Svolder : Interim Report #3 21/22

Interim Report 3 2021/2022

Positive net worth trend on an uncertain stock market

The Managing Director's comments, page 2

Result for current reporting period

3 months: 1st March-31st May 2022

• The company posted a result for the period of SEK 166 million (987 m), corresponding to SEK 1.60 (9.60) per share
• The net worth increased 2.8% to SEK 59.60 per share
• The listed price of the Class B share increased by 2.0% to SEK 62.96 per share
• The Carnegie Small Cap Return Index fell by 4.3%

Major contributors to net worth

• Positive: XANO Industri, New Wave Group, MilDef Group

• Negative: Wästbygg Gruppen, Troax Group, Boule Diagnostics

Major changes in the equities portfolio

• Bought: New Wave Group

• Sold: GARO, XANO Industri

Result for the interim period

9 months: 1st September 2021-31st May 2022

• The company posted a result for the period of SEK -944 million (2,181 m), corresponding to SEK -9.20 (21.30) per share
• The net worth decreased by 13.4%, including reinvested dividend
• The listed price of the Class B share decreased by 15.5%, including reinvested dividend
• The Carnegie Small Cap Return Index fell by 19.0%

Latest published figures

10th June 2022

Share price	Net worth
57.07	56

SEKSEK/share

Dear

Shareholder,

Nine months of Svolder's 2021/2022 financial year have now passed. The most recent quarter was a successful period for Svolder in terms of portfolio management. The company's net worth increased by 2.8 per cent during the three-month period, while the small cap market decreased by 4.3 per cent (CSRX) and the Swedish stock exchange overall (SIXRX) fell by 2.5 per cent. In the same period, Svolder's Class B share rose by two percentage points, and the share therefore continues to trade at a premium to net asset value of almost 6 per cent.

The financial year to date has been an eventful and changeable year, to say the least, with elements both dramatic and severe. Until the end of 2021, world stock exchanges were performing well and an economic recovery following the pandemic seemed assured, although with certain disruptions to supply chains and higher prices for input goods. Rising inflation worldwide was evident in raised bond interest rates. Inflationary impulses were created especially by dramatic rises in energy, commodity, transport and food prices. When the demand for labour in many sectors also led to labour shortages and pay increases, investors around the world started worrying about a tightening of future monetary policy by the central banks, and in the longer run also weaker economic growth. And when Russia then, in

late February, invaded Ukraine, supply chain problems increased and we were suddenly facing an even more insecure geopolitical situation. Economic sanctions against Russia, with clear reductions in commodities such as oil, natural gas and industrial metals, amplified the price movements for many input goods. Moreover, and needless to say, war has a detrimental effect on people's faith in the future and on companies' willingness to invest. This was the situation when the previous interim report was published - indeed my comments were entitled "A great deal of uncertainty".

The uncertainty remains

Three months later and the uncertainty remains in many areas, although some economic patterns have begun to crystallise. As for the war in Ukraine and relations between Russia and the Western World, the situation is serious and unlikely to be remedied in the near future. This means that as citizens and investors, we must unfortunately accept a new geopolitical world order, with greater tensions and altered flows of goods and materials.

The security situation means higher defence spending and closer collaborations among democratic Western states. It also means that rather than being challenged, the

Total return1) 10 years in % on 31st May 2022

1800										1800
1600	Svolder	1 year	3 years	5 years	10 years					1600
1400	Net worth	6	106	135	805					1400
1200	Share price (Class B) -4	127	142	1,064					1200
	Stock market index
1000	CSRX	-9	59	80	433					1000
800	SIXRX	-6	56	63	272					800
600										600
400										400
200										200
0										0
2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022

1. Total return is calculated using comparable methods to reinvestment indices and funds, i.e. assuming that the dividend paid is reinvested at the time of the dividend in underlying types of assets.

Infront and Svolder Morningstar, Source:

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domestic defence industry is now being treated with trust. The criticism directed - by myself above all, for many years in these comments - at the unwillingness of Swedish institutions to invest in defence company shares for reasons of sus- tainability, is no longer appropriate. This is also clearly evident on the stock market, where for instance our investment in MilDef, a producer of rugged IT solutions for defence and security companies, has developed very strongly during the current reporting period. Increased defence spending quickly has an impact on order book, sales and results.

Restrictive monetary policy and altered risk propensity

The greatest effect on the capital markets can, however, be traced to an altered view of inflation and applied monetary policy among investors and central banks. The exceptionally loose monetary policy, which in its worst moments has brought negative interest rates on bonds and savings, has long meant that investors have not been compensated for inflation when seeking secure interest rate investments. Investments and savings have therefore been directed towards equities, real estate, homes and high-risk bonds to a greater extent.

As market values rose, the willingness to take risks increased and potential future gains were discounted with increasingly low return requirements. More and more companies in Sweden and elsewhere were publicly listed in 2021, often with untested business models, weak cash flows and no profitability. Valuations of growth companies, particularly in new technology, sustainability and healthcare, rock- eted. For those of us who were around in the early 2000s, the reasoning around a 'new economy' sounded familiar, i.e. prioritising very rapid growth at the price of high costs and an ongoing need for further equity financing from investors willing to take risks. New technology is valuable and will always be in demand. Its valuation and financing, however, are subject to global change. In my opinion, there will be a dividing line between 'hope' companies and growth compa- nies, with owners of the former finding it increasingly difficult and expensive to find financing. I believe that this stock market development is at its beginning rather than its end.

Serious concern among

Swedish households

Having said all that, the macroeconomic situation that puzzles myself and my colleagues most is the quite extreme difference in future outlook between businesses and house- holds. Sweden's National Institute of Economic Research's recently published Economic Tendency Survey reveals that manufacturing companies are showing a confidence level well above the historical average, while households are more negative about their own finances than they were in the early pandemic, on a level with the financial crisis of 2008. Sharp rises in fuel, electricity and food prices, combined with higher interest costs for homes and official assessments of lower house prices, as well as the war in Ukraine, are all creating a lot of concern. Even so, the discrepancy in confidence levels between businesses and households is untenable. The fact

that the rate of economic growth in Sweden is falling is indis- putable. The question is rather by how much will it fall and how long the downturn will last.

Stock markets

are leading indicators

When thinking in terms of share investments, however, one must always bear in mind that investors tend to look ahead in a completely different way to households and businesses. A lot of the concern that citizens are currently feeling is therefore already discounted in, or priced into, many share prices. The stock market declines that have generally occurred in Sweden and elsewhere are signs of this. So there is always some truth in the idea that 'stock exchange risks are at their lowest when the perceived risks are highest, and vice versa'. Here at Svolder, we think it is too early to start believing in a lasting upswing in the stock markets, and we predict ongoing volatility in a world characterised by uncertainty regarding interest rates, risk premiums and profit development.

For a long-term investor like Svolder, however, there are always opportunities, and we select portfolio companies primarily based on criteria such as underlying growth, profitability, financial balance and proven business per- formance. The latest quarter is successful in that respect, particularly from a relative perspective, and comes on the heels of a long period of good growth in net worth and share price. In the longer term, we believe that equities will outperform interest rate investments, that shares in small and medium-sized Swedish companies will develop better than those of large companies, and that Svolder's portfolio management capabilities will add further value. In this context, it is also a pleasure to present a chart from DNB Markets on annual growth in net worth over the past 17 years for Swedish investment and portfolio management companies. In addition to Svolder's success, it is also worth noting that almost all of our fellow investors in the industry are outperforming the Stockholm Stock Exchange (SIXRX). This is a fine achievement, and well worth protecting.

Investment companies,

Source:

Annual growth in net worth (%, 17 years)

DNB

0

5

10

15

20

Markets

Creades1)

Svolder

Latour

Bure

Investor

Kinnevik

Traction

Öresund

Lundbergs

SIXRX2)

Industrivärden

1. Creades since 2012.  2) Stockholm Stock Exchange.

Yours faithfully

ulf hedlundh

Managing Director

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the equities portfolio

31st May 2022

					% of the	% of the
		Share price	Market cap.	% of	company's	company's
Share	Number	(SEK)1)	(SEK m)	net worth	capital 2)	votes2)
New Wave Group	5,112,715	158.90	812	13.3	7.7	2.1
Nordic Waterproofing	3,880,000	169.00	656	10.7	16.1	16.1
GARO	4,171,906	145.30	606	9.9	8.3	8.3
Troax Group	2,599,000	230.00	598	9.8	4.3	4.3
XANO Industri	1,700,000	326.50	555	9.1	5.8	1.8
Elanders	3,087,500	143.40	443	7.2	8.7	6.0
FM Mattsson Mora Group	2,000,000	216.50	433	7.1	14.2	6.2
Beijer Electronics Group	4,381,875	65.70	288	4.7	15.1	15.2
Viva Wine Group	4,188,370	52.00	218	3.6	4.7	4.7
MilDef Group	2,768,673	78.50	217	3.6	7.6	7.6
Wästbygg Gruppen	2,833,916	67.90	192	3.2	8.8	7.5
Profoto Holding	1,597,240	110.20	176	2.9	4.0	4.0
ITAB Shop Concept	12,172,550	10.86	132	2.2	5.6	5.6
Lime Technologies	422,665	290.00	123	2.0	3.2	3.2
Arla Plast	2,639,527	42.60	112	1.8	13.2	13.2
Serneke Group	2,077,608	41.95	87	1.4	7.2	2.8
Boule Diagnostics	2,414,194	36.00	87	1.4	12.4	12.4
Nivika Fastigheter	1,186,000	67.50	80	1.3	2.1	0.4
AGES Industri	584,000	41.60	24	0.4	8.3	2.5
Equities portfolio			5,840	95.6
Net receivable (+)/net debt (-)			268	4.4
Total/net worth			6,108	100.0
			59.60	SEK per Svolder share

All securities holdings come under level 1 of the value hierarchy.

1. In calculating the market value (fair value), the last price paid for the securities on Nasdaq Stockholm on the closing day has been used.
2. Based on outstanding shares in the portfolio company.

The following information, for example, can be obtained from the table. Svolder's largest holding is New Wave Group, which has a market value of SEK 812 million, corresponding to 13.3 per cent of net worth. A one-per-cent change in New Wave's share price would affect Svolder's net worth by SEK 8 million, which equates to SEK 0.10 per Svolder share.

Interim Report 3

Current reporting period: 1st March - 31st May 2022

Market commentary

The current reporting period, 1st March to 31st May 2022, was characterised by weak stock markets, although slightly better than the weak start evident at the beginning of the 2022 calendar year. The Swedish stock exchange (SIXRX) fell by 2.5 per cent, slightly less than in Europe (-3.7 per cent) and America (-5.5 per cent). The global stock exchanges decreased by a full 6.7 per cent (DJGI) measured in USD, but by a more moderate 3.8 per cent in SEK. The decline on the technology-heavy American Nasdaq exchange was particularly sharp (-12 per cent). Small Swedish companies, measured as CSRX, fell by 4.3 per cent during the current reporting period. Real estate shares performed weakly, as did the shares of several rapid-acquisition technology companies.

There are several areas that continue to cause concern for investors worldwide. In addition to the geopolitical uncertainty arising from Russia's invasion of Ukraine, changed and stronger military alliances are being established while defence spending in Europe is increasing mark- edly. Furthermore, extensive sanctions against Russia are causing shortages of raw materials, particularly forms of energy such as oil and natural gas. The price of oil, for ex- ample, increased by 18 per cent (Brent) during the quarter. A reduction in farmed crops, fertiliser, steel and other input goods from Ukraine and Russia is also impacting the supply situation in various world markets, the result being higher market prices and supply chain difficulties.

Investors are particularly worried by the marked increase in global inflation based on rising prices for input goods, particularly energy. In addition, there is strong demand for labour and wages are increasing. This has meant that the central banks have changed the policy in their market communication, recommending a tighter monetary policy, and in several cases this has also caused a rise in key interest rates, albeit from a low level. During the quarter, interest rates for government bonds have generally increased by more than 100 interest rate points (one percentage point). The higher market interest rates have led investors to raise their return requirements, thereby reducing the value of assets such as equities, bonds and real estate. The stock market effects are greatest for companies with expected profits far in the future. Consequently the slumps for many growth companies, in Sweden and elsewhere, have continued. In addition, the risks of lower profits and profit margins for companies in the future have increased as economists downgraded their growth forecasts for the

next few years.

Exchange rate movements have been volatile. During the current reporting period, the SEK weakened by 3.1 per cent against the US dollar and strengthened 1.3 per cent against the euro.

While energy prices continue to rise, the situation varies for industrial metals. The price of aluminium, which is partly produced in Russia and has properties that are of value in a situation where energy prices are rising, rose, while prices for copper and zinc, for instance, fell. The price of gold also declined slightly during the latest three-month period. The effects of the pandemic may be minor in the Western World, but they have had a huge impact in China in particular following city lockdowns and closures of industries and in- frastructure. This may have reduced demand for industrial metals, but there is probably also a more cautious attitude towards future economic growth among investors and busi- nesses, whereby they want to make their mark on pricing.

Index performance (12 months)

120

110

100

90

80

jun jul	aug sep oct nov dec jan feb mar apr may
2021		2022
	CSRX			SIXRX

Share price trends

The closing price for Svolder's Class B share on the balance sheet date was SEK 62.96, corresponding to an increase during the current reporting period of 2.0 per cent. The Class B share's value on the closing day represented a premium of 5.6 per cent on its net worth. The Class B share was traded on all trading days during the period, with an average of approximately 240,000 shares traded each day of trading on Nasdaq Stockholm.

Svolder's Class A share is only traded through three auctions (known as Auction Only Market Segments) during the trading day: one on opening, one at about 13:30 and one when the market closes. The closing price for Svolder's

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