Veolia Environnement to acquire Suez

 On 16th of September Veolia Environnement announced their acquisition plan of Suez of the outstanding 70,1% of Suez shares not held by Veolia. This will create a new giant in environmental services like waste management and water. I only own 12 shares in Veolia Environnement meaning the impact to me is small. Link to Veolia Environnements investor page is here. The total acquisition price of Suez will be 9 billion euros, Veolia is striving for annual synergies of 500 million euros split between 100 million the first year and 400 million in the second year.

In order for Veolia to acquire the outstanding 70% of Suez they have launched an rights issue to shareholders. For every 21 rights you have you can acquire 4 shares in Veolia at a price of 22,70€, yet got 14 rights for the 12 shares I have, therefore I would end up with a few right that would not be used and will be worthless unless I sell them or buy more rights. I have decided the use the rights I have, still open if the excess ones will be sold or at some point. 

Veolias share closed at 32,82€ on Friday which would give me a discount of 30% to market price, something very interesting now and could be considered a good discount.

At the same time my portfolios market value has dropped below the short-term goal of 55 000€, 54 842,79€ was the closing value on Friday. A bit below target yet as I have earlier mentioned that is something that will happen from time to time. This is a good opportunity for me to review my portfolio holding, their weights and see what I find valuable to increase my positions in. By default Veolias share of my total portfolio will increase a bit.

This Fall has started with good new in my opinion, Old Republic International with their special, one-time cash dividend and now Veolia will acquire Suez.

In search for undervalued Swedish stocks

I went on a search for undervalued Swedish stocks and the result was surprising. Based on market valuation 17th of September the Stockholm stock exchange has only 10 low or undervalued stocks, most undervalued stocks according to the screen was in the investment company class. The criteria for being undervalued in this screen was the following

• P/B- ration less than 3
• P/B (most recent quarter) less than 2 
• Trailing 12 months P/E-ratio 0-20
• ROE over 15%
• ROA over 10%
• Gross margin over 40 %

Unsurprisingly the list consisted of investment firms, yet also a goldmine company. Why the list of investment firms was not surprising is partially the high gross and net margin I set. Investment firms usually have high margins until markets turn south, that is when market valuations no longer work in their favor. ROA is also something many industrial companies can have difficulty achieving as their balance sheet consists of many factories, inventories, goodwill and so on. Even though industrial companies should achieve a good return on their assets it might be that they are relatively high priced now.

It is not a surprise we see so few undervalued stocks in Sweden. The market has risen a lot and OMX Stockholm Price index is up over 26% year to date, since 2011 it has risen 242% equivalent to a CAGR of 13 % per year. In other words the broad index has given a good return to investors. But to the topic of undervalued companies..

 

Which companies did show up on the list, let me introduce Stockholms undervalued companies;

• Investor Ab
• Kinnevik Ab
• Bure Equity Ab
• Creades Ab
• VNV Global Ab
• Svolder Ab
• VEF Ab
• Ab Traction
• Kopy Goldfields Ab
• NAXS Ab

Here I will focus on only six of the ten companies, reason is that all are not interesting for me and primarily want to see what the return would have been if I invested in the company back in the days. Let me start with the biggest and oldest of them all.

Invesor AB is a known Nordic company mainly ruled by Wallenberg family. Investor has investments in many known global companies and some more niche specific and less known companies. The last 10 years Investors A share has risen 558% excluding dividends. A good return if you jumped on the stock back in 2011. If you bought a share back in September 2011 you would have received gross dividends of 23,75 SEK (adjusted for stock splits), almost as much as you would have paid for a share in the company. What might be special with Investor and the Wallenberg family is their investment policy and horizon, they see their investments as almost forever and focus on development and improvements instead of fast gain and splitting companies to quickly realize a short-term profit. 

Kinnevik Ab is an investment company, like many others they provide expertise and possibility to develop companies through the large network they have. The last 10 years the share has returned 526%, still a very good return even though a bit behind Investor Ab. Dividends since 2011 Kinnevik has paid a total of 170,40 SEK including share distributions of investments Kinnevik had. The shares they distributed have been a bit harmful for some owners as it has increased their workload to ensure they claim their right to the shares, example with Zalando. It has also been a bit confusing how to proceed and fulfill your claim for the shares Kinnevik has distributed to you. If we exclude the issues with dividends as shares, one share in Kinnevik would equal a dividend return of 224%, which means a very good total return. 

Bure Equity Ab is also a more normal investment company like Kinnevik and one very small position I have. The share has returned a staggering 1 909% in return over the last 10 years. Dividends it has paid out a total of 12 SEK and is a bit below the price you would have paid back in 2011. Bure Equity Ab is also one of the companies that now in 2021 launched a SPAC on Stockholm's stock exchange. Bure has many investments in for me unknown companies and interestingly they own a railway company, if it does not ring a bell then look at Berkshire Hathaway. Overall the return from Bure as an investment would be terrific in capital terms but not from a dividend perspective. 

Creades AB like Kinnevik and Bure Equity is a normal investment company, yet first trading day was in 2013. If you would have bought a share on the first trading day you would by today have a appreciated value of 689 %, strong growth in other words. From a dividend perspective you would be far behind with only 6,30 SEK in dividend compared to a purchase price of 13,256 SEK. From cash-flow perspective not the best but from a value appreciation perspective a solid return. Creades is also one of the companies that launched a SPAC on Stockholm stock exchange in June 2021. From Creades investments I only recognized one, apotea.se which is a pharmacy company (if you ever look at Swedish TV you eventually will see an apotea.se commercial). 

VNV Global Ab is an unknown investment firm to me, a Swedish mid cap company with an IPO back in 2007 just in time before the financial crisis. Just like the other investment firms VNV Global has many investments in companies I do not know nor have ever heard. Their investment idea seems to be utilizing network effects, assume the idea behind is good and solid as focus seems to be on value appreciation and not that much on cash flow. If you bought one share in VNV Global back in 2011 you would see a nice 1 617% value increase by today, not that bad, yet you would not have received any dividends from the company. From a value perspective the company has managed to show owners a good return in market value, yet the cash flow to investors is still open. 

Svolder Ab is an investment firm that invests in listed mid and small cap companies. Svolder could be seen as a small Investor Ab as they also invest mainly in listed companies. The idea seems to be close to the same with the difference that Svolder focuses on the mid cap and small cap companies that are not subject to a large analytic army. This way they can find value before others, or the market realizes it. One share of Svolder would have returned an awesome 1 208% for 10 years while dividends would account for about 59% of the purchase price. Interestingly Svolder announces NAV (net asset value) of their investments every week. 

Summary

As these firms are undervalued on a few indicators and have high margins I am not that confident they all will be good long run holdings. Gold mines have the issues of dependence on gold price which markets determine, not the company. This means the business is vulnerable and can be volatile, it also has the environmental issue as mines are hardly sustainable nor are they good at managing their waste. 

Investment firms value their holdings at market value, during booming markets it all looks spectacular, but as we saw in Q1 2020 it can rip large holes in their income statement. Investment firms cash flow would be a better option to analyze just as REITs have EPRA and FFO to better reflect the business health. I am not suggesting investment firms should be regulated or required to change reporting, just simply saying that it is strange they do not have a similar cash flow or operational reporting KPI. Operational performance before market valuation could give better indication of the business health.

Assume there is some lobbying behind it and finance has deep pockets, might explain a lot.

 

To shortly reflect the annual growth (CAGR) of stock price of the reviewed companies I could draw some conclusions, but not any final. 

 

Company	Stock CAGR %
Investor Ab	21 %
Kinnevik Ab	20 %
Bure Equity Ab	35 %
Creades Ab	29 %
VNV Global Ab	33 %
Svolder Ab	29 %

I am not that interested in the Swedish undervalued firms that the screen gave me. If markets fall rapidly by 20-50% I might take positions in Investor Ab or some other company and do hope that day will come in the nearest future. Was not able to find the market P/E-ratio for Sweden, would however guess it is over 25 as Western markets in general are reflecting a stimulus monetary policy. 

A review of Alibaba Group

 Since the market value of Alibaba has fallen and I have a decent amount invested in the company, I decided to make a quick review of Alibaba. How does Alibabas financials look like? What is Alibabas political risk? These questions will be answered.

Alibabas Group (ticker BABA) has fallen and shows a decent minus in my portfolio, even though only 14 shares at $216 the unrealized loss would be painful with -21% of invested amount. Link to portfolio page from where you can see the latest market price of Alibaba, its return and weight of my portfolio. 

I do not see any operational changes and I am left pondering is it something wrong with the financials or is it political. There was the sexual assault scandal at Alibaba but would not be surprised if many other big companies have the same issue however are covering it up or handling it better. Sexual harassment or assault in any way or form is not acceptable and do expect Alibaba to take required actions. 

Back to numbers.

Alibabas financials

The numbers are from Alibabas 20-F filings and are all in USD, EPS (earnings per share) are for ADS which is equivalent to 8 ordinary shares. I will quickly start with the balance sheet and then proceed to the income statement and end with some key ratios.  

Balance sheet

Alibabas balance sheet is displayed in the below graph where we see that total assets have grown every year since 2015 while the equity ratio has remained stable. Alibabas equity ratio was at lowest 51% in 2018 and 2019 only to increase to 55% in 2021. This means Alibaba is profitable and reinvesting its earning into the company. It is exceptional that a company growing at this paste would be able to remain the high equity ratio unless it does what Alibaba is doing, reinvesting earnings. In the long run if Alibaba can remain on the same path the company can grow significantly and at some point might be able to declare dividends. 

 

 Alibabas current ratio has remained good, mostly around 1,90 except 2019 when it temporarily dropped to 1,30. Still good and means the company can handle its short-term obligation without any major problems. A ratio I use to see how fast a company can be debt free is cash to liabilities ratio, basically based on 31 March 2015 annual report Alibaba could have paid all their debt with the cash at hand, making the company debt free. 

Alibabas ROE (return on equity) has been outstanding, even though the company has a high P/B-ratio. The ability to return a high return on equity is important for any company as it states is the management can utilize the assets and cash at hand. Alibabas ROE has been very good.

Income statement

The following two graphs show Alibabas revenue development and net profit development since 2015. We can see that revenue has grown at a huge rate of almost 44% per year until 2021. The graph clearly shows that the growth rate has been above 40% from 2018 meaning Alibaba has been able to grow its revenue over 40% per year for 4 years. This is a huge achievement for any company, as we look further down the net profit has not followed the same growth patter as revenue. As Alibaba develops its operations and invests back in the business, while getting fined by Chinese government we can expect the profitability to rise at a slower paste than revenue.

In the above graph is Alibaba Groups revenue in million USD per year displayed in blue columns and scale on the left axis while annual compounded revenue growth is the red line and scale on right axis.

The graph below shows how Alibabas net profit has developed since 2015 until 2021. We see a strong growth rate and spike in profitability in 2016 while returning to a more modest growth rate of 28% to 40% between 2017 and 2021. The net profit margin of Alibaba has remained strong of a minimum of 20 % of revenue (2020). A net profit margin of over 20% is very strong for any company, many times banks and financial institutions have a similar strong net profit margin.

Above graph displays Alibaba Groups net profit in million USD per year in blue columns and scale on the left axis while red line shows the compounded annual growth rate of net profit. 

Alibabas segments

Now Alibaba has four operating segments, core commerce, cloud computing, digital media and entertainment and innovation initiatives. Of the four core commerce is the biggest with almost 87% of the total revenue and the only segment with a positive operating profit and EBITA. Of all the segments Alibaba has I find cloud computing the most interesting one and the one with a huge future potential. Cloud computing covers areas like big data analytics, machine learning, storage and elastic computing. If we look at Alibabas competitors like Amazon and Microsoft, they also have recognized the value of clouds and storage of data which is a big revenue stream for them with a tasty margin. Media and entertainment look interesting and do see it as a challenger to Western as well as locally in Asia as a possible profitable business, it will just take time and a few big hits.

P/E-ratio

Alibabas has a high P/E-ratio of 20,13 given the stock price of $168,10 and the last earnings per share of $8,35. Considering a tech-company and the growth opportunity the ratio is modest yet reflects the political risk associated with Alibaba.

Alibabas financials discussed

 Based on normal financial KPI’s (key performance indicators) Alibaba can be considered a bit expensive. At least P/B- ratio is very high at current market value. However, P/E-ratio is on a more moderate level for a company growing in the same speed. A fact that must be faced is that no company can grow forever and that needs to be considered in Alibabas case. To sum it up I still see Alibaba from a financial perspective a valuable company which will contribute with growth to my portfolio in the long run.

Political risk

Currently the biggest risk with Alibaba would be political or Chinese government in my opinion. The Chinese government has hit hard on different tech companies by adding legislation and forcing reduction of dominant position. This risk is reflected in market value and seems like many are expecting future fines and less profitable business. My opinion is that the market reaction is short sighted, and that Alibaba will recover just like rest of Chinese tech companies. Reason lies in Chinese government not wanting to scare businesses away as it employees and ensures discipline among citizen. If people have a job, they are less eager to rise against authority and governments limiting business loose tax revenue. I see the Chinese government regulation tech companies to ensure nobody gets a monopoly, which is good. Some companies do start with predatory pricing to remove competition only to raise prices afterwards. 

Let us see what the actual outcome of government actions will be and how hard it will hit Alibaba.

Conclusion

My conclusion is that I will not sell my Alibaba shares as I see a good future. There will most likely be days when the market value is below current value of $168,10 and days it is above. The business will continue and they will come up with good future solutions and value generating services for customers. I will continue to hold my shares in Alibaba if the business changes I will have to review it and my position.

Portfolio Update August 2021

 August was an interesting month, my portfolio value was stable above 55 000 euros which is good from my goal perspective. The increased positions in Bayer AG contributed with better margin to the short-term goal. If markets start to panic then my portfolio will fall below the 55 000 euro threshold, yet in the long run it does not matter that much. 

Focus has lately been to summarize annual reports and find new value opportunities. It has been hard to find value as many companies are valued at high multiples, meaning a long payback period.

I mentioned in my last portfolio update from July that I might consider liquidating some positions. I am still weighting the benefits and costs from having these positions and if some would be liquidated and funds used to increase other positions. The issue I am facing is when to sell and at what price, probably one of the most difficult questions ever in investing. For example, if I would have had some GameStop shares when the stock started to fly I would have exited it way below its high at $483, most likely bought around $2 and sold at $10.

Graph below displays gap to goals in portfolio value. Left axis is for short and long-term goal while right axis is to the ultimate 1-million-euro goal. As you can see the gap to short-term goal is zero.

Markets were behaving interestingly in August, Corona cases, interest rates, employment numbers and inflation pressure has caused some headaches to many. Especially inflation pressure has been a hot topic for a while, and I do see prices rising. Question is then, will prices rise and keep on rising to a extent that forces Central Banks to raise interest rates? It might happen, especially in the USA however Euro area seem to be struggling in different ways that might postpone rate hikes.

Taliban's taking over Afghanistan did seem to impact markets for a second only to be forgotten due to limited impact on global economy. We saw new all-time highs for some indexes, partially supported by low interest rates and good Q2 results but also future expectations.

Portfolio Changes

Small changes during August as still awaiting better moments to increase my positions in a few companies. Was also a bit short on cash at hand which limited the possibility to buy more stocks. In total I purchased shares for 285,64€ in August which is a small amount.  

Alibaba (ticker BABA)

Weighted average purchase price decreased from $216,68 to $212,98 as one share was bought for $159,50, not the best price in August but of value for me. Alibaba has been hit by a lot of challenges, Chinese government, sexual scandal and challenges with US Securities and Exchange Commission. As I have been increasing my position it might be a clear statement that I still believe the value of Alibaba to increase over time. I do see more value in Alibaba then many hype stocks as they have more tangible services and products and are not dependent on hypothetical future development.

Bayer (ticker BAYN)

Bought 3 shares of Bayer AG during August, main reason is that I still expect its future to be brighter than what we currently see. As the legal claims regarding Roundup! and Monsanto acquisition will dissappere the future of Bayer will be brighter and earnings stronger. The weighted average purchase price decreased from 62,14€ to 61,12€ per share. Still a way to go when market closed at 47,20€ on Friday September 3rd. If I would have a average price around 50€ per share I would be happy so will most likely continue to buy more.

Dividends 

In August I received 73,54€ in net dividends and on a year-to-date basis 1 086,59€ in net dividends. Still far from 2 200€ which is my short-term goal, as the portfolio is being built up on a long-term basis (including taking advantage of any short-term bargains) it might be that the dividend goal will not be reached next year. 

 The graph below displays monthly dividends (blue staples) and cumulative dividends from start (red line).

Regarding the dividends, note that AT&T dividend does not reflect the full position of 121 shares as 5 shares were acquired after ex-dividend date. AT&T has also the split of WarnerMedia to come which based on statements will reduce the dividend by around 50%. This will have a negative impact on dividends unless Warner Bros Discovery can compensate. Do see it a bit challenged as Discovery has not paid any dividends on common stock for some time.