Monthly report January 2022 - Exelity

The net return for Exelity during the month of January amounted to -7.05 %, compared to -9.7 % for OMX's broad index. Although this was by far the stock market's worst January since 1987, apart from the financial crisis, we are not satisfied. Our weak January figures are due to the fact that we entered the year with a lower proportion of loans than desired (8 %) and did not have time to receive any guarantee compensation in January, as we received the capital late in November. We thus lacked the important shield that we would otherwise have had through our investment strategy. With several agreed guarantees for the coming months and a higher and rapidly growing proportion of loans (18%), we are well on our way to remedying this. However, our goal of at least 10 % returns per year does not mean that we expect positive results for every single month. On the contrary, this type of market rally is necessary to create the conditions for excess returns in accordance with the allocation strategy.

About 70 % of the decline in the portfolio stems from Smart Eye and Awardit, where we briefly described the investment thesis for the latter company in our last month's letter (we will return to Smart Eye further down). Smart Eye and Awardit were traded during January down by -24 % and -12 % respectively. We have not sat still and watched during the race, but instead increased our positions with 26 % in Awardit and 66 % in Smart Eye. The broad stock market declines during January have also meant that we have found several new, low-valued share cases. We have therefore initiated a number of new positions that we will have reason to return to in the future, but the focus of this monthly newsletter is on explaining how the stock market crash affected our portfolio and how we handled the situation.

Why do we think the decline of Smart Eye was a gift from above? Smart Eye's base of existing customers and contracts, without a single new deal, means, according to our calculations, an annual average earning capacity that far exceeds SEK 600 million, which can be compared to today's valuation of just over SEK 3 billion. The stock market began to doubt the company's ability when the competitor won a major contract in December. However, in Q3'21 Smart Eye's tier-1 partner Aptiv won a major contract with a new customer, Mercedes, which has not yet been announced by Aptiv's tier-2 software sub-vendor (Smart Eye). Based on our sources in the industry, the volumes of the agreement should mean a contract value of well over SEK 500 million, corresponding to at least SEK 80 million per year, which goes straight down to Smart Eye's bottom line, like the other contracts. If the contract follows the usual lead times of the car industry, it will be announced within a couple of months at the latest, which in our opinion should turn the sentiment for the Smart Eye share. It is also important that the contract also means a grand slam for Smart Eye on the European premium car market, which is an important reference, because new technologies in premium cars are usually a model for other car models that are later mass-produced in larger quantities.

Exelity has significant upcoming inflows and 8% of cash left, or 17% if we include a bid arbitrage position. We will continue to put our cash register to work, but remain discerning. We have ice in our stomachs because we know that the longer the market turmoil continues, the finer companies with capital needs will be forced into guaranteed preferential issues, instead of the targeted issues that have not been successful in the past few weeks. Such a development would also mean markedly improved transaction conditions. Exelity is armed to the teeth and fully ready to seize the opportunities on offer.