|
Kavaljer Quality Focus
February 2025
|
|
|
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.
|
|
|
|
Stable Stock Market Month for Sweden and Europe – but Declines in the U.S.
February was a mixed month for global stock markets, with Europe performing strongly at +3.3% (including Sweden at +0.8%), while U.S. markets, Dow Jones and Nasdaq, declined (-1.6% and -4.0% respectively). Additionally, the Swedish krona strengthened by approximately 3.5% against the U.S. dollar, which resulted in a return of around -5% for global funds during the month.
5 Stars and Best in Our Fund Category
February saw a slightly positive performance for the fund at +0.3%. This brings our return to 35.9% over three years and +100.9% over five years. This places the fund at the top of all funds in the "Sweden, Small and Mid-Cap" category. The strong returns over both three and five years have also impressed the rating institute Morningstar, which upgraded the fund’s rating from four to five stars during the month – the highest rating.
The largest positive contributors among the fund's holdings during the month were Storytel, Ratos, and Securitas, adding +0.6, +0.3, and +0.3 percentage points, respectively. All three delivered strong quarterly reports. Later in the monthly report, we provide a deeper analysis of our thoughts on the reports from Securitas, New Wave, ITAB, Svedbergs, and Proact.
The largest negative contributors among the fund’s holdings during the month were Munters, RVRC, and Byggmästare AJ Ahlström, which detracted -0.6, -0.6, and -0.3 percentage points, respectively.
Strong Climate for Quality Stocks Leads to Portfolio Adjustments
We observe that quality companies are valued at a clear premium compared to those of slightly lower quality. In some cases, we believe valuations are becoming too high, prompting us to make further adjustments to the portfolio.
As a result, we have sold Byggmax after the stock nearly doubled since autumn 2023. We simply believe that expectations have now caught up with the company’s underlying value. We have also reduced our holdings in Inwido, Thule, Bahnhof, Alleima, Storytel, and Tomra.
Additionally, we have made several new additions to the portfolio: Nilörngruppen, Sdiptech, Protector Forsikring, and FlatexDegiro. All of these fall into the category of quality companies but at what we assess to be an undervalued price. We have also increased our holdings in Svedbergs and Carasent. Later in the monthly report, we provide a more in-depth analysis of our thoughts on Carasent.
|
|
|
Economic Outlook
Global Economic Outlook
Early indicators suggest that global growth is on the rise. The IMF projects global growth of 3.3% for 2025, a slight increase from the 3.2% forecast made in October. Rising real wages and lower interest rates are contributing to the higher growth rate. JP Morgan’s global manufacturing Purchasing Managers' Index (PMI) strengthened from 50.1 in January to 50.6 in February, signaling continued expansion.
However, the U.S. economy has shown signs of slowing over the past month. Weaker retail sales and a somewhat more cautious consumer sentiment have influenced developments. The manufacturing PMI declined to 50.3 in February from 50.9 in January. Nevertheless, the labor market remains stable, with an unemployment rate of 4.1% in February, though a slight increase is expected in 2025.
In Europe, growth remains subdued, but there are some positive signs. The manufacturing PMI rose from 46.6 in January to 47.6 in February, indicating a degree of recovery. Growth is expected to gradually improve over 2025–2026, driven by interest rate cuts, rising real wages, and a stable labor market that could support increased consumption.
Sweden
The Swedish economy has started to recover, with strong growth in both domestic demand and exports during the fourth quarter. The manufacturing PMI rose to 53.5 in February from 53.1 in January, confirming continued positive momentum despite uncertainties surrounding trade tariffs. Household purchasing power is expected to strengthen in 2025, supported by rising real wages, lower interest rates, and a gradual improvement in the labor market.
Interest Rate Market
The bond markets in both the U.S. and Europe declined in February due to weaker economic signals from the U.S. Central banks in both regions have adopted a slightly more cautious stance on further rate cuts, as they assess the effects of trade restrictions and tariffs. In Sweden, inflation has exceeded expectations over the past two months, leading many analysts to believe that the Riksbank will hold off on further rate cuts.
|
|
|
Selected Earnings Comments and Portfolio Changes
Sold Byggmax
Byggmax faced a tough period following the post-pandemic construction boom, with its operating margin dropping from 11% to 2% in 2023. In 2024, it recovered slightly to 3%, and analysts project an improvement to 5% by 2026. The stock has doubled from its low of SEK 25 to SEK 50, with a forward P/E for 2026 just below 15.
Historically, the operating margin was 8–11%, which would make the stock attractive, but the acquisition of Skånska Byggvaror in 2016 makes it challenging to reach those profitability levels again. With 5% as a reasonable margin target, we view the stock as fully valued and have therefore sold our holding.
Securitas – Strong Report and Continued Potential
A strong report from Securitas! The CEO appears highly confident in achieving an 8% EBIT margin by the end of 2025. Even if one assumes a slightly more conservative estimate of 7.5%, the stock is trading at a P/E of around 11, whereas we believe a P/E of 14–15 would be more reasonable. We like the stock and see further upside potential.
New Wave – Decent Report but Strong Outlook
The Q4 report was decent but nothing extraordinary. Revenue remained virtually unchanged for the full year, with an EBIT margin of 13.3%. This should be viewed in the context of an economic downturn combined with market expansion efforts in Germany and the U.S. The trailing P/E is 16.9, based on what seems to be bottom-level margins and weak revenue. What makes this interesting is that: 1. The economic outlook is improving, 2. The market expansion efforts in Germany and the U.S. are expected to start yielding results soon. In 2025, we anticipate a solid earnings boost, which should continue into 2026. The stock trades at a P/E of 11 based on consensus estimates for 2026, which assumes a 16% EBIT margin. We like the combination of a low P/E ratio with relatively conservative assumptions.
ITAB – Acquisition of HMY Completed, Strong Earnings Growth Expected in 2026–2027
In January, ITAB’s acquisition of HMY was approved, an event expected to significantly increase earnings per share going forward. The Q4 report stated that HMY had shown growth and margin improvements in 2024 compared to 2023—an unexpectedly positive development.
The primary synergies from the acquisition are expected to come from lower purchasing costs, as the company more than doubles its procurement volume. This effect should become visible towards the end of 2025. However, no overly optimistic assumptions have been made regarding OPEX synergies, although some savings in sales and marketing are seen as a potential bonus. We appreciate the company’s pragmatic approach to cost synergies, which seem very reasonable.
Customer demand has weakened since November due to macroeconomic uncertainty, concerns about Trump, and tariffs. The order book is lower than a year ago, which may indicate a weak Q1.
The CEO has a strong track record, having successfully led a turnaround over the past 5.5 years. He emphasizes that the acquisition will drive earnings growth, which we view positively. In a 2–3 year perspective, the investment case looks strong, as we believe earnings per share will exceed SEK 3 (compared to the current share price of approximately SEK 21). However, in the short term, there is a risk that the market reacts negatively to weak organic growth and pressured profitability, both with and without integration costs.
Svedbergs Q4 – Strong Report and Already Cheap at "Bottom-Level Earnings" Svedbergs delivered a very strong Q4 report, with slightly positive organic growth and strong profitability at an EBIT margin of 14.4%. The 2021 acquisition of Roper Rhodes, which operates in the UK, is performing exceptionally well. Additionally, the acquisition of Thebalux, active in the Benelux region, is also progressing positively, lifting profitability at the group level. Going forward, a better market environment is likely, leading to a return to growth and possibly even stronger profitability. Svedbergs is trading at P/E 12 and 11 based on consensus estimates for 2025 and 2026, respectively. We believe Svedbergs will, over time, approach valuations seen in companies like Inwido (P/E 16 for 2025 estimates), which suggests continued upside potential.
Proact Q4 – Better Than the Profit Warning Suggested
Proact issued a profit warning in mid-December but was clear that the Q4 decline was due to natural variations in its system business. A few late deals in December improved the results beyond initial expectations. The company has confirmed that it expects organic growth in 2025.
Proact is actively seeking 1–2 acquisitions, ideally in the SEK 500–1,000 million revenue range, though it is more likely to target smaller companies with SEK 100–300 million in revenue. Historically, acquisitions have been made at 7–8x EBITA, but prices could now reach 10x. The focus is on acquiring service-heavy businesses rather than pure system sales, prioritizing the Nordic region, the Baltics, and the UK, while Germany is likely to be postponed for a year.
The company’s strategy aims for system sales to represent 30–40% of revenue within 3–5 years, which could lift the EBITA margin from the current 7% to 10% over time. In the long run, there is a strategic decision to be made: either maintaining an 8% EBITA target while focusing on growth or aiming higher.
Cloud services order intake was at a record high in Q4—an important data point for future growth in recurring revenue. Proact is well-managed, strategically focused, and has a disciplined acquisition strategy that prioritizes quality, culture, and price. We remain positive on Proact and took the opportunity to increase our holdings when the stock was pressured following the profit warning.
|
|
|
|
|
Carasent – A Growth Company with a Strong Recovery
Carasent is a quality company and a leader in digital medical record systems (ERP for private healthcare providers), boasting 90% recurring revenue, a churn rate of only ~2%, recession-proof demand, and an 85% gross margin.
In 2021, Carasent lost its strategic direction due to expensive acquisitions and high investments. Since then, the company has replaced its CEO with an experienced leader with a strong track record, and the turnaround is now confirmed. Three key factors support strong stock performance going forward:
Accelerating organic growth, increasing from 10–15% to over 20%. Margin expansion, with positive cash flow since Q3 2024, an 85% gross margin, and future growth without increasing costs. Multiple expansion, driven by improved financial results and a planned relisting from Norway to Sweden.
From Market Favorite to Crisis – and Back Again
Carasent was listed in 2019 through a reverse merger between loss-making Apptix and Gothenburg-based Evimeria. The company quickly grew, achieving a 20% EBIT margin and continuous margin expansion, making it a market favorite. However, in 2020–2021, Vitruvian Partners and Aeternum injected capital and pushed for an aggressive M&A strategy, leading to the acquisition of five companies within two years. At the same time, investments in product development surged, significantly straining cash flow. Despite these heavy investments, "only" NOK 250m of the NOK 900m raised was spent.
Realizing these mistakes, the company replaced its CEO, who refocused on a more disciplined growth strategy. Shortly after, a share buyback of 10% of outstanding shares at NOK 16 per share was executed, followed by an extra dividend of NOK 1.84 per share in fall 2023.
After turning to underlying positive cash flow in Q3 2024 (measured as EBITDA – CAPEX), Carasent also completed an acquisition in Germany for EUR 8–12m. The plan is to gradually migrate the acquired company’s 1,000 customers from on-premise systems to Carasent’s cloud-based solution, significantly increasing revenue per customer.
CEO Daniel Öhman – A Cautious Strategist with Extensive Industry Experience
CEO Daniel Öhman plays a crucial role in this case. He comes from the customer side of the industry and has a strong track record from GHP/Capio, where he drove 9% annual revenue growth and 15% profit growth as CEO (2013–2022). He took over as Carasent’s CEO in January 2023, focusing on profitable organic growth.
Under his leadership, the company has made strategic adjustments, including:
Closing Webdoc Norway, Developing a surgical module with significant potential, Expanding Webdoc X in Germany via acquisitions of companies with older on-premise solutions.
These initiatives aim to strengthen Carasent’s market position, increase revenue per customer, and optimize capital allocation.
Key Growth Drivers Ahead
-
Already secured contracts: Contracts not yet implemented represent +SEK 12–14m in ARR (Annual Recurring Revenue).
-
Surgical module launched (TAM: SEK 150m): Pilot customers started in February 2025, with larger commercialization planned for summer.
-
Stockholm Region (TAM: SEK 350m): The TakeCare system will be phased out by 2030. Its replacement, Cosmic, is both more expensive and less suited for primary care—many healthcare providers are likely to choose Webdoc.
-
Germany expansion: A fragmented market with outdated systems presents a major growth opportunity. Migrating customers to Webdoc X could double revenue per customer.
Västra Götaland: The Millennium system rollout for hospitals has failed and is now paused indefinitely—potential new market worth SEK 25m in ARR, where Webdoc already dominates.
Profitability – On Track for a 30–40% Cash Flow Margin
At the cash flow level (EBITDA minus CAPEX, EBITDAC), Carasent was slightly above 0% until 2020. However, investments surged, and profitability turned sharply negative. After realizing this, CEO Daniel Öhman cut R&D costs, and the company has now returned to positive cash flow.
With an 85% gross margin and a stable cost base, every additional revenue dollar flows directly to the bottom line, driving clear margin expansion.
For 2025, the company is guiding for an EBITDAC margin of approximately 13% (equivalent to free cash flow). In the long term, we believe Carasent can reach 30–40% profitability.
We Expect 20% Annual Growth and Continuous Margin Expansion for Years to Come
We see a strong growth trajectory for Carasent, with 20% annual revenue growth until 2030, followed by 10–15% per year for many years thereafter. With a scalable business model and continued margin expansion from 2025, revenue multiples are the most relevant valuation method.
Based on the Rule of 40 and Carasent’s structural growth potential, we believe a valuation of 6–8x sales is reasonable, with upside potential to 8–10x if Carasent regains its market-favorite status. Overall, we see an attractive risk/reward.
Carasent accounts for 2.6% of Quality Focus
|
|
|
 |
Kavaljer Quality Focus - Performance/Index |
|
 |
 |
 |
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: 5 out of 7
Category: Equities, Sweden, small- and midcap
AUM: 707 mkr SEK
Morningstar Rating: ⭐️⭐️⭐️⭐️
|
|
Nacka Strand, March 10, 2025
Peter Lindvall, Håkan Telander & Jesper von Koch |
|
 |
|
|
|
|
|
|
|
|
