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.

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

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

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

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

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

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

Source: Borsdata.se

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

Source: TradingView

An introduction to my investment journal has now been uploaded. Here you can track all my investment decisions!

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