Fit Investment Ideas

Unjustified Selloff in Africa Energy is a buying opportunity

Congratulations to all who played Kyoto trade idea last week. The share price re-rated by almost 30%. Good trade!

Africa Energy sold off today based on misunderstood Reuters Article. It is a buying opportunity. Below is research by Pareto Securities describing the situation. We find the AEC most interesting oil play. The summary of the case is summarized in the below article.

Giant Hydrocarbons Discovery By Total And Africa Energy Better Than Expected (OTCMKTS:HPMCF) | Seeking Alpha

Pareto Research published today:

Misinterpretation of news article creates large buying opportunity

Africa Energy just declined 10-15% due to a Reuters article (link) indicating that Total postpones future drilling activity in South Africa. This is based on a withdrawal of an application for Environmental Authorisation for exploration drilling in the Kloofpadda area. In our view, this is not surprising as Total has previously stated that it near-term will focus on the development of the area containing the Brulpadda and Luiperd discoveries. The partners have already secured approvals for further drilling in this region and today’s news will therefore not impact future activity. In our view, the market is misinterpreting today’s news creating a good buying opportunity. We will keep our estimates and valuation unchanged – BUY/TP SEK 4.50

Initiation Research for Huddly IPO should put it on the strong rerating trajectory

Two weeks ago I suggested to look at buying IPOs in NOrway that sold off after its lunch. It was a good ideas and the share prices are up 10-30%. One of the was Huddly. Very solid company. Today, Pareto published the initiation research – see below. I am long and I am very bullish in the share price recovery of Huddly. Research is below:

High growth, unmatched partners & mispriced equity

Huddly is a Norwegian provider of video conference cameras, founded in 2013. Unlike other camera providers, Huddly’s products are software defined – atechnology endorsed by Tier 1 partners such as Google and Crestron, who continuously include Huddly’s cameras in their video collaboration bundles. A setup that has proved to be highly successful with triple-digit sales growth (118% revenue CAGR ’18-20) and world-class margins (29% EBIT margin ‘20). Despite this, the current valuation (~14x ’22e EBIT) implies a ~35-70% discount to peers currently growing at a slower pace, and seemingly doesn’t take into account our thesis of increased enterprise spending on video conference rooms in a post-Covid world. We initiate coverage with a BUY/TP of NOK 28, equalling pricing in-linewith peers and an upside of >80% to the current share price.Value proposition endorsed by Tier 1 partners

Unlike most camera providers, which offer standardized and non-dynamic solutions, Huddly’s products are all based on a common software platform. This enablesHuddly to do software upgrades, exploit data to enhance future products and maximize the current user experiences. Combined with an AI supported engine, it also offers features such as smart zooming, which frames the people in the room, and the ability to identify, extract and process content in the video stream, and much more. We like to think of Huddly’s products as software sold through hardware, and similarly the business model as a hybrid between the two. This new approach to video collaboration hardware has not gone unnoticed, with nine strategic partnerships now in place. As a testimony of its quality, eight out of 13 video collaboration bundles Google offers include Huddly cameras, thus being the preferred partner ahead of Logitech. With its core market estimated to grow by ~30% p.a. by 2023e and the return-to-the-office situation likely to alter the demand in favor of high-quality providers, we believe Huddly is positioned to continue its rise to video stardom.Triple digit sales growth & software like marginsSince the first commercial shipment of cameras in 2017, Huddly has grown revenues from close to nothing to NOK 366m in 2020 (118% CAGR ’18-20). While growth has been highly impressive on its own, a lean, R&D-centric organization combined with a fab-less setup and a strategic/channel partner sales strategy has not left profitability demised, as the EBIT margin reached 29% in 2020, above the median competitor at ~18%. With an ever-increasing product portfolio and partnerships with Tier 1 names (Google, Crestron and more) that continuously include Huddly’s cameras in their video collaboration bundles, Huddly has rapidly become a serious contender for the potential USD 90bn video conferencing market. Reflecting this, we estimate the company to grow revenues to NOK ~970m by 2023e, equalling a 2020-23e CAGR of 39% and achieve an avg. EBIT margin of 26% over the same years. While profitability will take a small hit in 2021e due to up-scaling, new product launches and unfavourable FX-movements, the outsourcing of both sales and production leaves little room for increased costs besides R&D over the next years. We therefore estimate margins to improve in 2022e and return to current levels in 2023e (EBIT margin of 28-29%). Valuation – BUY/TP NOK 28Reflecting multiples in line with peers (22x ‘22e EBITDA & 29x ‘22e EBIT) and a DCF approach (8% WACC & 3% growth) we initiate coverage of Huddly with a Buy recommendation and a TP of NOK 28, equalling an upside of >80% to the current share price. Despite positive outlooks, the stock currently trades at 14x ‘22eEBIT, a ~35% and ~70% discount to hardware collaboration and Nordic software peers, respectively. We believe the latest drawbacks reflect a softer pre-announced Q1 and a misconception that Huddly was a Covid-19 trade. Contrary, we believe demand for Huddly’s products will accelerate post-pandemic and see upside to our estimates. With the stock already trading at a discount to slower growing, less profitable peers, we believe the current valuation offers a risk/reward that will not go unnoticed for too long. Key risks include loss of key partnerships and the associated revenue and increased competition.

Scandinavian Opportunities – Corporate turnarounds

There are three companies that I like in Scandinavia that are restructuring their business. They have one common feature. They already told us, that they got new sales partnerships. The partnerships have not transferred into sales, yet, but there is a very high probability that they will. In all three cases, when this happens the share price should multiply.

NEXT Biometrics – I enclose the thesis below. It is well summarized and easy to understand. In summary that company has signed 16 sales agreements that are yet to transfer into sales orders. Pareto estimate that when this happen the quarterly revenues should increase by 400%. They expect this by the Q4 this year. If that happens the share price should increase three to four times as well. I find it very attractive. Since the article the company announced a new partnership with European major with 20 bil EURO sales. Just this company could multiply the revenues of NEXT. I am long NEXT and I am very bullish.

https://seekingalpha.com/article/4406713-next-biometrics-sales-wins-should-drive-revenues-400-percent-higher-this-year

Hofseth Biocare – very similar situation to NEXT. The company was processing Salmon waste for pet feed. They have remodeled their technology and now they stop supplying pets and focused on humans. They sell Salmon Oil and Salmon protein. Salmon protein is to be used for protein human foods. Last week they announced the game changing partnership – they signed contract with protein food producer Garden of Life (owned by Nestle). They already shipped the first protein cargo to Garden of Life that is planning to lunch the product in the US in Q3. Again just this contract has a potential to multiply HBC’s revenues and its share price. On the top of it, I found that the company is now selling its Salmon oil on Amazon, in 400 Lidl stores in Germany and in 1000 stores of Cosco USA. The company indicated in the past that they plan to do it, but for some reason they did not announce it. Fortunately we have Google that can give us the information. Look at the below link at an article that again summarizes the story. After the above is achieved the company is planing to lunch medical supplements. They got the first FDA approval this year. When this achieved the margins will jump further.

https://seekingalpha.com/article/4390174-top-value-creation-play-in-biocare

Norske Skog – it is the second largest paper company in the world. What the market does not appreciate are two things: it has a green product portfolio that has a value euqal to its current market cap. So either the market gives its paper business zero value or the market does not recognize the green portfolio. I believe that it is the later. On the top of it the company is now converting part of its paper production into Green Packaging production, that can be used for example for paper plates to replace plastic in fast food chains. The product has triple margins vs the paper production. The market does not appreciate this either. I speak to the company and they do plan to inform the investors on the value creation opportunity. See the below link for description of the value creation.

https://seekingalpha.com/article/4407578-gain-exposure-to-hot-scandinavian-ipo-circa-through-largest-shareholder-norske-skog

SIGNIFICANT UPSIDE STOCK WITH A FREE PUT OPTION

First, I would like to congratulate all those, who traded the Scandinavian Opportunities published about a week ago. Very good returns. The call on Circa is has been excellent for the last two weeks. You could almost double your money.

Two ideas are from a Fearnley daily report. I copy below their report in full. I am long both and I am glad Fearnley support this two ideas. I believe both are candidates for doubling during the next quarter:

ALUS/FREYR – Asymmetrical risk with zero downside until merger
Looks similar to HCCH/Fusion Fuel (now HTOO) ahead of its merger when the stock was essentially flat until two weeks ahead of the EGM, then rallied ~50% over the two weeks going into the EGM and another 35% on the day when the merger was approved.

We might be in a different market, but redemption value in ALUS is $10.07/share which is where the stock closed yesterday. ALUS filed with the SEC two weeks ago and said the EGM will be held promptly once the statement is declared effective, likely in late April / early May. ALUS is merging with FREYR, a Norwegian developer of clean, next-generation battery cell production capacity.

FREYR har hired executives from the oil/gas and aluminum industries (Equinor, Hydro, BP), who are experienced in running large projects. The company has received NOK 181m in support from the Norwegian government so far. While ALUS has $290m in cash on balance, the combined company has a fully-committed PIPE equity issue of $600m anchored by Koch Industries; Glencore; Fidelity FMR; and Franklin Templeton, among others. FREYR is located in a region with vast supplies of renewable energy and seabed minerals (cobalt and manganese). Commercial production will start in 1H23 and the company is currently in discussions with 40 potential customers within electrical vehicles, power production and marine electrification. The industry needs to quadruple capacity to at least 2TWh in 2030 in order to meet demand (Bloomberg). Note Sweden’s Northvolt recently won a $14bn order to supply Audi and Porsche. ALUS will likely get increased attention going into the merger, with zero downside to redemption value. Latest investor presentation: https://www.freyrbattery.com/assets/Documents/FREYR-Investor-Presentation_WEB.pdf

HTOO – Spoke with company, Evora on track for Q2
Fusion Fuel is on track with Evora production start this quarter, also with the production facility development. Evora will be a game changer for the company and a ‘proof of concept’ on an industrial scale. The company aims to get the first part of the project onstream, audited and verified as early as possible in 2Q21 which will be announced to the market. The company is sufficiently capitalized to carry out activities into 2022. Over the next 6 months, the following will happen: 1) Production start at Evora, major share price trigger; 2) production facility will be well underway; and 3) large agreements and projects will be announced and committed. Management thinks a dual listing in Oslo may make sense going forward. Interesting share price level to get in now ahead of the largest catalysts to date.

BWLPG/Avance/Dorian – Rates continue upwards Our analyst prefers BWLPG and Dorian, but a rising tide suggests Avance will move too. VLGC rates continue to recover from the March doldrums with levels now breaching $30k/d ($20-25k/d is cash break-even for the various players). In the Western hemisphere, April cargoes have continued to absorb the vessel overhang which coupled with discharge issues in the East has created a substantially tighter market than what was the case a few weeks ago. Vessel exiting the market for DDs have undershot our expectations YTD, but with several vessels set to enter docks near-term we see a continued tight market balance moving forward.

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Top BUY Ideas (adding LPG stocks/MGN, removing AOW/SGRE): LPG stocks, MGN, DVD, MPCES, TE, LSG, ODL, WALWIL, ZIM, NRS, HRGI, OHT, NFE, REC, AKSO, HTOO, OSUN
Top SELL Ideas: TGS, TK US

NORSKE SKOG – JUST ITS GREEN BUSINESSES HAVE HIGHER VALUE THAN ITS MARKET CAPITALIZATION

Norske skog is Worlds second largest paper company, that is changing its production capacity from print paper into green renewable packaging, that should be used in fast food chains etc. The company estimates that the renewable packaging should increase EBITDA by 500%. NSKOG is now very cheap – trading at 50% vs its peers. On the top of it it has a portfolio of new renewable business, that have a higher value than its market capitalization. So either its paper business is valued at zero by the market or the market does not yet appreciate the value of its renewable businesses.

The reason for this valuation gap is that everybody in Scandinavia was chasing renewables IPO and neglected NSKOG. This will change with the new communication strategy by the company.

I spoke to the company last week. They do recognize this valuation gap and will focus their communications to demonstrate the value of the renewable businesses and the value creation by its restructuring. It was already reflected in the annual report published last week. I am sure it will be reflected in their Q1 presentation, that will take place on 23 April.

We are long NSKOG. I believe it is an interesting short term play (Q1 presentation should be reflected in wave of research updates by brokers) as well as long term play (capitalizing on the restructuring that the company announced). Pareto says below: We expect more updates on certain projects throughout the year, and combined with recovering paper prices, triggers are lined up for a vast revaluation. We are quite bullish NSKOG.

Valuation still barely reflecting legacy assets

We expect a challenging H1’21 and reduce 2021 estimates following lower publication paper prices. LT outlook is largely unchanged,and capacity closures should rebalance the market from H2. Focus remains on non-paper initiatives and conversion projects. At current market value for CIRCA, NSKOG’s legacy paper assets are trading at modest 3.0x EV/EBITDA’22e with no value assigned to the project portfolio – puzzling in our view. We estimate a SOTP value of NOK 58/share, and see triggers lined up for a revaluation. Buyand TP NOK 50 reiterated.NSKOG due to report Q1’21 results on 23 April at 8:00 CET

We expect EBITDA adj. of NOK 38m for Q1, down from NOK 317m last year. This driven by lower prices for publication paper, down 15-20% y/y. Though efficiency improvements should offset some of the price shortfall. Focus on non-paper initiatives and market outlook for H2’21.

Estimates down on lower prices
We reduce EBITDA’21-22e by 27-3% amid expectations of lower prices for publication paper in H1’21e (5-10% down from H2’20). The market will likely remain imbalanced until volumes from capacity closures are fully taken out (~2.1mt in Europe). As such, we expect prices to recover during H2’21, supported by recent price uptick in North America and Asia.

Buy and TP NOK 50 reiterated
Our SOTP valuation indicates significant revaluation potential as the market barely reflects ‘legacy’ paper assets. Only adding the stake in Circa Group (at market value), we see ~30% upside to current share price. On top of this, several promising projects are coming up – totally neglected in our view. We expect more updates on certain projects throughout the year, and combined with recovering paper prices, triggers are lined up for a vast revaluation. We reiterate Buy and TP of NOK 50/sh.

Below is a summary of Pareto Research on Norske Skog published today:

HOW TO TRADE SCANDINAVIA THESE DAYS

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Tradin pattern changes. January and February was interesting to buy into IPOs. In late February this changed. There were so many transactions, that the Scandi market was not able to absorb it. Even great companies were failing. The trade changed. What is now the trade? Buy the failed IPO and wait till the publication of research. That is the catalyst that should drive the companies up.

Great example was Circa. We were very bullish on Circa based on the below article. But Circa failed – there were too many deals at that time. IPO was launched at 16.75, the share price stayed around 15. Yesterday, Sparebank issued bullish report on Circa, with price target of 30 NOK. Circa jumped 50% in two days. As I predicted in my previous blogs and as was predicted in the article. I believe that Circa will continue going up. The secondary thesis still remains. Norske Skog owns 32% of Circa. Circa is now valued at 7.5 NOK of NSKOG shares. This has not been reflected in the share and should lead to rerating of NSKOG. Do read the article, it is well summarized there.

https://seekingalpha.com/article/4407578-gain-exposure-to-hot-scandinavian-ipo-circa-through-largest-shareholder-norske-skog

Similar opportunities:

Huddly – Provider of premium tools for video conferencing. Another failed IPO – trading below IPO price. AGB issued research today. They believe it is 50% undervalued. See below. Pareto should issue their research any day. I bought Huddly few days ago. My target is 20 NOK.

Huddly

BUY, HDLY.OL: SP, NOK 14.20; TP, NOK 24.00 (0.00)

Growth in focus

Provider of premium tools for video collaborationCamera market to accelerate: 47% ’20-’22e sales CAGR~50% discount to peers: Initiate with BUY, TP of NOK 24

High-end VC cam provider with strong profitable growth
Huddly develops high-end video conferencing cameras for meeting rooms and home offices. The company differentiates itself by offering software-based cameras, which enables advanced features such as zooming in on meeting participants, as well as allowing for upgradeable features, leading to an improved product lifetime. Huddly has a strong distribution platform from partnerships with leading meeting room systems providers (Crestron, Google and Shure), as well as a range of distributors. Huddly has a proven record of profitable growth with a revenue CAGR of 118% since ‘18 and an EBIT margin of 29% in ‘20.Sales and EBIT CAGRs of 32.5% and 28% in ’20-’24e
We expect an investment boom in new video conferencing equipment for offices when the global workforce returns to offices from H2’21e (i.e. post-pandemic). We therefore estimate the VC camera market for meeting rooms (Huddly’s core market) to grow by 41% p.a. from ‘20 to ‘23e. Additionally, Huddly has recently launched several new products, which more than doubles its addressable market. We expect these new products to both drive significant volume and ASP growth in ’20-‘24e. The combination of these two factors is likely to lead to strong growth in both ‘21e and ‘22e, in our view, and we therefore forecast a 47% sales CAGR from ’20-‘22e. From ’20 to ‘24e, we forecast a total sales CAGR of 32.5%. We have conservatively not assumed any margin expansion in the forecast period and assume adj. EBIT margins of 25-27% (vs. 29% in 2020), but this will still drive a 28% EBIT CAGR from ’20 to ‘24e.Initiate coverage with BUY and TP of NOK 24, ~70% upside
Huddly is trading at ‘21e and ‘22e EV/EBIT of 22x and 13.5x, respectively, which is ~50% below Nordic high-growth tech peers. This is despite having significantly higher growth. This discount is unjustified, in our view. Hence, we initiate coverage with a BUY recommendation and TP of NOK 24 per share, corresponding to a ‘22e EV/EBIT of 23x and a ~70% upside to the current share price.

Kyoto – IPO that failed this week. Launched at 62.5 NOK, trading at 40 NOK. Very solid company. I have been buying every day. This is the most creasy week of the IPO. Too many deals and almost all failed – they went down after launch. I wrote a detail post on this over the last few days. Kjetil Bohn from Quantafuel has 6% in this. I heard he was buying too. Do read my previou blog on this that describes where is the valuation. This is my top pick in this area.

Scandia Energi – Another failed IPO. It is now trading 2 NOKs below IPO price. Was placed by Sparebank, that has large retail following. Look at what their research did with Circa. I spoke to the Sparebank analyst, he indicated that he would be publishing soon. This could move heavily and quickly. I am buying today more.

Pryme – IPO placed three weeks ago. It is like a Quantafuel two years ago trading at a fraction vs Quantafuel. Pareto published today a research – summary below:

Pryme is a chemical recycler of plastic waste. The company specialises in scaling the pyrolysis process with a reactor capacity of 5-10x current industry standard. This makes it well positioned to capitalize on the growing plastic waste problem, where increased regulatory actions also will benefit the industry. With likely news flow on construction progress, industry partnerships, off-take agreements, recycling certificates and permitting of further plants, we expect the share price to move well ahead of production start at the first plant in Rotterdam next year. Upon success, this will position Pryme with a highly profitable and scalable business model. We also see significant share price upside based on pricing of peers and initiate coverage with BUY/TP NOK 150.

HAV Group – failed IPO placed by Fearnley. Very solid company. See below summary of Fearnley research published today. See below their summary:

What’s new: Initiation of coverage with a NOK 25/sh TP. Buy
Our take: Through the pure-play Maritime Cleantech setup, we see HAV positioned for positive FCF generation, margin expansion and market recognition of its positive ESG impact

We initiate Equity Coverage of HAV Group (ticker: HAV) with a Buy recommendation and NOPK 25/sh Target Price. On the back of spinning off the HAV Group companies into a pure-play Maritime Cleantech machine, we see the stage set for positive FCF generation right off the bat (FSest FCF yield 2021/’22/’23 3/7/10%) on conservative estimates, higher margins (FSest EBIT margins 2.5-12.5%), all supported by a maritime industry that is screaming out for a greener future. Combine this with favorable trading vs. peers (EV/EBITDA’22 of 6x vs. 19x) and a healthy backlog of c. NOK 850m (FSest 70% execution in 2021), we see HAV bound to attract investor interest. Buy

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Energy Recovery – our largest position

Energy Recovery is meeting investors this week. It has just released its new presenation. It provides a good update on the company activities. For this first time it talks about its gas product IsoBoost, that was sold to Saudi Aramco and is in very successful operation there since January, 2020.

It also provides details on its new Waste Water Product ZLD and on Vorteq

Please note, that the company and consensus sales forecasts do not include any revenues from ZLD, Vorteq and IsoBoost. This is all valued at zero. Under our analysis both Vorteq and ZLD has a much higher revenue potential than current water business. That is the reason, why we belive in significant share price growth over the next years.

The presentation does not talk about new refrigeration/climatisation product announced on Q4 call. The product has the highest potential from all products from the portfolio. The growth will be facilitated be regulatory elimination of the greenhouse gasses replacement with CO2 that comes into effect in five years. This will be a new milestone in ERII history.

Click to access Investor%20Presentation%20-%20March%202021.pdf

Africa Energy update from Pareto conference

I just listened to Garrett Soden, Africa Energy CEO at Pareto conference. He brought a few new information:

he said that the 11B/12B Deposit should be valued “at least at 5USD per barrel”. That is substantially more than the 3-4 USD mentioned in the below article, that lead us to invest in AEC. That means that the value of the deposit is substantially higher. Look at the article below that will guide to make your ow assumptions and valuation. If AEC would sell 11B/12B this year as the CEO repeatedly indicated, the value should be multiple time higher than its current market capitalization. We are long AEC.
He also mentioned that the SA Government negotiations should be concluded this year. This is what was the major drag on the share price lately.
He also stated, that we should expect positive news flow in the near future on the Block 2B drilling.
https://seekingalpha.com/article/4395266-giant-hydrocarbons-discovery-total-and-africa-energy-better-expected

KYOTO FAILED IPO MIGHT BE AN OPPORTUNITY

Kyoto Group, an energy storage company started trading in Oslo. The IPO was launched at 62.5 NOK, but the share price went 25% down quickly to around 48 NOK. I called the brokers enquiring what happened. The explanation was: the company did previous funding round only in December 2020. At that time people were able to buy the shares at 25 NOK. So the December buyers sold now into the IPO crashing it. It is surprising conduct by the bankers. It should have been clear to them that this could happen. It is one of the worst performing IPO this year. I would be surprised if someone would not get fired over this.I am still trying to find out, what lock ups they did for the December buyers.

The IPO is down 25% this morning, I believe it is very attractive. I bought in the IPO and I bought a bit more today.

As I wrote in my blog yesterday, Kyoto has a similar product to Azelio. They are in the same stage of development – they are both scheduled to deliver their first products this year. Kyoto has strong partners and strong backing shareholders (CEO of Quantafuel for example). Azelio was a darling of last year. The share price multiplied. Azelio now has a 15 times higher market capitalisation compare to Kyoto. I am sure there are differences, but the valuation gap seems to be quite attractive.

KYOTO Group IPO trading on Wednesday

Kyoto Group (www.kyoto.group) launched its IPO through Fearnleys and Sparebank. The shares should start trading this Wednesday. Link to the investor presentation is below:

Click to access Kyoto%20investor%20presentation%202021.pdf

Why is Kyoto interesting?

Kyoto is very similar to Azelio. See below the share price of Azelio (https://www.azelio.com/). BOth companies offer a similar product. They are in similar stage. Both are due to deliver its first product to customers this year. Both are ramping up their production capacities. There is one big difference. Kyoto at the IPO price is valued at 550 mil NOK. Azelio has a market capitalization of 5.8 billion SEK. So the market capitalization of Azelio is 10x bigger than Kyoto. That does not seem right for two companies, who have a similar product and are at similar stages of launching it. Based on this back of the envelope calculation we entered into Kyoto.

Do look at Azelio share price movement. Since its IPO. The share price has multiplied. Kyoto should act similarly.