Hanseatic Champions 2021

And the winners are ....

This past week, we had the climax of our two month long Hanseatic Championship, our quest for top equity investments. As you can tell from the finals results, it was a very tight contest, but now we can crown the champions.

Our three champions in the “Solid Growth” category are:

Dometic/S (caravan equipment)

MCap €4.7bn, EV €5.3bn

3-year trend growth estimate p.a.: sales +11%, operating profit +19%

Current year valuation: EV/sales 2.7x, EV/operating profit 14x

Dometic offers a full sprectrum of accessories for RV’s, fridges, air conditioners, batteries, awnings, vents, etc. Before corona hit, the trend towards RV travel had already taken hold. Now, it continues to accelerate as the preference for individual travel and flexibilty is getting even stronger. Management is pursuing a smart strategy of streamlining its organization and suppliers while continuing to offer more and better products. In addition, the portion of higher margin retail and aftermarket is increasing. The stock’s sentiment continues to improve as this smallcap has become a midcap stock with analysts’ coverage mounting.

Zalando/D (online fashion)

MCap €25.9bn, EV €24.5bn

3-year trend growth estimate p.a.: sales +20%, operating profit +20%

Current year valuation: EV/sales 2.4x, EV/operating profit 35x

At the outset of this competition, we would not have expected Zalando to become a champion. Our prejudice was based on corona benficiaries’ momentum fading and increasing competition from Amazon and others. However, the stock took the initial hurdle of the Hanseatic Championship and then beat each stock it faced in the knock-out stages to reach the final. Our analysis of the catalysts then revealed that penetration of online fashion still has better momentum in Europe than in the US. Therefore, competition matters less and the company continues to gain share. In sum, it would be an ideal target for Amazon (weaker in fashion) or Alibaba (regional expansion).

ALK-Abello/DK (allergy drugs)

MCap €4.5bn, EV €4.6bn

3-year trend growth estimate p.a.: sales +11%, operating profit +40%

Current year valuation: EV/sales 8.9x, EV/operating profit 80x

It seems these days, we are all becoming experts in immunotherapy. But one of the biggest burdens on quality of life are seasonal allergies. Dating back to 1923, ALK probably has the longest running R&D effort in this area. Now it has aportfolio of approved drugs resulting in a growth profile consistently higher than the pharma average for years to come. ALK broke even in 2020 and profits are rapidly expanding in the years to come. The R&D pipeline offers additional potential from the field of food allergy. This midcap stock is on its way to becoming a largecap pharmaceutical stock.

Our two champions in the "Turnaround" category are:

Pandora/DK (jewelry)

MCap €11.5bn, EV €11.8bn

3-year trend growth estimate p.a.: sales +9%, operating profit +16%

Current year valuation: EV/sales 4.0x, EV/operating profit 12x

A decade ago Pandora shook the jewelry market with its bracelet charms. It was so successful that charms became a category in itself. Then, as is often the case with fast retail roll-out business models, management got ahead of itself and an accounting scandal followed. Management changed, new categories were added and the stock recovered, only to collapse again, as the roll out strategy was once more not profitably managed. The current management team joined in 2019/20 and an effective turnaround is well underway. This history lesson is important, as it explains investors’ scepticism of the stock. This wall of worry is being incrementally surmounted.

Sandvik/SWE (machine tools/mining)

MCap €27.3bn, EV €27.3bn

3-year trend growth estimate p.a.: sales +7%, operating profit +17%

Current year valuation: EV/sales 2.9x, EV/operating profit 12x

This global leader in cutting tools in benefitting from a new mining boom and revitalized industrial spending. Many mining projects that have been held back are now hugely profitable given higher commodity price levels. An inflationary macro scenario would be an additional benefit for this stock. The unleveraged balance sheet leaves plenty of firepower for large acquisitions and higher dividends. Investor sentiment is improving as Sandvik is showing it can deliver just as well as its top quality peers, Epiroc and Atlas Copco.

Our three champions in the "Highflyer" category are:

Media&Games/D (gaming)

MCap €0.8bn, EV €0.9bn

3-year trend growth estimate p.a.: sales +25%, operating profit +43%

Current year valuation: EV/sales 3.7x, EV/operating profit 14x

One of the biggest beneficiaries of the corona crisis was the gaming industry. Even pre-crisis, the sector was well on its way to becoming a major part of the global entertainment industry. We wrote a blog on the topic in Nov’2020. Some gaming companies were nimble enough to fully take advantage of the acceleration in client numbers and hours played. Media & Games is one of them. Their focus is on low budget, low risk games, but with a surprisingly sticky client base. The real kicker is their serial acquisition track record and their operating leverage via their own internet media company. The sentiment on the stock is a model of how a microcap becomes a smallcap. Due to size and illiquidity, there was no sellside coverage two years ago and the stock was valued on single-digit earnings multiples despite good growth rates. The large valuation gap in comparison to larger gaming stocks started narrowing about a year ago, when coverage increased due to its growth track record getting noticed.

SFC Energy/D (fuel cells)

MCap €0.4bn, EV €0.4bn

3-year trend growth estimate p.a.: sales +38%, operating profit +82%

Current year valuation: EV/sales 6.1x, EV/operating profit 74x

Strange things happen when government agenda collide with technology developments. A decades old technology was brought back to life when the push for more regenerative energy sources accelerated about 2 years ago: fuel cells (hydrogen -> electricity). This hype topic quickly deflated this year and most hydrogen related stocks are down 50 to 75% from their January peak. Within this space, SFC has some positive distinguishing features. They have over twenty years of history of developing and selling fuel cells and have reached profit levels. This is in stark contrast to their speculative peers in North America and Scandanavia. Especially risky are the Norwegians, while we love their entrepreneurial spirit, hope alone cannot lead to sustainable value-added for shareholders. SFC is starting to close the valuation gap to these peers, as it has already overcome similar expectations and disappointments. Their orderbook is gaining momentum and it is now delivering on many joint ventures (the most promising one with Toyota in Asia). More and more investors are discovering this niche alternative to the cash burning big players.

Cellink/SWE (bioprinting) individualized medicine – the future is now!

MCap €2.3bn, EV €2.0bn

3-year trend growth estimate p.a.: sales +35%, operating profit +100%

Current year valuation: EV/sales 21x, EV/operating profit na

Cellink is our final Hanseatic Champion and possibly the one with the brightest future of all. The biotech sector is on fire and we have all seen how a smallcap biotech company researching the mRNA technology can become a 50 billion megacap almost overnight (BioNTech -> corona vaccine). For each such success story there are probably 100 failures. This is where Cellink as a key technology supplier to biotech companies comes in. Testing on live cell cultures is key and 3D printing makes it possible. The company has methodically developed this field through innovations and regular add-on acquisitions greatly expanding its total addressable market. Analysts’ coverage is likely to expand soon, as there is only one (!) analyst despite its market cap of over EUR 2 billion.

The HanseaticHunter

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