I was reading through the investor letter. It’s interesting to read other people’s investment philosophies, and a fund management company that takes more of a conviction-based view brings variety to the market. I also exited QT Group during last year; I believe this exit was a good move.
After which you allocated money to Energy Save (ES). The company has indeed been able to scale its business up well, but the company’s competitive advantages are minimal. The only competitive advantage is a small organization; on the other hand, I don’t believe they can manage a large installed base in the capacity of an importer with such a small organization. Whenever you more or less dropship the cheapest electronics, warranty claims eat into profitability in the long run, and these are ES’s responsibility. The risk of the installed base must be taken into account, especially in fast-growing companies. The situation is further worsened by the poor repairability of the devices, meaning spare parts sales don’t help cover costs.
The claim that “the market will grow sevenfold by 2031” refers, in my interpretation, to air source heat pumps (ASHP), not specifically air-to-water heat pumps (AWHP), whose market is growing significantly less. Air-to-water heat pumps are also the type of investments that aren’t really worth building in new developments when the same efficiencies can be reached without expensive hydronic (water) circulation. Their biggest niche is retrofitting old heating systems if the property has been heated by some combustible fuel. However, the number of these sites in Europe is decreasing because new construction is not oil-heated. It is, of course, possible that ES’s market share will grow relative to competitors who have their own R&D, or alternatively against wholesalers’ private labels. I don’t personally believe this because, for example, Onninen (Kesko Oyj) has expressed very clearly its desire to increase its own importing as a share of its trade turnover. In addition, these products are often used as loss leaders, putting ES’s margins under significant pressure without pricing power. The Coeus report mentioned having discussed with an Onninen representative, apparently about the growth of the air source heat pump market, which is growing at a completely different rate than the air-to-water heat pump market.
The general slump in construction, especially in the Nordics, is a significant headwind for ES’s growth. For example, the Swedish real estate sector has almost come to a standstill.
If we consider valuation and competitors: I believe the company should be compared to the multiples of other importers rather than manufacturers and developers of air source heat pumps, who also operate in the growing ASHP market. Importers’ valuation multiples tend to hover around 1x revenue. If you want to value ES based on earnings multiples, it would be a good idea to normalize the peak-cycle profitability. If the company has a turnover of 400m SEK and we apply a revenue multiple of 1, the company’s value would be about 400m SEK, not 930m. If using earnings-based valuations, it’s good to normalize profitability to, for example, 10%, which is quite good compared to competitors. If you apply a 6x multiple to that—which I think is quite in line with the multiples of importers/dropshipping companies—the market value would be about 240m SEK. Assuming the company can maintain its revenue.
Well, now I managed to get the text here in the correct format.