Monthly Update - March 2024
Market comment
Optimism characterized March, as a result of falling inflation and the fact that more and more investors perceive the economic development as more predictable.
Global stocks rose 3.2% during the month. The Nordic small cap index (Vinx Small Cap SEK NI) advanced by 6.6%, while the Swedish microcap index (CMCRXSE) rose 5.6%.
ORIGO QUEST (Equity L/S)
Origo Quest rose by 3.5%, which means a new all-time high for the fund. The long book outperformed the market after strong performance for Catena, AOJ, Coor and Wihlborgs, among others. The short book and other positions had a mixed development. The return for the last six months amounts to 10.5%, while risk-taking corresponds to approximately one third of the stock market's risk level.
The volatility amounts to 9%, which can be compared with the small company index which is 24%.
Nolato is a new holding that we feel is both under-analyzed and misunderstood. We invested after the price decline in connection with the financial statements in February this year. In Nolato, it's the margin that rubs off.
The Integrated Solutions business area has more or less undergone an implosion in the wake of changing customer behavior and sharply falling VHP volumes.
The hub of the movement is the medical technology division, Medical, which accounts for the majority of the revenue base. Even in that business area, margins have been under pressure following rising commodity prices, a lag in price adjustments and jerky order placement in surgery. The major acquisition of American GW Plastic has – so far – not been a major success, but instead brought with it a diluting margin effect driven by, among other things, high labor costs.
However, there is great potential for improvement in the group. Recently, Nolato announced a significant cooperation agreement with a global pharmaceutical giant - by implication Novo Nordisk - regarding supplies of medical devices to administer drugs against obesity and diabetes. At full production, the collaboration is expected to bring in annual revenue of around SEK 700m. Nolato stock, which has traded weakly for the past 3 years, is in need of a positive trigger, something that is now here with the GLP-1 hype next year.
The Danish insurance company Alm. Brand, founded back in 1792, is also a new long holding in the fund. After the sale of the life company and the acquisition of Codan, the new company has established a strong position on the Danish non-life insurance market. We expect significant synergistic effects, driven by increased outsourcing, digitization and automation, as well as continued pure farming. The stock has risen by +20% in the past six months, but the upside is significantly greater than that, while we assess that both the operational risk and the valuation risk are relatively low.
The fund's largest long-term holding, the service and car company Bilia, made a major acquisition at the beginning of the month through the purchase of the family company Olofsson Bil. Through the purchase, Bilia adds SEK 1.3 billion in revenue and, fully in line with our investment thesis, continues to consolidate the car market in Sweden. The stock has risen by almost 30% in the last six months, but is nevertheless valued well below comparable service companies. We believe that the gap will close in the coming years as the recession risks subside and the stock market's view of the company's business model changes.
ORIGO SELEQT (Nordic Small Cap)
ORIGO SELEQT increased 6.8% during the month. The real estate company Catena and the winter tourism company Skistar made major positive contributions to the fund's development. Negative contributions came primarily from the larger holdings in Hanza and Medicover.
During the fall of 2023, we participated in Skistar's capital market day. At the time, we were surprised by the low interest in the company, where only a few institutional investors participated on site. The share traded close to the 100 kroner level and shortly afterwards we started to build a position in the company. Skistar recently delivered a record quarter and is a top holding in ORIGO SELEQT.
Under the leadership of CEO Stefan Sjöstrand, Skistar has implemented a series of operational improvements. Like other seasonal businesses, the majority of profit and cash flow is generated during a limited time of the year. Weather and wind can get in the way, but this year all the stars have aligned. A snowy, cold winter combined with a positive calendar effect (with Easter in Q1) has benefited the group. In addition, interest in sustainable tourism in the local area is growing.
In addition to the winter season, there is great potential in the summer investment. Break-even is some year away in the summer half, but would provide significant change on the bottom line. After a price rise of around +50% since the entry, the Skistar share is more reasonably valued. It is possible to reason about what a correct valuation is for a unique asset company with a monopoly-like position in the growing northern part of Sweden. For the time being, exploitation profits are lying fallow, but provide another growth cylinder once the economic and interest rate curve improves.
Nolato is another holding that we feel is both under-analyzed and misunderstood. The share was bought in after the price decline in connection with the financial statements in February this year. Since then, the holding has been built on and, like Skistar, is a larger holding in the fund. In Nolato, it's the margin that rubs off. The Integrated Solutions business area has more or less undergone an implosion in the wake of changing customer behavior and sharply falling VHP volumes.
The hub of the movement is the medical technology division, Medical, which accounts for the majority of the revenue base. Even in that business area, margins have been under pressure following rising commodity prices, a lag in price adjustments and jerky order placement in surgery. The major acquisition of American GW Plastic has – so far – not been a major success, but instead brought with it a diluting margin effect driven by, among other things, high labor costs.
However, there is great potential for improvement in the group. Recently, Nolato announced a significant cooperation agreement with a global pharmaceutical giant - by implication Novo Nordisk - regarding supplies of medical devices to administer drugs against obesity and diabetes. At full production, the collaboration is expected to bring in annual revenue of around SEK 700m. Nolato stock, which has traded weakly for the past 3 years, is in need of a positive trigger, something that is now here with the GLP-1 hype next year.
/Team Origo