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Kavaljer Quality Focus
January 2025
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Active Management of Nordic Quality Companies
Kavaljer Quality Focus is an equity fund that primarily invests in Swedish quality companies, with holdings also possible in companies based in the Nordic region and the rest of Europe. Characteristics that define a quality company include increasing revenue and profit over time, stable finances, an experienced and competent management and board committed to creating shareholder value. Investing in quality companies reduces the risk of unpleasant surprises.
The fund is actively managed, and the selection of stocks is based on fundamental analysis without regard to each company's weight in the index. The focus is on finding quality companies with good growth prospects at an attractive valuation. The fund has an investment horizon of 3–5 years and contains a concentrated portfolio of 20–35 companies. The goal is to generate returns that outperform the Swedish stock market over time.
As an investor, you gain access through the fund to a unique composition of interesting large and small quality companies. The fund is available on platforms such as Avanza, Nordnet, and Savr, as well as through banks and institutions that trade via MFEX and Allfunds.
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Commentary from the Fund Managers
January was a strong month for global stock markets, driven by optimism surrounding interest rate cuts and improving economic prospects. The Stockholm Stock Exchange (OMXSPI-GI) rose by 7.5%, while the Dow Jones World Index increased by 2.9%.
Unlike in 2024, the tech sector was weak. The Chinese AI developer DeepSeek launched a cost-effective AI model with Western-level performance, creating uncertainty around major AI investments and putting pressure on market leaders. Instead, cyclical companies, industrials, and commodities led the market rally, with the financial sector emerging as an unexpected winner following strong quarterly reports.
The earnings season for the fourth quarter of 2024 has begun with several positive statements from listed companies regarding the outlook for 2025. We expect earnings growth of 10% for the year, and dividends to shareholders are anticipated to reach record levels. Valuations are particularly attractive among mid- and small-cap companies, which makes us remain optimistic about the stock market in 2025.
Global Economic Outlook
Early indicators suggest that global growth is on an upward trajectory. The International Monetary Fund (IMF) expects global GDP growth of 3.3% in both 2025 and 2026. Lower inflation, rising real wages, and falling interest rates are contributing to stronger growth. JP Morgan’s global manufacturing Purchasing Managers’ Index (PMI) improved from 49.6 in December to 50.1 in January, signaling expansion.
The U.S. economy continues to perform well. The manufacturing PMI rose from 49.2 in December to 50.9 in January. The labor market remains stable, with an unemployment rate of 4.1% in December. However, a slight increase in unemployment is expected during 2025.
In Europe, growth remains weak. The Eurozone’s GDP was unchanged in the fourth quarter compared to the previous quarter, while the manufacturing PMI rose from 45.1 in December to 46.6 in January. Despite the weak figures, unemployment remains low and stable at 6.3% in December. Growth is expected to gradually improve in 2025–2026, supported by interest rate cuts, rising real wages, and a continued stable labor market, which could drive consumption forward.
Economic Outlook - Sweden
The Swedish economy remains weak, but there are clear signs that the business cycle is turning upward. The manufacturing Purchasing Managers’ Index (PMI) rose to 52.9 in January from 52.4 in December, indicating continued growth. Additionally, the National Institute of Economic Research’s economic sentiment indicator increased slightly to 97.7 in January from 97.5 in December.
Household purchasing power is expected to strengthen in 2025 due to rising real wages, lower interest rates, and some improvement in the labor market. This suggests an accelerating consumption rate during 2025–2026.
Fixed Income Market
The bond market showed mixed developments in the U.S. and Europe during January as market expectations for interest rate cuts were adjusted following central bank announcements. The U.S. 10-year Treasury yield declined from 4.57% to 4.54% over the month, while the German 10-year government bond yield increased from 2.36% to 2.46%. Sweden’s equivalent yield fell from 2.36% to 2.18%.
The U.S. Federal Reserve (Fed) kept interest rates unchanged in the expected range of 4.25–4.50%. Fed Chair Jerome Powell emphasized that the central bank is in no rush to adjust rates and that decisions will be made based on economic developments. The market now expects 1–2 rate cuts in 2025. The European Central Bank (ECB) lowered its key interest rate by 0.25 percentage points to 2.75%, as anticipated. ECB President Christine Lagarde stated that there has been no discussion on when rate cuts might end. However, many analysts expect further reductions, possibly down to 2.0% in 2025.
Sweden’s Riksbank cut its policy rate by 0.25 percentage points to 2.25%, in line with expectations. The December forecast remains largely unchanged, but the central bank is prepared to act if inflation and economic conditions shift. Riksbank Governor Erik Thedéen commented that the policy rate has likely been lowered sufficiently. Improved economic activity towards the end of 2024 supports this assessment. However, many analysts believe that an additional rate cut is likely before the summer, potentially bringing the rate down to 2.0%.
Fund Performance
Kavaljer Quality Focus increased by 7.4% in January. In comparison, OMXSPI-GI rose by 7.5%, and the Dow Jones World Index gained 2.9%.
The fund’s top contributors during the month were RVRC (+0.9 percentage points), Alleima (+0.7 percentage points), and Valmet (+0.6 percentage points). The biggest detractors were Firefly, Munters, and Dustin, each reducing returns by -0.1 percentage points.
Changes and Holdings
During the month, the fund sold its holdings in Pandora, Trelleborg, Paradox, and Dustin, while acquiring Green Landscaping Group, AFRY, KONE, and Carasent. The fund also reduced its positions in Inwido, Byggmax, and Thule.
The equity allocation stood at 99%.
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Has Interest in Global Index Funds Peaked?
Global equity funds have become increasingly popular among Swedish investors. The reason is simple: strong performance. The question is whether this trend can continue. To answer that, we need to understand where returns come from and whether their driving forces are sustainable. The share of U.S. stocks in global index funds has steadily increased and now accounts for approximately 75% of the MSCI World Index, up from historical levels around 65%. This dominance is primarily due to the strong performance of U.S. companies, particularly in the tech sector. Additionally, the U.S. dollar has strengthened by 23% against the Swedish krona over the past five years, further boosting returns.
Another key factor is the exceptional performance of the tech sector, particularly the so-called MAG7 companies (Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia, and Tesla). The market’s view of these companies is filled with optimism—often without healthy skepticism.
As Warren Buffett pointed out:
“You can’t buy what’s popular and do well.”
Similarly, Howard Marks warns:
“Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.”
This raises the question of whether global index funds are temporarily inflated—partly due to a historically strong dollar and partly due to the high valuations of the U.S. stock market, particularly driven by AI-related tech stocks.
However, valuations tend to normalize over time. As the saying goes: “Nothing changes sentiment like price.”. A correction in the valuation of highly priced U.S. tech stocks could trigger further declines. It remains to be seen whether the launch of DeepSeek will be the catalyst for a normalization of inflated AI valuations (Nvidia -20% since the launch less than two weeks ago).
And who knows? Perhaps Nordic companies with stable, predictable cash flows and low valuations might become popular again 😊
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New Year, New Opportunities…
January was an active month in terms of transactions, as some of our “darlings” finally left the portfolio after valuations, in our view, became too stretched. We also took the opportunity to clean out an underperformer that did not play out as we had hoped.
At the same time, this has given us the opportunity to invest in new quality companies, where temporary challenges or lack of market recognition have made their valuations particularly attractive.
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Recent Divestments
Sold Pandora
Pandora has been a long-term performer in Quality Focus. We initially invested around 600 DKK and significantly increased our position below 300 DKK, when temporary issues pushed its valuation down to P/E 6-8.
The company has now confirmed its turnaround with strong growth and improved profitability, but its valuation has risen significantly to P/E 26 on a trailing 12-month basis. Forward-looking estimates suggest ~10% annual growth and some margin expansion, which we see as optimistic but not unreasonable. Based on 2026 estimates, the stock is trading at P/E 17, and we no longer see a clear margin of safety—therefore, we have sold our holding.
Sold Trelleborg
Like Pandora, Trelleborg has been a strong contributor to Quality Focus returns in recent years. We bought the stock in June 2021 at just over 200 SEK, when it was valued at P/E 15, despite weakened profitability. At the time, the company hinted at a potential divestment of its more volatile and less profitable tire division.
Our investment thesis was straightforward: a sale of this division would strengthen the balance sheet, improve profitability, and enhance the company’s quality profile—which the market would reward with a higher valuation. Today, Trelleborg trades at P/E 27 on a trailing 12-month basis and P/E 20 on 2027 estimated earnings. As with Pandora, we now view the stock as more than fully valued and have exited our position.
Sold Dustin
Unlike Trelleborg and Pandora, Dustin has underperformed since our investment. The problems began with the acquisition of Centralpoint, a so-called "strategic acquisition" that added 35% in revenue but also excessive leverage. Integration issues and a weaker economy pressured profitability, eventually forcing a rights issue—and the balance sheet remains strained.
In hindsight, we should have exited at the time of the acquisition, as “strategic acquisitions” rarely meet expectations. Given uncertainty around profitability and the risk of another rights issue, we have now sold our shares.
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New Investment: Green Landscaping Group
A recession-resilient serial acquirer with strong historical growth and increasing profitability. Over 6 billion SEK in revenue and a 7% EBIT margin.
Over 60 subsidiaries with generally long-term, stable customer contracts. Strong profit growth expected through a mix of organic and acquisition-driven growth, as well as an improved financial net and acquisitions with higher profitability than the group average. -
Estimated P/E 12 for 2025 and P/E 10 for 2026.
A Recession-Resilient Serial Acquirer with a Strong Track Record
Green Landscaping is a serial acquirer within outdoor maintenance, including park and garden care, road maintenance, and related services. The group currently consists of over 60 subsidiaries, with the majority of revenue coming from long-term and stable contracts with municipalities, ensuring predictable income streams. Historically, the company has been focused on the Nordic region, but in 2023, Green Landscaping expanded into the DACH market, quickly executing several acquisitions.
Acquisition of Industry Leaders with High Profitability at 5x EBIT
The company focuses on acquiring industry-leading businesses with higher profitability than the group’s average. While the group’s average EBIT margin is around 7%, acquisitions have historically shown a margin above 10%.
The acquisition strategy is clear. Green Landscaping aims to carry out 8–10 acquisitions per year, where the optimal size for target companies is around 100 MSEK in revenue. This adds approximately 800 MSEK in revenue annually, corresponding to a 13% increase, and possibly 80-100 MSEK in EBIT. Acquisitions are generally made at 5 times EBIT and are primarily financed through operating cash flow. A portion of the payment is also made in company shares to key personnel to ensure proper incentives. The shares used for payment are not newly issued but repurchased on the market.
15% annual revenue growth should be sustainable
Organic growth is between 3–6% per year, driven by a growing market and improvements within subsidiaries through the proprietary "Wayfarer Model," a best-practice handbook. Total revenue growth going forward should therefore remain around 15% per year for the coming years.
Strong financial track record and controlled debt levels
At the end of the third quarter of 2024, Green Landscaping's total revenue amounted to 6.3 billion SEK, with an EBIT margin of just under 7%. Average revenue growth per share has been 15% over five years and 26% over seven years. Profit growth has been significantly higher as profitability has improved substantially. Net debt/EBITDA is 2.5, including EBITDA from recent acquisitions, which aligns with the company's financial targets.
Strong Insider Ownership
The company has strong insider ownership, with the CEO owning over 6% of the company, corresponding to a value of approximately 265 MSEK. The COO holds 17 MSEK, and the chairman of the board 15 MSEK. Salén Group and Byggmästare Ahlström each hold 16% and both have board representation.
Key Risks: Acquisitions & German Market Exposure
The biggest risks we see are that 1) acquisitions fail after purchase, 2) price pressure, and 3) debt levels.
During the Capital Markets Day in November, the company reviewed the performance of the acquisitions made so far, and there are no signs of failure. The results indicate slightly lower profitability but higher growth—reasonable considering that companies being sold tend to stop investing in the future just before they are sold. Regarding price pressure, the company acknowledges this, but given the high diversification across more than 60 companies, including geographical spread, we believe this risk may come and go in different markets. However, we do not believe this will happen simultaneously for all subsidiaries. It would require a total collapse of the German economy for this to become a real issue. Debt levels at 2.5x EBITDA could become problematic if profitability declines. However, we are already in a weak economic cycle, so once again, if the German economy deteriorates further, focus could shift to the balance sheet.
Strong Earnings Growth at an Attractive Valuation
For 2025, we expect Green Landscaping to reach revenue of approximately 7.3 billion SEK, which corresponds to 15% growth. Of this, 2% is expected to be organic growth, while the rest comes from both already completed but not yet consolidated acquisitions as well as further acquisitions during 2025. Profitability should also improve as acquisitions usually have higher margins than the group average. An additional approximately 55 MSEK in EBIT will come from 2024 acquisitions, and lower interest rates should improve the financial net by approximately 20 MSEK. Overall, we estimate that earnings per share for 2025 will land at 5.6 SEK, corresponding to a P/E ratio of 12. For 2026, we expect more than 20% earnings per share growth to 6.7 SEK, corresponding to a P/E ratio of 10.quirers
Attractive valuation compared to other serial acquirers
Serial acquirers have gained significant investor interest, especially niche consolidators like Lagercrantz, Indutrade, and Bergman & Beving, which trade at P/E 40–50. While roll-ups like Green Landscaping trade at somewhat lower valuations, we believe there is substantial upside. Given the company’s predictable, strong earnings growth, a P/E of 18–20 over time seems more reasonable.
Green Landscaping represents 2.9% of Kavaljer Quality Focus, of which 1.8% through direct ownership and 1.1% indirect ownership via the holding in Byggmästare Ahlström.
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Green Landscaping's Revenue and Profitability |
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New Investment: Kone
KONE Oyj is a true quality company, with a return on equity of 35% and a return on capital employed of 40%. This level of quality typically comes at a high price, with an average P/E ratio of 27.2 since its listing in 2009.
However, a very weak market in China since the second half of 2021 has caused revenue growth to stagnate, profitability to decline, and the P/E ratio to drop. We see this as an interesting opportunity to invest in a high-quality company with low operational risk at an attractive valuation.
A Leading Elevator Company with 90% of Profits from Aftermarket Services
KONE is one of the world’s leading companies in the elevator and escalator industry. Founded in 1910 in Helsinki, Finland, it has grown into a global player operating in over 60 countries. The company generates €11 billion in revenue and has an operating margin of just under 12% on a rolling 12-month basis.
KONE operates in three business areas:
Manufacturing and installation of elevators and escalators, “New Building Solutions” (41% of revenue): Elevator and escalator solutions for both new buildings and the modernization of existing facilities. Service (41% of revenue): Maintenance services to ensure that elevators and escalators function safely and efficiently throughout their lifecycle. -
Modernization (19% of revenue): Upgrading old elevators and escalators to improve performance, safety, and energy efficiency.
The Service segment provide recurring revenue with long-term contracts and high margins. This segment accounts for 41% of revenue, and together with Modernization (collectively known as “aftermarket”), these two segments generate 90% of the company’s profits. Therefore, KONE’s new equipment installations primarily serve to increase the installed base, to which the company typically secures a service contract.
Current Profitability More Predictable Than Ever
Between 2014 and 2017, New Building Solutions accounted for 45% of operating profit. This was driven by an unsustainable price level and profitability in China, fueled by the country’s construction boom. Since then, profits from New Building Solutions have declined by 75%, while aftermarket profits have grown at around 6% per year. The remaining operating profit is therefore of higher quality, as it is more predictable than before.
Weak Chinese Market Has Created an Attractive Entry Point
The weak market in China has led to declining revenue from the region. In 2021, China accounted for 35% of sales, compared to 23% in 2024. Although KONE has grown in other markets (particularly within Service, at around 10% per year), overall revenue has remained flat, while profitability has taken a hit due to lower revenue from China.
Potential Boom in Modernization Contracts in China Could Change the Outlook
In general, elevators have a lifespan of about 15 years before they require modernization. The real surge in elevator installations in China began in 2008–2009, meaning that the need for modernization is now emerging. In addition to elevators reaching their 15-year lifespan, modernization is also driven by energy efficiency, safety improvements, and accessibility requirements (e.g., wheelchair accessibility). The global elevator modernization market is expected to grow by 7–9% annually until 2030, with China expected to drive the majority of this growth, as volumes are forecasted to multiply.
Increased Reporting Requirements and Technical Complexity Are Benefiting the Industry Leaders
Since 2008–2009, local elevator suppliers have faced significant challenges, benefiting the major industry players (KONE, Otis, and Schindler). Local suppliers are generally much smaller, and as the technical complexity of elevators has increased and regulatory reporting requirements have tightened, the three largest companies have gained market share. KONE is therefore well-positioned to capture a large share of upcoming modernization contracts in China, further expanding its installed base for Service.
Return to Growth and Improved Profitability Should Drive Multiple Expansion – Strong Upside at Low Risk
China’s construction boom created excess profitability for KONE from 2014–2017. Afterward, growth slowed before collapsing from H2 2021, as new floor area construction in China declined by 70% up to the present day. However, this decline appears to be bottoming out, and while 2025 is likely to remain weak, there is potential for a rebound in China. Regardless, New Building Solutions now accounts for only about 10% of current earnings.
The remaining business, primarily the aftermarket, is fundamentally much more stable and now constitutes 90% of earnings. Service continues to grow steadily and has never shown negative growth. Modernization has strong potential for growth, primarily due to pent-up demand in China but also from Europe and the US. As modernization contracts are secured, the installed base for high-margin service contracts expands.
All of this suggests that after a few challenging years, KONE is now in a position to return to stable growth and recover its operating margin from the current 11.4% to 13–14% by 2027.
At a share price of €48, KONE trades at a P/E ratio of 21 for 2025e and P/E 19 for 2026e. We believe that a return to strong growth and improved profitability will drive the P/E multiple closer to its historical average of 27.
KONE represents 2.9% of Kavaljer Quality Focus.
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New Investment: AFRY
AFRY is a leading engineering consultancy operating in over 40 countries with approximately 19,000 employees. The company focuses on solutions within infrastructure, energy, and industry, with a strong emphasis on sustainability and innovation. By combining technical expertise with advanced design, AFRY helps its clients develop future-proof and climate-smart solutions. Since 2011, the company has grown revenue per share by 9.6% and earnings by 7.1% per year.
Strategic Acquisitions and Expansion
AFRY has an active acquisition strategy, regularly acquiring small and medium-sized companies to strengthen its market position and expand geographically. In 2018, the company made a major strategic acquisition of Finnish firm Pöyry, increasing revenue from 13.5 billion SEK to 19.2 billion SEK and leading to a name change from ÅF to AFRY.
Some Profitability Challenges
Following the acquisition of Pöyry, AFRY’s profitability has declined slightly, from historically stable EBIT margins of 8.3–8.7% to 7.0% today. This is partly due to Pöyry’s lower profitability at the time of acquisition, as well as increased costs related to high inflation and a weak construction market. Infrastructure is AFRY’s largest segment, but its lower profitability negatively impacts the company’s overall results.
Despite these challenges, profitability is expected to improve in the future, particularly if the construction market recovers.
Valuation and Outlook
AFRY’s stock has declined in valuation, with a current P/E ratio of 15, compared to sector peer Sweco, which trades at P/E 32. We believe this valuation gap is disproportionately large and expect AFRY’s P/E ratio to rise to 18–20 over time.
Conclusion
Despite some challenges with profitability and market conditions, AFRY is a high-quality company with strong potential for improvement. With a recovery in the construction sector and improved margins, the stock appears undervalued, offering significant upside potential moving forward.
AFRY represents 3.2% of Kavaljer Quality Focus.
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AFRY Revenue, Profitability, and Valuation. Temporary issues have pressured the valuation. |
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Selected Earnings Comments
Revolution Race
RVRC (Revolution Race) grew by 12% in Q2 (fiscal year) (11% in local currency), with particularly strong development in the DACH region (+15%) despite a weak German economy. Austria and Switzerland stood out, and new product launches contributed, with alpine clothing sales tripling. Looking ahead, the company plans to launch new footwear. Despite a strong USD, the gross margin remained stable, and the EBIT margin was maintained at an industry-leading 23%. Earnings per share amounted to 1.12 SEK. The company expanded with new websites in Australia, New Zealand, and South Africa and maintains a strong balance sheet with a net cash position of 270 MSEK.
Guidance: Market conditions remain challenging but show signs of improvement, and sales growth has continued into early January.
Green Landscaping Group
Continued growth through acquisitions with strong cash flow and stable profitability—although Q4 came in slightly weaker than expected. Total growth was +7%, but organic growth was -6%, with Sweden underperforming (-16% revenue, 3.1% EBITA margin), while Norway (11.6% EBITA margin) and Europe (9% organic growth, 21% EBITA margin) performed strongly. Margin improvement measures are underway in Sweden, where profitability is expected to improve in 2025. Net debt/EBITDA is now 2.5, allowing for 8–10 new acquisitions in 2025, primarily in Germany.
KONE
In Q4, order intake grew by 3% and revenue by 6%, with growth excluding China exceeding 10%. The aftermarket segment, the most profitable part of the business, grew at the same pace. Adjusted EBIT increased by 8%, marking eight consecutive quarters of improved profitability. Cash flow was strong, nearly 40% higher than adjusted EBIT, which likely contributed to today’s 4% stock price increase, as weak cash flow had previously been a market concern.
Guidance: Low single-digit growth and continued margin improvement, driven by the aftermarket segment. China remains a headwind, but the most profitable segments are performing well.
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Kavaljer Quality Focus, performance compared with index |
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Fund Information
Fund Type: SICAV (UCITS)
Name: LMM - Kavaljer Quality Focus
Custodian: CACEIS Investor Services Bank S.A.
Auditor: PricewaterhouseCoopers Société cooperative
Management Fee: 1,25% per year
Minimum Investment: SEK 100
Subscription: Daily
ISIN: LU1232457504
Risk Level: 6 out of 7
Category: Equities, Sweden, small- and midcap
AUM: 688 mkr SEK
Morningstar Rating: ⭐️⭐️⭐️⭐️
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Nacka Strand, 6 February, 2025
Peter Lindvall, Håkan Telander & Jesper von Koch |
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