2023-11-21 13:40:29 ET
Summary
- NIBE has been an interesting company to watch decline over the past year. I've managed to write some attractive puts and buy-writes during that time.
- In this article, I go through the company's 3Q23 results and show you why I'm lowering my PT for NIBE.
- Despite this lower PT, I'm still considering the company a "BUY" here.
Dear readers/subscribers,
NIBE ( NDRBF ) ( NIABY ) has been a successful play for me this year, as I've mostly focused on selling puts and doing a single-covered call buy-write on the company at a very attractive price. My initial coverage from May this year came at a time when the company was trading very high. Since that time, the company has been down over 40%, confirming my neutral thesis and the estimate that the company was trading much too high/expensive at this particular time. While I may have been too early in my rating ch ange to "BUY" in August - which is confirmed by the fact that since my last article, which you can find here, the company has continued to decline faster than the market, this decline has been single digits.
However, as of this article, I will be lowering my price target for NIBE, and I have not added any new shares since the very recent 3Q.
Why?
I'll show you in this piece.
Remember though, I've been adding shares of both Tomra ( TMRAY ) and Orsted to my portfolio this year. And both of these companies were companies that I, in retrospect, added too early.
So while I do like NIBE's business, it's a question of how we want to value the company, and where I say that I'm now valuing it lower.
But first, 3Q23.
NIBE Industrier - 3Q23 was in accordance with expectations
NIBE is a great business. What else could you call a business that manages an over 20% sales increase in this environment? The company's 3Q23 sales, reported on November 15th , went up to almost 35B SEK from a YoY level of around 28B SEK. The same sort of increase was seen from profit - where profit after net financial amounted to almost 5B SEK, up from just south of 4B. Net profit came to over 3.8B SEK, with an EPS of 1.89, up from 1.48SEK.
Again, it was a good quarter, and one showing the normalization of the company's troubles in delivery times, which are finally normalizing.
Still, it does bear mentioning that the company saw significant large variances for the quarter - the company completed no less than 4 M&As to one degree or another during the quarter. 1 M&A at 100%, a Dutch heat pump and water heater manufacturer, and 3 M&A's with percentages of 65-83.2%, making all of them majority ownerships for the company going into 2024.
When it comes to understanding NIBE though, you have to understand that the company enjoys a net positive FX from the weak SEK. In real terms, the growth you see here might be closer to around 12-13%, with a 10% target in mind here.
Still, there continue to be absolutely massive variations between certain segments. The central bank in Sweden has yet to get a grip on inflation as we see in other NA or European economies. It's my personal view that we need a few more hikes of the policy rate to get this under control - and the rates are already today influencing new production of housing, which of course for NIBE has direct adverse effects.
We're overall seeing a muting of a very strong building and sales as well as renovation trend. The renovation is part of what's holding things up here, but what's really saving NIBE is its absolutely stellar market position. If it was a weaker player, it would probably be down significantly.
Another boon to the company was energy price spikes due to Russia. It increased the demand for more efficient climate solutions , which NIBE sells and refurbishes. Still, as prices normalized, we're seeing a slowdown in the European heat pump market. This wasn't just due to energy prices either, but due to reviews of various incentives that were in place in various European markets, but might not be around for much longer.
At the same time, it's become clear that most distributor inventories are far too large for the demand that's coming. Coupled with interest rates, we're seeing the tail end of a slowdown.
NIBE's assessment - and mine as well, provided we don't see many more issues on a macro level of more than 1-2 hikes, is that the market will see continued growth here on an annual basis because there are no realistic, efficient alternatives for climate control to that which NIBE and similar companies offer. (Source: NIBE 3Q23 )
There's a clear split in overall demand for NIBE products - because here in the north and in Sweden, people continue to heat with wood-fired alternatives. It's cheaper (usually) and it's also efficient, as well as providing "another" sort of indoor heat which (at least if you ask those with stoves) is more pleasant than what's provided by other alternatives. Put it simply, every house I own (not the condo) has a wood-fired heating solution. (Source: NIBE 3Q23)
At the same time, the NA market for these solutions is seeing significant declines. Even with supply chains for these segments and products normalized, we're likely to see a few years characterized by mixed sales development.
Here are some basic numbers for 3Q.
You could rightly ask why I am lowering my price target for NIBE just as the company is seeing more and more growth - but the answer to that question is in the fundamentals. While overall profit is up, we're seeing a slowdown in margins and overall growth. The profit margin has stalled at 14.2%, and I believe this will be going down , as the SEK normalizes, which by the way it has already started to do. Sales are also showing a slowdown if we look at the business area split, with operating profit on a per-business area segment. (Source: NIBE 3Q23)
All that being said though, I will continue to state with clarity that this company offers a convincing business, and streamlined business model, with industrial COGS of Sub-70% and industrial SG&A of below 20%. No matter where you look in the world, if you're talking billions in revenues if you're talking a manufacturing business, those are numbers indicative of a very good business model. (Source: GuruFocus)
However, we've seen before, and I've seen with my own eyes , that superb business models, no matter how good and resilient they may be, are no longer a justification for a massive premium.
This makes me happy that literally all I have when it comes to NIBE currently is an exposed buy-write from a CC, and that at a very attractive price until March of 2024. I do not have any common share exposures to the company - as of yet.
The time might be ripe to consider this as the company continues to trade at multi-year lows. Even the 3Q23 results failed to significantly move the needle for this company's share price. (Source: NIBE 3Q23, GuruFocus)
However, in this market, I am extremely careful about any investment that demands a high premium coupled with a very low yield (sub-1% in this case) and with growth estimates and valuation trends that are based on historical rather than forward-looking realistic potentials.
NIBE is expected to increase earnings - by quite a bit this year, but only single digits next year - still double digits on average is likely for this player. At one time, this was definitely enough to warrant a 30-35x P/E for this company. I even argued at one time that over-time trends of 30x+ were justified here.
No longer.
Let's look at my updated valuation for NIBE.
NIBE - Plenty to like here, but I'm lowering my PT
When I last wrote about NIBE, my PT for the company was 92 SEK/Share. I'm now lowering this to 84 SEK/share due to significant interest rate pressures. I continue to view the company as being worth a premium , but only one of a 2025E 25-27x P/E, not one close to 30x any longer.
That 2025E 25-27x P/E starts at around 80 SEK and ends up at around 85 SEK, so slightly below that at 84 SEK is where I am now saying the company is worth. This is just about 15% per year , which justifies my continued "BUY" stance on this company.
However, I want to clarify that my own investments into the company have been made at lower levels than 84 SEK on the selling side - my buy-writes are "secured" at a lower level than that, and if I were to get to hold my shares at the strike, I would have an upside of 20% per year to 26x P/E. That's good enough for me.
Because this company is one of the most qualitative businesses in Sweden. Less than 17% long-term debt to capital and a market leader. It has typically warranted a premium of 35-40x P/E, but I no longer believe such valuations to be possible for any companies perhaps except truly unique luxury goods companies like LVMH ( LVMUY ).
Other analysts have changed their tune on NIBE as well - and that very quickly. At one point, this company was estimated to be worth upwards of 200 SEK/share. We're now down to a range of 50 SEK to 120 SEK, with an average of 86 SEK. At the current price, 6 out of 10 analysts are at a "BUY", which is of course an improvement, but I still want to tell you that there are many companies on sale in this market , and most of the ones I write about have at least higher dividend yields than this one - if not the same quality to their operations or balance sheets. (Source: TIKR.com/S&P Global)
I asked in my last article on NIBE if this company is now "cheap enough"?
As of this particular article, I would say we're probably cheap enough here, but we're also in a market where quality companies are being thrown around like skittles at year-low valuations due to the overall macro and the potential of a looming recession in 2024-2025E.
What i will be monitoring going forward is how the company's valuation holds up in the face of continued inflationary and other headwinds. Also, FX. The company has been enjoying positive FX for over a year - and just over the last few days, the USD/SEK pairing has materially declined from a 10.90 to less than 10.40 at this point. Such movements are likely to impact results. I will also be monitoring sales mix and margins to see how they hold up. I believe this will be the primary indicator of how we see this company trading in the next year and more.
Because of this, I would say that do not go overboard into anything - that has been my strategy for this year - and while I've made mistakes, I've also stayed relatively safe and added to my income stream in a very significant and real way.
The following is my updated thesis for NIBE.
Thesis
- NIBE Industrier is one of the best industries with a climate focus in all of Scandinavia. It's a high growth, high safety, and low yield, a combination I have become more interested in over the past few years. However, the company is trading at one of the highest valuations we've ever seen barring exuberance, and this makes it a tough sell for me.
- I would say that NIBE needs to fall to clear double digits - preferably below 88 SEK, but at the very least to 84 SEK before I would be willing to expose capital here. I have written options on a continued basis here, trying to "catch" the company at a good price, but so far all I have gotten is a few very nice premiums.
- I am at a "BUY" here - and my PT is 84 SEK/share as of the latest quarterly results, which marks a target update.
- Despite the company being cheap, I'm not in a hurry to "BUY" here - there are so many attractive potentials out there.
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.
The company fulfills every one of my criteria except being cheap, and should it fall below 63 SEK, I would be prepared to call the share "cheap" here.
For further details see:
NIBE Industrier: Continued Upside Going Into Q3 And Beyond