Summary

• We hosted an internal stock-picking dinner where The Analyst team made brief pitches of potential new longs and shorts.
• In this note, we publish details of these pitches as “food for thought” for clients. 
• We welcome client input at this stage of ideation. 

Ideas Discussed

Share prices and market data are correct as of 13 November 2023 and sourced from Sentieo. All forecast numbers in this document are Sentieo consensus and, unless otherwise stated, all reported historic figures are sourced from company filings.

British American Tobacco

• Traditional tobacco – been under fire for years, substitution to smokeless ongoing, but remaining smokers arguably are those most deeply committed to the habit leading to price gains offsetting volume losses.
• BAT’s smokeless alternatives – 10.4% of revenue are “new categories” and 4.4% traditional smokeless – are not yet profitable.
• Stock has derated in part with rising rates and growing interventions around smokeless.
• Trades on a 6.5x P/E, 17% FCF yield, 10% dividend yield, and has been buying back stock.
• Major discount to peers: Philip Morris 15x, Japan Tobacco 14x. Gap to peers in smokeless percentage of sales, but have adopted a longer term more organic strategy (Source: Annual reports)

Potential Investment Case

Large cap deep value “consumer goods” stock or “sin stock” that is late to transition to (potentially flawed) smokeless alternatives?

Adyen

• Former tech darling in payments, had growth €349m to €1.3bn revenue since IPO, 40% CAGR. 
• Internally-developed single payment platform does everything in-house providing margin advantages. 
• Signed large enterprise, land and expand (Source: CMD 2023 presentation). 
• Stock -60% since H1’23 due to slowdown from 40% (2022) to 20% (H1’23) given increased competition from PayPal and clients moving volumes away from Adyen. However, it is now 60% above its lows following its 8 November 2023 Investor day.
• 20% CAGR to 2026. EBITDA margin dropped to low 40% lower volumes and more hiring. EBITDA expected to improve to ~53%. 
• US leaders have lower EBITDA margins: PayPal at 24% (FY22) and Fiserv at ~40% (FY22) (Source: Sentieo).  
• Growth story but worst yet to come as US competition could eat into growth story.
• Trading 16x EV/Sales and 36x EBITDA FY’23, significantly overpriced versus US peers, premium may not be justified if market share is lost and margins under pressure. 

Potential Investment Case

Tug of war stock – scarce European tech leader versus rapid commoditisation.

3i Group

• 3i is seen by many as a diversified financial and covered by financial analysts.
• Yet over 60% of its net asset value now lies in its 53% stake in Action (H1’23 report).
• Action is the discount orientated European retailer.

Potential Investment Case

• Is the stake in Action hidden value or could it be nearing saturation in its roll-out?

Novozymes

• Novozymes was spun out of Novo Nordisk in 2000 and therefore shares corporate DNA with Europe’s best long of a generation. Parent Novo Nordisk stock was 4x last five years and has an incredible innovation track record.
• Merger of two highly regarded European businesses that are R&D intensive and at low point in cycle after destcoking and gross margin weakness. A potential global leader in biosolutions with pricing power. 
• High return and scalable business model based on fermentation and innovation in enzyme tech, proteins. Combined portfolio of ~10,000 patents with Chr. Hansen bringing additional microbial and fermentation platforms with commercial bacteria. 
• Pro forma revenue of €3.7bn with synergies, guided to grow 6-8%, but could have accelerating top line to 10%+ given structural megatrends, break-out of new products, restocking, and combined innovation efforts.  
• Margins of 26% pro-forma could go as high as 30% FY’26e with growth and synergies and pricing power. 
• Near-term destocking complete, Q4 top line guided better than Q3 and gross margins higher sequentially.
• Breakout top line options in new products, as shown by our summary of carbon capture technology launched with Saipem.
• Based on FY’26e revenue of €5bn, 30% margins, small interest, and low Danish tax rate 22%, roadmap to €1.2bn net income puts stock on <20x, for rare quality and long-term growth.

Potential Investment Case

Potential GARP compounder with value-add coverage opportunity from merger and new product pipeline analysis.

Norsk Hydro

• Shortage of copper for renewable transition and pricing becoming a problem. Aluminium is 60% as conductive, but 30% of the weight and cheaper.  
• Cable businesses and EV suppliers looking to replace copper for aluminium. 
• Vertically integrated aluminium and energy business, returning 10% of market cap through dividend and buyback in FY’23. 
• Assets at bottom of cost curve. 

Potential Investment Case

Possible underestimated TAM in a business seen as a traditional cyclical.

Accor

• Global hotel operator. Consensus long – only one of the 24 analysts covering doesn’t have a positive view.
• Valued at 14x P/FCF and 16x ’23 consensus EPS, which has come down due to 100% consensus upgrades in 2023.
• Risk of being at or beyond the top of the post-pandemic upgrade cycle and recent trading momentum disappointed at Q3 results. Consensus already projects that it will see no EPS growth next year (2024).
• 50% more exposure to the Middle East (~12%) than any of the listed peers and although there has only been minor impact from current geopolitical events in Q3; with Travel the driver of its business, there is a risk this could get significantly worse. There are also heightened terror alerts in Accor’s home market of France.

Potential Investment Case

Platform for future growth or cyclical peak?

Rexel

• Electronic distributor with 7% margins versus pre-Covid <5% potentially overearning. 
• Benefitted from supply-chain constraints into 2023. Looks cheap with a 2024E P/E at 7.8x. 
• Late cycle versus industrial components due to exposure to HVAC and heat pumps. Competitor Wesco is noting destocking per their Q3’23 results call.
• Lacks market dominance in large markets (No.2 in France, No. 4 in the US), staff reviews (Source: Glassdoor) are weak. 
• Unusual M&A profile, acquired Dutch HVAC distributor Wasco at the top of cycle in early 2023.
• Debt near to 2x EBITDA on elevated profit margins, with average maturity <3 years and 50% of it being securitised receivables with variable interest rates. 
• A normalisation scenario with €17bn sales at 5% margin, 6% interest rate, post-tax/lease would give €460m net income versus €835m consensus in FY’25.
• Note though the very low single digit PE, which does provide support to the share price.

Potential Investment Case

Structural improvement offering value or cheapness is only optical due to cyclical high earnings?

Bechtle

• There are areas of software potentially losing from AI. Bechtle could be exposed to disruption in IT ecommerce segment, which is one third of revenue.
• Growth slowed from 20% to 6%. Volumes up 12% but revenue up only 9% – may indicate losing pricing power.
• Acquisition spree could be sign of lower organic growth risks.
• Margins stopped expanding with group EBIT margin at 5.8% and declining margins in IT commerce.
• FCF shrinking and went negative including M&A despite boost from working capital.
• Dividend potentially uncovered, 22x PE may be challenged if the business is entering structural decline.

Potential Investment Case

Steady but slowing growth, with potential of overhype.

OPAP

• Greece-based lottery and betting operator.
• Investors are apparently taking a cautious view on the sustainability of OPAP’s cash flows.
• The company operates most of its activities under fixed life concessions with expiries between 2026 and 2036 and, in our view, the market should put a discount on cash flows that rely on renewal on favourable terms. But seems to discount little prospect of renewal.
• 2% of OPAP is owned by Allwyn, the privately owned winner of the UK lottery.
• Stock is highly cash generative with a dividend yield of over 10% and a track record of buying back stock to a similar extent.
• With currently a de minimis level of leverage – a private equity style debt raise to exceptional dividend might be a possible scenario especially (in our opinion) as Allwyn itself carries debt (Source: Allwyn website). This might stress the BB- credit rating.
• Valuation at 11x compares with an average of around 18x in the period over the last decade.

Potential Investment Case

A dividend yield story with a question mark over sustainability?

Stadler Rail

• Business model suffers from bidders’ remorse (ref. Alstom). Suppliers under price contracts to win large contracts.
• Backlog has almost doubled in last few years, with Stadler winning market share.
• CHF 13.2bn (FY’18)
• CHF 25bn (FY’23e)
• WIP and contract assets continue to increase:
• CHF 1.5bn (H1’23)
• CHF 1.4bn (H1’22)
• FCF has been supported by advance payments, which can unwind.
• Potential corporate governance issues, main shareholder 42%, and large related-party transactions.

Potential Investment Case

A number of accounting flags worthy of investigation.

Fluidra

• Relatively undiscovered market leader in the swimming pool and accessory market. Very profitable, decent balance sheet, strong growth. 
• 70% revenue to installed base that is growing. Industry to consolidate. Shares suffered from post-Covid normalisation. 
• 7% FCF yield, 3% divi whilst balance sheet delevers. Four disclosed shorts on Bloomberg and far from a consensus long on the sell-side given 8 Buys/7 Holds/2 Sells on sell-side.

Potential Investment Case

Contrarian steady grower?

Kindred Group plc

• Flagged from European Short Screen for high ROIC, low leverage, solid liquidity, and low historic cash flow multiples. 
• The screen also flagged several names where we are live or have looked at previously including current short Avanza, Volvo Cars, JD Sports and of course Kindred Group, the ‘Maltese Flutter’ listed in Sweden.
• Stock has heavily underperformed despite +30% revenue growth, +17% active users, and EBITDA >2x. 18% margins. 
• Strong local market footprint, domestic share, diversified portfolio. 
• Concerns over harmful gambling revenue have weighed on sentiment, despite making up around ~3% of group revenues, whilst also masking the structurally solid TAM opportunity within the regulated online gambling market.

Potential Investment Case

Fallen angel?

Yellow Cake

• Top-down idea on efficient carbon-free electricity. 
• Nuclear power shift in perception, Germany extended reactor lives of 3 reactors., 68% of respondents to Der Spigel poll were happy to extend further. China and India were industry drivers: +21 reactors in China but UK and Europe adding. 
• New, smaller modular reactors for more localised demand offering improved economics. 
• Single pellet one inch = 1t of coal, 17,000cf of natural gas and comes from stable sources. Outside Kazakh/Russia, stable supply from Canada and Australia.
• Cameco highlighted a supply-demand imbalance, but now Kazakh unlikely to fill demand gap as it has in previous instances due to longer-term contracts. Reactor demand bottomed 160m lb per year in 2020 and is set projected to grow to 240m by 2030 versus today’s supply of 144 with limited supply adds of 20-30 growth.
• Financial buyers and ETFs, which have to be closed-end funds mean stocks bought can’t go back into commercial market. Adding further pressure on inventories which only have 18 months demand inventory left. Last time Uranium price $145/lb = 2x share price. 
• European plays are limited, Yellow Cake buys and stores in France and Canada, only cost is small corporate and storage. 
• Alternative play is Aura Energy, junior miner in Mauritania a shallow pit with good economics, $226m NPV = 2x share price. 

Potential Investment Case

Underestimated TAM?