Description

ABG Sundal Collier - ABG NO Equity

ABG is a leading investment bank in the Nordics. It was founded in 1984 as Sundal Collier in Oslo, and merged with ABG Securities in Sweden in 2001 to create ABG. It mainly operates in equity and debt capital markets as well as mergers and acquisitions. Post the GFC, ABG expanded materially into debt issuance via convertible bonds and later into high yield bonds and more. It is among the dominant players in the Norwegian market and is in the process of growing stronger in Sweden(revenue approaching parity with Norway revenue). It is also present in Denmark, and internationally beyond the Nordics in Germany, the UK, USA and Singapore. 

ABG mainly operates in the Nordics though, an attractive region with strong economies and with a large and growing capital market, and is the only player consistently among the top 5 in the region in both M&A, equity capital markets and debt markets over the last few years. With approximately 37% of shares owned by employees (“partners”), the long term interests of shareholders and employees are well aligned. Its closest competitors are Pareto, Carnegie and Arctic Securities. The company has transitioned from a specialized transaction advisor and brokerage firm into a more complete full-service financial institution over the last few years. More than twice the amount of clients now buy more than one service from ABG compared to five years ago. Beyond M&A advisory, brokerage services and debt/equity issuance services, ABG’s business areas now also include other areas like real estate financing, direct real estate investment vehicles (Vika Project Finance, ABG Fastena) and even factoring services. This reduces the cyclicality of an otherwise volatile business.

Competitive position

ABG’s full service offering is attractive because it allows for more sticky corporate customers. It typically stays with the company beyond a first service offering by providing help with debt or equity issuance and/or M&A services or restructuring at a later stage in the company life cycle. This is an advantage versus competitors with a smaller number of services offered, and in terms of emerging competition, increased regulatory requirements in the investment banking business creates barriers to entry that are higher than in the past. Finally, ABG has operated successfully over 20 years, building a solid brand over time that is a very real advantage in terms of customer acquisition.

Why now?

The stock is currently out of favor as new listings and debt issuance have dried up with more difficult market conditions and it is reasonable to expect earnings to deteriorate further in the near term. As a result, the stock has given back about 50% of the gains since the march 2020 bottom. The reason I think the stock is interesting now in spite of the short term outlook is that it looks cheap compared to its long term earnings power, currently trading at 9x the avg EPS over the last 10 years and below 8x the average EPS over the last 20 years.

This is a capital light and well run company that has made money fairly consistently (but with large short term fluctuations) for ages, only one year since 2002 saw a small loss per share (2008). Otherwise, this is a company that makes very good money and pays out virtually everything in dividends. The track record since 2002 speaks for itself:

Valuation

ABG is well capitalized, so well in fact that it is reasonable to believe that 0.40 NOK per share can be paid out as an excess capital distribution in 2022 (the reason is that a regulatory change means operational risk is now calculated as a % of fixed costs going forward, instead of by using an average of revenues over the last 3 years as the base for calculations. This means that Risk Weighted Assets (RWA) goes from 4.8 Bn NOK to around 2.8 Bn). Adjusting for that figure, the valuation versus long term earnings power becomes even more attractive:

What is the “correct price” of ABG? One way to guess is to take the very long term ROE and growth track record of the company and go via the theoretically correct price/book multiple (30% ROE - 7% LT growth rate) /10% DR = 2.4 → 2.4x 2.73 NOK per share = 6.46 NOK. From that perspective, the stock is undervalued, but not dramatically so.

No huge upside, but little long term downside and a decent expected return over time

Do I believe in a great deal of multiple expansion here? No. Looking at peers in the independent investment bank universe, there is no reason to think so. It/they rarely trade above 10x EPS. But it’s not out of the question that it’ll happen from time to time. Nor do I believe in high growth in earnings, certainly not short term. As such, the expected return from here in ABG should be ok, but not spectacular.

The bottom line is that I think it’s reasonably safe to assume that buying ABG now will yield > 10% per year over time and that the stock is not fundamentally overvalued. 

I’m happy with 10% long term in a well run, solid company. If markets fall further, could the stock get much cheaper? Yes, that would be my guess. A prolonged bear market would mean a longer period over “underearning”, even if refinancing services e.g. does help a pick and shovel provider like ABG. But compared to its long term track record, ABG is trading at a reasonable price already. Admittedly, there’s a reason for that - it’s a volatile, short term unpredictable business. Over time, it’s probably a good one to own, though. 

End note: I will be buying ABG NO at these levels, but it seems prudent to buy only part of a full position, as things may very well get worse before they get better. A 30% discount to fair book value per share would imply a share price at around 4.50 NOK. In this market, that price might be right around the corner.

Catalyst

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