Delving deeper into Catella Hedgefond

Sven emphasises that engineering stocks have performed very well since last autumn, driven by accelerating growth and increased profit expectations. Interim reports, especially for the first quarter of this year, took investors a little by surprise and were unexpectedly strong. Report outcomes for the second quarter of 2017 were also better than expected, although overall not as strong as for the previous quarter. There were also negative earnings revisions, albeit small and mostly due to currency effects. Much of the profit growth is now factored in, and it is difficult to find shares worth buying in the long term given the high valuations and slowing or even negative earnings momentum, says Sven. Volvo is a company we have had in the portfolio for a long time and that we still like. It is benefitting from continued strong demand in Europe. Volvo's share fell after its report in the second quarter, despite stronger profit than expected. The problem is not demand but rather a shortage of components related to bottlenecks internally and with external suppliers. However, it is likely that this problem will be resolved in the second half of 2017. We are also seeing a strong recovery in the US market and in the construction machinery division. In addition, there may be structural changes, Sven points out. The stock is attractively valued both in a historical perspective and compared with other companies in the sector. The new management has also shown that the company is not quite as cyclically sensitive as it has been historically. It is, of course, still cyclical but an expanded service offering and proactive cost-focused management bode well even if demand were to slow.

Anders Wennberg has another way to invest with a better Capex theme (capital expenses or expenditures are costs for new development or new investment) in mining, construction machinery, agricultural machinery etc, and this is through shipping company Wallenius Wilhelmsen. Wallenius Wilhelmsen ships this type of equipment, a segment known as high & heavy. Although high & heavy makes up only about 24 percent of volumes (its biggest segment is cars), prices are better for high & heavy. The segment is more volatile than cars, and when things improve the growth is normally intense. Its fleet of ro/ro, car and high & heavy vessels is growing by only about 2-3 percent annually at the moment due to a slim order book, and some of this growth is absorbed by increased car exports. If high & heavy experiences the recovery we and the market predict, the balance between supply and demand could improve considerably, says Anders. Furthermore, Wallenius Wilhelmsen was created through a merger of Wallenius and Wilhelmsen, and the company is well on its way to delivering synergies of USD 100 million. This means that the company has the potential of good earnings growth over the coming two years and its P/E ratio for 2019 could be as low as 6. The share has always been cheap due to its historically poor liquidity, low free float and messy structure. Following the merger between Wallenius and Wilhelmsen, the structure has become cleaner and a placement of shares has improved the trade in its stock, so the reasons for the low valuation no longer exist.

Anders says that the market in container shipping has also consolidated and the market balance seems set to improve. However, we believe this is fully factored into the share price of Maersk, which has a P/E ratio at least twice as high as Wallenius Wilhelmsen. This is despite the fact we have included the assumption of an improved container market and synergies from the acquisition of Hamburg Süd. Maersk could therefore be a short (sell) against a holding in Wallenius Wilhelmsen for investors wishing to obtain a neutral position in shipping. We are also a little worried that Maersk’s excellent cost performance in recent years has ended; in the second quarter of 2017 both fuel consumption per moved container and other costs per container were up for the first time in several years. Maersk's profitability leadership compared with the industry has gone from around 5-6 percent better margins to just a percentage point or so better than the average.

In shipping, Anders believes that LNG will be an attractive market for the long term. The industry has been suffering from overcapacity for several years, but this also means that very few vessels have been ordered. As new export terminals in the US and Australia come online in the next few years the market looks set to be attractive. LNG is cooled natural gas and a much cleaner alternative to burning oil or coal. There are fairly few stocks in the Nordic region, but one is Flex LNG, Anders points out.

In conclusion, we want to emphasise that our managers analyse these companies continually. Our view of companies and stocks can change over time, and holdings may be for the long term or short term, depending on our analysis and the current situation.