Portfolio update – what a difference 3 weeks make -22% YTD

My portfolio has dropped -22% year to date and it’s been a struggle how to position myself in this type of market. This still compares fairly well to MSCI World which is down -30% YTD, both calculated in USD. Talking about USD, the currency moves we have seen lately has been out of this world. I have a few holdings in NOK and SEK, in the last three weeks USD strengthened 25% vs NOK and 8% vs SEK. This means that my portfolio calculated in NOK is actually UP year to date! Such moves are way to big to ignore and must be incorporated in the analysis of the company you are buying, especially if the companies income is in USD. And then we have the oil, here I feel a bit unlucky buying into my first oil investment since I started the blog just before this epic double whammy of Corona scare and Saudi/Russia oil price war. A bit more on that later. Oil is important, but the big one has of course been the spread of the virus and lock downs around the world. First of all, I think it has been a process for all of us investors to come to grips with this. What does this all mean for my holdings and the economy? I had a head-start given I had closely followed this situation in China before most investors barely looked at it. Even with a head-start it has not been easy. Question like should I re-balance my portfolio when one holding drops unreasonably much compared to another, pops up for me on a daily basis. It’s very easy to over trade in this type of market. I will do a new quick review of all my holdings from a corona perspective. Debt levels for example become more important (I have usually been careful with this). First a few more Corona thoughts..

Further virus thoughts

First I want to say, you are probably pretty tired of reading about virus opinions from unknown readers online. Like 99.9% of these opinions I’m not an expert on virology. That said, I spent an almost unreasonable amount of time following this, listening to experts, trying to form an opinion on what is happening, long before most of you did. Not because I’m more clever or anything, it just happens that I live in a region which was close to the epicenter of this. I mentioned this many times before over the years in my blog, normally I would ignore Macro and focus on stock picking. But some events are so large you should not ignore them, this is such an event. I previously posted about how serious I thought this virus was in China. I just assumed that other developed countries closely monitored the situation and would sound the alarm if cases started to spread elsewhere. I was wrong. It’s now clear that the virus must have spread for a long time in Italy before getting noticed. But I wasn’t entirely wrong, in my post Feb 9th I wrote: “I really don’t understand why we are 1% off all time high the S&P500 when we are staring this situation right in the eye.” That doesn’t mean though that my portfolio was hedged for this scenario. I have tried to stay in defensive stocks for quite some time now, but that was defensive in a general sense, not Covid-19 defensive. In the past three weeks the whole developed world has changed and with that stock markets has totally repriced the world economic outlook. Credit/default risk and significant rise in unemployment is a certainty. The question now is not if, but how bad it will get, before it gets better? Vaccines is everyone’s big hope and that would be wonderful, but unrealistic to have before late this year. If we are locked down until a vaccine comes around then, this will be as bad as the depression in the 1920’s in my opinion. My hope stands to a medicine which significantly reduces the symptoms and the deadliness (right now malaria medicine + zinc seems like the best candidate, with HIV medicines a good second). Such a medicine could potentially reduce symptoms and would enable the younger/healthier part of the population to dare to go back to work and a more normal life. I read that most countries are now giving their patients the malaria medicine (based on the results from China and Korea). Given that governments have to find a way to at least partially normalize this situation, I see such medicines as the base case scenario, where governments can within a month or so go out and proclaim that they have a positive effect. A more bullish scenario would be an even more effective medicine, making the disease harmless, which seems unlikely to me. Then there is the depression scenario, one has to at least have a plan to survive that as well. That scenario goes a bit outside of this blog though. It means buying physical gold (which I have done and potentially I will buy more), stock up on goods at home, and hope you are lucky still have a job with cash flow coming in. I will focus less on the depression scenario, such scenario is a bit to bleak and in my view, still unrealistic, at least at this point.

2nd Corona status check on my holdings

I need to redo my Corona virus status check from Feb 9th, since the one I did a month ago was discounting “only” a significant spread in China, not a world pandemic. So here we go again (press read more):

Nagacorp

Over the last few days the Covid-19 has started to spread in Cambodia after returnees from Malaysian religious gather brought back the virus. Investors are definitely selling the stock on this information.  Cambodia could have been on of few places that Chinese would be willing to start travelling to again, but that is looking less and less likely. Here one has to be realistic that Cambodia is in a much worse position to contain this than much more developed Macau. Nagacorp for a while looked like a winner when Macau was closing down and Cambodia was still virus free, not anymore. What does a total shut-down of Nagaworld (let’s say in a bad scenario) until year end mean? Virtually all debt is concentrated in one bond issuance of 300m USD which matures in May 2021. By then the virus situation should be well under control (vaccines widely available), so there is no such cash-flow risk. The second big cash outflow risk is the Naga3 project, I think given a partial shut-down in the country the work here would slow down and then also cash spend. Left is workers, where I think Naga would have to take some middle ground and pay the staff at least partial salaries, to be able to ramp up when the situation is over. These costs though is very minimal, given the low salaries in Cambodia. I’m not overly happy that Naga goes ahead now and keeps its high dividend payout, I think they should cancel it to calm investors that they have ample cash to go through this. Even if they do pay the dividend, I think the company is in a strong position to weather the storm, even if lasts for a long time. I regret increasing my position in this holding on Feb 4th, but as stated, much has changed since. But the stock is very cheap now, given some type of return to normal within a year.

Swedish Match

ZYN sales has continued to show fantastic progress in USA, listening to Altria’s CEO on the last conf call one can really sense that this is a big product in USA in another way than regular snus. This is probably one of the holdings I have that will be least affected by the virus, if anything stressed out people might use more nicotine products. Also some smokers might consider shifting from smoke to smokeless due to Corona. Downside would be production disruptions if factory workers can’t produce the products or ship it out in the country. Still, this is a clear defensive holding in this market and stock performance so far also show this.

LiveChat Software

Companies wanting to continue to interact with their clients although physical sales is now impossible would at least in theory turn more to these type of solutions, chatting with their customers through their web-page. From that aspect this would be a positive for LiveChats product, the downside is of course that companies are struggling and might need to cut costs or even default. So on balance I would not expect LiveChat to increase net income over the coming year, but still a very well positioned company with a reasonable valuation and no debt. Another struggle for the company might be the total lock-down in Poland which is in place, but if any companies can work around this it would be a modern small scale IT company.

BBI Life Science

The take over spread has widened but still held up fairly well. I don’t have any deeper insight on the probability that this would go through, although before the market crashed it traded like it was a done deal. On top of that one case say the company is in a very important niche, where it’s products are probably used to research a cure for the Corona virus. In my this company should trade almost above the bid, given how other similar companies like BGI Genomics has traded up during this crisis. I see no reason to not keep holding this, either the bid goes through and I have cash to deploy or it doesn’t and I’m happy to hold this company long term.

Vinda

Exposure is against China and China is coming out of the crisis now, I see China exposure as less risky short term than developed markets. Even during the crisis in China people needed tissues and toilet paper (maybe even more than per usual). So the case is intact, I don’t see any reason to be worried here. Rather the opposite if the stock trades down significantly.

Olvi

Breweries has been hammered down hard in general, Olvi less so than peers. For one reason I think Olvi’s product is less reliant on sales in pubs and restaurants (Finnish and Baltic people like to drink at home). Secondly Olvi is net cash, which has hurt me on the way up, giving less leverage on the ROE. Now it’s saves the company when investors focus on downside. Even so it’s clear that a longer lock-down, especially one that last over the summer would be bad for Olvi, I’m expecting more downside here if things get worse, which I think will be. Long term I’m confident with this holding, tactically given that the stock held up decently I have considered to lower my exposure to increase in something else.

Greatview Aseptic

People hoard toilet paper, hand wash etc, but overall they also buy more stuff from supermarkets, including food in aseptic packages. Greatview should be a beneficiary on the back of this. The risks lies in if they need to shut down their factory in Germany, which could happen. On the other hand it should be in Germany’s interest to keep the food supply-chain open as long as its possible. As long as the factories are open I see Greatview as a winner in this, the market has not priced the stock as such at all lately, so maybe they know more than me. I’m carefully optimistic that this could be a really strong performer in the coming year. Looking at peer SIG Combibloc, sure the stock is down, but not by much (-14% YTD vs -30% for Greatview).

LG Chem

We haven’t talked about oil yet, low oil price is normally net positive for LG Chem as a chemicals producer. The market seems to have disregarded from that lately and brutally hammered down the stock. One reason is of course that even if normally lower oil-price means better margins, now its the top line revenue which is at risk. On back of that is also some disappointment that the battery section of the company will not be spun out. Car sales are for sure going to fall off a cliff here, luckily for LG Chem, they haven’t stared production at massive levels just yet so that part should be fine. The battery part is still a 2021-onwards case. Debt level wise LG Chem is not fantastic, with net debt to ebitda around 3x, in this type of environment is a bit too high for my taste. This is actually my largest worry, normally LG Chem has been run conservatively, but the battery expansion has forced the company to take on massive amounts of debt. I’m worried that LG Chem might suffer the same fate as my investment in Coslight, where the debt comes back to bite.

Dream International

6th March the company released a positive profit alert, at least 40% higher profit than last year and at least 10% revenue increase. The market totally ignored this and traded down the stock further. So trailing the company will trade on 3.6x profit vs Enterprise Value. How much toys will the world buy in lock-down? Probably less than before, how much less? The big toy companies listed in US and Canada has been hammered pretty bad (Funko, Spin Master, Hasbro) so the markets judgement is that it will be blood bath. But I think these companies are tanking because of the significant debt levels they have (at least Hasbro and Funko). This might be the largest risk for Dream, that one large customer goes belly up due to debt. Given the strong cash position Dream is in they can clearly weather the storm, but its also looks like sales for the rest of the year will be very meager. Not an ideal position to sit on through this, it could turn ugly with a default in Funko or Hasbro. It would also hurt tremendously to let this stock go trading around P/E 4 and net cash.

Dairy Farm

I recently added to this holding. I think this company on balance of all its activities is a winner in this tough situation. The largest revenue portion comes from supermarkets and pharmacies, clearly to sectors with no sales problems lately. Sure the IKEA and Maxim’s restaurant sections will suffer and the 7-eleven segment will probably do so-so, but this stock has been hammered down too deeply. Dairy Farm owns 20% of Yonghui Superstores that is today worth 2.56bn USD, you get the whole Dairy Farm for 5.3bn USD. I’m actually willing to add further to this holding here as I see it as extremely defensive through all of this. Another big aspects is that rents should reasonably come down over the coming year, which would push up margins further for Dairy Farm.

Modern Dental Group

Another positive profit alert, another ignore by the market. FY 2019 to be within the range of HK$155 million to HK$165 million, which represents an increase within the range of approximately 87% to 99%, and its EBITDA for FY 2019 to be within the range of HK$380 million to HK$400 million, respectively, which represents an increase within the range of approximately 43% to 51%, when compared to the profit for the year ended 31 December 2018.

When I first bought into this company I ended the analysis with: “I initiate this at a 4% position as a Long Term Holding in my portfolio, I will not increase my position before I see proof of margin improvements. I’m willing to give the company about 1-1.5 year to prove that they can improve margins from here.”. It’s 1 year and 3 months since I wrote this and the stock is trading slightly below my entry price. This profit alert is a clear turn around to me, so things turn out as I predicted and long term I should be rewarded. Then we have the Corona, where this starts to be much more tricky. Just the last few days the directives have changed in Europe to recommend a hold on all non-emergency treatments at the dentist. With almost all of Modern Dental’s business in Europe and USA this is a clear clear negative for company. So it comes down to can the company survive such a drastic downturn in orders? This is where it starts to look a bit tougher, the company has some 700m HKD in net debt with the historical stated ebitda of 380-400m. I estimate their current cash position at 400m HKD. This will obviously collapse if the company starts losing money now. Being such a small company the company will struggle to raise further debt. It will probably be a close call if almost nobody goes to the dentist for the rest of the year. I’m very torn how I should do here, without Corona I feel the stock deserves to revalue, maybe as much as 100% upwards. But debt is the devil in this type of market, especially when you are a small company. Just to see how serious the market has revalued peers on this, market leader Straumann is down almost 50% and Dentsply Sirona over 40%, from that perspective Modern Dental has held well.

JOYY

I think core YY would trade up in this market, but the strategy of plowing that money into loss making worldwide expansion of their apps is not something investors trust the management enough for right now. Also given the strong cash situation the company is in, a dividend or massive share buybacks would also change the sentiment around the company. That said, this company is net positive that people are sitting at home with too much time on their hands. The only negative I could come up with is that people will be poorer if this crisis continues which would lower available spend on tips as well as companies willingness to advertise on JOYY’s platforms. Still I don’t understand why the stock has been so punished, if anything I’m looking to add here, very defensive given strong balance sheet and nature of business.

Tianneng Power Int

This is mainly China and to some degree South East Asia exposure on how much people need to change their batteries in their electric scooters. This might have been slightly delayed when everyone stayed at home, but the battery more or less age the same anyway. As long as China kicks off activity now again, this company should be less affected than most in terms of sales. I also think less people will hold back buying a new scooter and just opt to change the battery in their old scooter. Balance sheet is again strong here and valuation super low.

Diageo

For a long time I have held this mega cap in my portfolio as a clear defensive high quality holding. Over the last year I have been closer and closer selling this, given that I changed my view on the younger generations drinking habits. Now with a large part of Diageos sales beeing in pubs and clubs, they are going to get hurt. The company is as most stable large cap highly leveraged to optimize ROE. This again is dangerous in this type of downturn and has for sure hurt the stock now. Given how close I was to selling before the downturn, I’m even more inclined now.

Mix Telematics

Transportations I think is one of the last things that will be shut down in a country. Meaning Mix’s products would still be a service used. The prospects for new clients will for sure look bad, but the company is net cash and should be able to weather the storm. Another worry is currency, where the ZAR is tanking like many other currencies vs the USD. This is what it is, I’m not going to sell Mix due to weaker USD income because parts of the profits is generated in ZAR. I’m pretty happy to hold this company, but not overly excited to add here.

Sbanken

Norway is in trouble, with double whammy Corona + oil price collapse. Norway will for sure see a deep economic downturn, the salmon sales will not save the country. Sbanken is mostly exposed to private individuals mortgage loans and that the property market in Norway holds up decently. There will for sure be unemployed individuals, luckily enough they live in one of the richest countries in the world with a government which holds more assets per individual than probably any country in the world. How Sbanken will do comes down to the support the government gives it people, I’m pretty confident here that they will go all in, like most other governments. The difference here is that a Norwegian all in is much more than most countries can afford. So it’s a bit sad that my bank holding investment becomes a bet on a bail-out, but such are the times for many companies. Do I want to take a lot of bail-out bets? No, not really, if I would take a bail out bet, betting on Norway is one of the safest bets I can think off. If Sbanken and the NOK keeps trading this weak I might even add to my holding going forward.

TGS Nopec

Something as unique as a cash light business in the oil industry, with a fantastic track record through previous tough times of low oil price. Maybe I was too quick jumping on here (obviously I was given that the stock is cheaper today), but I think this one of few examples where you should buy something which is in “distress”. When I say distress I don’t mean the company per see, but where the outlook is just terrible, I mean people are talking about oil price going to zero. The sentiment could not be much worse, perhaps if/when we get deeper into the bear market I will need to revise that but I still think TGS comes out on the other side of this, fairly unharmed.

Philip Morris

Another holding I had expected to hold up much better than it has. I think partly it is the debt load which scares investors. The only negative case I could think of here is that the Corona virus kills you through pneumonia in your lungs, obviously its not beneficial being a smoker in such a situation. Will a lot of people use Corona as a reason to stop smoking? Perhaps, I don’t think many will do it though, but I might be wrong. If that’s the case I think I will gain more on new Swedish Match customers than the loss of smokers.

Tethys Oil

Boy o boy.. what a timing for me to buy my first oil company. I bought a defensive company with production all-in cost still below the current oil price, the company has net cash and plans to shift out 8 SEK per share (trading at 42 SEK) now. This is still pending and perhaps they should reverse that, otherwise we are talking about a dividend yield of 19% currently. But all this doesn’t really matter much when oil crashes like this. The company has naturally been hammered hard. Again I think this is a historical coincidence of two black swans at the same time. If anything an opportunistic investors adds more here.

Veoneer

Company has 859m USD cash as per year end 2019, deduct some debt of 400m, the company trades on an Enterprise Value of 182m USD. The company has 1.9bn of sales. So it’s trading at roughly 0.1x Sales (compare that to the loss making compounder bro software companies). The company burns cash though, so it’s very hard to say in this environment what the value of the company is. This is high risk obviously, the company could default, but not within 1 year, given the cash buffer. So since the company is guaranteed to survive past Corona, is the future going to be so bleak that this company has nearly zero value? In my view this is a gross mis-pricing by the market. At the same time I don’t have the balls to make a big bet on this, I will keep my small bet though.

Summary

The Corona virus + oil situation is mostly a test of survival for my companies. As long as I don’t see any major risks to their survival or long term prospects I should be fairly happy to hold here. What disturbs that might be that some stocks get very cheap compared to what I own, or some stock in my portfolio gets relatively very cheap to something else. I will try to not over-trade such mispricing, but sometimes one also have to take advantage of it. As you can almost read from my conclusions above, this spurs me to some portfolio changes. I will keep that in a separate short post though.