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%.

Technical analysis: The share price bottomed out at 15.6 EUR and the trend is upwards. Support is found around 19.8 EUR and resistance at 21.5 EUR. 10 day MA has crossed 50, 100 and 200 days MA and 50 days MA has crossed 100 and 200 days MA.

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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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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I bought my first shares in Securitas at 147 SEK on the 10 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.

The company was established back in 1934 as Hälsingborgs Nattvakt and has since then grown to become a world leader in security services. Investment AB Latour entered as owners of the company in 1985 and under their ownership the company developed into a multinational corporation. The market for Securitas’ services benefits from the megatrend of urbanisation which support the companies growth outlook. Securitas is investing heavily in security technology and are making acquisitions in order to meet the rapid pace of transition to security solutions that combine on-site and mobile guarding with various forms of electronic security.

Megatrend: Urbanisation. Rapid urbanisation will most likely have the greatest impact on how and where humans live. People leave the countryside and migrate to cities. Combining urbanisation with increasing demand for improved standard of living for emerging economies and an increase in the world’s population results in megacities and the need to rethink how cities are built. Securitas will benefit from this megatrend since there are higher crime rates in cities than in rural areas.

Dividend: The company has increased its dividend the past four years and their dividend policy is to distribute 50-60 % of annual net income to its shareholders. Historically, the company has paid a steady dividend and has also distributed shares in Loomis and Assa Abloy.

  • Current dividend yield: 3.0 %
  • Dividend payout ratio: ~50
  • Return on equity: ~17 %
  • Equity ratio: ~29%
  • Net debt / EBITDA: 3.0

Technical analysis: The share prices has recently come under a lot of pressure and the stock is a sales candidate (downwards trend). 10 day MA has crossed 50, 100 and 200 days MA and and 50 days MA has crossed 100 days MA. The stock has support around 140 and there is resistance around 150 SEK A break through 140 signals further decline.

https://www.tradingview.com/x/tDbYgyLr
Securitas security Las Vegas