunities presented itself this month and I’ll go through them below.

Seafood – crashed on 15 June

Added to my positions in Bakkafrost (@550 NOK) and Mowi (@178 NOK). In my view the market clearly overreacted to the rumours of Covid-19 on a chopping board in Beijing. I believe the possibility that the virus came from Nordic salmon was minimal and the risk/reward of buying on this pullback was great.

Public offer on NetEnt by Evolution Gaming

The main event this month for my portfolio was a public offer by Evolution Gaming for all outstanding shares in NetEnt. The offer represented a premium of 43 % compared to the closing price of NETB-shares on 23 June, and the offer is 0.1306 shares in EVO per NETB-shares. Normally, the share price of the acquiring company falls on the news of large takeovers and this was not an exemption. Share price of EVO was down over 10% on the news and I picked up some shares in the company as a hedge in case the bid fails (in that case EVO share price increases and NetEnt shares decreases). After adding EVO to my portfolio my exposure to the combined EVO-NETB was 14.5%. On 26 June I cut my position in NetEnt by 50%, bringing my cash balance back to 27%.

Complete position in Beijer Ref was sold due to low risk-reward at current prices and in my opinion the ESG-premium has been priced in for now. I’ll definitely keep an eye on the company going forward and initiate a position at more favourable levels.

Summary:

  • Another great month in the stock market, and I’m becoming more and more cautious for every market uptick
  • The refined strategy; «Nordic Compounders» is on track and operational
  • Portfolio is outperforming every benchmark, even with a large cash position, and close to a new all time high
  • Cash position of 25.6%
  • Current portfolio is comprised of 17 companies, which is down from 19 companies in end April
  • Sold Securitas, Boule Diagnostics and switched Castellum with Sagax. Added more in Tomra Systems.
Portfolio as per 29 May 2020

The portfolio return for May ended at 6.5%, and is close to a new ATH! This is achieved even with a large portion in cash, which means the remaining stocks are performing great. The reason why I’m holding such a large cash position is because the I cannot understand the recent market recovery. Record-high unemployment, increasing US – China conflict and an ongoing pandemic is not, in my opinion, a reason for new all time highs. I’ll therefore play it more on the safe side going forward.

Performance YTD

Nordic Compounders

I want a portfolio with high quality Nordic compounders. To be of interest a company has to have a solid balance sheet, high return on capital, high historic growth, stabile margins and a long term megatrend in the back. By constantly focusing on quality compounders over the long run the outperformance against benchmarks will be great.

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive-looking price, you’ll end up with a fine result

Charlie Munger

Investment Journal:

As mentioned in the report for April I did not expect an active month in May. Most of the «clean up» was done in April and just a few transactions was made this month. Going forward I don’t expect to be very active in purchasing additional companies, but I might add to existing positions or become more aggressive if the right opportunity presents itself.

Securitas was sold due to poor performance and because my investment thesis proved wrong. Link to write-up: «Securitas – buy, sell or hold?»

Boule Diagnostics was also offloaded this month as my investment thesis has played out and because the company does not meet the standards I set for my companies, i.e. the quality of the company is not high enough and they have not a good enough historically track record. Link to write-up: «No longer bull on Boule Diagnostics»

A switch in my exposure to real estate was also made. Castellum was sold and Sagax was added Castellum may be a safer real estate play, but 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. Link to write-up: ««Switched Castellum with Sagax»

Finally I bought more shares in Tomra Systems at 330 NOK per share following the selldown by Latour AB (majority shareholder). The share price declined ~ 15% in two days and the short term Risk/Reward was OK. Valuation still stretched, but the company is a real compounder!

Dividends received

Received redemption shares in NetEnt AB

Latest posts:

Today I sold my position in Boule Diagnostics at 65.8 SEK per share. The reason why is that my investment thesis has played out, and because I only rank the company as a «Class 4»-company.

This is what I wrote on 1 October: «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».

Since then the FDA letter has been adressed and the share price has increased to a high of 78 SEK and a current share price of 66 SEK. 2019 ended at a very positive note, but Q1 2020 was somewhat of a disappointment and the coming quarters will be impacted by Covid-19 to a greater extent than Q1.

It may be that I sell my shares too early, which is often the case, but in the current market I want less exposure to companies I rate as Class 4.

Why is Boule Diagnostics a Class 4 – company?

  • Low and declining ROE / ROIC
  • High EBIT and EBIT%-variance
  • Low EPS-growth

The company has focused on selling instruments to emerging markets (e.g India) at a lower than normal price, and I believe this focus has resulted in lower profits to the company in the past. Essentially they have undercut themselves in order to boost future sales of consumables. This is not what I want to see as it indicates that the products are inferior and it may result in a permanent lower selling price for their instruments. Asia is soon the largest market for the company and in my opinion unfavourable for the company going forward.

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.

It’s time to revisit Securitas again after a poor performance in 2019 and 2020.

I wrote the following in 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»

Post: Stabile growth outlook

Since last time the «Stabile growth outlook»-statement has proven wrong. Covid-19 has turned a lot of the company’s operations upside – down, but I would argue that some of the problems from previous quarters are still inherent and not solved.

Buy, sell or hold?

With the latest quarterly results behind us and expected weak quarters ahead does the company still make a good investment, and is it of a high enough quality to tick of the boxes in my newly updated investment strategy?

  • The EBIT-margin has been under pressure for some time
  • Cost saving programs has not materialised in improved margins
  • Organic growth has stalled
  • Future acquisitions are put on hold for the company which may reduce expected growth in the Electronic Security Solutions segment (with higher margins)
  • I have other companies on my watchlist that will steward my capital better

Conclusion: Sell

Current background:

  • Organic sales growth Q1 2020: 2% (7% in Q1 2019)
  • Decline due to Corona pandemic, with main effect from March. Therefore, expect a weak Q2. Rapid decline in European aviation business had the most impact, and I don’t expect the demand to pick up anytime shortly. Increased security services at hospitals and protection of facilities
  • Security solutions and electronic security grew by 10 % in the first quarter to represent 22 % of total Group sales.
  • No planned acquisitions
  • The operating margin in the first quarter was 3.8 % (4.8), a decline deriving from all business segments but the main impact from Security Services Europe.
  • The operating result, adjusted for changes in exchange rates, declined by 19 %. Earnings per share, before items affecting comparability, amounted to SEK 1.70 (2.12).

Q1 2020 Comments from the President and CEO:
Organic sales growth declined in all ­business segments due to the extra­ordinary situation of the ­corona pandemic which started to affect our business in the beginning of March and increasingly throughout the month. Our business segment Security Services Europe was most impacted, mainly driven by a rapid decline in activity in the aviation ­business.

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.

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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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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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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In 2020 I’ll publish montly reports of my portfolio, instead of the monthly dividend income update as last year. For the first month of 2020 there has been several changes, and some of them I have to admit was mistakes. But, I’ll learn from these mistakes and I do stand by my decisions.

The portfolio gained 1.8 % in January 2020 and lagged the benchmark index which gained 3.59 % (VINX Benchmark Net Index NOK). Nevertheless, the past years I’m way ahead of the benchmark and trust that the portfolio will bounce back.

Dividends in January:

The dividends in January was paid out by Transalta Renewables and Brookfield Renewable Partners (I use payment date in my records, and not ex. div date). Total dividends received was NOK 535, up from NOK 146 last year. Last year I only received dividend from Eolus Vind, which was sold in mid-January this year.

Dividends per month increases year over year

Investment Journal:

January turned out to be a very active month. A total of 8 transactions was made, and I’ll shortly go through them below.

Transactions in January

Purchases:

Valmet Corporation – out of the woods – (write up)

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%).

Chr. Hansen Holding A/S is an excellent defensive stock, with a convincing, recession-resistant portfolio. The company operates within food cultures, enzymes, natural colors, plant and animal health and probiotics. High return on invested capital, nice free cash flow yield and high entry barriers was main reasons for investing in this company.

Novo Nordisk is a global pharmaceutical company that is a market leader in the treatment of diabetes. It has strong positions in haemorrhage, obesity treatment, growth hormone therapy and women’s health. Novo Nordisk has a broad and innovative product portfolio and benefits from economies of scale related to the development, production and sale of diabetes products.

I also added to my positions in Sparebanken Vest and Securitas AB during the month.

So, over to the mistakes; my sell decisions. In hindsight the decision to sell Eolus Vind AB and Scatec Solar proved to be bad decision. I sold both companies prior to their quarterly reports. They have greatly outperformed the market subsequent to my exit and left me baffled over their share price performance. I sold my position in Scatec Solar since, in my opinion, the risk in their project pipeline has increased (emerging markets e.g. Vietnam) and that the risk / reward in the company was low. Eolus on the other hand disappointed me in their reporting in Q4 (23 October 2019) with no extraordinary dividend, low project backlog visibility and cost overruns on latest projects delivered. Conclusion: I missinterpreted the amount of fund inflow to companies with exposure to renewable-companies.

Sold Eolus at 113 SEK per share
Sold Scatec Solar at 130 NOK per share

NIBE Industrier AB on the other hand proved to be a better sell decision. The company was bought in October for 120 SEK per share and since then the share price development was straight upwards, and I sold at 175 SEK per share to make place for Valmet Corporation and Chr Hansen.

The focus in February will be 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.

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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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