Disclaimer: This is not investment advice, PLEASE DO YOUR OWN RESEARCH !!!!
For all readers that found my SFS write-up from February as too exciting, I have good news: I have found a stock that looks at least as boring as SFS, maybe even more so: Logistec, a maritime terminal operator from Canada.
Background/Intro:
This is the first investment idea that I initially found on Twitter, a big Hat tip to Sutje who brought this up on my radar and of course to the author of the original write-up “Wintergem Stocks”. The Wintergem Substack has a 3 part write-up that I can only recommend to read first:
And on we go after a short break with another fresh 15 Norwegian stocks, selected by the Google Sheets random generator. This time, I have identified six companies that go onto the preliminary watch list. Let’s go:
106. Instabank
Instabank is a 50 mn EUR market cap “fully digital bank that offers loan products, savings and insurance to consumers in Norway, Sweden and Finland.” The company was IPOed in 2022 and surprisingly trades slightly above its IPO price, a clear exception for the 2020/2021 IPO vintage.
Equally surprising is the fact that a relatively young “digital bank” makes a profit. They seem to lend to more “high yielding” customers but overall, they show decent growth and the stock looks cheap at 8x trailing earnings and ~6,5x 2023 earnings.
Although I am not a big fan of Nordic banks, I think this one is worth to potentially “watch”.
107. GNP Energy
GNP Energy is a 19 mn EUR market cap Energy company that has lost more than 50% since its IPO in 2020. I also found very little tangible information on this one. “Pass”.
108. Wilh. Wilhelmsen
Wilh. Wilhelmsen is a 1 bn EUR market cap “global maritime industrial group offering ocean transportation and integrated logistics services for car and ro-ro cargo. It also occupies a leading position in the global maritime service industry, delivering services to some 200 shipyards and 20 000 vessels annually.”.
Looking at the long term chart, it seems that there is significant cyclicality in Wilhelmsen’s business:
The shares currently trade at a historical high and on avery low P/E multiple. The P&L is not easy to read as the majority of net income comes from non-consolidated JVs. My gut feeling tells me that entering at the top of the cycle might not be a smart idea, however they seem to be very active in supporting the offshore wind industry. Therefore I’ll put them on “watch”.
109. Austevoll Seafood
Austevoll is a 1,6 bn EUR fish farmer, which compared to the other fish players so far, is a very established player. Looking at the long term chart we see a relatively good value creation, but quite some volatility:
The stock looks quite cheap at 8x 2023 earnings, but they employ quite some leverage. I think they were also hit by the suprse Norwegian Special tax for Salmon fsih farmers. Overall, this could be one of the fish farms where one could learn something, therefore they go on the preliminary “watch” list.
110. Tysnes Sparebank
Tysnes is a 20 mn EUR local savings bank, which, not surprisingly is located in Tysnes near Bergen. The stock looks cheap, but regional savings banks are not my specialty, therefore I’ll “pass”.
111. Salmar
Salmar, with 5,5 bn EUR market cap seems to be one of the “larger fish” among the Norwegian fish farms. The long term share chart looks impressive, despite the obvious hit from the special tax:
However, the valuation at 17,5x 2023 earnings seems to reflect this already to a certain extent. Interestingly, Salmar holds a 71% interest in another listed Norwegian company called Froy which seems to be a specialist in servicing fish farms. According to the Q4 report, they seem to contemplate selling Froy
Overall, Salmar is also a company which could be interesting to “watch” as their track record seems to be really god.
112. Froy
As a one time excepion, I follow up with Froy, a 475 mn market cap stock in which Salmar holds a 72% stake. Froy was IPOed in 2021 and its share price went on a pretty wild ride:
According to their initial investor presentation, Froy seems to be a very important service provider to the fish farming industry, providing all kind of essential services with a focus on Norway:
I guess that their focus on Norway led to the significant loss in the share price follwoing the surpise tax on Norwegian Slamon farming last years.
As mentioned in the Salmar write-up, Salmar seems to be considering “strategic options” for Froy whatever that means. In any case, I find Froy interesting, despite the fact that it is not cheap at 18,5x 2022 earnings. “Watch”.
113. Okea
Okea is a 250 mn EUR market cap company that owns minority interest in several Norwegian off shore oil fields.
They seem to specialize on mature oil fields and try to extend the life of these fields.
The company was IPOed in 2020 and the share price has been fluctuation widly between 10 andf 70 NOKs:
As many oil stocks, the stock looks ridicuolosly cheap at around 2,4x trailing P/E and a big juicy dividend. However there seems to be clearly a strong leverage to oil prices which are now declining for some months. Somehow I still find them interesting bexause of their foucs on Norway, therefore they go on “watch”.
114. Techstep
Techstep is a 37 mn EUR market cap company that seems to hav had its best time in the early 2000s, although the current business model seems to have impmented only in 2016. The company seems to offer some mobile services, but only achieved to have a positive operating result in 2 out of the last 6 years. “Pass”.
115. Sparebanken 1 Helgeland
This is a 324 mn EUR market cap regional savings bank that looks quite profitable- The stock has performed quite welll since the GFC and is not too expensive (P/E ~10,5). However. local banks are out of scope for me, “pass”.
116. Agilyx
Agilyx is a 228 mn EUR market cap company that is active in chemical plastics recycling. As a 2020 IPO, the stock trades around the IPO price, which can be considered a succes for this vintage.
As one can expect from a young cleantech company, they are loss making, although they do have sales, currently a run rate of 15-20 mn EUR. However gross margins are negative for the time being and they are burning cash.
The main shareholder is a fund called “Saphron Hill Ventures” and as many such companies they have an impressive list of strategic partners (Exxon etc.). They seem to operate a JV with Exxon in the US called Cyclix, that recycles plasticand another project seems to be in construction in Japan
Plastic recycling is an interesting topic, however a negativ gross margin really turns me off, therefore I’ll “pass”.
117. Aurskog Sparebanken
Aurskog is a small, 89 mn EUR market cap local savings banklocated in Aurskog near Oslo with no specific aspects at a first glance. “Pass”.
118. SATS
SATS is a 110 mn EUR market cap fitness chain that is active across Scandinavia. The company IPOed in 2020 and lost around -75% since then, indicating that not all is great.
The main reason might be that since their IPO, they have not been able to genrate a profit. The company has significant debt, although they managed to lower the debt burden over the past 3 years.
Because of loan covenants, the company is not allowed to distribute dividends and Q4 2022 was not great, most likely due to electricty and heating costs.
At an EV/EBITDA of ~5,5 this might be interesting for turnaround specialists, but for me the risk is much too high, therfore I’ll “pass”.
119. Nykode Therapeutic
Nykode is 570 mn EUR market cap “clinical-stage biopharmaceutical company, dedicated to the discovery and development of vaccines and novel immunotherapies for the treatment cancer and infectious diseases. Nykode’s modular platform technology specifically targets antigens to Antigen Presenting Cells.” Nykode was only profitable in its IPO year 2020 and has been making losses in 2021 and 2022.
As far as I understand, they are using a different technology to MRNA, but they have some interesting cooperations and Cash should last for a couple of years. However, Biotech is far out of my circle of competence, therefore I’ll “pass”.
120. Wallenius Wilhelmson
By coincidence, this 3 bn EUR market cap company has been selected in the same part of the series as Wilhelm Wilhemsen. And indeed, the companies are related as Wallenius Wilhelmsen seems to be a JV between Wallenius and Wilhelmsen, specialising in owning and operating ships that transport cars.
As other shipping companies, the stock did quite well, doing ~11x since the bottom in MArch/April 2020. The stock looks really cheap at a P/E < 5, but buying cyclical stocks at the margin peak is rarely a good entry point. As I have Wilhelm Wilhelmson already on watch, I’ll “pass” here.
In between, the bank run accellerated and SVB was then closed and rescued by the FDIC. In the age of social media, there is now a lot of coverage on this event available, personally I found this Odd Lots Podcast Episode helpful as well as Matt Levin’s take. Matt Levin also has an answer on why SVB was not sold over the weekend: In the wake of the GFC, many of the banks who bought failing lenders were then punished with lawsuits and it seems that something like this could happen to SVB as well.
Current consensus is that SVB failed both, because of very unwise interest rate bets on its asset side as well as an unhealthy concentration of its depositor base connected by a few big VCs on its liability side. According to many stories, SVB was a very active member of the Silicon Valley VC ecosystem and somehow the VCs (and startups) basically killed the Goose who laid them golden eggs with this bankrun. In the current difficult funding environment, It would have made more sense fot the VCs to support the bank but I guess they were all in panic mode.
CS was a slow moving train wreck ever since the former McKinsey “Wunderkind” Tidjane Tiam took over as CEO in 2015. When he was fired in 2020, not only it was revealed thaty he used private investigators to spy on fellow board members, but more importantly, Credit Suisse was involved in almost every major fuck-up in the last few years. A few examples:
Looking at the CS share price, it is pretty obvious that there is literally no bottom:
Although it is always very difficult to make predictions, I personally think that a true and lasting turn-around for CS is very unlikely. There are very few cases in banking history where a financial institution survived such a “clusterfuck”. Credit Suisse would not be the first big name in Banking that just disappears. Besides Leahman and Bear Stearns, who remembers Salomon Brothers, DLJ, Bankers Trust, Barings, Smith Barney, Chemical Bank, Dresdner Bank and all the others ?
The most likely scenario in my opinion will be that the ring-fenced Swiss operation will somehow survive. What that means for Bondholders and shareholders on Group level is open, but in my opinion the CS shares are at best a “far out of the money option” on a very optimistic scenario. Of course anything can be traded profitably in the short term, but mid- to longterm, a complete loss of capital is very likely for CS shareholders.
Today: First Republic Bank
First Republic, a “mid sized” 200 bn plus US bank with ~21 that banks to “High net worth clients in costal regions” continued its plunge and said it would be open to almost anything, including a fire sale in order to survive.
When reading the January invetsor presentation, First Republic looks like an absolute success story, among others, their share price went up 13x since 1987, almost 2x the level of the S&P (i guess ex dividends) which is remarkable for a bank:
However, looking at these slides, it becomes relatively clear where the problems of Republic are: Funding is mostly via deposits:
The deposits are mostly business accounts and larger size:
And, the Asset side consists mostly of “coastal real estate loans” and business loans to venturec Capital funds, both assets that might be in trouble:
To be honest, If I would have known about First Republic earlier and read the investor presentation, I might have considered it as a potential investment. The bank also traded at unusual high P/E multiples in the range of 20-30 earnings, so very few investors
Next week and thereafter: Whatcould be the more lasting effects of this episode ?
I guess that for the next two or more weeks, the market is “hunting” for further weak players and all of them will be backstopped by their respective Governments and Central Banks. A “Lehman moment” in my opinion still remains a very low probability scenario. However it is also clear that this whole development might have wider consequences.
For the banks, it will be even more difficult to transform short term deposits into longer term assets, which by definition is one of the main function of the banking system. For the US, more and tougher regulation is already on the way.
Among other side effects, overall the current development will most likely increase funding cost and limit borrowing capacity for the banking sector. This in turn will make it more difficult for borrowers to obtain or roll over bank loans. And if borrowers are able to obtain bank loans, they will need to pay higher credit spreads. A certain increase in Corporate Credit spreads was already observable in the past few days.
Overall this could have a siginficant impact on business activity as the availability of bank loans is a leading indicator for economic activity. This in turn could then lead to the second part of the cycle, the real credit cycle with more defaults etc.
Depending on how inflation rates are developing, the central banks might counter with lower interest rates, which however, do little to make lending easier for the banks. Of course, Governements and Central banks will try to counter a big credit squeeze, however without tighter credit conditions it is unlikely that inflation will cool off quickly.
I need to emphasize here that I am not a Macro guy at all, but overall, I think the probability for a real credit cycle has increased significantly. As a consequence, in my opinion one should limit exposure to exposed financial companies as well as businesses with near or mid term funding requirements.
For some time now, many market pundits were pushing the idea that Banks and Insurance companies would be basically “no brainer” investment as higher interest rates mean higher profits for these players.
And indeed, historically one can observe that higher interest rate levels allow for higher spreads, both for banks and insurers. Subsequently, even low quality institutions like Deutsche Bank and Commerzbank saw decent rises in share prices, even significantly better than the respective indices:
The main problem: existing assets and liabilities
The main problem however with the “higher interest rates are good” for banks and insurance companies is the fact, that they cannot start from a clean sheet. Every financial institution has a starting Asset pool and liability structure. Increasing interest rates eat themselves through the financial system at a relatively slow but unstoppable pace and different mismatches will be revealed at different stages during that process.
Early victims: Liquidity mismatches
The earliest victims will get caught if the underestimate the liquidity of their liability side and are then forced to liquidate assets at (very) unfavorable prices.
First “Liquidity risk victim”: Uk Pension funds
Very early in the current interest rate cycle, we saw the first casualty: UK Pension funds, which used large amount of derivatives in order to extend their asset duration which in turn led to high collateral requirements and forced sales of liquid long term governemnt bonds which in turn pushed interest rates higher. Only a massive intervention from the Bank of England prevented that UK meltdown. In the case of the UK Pension funds, the potential liabilities of the derivatis were not adequatly matched with uncorrellated liquid assets which caused the systemic problem. Due to the instant collateral requirement, the problem surfaced very early in the crisis
Second “liquidity risk” victim: “Liquid real estate funds” Blackstone
Blackstone, the US PE giant had arount 70 bn USD in real estate funds that invested into illiquid real estate but offered investors to get their money back at regular intervals. As the prices for the funds still went up, some investors thought it might be better to get the money out which in turn required Blackstone to “gate” withdrawels. In this case, Blackrock had actualy the opportunity to stop withdrawals, which in the short term of course helps them a lot, but in the mid- to longterm will create some reputational issues with their investors.
Third “liquidity risk victim”: Silicon Valley Bank
In a situation that is currently developing, among other issues, Silicon Valley Bank thought that it was a good idea to invest a significant part of short term deposits into long term Mortgage Backed Securities (MBS).
This week it seems that its institutional depositor base seems to have became worried and satrt to ask for their deposits which in turn will require SVB to sell thes bonds at a loss and therefore deplete capital which could easily turn into a death spiral in a few days.
It will be interesting if and how the situation develops over the week end. My best guess would be that a few Silicon Valley VCs/Teck billionaires might step up and rescue SVB as the Bank is super important for the Silicon Valley ecosystem.
The market now will clearly try to identify and “hunt” banks that have similar mismatches. I could be very wrong, but I do think that most of the larger players, both in the US and Europe have managed their liquidity risks a lot better than SVB, but some smaller and more “innovative” players could be equally vulnerable.
Mid- to long term victims: Credit troubles – Example Commerzbank
However, liquidity risk is something that usually shows up at the early stages of an interest rate cycle. The other, much slower but at least equally big risk for any financial institution is credit risk. Higher interest rates mean higher expenses for borrowers. Over time, more and more highly leveraged borrowers will start to default. For banks, in principle this could be manageable, as the usually have collateral that they will seize and sell. But if the collateral is also negatively effected by rising interest rates (e.g. real estate), another death spiral could be created.
The credit cycle normally moves a lot slower than the initital liquidity cycle and to be clear, for the last 20 years or so there was actually not a “real” credit cycle. The first credit cycle, after the financial crisis was mostly mitigated through central bank intervention. The second potential cycle following Covid was neutralized via direct transfers from the Government. I think it is fair to assume certain interventions again this time, but it would be very optimistic to again assume no real credit cycle this times with high fefault rates over a couple of years.
Interestingly, some banks seem to see this very differently and do not prepare themselves for a more harsh climate. Commerzbank for instance, who proudly reported “record results” for 2022 did not increase loss reserves very much in 2022 as shown in this slide from their investor presetnation and seem to cover their existing exposures at a lower level than at the end of 2021:
This clearly allowed them to increase compensation for Managwment significantly but I do think that there is significant potential for nasty surprises in the next few years. Commerzbank might be facing increasing write-offs in the very near future if more creditors get into trouble and therfore I find it very aggressive to actually lower the coverage of the existing exposure.
Interestingly the mortgage sector for them is not a concenr, as they write the following:
The automative sector however, who just recorded record profits, is mentioned as a risk sector. I am not saying that Commerzbank is the worst offender, but assuming that it can only go up for them from here due to higher interes rates is very naive. Maybe Commerzabnk can create one good more year if the credit cycle moves slowly or interest rates would go down quickly, but at some point in time they have to face reality.
So when looking for potential financial services companies to invest, one should look especially if and how and institution prepares for the coming necessary adjustments.
Summary:
In my opinion, we are currently in the early stages of a longer adjustment process that high interest rates will be “adequatly reflected” on the balance sheets and the P&L of financial companies. This adjustment process will very likely lead to significantly higher default rates than we have seen in the last 20 years which in turn is a big issue for every financial institution.
Those companies who had conservative balance sheets before this recent devlopment and prepare themselves with adequate provisions will have much better chances of being long term winners than those who do not.
One should be especially careful with companies that were already in troule before interest rates shot up so quickly (Credit Suisse for instance).
To keep the running gag going: No fish this time and only a few ships, but a lot of other stuff in this random selection of 15 Norwegian stocks. 4 out of these 15 qualified for my prelimiary “watch” list. Let’s go:
91. Wilson ASA
Wilson is a 270 mn EUR market cap shiping company that operates ~130 smaller vessels. As other shipping companies, they trades at very low valuations, in this case 3,5x 2022 P/E. Operating margins have increased from 2,5% to 40% in 2022. I have no idea how sustainable these margins are, but historically the peak has been around 20% and on average maybe 10-15% with a high volatility. Interestingly, the share price hovered around 20 NOKs for 20 years before going up more than 3x in 2021:
Nevertheless, volatile shipping stocks are not my area of expertise, “pass”.
92. Elektroimportoeren ASA
As the name indiactes, this 84 mn EUR market cap company retails and distributes equipment for electrical installations (light, electricity etc.). The company has grown nicely over the past 5 years, however EPS halfed in 2022 which led to a significant drop in the share price below the level of the IPO in 2020:
They seem to have entered the Swedish market in 2022 but overall, Gross margins and like-for-like sales struggled and interest expenses increased, leading to a big reduction in profits. At 19x trailing p/E and 15x trailing EV/EBIT, the stock is not cheap and the IPO seems to have been “well timed”. “Pass”.
93. Entra
Entra is a 1,9 bn EUR market cap real estate company that mostly owns office buildings in Norway. The stock lost almost -50% from its top, similar to many other real estate stocks. I always find it hard to understand the commercial real estate KPIs like EPRA NAV and this stuff, their P&L is quite messy as the show mark-to-market gains and losses in the P&L. Real estate is something I would only consider in very specific circumstances which this is not. “Pass”.
94. Navamedic
Navamedic is a 57 mn EUR market cap “Nordic pharma company supplying hospitals and pharmacies with pharmaceutical and medical nutrition products”. The company has been loss making for many years but, surprisingly, became profitable in 2022. This is reflected in the share price which is now close to ATH:
The company seems to have a wide protfolio of OTC and prescription drugs as well as “medical nutrition” with some focus on obesitiy, but also antibiotics and other stuff. At less than 20x P/E, the stock is not too expensive and the company plans o grow via M&A etc to 1bn NOK in revenue and 150 mn NOK in EBITDA. For the time being, I will put them onto the extended “watch” list
95. Cyviz
Cyviz is a 44 mn EUR market cap “global technology provider for standardized conference rooms, control rooms and experience centers.” The company was IPOed in December 2020 and is loss making, but based on TIKR at least cash flow positive.
If I understand their business correctly, they establish control rooms for the defense sector as well as high quality board rooms atc around the world:
Somehow I find this company quite interesting, especially as it is still growing quite quickly (+50% full year, +80% q-o-q). This seems to be one of the better 2020/2021 IPOs, therefore “watch”.
96. Elliptic Laborator
Elliptic is a 160 mn EUR market cap company that does some “”sexy” things like “AI Based 3D gesture Software sensors”. However, Revenue is only 5 mn EUR, stagnating and they are making losses. One of the weaker 2020/202 IPOs, “Pass”.
97. ATEA
ATEA is a 1,2 bn EUR market cap “leading Nordic and Baltic solution provider of IT infrastructure with over 7,000 employees. Atea is present in 85 cities in Norway, Sweden, Denmark, Finland, Lithuania, Latvia and Estonia. “
With operating margins of 2-3%, the bsuiness model seems to be more of a reseller or distributor. The company is relatively moderately valued at 14x P/E and return on capital/equity is currently at around 20% or more.
Atea has net cash, is paying a rather generous dividend (~5% yield) and has been growing nicely over thy past few years. The share price however does not fully reflect this:
Although similar IT distributors are equally cheap, I put ATEA on “watch”.
98. Green Minerals
Green Minerals is a 5 mn EUR Nano Cap that claims to be the ” pioneer in marine minerals on the Norwegian Continental Shelf”. The company has little revenue and is burning money, with a runway of less than 2 years left. “Pass”.
99. Norwegian Block Exchange
This 10 mn EUR market cap 2021 IPO runs a Crypto exchange. Of course they are burning cash and they have raised addtional money in Q3 2022. “Pass”.
100. Questback Group
Questback is a “leading platform for conducting Employee and Customer Experience surveys”. The market cap of only 5 mn EUR indicates that business is not so great. They have been growing in 2022 but are CF negative and have substantial debt. Further equity financing is likely required as they have less than 1 year runway left. “Pass”.
101. Exact Therapeutics
Exact is a 31 mn EUR market cap stock that IPOed in 2022 and lost around 2/3 of its value since then. They develop technology ” for targeted therapeutic enhancement – Acoustic Cluster Therapy (ACT®). ACT® sonoporation is a unique approach to ultrasound-mediated, targeted drug enhancement”, whatever that means. The company has no revenues, “pass”.
102. Solstad Offshore
Solsatd is a 320 mn EUR market capo company that “operates offshore service and construction vessels for offshore and renewable energy industry worldwide. It provides platform supply vessel, anchor handling vessel, subsea construction, and renewable energy services.”.
Operationally, things look relatively good these days, but the company still carries a lot of debt (~2 bn EUR) and is making losses on GAAP basis. Largest Shareholder seems to be Aker who snapped up other Norwegian players in the past. “Pass”.
103. Adevinta
Adevinta is a 8,4 bn EUR market cap online classifieds company that was spun-off from Schibsted in 2019. Schibsted owns ~34,8% and interestingly Ebay owns almost the same amount. Looking at the chart, we can see that initially the stock perforemd very well before than suffering from 2022 on:
The business as such looks attractive. High growth rates (+40% in 2022) and decent operating margins. However, a large Goodwill impairment in 2022 led to a GAAP loss.
Based on the projections, the stock is valued a ~15x EV/EBITDA for 2023 and they expect to grow at “low double digits” for the next years. Although the stock is not cheap, it is defintely one to “watch”.
104. Nel ASA
Nel is a (much hyped) 2,2 bn EUR market cap company that is active in the Hydrogen Economy. Nal manufactures Electrolyzers and Hydrogen Filling station equipment. Looking at the chart we can see that Nel has been around for some time and had a frist hype cycle just before the financial crisis:
Compared to other companies in that space, NEL actually does have sales (~90 mn EUR in 2022), but is not making money. Losses are actually higher than sales. Personally, I do not believe in a mass market for Hydrogen as a car or truck fuel at least for the next 10 years or so, therfore I’ll “pass”.
105. Arctizymes Techno
This “fancy name” company has a market cap of 180 mn EUR does something with enzymes and surprising to me is actually making a small profit. Nevertheless, at around 13xEV/Sales and 50x EV/EBIT with only moderate growth, I do not think that this is interesting. “Pass”.
value and opportunity 