Monthly Update - September
- September surprised positively after significant stimulus
- Elekta - time for change
- Origo Seleqt: +31% (12m)
Origo Seleqt
Seleqt lost 0.5% during the month while the market (VINX Small Cap) rose 0.1%. Last year, the fund rose by 31%, which is 3 percentage points better than the index. Hanza and Bilia had a negative impact. Paradox, Kalmar (new investment) and Elekta made positive contributions.
During the summer, the forklift manufacturer Kalmar was listed on the stock exchange, after being spun off from Finnish Cargotec. We have followed the company for a long time, both during Cargotec's ownership and during the period before when Kalmar was its own company on the Stockholm Stock Exchange. The company has a strong position globally, profitability is good and it has a well-developed service business. We think the valuation is very attractive and expect a revaluation as the transport industry stabilizes.
Origo Quest
The hedge fund Quest lost 1.5% during the month, and has risen by just over 12% in the past 12 months. The correlation (beta 24m) against the Swedish stock exchange is 0.3-0.4 and the volatility amounted to 8.5%, which can be compared with CSRX, which has had just over 19% in total risk during the same period. Returns since inception in 2013 have been strong, with value growth of 155% which compares with the hedge fund index (NHXE) which has risen by 112%.
The long book has returned in line with a relevant market index this year, while the short book has had a certain negative development but still created positive alpha. During the month, however, the long/short spread was negative. The long books most important holdings now are Elekta, SOBI and New Wave.
The short book is dominated by companies where we have identified risks in the accounting or other "red flags" that risk leading to impaired earnings and lower valuation.
The Market
After several years of negative development, China again issued a gigantic stimulus package with the aim of boosting consumption and at the same time reducing indebtedness. The combination of measures has not been seen in 20 years. In addition, further measures are promised in the future to reach the GDP growth target of 5%. The stimulus package gave new energy to both the Asian and international stock markets. The American central bank further chose to lower the key interest rate by as much as 0.5%, which was the first reduction in over four years, and more aggressively than the market had expected. While it may be a signal that the US economy is weaker, we rather assess that this will lead to increased investments at the end of the year and increased confidence in the soft landing scenario.
On the more pessimistic side of the news feed, we note a sharp escalation of the Middle East conflict in recent weeks with rising oil and natural gas prices, higher insurance premiums and more expensive transportation costs as a direct result. It may in the long run become a negative driver of inflation, but it is a bit too early to have a strong opinion.
During the month, there have also been several profit warnings, both globally and in the Nordics. After the pandemic and the problems with the logistics chains, we note that many companies are unsure of what the de facto inventory looks like in their industries when you include wholesalers and other intermediaries. Overall, we assess that inventories have come down but that they are still somewhat high on an aggregated level.
On the stock market, the world index rose by 1.4%. The Nordic region fell by 3.5% and the Nordic small company index rose by 0.1%. September was thus not the shivering month that it has historically been. In the fixed income market, we saw falling government bond yields both globally and in the Nordics.
In the wake of expected and implemented interest rate cuts, risk appetite has increased, which has mainly benefited cyclical companies with high indebtedness. Defensive quality companies have not kept up.
Sector rotations like this usually occur once a year and in the short term there is always a lot of drama, but in the slightly longer term it basically means nothing. What we do know, however, is that it is actually precisely periods like this that, historically speaking, it has been most profitable to invest in our funds. With less than half the stock market risk, Origo has created 9% annual return over 12 years and if we look at the long share book alone, the annual return amounts to +16%. For "value-oriented hedgerow investors", the situation is therefore particularly interesting, based on history.
Where do we find Value, Quality and positive Change?
Throughout 2024, we have put significant analysis resources into the Nordic medical technology sector. The work has continued during the month with a particular focus on radiotherapy.
Radiotherapy is a technology where ionizing radiation is used to treat mainly cancer. Today there are four common ways to treat cancer (drugs, surgery, immunotherapy and radiation therapy) and not infrequently several of the methods are combined. Radiation therapy is one of the most effective methods and has become a mainstay of today's cancer treatment. Globally, over 20 million people receive a cancer diagnosis each year. By 2035, that number is estimated to have grown to 35 million people, so the need for effective care in the future is enormous. (source: WHO)
During the month, we met with the management and principal owners of Elekta, and RaySearch, both of which are medium/large positions in our funds. We have also met with the global leader Siemens/Varian as well as external advisors.
It is quite clear that Elekta has not delivered in accordance with the market's or the company's own expectations. This applies regardless of which line you look at in the income statement. The most obvious problem has been growth, with organic growth around the zero mark recently. Another problem is the weak gross margin of 37%, which given the high-tech focus and strong global position must be seen as a minor disaster.
However, the weak development has been affected by several external factors and specific projects, which makes it easy to miss the underlying quality of the company (Market position, product portfolio, customer base).
Our analysis briefly looks as follows:
Growth:
Sales will pick up going forward when the new product range takes hold in the market. The growth is supported by the fact that hospital budgets, which were squeezed hard by the Covid pandemic, are also heading towards more normal levels. The cancer queues have grown during 2021-2024, but we see several new initiatives, not least in Asia, to reduce the gap. Bottlenecks created in light of China's anti-corruption rules are also slowly dissolving, which could add momentum.
The margins:
We believe that Elekta has developed the best radiation machines based on a patient perspective. This has contributed to Elekta's international success and good reputation among the medical profession, but has probably also affected gross margins negatively as the design and manufacturing processes may not have been state-of-the-art from a profitability perspective.
Inflation has also been extremely troublesome, with increased costs for goods sold on already fixed-price machines. We now see a clear change regarding cost development and cautiously also factor in a gradual improvement regarding the profitability focus in product development.
First profitability – then consolidation?
After Siemens' purchase of Varian in 2020, there has been speculation about what happens next. We expect consolidation in the industry to continue and see the industrial logic of radiotherapy, x-ray and imaging growing together. There are significant synergies within IT development but also when it comes to refining the products and its workflows.
However, we are not interested in receiving a take-over bid at the current valuation level, and we don't think any other owner is either. Elekta's focus in 2025 must be profitability, profitability and...profitability. At the same time, we note that the stock market's confidence in Elekta is at historically low levels, which we find interesting.
We think the underlying quality is underrated now see the light at the end of the tunnel. We have continued to buy shares during the month.
Best,
Team Origo