Kavaljer Quality Focus

Maj 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.

Focus on Companies Despite Macro Swings Making It Hard to Stay Focused
May developed positively, and the Stockholm Stock Exchange (OMXSPI-GI) rose by 2.4%, while the Dow Jones World Index rose by 5.5%.

Focus on What Really Matters

The stock market remained heavily influenced by tariff headlines, where the U.S. president would raise the rhetoric one day only to lower it the next. The term TACO (Trump Always Chickens Out) was coined as a trading strategy—buying the dip each time Trump raises the tone, assuming he will most likely backtrack on his statement anyway. In times like these, it’s very easy to become fixated on macro events. As the above example shows, macro focus often leads to the creation of new macro-related trading strategies. One starts to think about how to “outsmart” the market and time opportunistic buys and sells. Our view is that it’s very easy to get this wrong, and then you have to “catch up” by buying back in after a failed trade. Since the media is driven by clickbait headlines, the effect is that both headlines and content become overly dramatic.

This creates an irrational impulse to act. We aim to completely resist this impulse. When things feel most difficult and the urge to sell is strongest, that’s often the absolute worst time to act—something clearly illustrated by the image below:

When stuck in macro thinking, it's easy to forget what investing in quality companies is actually about—co-ownership in businesses that earn money day in and day out. Moreover, these are companies that, for one reason or another, have historically been skilled at navigating tough macro environments. As fund managers, we also shouldn’t underestimate the impulse to appear as experts on everything related to the stock market—even though it’s been shown time and again that a focus on predicting macro events does not lead to outperformance. What we do in situations like this is what we always do: we assess how our holdings might be affected by broader macro concerns, estimate normalized earnings for our holdings and what we believe they should be worth—and allocate accordingly. Our hunt for quality companies continues, especially opportunities to buy them at attractive prices.

Fund performance

Kavaljer Quality Focus increased by 2.9% in May. The corresponding figures for OMXSPI-GI were +2.4%, the small-cap index (Carnegie Small Cap Return Index) +3.3%, and the Dow Jones World Index +5.5%. The fund’s return over the past 5 years amounts to 134%, compared to 84% for the Stockholm Stock Exchange (OMXSPI-GI) and 70% for the small-cap index.

The largest positive contribution among the fund’s holdings during the month came from Pandora, Ratos and Protector Forsikring with +0.8, +0.8 and +0.4 percentage points, respectively. The largest negative contribution among the fund’s holdings during the month came from RevolutionRace, ITAB and Securitas with -0.5, -0.4 and -0.3 percentage points, respectively.

Portfolio changes

During the month, the fund sold its holdings in Bahnhof, Scandic Hotels, Fagerhult, Husqvarna, and Munters, and reduced its positions in Alleima and Valmet. During the month, the fund acquired three new holdings: Catella, Huhtamäki, and VBG. In addition, we increased our positions in Nilörngruppen, Pandora, Svedbergs, Thule, FlatexDegiro, Storytel, and Securitas. Our holding in Bravida remained essentially unchanged, although we initially sold part of the position at high levels (around SEK 95), which we then bought back after the stock fell to SEK 82 following news that we believe the market overreacted to.

Later in the letter, we provide an in-depth review of our thoughts on Catella and Nilörngruppen—both entirely or relatively new holdings. We also explain why we sold Bahnhof after having held the stock since the inception of the fund. May also brought dividend payouts for many of our holdings, which is why we include a section on the power of dividends.

The equity allocation was 97.5%.

Catella: A Misunderstood Company with an Attractive “Golden Egg” Now Emerging as the Clear Core

A new holding in the fund is Catella – a European asset manager specializing in real estate. In our view, this is a quality company that has undergone years of strategic streamlining, with the final key piece falling into place in early May. At first glance, the company appears complex and still cannot be discovered via standard screening tools such as Börsdata. The stock has long been considered a value case based on the “sum-of-the-parts” (SOTP) approach—valuing each part of the company separately, adding net debt, and comparing the result to the market value. We believe a sensible investment rule is to avoid SOTP cases until the core of the business becomes clearly visible. We believe the May trigger fulfills that criterion, which is why we chose to buy shares in Catella. In short, this is a company with a high share of recurring revenues and a scalable business model that has grown by 18% per year over the past 9 years. We estimate normalized EBIT for this part to be around SEK 300 million, potentially up to SEK 500 million in strong years. In addition to this, the company holds net assets of SEK 1.7 billion. The current market valuation of just under SEK 3 billion implies that the scalable, recurring-revenue business with strong growth history is valued at SEK 1.2 billion—or 4x normalized EBIT. Some of these net assets are currently locked, but the valuation highlights how undervalued the company is as it begins to unlock these values.

Company History and Evolution

Origins and Early Operations

Founded in Sweden in the early 1980s, Catella started as a financial advisory firm. Over the 1990s and 2000s, it grew into a diversified financial group with activities such as:

• Corporate Finance and M&A advisory

• Asset Management

• Banking (e.g., through Catella Bank in Luxembourg)

• Proprietary trading

• Real estate advisory
  

This created a fragmented structure with geographically and operationally diverse activities.

Strategic Streamlining: From Conglomerate to Focused Real Estate Platform

Phase 1 – Divestments and Restructuring (2014–2018):

• Began winding down banking operations due to capital inefficiencies and regulatory burden

• Divested or shut down non-core activities

• Refocused on real estate advisory and asset management

Phase 2 – Strategic Real Estate Focus (2019–2022):

• Clear shift toward becoming a pan-European real estate investment manager

• Focused on launching and managing property funds and mandates

• Emphasis on logistics, residential, and office properties—often with a sustainability focus

Phase 3 – Capital Partnerships and Investment Platform (2022–)

• Structures investments with external capital partners (institutions, family offices, etc.)

• Co-invests selectively to align interests

• Core strategy is to act as an investment manager, not a property owner

Catella Today: A Specialized Real Estate Platform

• A European real estate-focused asset manager with offices in ~10 countries

• Operates funds, mandates, and joint ventures

• Primarily manages external capital, with some co-investment

• Focus on residential, logistics, and urban development projects

Key Trigger: “Kaktus” Project Divestment Reveals the Core

On May 1, Catella announced the sale of the Kaktus real estate project for SEK 2.1 billion, turning 2/3 of Catella’s market cap from a “high-risk mega project” into cash. The sale yielded a SEK 260 million profit, or 10% of the market cap. More importantly, the deal made Catella's balance sheet easier to understand:

• Previously appeared overleveraged, masking a net cash position

• Interest expenses from Kaktus’ debt were absorbing nearly all EBIT

• Core business is a scalable platform with 18% CAGR and sticky, recurring revenues

Even in a weak real estate market, this core has delivered 12% EBIT, compared to 33% at peak (2021–2022). A normalized level is estimated at 23% EBIT margin and SEK 300 million EBIT.

Business Segments: Focus on Investment Management

Catella operates in three segments:

1. Investment Management (IM)

2. Corporate Finance (CF)

3. Principal Investments

Investment Management: Scalable and Recurring

IM has seen 18% AUM growth annually since 2015.

Comprises two areas: 1) Property Funds: earn via rental income and property appreciation, and 2) Property Asset Management: PE-style mandates with multi-year lock-in.

• High “stickiness” due to long contract terms (2–10 years) and penalties for early exits

• Several funds among top-ranked German property funds

Revenue Structure:

1. Fixed fees: ~0.6% of AUM
   

2. Transaction fees: ~0.1–0.3% of AUM

   
   

3. Performance fees: ~0–0.17% of AUM (require “high watermark” returns)

Current AUM revenue yield is 0.68% (2024), with potential to rise to 0.80–0.85% as the market recovers:

Data: Redeye

Normalized margins: EBIT of 22–25% is achievable; peak of 33% already proven. Cost base has been reduced since 2021–2022, increasing scalability.

As the real estate market recovers, transaction revenues are expected to increase immediately. After European transaction volumes dropped to financial crisis levels, Q4 2024 indicated that the transaction market has bottomed out. However, volumes are still far from “normal” levels. See below:

Nevertheless, the funds use a so-called “high watermark principle,” which means that no performance fee is collected until returns reach a new all-time high. Therefore, we believe that performance fees are unlikely before 2027, but transaction fees could help increase revenue generation to 0.80–0.85% of AUM, up from the current level of approximately 0.68% (full-year 2024).

Scalable Business Model with a Normalized ~22–25% EBIT Margin

The business model is scalable, and EBIT margins above 20% should be achievable consistently in a normalized market. In a strong market, the company has already demonstrated an EBIT margin of 33% on a full-year basis, even while operating “sub-scale,” in our opinion. Continued solid growth should lead to strong profit growth as the market recovers.

Data: Redeye

Over the past two years, IM has made several cuts to central functions, resulting in a leaner organization than in 2021–2022. This points to even greater scalability in profitability when the market turns upward.

A large part of Catella’s path to improved profitability lies in its scalable platform, meaning it can take in more assets under management (AUM) without expanding the organization. Fixed costs decreased between 2023 and 2024, while AUM actually increased. This highlights the scalability of the model, and we believe this will become more apparent as the market recovers in the coming years. This forms the basis for improving IM’s minimum profitability. See below for the development of AUM per employee:

Källa: Redeye

In summary, we believe that IM is the true core of Catella and should remain the primary focus. We estimate normalized revenues at present to be around SEK 1.25 billion, with an EBIT margin of approximately 23%, resulting in EBIT of just under SEK 300 million. A clear sign of quality is the company’s ability to maintain stable AUM even during a very weak real estate market. We believe IM can return to healthy growth of around 10% per year, with expanding margins. Given the underlying quality of IM, we consider 15x EBIT to be a reasonable multiple, corresponding to a valuation of SEK 4.5 billion.

Corporate Finance

Corporate Finance (CF) has previously been described by the company as the backbone of Catella. CF involves acting as a strategic advisor in major real estate transactions. Catella can operate on both the sell-side and buy-side, meaning they support both sellers looking to divest and buyers interested in acquiring properties.

The foundation for CF’s success lies in its strong reputation and extensive network among market participants. This means that 1) many know who Catella is, and 2) they recognize Catella's expertise in real estate transactions.

This division is expected to generate approximately SEK 40–50 million in annual EBIT over a full cycle. That is roughly in line with group-wide overhead costs, which is why we consider CF to offset those costs when valuing Catella as a whole. While some synergies exist between CF and IM, we believe CF contributes to the perception of Catella as scattered, which may lead many investors to dismiss the company. Therefore, we believe selling CF would be positive for the stock.

Principal Investments: Real Estate Projects on Catella’s Own Balance Sheet

This segment involves real estate development where Catella itself bears the risk/reward—unlike PF and AM, where risk/reward lies with the client. As of Q4 2024, Catella had nearly SEK 1.5 billion of equity invested, with 49% allocated to the Danish project Kaktus.

After the divestment, approximately SEK 800 million remains invested, spread across seven major projects, each involving SEK 50–200 million. These are valued at cost, despite likely having appreciated in value since initiation.

Going forward, Catella’s strategy is to only undertake co-investments—projects mainly run for clients (as in Asset Management), where Catella invests a small portion of the capital. The aim is to move from a few large projects to many smaller ones, thereby reducing individual project risk and shifting investor attention back to IM..

The Kaktus Divestment: Simpler Balance Sheet and Improved Net Finance

One reason we believe Catella has been undervalued is its difficult-to-read balance sheet. In short, the company appeared to have substantial net debt, when in fact, net cash position (liquid assets minus liabilities) stood at around SEK 1.7 billion. The outstanding bond is split in two: one half matures in fall 2026, the other in spring 2027. Unless repaid early, the company will incur unnecessary interest costs for some time. Assuming no new mega projects are initiated, this will make it much easier for investors to assess how cheap Catella really is.

See below from the Q1 2025 report for an illustration of the post-Kaktus divestment situation:

Provided that no new mega projects are initiated, this should make it easier for investors to see how undervalued Catella is.

Main Owner: Johan Claesson

Johan Claesson, via CA Fastigheter, owns just over 49% of capital and voting rights in Catella. His daughter, Pernilla, owns just over 0.7%, making the Claesson family the majority owner.

Claesson first acquired 27% of Catella in 2008, increased to 39% in 2010, 47% in 2011, and continued small additions up to the current level in 2016.

At 74 years old, Claesson may be looking to scale down his involvement. He is known to be highly hands-on with everything he owns, including Catella, where he was Chairman until spring 2024. There’s speculation about a potential sale, though we believe he may wait for an improved property market and stronger earnings before considering such a move. Regardless, Claesson will determine the future path for Catella, including the use of proceeds from the Kaktus sale.

Full Acquisition a Possibility

Beyond Claesson potentially being open to a sale in the coming years, many credible buyers exist. The private equity (PE) industry is consolidating, with many major players acquiring real estate firms—e.g., EQT’s acquisition of Exeter in 2021. Catella would be a prime target for a mid-sized U.S. firm lacking a European platform, or a European public/buyout firm wanting to enter real estate.

Consolidation is driven by economies of scale and cross-selling opportunities with existing investors.

Capital Allocation – The Million Dollar Question

Following the Kaktus sale and its debt repayment, Catella now has more than SEK 1.7 billion in cash. Bond repayments of around SEK 650 million are due in fall 2026 and spring 2027, leaving at least SEK 400 million in surplus liquidity—not counting potential additional project exits.

Key options:

• Special dividend

• Share buybacks

• Co-investments

• Acquisitions within IM

  
  

Special dividend: SEK 400 million corresponds to just over SEK 4 per share. The fact that Claesson may want to partially exit Catella suggests that part of the surplus liquidity could be used for this. It also makes sense if the intention is to eventually sell the entire company. Regarding the ability to pay a dividend, the company has two conditions tied to its bonds. One is that at least SEK 200 million must be held in liquid assets, which is covered through an unused credit facility of the same amount. The other is that the company must maintain equity exceeding SEK 1 billion, which is already comfortably met.

Share buybacks: The stock is cheap relative to its underlying value, which the board is well aware of. Many larger shareholders have been pushing for this option for some time. The obstacle is that Claesson (via CA Fastigheter) would then surpass 50% of the outstanding shares, which would require Catella to be consolidated into CA Fastigheter’s financial statements. Therefore, Claesson would likely need to sell a corresponding portion of his stake if buybacks are to proceed.

Co-investments: The stated strategy for Principal Investments is to carry out multiple co-investments while simultaneously increasing AUM. However, they are unlikely to rush into so many projects that it would consume all liquidity. The maximum investment from Catella is EUR 15 million per project, typically representing at least 5% of the total capital invested in the asset.

Acquisitions within IM: Detta har tidigare gjorts och är även sannolikt framgent. IM är idag starkt positionerade mot det segment som kallas ”Core residential”, dvs investering i stabila bostadsfastigheter i attraktiva lägen med långa uthyrningar, låg vakans och förutsägbart kassaflöde. Fokus ligger på stabilitet snarare än maximal avkastning. Då denna typ har ett typisk avkastningsmål på 4-6 eller 4-7% så är denna typ mycket attraktiv i en lågräntemiljö, men mindre attraktiv när räntor blivit högre. Detta gör att IM sannolikt inte kan växa lika starkt som historiskt i dagens räntemiljö.

Instead, Catella wants to focus on “value add” and “opportunistic” strategies. A value add strategy involves investing in properties with potential for improvement, often through active management, renovation, or tenant restructuring. An opportunistic strategy involves taking on high-risk, high-return properties—typically through development projects, conversions, or turnarounds.

Since “value add” and “opportunistic” strategies aim for higher returns, they are better suited for high interest rate environments. Therefore, we believe that one or more acquisitions may fall into one of these categories—or both. This strategy could also potentially command a higher fee structure compared to existing funds.

Summary and Outlook

In summary, Investment Management (IM) is the true golden egg within Catella, and we hope this is where the company will increasingly focus now that the Kaktus project has been sold. Even though we don’t assume or expect it, it would likely be positive for the share price if the Corporate Finance division were also divested. That way, the full focus would shift to IM, which should be able to grow AUM by 5% over the next two years, and then return to 10% annual growth with scalable profitability.

We are also hoping for both a special dividend and share buybacks.

Finally, the company rests on a foundation of approximately SEK 19 per share in net assets. In addition, Investment Management is expected to generate normalized EBIT of at least SEK 300 million (SEK 3.4 per share), meaning the market is currently valuing this part at around 4x EBIT, while we believe a multiple of 13–18x EBIT would be more reasonable.

We believe Catella is a case that aligns well with what Monish Pabrai so wisely expressed: “If we as investors fixate and overdose on downside protection, the upside, in many cases, takes care of itself.”.

Catella represents 2.4% of Quality Focus..

Nilörngruppen – Cheap, Steadily Growing Cash Flow Machine

Nilörngruppen is an international company founded in the 1970s with expertise in adding value to brands through branding in the form of labels, packaging, and accessories—primarily for clients in the fashion and apparel industry. The company offers complete, creative, and customized concepts in branding, design, product development, and logistics solutions. Nilörn has over 1,000 clients, including Lyle & Scott, Fred Perry, and Polarn o. Pyret. It delivers more than 1.5 billion labels annually and has built a strong market position in Europe and Asia through acquisitions and efficiency improvements. With factories in low-cost countries and a focus on design and branding, Nilörn has optimized its profitability, historically maintaining an operating margin of 10–11% and annual growth of 6–7%.

The company is often viewed as "just a label producer," leading many to place it in the “too boring” category. While labels still make up over 40% of revenues (and are not growing significantly), other segments are expanding rapidly: Packaging products (19% of revenues) benefit from the rise in e-commerce. Digital services (30% of revenues) allow labels to act as data aggregators. As product traceability becomes more important, this area benefits from strong structural tailwinds.

Geographic Presence

Nilörn operates through subsidiaries in Sweden, Denmark, the UK, Germany, Belgium, Portugal, Hong Kong, India, Turkey, China, Bangladesh, Italy, Pakistan, Switzerland, Vietnam, and the U.S. Operations were recently established in Vietnam, and a new office is planned in Sri Lanka.

Intäktsfördelningen, vilket speglar varifrån produkterna producerats, är enligt följande:

Business Segments

• Labels (43%) – Includes woven labels, printed fabric labels, hang tags, and fringed labels. High margin, low growth.

• Retail Information Service (RIS, 30%) – Focuses on digitalizing brand and product information. High-growth segment.

• Nilörn:Connect – A digital concept based on QR codes for consumer engagement and EU-compliant product traceability. Expected to grow as EU Digital Product Passport regulations take effect in 2026.

• Packaging (19%) – Premium packaging for retail. Strong growth outlook.

• Accessories and Other (8%)

Market and Strategy

Both the global and European markets for branding and design are growing. Brand owners are increasing their investments in initiatives that strengthen their brands, where labels, packaging, and accessories are important elements.

The company is focusing on growth in new markets such as the USA and Vietnam, while also planning to expand production capacity through a new factory in Bangladesh and an upgrade of the facility in Portugal.

The growth target is 7% per year, with an operating margin exceeding 10% and net debt not exceeding 2 times EBITDA. Over the past five years, annual growth has averaged 7%, and the operating margin has been 11%. Regarding net debt, the company has never come close to its limit—and currently holds a net cash position.

Limited Impact from U.S. Tariffs

Nilörn is minimally affected by the April-announced U.S. tariffs as it has no direct U.S. sales. Impacts are indirect—via clients exporting to the U.S. The risk of losing clients with U.S. exposure is low, and client relationships are long-term. Domestic competitors are lacking, and Nilörn sees no reason for concern but is monitoring developments.

The broader economic climate, not tariffs, poses a bigger risk.

Strong and Stable Financial History

Nilörn has a stable and profitable business model. From 2011 to 2019, the company consistently maintained an EBIT margin of 9–13% along with very steady growth. However, if one only looks at the past five years, we believe investors may get a misleading impression of the company’s stability. The explanation for the recent earnings volatility is as follows:

• 2020: The pandemic hit hard → EBIT 8%

• 2021–2022: Inventory buildup and high demand → EBIT 14–15%

• 2023: Inventory reduction and weak economy → EBIT 7.2%

• 2024: Recession weighs on performance, but recovery visible in some segments → EBIT 9.2%

Historically Low Valuation

Nilörn is currently trading at a trailing 12-month P/E ratio of 12, which is historically low. What’s more notable is that profitability is temporarily depressed, meaning the company is underlyingly cheaper than it has ever been (except during near-bankruptcy levels in the midst of the pandemic crash). This is most clearly illustrated by looking at the EV/Sales ratio, which is historically low at just over 0.7x, compared to a historical average of nearly 1.1x.

In the event of a normalization in profitability—which we believe is highly likely—the valuation would look as follows:

• Normalized EBIT margin of 11% → Earnings per share (EPS) of approximately SEK 7

• EV/EBIT on normalized earnings: 6x, compared to a historical average of 10x

• P/E ratio of 9 on normalized earnings, versus a historical average of 14

In 2025, it was decided to distribute only a small portion of the profit in order to finance growth-oriented factory investments in Portugal and Bangladesh. We believe that the dividend will return to historical levels of 60–90% of earnings as early as next year, which should correspond to approximately SEK 5 per share and a dividend yield of 8.5% at the current share price of around SEK 60. This is expected to be a key trigger for the stock in connection with the Q4 2025 report.

Acquisition Potential

Due to increasing regulatory demands—particularly in sustainability reporting—the industry is facing relatively high overhead costs. This makes it difficult for smaller companies to remain profitable, which in turn is driving ongoing market consolidation. As a result, small players are being acquired by larger ones. While Nilörn is not among the very smallest, it falls into the mid-sized category. There is therefore a clear opportunity for Nilörn to participate in market consolidation itself, but also a distinct possibility that it could be acquired by a larger competitor.

High Quality at Historically Low Valuation Provides Significant Margin of Safety

Given that Nilörn is currently trading at an all-time-low valuation relative to its revenues, this should imply one of two things:

1. That growth prospects are worse than ever

2. That profitability has structurally and permanently deteriorated

However, we believe the opposite is true—both in terms of organic growth and growth through acquisitions, supported by the company’s net cash position. Organic growth is expected to come from the Packaging segment, and particularly from RIS (Retail Information Services), which is the company's fastest-growing division and now accounts for a significant 30% of total revenues. Growth from this segment will have a noticeable impact on overall performance. As for profitability, while the company has seen weaker earnings in the past two years (7–8% EBIT margin vs. a historical average of 11%), we believe this is due to well-founded, temporary factors. The rolling twelve-month EBIT has also been impacted by one-off costs (a cyberattack and currency losses) totaling SEK 7.4 million, which corresponds to almost one full percentage point of annual margin. Moreover, company management is confident in achieving EBIT margins above 10% again already this year.

In summary, Nilörn is a high-quality, stable, and well-managed company. The current valuation is at an all-time low, which we consider unjustified given the company’s outlook. As a potential bonus, the possibility of the company being acquired at a decent premium remains on the table.

Nilörn accounts for 2.7% of the Quality Focus fund.

Kavaljer Quality Focus compared to 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: 731 mkr SEK

Morningstar Rating: ⭐️⭐️⭐️⭐️

“The greatest challenge in our world today is not access to information, but knowing what to ignore.”

Yuval Noah Harari

Nacka Strand, June 10, 2025
Peter Lindvall, Håkan Telander & Jesper von Koch

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