Reka Industrial - Insane cash and rubber to the world

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Neo Industrial Oyj is a Finnish investment company that invests in various industrial companies.

Inderes company pages:
https://www.inderes.fi/fi/yhtiot/neo-industrial
Analyst: @Petri_Gostowski

Extensive report 05/2020

Neo Industrial as an investment

Our portfolio includes the rubber and cable industries. The cable industry is an essential sector for the functioning of society, which is growing and evolving and offers interesting opportunities for companies, especially in the Nordic countries. The rubber industry, on the other hand, is an important pillar for the industrial sector, as industry utilizes the special properties of rubber to produce high-quality and durable products.

“An investment in Neo Industrial enables participation in the growth of unlisted industrial companies.”

As a family company, we are committed to the long-term development of the performance and sustainable development of our owned companies, thereby increasing shareholder value.

We are a conglomerate that renews the industry serving as a pillar of society.

Source:
https://www.neoindustrial.fi/miksi-sijoittaa-meihin

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Inderesin kahvihuone (Osa 5)
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2020 H1 review: https://www.neoindustrial.fi/sites/default/files/attachments/NEO1V_Puolivuosikatsaus_H12020.pdf

In June 2020, Neo Industrial Plc acquired the entire share capital of Reka Kumi from Neo Industrial’s largest shareholder… Reka Kumi was merged into the group on June 30, 2020… As a result of the acquisition, the company formed a new business sector, the rubber industry, alongside the cable industry. This is a step from an investment company to an industrial multi-business group.

Green cable :seedling:

Reka Kaapeli on its way to becoming the world’s greenest cable producer

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Good opening @kettunen. I hope we get a discussion about the company here. As usual, feel free to ask me questions if any arise :slight_smile:

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Thanks @Petri_Gostowski, I also hope to get some discussion going regarding Neo. I was a bit surprised when I couldn’t find a thread, even though it’s covered by Inderes.

I personally got into Neo with a somewhat superficial understanding, based on the H1 report predicting a turnaround and a corporate arrangement supporting operations. I’ve gradually learned more about the business, and in the long run, I do trust this as a turnaround company in line with my investment strategy.

How do you see the addition of Reka Rubber affecting the portfolio in the future? The comprehensive report mentions “…the company is currently profiled as a turnaround company. In the long term, we estimate that the company aims to profile itself as a growth company, but the growth company profile is weakened by the fluctuating demand in the cable industry. A growth company profile would require expanding the investment portfolio…”

And from Neo’s H1 report: “If Reka Rubber had been acquired on 1.1.2020, the group’s revenue would have been 65.9 million euros, EBITDA 4.5 million euros, and operating profit 1.6 million euros.”

The rubber business is apparently much more profitable and even a larger industry than cables. With this arrangement, one could expect the operating profit to turn clearly positive for this year, if H2 continues at the same level? Are there potentially other arrangements still to come, which would expand the portfolio?

In addition, the balance sheet took a step in the right direction in the H1 report:
“The Group arranged the ownership of a property located in Keuruu, which was owned by an external party. Neo Industrial Oyj purchased the said property for a purchase price of 1.0 million euros using the purchase option in the previous lease agreement and sold it further to Reka Pension Fund at the fair value determined for the property, 2.2 million euros. A 10-year lease agreement was made with Reka Pension Fund. The fair value of the property was determined by external appraisers. With the financing generated by the arrangement, Neo Industrial Oyj paid off its short-term loan of 1.2 million euros. The arrangement had no significant impact on the result.”

Does this apparently ease potential future arrangements and lighten the capital needed for short-term financing?

The cross-ownerships of the Group with Reka Oy are a somewhat confusing combination. Neo Industrial is part of the Reka Group, but nevertheless owns Reka Kaapeli (Reka Cable) and Reka Kumi (Reka Rubber) companies. Is there any essential reason for this, or does it have any practical impact on daily operations?

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Here are answers to the many questions you’ve asked:

How do you see the addition of Reka Kumi to the portfolio affecting the future? - Considering Kumi’s relatively good earnings performance (and free cash flow), I see it playing a key role in solving the company’s significant debt burden. The challenge for the cable business in recent years has been that due to weak earnings performance, the financial position has had to be remedied by increasing debt. Of course, this debt package also includes the issued Green bond, the use of which is still in its relatively early stages. Historically, Kumi has generated just over 1 MEUR in free cash flow per year according to my calculations. Thus, reaching this level in the future would also enable the group’s debt level to decrease, which I believe would lower the risk profile.

Are there possibly other arrangements still to come, which would expand the portfolio?

  • A difficult question, but if one considers the company’s goal of 1-2 new independent business segments, then possibly 1 could still be coming at some point. However, I would estimate that in the short term, the focus is on operational development. On the other hand, even this Reka Kumi arrangement came as a slight surprise to me, so at this point, it’s probably better to say that anything is possible :smiley:

With this arrangement, could operating profit be expected to turn clearly positive for this year, if H2 continues at the same level?

  • You can see the latest forecasts in the update after the H1 report. Summa summarum: I estimate Kumi’s business will suffer significantly in the short term due to a decrease in customer demand, especially from heavy vehicle manufacturers (corona caused order book stagnation), and therefore Kumi’s year-end earnings contribution is small in my forecasts. I already partly commented on the long term in my first answer.

This apparently facilitates possible future arrangements and lightens the capital needed for short-term financing?

  • These were indeed used to pay off a short-term loan, so the answer to the latter part of the question is yes. Certainly, a decrease in the debt level would also facilitate other possible arrangements, but as I mentioned above, I do not primarily expect them in the short term.

Is there any essential reason for this, or does it have any practical impact?

  • This view of mine reflects historical factors and the fact that the main owners have wanted to maintain a significant ownership (and voting power) in the company. In practice, this primarily affects the overall understanding, which can be slightly more challenging at first.

I hope these were helpful :slight_smile:

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Thanks @Petri_Gostowski for the comprehensive answers, these clarified my own thoughts - and hopefully gave other Neon followers more to discuss :wink:

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Insiders buy for only one reason :wink:

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Rentto’s purchases continue, 2000 more shares:

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This morning’s news at 9:30 AM

Neo Industrial Plc’s associated company Nestor Cables Oy has signed an agreement with the Finnish Defence Forces for the delivery of cable laying and retrieval equipment. The agreement covers twenty units of cable laying and retrieval equipment during 2020–2023. In addition, the agreement includes an option for 180 units. The total value of the agreement for the contract period is 5.4 million euros.

Press release in PDF format here

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Isn’t this a rather large order for Neo? And from the Defence Forces no less.

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From the extensive report: “Neo Industrial’s ownership in Nestor Cables is almost 23%”
So not everything goes directly into Neo’s pocket. In addition, the total value of the deal includes an option, if I interpreted that correctly. The first order of 20 units would therefore be €540k. Positive in any case, and PV is a convincing customer reference :+1:

@Petri_Gostowski will probably give us a better comment on the scale of the deal and its future impact on Nestor and Neo.

Edit:
Nestor Cables is generally very much a side player in Neo’s operations and figures. The valuation section of the extensive report provides reasons for this.
If things take off at Nestor and results are achieved, it will quickly show up in Neo’s figures.

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Here’s the comment: Neo Industrialin osakkuusyhtiölle kohtuullisen kokoluokan sopimus - Inderes

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It looks like the direction of Neo and Reka is upwards

The name is also changing as a sign of a turnaround:
“The company has prepared to change its name to Reka Industrial. An extraordinary general meeting will be convened in November to discuss the name change.”

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What’s driving the stock price up? Has some news come out?

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A couple of Kauppalehti news articles from this morning, behind a paywall

Low-volume stock, if there’s even a little interest, the sell side will quickly be empty.

I sold it after Q3 and was supposed to come back to it later when the price dropped :see_no_evil:

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I updated the company name in the title to the correct one.

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Bringing Petri’s comments to this discussion as well

The turnaround is progressing, but the outlook has been front-run quite a bit in the stock price.

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Wind Power
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On the near future of wind turbines:

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Exel Composites
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Thanks @Due_Diligence! I’ve had it on my to-do list for spring to dig up some summary of how many of these investments are coming in the next few years. When I quickly searched for it earlier, I couldn’t find anything, but that seems to be very recent. You made my job easier - you get a virtual pint as a reward :smiley: :beers:

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@Petri_Gostowski What is the current value of an order that exceeds the company’s disclosure threshold? Thinking about wind power orders:

“Wind power is a spearhead for us, as about a third of one cable factory’s production goes to the needs of wind power. Wind power is our thing, as its demand is really picking up,” says Poutanen.

The value of a single wind power project’s cable delivery is calculated in millions of euros, so from that, one can estimate the potential wind offers to Reka.

“More cables are needed anyway as society electrifies. And if hydrogen starts to be utilized as fuel for cars, that too is produced with electricity,” Poutanen gives an example.

Poutanen reminds of digitalization, which requires cables for data centers in the background. More data centers are being built, and decentralized energy production also increases cable demand. Source: Kauppalehti

CEO shopping yesterday: