At the turn of the month, I asked on the Sijoitustieto.fi website if anyone knew why Scandic’s share price rose rapidly by 12% on April 30th, even though it wasn’t an interim report day or anything similar. I found the answer myself half an hour later using the gvi method. Last night, I wrote about the latest developments on Sijoitustieto’s pages, but I thought there might be Scandic investors here too. The matter is timely, as Scandic will release its Q1 results the day after tomorrow.
For example, on Dagens Industri’s website, one can read what Nyhetsbyrån Direkt originally reported: that Erik Penser Bank had estimated (av en casebaserad analys) that Scandic’s current share price should be 59 kronor in a so-called “trading case” and that a state rescue operation would provide Scandic with a significant liquidity buffer even in the most negative scenario. Good to hear. That’s why the 12% share price jump happened.
The starting point was that, according to Juurikki’s investment philosophy, it’s enough to act 95% rationally, and 5% of investments can and should be made purely on gut feeling. So, I previously added a small amount of Scandic to my portfolio when I got it seemingly cheaply. Before buying, I thought I’d research the background later. I did notice the earlier negative profit warning (negar) on April 10, 2020, and even skimmed through it. No alarm bells rang. On April 29th, an announcement came about an extraordinary general meeting on May 28, 2020. Not even this rang any warning bells.
Erik Penser Bank had thus estimated (av en casebaserad analys) that Scandic’s share price should be 59 kronor. This news raised the share price, and Juurikki decided to sell when the peak began to melt. There was a profit, but not by skill, but by luck. It became interesting how Erik Penser’s bank had arrived at that valuation. Of course, it couldn’t be found online. Apparently, the price increase was based on news, not analysis. That’s how the stock market works.
Even though Scandic’s shares had already been sold, I was interested in what would be decided at the extraordinary general meeting on May 28th. Big things. Scandic’s capital is proposed to be raised from a minimum of 12.5 billion kronor to a minimum of 28.125 billion kronor, and from a maximum of 50 billion kronor to a maximum of 112.5 billion kronor. This has an interesting effect on the number of shares.
Whereas previously the minimum number of shares was 50 million, it is now proposed to be raised to 112.5 million, and the former maximum number from 200 million to 450 million. The current number of shares is 102,985,075, Scandic states on its website. Thus, if and when the proposal passes, there will be at least about 9.5 million and at most about 347 million new shares. Quite a few or quite a lot. If the number of shares were to increase by a factor of 3.37 according to the worst-case scenario, the current owners’ share would shrink from 100% to 29.7%.
During the recession of the early 1990s, the Swedish state was the only country in the world that made a profit from its subsidies. When the support came as capital investments, they could be redeemed later, and for listed companies, the stakes were later sold at a profit. The bank’s assessment mentioned a capital injection from the Swedish state as if it were a given. At this point, reading the meeting invitation, I already felt sorry for the current owners, as their ownership stake seemed to be dissolving quite harshly.
And that’s not all! I read further into the agenda of the extraordinary general meeting, and the aforementioned was only the first option. The worst is yet to come! If the above is not chosen, the extraordinary general meeting will be forced, under threat of bankruptcy, to grant the company’s board the right to amend the articles of association and raise the minimum number of shares at its discretion from the current 50 million to either 112.5 million, 450 million, or 1.8 billion shares. Correspondingly, the board may decide to raise the maximum number of shares from the current 200 million to 450 million, 1.8 billion, or 7.2 billion shares. Phew. It seems Scandic is preparing for a future as a state-owned hotel.
Back to the news that brought Juurikki the money for his next Scandic visits. Oh, if only Juurikki had a ‘case-based analysis hat’ like Erik Penser Bank. The bank’s analysis hat says that Scandic’s 2020 sales will halve from 2019 (Juurikki’s hat would say that halving is not enough), 2021 will also be in a weak state (Juurikki’s hat says the same), and in 2022 Scandic would strive for a profit of 600 million kronor (Juurikki’s hat remains silent). There are so many variables in this equation that one must humbly tip one’s own guessing hat when someone has the nerve to throw out such figures.
Erik Penser Bank’s magic hat says that, considering the non-payment of dividends, a P/E requirement of 13 would mean a current share price of 59 kronor. Now it’s gone so far into higher mathematics that Juurikki also has to look into his own case-based analysis hat.
P is price. E is earnings. In the calculation, earnings for 2022 are given as: 600,000,000 kr. Calculating with the current number of shares, 102,985,075, the future present value P of the shares in 2022 would be 6,076,119,100 kr. In this case, the P/E would be 10.127. Something is wrong here. It was supposed to be 13. Exactly! When E is given, then one of the elements of P must be wrong. When one of the two elements is also set in stone in the calculation, that 59 kronor, the only solution left is that the number of shares has changed in 2022. Juurikki had already thought for other reasons that the number of shares would certainly change.
Here we delve into the mathematics of possible worlds. A P/E level of 13 and a share value of 59 kr/share would suggest that in 2022, Scandic’s share count would have increased by a good 22%. There’s a somewhat strange contradiction here with the fact that Scandic was supposed to be in great financial difficulties in 2020 and 2021. Scandic gets off quite lightly if the Swedish state’s capital injection only increases shares by 22%. Of course, a partial explanation could be an increase in the debt burden, as Scandic’s gearing ratio at the end of 2019 was only 37%.
The Swedish welfare state will not let Scandic go bankrupt, which it would undoubtedly be heading towards with its current trajectory. Nor will Scandic be allowed to hastily sell off part of its 2,800 hotels at market price, i.e., at a bargain price during this crisis. That would unfortunately tarnish the crown jewel. Scandic will be rescued by the state, but rescuing Scandic’s owners is not the responsibility of the Swedish state. In Norway, the state is currently rescuing the Norwegian airline, and a capital injection is diluting the current owners’ stake from 100% to 5.2%. So, if Norwegian ever made a profit, the old owners would get 5.2% of what they had before the corona era. What will happen to Scandic?
Scandic is preparing for a massive share issue, where the number of shares will increase very significantly. Otherwise, it’s unlikely that the extraordinary general meeting would also consider the option that increases the number of shares to 1.8 - 7.4 billion, when there are currently 0.1 billion.
Juurikki is not doing science. Juurikki is not going to look for the original source of information, nor would it help. Erik Penser Bank would hardly provide those actual calculations to Juurikki, citing business secrets.
Please tell me where Juurikki is reasoning incorrectly, thank you. Until then, Juurikki will not touch Scandic’s shares with a ten-foot pole, even though he is a satisfied regular customer of the Scandic hotel chain. In two or three years, when hotel operations are functioning again and the Swedish state sells its enormous Scandic ownership, it might be time to consider buying.
The markets are always right, and Scandic’s share price today appears to be up over 5%, from 36 kronor to 38 kronor. Scandic’s revenues have collapsed, and a large portion of its costs are running. Someone could, for fun, calculate how much capital Scandic is forced to take from the Swedish state, for example, based on the bank’s estimates mentioned above, and how much it would dilute current ownership. The most important figures can be found in the 2019 income statement. After that, we can all have a good, derisive laugh at the idea that the markets are always right.
