With a rise of more than 20 percent for the Stockholm stock exchange, the first half of 2019 was the best in 10 years.
This was despite a number of clouds in the economic sky, such as signs of a weaker economy, trade wars, a hard Brexit and geopolitical concerns in Hong Kong, Kashmir and Iran. The stock market is being sustained by central bank action, extremely low interest rates and passive money that reinforces stock market fluctuations. The question is whether this strong performance can be sustained, or whether the negative factors will weigh most heavily and lead to a tough stock market autumn like last year.
When growth falls at the macro level, it is important to find growth at the company level. It remains to be seen whether there will be a serious recession, but if you are worried it is important to identify companies that are masters of their own destiny. Many small companies have better prospects than their larger counterparts of growing under their own steam as the economy weakens. In general, profit growth is also better at the same time as the valuation is not much higher than for larger companies. Small caps have for a long time had stronger performance than large caps on the Stockholm stock exchange, and this has remained so this year. Another interesting aspect of smaller companies is that they are subject to acquisitions to a greater extent, while not being as analysed and appreciated in the market. In this newsletter, we intend to present several companies included in Catella Småbolagsfond that we believe can drive their own growth and are interesting to own going forward.
Nordic Waterproofing is a market-leading manufacturer and supplier of waterproofing products and services for buildings and infrastructure. The company operates in Northern Europe and has only 5 percent exposure to Swedish housing construction. It supplies mainly to commercial buildings. Although the business is to some extent cyclical, the company has shown that can govern its own growth, not least through acquisitions. Nordic Waterproofing is growing organically and has very good cash flow generation that is employed to grow through acquisitions as part of its central strategy. By acquiring, the company can diversify its offering and keep up with megatrends, not least in sustainability. For example, so-called green roofs are experiencing demand among its customers, with much more wood used instead of concrete. In this way, sustainability issues drive both sales and profit growth. We also believe that Nordic Waterproofing is traded at an attractive valuation and is a likely acquisition candidate.
Xvivo Perfusion develops and sells solutions and systems used in organ transplants, currently mainly for lungs and hearts. A major problem for the healthcare system is the shortage of donated organs, and that many donated organs are discarded as they cannot be delivered in time or are not of sufficient quality. For example, only 20% of all donated lungs in the United States are used for transplants, with others considered too risky to use. Xvivo has solutions that allow more organs to be used through products and systems that can store, improve and extend the life of the organs. The company has a clear market-leading position in an area of obvious clinical benefit, and has strong growth. Since its stock market listing in 2013, Xvivo has had an annual average growth rate of 22 percent. A majority (90 percent) of sales are consumables with recurring revenues that have a gross margin of 75-80 percent. This growth is non-cyclical and driven by the desire to save lives.
Midsona develops and sells organic products and brands in health foods and hygiene products. This market is controlled not so much by the economy, but rather by megatrends in sustainability and health. Midsona has grown through acquisitions and has consolidated the Nordic market, and will now do the same in Europe. The penetration of organic food is highest in Sweden and Denmark, at around 12-14 percent. Europe lags behind, with Germany and France having 4-5 percent penetration and Spain 2 percent, but these markets are now starting to gain momentum. Midsona has made acquisitions in Germany, France and Spain, thus creating new platforms where it can both create cost synergies for purchasing and gain access to new products, not least in plant-based foods. We see Midsona as a holding with a defensive nature and good growth potential. Next year, profit growth could be as high as 60 percent, which makes the stock look cheap, and it is also a likely acquisition candidate since many of the large international food companies want exposure to organic and healthy food.
Catella Småbolagsfond in brief – The fund invests in a concentrated portfolio of carefully selected Swedish small cap equities that the managers consider undervalued. The analysis process behind the fund's investments is based on Catella's fundamental analysis and broad expertise on Swedish companies. The fund applies negative screening for sustainability criteria and we consequently avoid positions in companies that produce tobacco, alcohol, commercial games for money, pornography, coal or weapons.