NIBE Industrier: Looking At The Industrial Upside (OTCMKTS:NDRBF)

Dear readers/followers,

I’ve been at a “BUY” for Nibe (OTCPK:NDRBF)(OTCPK:NIABY) for some time at this point, and since my last article on the company, the stock has declined another 9%. You can find this article here.

Nibe has a very solid long-term growth trend, even after normalizing back down below 63 SEK/share. The company once traded close to 150 back during ZIRP – and while I did not own shares at the time, I would have done the same as with similar overvalued Swedish stocks and sold them at the time.

I find it very interesting to finally see a company of this caliber trading at what I believe to be a normalized appealing share price, in this case below 53 SEK/share. The yield isn’t fantastic – NIBE is at 1.24%, and will likely never be a “yield monster”. What’s even worse, the company is likely to decline further in terms of yield this coming fiscal and when the dividend for 2024E is decided, because the current forecast is a deep decline to less than 1.2 SEK in adjusted EPS for the year, compared to almost 2.4 SEK for 2023.

That’s also the primary reason for why we’re looking at a very low share price comparatively for the stock here, with levels finally approaching the 20-year average. It’s not yet “cheap” – but a company like Nibe which needs to normalize from heights not seen for many industries has plenty of movement still left to do.

In this article, we’ll update the company and see what can be estimated here in terms of upside. It’s not yet a “STRONG BUY”, but I do believe the company may get there eventually.

Nibe After 1Q24 – plenty to like now at almost 50 SEK

1Q24 was not a very good quarter – and the company doesn’t pull any punches here. Sales were down over 2B SEK from 11.6B to 9.5B, with adjusted operating profit less than a third YoY, and after financials items dropped by more than 80%. The company’s after-tax profit declined to near-negative levels to 34M from 1,275M SEK, and EPS was a measly 0.02 SEK, compared to 0.63 YoY.

The first thing you see on the report is the wording “Action plan underway”.

So what exactly happened with NIBE?

A combination of a few factors, many of which I eluded to previously – some of which came as a surprise. The clear ones first.

Housing and house construction has been fairly low, unusually low in fact, and there’s no current sign of an increase in demand or recovery as of 1Q24. The company currently theorizes, or forecasts, an improvement here in 2H24. Housing was no secret or surprise. Also, no surprise was the negative impact of overall interest rates, which further slowed down housing production, impacting demand for both stoves and pumps. This is beyond just new construction, the interest rates have also resulted in some fairly negative trends for renovation and consumer spending overall.

What was a surprise to me was the sheer negativity in the distribution and manufacturing chains. Stoves and Heat pumps have been adversely affected due to inventory levels since the end of 2023. Order levels have been extremely low. In fact, the company expresses that the European heat pump manufacturing market has nearly halved YTD.

This inventory adjustment and trend normalization is expected to finish in about 2H24 – which is where this forecast comes from.

The company also, uncharacteristically, expresses a great deal of frustration in the report.

As for any real political will in Europe to replace fossil fuels with sustainable alternatives, such as heat pumps, this leaves a lot to be desired. This particular problem is actually three-pronged. Existing subsidies for the installation of heat pumps provide a clear signal and some assistance, but the application process is often overly complicated. In some countries, the end date for use of fossil fuels in existing properties is up to 20 years in the future, which means the transition to heat pumps will take far too long.

(Source: Nibe Quarterly report)

In addition, the price of gas/electricity is being mentioned, with some places having extremely cheap gas. I view this frustration as the result of some naivete as to the question of switching and pacing here – I believe this could have been more easily forecasted when looking at the switching costs and how long time this could realistically take – essentially, that the industry “could have seen this coming” – but this is my personal view. It’s also why I was very negative on Nibe at the massively high valuation at which it traded not long ago.

The company’s current action plan to combat these trends is nothing strange. We’re talking about savings in excess of 900M SEK at least, potentially up to 1.1B SEK that the company is trying to save by “adapting to prevailing demand” – i.e. cutting.

It’s important to mention that Europe is the problem here – NA is actually a lot better. The NA market is showing stable performance, with a better political landscape compared to the EU. Current plans are to bring back the climate solutions segment, i.e. Heat pumps, to historical levels by 2025E – and I consider even this to be optimistic given how difficult it is to get real political pushes through here.

The Stove segment is still in the midst of an energy price battle, which left distribution channels extremely overstocked. Whenever a company is trading like Nibe did years ago, we always need to ask “Why?” and understand why that is, to see if it is sustainable.

Nibe never was.

In Stoves, the company is forecasting a recovery by 2025 as well, and in this case, I consider that to not be unrealistic – but time will certainly tell here.

Lastly, the Nibe element segment. This is also in the process of implementing cost reduction, and like other segments, 2025E is the expected turnaround.

In short, there was a material deterioration in market conditions, and the company expects here that 2025E is the turnaround. For 2024, the company expects for the first two quarters here to be very weak – but with a tail-end gradual improvement accelerating into 2025. As I see it, the company should have previously been able to forecast for this more accurately, and this program and these actions should have already been done during the middle and late end of last year. The distribution situation has been spoken about before as well.

Nibe hasn’t been “massively overvalued” for some time now. Given the company’s market share and products, I do believe it warrants a premium, and one above 25x normalized P/E. That’s why I have been “playing” with cash-secured put options for the last few quarters on this company, to see just how low Nibe would end up going. When it dropped below 65 SEK, I initiated a small native position and am looking to expand this on the longer term here – and have, recently, bought a few more shares at 53. So I’m “expanding and establishing here”, because the company, if reversing, does have a lot to offer.

15% annualized is definitely in the cards here, as I see it, and the main worry is the timing of the recovery for the stock.

Nibe’s valuation – some upside, even if the inflation in price is still somewhat there

Given some of the negative surprises here, I have no choice but to slightly lower my PT for Nibe here – around 80 SEK is my new PT, down from 84 to account for these stronger-than-expected headwinds the company is seeing and expecting.

For other analyst targets, these have massively deteriorated over the past few months. A year ago, the company had around a 121 SEK average from a low of 75 to a high of 175 SEK. We’re now down to a 34 SEK low – less than half – to a 120 SEK high, with an average of 61.14 SEK. I believe that analysts are being somewhat impulsive. Impulsive is also the rating changes. One year ago, not a single analyst believed in “underperform” for this company – now it’s suddenly 5 out of 14, with only 4 at a “BUY”. (Paywalled TIKR.com Link) This is, as I see it, a classic example of some running scared for the hills. Given the trends, this is understandable, but not acceptable for professional analysts, as I see it – as this downturn at least in part was fairly clear that it was going to come.

I do not believe that the company’s potential to rise above that 30x P/E again should be underestimated once the economy improves and the operations recover.

Nibe has been at over twice that valuation, and while I don’t expect a repeat of that, I do see the possibility for much higher premiumization – but want to expect 22-26x P/E or thereabouts. The last time the company was above 30x P/E was in August/September of last year, and this was a downward trend, not an upward one.

Because I forecast at 22-26 and up to 30x, I continue to see a potential upside for Nibe at this valuation. And for the first time, even with the deteriorating earnings in 2024E, we can see close to a 15% annualized upside to something like a 30x P/E for the company, even with less than 10% annualized EPS growth rate.

This is what I expect for Nibe, and what I would consider my “base” thesis. As you can see, it’s within the realm of possibility that I would consider it a PT of between 70-75 SEK, but I do want to take into consideration the potential for outperformance on the part of Nibe – because Nibe quite often does outperform expectations. In fact, if we look at analyst accuracy, the company’s forecasts suddenly look a lot better than you might expect.

Based on what you see here, it shouldn’t be a surprise that I maintain my “BUY” rating here. In fact, if the company drops below 45 SEK, I’m ratcheting this up to a “STRONG BUY”.

My thesis for Nibe is as follows for 1Q24.

Thesis

• NIBE Industrier is one of the best industries with a climate focus in all of Scandinavia. It’s a high growth, high safety, and low yield, a combination I have become more interested in over the past few years.
• I would say that NIBE needs to fall to clear double digits – I want to buy it below 80 SEK before I would be willing to expose more capital here, which is where we currently are.
• I am at a “BUY” here – and my PT is 80 SEK/share as of the latest quarterly results, which marks a target update for 1Q of 2024.
• Despite the company being cheap, I’m not in a hurry to “BUY” more here. The reason is that there are so many attractive potentials out there, but it’s an attractive potential for the long-term investor with an eye towards 15% annualized “safe” growth, and not too focused on high dividends – which the company does not offer. Another reason is that I already own quite a bit of Nibe, and I would be looking to lower my cost basis even further.

Remember, I’m all about:

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

This means that the company currently fulfills every single one of my criteria, including a “cheapness” in price.

This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.