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:
Bouvet is a Norwegian IT consulting company which I unfortunately “discovered” last year in August before the oil price began its free fall in autumn 2014.
Not surprisingly, the stock price suffered along the other oil dependent stocks. Despite the recent small rebound, the stock is still a relative loser for me, especially compared to the huge rally taking part in German stocks:
To add insult to injury, I lost even on the currency side as the NOK became even weaker than the EUR:
Annual Report 2014:
Let’s look at the 2014 annual report first.
Diluted EPS fell in 2014 from 6,75 NOK to 5,45 NOK. If we look at quarterly earnings over the last 2 years, we can see that already Q2 2014 showed a clear decline which then continued the rest of the year. The profit is now at 2012 levels. With a current P/E of around 14 and EV/EBIT of ~10 Bouvet is not that cheap anymore,.
Also, receivables and “work in progress” increased, resulting in a Free Cash Flow before acquisitions of only ~80% of net profit which is very low for Bouvet.
The most interesting part of the annual report was the info on the CAP Gemini acquisition. They paid 12,5 mn NOK, mostly Goodwill for Cap Gemini’s Norwegian business. This is what they say is the impact:
The acquired company has an estimated contribution with NOK 6.0 million to the Group turnover and NOK 0.6 million to the Group’s profit before tax in the period between the purchase and the balance sheet date.
Included in the value of goodwill are employees and expected synergies with Bouvet Norge’s existing business.Had the acquisition been carried out on 1 January 2014, the Group’s estimated total turnover for the entire period would have been NOK 1 159.4 million and the Group’s estimated profit before tax would have been NOK 85.5 million.
With this information,we can easily calculate the acquisition multiple:
Stated 2014 sales of Bouvet were 1.132 mn NOK and EBT 81,6. So without the “partial” contribution, Sales would have been 1.126 and EBT 81,0. So the 12,5 mn NOK bought 33,4 mn NOK Sales and 4,5 mn NOK EBT.
Overall this looks like a pretty good deal for Bouvet. Buying at a trailing EBT Multiple of 3,5 is clearly a "bargain purchase" although it's clearly relatively small.
Q1 2015
After the pretty bad last months in 2014, I was quite surprised that they showed really strong Q1 figures for 2015. At 2,32 NOK, Q1 profit is +26,5% against Q1 2014 and EBIT margin was 9,8%, pretty close to their target.
However, Q1 always looks volatile at Bouvet, from 2012 to 2013 for instance, Q1 results dropped by 23% and Q1 2014 was around +16% against 2013.
So I do think it is too early to call a “turn around” at Bouvet, although their tone is quite optimistic:
Demand for Bouvet’s services is good and stable in Norway, and growing somewhat in Sweden.
Bouvet’s turnover is highest in the oil and gas sector, where the company has tailored its range of services and increasingly delivers to the core processes of its clients. That means the decline in sales to clients in this industry has flattened out
I found this quite interesting, as in other oil related industries (drilling etc.) we only start seeing cost cuts and project delays now in 2015. In the Q1 presentation, Bouvet gives additional information.
From my side, the most interesting developments were:
– they diversified their client base
Client portfolio
The 10 largest customers represent 39.3 percent of total revenues – down from 48.8 percent in Q1’14
The 20 largest customers represent 52.5 percent of total revenues – down from 63.6 percent in Q1’14
– they used less “hired” consultants which might explain the increase in margins to a certain extent.
Other stuff
There has been some movement in the shareholder base in the recent week. According to Bloomberg, DNB sold down around -2,5% via several funds. Handelsbanken however increased in their funds the overall position by around +2% of market cap. So overall no big net movemnet.
Summary:
2014 was clearly not a good year for Bouvet and when I bought the stock, I didn’t expect the oil price to drop and their oil related business to suffer so much. On the other hand, Q1 looks very solid although one has to look if this trend really continues. Overall I do think Bouvet is a good “hold” position and if they continue to perform well I might add to the position later in the year.
Overall their strategy to be a “local Norwegian” consultant seems to work and might help them to secure more Government contracts going forward. I do expect that Norway will try to pump money into their local economy if oil stays weak and Bouvet might profit from this.
DISCLAIMER: The stock which is discussed in this post is an illiquid micro cap stock. The author will most certainly have bought it before writing the post and will not necessarily tell you when he sells. This is not an investment advice. Please do your own research and never rely on stock tips without carefully scrutinizing th motivation and assumptions behind them.
The company
Bouvet ASA is a small Norwegian IT consulting company operating almost exclusively in Norway.
The company is the result of a merger of several smaller Norwegian IT consulting companies and, after a management buyout went public in 2007 on the Oslo stock exchange. Current market cap is around 850 mn NOKs or ~ 100 mn EUR, so it is really small.
Valuation wise, the traditional metrics are OK but not spectacular (at 83 NOks):
P/E: 11,8
P/B: 4,8
P/S: 0,7
Dividend yield 7,2%
EV/EBIT: 8,1
EV/EBITDA: 7,3
No debt, the company has net cash of ~15 NOK per share.
Clearly the dividend yield looks attractive but P/B for instance looks quite expensive, so it’s definitely not a Graham cigar butt.
The business
Consulting business itself is a relatively straight forward business. You hire bright young motivated people and “sell them” on a daily basis to companies at a higher price. In between you have to train and motivate them. This business requires very little capital, mostly it is the receivables from clients and some office supply in a small company office. You don’t need big offices anyway as the consultants are usually at the client’s site.
In my opinion, barriers to entry and therefore competitive advantages in consulting can be achieved via:
1) “Brand name”
The brand name is important for two purposes:
a) For clients: Hiring a “famous” consultant is more expensive but also lowers the “reputational risk” for a project sponsor. If “xyz consulting” is screwing up a project, then the project sponsor has a problem because he hired and unknown consultant. If McKinsey screws up, than it’s not his fault. Achieving a brand is not that easy, so entering the market on the “High end” is not that easy either. It needs time to build up the reputation, although in IT consulting the brand name is a little less relevant than in typical management consulting.
b) For employees: In order to get the best employees, you must have a good reputation with Students, MBAs etc. Without good people you cannot charge high prices, so this is a self-reinforcing cycle once you are on the list of the “High potentials”. High potentials these days have many options, consulting companies, start-ups, investment banks, Google, brand companies etc.
2) Existing client list
It is always easier to pitch “from the inside” than from the outside. Once you are inside a company as consultant, you have access to decision makers which is essential to sell new projects. If you do a good job, many managers will think twice to go through an official bidding process and give the follow-up work to the consultant who is already there. Even for projects with a competitive bidding, it is always better to have some “Inside” knowledge, especially about the client company culture etc. The bigger the client company, the better the chances to get additional projects. Large companies have a surprisingly large “thirst” for consultants.
3) Network effect of “old” consultants with important function
Consulting is not a job to get old. Most young employees will switch to a “normal” job at some point in time. If you treat your employees well, they will be proud of having worked there. Often consultants switch to relatively senior jobs or get hired straight way by clients. If they then search for consultants, they will often give the first shot to their former colleagues (and friends…). This is even more important in management consulting but also important for IT consultants. Good consulting companies “groom” their network of ex colleagues via regular “off site” meetings in nice location.
So how does Bouvet score on these 3 categories ? From my armchair perspective, it is clearly difficult to judge. With regard to attractiveness to employees; Bouvet seems to do some things right, as they are regularily among the “top places to work” both in Norway and Europe. Employee reviews are generally good, although I found one comment that the atmosphere might be a little bit “too relaxed”.
I cannot judge how good their network is, but at least the “Brand” seems to be good in Norway. The client list seems to be as good as it gets in Norway, with Statoil being a big client as well as the Norwegian Government.
Additionally to their consulting (or as a result of it), they also seem to develop some specializes software, for instance this one which measures electricity consumption of trains.
Financial track record
The easiest way to look how Bouvet is doing is of course to look at their financials
| EPS | ROE | NI margin | Div | Payout ratio | |
|---|---|---|---|---|---|
| 2006 | 3,04 | 53,6% | 7,7% | ||
| 2007 | 3,96 | 39,3% | 8,3% | 3,70 | 121,8% |
| 2008 | 5,51 | 42,3% | 9,8% | 4,00 | 100,9% |
| 2009 | 4,21 | 34,3% | 7,2% | 3,75 | 68,0% |
| 2010 | 4,78 | 40,1% | 6,8% | 4,10 | 97,3% |
| 2011 | 6,13 | 50,0% | 7,0% | 5,00 | 104,6% |
| 2012 | 5,41 | 40,2% | 5,4% | 5,00 | 81,6% |
| 2013 | 6,75 | 46,2% | 6,2% | 5,00 | 92,4% |
| 2014 | 6,00 | 88,9% | |||
| CAGR/avg | 10,5% | 43,2% | 7,3% | 99,4% |
Them most remarkable part is clearly that they managed to grow EPS by 10,5% p.a. and distribute 100% of their profit as dividend. This shows that consulting can be really good business if done right and Bouvet at least in the past seems to have done a lot of things right.
Let’s look at a quick peer group comparison:
| EPS Growth | NI margin | ROE | Payout ratio | EV/EBIT | |
|---|---|---|---|---|---|
| Accenture | 14,3% | 7,5% | 64,4% | 146,0% | 12,0 |
| Cap Gemini | 3,0% | 3,9% | 8,8% | 103,0% | 8,8 |
| Atos | 5,6% | 1,7% | 5,7% | 109,0% | 9,3 |
| Bechtle | 10,2% | 2,8% | 13,6% | 100,0% | 12,1 |
| Reply | 16,2% | 5,4% | 16,4% | 100,0% | 8,8 |
| Tieto | -3,6% | 3,90% | 12,3% | 89,0% | 17,0 |
| Bouvet | 10,5% | 7,3% | 43,2% | 99,3% | 8,1 |
Interestingly, payout ratios are in all cases around 100%. However margins and especially return on equity are very different. Clearly US behemoth Accenture shows outstanding ratios in any category, but the stock is also priced a lot higher than the competitors. The comparison in my opinion shows that Bouvet is cheap compared to how good the business look. Bouvet has at least double the profit margins and multiple time ROE compared to those peers and still trades as the cheapest stock in this group.
Other considerations
Management / compensation
This is CEO Sverre Hurum, who owns 4,9% of the Bouvet SA:
He earned around 330k EUR total comp in 2013. This is actually slightly less than what he earned as dividend on his ~5% stake. So at first sight, comp seems to be reasonable and aligned with shareholders. One has to mention that he seems to have sold 1,4% some years ago, he used to own 6,3%.
Other than for instance the Akka CEO, he is not into motor racing but seems to enjoy cross-country skiing. The CFO Erik Stuboe owns another 2,35% in the company.
Analyst coverage /shareholders
Only 2 analysts are covering the stock according to Bloomberg and only one analysis is actually from 2014 (ABG, price target 110 NOK).
Other shareholders:
No dominating shareholders, mostly Nordic pension funds and asset managers. The biggest shareholder is Varner Kapital, the investment arm of a rich Norwegian textile family, followed by Stenshagen, another Norwegian investor with 8%, Interestingly, none of the big international investment companies is invested, this seems to be a “Local” stock.
Stock price & performance
Shareholders who bought Bouvet at the IPO and held the stock, will be very happy. They made 21,9% p.a. or 320% in total compared to only 3,9% p.a. for the Norwegian Stock index.
Despite the stock price increase, the valuation of Bouvet stayed mostly in the 11-13 P/E range as profits rose proportionally to the stock price. The stock has a very low beta to the stock market (0,38). That is not terribly important but good for my nerves especially in volatile markets….
“Flying under the radar” or why is the stock cheap ?
Bouvet is a micro cap stock. Most of the stock is held by pension funds etc, so although free float is theoretically there, trading volume is very low, around 60k EUR per day. So for many small cap funds, this is not interesting as they want to be able to move in and out of a stock relatively quickly. On the other side, this is also a potential “double upside” for investors who are able to invest “under the radar screen”. If the company continues to grow, at some point in time the market cap, free float and trading volume get so big that smaller funds become interested. In such a case, multiple expansion is often very likely. So as an investor, investing in a small, unknown grwoth stock the upside is much better than compared to an “established” stock with a relatively big free float
Negatives:
– expansion outside Norway difficult. Norway is a high cost country, exporting Norwegian consultants to other countries will most likely not work that well
– CEO is 57, how long will he continue ?
– cost structure most likely not as flexible as in an US style company
– consulting is to a certain extent personalized business. If employees are unhappy they can leave the firm but keep the client
Valuation / return expectation
Instead of coming up with a valuation, this time I make an even simpler case. I want to earn 15% on this investment p.a. With the 7,2% dividend yield, I am almost half way there. In order to earn another 8% p.a. over 3-5 years I need either:
– a multiple expansion. Based on the current cash adjusted multiple of ~10xP/E, it is not unreasonable to expect a 12-13 multiple at some point in the future
– or, based on the same multiple ~7% p.a. which is slightly below the CAGR since IPO (around 8% pa.a.)
I am willing to “bet” that it ois likely that one of those 2 scenarios will happen. If both happen, then my upside would be much higher.
Summary:
Bouvet in my opinion is the perfect “boring” small cap company I am looking for. Although it is neither terribly cheap nor having a big moat, it is a very good business at a reasonable price. It is pretty much neglected from analysts and the shareholders seem to be “strong hands”. The company is very shareholder friendly and has good growth potential in a normal environment. There is no “catalyst” event around the corner, but I still think that it is a very good complimentary position to my current portfolio, adding some Norwegian exposure along my mostly continental Europe /UK stocks.
I will therefore establish a “half position” (2,5%) at current prices of ~85 NOK per share. My target would be a 50-75% gain within 3-5 years including dividends.
With a delay of a few calendar days against the original 2023 year end target, I am very happy to conclude the “All Norwegian Stocks” series with the final “Top 20” Watchlist.
Overall, I was somehow a little bit underwhelmed by the Norwegian stock market, at least it doesn’t offer that much of what I am interested in.
From the 270+ stocks, there is a large share of what I would call “listed early stage VC companies” that have been IPOed in the last 3 years. These companies have normally little sales and little cash left but high losses. If you pick the right one, one could make a bundle, but most of them will disappear into bankruptcy sooner or later. This is not my game. Then there are something like 40 different Sparebanken, many Shipping companies and Fish farmers that have business models where I am not 100% comfortable either.
I still managed to collect 20 stocks that I find worth watching going forward, In contrast to for instance the “All Swiss” series I didn’t find any company that I felt the urge to directly invest into (besides my portfolio holding Bouvet).
Final Top 20 Watch list
Without further intro, here are the 20 stocks that I decided are worth watching going forward (on top of my portfolio holding Bouvet ASA):
Following an annual tradition, by the end of the year, I review my portfolio by writing/updating very short summaries for each individual position. 16 of the 23 positions from last year are still in the portfolio and I have added 7 new positions. That turnover has been partially driven by exits/take-overs (Schaffner, Logistec) and by finding new ideas. A more comprehensive Performance review will follow in early January 2024.
A short user guide:
My preferred style of investing is a bottom up approach, focusing on 20-30 small/midcap stocks that in my opinion have a good return/risk profile over the next 3-5 (or more) years. Many of these stocks are not household names and are unlikely to make spectacular gains in any single year. Many of them look interesting only after the second or third glance and are rather boring, which is exactly what I am looking for. So if you are looking for a “Hot stock for 2024”, this post won’t help you much.
And always remember: THIS IS NOT INVESTMENT ADVICE. PLEASE DO YOUR OWN RESEARCH.
As a special service and to offer something “fresh”, I have created a new portfolio overview chart based on holding periods which I proudly present here:
The summaries of the previous years can be found here:
My 23 Investments for 2023
My 28 Investments for 2022
My 21 (+6) Investments for 2021
My 20 investments for 2020
My 22(+1) Investments for 2019
My 21 investments for 2018
My 27 investments for 2017
My 27 investments for 2016
My 28 investments for 2015
My 24 investments for 2014
My 22 investments for 2013
Let’s go:
1. TFF Group (Portfolio weight 7,4%, Holding period 13,0 years)
Read moreAnd on we go witj another 20 ramdomly selected Norwegian stocks. This time, I found 5 of them quite interesting and put them onto the preliminary watchlist. Less than 40 companie sto go. Enjoy !!!
216. Cloudberry Clean Energy
Cloudberry is a 247 mn EUR market cap renewable energy company founded in 2017 and IPOed in 2020. In contrast to Sctaec, Cloudberry is only active in the Nordics. They develop and own and operate renewable power plants in Sweden, Norway and Denmark. Mostly Wind, but also some hydro assets and they seem also to plan to build some hybrid wind/solar parks.
This has become a quite long and somehow rambling post. If you look for “actionable investment advice”, then you don’t need to read this.
Background: Handelsbankon on the blog since 2015
One of the great things of an Investment Blog/Journal is that one can easily revisit everything that one has written years ago when I want to look at a stock again.
Handelsbanken is a stock that I have covered quite often since 2015. Initially, I compared Handelsbanken to Deutsche Bank in 2015, claiming that Handelsbanken is a much better run “quality bank” compared to Deutsche Bank and that Deutsche Bank, despite the much cheaper valuation, most likely the worse investment. This is how Handelsbanken has performed against Deutsch Bank and the European Banking index.
And on we go relentlessly with another 15 randomly selected Norwegian Stocks. As this time, an “old friend of mine” is within the selection, maybe one interesting aspect:
When I bought my first Norwegian stock in 2014, the Exchange rate had been 8,21 NOK per Euro. These days, Norway is stronger then ever and Europe is limping along. Nevertheless, the exchange rate today is 10,92 NOK/EUR which means the the NOK lost -25% over 8 plus years. Quite a surprise if you just look at this from the outside. And maybe the Euro is not so weak after all.
61. Höegh Autoliners
Höegh is a 1,15 bn EUR market cap “leading global provider of Roll On Roll Off transportation services, operating a fleet of around 40 Pure Car and Truck Carriers”. The company IPOed in late 202, but compared to other 2021 vintage IPO’s, Höegh investors are quite happy with the share price being up 3x since IPO.
The company seems to have a rather short financial history. Because of supply chain disruptions, charter rates are at mutli-decade highs. The market thinks that these rates are not so sustainable, otherwise the stock would not trade at a P/E of 3,5:
It is still January and I have managed to look at already 60 Norwegian companies, so this is good progress. This time, 6 companies made it onto the watxh list, although I would not consider any of them a strong candidate. Let’s go:
46. Itera
Itera is a 108 mn EUR market cap IT consulting company. The company has managed to grow topline consistently which is reflected in a relatively high valuation with a P/E in the mid 20s.
If I understand the business model correctly, a sinificant part is “near-shoring” IT employees in Eastern Europe.
The company was IPOed in the heydays of the dotcom boom and needed many years to regain the share prcie level from back then as we can see in the chart:
Following an annual tradition, I’ll try to review my current portfolio at least once a year by writing short summaries for each individual position. 14 of the 28 positions from last year are still in the portfolio and I have added 9 new positions. That tunover has been mainly driven by the events in 2022, which have changed fundamentals for quite a few of the old positions, but also opened up opportunities for new ones. A more comprehensive Performance review will follow in early January 2023.
A short user guide:
My style of investing mostly concentrates on 20-30 small/midcap stocks that in my opinion have a good return/risk profile over the next 3-5 years. Many of this stocks are not household names and are unlikely to make spectacular gains in a single year. Many of them look interesting only after the second or third glance. So if you are looking for a “Hot stock for 2023”, this post won’t help you much.
And always remember: THIS IS NOT INVESTMENT ADVICE. PLEASE DO YOUR OWN RESEARCH.
The summaries of the previous years can be found here:
My 28 Investments for 2022
My 21 (+6) Investments for 2021
My 20 investments for 2020
My 22(+1) Investments for 2019
My 21 investments for 2018
My 27 investments for 2017
My 27 investments for 2016
My 28 investments for 2015
My 24 investments for 2014
My 22 investments for 2013
Let’s go:
1. TFF Group (Portfolio weight 8,1%, Holding period 12,0 years)
value and opportunity 