value and opportunity

Svenska Handelsbanken

I mentioned it in the comments, that I sold my Svenska Handelsbanken a few days ago. This was not an easy decision as I still like the company due to its unique culture. However I see the following short- mid- and long term issues:

• UK exposure: The combination of Brexit and Covid-19 creates a rather big “tail risk” for UK borrowers. The UK was supposed to be Handelsbankens gowth engine. I think this is over and there is a risk of significant credit losses
• Interest rates: Before Covid-19, there was some hope for increasing interest rates. The Swedish Riksbank even cautiously increased interest rates back to zero percent from negative territory in December. However now, with Government deficits ballooning, another decade of ultra low or even negative interest rates is highly likely and therefore banks will not do well in aggregate
• Finally, one of Handelsbanken’s defining feature, the personal contact to customers is being challenged by Covid-19. I think there is a risk that the underlying push to fully digital offerings also in banking will be accelerated and that Handelsbanken’s branche-based strategy will suffer

The combination of these 3 issues led me to sell the position sa few weeks ago. Including dividends, I realized a loss of ~6% in total over a period of 4 years and a few months. This is a combination of +20% in aggregate in dividends and the negative price action. Not good, but within the banking sector still an outperformer. It will be interesting to see if and when banks become interesting again.

Bouvet ASA

Due to a massive rebound after the Covid-19 crisis, Bouvet has now become my best investment ever since I started writing the blog. Funnily enough

I bought the stock in Summer 2014 as a cheap “quality” stock, expecting 50-75% return after 3-5 years. I looked briefly at the stock after the 2014 “Oil crisis” when it was not doing well and decided to hold which was a very good decision.

Compared to the 85 NOK purchase price, the current price of ~500 NOK is almost 6x the initial price plus around ~50 NOK in dividends. Unfortunately, the weak NOK took out some -20% via currency depreciation.

Nevertheless, this outperformance increased the weight of the stock from an initial half position(2,5%) to 8,4% of the portfolio and becoming my biggest position.

This is a quick comparison table between 2013 (the year that was the basis of my purchase) and 2019:

	2013	2019	Delta in %
Sales	1112	2132	91.73%
Op. Profit	95	232	144.21%
Net Income	70	180	157.14%
Operating margin	8.54%	10.88%
Net income margin	6.29%	8.44%
EPS	6.75	17.44	158.37%
ROE	46.20%	60.71%
Trailing PE	11.8	28.8
EV/EBIT	8.1	14.7
EV/EBITDA	7.3	18
P/S	0.7	1.92
P/B	4.3	15
Dividend yield	7.10%	1.65%

So we can clearly see that a good part of the share price increase is driven by a ~160% increase in EPS which itself is driven both, by increase of sales and a margin expansion. However the the increase in valuation multiple is still more than 50% of the overall positive development.

Bouvet is clearly benefiting from the push to digitization and as the biggest Norwegian consultant they also have the “Home advantage” when pitching for Government contracts.

On the other side, they now seem to have already a significant market share (~20%) and the question is how much more their profit margins can be improved. Valuation wise they are now at par or even slightly above global market leader Accenture which would I use as the ultimate benchmark. Accenture has an operating margin of 14%, however this is based on 20x the revenue of Bouvet.

All in all, it looks like that Bouvet, despite showing good growth in Q1 is now clearly on the expensive side. As I have learned the hard way in the past, good and expensive companies tend to become even more expensive, I won’t dump the full stake anytime soon.

However in order to manage the exposure, I’ll take the position down to 4,8 6% and sell ~25 42% of my position at 500 NOK/share.

Edit: The strike-through numbers are the effect that during writing the post I saw that insiders including the CEO sold around 16% of their holdings. That’s why I cut the position  further than initially planned (by around 16% ;-).

Coface

A few weeks ago, invested into a 1,5% position of Coface as a “punt” on a European back stop. Since then the stock price has moved -20% against me.

As it looks now, the market seems of the opinion that things do not look good. I think part of that is the fear that a lot of small companies will not be bailed out and that this translates into big losses for Credit Insurance.

As this was more of a punt than a deeply researched investment, I’ll take the hint from Mr. Markt and realize my loss.

Maybe it’s the exact wrong timing, but I learned the hard way that in such “Low conviction” investments, the market is right more often than I am.