Svolder : Interim Report #3 20/21

Interim Report 3 2020/2021

Dramatically different compared to a year ago

The Managing Director's comments, page 2

Result for current reporting period

3 months: 1st March-31st May 2021

• The company posted a result for the period of SEK 987 million (-273 m), corresponding to SEK 38.50 (-10.70) per share
• The net worth increased 20.5% to SEK 227.00 per share
• The listed price of the Class B share increased by 43.4% to SEK 263.80 per share
• The Carnegie Small Cap Return Index increased by 15.3%

Major contributors to net worth

• Positive: Troax, XANO Industri, New Wave Group
  - Negative: Lime Technologies

Major changes in the equities portfolio

• Bought: Arla Plast
  - Sold: Troax

Result for the interim period

9 months: 1st September 2020-31st May 2021

• The company posted a result for the period of SEK 2,181 million (-18 m), corresponding to SEK 85.20 (-0.70) per share
• The net worth increased by 59.9%, including reinvested dividend
• The listed price of the Class B share increased by 89.8%, including reinvested dividend
• The Carnegie Small Cap Return Index increased by 35.2%

Latest published figures

4th June 2021

Share price	Net worth
273.80	224

SEKSEK/share

Dear

Shareholder,

Svolder is approaching the end of its 2020/2021 financial year. During the first nine months, Svolder saw excellent results in both absolute and relative terms. The situation is dramatically different compared to a year ago, when the effects of the coronavirus pandemic on society, citizens and businesses were very uncertain.

Svolder's net worth has risen by 60 per cent during the financial year to date, exceeding the CSRX (Carneg- ie Small Cap Index) by 25 percentage points. This means that the long-term positive absolute and relative trend for Svolder compared to the small cap index (CSRX) and the Stockholm stock exchange (SIXRX) has continued. This is shown clearly in the graph below.

Dividends normalised

Many listed companies cancelled their dividend payments during spring 2020. In a global environment riddled with great uncertainty about the pandemic, many company boards chose not to propose a dividend, or to postpone it. As the majority of companies have successfully navigated their operations through the pandemic, boards are once

again resuming dividends. From Svolder's perspective, share dividends are the most natural way of compensating shareholders for invested capital, and are fundamental to the long-term supply of capital. Moreover the profits are already taxed, and in many cases the dividend is taxed a yet again.

Svolder's Board proposed a dividend for the previous financial year of SEK 2.20 per share (SEK 56.3 m), even though dividends received were considerably lower than what is considered normal for each portfolio company's long-term dividend capacity. Svolder's dividend policy is based on paying dividends received on to shareholders, with a deduction for ongoing management costs. Moreo- ver, the ambition is to create long-term dividend growth. Since the company's inception a dividend has been paid every year, which means that a total of SEK 1.2 billion (SEK 47 per Svolder share) has come to us shareholders. For the 2020/2021 financial year, we forecast that received dividends will total SEK 93 million, an increase of just over SEK 84 million on the previous financial year.

It is therefore crucial to remember that received dividends were not normal in either the previous or the current

Total return1) 10 years in % on 31st May 2021

1100										1100
1000										1000
900	Svolder	1 year	3 years	5 years	10 years					900
800	Net worth	101	111	245	613					800
Share price (Class B) 162	191	329	862
700										700
600	Stock market index								600
CSRX	57	94	145	430
500	SIXRX	49	73	116	246					500
400										400
300										300
200										200
100										100
0										0
-100										-100
2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021

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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financial year when making forecasts for Svolder's own div- idend. The Board of Directors' proposed dividend for the 2020/2021 financial year will, as usual, be presented in the Year-End Report on 16th September.

Investment companies

perform well

The listed price of the Class B share rose by a full 90 per cent over the past nine months, which meant that on the closing day, the share was trading at a premium of 16 per cent in relation to net worth. This is high in historical terms, but follows a current trend on the stock market where Swedish investment companies are being valued ever more highly in relation to their net worth. In terms of performance, howev- er, the valuation is not unnatural if the companies manage to create better value growth than the market also moving for- ward. The chart below from investment bank DNB shows how most investment companies have created growth in net worth over the past 15-year period or more. In addition to the growth in net worth the discounts have also decreased, and on occasion also become premiums, thus further increasing the total return on the shares during the period.

Investment companies,

Source:

Annual growth in net worth (%, 15 years)

DNB

0

5

10

15

20

Markets

Creades1)

Bure

Svolder

Latour

Investor

Öresund

Lundbergs

SIXRX2)

Kinnevik

Traction

Industrivärden

Ratos

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

Overheating tendencies

The world's stock exchanges have now experienced a long period of increase, and in several cases are displaying overheating tendencies. Hugely expansive fiscal and monetary policies worldwide have created a lot of liquidity, which has gone into increasingly speculative assets to yield a re- turn. In previous interim reports, I have mentioned very high valuations for companies without tried and tested business models, speculation in cryptocurrencies, concerted trading by small investors via websites/apps like Reddit, and the occurrence of so-called SPACs (Special Purpose Acquisition Companies). This is a form of option to acquire a new company that shareholders have left to a particular company with a specified sponsor. The intention is then that the acquired company then assumes the place on the stock exchange already held by the SPAC.

The SPACs we have seen to date on the Swedish market give no cause for concern in terms of their readiness for list-

ing, as they are represented by established sponsors and experienced people. What can be questioned, however, is how profitable it will ultimately be for the co-investors. What is there to say that a company newly acquired at market price, with costs for the SPAC's management and future dilution via the sponsor's options, is more profitable an investment than a directly listed company with no middlemen? If, in ad- dition, this was to take place outside of the Nasdaq's main list and be fronted by people with little experience of en- terprise, but with a high risk tolerance and a limited moral compass, that would be worrying.

Personally, I feel that classic stock exchange listings on the Nasdaq's main list are always to be preferred. With such an approach principal owners, the board and the company management must prepare a prospectus and assume obligations to investors and the stock market. Moreover, each company has a chance to present its business model and the market conditions under which it operates. During the financial year, Svolder has looked at many public listings, but has been extremely selective. Having said that, in the past quarter we have acted as an anchor investor and have subscribed for shares in the IPOs of Arla Plast and MilDef Group.

Strong economic growth,

with inflation risks

Even though the stock market, on a general level, has a high valuation, this does not mean that there are no interesting investment opportunities for an investment company like Svolder. The stock markets are volatile, and investment trends tend to change. Even so, the most important parameters for valuation are future profits and return require- ments/interest rates. In somewhat simplified terms, when interest rates rise, profit has to develop at the same rate to keep the share prices from falling. The factor that has the largest negative effect in share valuation models is raised interest rates on anticipated profits a long way into the future.

Companies that are cautiously valued based on profits (low P/E ratios) and net sales run less risk than the highly valued ones (high P/E ratios) in periods of increasing interest rates. In such a scenario, the value development for growth shares, which for several years has been far stronger than for value shares, has every chance of reversing. The inflation tendencies that can be inferred from dramatically rising commodity prices, a global increase in capacity utilisation and higher employment primarily in the US, are all reasons to expect higher long-term interest rates.

At the same time, the boost in the economic situation means that profit development in many companies will be favourable andwillbenefitsharevaluations.Everythingistherefore in place for Svolder's investment philosophy - to manage listed shares in small and medium-sized Swedish companies with established business models - to continue creating added value, even though humility of course always has a natural place in any foray into commenting on the future.

Yours faithfully

ulf hedlundh

Managing Director

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the equities portfolio

31/5 2021

			Market		% of the	% of the
		Share price	value	% of	company's	company's
Share	Number	(SEK)1)	(SEK m)	net worth	capital 2)	votes2)
Troax	2,650,000	315.50	836	14.4	4.4	4.4
Nordic Waterproofing	3,542,952	179.80	637	11.0	14.7	14.7
GARO	4,772,600	126.80	605	10.4	9.6	9.6
New Wave Group	4,485,850	103.40	464	8.0	6.8	1.8
XANO Industri	1,730,500	262.00	453	7.8	5.9	1.8
FM Mattsson Mora	1,955,000	182.00	356	6.1	14.1	6.1
Elanders	2,069,332	171.00	354	6.1	5.9	4.0
Elos Medtech3)	1,245,892	201.00	250	4.3	15.4	21.9
Beijer Electronics Group	4,367,960	51.60	225	3.9	15.1	15.2
ITAB Shop Concept	11,997,551	17.50	210	3.6	5.5	5.5
Nolato	2,425,760	85.75	208	3.6	1.0	0.9
Wästbygg Gruppen	1,817,916	107.60	196	3.4	5.6	4.8
Lime Technologies	422,665	352.00	149	2.6	3.2	3.2
Boule Diagnostics	2,414,194	57.80	140	2.4	12.4	12.4
Magnolia Bostad	2,095,000	58.10	122	2.1	5.5	5.5
Saab	500,000	239.90	120	2.1	0.4	0.3
Arla Plast	2,001,000	54.00	108	1.9	10.0	10.0
Serneke Group	2,077,608	50.60	105	1.8	7.2	2.8
AGES Industri	584,000	64.00	37	0.6	8.3	2.5
Equities portfolio			5,575	95.9
Net debt (-)/net receivable (+)			236	4.1
Total/net worth			5,811	100.0
			227.00	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.
3. Of which 297,946 Class A shares.

The following information, for example, can be obtained from the table. Svolder's largest holding is Troax, which has a market value of SEK 836 million, corresponding to 14.4 per cent of net worth. A one-per-cent change in Troax's share price would affect Svolder's net worth by SEK 8 million, which equates to SEK 0.30 per Svolder share.

Interim Report 3

Current reporting period: 1st March - 31st May 2021

Market commentary

The current reporting period, 1st March-31st May 2021, has been characterised by very strong stock markets. As worldwide vaccination increased and the spread of COV- ID-19 gradually slowed, investors started having faith that the nascent economic recovery would gather momentum. The Swedish stock exchange (SIXRX) rose 15 per cent, which was on a par with the development of shares in small and medium-sized companies (CSRX). Large companies (OMXS30) increased slightly less, but still by just over 13 per cent. During the 2020/2021 financial year, the outcome has been just as strong for large as for smaller companies (35%), but with the advantage for the large companies in the 2021 calendar year only.

Pricesontheglobalstockexchangesalsodevelopedwell. The S&P Europe index rose 13 per cent compared with, for example, 12 per cent for the American S&P500, both measured in Swedish kronor (SEK). The Dow Jones Global index increased by about 10 per cent measured in SEK, as several Asian stock exchanges reported only marginally positive value development. During the current reporting period the SEK has weakened by 1.7 per cent against the US dollar and strengthened slightly against the euro.

Over the three-month period, interest rates for Amer- ican government bonds in particular rose, while those for other global bonds showed small movements. Both the American FED and Europe's ECB repeated their ambitions to keep bond interest rates low through various kinds of market operations. There are however clear signs of in- flation, especially in the US in line with an ever-stronger labour market, higher values on financial assets and sharply rising prices for input goods. In most cases, prices for commodities and industrial metals rose by double-digit percentages during the current reporting period, measured in both USD and SEK. Aluminium increased the most, by about 18 per cent (SEK), but the rise in oil and copper prices was also noticeable. The price of gold developed in line with industrial metal prices.

Political developments in many parts of the world remain uncertain. Latent conflicts in the Middle East and countries located close to China and Russia are clear examples of this. The war of words about trade disputes between the US and China have not abated since the change of US

president. In addition, there is mounting irritation between European countries about the lack of coordinated management of COVID-19, the content of upcoming vaccination passports, the development of public finances, and the degree of involvement in each other's domestic policy.

Index performance (12 months)

165

140

115

90

jun jul	aug sep oct nov dec jan feb mar apr may
2020		2021
	CSRX			SIXRX

Share price trends

The closing price for Svolder's Class B share on the balance sheet date was SEK 263.80, corresponding to an increase during the current reporting period of 43.4 per cent. The Class B share's value on the closing day represented a premium of 16.2 per cent on its net worth. The Class B share was traded on all Nasdaq Stockholm trading days during the period, with an average of just under 50,000 shares traded each day.

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 Class A share on the balance sheet date was SEK 380.00, which means that the Class A share was valued at a premium of 67.4 per cent in relation to net worth.

Under the terms of Svolder's Articles of Association, Class A shareholders wishing to convert Class A shares into Class B shares may do so by application to Svolder's Board of Directors.

Infront Source:

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