Value, Quality and Change

• 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

Better risk/reward in small caps

• Volatile stock markets
• Strong reports from several portfolio companies
• Great potential in MTG

Our funds performed relatively well during a month that was difficult to navigate and generally messy. Origo Seleqt rose by 0.6% during the month, which was approximately 2 percentage points better than the fund's benchmark index. So far this year, Seleqt has returned 18.1%.

The hedge fund Origo Quest rose at the same time by 0.4%. The fund has delivered almost 9% in annual returns since inception and 11.3% in the last 12 months. At the same time, the fund has had a limited net exposure (beta-adjusted) of around 20-25% recently.

August began with a major global stock market correction. A negative development in the American labor market, the geopolitical situation in the Middle East and great nervousness about the valuations of American technology companies contributed to the slide. After a week or so, however, the market began to discount an increased likelihood of a US soft landing rather than recession, which bounced back for the remainder of the month.

Elekta, a larger position in our funds, came out with a Q1 report that was positive. Both sales and the important gross margin beat the market's expectations. However, it kept its "mid-single-growth" forecast for the rest of the year, which perhaps dampened the positive reaction somewhat. We have continued to buy the share as we think the company is still severely undervalued and has good growth prospects when the new product portfolio is gradually introduced in the coming years. We follow the development of the new flagship product EVO, which is in an early stage, extra closely. CE marking has recently been applied for, where permission in the autumn could lead to a sales boom next year.

MTG has been on our radar screen since they sold the esports business in 2022. They were paid well and thus a strong balance sheet and net cash. MTG also sold a smaller part of its mobile gaming business, where the need for investment was greater and the cash flow was negative. The entire sector, except for MTG and a few other companies, has had balance sheet problems, which has pushed valuations down considerably. On top of that, mobile gaming as an industry is still suffering from the effects of the pandemic and a more restrained consumer. Improved demand will result in increased turnover, but will also mean increased marketing costs. However, our view is that the underlying margins in MTG are structurally higher now than a few years ago, which means that we expect a margin expansion when demand turns despite increased market activities.

In the spring of 2024, we started to build up a position in our funds and after a small price development during the summer, the share has now become even cheaper, especially adjusted for the large net cash. We believe that MTG should buy back more shares than has been communicated and that they should take a break from future acquisitions until they have proven that they can scale up both revenue and margins. From current valuation levels, we see strong IRR potential over the next 3-5 years as demand returns to the industry and MTG delivers in line with its ambitions. The Playsimple studio is the clear shining star, but we also see great marginal potential in the Innogames studio. The CEO and board have shown good capital allocation skills since the sale of e-sports, and if they continue with that, we expect the valuation to rise. If that does not happen, the MTG share is an acquisition target as they have strengthened their position but still risk becoming a pawn in a larger game plan when the industry recovers and the M&A window opens.

Another company that came up with an encouraging report was trailer company Freetrailer. "We assess that Freetrailer, with its sharing economy platform, is well positioned to generate profitable and sustainable growth in the coming years," we wrote in the press release in the fall of 2021 after we had acquired a larger stake in the company. At the time, the Danish micro-company had a turnover of around DKK 50 million and had around 600,000 rentals. For the coming year, we expect a turnover of around 130 million and 1.6 million rentals. The stock has risen by more than 80% since our purchase, an increase that is thus driven by significant operational progress.

During the year, Freetrailer launched its new IT platform and a brand new App, which is an important step on the way to becoming the leading micro-mobility platform in Europe. The partnership with IKEA celebrates 20 years this year and together with new customers such as Byggmax, Power and not least Jem & Fix, the continued growth prospects look very promising.

We expect the high August volatility to persist in the second half of the year and assess that small companies have a better risk/reward than large companies in general. This definitely applies to the USA but also to the Nordic countries.

We also want to take the opportunity to tell you a little about what is happening at Origo. Origo Fonder was a bit of a pioneer when we launched the small-cap oriented hedge fund Quest in 2013. In 2022 we followed up with the distinctly alpha-oriented long-only fund Origo Seleqt. Now we take the next step.

I am very happy to now be able to tell you that Origo has recruited the experienced fund manager Per Johansson. Per has an impressive CV with, among other things, 11 years at long-standing Fidelity Investments in London and Boston and several years at the Brummer & Partners-backed hedge fund Bodenholm. The closest comes from Per from D&G where he was a partner. Per has shown that he can create sustainable excess returns regardless of market trends and is sharp when it comes to identifying Special Situations. Per will become a co-owner/partner and together we will form a very experienced small company team with well-documented results on both the long and short side.

We have also hired Oscar Severinsson as new COO. Oscar is a very driven man and with his background as a business developer at ISEC and Head of Fund Operations at Catella Fonder, he will contribute enormously to Origo in the future.

Earlier in the year, we also hired Milo Wahlgren within Operations & Research. Milo has just started the master's program at the Stockholm School of Economics and at the same time works at Origo. Milo is a math pro and has a background as an elite athlete.

Origo Seleqt (Nordic Small Cap)

Origo Seleqt rose by 0.6% during August, which was a couple of percentage points better than the index. In the last 12 months, the increase amounts to 26%. The Danish allergy company ALK-Abello raised its profit forecast once again and the share contributed the most to the fund's return. Freetrailer and Catena also made positive contributions. On the negative side, we find SparNord Bank, which after a longer period of growth bounced back. Net profit in the bank has gone from DKK 900 million to approximately DKK 3 billion in 2024, while the number of shares has decreased by 6%. A huge boost in earnings per share, in other words. We believe that growth will continue, but at a somewhat slower pace.

Origo Quest (Equity L/S) Origo Quest rose by 0.4% during the month which gives 11% on a rolling 12 months and 159% since start. The long book gave a positive return and the short had a neutral development, while the small cap index (VINX Small Cap SEK NI) fell by 1.4%. SOBI accounted for the largest positive contribution. The stock has climbed 18% this year as the market sees the breadth of the product portfolio and that the news flow around the projects has been positive. SOBI is the fund's largest holding (+7% of NAV). Raysearch also had a nice development after presenting another strong report.

Thank you for your trust and support,
Team Origo