Kavaljer Quality Focus

March 2025

Active Management of 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.

Turbulent Stock Market Month Driven by U.S. Tariffs

March turned out to be a weak month for the stock market. The Stockholm Stock Exchange (OMXSPI-GI) declined by 7.9%, the small-cap index (Carnegie Small Cap Return Index) fell by 8.0%, and the Dow Jones World Index dropped by 4.0%.

The month was marked by rising concerns due to threats of new U.S. tariffs (on April 2, a 20% tariff was announced on imported goods from the EU), weak consumer confidence, and an underperforming tech sector. At the same time, inflation remained high, and the labor market showed signs of weakening. Together, these factors increased the risk of stagflation and economic slowdown, leading to heightened market volatility.

Regarding U.S. tariffs, the analysis firm Jefferies stated the following, which aligns with our view:

“We believe the proposed tariff rates represent a ceiling and may be reduced as countries negotiate bilateral agreements, which could support a market recovery.”

The Tariffs

The brutal market reaction at the end of the month is due to the fact that the tariffs announced by the U.S. are significantly higher than expected. The best and most likely scenario is that the high tariff levels are a negotiation tactic, with Donald Trump starting out aggressively only to later scale back in order to reach a new “deal.”. This is a negotiation strategy Donald Trump thoroughly described in his bestselling 1987 book The Art of the Deal. The book remained on the New York Times bestseller list for over 48 weeks and sold more than 1 million copies. The introduction of tariffs was expected. Donald Trump has talked about tariffs for decades, and implementing tariffs was also an election promise.

However, what was expected were reciprocal tariffs—i.e., ones that match the tariffs imposed by the other party. The method used by the U.S. to calculate counterpart tariffs is incorrect and leads to a gross overestimation of the opposing party’s tariff levels. Once again, regarding U.S. tariffs, Jefferies wrote the following, echoing our perspective: “We believe the proposed tariff rates represent a ceiling and may be reduced as countries negotiate bilateral agreements, which could support a market recovery.”

It is easy to feel anxious when the market falls sharply, and it's impossible to predict short-term developments. However, history shows us that stocks rise in the long run, and some of the absolute best buying opportunities in history have occurred during periods of market turmoil. Therefore, we continue to believe that the best course of action is to “stay the course.” Our focus remains on owning high-quality companies that grow and create shareholder value over time.

Fund Performance and Contributions

Kavaljer Quality Focus decreased by 6.0% in March. The corresponding figures for OMXSPI-GI were -7.9%, the small-cap index (Carnegie Small Cap Return Index) -8.0%, and the Dow Jones World Index -4.0%.

The fund’s top positive contributors this month were FlatexDegiro, Kitron, and Protector Forsikring, adding +0.3, +0.2, and +0.2 percentage points respectively. The largest negative contributors were ITAB, Dometic, and Munters, each with -0.4 percentage points.

Changes and Holdings

During the month, the fund sold a large portion of its holding in Kitron (and completed the sale in early April), and reduced positions in Thule (around SEK 350+), Storytel (around SEK 95), and Inwido (around SEK 210). The fund increased its holdings in Carasent, Nilörngruppen, and Sdiptech.

A new holding for the month is Swedencare. In our February monthly letter, we wrote the following: “We find that quality companies are valued at a clear premium compared to those of slightly lower quality. In some cases, we believe valuations have become too high, and have therefore continued to make some changes to the portfolio.” As a result of the situation at that time, we decided to sell several holdings that we considered to be part of these “market darlings.”.

Among others, we sold Pandora, which is down more than 30% since then, as well as a large part of Thule, which has dropped by a similar magnitude. We believe the current market dip has been reasonable in bringing many “darlings” back to more rational valuations. Additionally, we see many interesting opportunities emerging among smaller companies that have also been dragged down by the general market anxiety. Later in this letter, we provide a deep-dive analysis of our thoughts on FlatexDegiro (acquired in February), as well as updates on Carasent and Craft (New Wave).

The fund’s equity exposure was 99%.

Large Market Potential

FlatexDegiro operates in 16 different markets: Germany (its home and largest market), the Netherlands, Austria, France, Spain, Portugal, Italy, Greece, Ireland, the UK, Sweden, Norway, Denmark, Czech Republic, Hungary, and Poland.

What makes this case particularly interesting is that the growth runway is very long, as market penetration remains very low in most of the company's markets. For example, “only” 1% of the population in Germany are customers of the company, despite it being the market leader.

This can be compared to Avanza, which in 2024 had 19.5% of Sweden’s population as customers. In 2023, market leader Nordnet had a market share of 7% in Norway, 7% in Denmark, and 10% in Finland, measured as the proportion of the population who were customers of the company.

Assuming that Sweden and the rest of Scandinavia are further along in the digitalization of equity trading (and also in terms of general interest in stocks), FlatexDegiro likely has a long and strong growth path ahead.

Profitability: Already Strong, but with Significant Upside

Strong fintech players like Robinhood and TradeRepublic are competing with modern platforms and aggressive pricing models.

In 2024, FlatexDegiro reported an EBITDA margin of 42%. The company’s scalable model allows for continued expansion with healthy profitability. With larger volumes and improved efficiency, the company should have the potential to reach the profitability levels of Nordnet and Avanza.

In terms of profitability, Avanza and Nordnet are at 73–76% EBITDA margin. This suggests that FlatexDegiro could see further margin expansion as it continues to grow.

Compared to Avanza and Nordnet, the company has had similar growth over the past 5 years. However, the big difference lies in the last year, where FlatexDegiro has continued to grow over 20%, while Avanza and Nordnet have grown “only” around 10%. This particularly signals that Avanza’s growth runway may be nearing its end, while Nordnet still has some room to grow due to its presence in more markets. FlatexDegiro, on the other hand, has significantly more room for expansion.

Valuation: P/E of 11 Based on 2027 Guidance Despite Strong Upside in Profit Growth

The company is currently trading at a P/E of 22 (based on the last 12 months), which is in line with Avanza and Nordnet. However, in our view, there is a significant difference in the companies' respective potential for future earnings growth.

Avanza has already reached a very high market penetration in its only core market, and its profitability is near a logical peak at 73% EBITDA. Nordnet may have slightly more room for growth than Avanza, but it already operates at a high 76% EBITDA margin. FlatexDegiro, on the other hand, should be able to grow its revenues faster than its Swedish peers, and this growth is likely to continue for many years, thanks to low penetration in its key markets. Additionally, the company should be able to increase its profitability to around 60–65% EBITDA in the long term—slightly lower than its Nordic counterparts due to higher costs from operating in multiple markets. Despite the fact that FlatexDegiro appears to have a future of higher growth and margin expansion of up to 50%, it still trades at the same P/E multiple as both Avanza and Nordnet on a trailing 12-month basis.

The company has guided for 2027 revenues of EUR 650 million and net profit of EUR 200 million (representing a 31% profit margin). Given the company already has an active share buyback program, the number of outstanding shares should decrease slightly by then. We therefore estimate earnings per share of EUR 2.0 in 2027, which corresponds to a P/E of 11 based on today’s share price of EUR 22.

This implies substantial upside toward what we consider a reasonable valuation, which could very well be around P/E 20.

Conclusion

FlatexDegiro is a growth case with low valuation and significant potential in a fragmented European market. With a proven stable business model, low market penetration, and the ability to improve margins, the company resembles Avanza and Nordnet 10–15 years ago. However, successful navigation of competition is required to realize its growth potential. That said, we believe the upside clearly outweighs the risk in this case. FlatexDegiro currently represents 2.8% of the Quality Focus fund.

New Holding: Sdiptech

In February, we added a new serial acquirer to the portfolio: Sdiptech.

Long-Term Serial Acquirer, Primarily in Industrial Sectors

Sdiptech is a Swedish technology group and serial acquirer headquartered in Stockholm, specializing in technical services and products for critical infrastructure. The company began its acquisition journey in 2016 by acquiring low-profit service companies. The strategy later shifted towards acquiring highly profitable infrastructure-related product companies, akin to those targeted by other successful serial acquirers such as Lagercrantz and Indutrade—companies known for strong track records and high valuations.

Most of the group’s companies are market leaders in small niche markets. These niches tend to be stable, as their size is usually too small to attract new entrants. Like the most successful serial acquirers, Sdiptech’s subsidiaries are run in a decentralized fashion, without central interference.

Currently, 61% of revenue comes from proprietary products, 16% from installation, and the remaining 23% from service. Over time, the company has transitioned more toward proprietary products (only 32% in 2020, now 61%), which has strengthened profitability and created a moat against competitors. This transition is reflected in an EBITA margin improvement from 7% in 2018 to nearly 20% in 2024.

Sdiptech operates in several countries, including the UK (42%), Sweden (18%), USA (5%), and the rest of Europe (35%). In 2024, the company reached revenues of SEK 5.2 billion with an EBITA margin just under 20%.

The company is led by Bengt Lejdström, who has been part of the transformation since 2018, when the company began shifting from service- to product-focus. He became CEO in December 2023, following a period as CFO. Sdiptech lacks a clear anchor shareholder with a proven capital allocation track record—something that may explain the lower valuation compared to more popular serial acquirers on the stock market.

47 Subsidiaries Across Four Business Areas With Strong Historical Growth and Profitability

Sdiptech currently owns 47 companies, divided across four business areas:

• Supply Chain & Transformation: SEK 2.3 billion revenue, 18.7% EBITA margin

• Energy & Electrification: SEK 1.4 billion revenue, 21.1% EBITA margin

• Water & Bioeconomy: SEK 1.1 billion revenue, 23.8% EBITA margin

• Safety & Security: SEK 0.5 billion revenue, 25.8% EBITA margin

These segments offer solutions in water purification, energy supply, electrical automation, temporary power, and air and climate control.

The company has seen strong growth in recent years, driven mostly by acquisitions but also organically. Historically, organic earnings growth has been around 3–5%, and revenue growth around 4–6% annually. (Full historical data available below.)

Picture: Sdiptech, 2025

Strong Profitability Funds Acquisitions Alongside Debt (and Possibly Equity Issuance at Higher Valuation)

Sdiptech finances its expansion through a combination of cash flow, debt, and selective directed share issues. The EBITA margin is approximately 20%, and the return on equity (ROE) currently stands at 10–11%. Net debt/EBITDA excluding leases is 2.25, and including potential earn-outs (primarily for 2025–2026, but also extending through 2029), total leverage amounts to approximately 2.85. The company aims to acquire SEK 120–150 million in EBITA annually, which we consider slightly high given the already relatively elevated leverage. At that pace, there is a risk of a share issue, which we would prefer to avoid. We would rather see a target of approximately SEK 100 million in acquired EBITA—equivalent to 10% growth—which could be fully financed by internal cash flow. Still, we believe and hope that the company avoids issuing new shares at current valuation levels.

Attractive Valuation

Despite strong growth and profitability, the company’s valuation is significantly lower than that of comparable firms, which could suggest potential for future revaluation. Analyst estimates indicate that Sdiptech trades at just over 10x EBITA for the current year. Historically, the company has had a cash conversion rate of about 80% of EBITA, corresponding to a free cash flow (FCF) multiple of 12–13x. We consider Sdiptech to be very conservatively valued, both in absolute terms and relative to its highly valued peers (e.g., Lagercrantz is trading at a P/E of 43 this year, with several others in a similar range).

Strong Risk/Reward Profile for Our Long-Term Portfolio

The biggest risk lies in exposure to the cyclical industrial sector. However, the company has shown resilience by owning businesses with low economic sensitivity. Naturally, U.S. tariffs are an uncertainty that affects all industrial companies—either directly or indirectly. All things considered, Sdiptech offers strong growth potential, with a continued focus on value creation through strategic acquisitions and operational efficiency. We believe that the opportunities and attractive valuation outweigh the risks, and expect Sdiptech to be a strong long-term holding. Sdiptech currently accounts for 2.0% of the Kavaljer Quality Focus fund. The company is also held in Kavaljer’s other fund, Kavaljer Investmentbolagsfond.

Carasent: Excessive Concerns About VGR Customers Being Forced Into Millennium

On March 21, Carasent announced that the Administrative Court had rejected an appeal from its healthcare provider customers (i.e., Carasent’s clients, such as primary care centers) regarding being forced to adopt Millennium, a competing medical records system procured by the Västra Götaland Region (VGR). Currently, customers in VGR account for approximately 10% of Carasent’s revenue, and it is this revenue that is potentially at risk.

However, we believe the concern that customers will be forced to abandon Carasent for Millennium is exaggerated. There are several plausible scenarios where the customers remain—and Carasent’s addressable market could even expand as a result. These possibilities include:

• Carasent and its customers may win the appeal

• Millennium could be discontinued

• Millennium may not comply with GDPR when multiple care providers are integrated (especially if private providers are included)

• Carasent's customers could face bankruptcy under the current reimbursement structure if forced into Millennium, due to higher costs and a much less efficient workflow

• The Liberal Party in the Västra Götaland Region has proposed exempting primary care, including health centers, from the implementation of the Millennium system (source). If this proposal is adopted, Carasent’s addressable market in the region could expand even further

Given these factors, we do not believe customers will ultimately be forced into Millennium. As a result, we took the opportunity to increase our holding in Carasent after the stock price dipped. Carasent currently represents 3.0% of the Kavaljer Quality Focus fund.

New Wave: Strong Growth Prospects for Craft

Craft has set ambitious targets for 2030, aiming to double its revenue to SEK 4 billion while maintaining an EBIT margin of approximately 20%, in line with its parent company, New Wave Group. The growth strategy is based on a shift in business mix, with a focus on more profitable segments. Much of the forward-looking investment is concentrated on the Club segment and the footwear product category.

Club Segment: Key Driver of Growth and Scale

The Club segment is expected to grow from 25% to 35% of total sales, equivalent to over SEK 1.5 billion. In this segment, reliable delivery is crucial, as purchasing decisions are often made by coaches and parents. New Wave views its strong inventory and warehousing capabilities as a key competitive advantage in meeting these demands.

Footwear: Cornerstone for Geographic Expansion

Footwear is seen as a strategic category for geographic expansion. The goal is to increase its share from 5% to 15% of total revenue, equivalent to SEK 0.5 billion. Although the footwear market is one of the most challenging within the sports industry, Craft believes in the potential for growth through its “Road to Trail” concept. This approach builds brand recognition gradually, starting with basic products and moving toward technically advanced running shoes.

In conclusion, the strategy builds on growth in the Club segment, as well as expansion within the category shoes, to drive both growth and profitability.

New Wave constitute 4.1% of Kavaljer 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: 673 mkr SEK

Morningstar Rating: ⭐️⭐️⭐️⭐️

Nacka Strand, April 7, 2025

Peter Lindvall, Håkan Telander & Jesper von Koch

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