Exelity - Monthly Report August 2022

The net return for Exelity during the month of August amounted to +2.6 %, which is 10 percentage points better than the broad OMXSPI index. The rise was driven by Smart Eye and the new holding Net Insight, which already returned 23 %, driven by a large buyback program. Our case in Net Insight can be likened to an egg in the cheek where the buybacks are complemented by a low valued core business with hidden high margins and options on new large 5G contracts worth hundreds of millions in the coming months.      

As we indicated in last month's newsletter, we have taken a position in a company with even better revenue visibility than Smart Eye, albeit with a 40 percent operating margin already today. This new holding, which sailed up as our second largest holding after Smart Eye with 10 % of the portfolio, is the aerospace subcontractor CTT Systems, which has a monopoly in its niche and one of the stock market's deepest moats, or economic moats as it is called in English. CTT's highly profitable aftermarket contracts span two decades with predictable, recurring revenue and incremental EBIT margins we estimate at over 60 %. We hope that Exelity's shareholders will like the long-term case, but even in the short term there is rocket fuel for the share in the form of currency tailwinds and that since a few weeks ago, after a one-year ban, the customer Boeing can once again deliver the 787, which made up a majority of CTT's system sales. CTT has all costs in Nyköping, while they charge in USD, which is at record levels.

Regarding news in the portfolio companies, Modulight's report can be mentioned in particular. Modulight is a prestige IPO from 2021 where the market's confidence has completely disappeared (-65 %) after the company was sold on incorrect grounds and immediately made a large write-down of the accounts receivable. The intrinsically uninteresting Q2 report led to a price drop of -46 %, which for us is as inexplicable as it is unreasonable because the entire value is in the growing portfolio of 26 client projects. The stock market's misunderstanding of the business is rooted in the company's weak communication. Despite a strong history where the company did not take in a single euro in external capital before the listing, more than half of the valuation now consists of cash, as if the company were a one trick pony in an early development phase. With a larger royalty contract expected in H2'22, Modulight would trade at an annual earning capacity equivalent to 5x EBIT. If Modulight reaches its 2023 goals, the company trades at closer to 1x EBIT. In other words, today's levels do not require by a long shot that the perception of Modulight should return to a hot platform company with one of the stock exchange's best business models.           

Accumulated financial transaction income increased during the late summer seasonal lull by only 0.5 % to 6.7 % of AUM. Autumn has, however, kicked off, so we are already seeing a doubling of the monthly rate of transaction revenue during September. We are part of three guarantees where the average discount is just under 70 %. High discount has been a common key success factor in getting existing owners to subscribe in the previous issues we have participated in. Many transactions are procured at the moment, but we are waiting for better conditions and therefore hold tight to our cash, which now amounts to about 20 %, after we completed (so far) successful tactical reductions in holdings in Smart Eye, 11 Bit Studios and Embracer, to minimize the impact from possible short-term pops of various kinds. All three are still important holdings, but the exposure in the new holdings in CTT (10 %) and Net Insight (5 %) is greater than 11 Bit (3 %) and Embracer (4 %) In summary, this means that we now have a more diversified equity portfolio in a range of different industries, supplemented by seven loans and three guarantees.