Portfolio Changes – larger reshuffle – Part 1

Thoughts on investment philosophy

I have recently had quite a lot of time to contemplate my investment style and philosophy. I think I reached some conclusions. After all that is what this blog is about for me, learning from and seeing my mistakes more clearly and then adjusting accordingly.

Before I started this blog I have during periods followed the market and specific stocks very closely. I have used technicals and fundamentals to swing-trading holdings (3-12 month horizon) with fairly decent results. Meaning that I see the stock as fairly/undervalued with a chart that looks good for a move up. I then later sell when the stock is more close to fully valued. To some degree I have implemented such a strategy also for my blog (for example Avanza, Ericsson, YY, Shanghai Fosun etc). But this is very different from believing in a company truly long-term, even if the stock gets ahead of itself valuation wise. Given that I do have a full time job and this is a hobby, the time I can spend on updating myself on holdings vary widely. From another perspective baby-sitting such swing trade positions takes away valuable time from researching new interesting companies and sectors/niches.

All in all the conclusion for my future investment strategy is stop looking at these companies that trade cheaply currently and then start to swing them in/out of the portfolio as they get cheap/expensive. If all stocks in the world would be drifting sideways forever with some volatility this might be a successful strategy, but that’s not a very likely scenario. Instead I will focus on what makes more sense, finding great companies. Preferably currently cheap, but anyhow companies that in 5 years time in my view has a high probability of trading significantly higher. I should also at all times be comfortable turning to stop following my holdings and be happy to own them for the coming 5 years. Currently I do not hold such a portfolio and I intend to spend the coming months to do just that. This means that I am tilting my portfolio more towards Quality, which in general is expensive now. But I intend to find my own type of Quality, not necessarily Nestle and the likes (nothing wrong with Nestle though)

In terms of Portfolio management I will still allow myself to trim holdings that grow very large or add in holdings that have under-performed but I still believe in. And of course I will still make mistakes and mis-judge companies, meaning they will not sit in the portfolio for 5+ years, but till be sold when my view has changed. But preferably the investments should be such so I won’t be easily swayed in my judgement of the future prospects of the company. For example an oil company with great management and execution might be dead in the water if oil production cost is around US$60/barrel and oil drop to US$40, so before I have a very clear and sure long-term view on the oil price, it would be a silly investment to add to this portfolio. I take this as an example because currently outside the blog holdings I do have a swing-trade position in a what I think is a very decent oil company (Tethys Oil).

Reshuffle of Portfolio – Part 1

Not only have i contemplated my strategy, but another reason why I have written so little lately is that I have been very busy re-searching a larger number of companies. Most of these investment ideas will materialize in new holdings over the coming months. It probably won’t be perfect, since I change so much at the same time. Minor adjustment might come later. But all in all it’s holdings more in line with a more long-term investment strategy. The holdings are in general also more defensive than what I currently hold. This I also very much what I seek in such a late stage bull-market. I’m not sure if I should call it new Themes, but I chose to allocate significant capital to two industries below, 1. Funeral Services and 2. Alcohol and Beverage related companies. In due course I will try to expand on my thoughts behind these investments.

Dignity – Add at 5% weight

Funeral service business in the UK. I had my eyes on for some years now and lately a very good buying opportunity arose. I heard about it for the first time from a long only manager and have since understood what a wonderful business segment funeral service is. Firstly from a margin perspective. but also how fragmented the business is and the possibilities for a cash flow generating company to buy these small companies at attractive multiples.

Fu Shou Yuan – Add at 4% weight

Basically the same story as Dignity above, funeral services, this time in China. This stock I’m perhaps not buying at the right moment short term, as it has traded up and is actually very expensive at the moment, but from a long term perspective I’m very comfortable holding this.

Diageo – Add at 4% weight

Has a portfolio of high quality liquor brands. Also has a minority holding in Moet Hennessy which I find interesting. Overall the thesis here is that they will continue to leverage their strong brands and their tremendous track-record of shareholder returns. For example the portfolio of whiskey brands probably is 50% of all top quality brands available.

Olvi – Add at 4% weight

I have searched for quite some time for a way invest in line with my positive view on the three small Baltic countries, I think this might be one good way. I also have fairly bullish view on Finland, finally coming out of some economically challenging years. This is a family owned (through voting strong shares) beer and beverage company with exposure to the above mentioned countries. They have also shown a tremendous track-record of execution. Overall, smaller listed beer and beverages companies start to be as common as unicorns. I will expand on this later, but not many are listed anymore. As uncommon they are, its seems to be a fantastic business to be in. Since almost all companies shows great returns (until they are bought out) with very strong cash flows. Previously I held Royal Unibrew for mostly the same reasons (I should have kept it), but overall I find Olvi more attractive, with a stronger track-record.

Tokmanni – Sell Full Holding

This was also a play on Finlands recovery and that the company felt cheap with a good dividend. But they continue to under-deliver and the last straw was the mess with the new CEO not being allowed to start due to a non-compete clause. Felt very unprofessional. Also nothing I’m very confident to hold in 5+ years, with what currently goes on in Retail. I’m happy coming out of this one with a small profit.

Microsoft – Sell Full Holding

A great company of course, but current Tech-hype is just too much for me. If/when Tech companies re-price downwards I will definitely be looking at adding 1-2 Tech holdings again. I’m happy for the returns I got and unfortunately I cut my position in half way too early, the part I kept returned almost 80%.

Catena Media – Sell Full Holding

This became the latest of my “swing trades”, with over 40% return in less than 4 months one of the better ones as well. I was a bit torn about this holding, since I do see some good long-term prospects. The online gaming business will grow, and these sites really need channels which supply them with customers. But it’s a way to unstable business case for me to comfortably hold for many years. It is definitely in the “baby-sitting” category, where I felt a need to keep myself updated on a frequent basis. So with a bit of a heavy heart I sell this holding. This could for sure keep performing very well for a long time, but I categorize it in the “too difficult” pile.

 

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Buy the dip – Tokmanni

Tokmanni – another bricks and mortar investment

tokmanni_perfgraph

Company Overview – Finland’s largest discounter

Tokmanni which today is something of a “Wallmart light”, started in 1989 and changed the name to Tokmanni in 1991. The first stores were established in Eastern Finland. In the 2000s it was decided to expand nationwide, and Tokmanni made significant acquisitions in 2004-2007. The larger acquisitions were Vapaa Valinta, Tajousmaxi, Robinhood and Säästöpörssi, in total about 90 stores were acquired from these four and over 100 stores in total was acquired. In 2008, a new administration and logistics center in Mäntsälä was started, including nationwide distribution of products. This was to oversee the previously decentralized activities. In 2012 PE investor Nordic Capital acquired 88.5% of the shares and Mr Seppo Saastamoinen acquired 11.5%. 2012 was also the year TokNet e-commerce opened. After this a brand harmonization followed, and as of 2016 all the stores and the online shop are known as Tokmanni.

  • Tokmanni is today the largest general discount retailer in Finland measured by number of stores and revenue, with 163 stores across Finland as at the end of first quarter.
  • The product assortment includes A-brand products from leading manufacturers, Tokmanni’s private label products, licensed brand products and non-branded products.
  • Tokmanni’s policy is to lease, and not own, its store premises. Stores are normally leased on a 15 year term
  • In 2013 Tokmanni entered into a JV with Norwegian listed Europris for sourcing of products from China. The joint venture has resulted in savings across various product categories thanks to both better pricing and scale of orders. Margins are 10-15% better on products sourced this way.

As of Dec 2015, the split of product types sold is the following:

  • Groceries – 31%
  • Tools and electrical equipment – 19%
  • Home cleaning and personal care – 16%
  • Leisure and home electronics – 12%
  • Home decoration and garden – 11%
  • Clothing – 11%

The good and the bad (+/-)

+ Tokmanni has successfully consolidated smaller players under it’s brand name. Economies of scale together with increased direct sourcing from Asia has the potential to support further margin expansion.

+ The Finnish market seems to be look more favorably at discount stores (although the stock market is very negative to bricks and mortars). The company is taking market share (still opening new stores) in what has been a tough market (defaults and low profitability among competitors).

+ Anttila department store bankruptcy in 2016 created short term weakness (store clearance), but should mean long term opportunities (Tokmanni is taking over Anttila empty store space). The store openings will also short term lower profit margins, but is of-course a long term positive. The store indicated to be added in 2017 is 26 000 m^2, which is roughly an increase of 6% of total floor space, much higher than previously, if this is executed successfully, it should give 5-6% revenue growth in 2018. I value this growth opportunity at 30 cents per share in 2018 and possibly more in the coming year.

+ 70% Dividend pay-out policy, dividend yield 5.89%.

+ Finland’s economic outlook has been lagging rest of Europe but lately there has been clear improvements, something of a turn-around? An improvement in Finland’s economic outlook would warrant a higher share multiple.

– Recent Profit warning for 2017 (Link), revising down guidance. Is this the beginning of a longer term trend? They blame weather (which I hate when companies do, although I can agree that snow in June in Finland is extraordinary). Listening to their latest full conference call after Q1 it sounded like it was not all weather related, but rather that they had not supplied stores efficiently.

– The Like-for-like store sales has not been that impressive (but the market has been weak). Tokmanni’s own data paints this picture:

like-for-like-tokmanni

– CEO was supposed to leave in September 2017, after 8 years at the company. A few days ago he announced that he is leaving early. Not sure how much to read into this, normally it wouldn’t be strange for a CEO to leave after 8 years, but if one wants to speculate, the way he left leaves some question marks. Obviously there is also uncertainty around the new CEO they are now looking for. The company was floated by Nordic Capital and they have now divested the majority ownership in the company, the lack of a new strong majority owner also gives some reason for concern in this regard.

– Its sales channels does not sound that modern, one would have hoped some more modern technology, like apps. But they rather have been spending their sales budget on this old style leaflets sent by ordinary mail, with the “weekly discounts”. Probably works well with the older generation, but not really for people below 40. The homepage they have is OK though and maybe their newly hired Business Dev Director Hanna Nikoskelainen can change that.

– The share price is not even in a negative trend, but rather in a free fall currently. Who knows when this turns around, one could get hurt (short-term) trying to catch the falling knife. This is off less concern for me though, although I prefer to buy stocks with good long-term momentum.

Seasonal results

As can be seen below sales (and profits) are highly seasonable, we have just now passed the weak first half year. The company has been growing at ~3% yearly rate (store openings rather than stores selling more), but the latest quarter was a disappointment and now they are warning that Q2 will also be disappointing.

Tokammi_quarerly_revenue

tokmanni_revenue

Valuation

The valuation model is highly sensitive to both margins as well as the cost of capital. I believe research firms that get very high DCF values are using a fairly low Cost of capital when discounting the cash-flows. I’m more conservative here with a WACC of 7%. I like that the bear case shows so low downside risk (about -15%), given that we are already in a weak market in Finland and if anything, signals are for improvement.

Valuation assumptions – base case

Moderate average future revenue growth at 2.5% per year.

An EBIT margin of 6.5% growing to 7% over the coming 5 years.

Cost of capital: 7%

Gives a DCF value of 8.13 EUR per share.

Valuation assumptions – bear case

Low future revenue growth at 1% per year.

An EBIT margin of 6.5% decreasing to 6% over the coming 5 years.

Cost of capital: 8%

Gives a DCF value of 6 EUR per share.

Valuation assumptions – bull case

Maintain 3% revenue growth rate over the coming  5 years, thereafter lowered to 2.5% per year.

An EBIT margin of 6.5% growing to 8% over the coming 5 years.

Cost of capital: 6%

Gives a DCF value of 12.5 EUR per share.

Looking at Peers

Peer_valuation_tok

Conclusions – Initiate 4% position

I would not say that this is my strongest buy case ever, but I like being contrarian and do believe you have to be contrarian to generate alpha. Or if you are not contrarian, at least you have to identify the new trends before everyone else. I think this is a stable business, which is just experiencing a bit of a soft patch and turbulence currently, which will have passed before year end. Indicators in Finland are improving (Consumer Confidence) and the bankruptcy of Anttila is actually an extra boost in long term revenue growth for Tokmanni. I also like the very healthy dividend yield. All in all the probability of outcomes seems skewed to the upside, I put a medium-term target price of 9 EUR and will re-evaluate the case when/if it is reached. I initiate a 4% position.

 

 

 

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