Short comments on four of my holdings

Gotlandsbolaget, Tingsvalvet, Bredband2, Ferronordic

I usually go deep and long into some specific company. This post will do something a bit different. I will pitch four Swedish listed stocks that I own myself. Two of these stocks really only trade by appointment and the other two are a small market caps but with decent liquidity for their size. I will begin with the least liquid stocks. The idea is to illustrate why I think the situation that they are in is interesting and especially so right now. Of course, the aim here isn’t to be comprehensive by any means, so if something piques your interest, feel free to ask more about it.

Gotlandsbolaget (Rederi AB Gotland)

After last year being one of great overperformance with the relisting of the stock on First North, this stodgy cashbox has lagged the market in 2023. Much of that is naturally explained by the negative leverage from the extremely lazy balance sheet. A short-term trigger for re-rating here is the probable win in the procurement process for the government concession ferry line to Gotland from 2027 to 2035 (with additional 2 years option). Even in the event of losing, the value of the assets easily covers the market cap and the earnings left up until 2027 will also help a bunch. We will know the final outcome at some point next year. In line with the recently changed dividend policy, there is also some possibility of an extraordinary dividend this summer due to ship divestments this year and last.

Longer term — the head of the controlling family is 95 years old — succession to the three children, who are all in their 60s, might prompt a more thorough reassessment of the balance sheet. Over time, cash might also be deployed into more active investments, in addition to the planned ferry newbuilds with finalizations in the next decade.

Meanwhile, operationally this company is always chugging along and they have been savvy ship traders historically. The ferry business is comfortably profitable — even more so adjusted for the insanely conservative depreciation schedule — and there is another three years left on the current concession. There isn’t that much to it, really. Monopoly ferry operator with lots of cash and assets which might, at least partly, get into the hands of shareholders in the future. Lower risk is hard to find and one day there could be a catalyst.

As this company and its market position could be a bit impenetrable to a foreigner, this recently initiated sell side research might be of help. I don’t particularly endorse the valuation work, but the initiation note gives a good overview of the lay of the land for an international audience.

This might have the weakest case for why it is especially interesting right now, so don’t feel overly cheated if you didn’t find it interesting. Perhaps it better fits the description of what Dave Waters at Alluvial sometimes fittingly calls “one day” stocks. Suddenly, one day, values can unlock.

Tingsvalvet

This small real estate company is listed on Spotlight (an uplisting was temporarily put on hold a few months back) and may be hard for international investors to buy. I talked about the warrants in a post last year. They have now turned so illiquid that they might as well be completely unlisted. No matter — I never expected to be bailed by selling them back into the market and I think they are still a great value proposition to hold until 2030 even at the prices I paid.

This year, the common stock also became cheap. While optically the LTV looks high, in practice this company is resilient to high rates in spite of short duration. Vacancies are still practically nothing at 3.4% and WAULT is 7.8 years in Q3 and will increase in the upcoming quarters from even longer contract lengths in recent acquisitions. Rents are low and overwhelmingly fully CPI adjusted and triple net. The company has recently been able to do new deals using their preferred share as partial payments, which at recent cap rates of 8% and above gives a lot of financial leverage and a great return on equity. The latest deal is a large sale- and leaseback signed with American investor favorite Humble Group, whose first buyer fell through. A recut a deal was struck with Tingsvalvet at a lower price and a staggered payment.

My view is that Tingsvalvet’s closest peers should be the smaller cash-flow focused companies associated with Sagax — NP3 and Emilshus. They have a similar setup with high cap rates, a preferred share and a focus on smaller cities. Tingsvalvet is of course an even more miniature version and lacks the implicit — and explicit — support from the legendary David Mindus. But even so, the deal-making it has been doing for its size is probably unmatched in Sweden this year.

Håkan Karlsson, Tingsvalvet’s CEO, ran Maxfastigheter with good results before exiting by sellling to Stenhus when the market was hot as lava. In the comeback with Tingsvalvet in 2022, Karlsson managed to create a levered vehicle with an attractive preferred share paying monthly dividends just as really good opportunities to buy from pressured sellers was starting to emerge. Karlsson, as opposed to some other controlling shareholders, is not incentivized to dilute Tingsvalvet common at this point, as that would destroy the warrant value (he and his second in command are the largest single holders in this huge series of warrants)

Fair warning here: the stock trades by appointment and you can drive a couple of double deckers through the bid-ask spread. However, provided that they can keep going the way they have been, I see no reason why it should trade at a discount to book at all. The opportunities seem ample currently and vacancies in this niche look manageable by choosing good counter-parties. All of the cash flows are plowed back into new properties at +8% currently and the stock has not at all participated in the rally in listed RE during the last month. Assuming a 1.5% bank spread above the Swedish long term rates over time, this trades easily below 5x profit from property management on next year’s figures (after adjusting rents for CPI and adding recent acquisitions). At 25 per share, the discount to NAV is 42% with an LTV of 53%. While the LTV figure may seem high, note that Tingsvalvet has been a big buyer of properties throughout 2022-2023. The yields on the books are high, so doesn’t directly compare with almost any of the large companies. The break-even interest rate for Tingsvalvet after accounting for preferred dividend payments is per my calculations above 10%. ICR is 2.2x in Q3. Nyfosa, among the larger and more liquid companies, has a similar financial profile and has rallied more than 80% since the lows at the end of October.

I would like to note that while Tingsvalvet is my favorite on many characteristics, there are a lot of small RE stocks in Sweden that have not fully participated in this rate easing rally. Some of them may be equally good or maybe even better.

My view is that there is currently no real fundamental reason to prefer the larger companies in the sector, many are still worse off than the smaller ones due to their bond market exposure and general inability to grow due to deleveraging commitments. They are also by sheer size less likely to be able to create as much value with opportunistic deals from pressured sellers. This provides an opportunity for the brave REIT investors who are willing to accept some frictional costs. Now that many smaller companies have deleveraged through new share issues, I would also expect mergers to start going off among these smaller names in order to get central admin cost burdens down.

Bredband2

Now on to companies that are actually somewhat possible to trade in — at least with some determination. This Swedish virtual ISP is probably familiar to many readers. They have had some issues with competition and the integration of the giant acquisition of A3. In Q2 this year they seemed to have turned the corner, with further confirmation in Q3. I would also like to stress that the situation for the fiber players doesn’t bear much resemblance to the situation for the American cablecos. FTTH via city networks in Sweden is really cheap and thus 5g may have an impact but not by suddenly becoming a viable and much cheaper alternative for steady internet access for large swathes of people. Cheap, high-speed and dependable internet has already been available to the crushing majority of Sweden’s population for many years. My feeling is that the market doesn’t really want to believe that the pricing situation has improved yet, or that there just isn’t enough trading liquidity around to reprice it efficiently.

Additionally, Tele2 has again reiterated their willingness to participate in sector consolidation. Bredband2 is really the ultimate fit with wireless heavy Tele2 on the Swedish market. No other player is for sale, large enough to make a dent or a plausible combination from the standpoint of antitrust. Bredband2 is the perennial merger candidate, but now the stars may finally be aligning while the multiple is a lot cheaper than historically. This final step is also quite clearly in my mind what the company has been building towards ever since the Swedish fiber market started showing signs of maturation a couple of years back. The current number of players doesn’t make sense anymore. While waiting for consolidation, Bredband2 churns out great cash-flows on an almost unlevered balance sheet.

Ferronordic

This is not my original idea.

Ferronordic sells trucks and heavy construction machinery. Main partners are Volvo and Sandvik. The company miraculously exited Russia last year on decent terms, and have since been focused on doing a turnaround and roll-up in the relatively recently acquired German truck business. Its second market, Kazakhstan, has seen an upsurge in demand since the Ukraine invasion like many of the former Soviet satellites that are still in the Russian sphere of influence. I entered recently with the expectation that they would make another acquisition of a mature cash-flowing business, in line with their stated intent. My belief was that the market was underestimating the likelihood of this happening soon due to a valuation that seemed to indicate ongoing cash burn.

An acquisition happened even faster than I thought, and it was probably the ideal one from the standpoint of earnings quality and future growth possibilities; they bought the American dealership Rudd. Rudd is the exclusive Volvo Construction Equipment dealer in Kentucky, Ohio and Indiana and also active in a handful of other states.

There’s always a possible issue with a large, transformative deal of overpaying or at least not quite knowing the difficulties involved beforehand. My notion is that this risk is mitigated by the fact that a buyer of these dealerships needed to be approved by Volvo to make any sense. That means that the number of possible buyers was likely somewhat limited and Lars Corneliusson and his team probably were in pole position all along. In fact, I suspect that Ferronordic had this specific deal in mind at least since early this year, that is shortly after they exited Russia. This management team is proven in the toughest of markets and trusted by the manufacturers.

Lars Corneliusson, CEO, Ferronordic

The share price reaction to the acquisition was somewhat muted. Shortly afterwards, excitement was even more dampened by a poor quarter and a murky cyclical outlook from the legacy business. Perhaps there were also some desperate investors who thought this was their final break to catch and sold.

I suspect that there is good reason to believe that Ferronordic and Volvo CE can turn Rudd into a growth story going forward. It’s not impossible by any means that the German truck business could start earning real profits in the future even if it has been a slow one thus far. Additionally, sale- and leasebacks of properties should be able to aid a lot in the deleveraging of the business, perhaps even more so now that the long term rates have started to fall.

Obviously, this isn’t the kind of business that will ever trade at nosebleed multiples. But we have a completely proven management that has now been blessed with a second opportunity to shine. And you can get in on this — completely aligned — with the CEO buying even more stock in bulk over the market recently. And it’s cheap. Maybe because of the cycle, maybe because of the former Russia connection, maybe because a lot of retail shareholders are deep in the red still from the Eastern misadventures. Or maybe because optically it now looks quite leveraged. Who knows? I’m not looking a gift horse in the mouth. This looks like a good setup.

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