Reports
2024
The Nordics shows strength
Market comment
The global growth statistics have continued to surprise on the upside and in most markets the decline in inflation continues at the same time. The exception is the United States, where the rate of price increase is higher than expected. The market's interpretation is, however, that there is room for interest rate cuts in Europe going forward, which is an assessment that we share.
The reporting season is in full swing and at the time of writing we can state that profits have exceeded forecasts while sales have come in lower than expected. It is too early to draw any major conclusions, but the fact that turnover is weak does not feel particularly surprising given where we are in the business cycle. More surprising is that the Nordic gains are holding up so well, and for Sweden specifically, it is even more interesting as the forecasts, unlike the USA and the rest of the Nordics, have been adjusted up for the reporting period.
The world index fell by 3.4%, while the Nordic stock markets had a more neutral development. The small companies (VINX Small Cap SEK NI) on the other hand rose at the same time by 0.3%. So far this year, cyclically stable sectors such as health care and consumer goods have performed the strongest, while interest-sensitive construction and property stocks are at the bottom.
ORIGO QUEST (Equity L/S)
The fund's development and focus
Origo Quest lost -0.9% during the month. In the last six months, the fund has risen by 12.3% and since the start the return amounts to 154.9%, which corresponds to 8.7% per year. The long/short spread was negative during the month given a weak development in the long book, where mainly New Wave and Hanza cost. The short book produced a slightly positive result for the month, as well as YTD.
Munter's Q1 report was solid, with both order intake and profit margins surprising the market on the upside. Revenue grew organically by 7% (11% in total), driven by, among other things, the Datacenters business area. Order intake was even more impressive with an increase of 32% for the group. Parts of the sell-side analyst groupn have been skeptical of Munter's margin targets for the past year, but have been too cautious so far and we are now seeing upward revisions to the profit forecasts for 2024 and 2025.
We further assess that the company's successful transformation continues and believe that software, sensors and control systems will play an even more important role in the future.
The fund is positioned for some upside but with a belief that the high volatility will continue to be high. The focus is on creating additional returns and limiting market risk. The fund's volatility amounts to 9.6%, which can be compared to the small cap index of 24.6%
ORIGO SELEQT (Nordic Smal Cap)
The fund's development and focus
Origo Seleqt rose by 2.1% during April. The increase in the last six months amounts to 29.0%, approximately 3 percentage points better than the Nordic small company market.
Medicover, Freetrailer and Nolato contributed positively, while Hanza, Europris and New Wave negatively affected the monthly return.
One of the fund's best investments last year, with a share rise of over 80%, is Danish NKT. The company, which is one of the world's leading companies in high-voltage cables, has invested heavily in recent years and is now reaping the success of this. NKT benefits from the strong electrification trend and has become a winner when new energy systems are to be connected to old electricity grids. NKT, which was actually the first company that
Origo invested in after the launch of the Origo Quest fund in 2013, delivered a whopping 36% organic growth and a new record for operating profit in 2023, and the future prospects are still bright. For example, NKT recently signed an order of 40 billion to a German company to be able to carry out an energy transition.
The market capitalization has swelled and after the valuation to a P/E of over 20X for next year - on a record profit - we see, however, that the risk from here has increased. We have therefore taken home part of the profit to finance new investments.
So far this year, we see big differences in the price development on the Nordic stock exchanges and at sector level. The pattern from last year seems to be repeating itself. The Danish stock exchange has climbed over 15%, while the Finnish harrows around the zero mark. Banking and finance have led the rise so far, while real estate and above all energy have had a hard time keeping up.
At Origo, companies are not chosen based on a country och sector strategy, but on company-specific risk/reward. However, we can state that the funds currently have a clear bias towards consumer discretionary.
After the pandemic-doped super demand in 2021, large stocks of, for example, leisure products and other capital goods were built up at distributors and stores. When it then turned out that that demand was not realistic, there was a "stop" in new sales for many companies and the valuation multiples fell dramatically. We believe that the first half of 2024 marks a bottom in the inventory cycle for most of the companies in the sector.
Another favorite sector right now is Healthcare. Stable underlying demand, in several cases clear signs of normalization after pandemic-related disturbances, as well as historically low valuations are some of our arguments
So far this year, several of the funds' largest new investments have taken place within this group of companies (Elekta, Raysearch, Alk-Abello etc.)
/Team Origo
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
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
Strong month in a volatile market
January started more cautiously compared to the turn-of-the-year optimism that marked December 2023. Repositioning and profit-taking resulted in relatively sharp jumps between different sectors and asset classes during the start of the new year. The market has continued to focus heavily on incoming inflation data and how the world's central banks are expected to act in 2024. Speculation about when the first interest rate cut will become a reality has been rife. Most indications are that the first interest rate cut is approaching, whether it will be late spring or summer remains to be seen.
At the time of writing, reporting season is in full swing. Last year was clearly macro- and flow-driven, but our expectation is that 2024 will bring more focus on micro factors and how the various companies are coping in an environment of falling demand, softer economic conditions and geopolitical unrest. Our analysis is that resilient business models will be rewarded during the year, especially if you can demonstrate organic growth and margin stability. The Stockholm Stock Exchange (OMXSGI) lost momentum and fell 1.6% in January. The Swedish small cap index (CSRX) also retreated 2.4%, while the Nordic small cap (VINX Small Cap) fared better and advanced, albeit modestly, by 0.5%.
ORIGO QUEST
The return for the month amounted to 0.3%, which means 7% last year and 9% in annual average return during the almost 11 years that the fund has existed. On an aggregated level, we saw rather small changes within the portfolio during the month. The long book rose slightly during the month with the short book falling slightly, meaning that the long/short spread produced a positive result. Derivatives on indices contributed slightly negatively. Three investments stood out positively, of which two were long holdings: SOBI and A&O Johansen and a short position in the gaming sector. On the negative side during the month we find a long holding; Bilia.
The salmon sector was under pressure following the news that the European Commission is investigating whether six salmon farmers may have breached EU competition rules, based on inspections in 2019. One of the named farmers, MOWI, was quick to respond with a sharp response that they were convinced that any breaches had not happened. QUEST previously had investments in Norwegian salmon, but since last autumn the fund's position consists of the Faroese company Bakkafrost. Our initial assessment is that the commission's analysis may be flawed, but that it involves a clear uncertainty factor and may become a wet blanket over the sector. Our holding Bakkafrost, on the other hand, can be a relative winner In the long term, Nordic stocks and US stocks have followed each other quite well, but now we see clear bubble risks in the US tech sector at the same time that Nordic small and medium-sized companies are valued below their historical average. In our opinion, the Nordic stock market is very attractive with many companies that are at the forefront of structural trends such as automation, the environment and energy.
However, we started the new year by increasing the short side of the fund. After the strong share appreciation during Q423 where several leading indices rose by 10-15%, and with increased geopolitical tensions, as well as an impending and highly uncertain quarterly report season, we chose to take several new short positions and increase the short book in total. When we take short equity positions, it is not only "broken business models" that we are looking for, but we also include companies that we judge will underperform against the market.
ORIGO SELEQT
SELEQT rose 4.9% during the month. The positive development was broad-based in the fund, where several holdings contributed to the positive development. Trifork, Norva24 and Medicover made positive contributions to the fund's development. Negative contributions came primarily from the holdings in TGS, Hanza and Vaisala.
The holdings in SELEQT are clearly different from both indexes and similar funds. The portfolio is exposed to companies with strong business models, often focused on service, maintenance and sales of consumables. During the past year, sectors such as industrial services and health care have been weighted up, where we find businesses that can maintain growth even in a weaker economy. At the end of January, the Norwegian insurance company Protector Forsikring presented its financial statements. As usual, the company pleasantly surprised again. Growth continues, with premiums increasing 48 percent in local currency in the fourth quarter. At the same time as the combined ratio landed at 86.4% in Q4 2023, driven by both good cost control and an improved claim rate. The shareholder-friendly policy is clear in Protector, where the company has returned significant amounts to the owners in the form of cash dividends, often on a quarterly basis, in recent years. The stock has developed strongly and has been included in ORIGO SELEQT since the fund's launch in March 2022.
Among the month's losers, the Norwegian energy data company TGS stands out with a clear negative contribution. TGS came out with a surprisingly weak trading update in January, where the - seasonally strong - Q4 showed weaker development than expected. The explanation can be found partly in lower energy prices, but mainly in the fact that larger energy companies focus on M&A rather than investing in organic growth. It's nothing new, but a trend that has been evident lately and reinforced with major transactions among players such as Exxon, Chevron, etc. Following the merger with industry peer PGS, TGS has the premier library of energy data in the world. The TGS share is in the valley of disappointment, but trades on low multiples given conservative synergy estimates and a normalization of the pace of investment going forward.
/Team Origo