An in­vest­ment smor­gas­bord

Financial Mail - - GLOBAL INVESTOR - By Jean Pierre Ver­ster

Swe­den has stood out this year for its un­usual re­sponse to the Covid-19 cri­sis. But there are other ways in which the coun­try stands out too. The Nas­daq Stock­holm is the largest of the Nordic stock ex­changes, as mea­sured by the to­tal mar­ket cap­i­tal­i­sa­tion of all the com­pa­nies listed there. It forms part of the broader Nas­daq Nordic ex­change. This is a net­work of linked ex­changes, all owned by the US Nas­daq, and in­cludes the main stock ex­changes in Ice­land, Den­mark and Fin­land. Nor­way is not in­cluded, with the Oslo Stock Ex­change owned by Nas­daq com­peti­tor Euronext.

There are more than 300 com­pa­nies listed in Swe­den, op­er­at­ing across var­i­ous in­dus­tries. The six largest firms with pri­mary list­ings in Stock­holm are At­las Copco, In­vestor AB, Volvo, Eric­s­son, Nordea Bank and Hennes & Mau­ritz.

At­las Copco was founded in 1873 and man­u­fac­tures in­dus­trial tools and equip­ment. Its four fo­cus ar­eas are air com­pres­sors (it is the world’s lead­ing pro­ducer), vac­uum prod­ucts, in­dus­trial prod­ucts and power prod­ucts. The air com­pres­sor divi­sion is the crown jewel, with a sus­tain­able op­er­at­ing mar­gin of more than 20% and a re­turn on cap­i­tal em­ployed of al­most 100% per year.

Still, not­with­stand­ing its im­pres­sive his­tory, we view At­las Copco shares as mod­er­ately ex­pen­sive at the cur­rent

400 kro­nor (about R733).

In­vestor AB can be thought of as Swe­den’s Rem­gro, al­though it is more than 10 times larger. An in­vest­ment hold­ing com­pany founded in 1916 and still con­trolled by the Wal­len­berg fam­ily, In­vestor AB owns sig­nif­i­cant stakes in other listed com­pa­nies such as At­las Copco, ABB, As­trazeneca, Eric­s­son, Nas­daq, Saab and Elec­trolux.

Th­ese in­vest­ments rep­re­sent about two-thirds of In­vestor AB’S NAV. The other third is mostly in­vested in pri­vate com­pa­nies op­er­at­ing in high-growth in­dus­tries such as med­i­cal de­vices. As with most in­vest­ment hold­ing com­pa­nies, In­vestor AB trades at a dis­count to its NAV. At the cur­rent 20% dis­count, we view the shares as rea­son­ably at­trac­tive.

The Volvo Group is a lead­ing man­u­fac­turer of trucks, buses and con­struc­tion equip­ment as well as marine and in­dus­trial en­gines.

It does not own Volvo Cars any more, which was sold to Ford in 1999 and on­sold to Zhe­jiang Geely Hold­ing Group in 2010.

Volvo Group’s fu­ture com­pet­i­tive­ness will be de­ter­mined by how rapidly it de­vel­ops tech­nol­ogy for con­nected, elec­tric and au­tonomous ve­hi­cles. The stream­lined fo­cus on com­mer­cial ve­hi­cles places Volvo Group in a better po­si­tion, but we are con­cerned about the im­pact of the pan­demic on the im­me­di­ate de­mand for its prod­ucts.

Eric­s­son op­er­ates as a multi­na­tional net­work­ing and tele­coms com­pany. It in­vented the Blue­tooth tech­nol­ogy pro­to­col in 1989 and holds more than 54,000 granted patents.

But Eric­s­son has a some­what che­quered his­tory. The com­pany agreed to pay more than $1bn to the Se­cu­ri­ties & Ex­change Com­mis­sion and the US depart­ment of jus­tice in De­cem­ber 2019 to set­tle al­le­ga­tions of bribery in se­cur­ing lu­cra­tive con­tracts from state-owned tele­coms en­ti­ties in mul­ti­ple coun­tries over the years. While Eric­s­son has ex­cit­ing prospects from be­ing a leader in 5G tech­nol­ogy, we are wait­ing to see if the com­pany has truly turned a new page.

Nordea be­came the big­gest bank in the Nordic coun­tries due to suc­ces­sive merg­ers of re­gional banks in the late 1990s. This seem­ingly sad­dled it with com­plex­ity, a bloated cost base and in­ad­e­quate in­ter­nal con­trol sys­tems. The bank’s shares have been tread­ing wa­ter ever since, with bouts of con­tro­versy and reg­u­la­tory fines along the way. The shares are trad­ing at a dis­count to tan­gi­ble book value, but the sin­gle-digit long-term re­turn on eq­uity jus­ti­fies this low val­u­a­tion.

Hennes & Mau­ritz, the sec­ond-largest cloth­ing re­tailer in the world (af­ter Spain’s In­di­tex), op­er­ates eight brands, in­clud­ing the epony­mous H&M. Founded in 1947, the group has about 5,000 stores in 74 coun­tries. The past decade has been tough go­ing, as in­creased scru­tiny of labour prac­tices in South­east Asia, greater in­vest­ment into sus­tain­abil­ity ini­tia­tives and a shift to­wards on­line re­tail have put pres­sure on prof­itabil­ity. The past three months have been par­tic­u­larly dif­fi­cult, and group rev­enue has dropped 50% from the com­par­a­tive quar­ter in 2019. We are short Hennes & Mau­ritz shares.

Our favourite Swedish stock is Swedish Match, which traces its roots to “match king” Ivar Kreuger in the early 1900s.

It man­u­fac­tures smoke­less to­bacco prod­ucts, mostly ni­co­tine pouches and snus — moist to­bacco many Swedes like to place be­tween their lip and gum for ex­tended pe­ri­ods.

I have not vol­un­teered to try out the ben­e­fits of this prod­uct, but the mil­lions of peo­ple who get their ni­co­tine fix in this pe­cu­liar way make for a very prof­itable busi­ness, one which in­vestors have ben­e­fited from hand­somely over the years.

Ver­ster is CEO of Protea Cap­i­tal Man­age­ment

Our favourite Swedish stock is Swedish Match, which traces its roots to ‘match king’ Ivar Kreuger in the early 1900s

Stock­holm Stock Ex­change Bloomberg News/mikael Sjoberg

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