Portfolio overview for half-year 2023, part 1/2

I’ve mentioned this several times in the past: I don’t think it makes sense to do quarterly portfolio company updates because some of my holdings don’t even report quarterly and it would take a lot of time.

It’s also strangely fascinating to see how many investors seem to see quarterly earnings as something of a holy grail that you must follow and react to as quickly as possible (“Beat -buy” etc.). Personally, I prefer to let the dust settle and then look at the earnings in a few weeks to see if they are roughly in the direction I originally thought. Sometimes you can miss the best time to sell, but in my opinion, quarterly earnings are more often very “noisy” and distract from the longer-term picture. I also purposely ignore analysts’ expectations and only measure earnings against my own expectations.

However, looking at the portfolio every 6 months or so makes some sense. Since not all companies report on time, I have split it into 2 parts.

So let’s dive into part one (in no particular order, sorry. I’ll check it out Admiral, Alimentation Couche-Tard, Logistec, SFS, TFF Group, Thermador, Solar Group, DCC, Sto, Italmobiliare, Sixt, Nabaltec and Schaffner.

  1. Admiral

Admiral announced the 6 month results a few days ago and the market seems to have been positively surprised. In the case of Admiral, which is a long-term hold (~9 years), I actually “overwrote” the stock last July.so it makes sense to compare with my business case from last year.

2022 EPS came in at £1.24 per share versus my estimate of £1.20. So far so good. However, £0.576 EPS per share for the first 6m is a bit on the low side if they are to achieve my estimated £1.47 EPS for 2023.

One thing that worries me a bit is that still all other activities apart from engines in the UK make a small loss in the aggregate. For example, I don’t understand why the “Admiral loan” division is not making money after 5 years. And cost ratios are also creeping up, especially in British engines. In the “old days” they were something like 15-17% of the cost, now they are at 22% in British engines and without good explanation they are increasing every year.

Somehow I feel like they’re losing ground in the UK and the rest of the activities are mostly treading water. If the car insurance cycle turns, the Admiral will most likely be a good investment for the next 6-12 months, but due to the cost issue, I’ll put them on ‘medium term watch’.

One obvious mistake I made with the Admiral was thinking they would handle it better than the FBD. I sold FBD in April 2022 because I was afraid of inflation.

Looking at the share price, holding FBD instead of Admiral would be much better.

2) Couche-Tard Food

ACT issued its 2022/2023 annual numbers already at the end of June. Last financial year was a good one for ACT, with earnings per share up around +20%. They keep buying back shares and increasing their dividend.

They continue to acquire businesses, the largest of which is Total’s gas station activities in Europe for €3.1 billion. Margins grew, so did return on capital (ROE/ROIC). The final P/E is 17.5x, next year according to the analyst 16.5. The stock obviously isn’t cheap, but considering the quality, it’s not too expensive either. I’d say it’s a “keeper”.

3) Logistics

Logistec is one of my newer holdings. Fortunately, they announced a “strategic review” that could result in a potential M&A that sent the stock price significantly higher. On the operational side, things look good. Sales and profits are in double digits. In the short term, the biggest risk here is clearly that the strategic review ends up being a dud, but from an operational perspective, the business seems to be doing well. There is nothing to do here at the moment.

4) FSS

SFS announced 6 million numbers a few weeks ago. In short, the Hoffmann acquisition seemed to be doing well, while the core business is suffering a bit due to the slowdown in Asia.

Distribution & Logistics, which includes Hoffmann, was ~50% of EBIt for the first 6 months of 2023. The market seems to have been disappointed with these results:

After the sale of Meier & Tobler and the takeover bid for Schaffner, SFS is currently my only Swiss investment. I might add weakness here, assuming we don’t get into a full blown recession.

5) TFF group

Finally, after some delays, the US business really took off and delivered a “monster year” 2022/2023 for TFF Group. This is according to the annual report published in mid-July:

They predict a growth rate of +10% for the current year. With a trailing P/E of 17x and a forward P/E of ~15 according to TIKR, the stock is not expensive for the quality it offers. I have now held TFF for over 12 years and expect to hold it for several more years.

6) Thermador

Thermador she put up very decent 6M numbersalthough Q2 was much weaker (~2% y) vs Q1 which still showed +10% growth.
Thermador will obviously be affected by the housing slowdown, but the exposure should be manageable, and Thermador has taken on competitors and/or neighboring businesses at attractive valuations in the past.

7) Solar Group

Solar has definitely been one of my weaker picks over the past few years. I bought them when I identified them in my “all Danish stocks series” because 2022 was very good for them and they were trading at around 6-7x 2022 P/E.

My thesis was that the focus on all things electric in particular should shield them to some degree for the interest rate driven construction slowdown. While Q1 2023 still looked good, Q2 was already significantly weaker than last year.

However, management confirmed their original DKK 900m EBITDA outlook for 2023. That would be around 2021 and still ~80% higher than pre-pandemic 2019. Assuming they deliver, that would mean ~DKK 60 EPS and a P/E of 8. I actually listened to earnings and they were quite bullish on the situation. Moreover, the acquisition of a large heat pump business looks like a nice “free option” to the upside.

So, despite the negative performance, Solar Group is a stock that I will continue to hold because fundamentally things are looking pretty good.

8) DCC Plc

The DCC 2022/2023 annual numbers and EPS were generally roughly in line with my expectations, or rather at the upper end. Business statement for the 1st quarter he was a little weaker. The energy business is still doing very well, but the two smaller segments are struggling a bit.

DCC still expects decent growth in all relevant KPIs. Excluding purchase price amortization, DCC trades at ~9x P/E, which is very cheap for such a quality business. However, patience is clearly needed here as the stock may also be suffering from some sort of UK malus.

9) Sto SE Pref

My investments and especially the increase in Sto, a German manufacturer of insulation systems, turned out to be ill-timed. The stock is down more than -20% from my entry point. It is clear that the current dramatic slowdown in new construction is playing a role, but the delay in German renovation and heat pump policies has not helped either.

However, it was my own decision to focus on Sto in May, and so far it’s proven to be a bad decision, with only Steico doing worse (despite the announced takeover by Kingspan):

Interestingly, Sto’s half-year numbers weren’t too bad. They lowered their sales forecast but stuck to their profit forecast, which to be fair is wide.

Sto currently trades at around 10x 2023 P/E and 6x EV/EBIT, has clean cash and is well positioned to profit from the (in my view) inevitable renovation boom. Despite all other factors (KgAA, pref shares) it is extremely cheap.

The only question is how deep the new construction slump will be and how hard it will hit the Sto. There is clearly a risk that they could lower the profit outlook for this year.

Sto is definitely a “pain trade”, but in my opinion these investments often turn out to be the best. I might increase the position on further weakness as I am quite optimistic that things will turn out well over the next 3-5 years despite the strong current headwinds.

10) Italmobiliare

Nothing to add since my recent writing. The only new thing to mention is that the CEO, Carlo Pesenti buys stocks on a daily basis as seen here in this report.

Interestingly, this is not published on their own website. Meanwhile, I slightly increased the position to 4% of the portfolio.

11) Sixt Pref

Despite very good numbers for Q2, Sixt shares have given up much of their 2023 gains in recent days, as seen in the chart:

At current levels, the preferred shares are priced at a single-digit P/E ((7-8), which seems pretty cheap to me given Sixt’s track record. In particular, their move to the US seems to be paying off quite well. The view adds significant runway growth going forward.

12) Nabalt.

The timing of Nabaletec’s initial investment in early February 2022 was not “sub-optimal” to say the least, 3 weeks before the invasion of Ukraine began and the world changed. As an energy-intensive chemical company with its main operations in Germany, this was clearly not positive for Nabaltec in the long term.

Initially, Nabaltec actually benefited from supply chain problems as I outlined in the June 2022 post. It looks like companies have ordered more material in 2022 at any cost.

Looking at the share price, Nabaltec has suffered more than other chemical companies, as seen in this chart.

Nabaltec’s Q1 2023 was still okay, but the second quarter was really not good. Although sales fell “only” 4% in the first 6 months, profitability almost halved. The outlook for 2023 was already significantly reduced at the beginning of August. Operationally, both the “old” business and Boehmit’s sales are far below expectations.

Using their mid-bridge guidance would result in 2023 EBIT of €14.6m, well below the €29m in 2022 and €24.6m in 2021. This is clearly below my original case, although 2022 was well above my original case.

I’m not really sure what to do here right now. Management appears to have been genuinely surprised by the decline in 2023. The currently expected midpoint EBIT margin of 7% would be the lowest since 2011. This appears to be reflected in the share price, which has fallen to a 6-year low. before. The big question is whether and how they can reach the levels of profitability of earlier years, or if the business is somehow permanently affected.

There is clearly a risk that this could happen, i.e. profitability will remain lower for the foreseeable future due to higher energy prices in Europe and perhaps competitors could gain a sustained competitive advantage. On the other hand, I understand that their products are not so easily interchangeable due to quality requirements etc.

So overall, this is clearly a position to watch closely. I would not sell or increase the position at this time.

13) Schaffner

As noted in the blog, the takeover offer was quite a surprise. My best guess is that after reorganizing Schaffner for quite some time, Buru’s biggest investor wanted to see some money sooner rather than later and jumped at the chance.

Since I don’t want to bet on the Swiss franc until the offer is definitely closed, I started to sell the position down.

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