Monthly Update - February 2024

Market comment
Global stocks continued up a whopping 4.5% during the month, led by US technology companies, but despite a strong stock market month, we noted a lot of conflicting movements. At the same time that the semiconductor company Nvidia came out with a super report that was followed by a new all-time-high, long-term yields in the US rose by almost 0.3% points and generally the defensive segment of the stock market was the relative winner. The Nordic stock exchanges were traded more like the global index ex. US tech. The Nordic small cap index (Vinx Small Cap SEK NI) rose by 1.4% and the Carnegie Micro Cap index fell by 1%.
 
ORIGO QUEST (Equity L/S)
The return during the month amounted to -0.8%. The return in the last six months amounts to 7% and to 149% since the start. The long portfolio rose slightly and the short increased, giving a positive long-short spread. The hedge, on the other hand, contributed negatively. At company level, positive contributions came from the long holdings New Wave, Munters and Freetrailer, while SOBI had a negative impact.
 
At the end of the month, our Danish micro cap Freetrailer presented a really encouraging report that showed solid growth on all lines. Turnover grew by 42% and earnings per share increased sharply. The number of rented trailers grew by 35% during the quarter, which was a new record. We are impressed by the momentum the new management has created and also note that they raised their growth forecast for the full year. The stock rose significantly after the report and is up 24% so far this year.

In previous years, from time to time, we have had a short position in the Swedish medical technology company Elekta. For several years, the company has had noticeable difficulty in raising profitability to a sensible level. We have gradually changed our view on the company over the winter and have now take n a long position.
The basis of our analysis is that we unfortunately see a constant increase in the world's need for radiotherapy against cancer. We expect the need to generate global growth of around 6% per year and double that for emerging markets. The market is dominated by two suppliers; Varian and Elekta, which together have around 90% market share. We see it as highly unlikely that Elekta will not be able to take part in the market growth.
 
The pandemic created many problems for the industry with fewer cancer treatments, and smaller hospital budgets than planned, which ate into Elekta's margins. In addition, inflation took off, which created a negative cost effect on the large order book that had already been built up. As if that wasn't enough, China introduced new anti-corruption rules last year, which caused several hospitals to hold off on their purchases.
 
We now expect that the pandemic and inflation problems will subside and that the turnaround will come within the next 1–2 quarters. We further believe that the new precision radiation therapy system Unity, which has a higher proportion of software and service, will contribute to the margin lift and that the stock market is underestimating Elekta's potential going forward in China.

ORIGO SELEQT (Nordic Small Cap)
ORIGO SELEQT fell 2.0% during the month. The pharmaceutical company ALK-Abelló, the salmon company Bakkafrost and the sharing service Freetrailer made major positive contributions to the fund's development. Negative contributions came primarily from the holdings in Medicover, Hanza and Norva24.
 
After a strong January, several larger holdings developed weakly during February, which negatively affected the fund's return. Medicover fell sharply on its Q4 report, which we find unjustified. The outlook is stronger than in a long time, while Q1 2024 will be the first quarter without major clinic openings and covid-related revenues in the comparison base. Profit growth is expected to accelerate in 2024, when already expanded care capacity is filled with a high incremental margin. During the month, we acted on the weak price trend and increased the position.
 
At the end of February, Norva24 came out with its financial statements. During October and November, the trend from Q3 continued with high organic growth and rising margins. Then came the month of December, which brought the coldest and snowiest weather in 25 years. As operations are largely carried out outdoors, activity was negatively affected in several departments, especially in Norway.
 
Working outdoors - with water - at minus 25 degrees is for obvious reasons challenging, which was also visible in the cross rivet. The margin in Q4 was disappointing for both us and management. However, weather and wind cannot be controlled and the weather-related "post out" could just as well have become a "post in" if December had been milder, such as winter 2020/2021.
 
Despite the weather situation, organic growth amounted to +5% for Norva24 during the fourth quarter compared to the same period last year. At a time when most serial acquirers lose one or more percent organically, the level of growth demonstrates the strength of the cyclically stable business model that Norva24 has. A short-term and backward-looking market, chose to trade the stock down sharply after the Q4 report.
 
Looking ahead, the outlook remains bright. Although the month of January has been affected by similar weather to December, higher temperatures are imminent in the spring. With the extreme cold experienced during the winter, another, deeper, type of frost also comes in the ground. When this pipe goes out of the ground, the aging pipe infrastructure will be greatly affected. In addition to frost damage, all snow is expected to melt. The risk of burst pipes, floods and water leaks is high during the spring, which is expected to increase demand for Norva24's services.
 
M&A activity has been muted recently, driven by the CEO change in September 2023. The new CEO Henrik Norrbom is now in place and the company has several ongoing DD processes. Cash flow has improved sequentially and the balance sheet has strengthened, which means that we expect a substantial ramp-up in the number of M&A transactions in the next 6–12 months. Overall, the investment thesis is followed despite the margin disappointment in Q4. Norva24 is the largest holding in ORIGO SELEQT.

/Team Origo