NIBE: I like what I see below SEK 50 (OTCMKTS:NDRBF)

Dear readers/users,

I was cautiously optimistic about the decline in NIBE’s ( OTCPK:NDRBF ) share price. Since I slowly started allocating to this company, I’ve seen a decline of about 24%, with a 7% decline since then. my last article. The correct and precise valuation direction in which this company becomes investable without risking a loss is, as I see it, almost impossible. I think the company’s unsustainably high valuation has come to an end. By unsustainably high, I mean the company has seen peak normalization levels P/E of 80-83x.

This somewhat surprises me as a value investor. I “knew” things would go down sooner or later, but I honestly underestimated how long it would take. It happened between 2022 and 2023 and we are still in the wake of this, although we are now seeing more recovery than decline.

Take a look at this 9-10 year trend.

This tells you several things pretty quickly. First, invest in a company with a significant premium – look at how much it’s earning alongside how much it’s trading. Second, overvaluation has been around for a long time – but also that we see normalized P/E levels well below those premium levels, implying that this is some sort of temporary trend. And third, if you’re paying attention, this company is no stranger to dividend cuts. The company has cut its dividend in the past, and current estimates for the full year, as you can see, come in at an adjusted EPS decline of more than 60% and a dividend expected to be cut by more than 50%.

Is this likely?

I’d say yes, and in this article, I’ll show you why I still consider the company investable despite that fact.

NIBE Industrier – Lots to like, but we want that good rating (and good fundamentals)

Good fundamentals are something that NIBE definitely has. The company’s leverage is 36% long-term debt/cap, and while it doesn’t have an S&P global credit rating, the company is conservative enough that I don’t think it needs one. At this point, it is very clear to me that the company faces a fiscal year 2024 that will see a deep decline in most financial KPIs. And from 1H24 and 2Q24, we are already seeing the beginning and middle of this trend. In Interim 2, the company’s sales fell by SEK 4 billion, which represents a sales decline of more than 16%, while (adjusted) operating profit fell by more than half. The company’s post-net financials are the most sobering, as they’re just 20% of what they were YoY – that’s down more than 70% over the same period, and adjusted profit after tax is down as well. Adjusted EPS for items affecting comps also fell to the same/like amount and is only about 20% of what it was.

The company says an “action plan” is now underway – but what is the reason for this development?

As we’ve suggested in previous articles, and as the company has confirmed, we’re talking about continued high interest rates, destocking in the distribution and storage chain, and a close correlation with the overall housing market, which is currently very weak. .

But this has been underway for some time now – so the company is starting to see improvements on the horizon. Distributors are taking steps to reduce stock, particularly for products such as heat pumps and stoves – but that also means current sales trends will remain weak. Stock adjustments are expected over the next few months, which have now been underway for 9 months. NIBE expects the company’s sales to start growing again later this year, with Germany being the exception and needing more time to recover.

The company’s business remains cyclical. Part of its effort to diversify its mix was to address this cyclicality, but at the end of the day you can’t escape the fact that we’re talking about a business with strong ties to housing.

The company’s current view is that production-level demand has now bottomed out and will start to improve in the second half – or, in this case, has already started to improve.

The company’s action plan to address this year’s shortfalls involves annual savings of SEK 750 million going forward – albeit at a cost of just SEK 1 billion.

The climate solutions segment is leading the way here – and the US heat pump market remains a beacon of light in an otherwise dismal market and trend of dismal company results. Climate Solutions has largely completed its investment program.

All in all, we have an overview of the company that looks like this.

It is fair to say here that the trend the company is showing us is quite astounding. The decline we see here is significant in a way that NIBE has not seen in over a decade. The company mix doesn’t help here, which it would if they were more US-targeted. It’s also fair to say that every financial KPI is worse now than before.

But it’s equally fair to say that there are very clear and understandable reasons for this development – reasons we’ve covered before. It is also very clear to me that eventually these trends will reverse and NIBE will be one of the major players and will be back in this field at that time. The company also remains an innovator in adjacent product groups such as its stoves. The company recently launched products that reduce particulate emissions to near zero.

So I remain convinced that, fundamentally speaking, this is a very attractive company with an upside. I’m also willing to give the company a decent market share premium – although this has become almost an exercise in what can happen if you invest in a company at too high a valuation. The rating “had” to go down and it did. Anyone with even a little knowledge of how valuation “should” work (although there are no “rules”, just guesswork) could see that this long-term trend makes very little sense and you would have been better off selling the company’s stock to the max – although I don’t know how many made it in time.

Valuation for NIBE – company upside depends on recovery but see 10-16% potential at decent conservative multiples

In my last article, I gave the company a PT of around SEK 80/share as of the last quarter. The company currently underperforms this PT by more than SEK 30 for the native shares. However, the company also remains one of the best climate-focused industries in all of Scandinavia and, I would say, Europe.

This is worth a decent amount of premium on its own, in my opinion. As I said in my previous article, I was in no rush to “Buy” more at that particular time.

It is possible that the company will become attractive in the future. In my last article, I lowered my PT from 84 to 80 SEK to reflect the longer recovery period we have here. Finally, we see a significant normalization of price targets for NIBE here. The discount was from 127 SEK on average about a year ago to less than 60 SEK. The low-end target is now SEK 29 per share, which is down from the low-end target of SEK 99 about a year ago, with targets raised from SEK 170 to SEK 120. Target descent is much slower – and I think we’ve leveled off here. There could technically be a PT adjustment, but I think right now the market is actually underestimating what the company is capable of.

Based on an estimate of the company trading at around 28-32x earnings, which I think the company is capable of in a positive scenario, I say the company is worth at least SEK 75-80 per share, on 14-20% upside annualized at this time. As I said earlier in my last article, NIBE needed to fall in order to generate double digit returns. We now have such a drop in valuation and now we can see that double digit growth.

Because of this, I am now willing to fully add more to my overall stake. For those of you who doubt the company’s ability to generate above what is forecast here, the company has a 25-33% trend over 20 years to beat estimates with a margin of error of 10-20% .

So I’d say the potential for a good long-term RoR is probably here, and for that reason I’m adding more – in fact, I’m increasing the overall pace of my investment here and I’ll be adding more in the morning. (as the company recently fell below SEK 50).

ADR is NDRBF ADR. This is a 1:1 ADR and PT here is around $7.75.

My September 2024 thesis is as follows.

thesis

• NIBE Industrier is one of the best climate-focused industries in all of Scandinavia. It’s high growth, high safety, and low yield, a combination I’ve become more interested in in recent years.
• I would say that NIBE has now dropped enough to eliminate conservative rates of return involving double digits – I wanted to buy it below 80 SEK before I was willing to expose more capital, which is where we are currently – and now we are below 50 SEK, so my goal is achieved.
• I’m at a “BUY” here – and my PT is SEK 80/share based on the latest quarterly results, which marks a target update for Q2 2024.
• Now that the company is very cheap, I am more than willing to “BUY” more here. While there are many attractive investment potentials, NIBE is now an investment that I believe has considerable long-term upside and safety. NIBE is now a possibility that has 15% annual growth, despite not being focused on high dividends – which the company does not offer. Another reason is that I already own quite a lot of NIBE and am now looking to further reduce my cost base.

Remember, I mean:

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

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

3. If the company does not become overvalued, but is at a fair value or falls back to undervalued, I buy more as time permits.

4. Reinvest dividend income, job savings, or other cash inflows as specified in #1.

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

• This company is generally qualitative.
• This company is fundamentally safe/conservative and well managed.
• 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 currently meets every one of my criteria, including a “cheap” price.

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