$KABE.B:SE

A simple cyclical business with long-term tailwinds - a very brief snapshot.

When looking at cyclical businesses I want to have some certainty that the long term tailwinds are there. Recreational vehicles is a type of product which is rarely purchased but is gaining momentum when a certain stage of life is approached.

The COVID-19 period expanded the use of these vehicles when work from home and nomadic culture arose. Young professionals travelling around while working from anywhere is quite a proposition.

The high sky prices of real estate is creating an opportunity for living and travelling in an RV while renting your house or apartment.

This is a cyclical business, because the products are of a cyclical nature. How often one buys a RV and how badly one needs one? It is a niche product, it is a discretionary product but with a more nomadic lifestyle it can be a cost effective way to live and travel while renting your place.

The price is approaching 200-250SEK range.

Operating margin range 5%-9%.

Net sales CAGR of 7.5%

EBIT CAGR of 8.5%

Look at the 2007,2008 and 2009 period (GFC) - margins are stable close to 6%, only in 2009 there was a sales fall 15% but EBIT fall only by 5%.

Let’s see from cash flow perspective:

The company is continuously generating cash flow from operations in the 50-150 million SEK annually with some exceptions on both sides. more interesting are the negative cash flows in 2023 and 2024 / most recent years and two consecutive negative cash flow years caused by increase in working capital. Let’s look at the balance sheet to examine which part of the working capital is eating our cash and why?

What a surprise - it is the inventory :)

Finished goods inventory or materials is the main cause. If finished goods are building up, that means that demand is softening and production capacity should be adjusted meaning higher cost of production but solving for the cash flow problem. I materials are building up and finished goods inventory is stable, that means the company is expecting an increase in demand or is building up parts to secure the production capabilities in the near future. Global tensions and supply chain risks may lead to overbuilding inventory.

source: https://www.kabe.se/documents/pdf/KABE-Group-annual-report-2023_en_gb.pdf

In 2023 we can see that finished goods inventory is quite stable - just a slight increase.

Still waiting for 2024 group annual report. The logic is that demand will soften and the company will have a temporary inventory problem, but I really want to look at the numbers.

Normalized earnings:

I can conclude that operating earnings (normalized) are in the 150 - 200 range and using a 15x multiple we get a range of 2 250 mil SEK - 3 000 mil SEK.

Current EV is 2 225 mil SEK. The price and the business are in fair game territory and buying at current levels may provide a long-term fundamental return close to ROE of 10%-12%.

Currently you can buy a participation in the business at close to book value. Only two times from the sample I have the company was available at below TANGIBLE book value - once in 2009 during GFC and once during COVID19 crisis:

The mean is close to 1.8 x tangible book value and currently the company is trading at 1.4x tangible book value. I think those are good levels to start building a position. If I see the company at below tangible book value I will increase the position aggressively.

PS: This writeup is a personal opinion and not an investment advice. Do your own due diligence.