Several Helsinki-listed companies are on the operating table – creating opportunities for investors willing to look beyond the surgery
***Nothing mentioned in this article should be interpreted as investment advice or as a recommendation to carry out any transaction involving securities.***
About ten years ago, while working for my former employer, I wrote an article about what I called “operating-table companies” on the Helsinki Stock Exchange. I did not mean companies that manufacture operating tables. Rather, I was referring to companies facing temporary difficulties – companies that are, figuratively speaking, on the operating table. Warren Buffett once put it as follows:
“The best thing that happens to us is when a great company gets into temporary trouble… We want to buy them when they’re on the operating table.”
Two essential observations can be drawn from Buffett’s remark:
- The problem should be temporary.
Determining whether this is the case is often difficult, if not nearly impossible. Investors should therefore resist the temptation to indiscriminately shovel every piece of beaten-down rubbish into their portfolios. We can only know with certainty that a problem was temporary in hindsight, often several years later. That is far too long a time horizon for many modern investors. Most investors hate uncertainty, whereas contrarian investors actively seek out situations that appear uncomfortable and shares whose existing owners have already suffered painful disappointments. One excellent example from Buffett’s career is American Express, which was caught up in the salad oil scandal when he acquired a substantial stake in the company. In short, a fraudster had filled industrial tanks pledged as collateral mostly with water instead of vegetable oil. Investors were terrified about what the resulting crisis might mean for Amex. Buffett concluded that the ultimate impact on the company would not be particularly severe, giving him the confidence to buy. He was right. American Express was a clear operating-table company whose problem proved temporary.
- The company should ideally be of exceptional quality.
The worst companies are usually the ones facing the most serious problems. The better the company that ends up on the operating table, the more attractive the opportunity is likely to be for investors. Early in his career, Buffett focused on troubled and extremely cheap companies – the so-called cigar butts – until his late business partner Charlie Munger effectively brainwashed him into paying greater attention to business quality. This shift was also necessary for Buffett’s investment success to continue as the amount of capital under management grew substantially, since most cigar-butt companies were relatively small by market capitalisation. The truth is that the Helsinki Stock Exchange does not contain many companies that would qualify as exceptionally high-quality businesses under Buffett’s definition. For the purposes of this article, I will therefore expand the category to include companies that are simply solid businesses.
Which Helsinki-listed companies might currently be on the operating table? Among smaller companies, almost all of them – with the exception of Harvia and a couple of others – are currently viewed by stock market investors as being on the operating table in one way or another. The gloom has persisted for around five years. Focusing mainly on large- and mid-cap companies, the following names are the first that come to mind:
- Kone. Kone’s enormous bid for TK Elevator has caused investors to shun the shares. The company is facing years of hard work. The industrial logic is perfectly clear, but the price tag for TK Elevator is steep. The Herlin family is not approaching this deal with a quarterly mindset. With this move, Kone’s position as the industry leader is close to being cemented, while Otis will be left spinning its wheels. Excellent! If the integration proceeds well, the potential for value creation is significant over even a moderately long time horizon. Funds managed by Proprius Partners do not own Kone shares.
- Terveystalo. The company has suffered from weak market conditions for an extended period. Its tender offer for Silmäasema came as a shock to many. Most observers considered the price excessive, and the burden of proof now rests firmly with the company. It is difficult to see market conditions deteriorating much further. The sharply fallen shares could therefore offer an opportunity to gain exposure to the megatrend of Finland’s ageing population. Funds managed by Proprius Partners own Terveystalo shares.
- Revenio. Revenio has also ended up on the operating table as a result of a major acquisition. Buying Visionix may have changed the company permanently, although only time will tell whether that change was for better or worse. The share price has fallen like a stone since the transaction was announced, and a share issue is still expected later this year. If you believe the acquisition will prove even moderately successful, there could be considerable upside from current levels. Funds managed by Proprius Partners own Revenio shares.
- Tokmanni. The shockwaves from the Dollarstore acquisition continue to weigh on the shares. Tokmanni significantly overpaid, and the integration has gone completely off the rails. The company was far too hasty in executing the deal. New management is now trying to change course. The Finnish operations have, in fact, performed reasonably well. The share price is extremely sensitive to developments at Dollarstore, while the balance sheet does not make for pleasant viewing. Funds managed by Proprius Partners own Tokmanni shares.
- Lumo Kodit. The Varma transaction discouraged even the last remaining semi-optimists. At these valuation levels, every available euro should have been used to repurchase the company’s own shares. Instead, management incentives led the company to make the wrong decision from the shareholders’ perspective. The company’s track record in capital allocation is poor. The rental market has been dreadful, housing prices have developed unfavourably, and interest rates remain too high. Several of these variables may now be approaching their most difficult point. The discount to net asset value is substantial, the company has managed to keep its apartments surprisingly well occupied, and it will probably eventually become an M&A target. Funds managed by Proprius Partners own Lumo shares.
- Huhtamäki. Huhtamäki has been on the operating table because of its lack of organic growth, with consumers remaining cautious. After several years of waiting, the drought effectively ended in the second quarter, when the company finally managed to produce what, in this context, almost amounted to a growth bonanza: approximately 2% organic growth. The shares promptly surged by around 20% in just a few days. If growth continues, it would not take much for the shares to return to €40. However, the second-quarter result has already improved sentiment considerably – and the shares have begun to get excited. Funds managed by Proprius Partners own Huhtamäki shares.
- Admicom. The “SaaSpocalypse” and the weak construction market have punished Admicom’s shares severely. The company has a reasonable chance of making it through, and conditions in the construction market will eventually improve. The threat posed by AI may continue to cast a shadow over sentiment for a long time. However, Admicom should enjoy some protection from operating in a small niche market that is unlikely to be the first target for every new entrant. In addition, our understanding is that the company’s software is quite deeply embedded in various customer workflows. Funds managed by Proprius Partners own Admicom shares.
- Qt. The same AI-driven mauling of software companies has also affected Qt. The company has failed to deliver on its promises in recent years, and it, too, is currently integrating a significant acquisition. The management team has undergone a major overhaul, there are numerous questions surrounding future pricing models, and the shares have fallen like a stone. If the future proves even reasonably favourable, there is certainly considerable upside. Then again, there are also plenty of moving parts. The second-quarter result gave short sellers a serious fright and provided grounds for optimism on several fronts. Funds managed by Proprius Partners own Qt shares.
In my article ten years ago, I highlighted Nordea, Outotec and YIT as potential operating-table companies. Nordea’s slow turnaround ultimately succeeded in emphatic fashion, despite the many headwinds it faced at the time. Outotec’s condition on the operating table proved serious enough for the company to stumble into Metso’s supportive arms. Today, life at Metso looks extremely good. YIT, meanwhile, has effectively slipped from the control of equity investors onto the leash of its creditors.
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