IVSBF - Investor AB - Remains One Of The Most Qualitative And Boring Investments In Scandinavia

2023-10-02 23:34:49 ET

Summary

• Investor AB is the largest Swedish position in my portfolio, representing over 4.5% of their investments.
• Investor AB is a well-known and recommended investment in Sweden, offering exposure to various sectors of the Swedish industry.
• The company has a strong track record of outperforming the stock market and offers diversification and stability to investors.

Dear readers/followers,

Investor AB ( IVSXF ) is a company that, technically speaking, is actually the largest Swedish position in my portfolio, making up over 4.5% of my private investment portfolio. It's probably one of the oldest positions I hold because it was one of the first things I ever invested in. It's a very typical "starter stock" in Sweden.

When someone new to investing asks "What should I invest in?", a standard answer from your wise investment sages is "Buy Investor".

The reasons for this advice are fairly obvious when you start to dig down into what makes Investor into Investor. I've written about the company before - one of the articles, the very first ones, was a "PRO"-article, and as such is probably not visible to all. But I've covered it a few times since, in articles like this.

However, the latest article was quite a while ago. So it's a good time for an update on this company, and to show you why this remains an investment favorite for many Swedes. However, in order to successfully invest in Investor AB, you really need to look at those valuations and not buy it when it's too expensive.

So let's see what we have here.

Investor AB - We have some upside, but not much

Investing in Investor AB is a fair proxy for investing in the Swedish state or Swedish industry itself.

Why is that?

Because Investor "are" a large part of the Swedish industry.

I ask you to look at the various companies and logos represented there, and you will find much of Swedish industrial cyclicals, the defense industry, banking, mining, and finance as well as healthcare. (Source: Investor AB 2Q23)

This is what is called the "Wallenberg Sphere", which contains most of the Wallenberg family assets. For over 100 years, the Wallenberg family has kept very strict reins on their investment vehicle, known as Investor AB, which is now split into the holding companies Investor and FAM, both traded under the publicly listed company " Investor AB ". Each of these holding companies is either managed by a Wallenberg or has board members who are Wallenberg.

Without applying hyperbole, I believe it fair to say that this is the Swedish equivalent of an oligarch family - not in the way that the businesses are run, but in the way that this power is built and exercised. The shareholder structure is extremely complex and ends with all stocks owned by a foundation, not a C-corp.

It's also not hyperbole to say that at the beginning of the century, this family and up until the 60's-90's have made Sweden into what it is today in terms of industry. The foundation and the companies manage and support science, education, basic research, and other projects which in the long term are beneficial to Sweden. In some ways, it's a very "patriotic" company.

As you may expect, investing in such a business comes with a number of caveats. For one, the dividend. It's never going to be "high". It was okay during ZIRP, but now it's less than a savings account. The current yield for investor AB is 2.1%. My own YoC is closer to 4%.

In essence, what you get when you buy Investor is nation-leading investments and companies within the following areas.

• Electronics Manufacturing
• Weapon Manufacturing
• Medicine/Bioscience & Healthcare
• Appliances
• Machinery
• Fintech-companies
• Finance/Banks
• Commodities (such as timber)
• High-tech/niche technical companies
• Smaller investments, through its investment arms EQT and Patricia industries.

As you see, it's a fairly broad coverage, and the current market cap is over 0.77T SEK or 773B SEK. (Source: Investor AB 2Q23)

Diversification is the main advantage of investing in investors. While you may be able to get higher yields in some, or many of the individual companies in the portfolio, you also get exposure to growth potential while being shielded from the worst downturns.

Investor, like most investment companies/conglomerates, care about their adjusted NAV and their relative performance to a number of comparative indices. Its main argument for shareholders is the comparative, total outperformance of investors relative to the stock market. (Source: Investor AB 2Q23)

The latest set of results we have is 2Q23m, and it saw, as always, a mixed performance with some things up, and some things down.

The more growth/investment-oriented Patricia Industries saw higher returns and better sales growth, with adjusted EBITDA up 34%, continuing to deliver excellent results.

Developments worth noting during the quarter include a record NAV, strong outperformance on a broad basis in the listed part of the companies, double-digit organic growth, and strong EPS/EBITDA growth in Patricia, and Investor working to "future-proof" its fundamental investments. (Source: Investor AB 2Q23)

Fundamentally, very little at all can impact Investor AB. Even a war would not, as I see it, de-rail this company. This is the recent set of NAV results, and the total return for the entire company during 2Q23 was a strong 9%.

Investor remains one of the best-rated companies on the entire Swedish stock market. We have AA-rating, which is very, very rare on the market, and in Europe when it comes to publicly listed companies. Part of this is because Investor AB makes so very little use of debt in its operations. The current leverage is less than 3%, and the company has an official target to keep it below 10%.

The outperformance Investor AB offers its investors is documented and safe over time. The company has a return requirement, and for the past 20+ years, it has achieved this. That means if you invest in the market, and only invest in Investor AB, you would have substantially outperformed the market.

Any such company that can offer this is worth considering.

At the same time, it's very important not to become complacent in any sort of investment. Past performance is no guarantee, or sometimes not even all that indicative of future performance. In this case, I do believe it to be very indicative of the future performance, but I do understand and want to state that large downturns do affect Investor AB as well. The one time not to invest in Investor AB would be when you're bearish on Sweden as a whole - and at this time, I believe there are justifiable reasons as to why you might be negative on Sweden as a whole.

Still, we have interesting recent trends to go by, and most of the companies Investor AB holds are so large and diversified that they have operations on a global basis.

The simple fact is that I like Investor AB because of its business strategy. Sweden has plenty of investment companies. Kinnevik, Industrivärden, Lundbergföretagen, and others. All of them have somewhat different targets, investment philosophies, and how they "work" the market. Most of them come with flaws that I find "not workable" for my own investment approach.

Investor AB is currently the only company that I believe practices holding and not selling good investments, instead managing them, and combining this with appealing shareholder returns. Many investment companies do the former, but then underpay their shareholders relative to what they would get if they simply bought the portfolio shares at market and provide no meaningful private market exposure. In that case, I don't believe there is a good argument for even investing in that company.

In this case, I view the company with the following upside when we come to valuation.

Investor AB - The valuation is high, but could go higher.

When it comes to evaluating Investor AB as an investment, the one metric I look at above all others when it comes to any investment company is its discount or premium relative to its current NAV. I've covered this when I look at companies like Prosus ( PROSY ) as well, because this is the one thing that really, in the end, matters to me.

The one tricky part about the company is the privately-listed companies. The rest of the NAV is fairly simple, just looking at what's being reported and divide it as to the percentages of the portfolio. The listed holdings make up 73.39% as of the latest filing (Source: Investor AB, Filing) with the rest being holdings by Patricia Industries. Based on these valuations, the NAV/share would be just south of 250 SEK/share. Given the current Price for the company on the market of around 210 SEK, this marks a discount to the NAV of around 15%.

This might sound excellent, but it's worth noting that the company typically trades at around 0.85-0.9x to NAV, so this is nothing strange. During the best times, this discount may narrow to 5-8%, but over the past 5 years, the company's NAV has never actually equated to or been the same or below the company's share price.

Because of how the company works, looking at P/E or even earnings are tricky. This is what things look like when we look at P/E valuations.

S&P Global targets come in at the following levels. Analysts start at 200 SEK for the company on a low-range target level, going up to around 245, with a current average of 230 SEK. So analysts follow NAV but consider a 5-10% discount to NAV acceptable for the company given its fundamentals - which is why over 70% of the analysts following the company have a "BUY" recommendation at this current price of 209 SEK for the B-share (Source: S&P Global).

Concluding my update here, risks for Investor AB are mainly very macro-focused. The company is too large for even one of its holdings to turn down, really impacting the overall business trends. Sweden's current situation given its leverage, real estate market, and the state of our currency is problematic - but foreign investors get a lot of bang for their buck given the current weakness of the currency.

Generally, I would say the potential for investing in Sweden is favorable if you're willing to take on the risk. However, with a PT of 210 SEK, this company is barely a "BUY" here, and perhaps only suitable for the most risk-averse investors.

The following is my thesis for the company. With regards to trimming my position, I would not be interested in doing so below 235-240 SEK.

Thesis

• Investor is one of the safest and "best" investments you can make in Sweden, provided that you get the company at a good valuation. The valuation is key here, and given the company's historical NAV discounts, it's not that difficult to see when you'd want to buy and when you'd want to stay away from buying more in the company.
• Investor AB is AA-rated and remains one of the best, in terms of fundamentals, businesses you could hold for the long term if yield is not at the top of your priority list.
• At this price of around 210 SEK, I would consider the company barely buyable based on a 15%+ NAV discount. That 15% NAV discount is what I want to see in the company if I am to invest in it. My PT for the company here is 210 SEK/share.
• For that reason, I consider the company a "BUY" here.

Remember, I'm all about:

1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them ( italicized ).

This company is overall qualitative. This company is fundamentally safe/conservative & well-run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside based on earnings growth or multiple expansion/reversion.

This means that the company fulfills every single one of my criteria, making it relatively clear why I view it as a "BUY" here.

Thank you for reading.

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