Banks paid the price for real estate’s recovery

In September, we wrote that banks are likely to be long-term winners from rising interest rates, while real estate companies have paid the price. We made it clear that while we, as owners of a significant amount of real estate, had taken a hit, we were certainly not sellers at the levels real estate companies were trading at. Quite the opposite, in fact. Instead, we were pleased that the portfolio contained a roughly equal proportion of bank shares, which benefit from a stable and higher interest rate environment.

During October, sentiment shifted, and it was the banks that struggled instead. Both Nordea and SEB stood out on the downside. The trigger was indication from the ECB and Finansinspektionen (the Swedish Financial Supervisory Authority) that banks must apply greater conservatism in their internal risk models for corporate lending. This increases risk-weighted assets, and thereby the basis for banks' capital requirements, which reduces scope for dividends and buybacks. While this is clearly not positive, we lean towards the market reaction being overdone. Just as we refused to sell real estate last month, we are not selling any banks this month. On the contrary, we have increased our position in Nordea after the report.

Real estate companies, on the other hand, performed more strongly, especially in the second half of October, naturally aided by the ten-year interest rate falling back. The companies also delivered solid reports with a clear focus on strict capital allocation. More on that shortly.

Reports

Twenty-one of our 33 holdings released interim reports during the month. In the previous letter, we anticipated significant movements at the company level but a stable overall picture, which proved to be true.

The tech consultancy Prevas was set to prove its mettle at the end of October. The consulting sector has been hit by both a tough economic climate and falling valuation multiples driven by AI concerns. Do we need consultants in the same way as before, or can anyone, with AI support, deliver what Prevas has historically provided? This is a question we have asked ourselves, but we are humble enough to admit that we (also) lack a clear answer. What is clear, however, is that the market has been extremely uneasy, which is an environment that generally appeals to us. We are drawn to quality companies that are depressed and thus have a low valuation.

During the quarter, concerns intensified further when former CEO and now board member Johan Strid sold just over half of his shares, just days before Q3 ended. When not even a former CEO chooses to retain their holding, it is fully understandable that the market reacts cautiously.

However, the report was stronger than feared. Revenue totalled SEK 357 million (355), and operating profit was in line with the previous year. Both Denmark and Finland improved their results, while Sweden continues to deliver strongly. The share rose by 20% on the report day, which was a small but pleasing confirmation that our strategy of seeking undervalued quality companies with temporary problems pays off when companies prove their adaptability. That said, we want to be clear that even we felt great uncertainty about the figures, and we entered the report with a modest position of approximately 2% of the fund's capital.

Securitas reacted worse. The Technology (camera surveillance) and North America business units showed stable growth, while lower activity in airport operations weighed on organic growth in Europe, which was worse than expected. The market had also expected a few points higher margin. Encouragingly, the proportion of technology and security solutions increased to 35% (33) of revenue, which is the most profitable business area. They argue that the company's combination of cameras, technology, and guards with rapid response is a strong and comprehensive offering. We agree, and in today's world, the need for security is unlikely to diminish.

Although growth is meagre, the valuation of P/E 13 on a rolling basis is attractive. In addition to the company's secure solutions, we therefore see a clear margin of safety in the stock. After the strong price development leading up to the report, we scaled back 25% of the holding, only to buy back the shares at a 6-7% discount after the drop on the report day.

Brief comments on a few more reports

Europris: Revenue decreased by 1.6% in Norwegian kroner but increased by 0.6% at constant exchange rates. Operating profit fell to NOK 244 million (256). CEO Espen Eldal attributed the decline to an unsuccessful campaign programme with an excessive reliance on summer goods. Swedish ÖoB continues to struggle, but the company has a clear plan to achieve profitability by 2028. While we await the Swedish market's turnaround, we gain a growing value company at just over 11 times EV/EBIT. Adding a dividend yield of 4.5% makes the total return potential attractive.

Logistea: The company owns 174 warehouse and light industrial properties in the Nordics worth just under SEK 20 billion. Profit from property management per share rose by 31% thanks to high-yielding, newly acquired properties combined with interest costs not having risen at the same pace. With NAV discounts across the sector, buybacks are a hot topic. Logistea states that they weigh acquisitions against share buybacks every week, which of course warms a value investor's heart. So far, the company believes new properties are more attractive, but that could shift if the share price falls. At a price of SEK 13.7, the company trades at under 9 times earning capacity, which is far below our intrinsic value. Speaking of capital allocation, Balder (our second-largest real estate holding) argues that share buybacks are currently the absolute best way to invest cash flow.

Avanza Bank: Revenues rose by 12%, while costs increased at the same rate, partly weighed down by the Denmark initiative. Growth was primarily driven by fund commissions and net interest income, while net brokerage was weak. The CEO noted that the stable stock market during the quarter dampened trading activity as volatility is needed to drive brokerage. Over time, Avanza has proven to be one of the stock market's most profitable growth companies with a strong market position. The high quality is also reflected in the valuation, and at approximately 19 times rolling 12-month earnings, the stock is among the higher valued in the fund. Due to the price tag, which is no higher than the market average today, we are content with a relatively small position.

Cash flows now beat promises of the future

Weak cash flows from Alphabet after heavy AI investments led to a stock price decline across the Atlantic, and the same applied to Intel and Amazon after reports that did not please investors. Growth is all well and good, but the market has once again reminded itself that cash is king and instead rewards companies that are actually delivering increasing cash flows here and now.

In recent years, primarily AI companies and Swedish industrial companies have driven the stock markets in the US and Sweden. We, however, are looking for companies in those corners of the market where relatively few other investors gather. It may take time before the rest of the market looks in the same direction as us, and as an investor in Amos Value, one should be prepared for us to periodically underperform when individual highly valued sectors, such as heavy industrial companies, pull the entire index.

However, we believe that the conditions for generating good outperformance over time are unusually strong from here. Small and medium-sized quality companies like RVRC, Logistea, AcadeMedia and Spiltan are trading with overly large margins of safety against their intrinsic values, while the index-heavy companies are generally highly valued. The gap between low- and high-valued is greater than normal, and this is an environment that should suit us well.