Nordic Value 2019 – Interesting investment cases and inspiring speakers

The second edition of the value investor conference Nordic Value was held at the beginning of June in Copenhagen. It’s a buy-side only event with a focus on actionable investment ideas presented by carefully chosen value investors.

The presenters covered a wide range of investment ideas from European small-cap companies and Indian micro caps to large multinationals.

There were also more thematic presentations on topics such as the last decade of underperformance in value equities and on the use of ESG in value investing. On day two, a number of Danish companies presented.

The event was hosted by Ole Søeberg. He has previously been involved in two of the most successful independent Nordic asset managers – Carnegie WorldWide and Skagen Funds. He was a board member at Skagen before taking on the role of CIO and portfolio manager. Since November 2018 he has been the advisor for the Advice Capital Vision Fund.

He knows what characterizes a good investor and he managed to put together an interesting program.

Below are highlights from three of the many great presentations.

Vegard Søraunet, ODIN Fund Management

Vegard is the CIO of ODIN Fund Management, one of the leading Norwegian fund managers. He is also the portfolio manager of the ODIN Sweden fund and the ODIN Nordic fund. Since its inception in 1994, the ODIN Sweden fund has delivered an impressive annual average return of 18.3 percent.

Vegard invests in companies with products or services that add value to their customers. He prefers companies with strong management teams and strong corporate cultures, and 70% of the holdings are industry leaders with clear competitive advantages. ODIN Sweden often has long holding periods – many companies have been in the portfolio for 10 to 15 years. 

He presented the investment case for one of the holdings in the ODIN Sweden fund, AQ Group:

AQ Group is a Swedish contract manufacturer. They produce components and systems for industrial customers. Like many other Swedish companies, they have been good at expanding internationally. A large part of the production is in low-cost Eastern European countries.

It’s a small-cap company with no analyst coverage, and ODIN owns 9.3% of the shares. The company has an impressive track record and strong long-term equity returns driven by the positive fundamental development. Since 2003 AQ Group has had an 18% sales CAGR.

Vegard sees the company as a decentralized acquisition machine with a strong track record of buying companies that can supplement the organic growth and build scale at attractive prices. He likes these M&A machines and you can find a number of them in the Swedish small-cap space and in the ODIN Sweden portfolio, including Indutrade, Addlife, and Addnode.

Last year, AQ Group’s EBIT margin disappointed as three subsidiaries had issues. This led to a 4.5% EBIT margin in 2018 compared to the target of 8% – if adjusting for the three subsidiaries, the EBIT margin was 6.5%. Two of these have been sold and the third is bankrupt. Vegard expects the margin can be around 7–7.5% in 2019 with the potential to increase to 8% in 2020. ODIN sees AQ Group as a good company with short-term earnings pressure.

Vegard believes an attractive structural development in product mix is likely. The systems solution segment is more complicated, and the EBIT margin is almost double compared to the components segment. Systems is growing twice as fast as components, which will lead to margin expansion. AQ Group is also growing in more stable sectors such as healthcare, food, telecom, and power.

Contract manufacturers are typically not very wide moat businesses, but before ODIN made its investment in AQ Group they spent a lot of time traveling around to meet different customers. Often customers said they did not have any clear alternatives and that they had collaborated with AQ Group for many years. The customers would incur switching costs, AQ Group delivers a good product, and they benefit from scale effects in some niches.

In a scenario with a 7% EBIT margin, it trades at 11x 2020 PE; in an 8% EBIT margin scenario, it is trading below 10x PE. Peers such as Nolato and SP Group trade at EV/EBIT multiples that are more than 40% higher than AQ Group’s current multiple.

The two founders are still the largest owners with stakes of around 25% each. They are still active on the board and have created a strong entrepreneurial and cost-focused culture in the company.

Jamie Carter, S. W. Mitchell Capital

S. W. Mitchell Capital is a specialist European equities investment boutique based in London. They manage assets for a global client base that includes pension funds, endowments, financial advisers, charities, family offices, and high net-worth individuals. Jamie Carter is a partner and investment manager of the SWMC Small Cap European Fund.

The two main types of investments in the fund are compounders and misunderstood companies. They find these across the spectrum from deep value and value to GARP and growth. Carter sees good opportunities in finding mispriced companies in the small-cap space with limited analyst coverage.

When they invest, two of the most important factors are the management and the cash flows. When they analyze a company they meet as many people across the organization as possible, and in January 2019 alone they saw 210 companies. According to Carter, the strong focus on cash flows is a great defense against value traps.

Carter presented the case for Irish housebuilder Glenveagh Properties:

Glenveagh Properties is one of two listed housebuilders in Ireland. They have two business units: Glenveagh Homes builds starter homes for private customers (€350,000 average selling price). Glenveagh Living designs and develops residential solutions for institutional investors and public bodies.

Carter sees a number of attractive characteristics in the Irish housing market. The economy has been the poster child in economic recovery since the global financial crisis, and the expected GDP growth in 2019 is 5.6%. The population is growing rapidly, while the housing market is undersupplied, affordable, and well financed. Despite a recovery since the global financial crisis, new construction is still only at 50% of structural demand.

Government incentives are also supporting the market, especially benefiting the first-time buyers Glenveagh Properties are targeting. They can receive tax rebates and stamp duty redemption.

Carter believes the company has a great land bank with more than 7 years of development. Over 80% is in the greater Dublin area. Here they benefit from the foreign direct investments and jobs created by companies such as Google and Facebook that Ireland has been able to attract to its capital. The Irish economy will suffer in a hard Brexit scenario, but in the longer term, Dublin could benefit from Brexit since it is an obvious EU hub for UK companies.

The company IPOed in 2017, it’s debt-free, and few analysts follow it. According to Carter, the management is experienced and of very high quality. They have a clear strategy and know how to execute. Management owns 15% of the company and there is a big incentive scheme in place linked to the total shareholder return. 

Carter prefers to use EV/capital employed to value housing developers. Glenveagh Properties trades below 1x EV/CE – they should be able to do 20% ROCE, which justifies a multiple of 2x EV/CE. It also trades at a 50% discount to UK housebuilders if you look at PB. The FCF yield is currently 6% and could go to 12% in 2 years and from there increase to 21% in 2023.

Adam Rozencwajg, Goehring & Rozencwajg

Goehring & Rozencwajg is a fundamental research firm focused exclusively on contrarian natural resource investments. They aim to produce top-quality differentiated research, looking at the commodity level as well as the specific security level. They are among the leading investors in the space globally and they have a very strong track record. Adam A. Rozencwajg presented the firm’s approach to value-oriented investing in natural resources equities.

Rozencwajg believe the best time to find great value in natural resource stocks is when investor sentiment is bearish, companies cannot make money, and when equities are trading at deep discounts on measures such as P/B or P/NAV.

When these conditions are met, Goehring & Rozencwajg do deep independent research to see if trends will reverse and whether supply-demand dynamics are likely to change. Goehring & Rozencwajg make their research available online so investors and others can follow their thought process and see where they have been right and where they have been wrong in the past.

One indication that commodities are currently out of favor can be seen in the long-term time series Goehring & Rozencwajg have constructed. They compare the development of commodities and financial assets going back to 1917. The ratio is currently close to an all-time low, and clearly depressed. Previous periods at these levels have been followed by great investment opportunities. When they compare the development in commodity-related equities to the market index, the deviation is even bigger.

Chart from Goehring & Rozencwajg research

Rozencwajg presented their thesis for growing energy demand. They disagree with the prevailing view that global energy growth is slowing. Based upon their research, all forms of energy consumption, with the possible exception of coal, will experience robust demand growth exceeding consensus estimates.

When a country reaches a certain level of real GDP per capita it goes through an S-curve tipping point in oil intensity. Never in history have so many people gone through the S-curve tipping point at the same time, which will lead global commodity demand to surge in the coming decade. Demand is not anywhere near the peak, according to Rozencwajg. India is just entering their tipping point and is where China was between 2000 and 2004. People are also overestimating the impact of electric vehicles compared to the demand growth from the EM economies. You can read their in-depth analysis on their website.

Goehring & Rozencwajg combine their top-down view with bottom-up stock picking. They believe the greatest disconnect between market perception and likely future supply-demand dynamics has been seen in the energy sector. High quality American E&P players make up the largest part of their portfolio. However, they also have investments in companies in more niche areas, such as uranium, where they see attractive dynamics.

Nordic Value will be back next year for the third edition with more interesting investment cases presented by leading value investors and the possibility to network with likeminded people. Watch out for an invite or check the website in the spring of 2020.

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