Hyvää pohdintaa nykytilanteesta ja historiasta. Krediitit Redeyen jäsenelle nimeltä labull.
Lopussa linkki tekstiin. Teksti on käännettynä kääntäjällä ruotsista englanniksi, joten virheitä saattaa esiintyä.
Nobody wants to be a party pooper. It is much more fun to order another round at 02.00 than to be the one who says it’s time to think about the chorus. But the next day you usually wish that someone had stopped in time.
The IT bubble
I was there 20 years ago when the IT bubble swelled and exploded. My first job after Handels was as a stockbroker at Lehman Brothers. After an initial trainee program in New York in the late summer of 1999, I was stationed in London, with the task of brokering American shares to Nordic institutions.
I was thrown right into the last chapter in a crazy bullish market where EVERYTHING that breathed Internet, Telecom, Mobile, WAP, Fiber, Hosting rose hundreds, if not thousands of percent. Lehman Brothers was a large bank and listed and raised capital for lots of companies that do not exist today. Digital Island, Exodus, Razorfish, Worldcom, Lucent, Scient, VA Linux…. The list can be made infinitely long.
There are many funny anecdotes from this era. The most amazing is the listing of VA Linux. When the company was to be listed, demand was so overwhelming that the price range was raised not only once during the subscription period (which ALWAYS happened at this time), but TWICE. Since this clearly signaled that demand was astronomical, the listing day was the sickest I have experienced. The stock opened 1000% higher to close 737% above the subscription price. Thereafter, the share fell over 90% in the coming year, to levels below the subscription price, see links.
VA Linux Sets IPO Record | WIRED
Geeknet - Wikipedia
During this period, most of the IT companies such as Lehman Brothers and our competitors did not make any money. The companies were benchmarked with P / S multiples, sometimes on forecasts several years into the future. But everyone wanted to join. The Internet was the future!
And that was true. The Internet is a fantastic invention that in 2021 permeates pretty much everything we do, all the time. But even if that prediction came true, many investments became worthless. Not all companies succeeded, believe it or not! And several of the companies that really succeeded gave lousy returns for an extremely long time if you bought them at the top of the IT bubble. I found an interesting article on Bloomberg recently where the author had looked at how long it took to get the money back in Cisco, Microsoft and Amazon. In the case of Amazon, the stock first fell over 90% and then regained the entire slump and gave a positive return after about 10 years. For Microsoft, those who bought at the top had to wait 15 years to get a positive return. And the one who bought Cisco at the top has not earned a penny after 20 years.
Durability a bubble?
Fast forward to today, two decades later. The world is living with a pandemic that has forced the most expansive conditions in a long time, maybe ever? Money is free. The countries of the world borrow indirectly from their own central banks, which have set interest rates at 0%. At the same time, Greta Thunberg’s in many ways praiseworthy grassroots movement has spread into the fine rooms of the financial market. Now all fund companies must invest sustainably. Out with coal, oil, mines! In with hydrogen, solar panels, bioplastic! Special Sustainability Funds attract billions from both private individuals and professional investors. In the last year, most broad funds have done quite badly, but these new sustainability funds have done great! And then you do a good thing for the environment or?
Take a step back and think about the incentive structures for the financial industry. If it’s a bubble, who wants to ruin the party? There were at least 3 different Digital Sustainability Conferences last week, with lots of unlisted companies standing in the starting blocks to begin their listing processes. Would the banks then be interested in putting something other than Buy on the companies that investors are crying out for? It would be to saw off the branch you are sitting on. Consequently, both Re: NewCell and Hexagon Purus were worth buying, according to the banks that published analysis a few weeks after the IPO of these companies. Despite the fact that prices have already risen several hundred percent in a short time.
The fund companies then, what about their incentives? I heard a few weeks ago that the assets in one of the major banks’ Sustainability Fund had risen from SEK 6 billion to SEK 35 billion in about six months. Since the fund companies’ profits are in direct proportion to the amount of assets managed, they also have no interest in curbing inflows by warning customers to continue buying shares in companies with a sustainability stamp.
So the two major players in the financial market, fund companies and banks, both have everything to gain from the game continuing for as long as possible.
1 + 1 becomes 4
A little arbitrarily, I will now take a closer look at one of the companies that has quickly become immensely popular, Norwegian Hexagon Composites and its recently spin-off daughter Hexagon Purus.
Hexagon Purus is in many respects an interesting game on the transition from hydrocarbon-powered vehicles to more environmentally friendly ditto. The company was spun off from Hexagon Composites at the end of 2020. For several decades, Hexagon Composites has manufactured storage tanks in composite materials, which can be used to store, for example, hydrogen gas. The share was a rather lousy investment over the past two decades, but when the company decided to make this exposure visible via a spin-off, interest soared.
A separate listing of Purus means that investors can now have a pure exposure to hydrogen, rather than owning exposure to gas containers for, for example, the Weber grill, which remains in Composites.
It is well established that the financial market appreciates pure, focused company structures, rather than conglomerates, so the reaction is understandable in a way. But is the sum of Purus and Composites really worth SEK 30 billion today against SEK 7 billion a year ago?
Another interesting mechanism in the case of Hexagon is that Composites still owns 75% of Purus. So now it is only the expectations of Purus that control the share price of Composites. It’s quite reminiscent of when 3Com handed out the Palm two decades ago.
Valuation arguments in a bubble
I want to be clear that I am not negative about the electrification of the vehicle fleet, solar panels or environmentally friendly plastic. It is fantastic that this has finally come up on the agenda and many large successful companies will be created in the name of sustainability.
What makes me funky, and the whole purpose of this blog is to highlight how to do tricks to make the music play as long as possible. Now Purus has to dress up again, and it is also not intentional for similar arguments can probably be made for the most part in this “sector” right now.
The banks valued Purus at SEK 27 per share in the IPO in December. Fast forward to January, a whole month later and one of the banks calculated that Purus is at least worth SEK 115. The analysis is based on the company growing revenues by 54% per year, every year for a decade. It is also based on the company receiving an additional SEK 2.6 billion (the smallest risk in the entire analysis if you ask me) and that the margins in steady-state are 15%.
And perhaps most powerful of all, the discount rate used in the valuation model is 7%. Purus has a significant capital need and will not have positive cash flows for the next 7 years according to the analysis. I have never seen a return requirement as low as 7% on a company in a similar maturity phase.
So if you buy the share at SEK 75, where it closed on Friday, you get about 12% return per year (the required return of 7% per year plus the upside to SEK 115 of about 50%) next decade, provided the assumptions are correct. Is it really worth a buy recommendation? After all, there are a lot of risks and uncertainties left when the whole world has to switch from hydrocarbon operation to hydrogen operation.
Another sanity check; if we say that SEK 115 per share today is a reasonable value, then what do you pay for the profit in 2030? If it is assumed that Purus issues shares of SEK 70 (7% discount) at the closing price, the number of shares will then be 266 million. That would mean a market capitalization of SEK 30 billion today at SEK 115. The analyst assumes SEK 13 billion in sales in 2030 with a 15% margin. This gives an operating profit of approximately SEK 2 billion. The analyst therefore thinks that the market should be prepared to pay 15x this hypothetical operating profit a decade away.
Since DCF models are notoriously useless in determining the value of such an uncertain asset, I think it is more interesting that Purus today is considered to be worth 15x the operating profit in 10 years. From now on, I will call this the “Purus method” and will use this term below.
If you cant beat them – join them!
Those who follow me know that I like themes and structural trends. Over the years, I have invested in the audiobook, NewSpace, CAR-T, robot surgery, 3D printing, digital health and gene therapy.
Sustainability is a fantastic theme. We will switch to more environmentally friendly alternatives, no doubt. Huge money will be allocated to this conversion. Klondike! So what’s not to like?
At the end of the day, return is a function of two things; price at investment and price at sale. If the price at investment is too high, it will not be a good investment, regardless of whether the sustainability change takes place exactly as I and most people with me hope. 54% annual growth for sales of storage tanks for hydrogen! In a decade! It must give a fantastic return to be part of that journey or?
Personally, I refrain from investing in sustainability companies, not because I am not convinced that it will happen, but rather because the return will be too poor. I continue to focus on the healthcare sector, which I believe is facing a golden age in many ways. Partly because the governments of the whole world will probably have a mandate to pour money into improving healthcare after the pandemic, and partly because the advances made in, for example, genetic engineering and digitalisation lead to major innovations and improvements that will create a lot of value.
So in conclusion, I was just going to borrow a pair of pink glasses from the ESG analysts and do some quick estimates for my five large portfolio holdings. And then calculate what the shares are worth today with the Purus method.
ArcticZymes has refined the company against the enzymes following the sale of the Betaglucaner business area to Lallemand in December. AZT grew over 100% in 2020 on my forecasts with underlying growth of 50-60% adjusted for sales related to Covid. The major driver of the company’s growth is the company’s SAN enzyme, which is used in the advancement of gene therapy and various vaccines. I am convinced that gene therapies will grow strongly for many years to come, which gives AZT the conditions to grow at least 25% organically in the next 5 years, say 20% thereafter. On top of this, they want to broaden the product portfolio through their own research and through company acquisitions, which will provide further growth. Assuming an average of 30% growth by 2030, AZT will then have sales of approximately SEK 1.4 billion. With an expected EBIT margin of 60% (same as 2020), the profit will then be SEK 820 million. With the Purus method, the justified value for AZT would then be SEK 12.4 billion today. Even with 25% more shares adjusted for acquisitions, the value per share will be SEK 200 today.
Sedana Medical launches its propofol killer in Europe this autumn. In 2025, the launch is expected to take place in the USA. My opinion is that the method is superior to today’s product (propofol) on a number of important parameters, which creates improvements for patients and healthcare systems at a lower cost. Win-win-win. This means that Sedana will take 30% of the market for sedation at IVA 2030. Sales will then be SEK 7.5 billion and operating profit SEK 3.5 billion. With the Purus method, the market capitalization will be SEK 52.5 billion or SEK 2,300 per share.
After changing CEO and business model, SyntheticMR has set the stage for rapid growth with high profitability. There are currently about 3,000 SyMRI-compatible MRI cameras in the world, a figure that will grow by 2,500-3,000 annually. This means that around 30,000 MRI cameras by 2030, equivalent to half of the world’s MRI cameras at that time, will be SYMRI compatible. Assuming that SYNT can sell “apps” (Neuro, MKS, 3D version, etc.) to 25% of these 30,000 cameras with an average revenue per camera of SEK 100,000, it generates revenue of SEK 750 million, with at least a 60% EBIT margin , or SEK 450 million in operating profit. The Purus method provides SEK 6.8 billion in justified market capitalization today or SEK 1,700 per share.
Cellink operates in markets with fantastic growth prospects over the coming decade. 3D Bioprinting can be established as an efficiency-increasing method in preclinical drug development, for example because drug candidates can be tested on printed liver tissue. And you will bioprint support tissues such as cartilage, ligaments, tendons with the help of Cellink’s printers and bio inks, which will revolutionize orthopedics. In precision dispensing, Cellink will be an important subcontractor for players in cell and gene therapy, markets that will explode. This means that Cellink can continue to grow organically 30% per year after 2022, as I expect 1 billion in sales. M&A adds at least 10% growth. In 2030, Cellink will have sales of SEK 15 billion with operating margins of around 30%, supported by very high margins in consumables of over 80%. The number of shares has increased by 30% to 70 million over the decade. With the Purus method, Cellink is worth SEK 950 today.
Surgical Science is about to become the standard in training software for robotic surgery. In addition to the industry leader Intuitive Surgical, agreements have recently been signed with Johnson & Johnson and previously with the upstarts Meere Company and CMR. Before 2030, it has expanded its licensee portfolio with a number of players, including Medtronic. It will also have launched a number of new apps that generate recurring revenue. Robotic surgery has exploded and is used in 30-40% of all surgeries. SUS has grown 30% per year and has sales of SEK 1.5 billion with a 40% operating margin. The company is then worth SEK 9 billion today with the Purus method, or SEK 265 per share.
Summary. An increased focus on sustainability is fantastic news, for all people and animals on earth and for future generations. But in several cases, equities are already discounting enormous growth and the road is seldom straight. It is obvious that the industry’s main players have no interest in warning fund savers of the risks of buying sustainability funds. But if one assumes that most people save in funds to get a return on their capital, it feels doubtful to continue to advertise sustainability in the way it is done today. Personally, I think there are many better themes to invest in for the long-term, which provide better returns at lower risk. For the money you earn, you can buy solar panels or an electric car and the environment wins in the end anyway.