Disclaimer: This is not investment advice. Never trust any anonymous dude on the internet. PLEASE DO YOUR OWN RESEARCH !!!
Panic Update:
As to be expected, my last “panic post” marked more or less the (short term) peak in Natural Gas and Electricity prices in Europe. Since then, prices have gone down more than -50% from the peak. Nevertheless, prices are far from normal and sustainable. Governments have already proposed action in the form of intercepting the markets.
In the recent days, I have seen more and more “models” that seem to tell us that Germany/Europe is fine for this Winter and after that everything will be smooth sailing (LNG terminals, French deliveries etc.), despite the Russian completely halting NS1 deliveries last week and not reinstating them based on phony reasons.
I actually started to build a model myself but then decided to focus on the big picture instead. As I argued on Twitter, the one big variable that will determine how Europe is doing will be the temperature.
However, independent how this winter will be, Natural Gas will be a scarce resource in Europe for some years to come. Even in the (low probability) case that there will be a quick end of the Ukraine conflict, Europe will not and cannot go back into the Russian dependency. On the other hand, switching to LNG at acceptable prices will take a few years until enough liquification, gasification and transportation capacity is available.
This recent article in the FT quotes the boss of Shell:
“It may well be that we have a number of winters where we have to somehow find solutions through efficiency savings, through rationing and a very, very quick buildout of alternatives,” he said. “That this is going to be somehow easy, or over, I think is a fantasy that we should put aside.”
Another German language article quotes several Oil and Gas executives that it takes at least 3-4 years until Russian Gas can be fully replaced.
So my base case for the coming 3-5 years will be: There is not enough Natural Gas (ex Russia) available in Europe and Gas and electricity will remain very expensive in Europe.
The only real option: Decrease Demand
High prices decrease demand automatically unless the Governments are start manipulating prices which they are now starting to do. This will dampen the demand reduction.
Another course of action are Government-mandated savings law like closing Public swimming pools, turning off lights etc. but this is not a long term solution as people will get more and more aggressive.
Saving energy and especially natural gas in the mid to longer term only works through substitution or better Energy efficiency.
Substitution: Heat pumps, wood, oil, LNG
Heat pumps are one way, but in the short term, significantly higher electricity use will increase the gas price and heat pumps can not easily be retrofitted into older buildings. Wood has become very expensive as well and is in many cases (apartments) no option anyway. Oil is a limited option and will not be able to replace Gas to a certain extent. The planned floating LNG terminals will only able to replace a small amount of the Natural Gas deficiency. LNG will be a mid- to long term replacement, but LNG is much more expensive than the good old Russian Pipeline gas.
Energy efficiency: Insulation
The simplest solution for saving energy without sacrificing personal wellness or negative cultural aspects is ….better insulation. The EU commission has already introduced guidelines forcing more insulation until the year 2030. As outlined in this German article, real estate owners have not been too happy and there is a lack of craftsman anyway.
Now things might change quickly. For homeowners, the break even of investing into insulation has changed dramatically and for instance in the UK, the Government at least seems to contemplate more support for better insulation. Even as the German Government is currently focusing on direct money transfers and killing free markets, in my opinion the “investment case” for insulation and energy efficiency has profoundly changed.
The new “Freedom Insulation” Basket
Health warning: I selected these stocks based on a “tactical macro idea” with only relatively shallow research per company.
Following Mr. Lindner’s (German Finance Minister) famous “Freedom Energy” speech, I hereby reveal my new “Freedom Insulation” Basket. My main criteria for the inclusion were: Strong European footprint, solid performance and significant exposure to insulation and/or energy efficiency.
Here is the “Starting 6 line up” with a total weight of ~4,5% of the portfolio at inception:
- Sto SE Pref shares (1,0%)
- Rockwool (1,0%)
- Kingspan (1,0%)
- Steico (0,5%)
- Va-q-tec (0,5%)
- Belimo (0,5%)
The strategic goal is to gain exposure in a first step and then to refine over time and concentrate on the best players over time. I have funded the basket mostly by the sale of most German renewable positions (with the exception of Abo Wind) and a decrease in Nabaltec last week.
1. Sto Pref shares (1,0%)
Sto is a German headquartered insulation company with mostly “plastic foam” based products. The company has a market cap of 1 bn EUR, has net cash and is valued at 12,7x P/E and 7x EV/EBIT for 2022. Gross margins are at around 53-56%, EBIT margins in the high single digits and returns on capital in the “high teens”. According to the investor presentation, 90% of sales are in Europe, thereof 40% in Germany. Most of Sto’s products are put on the outside of buildings. 6M 2022 margins have been under pressure, as so far, Sto could not fully pass on input costs to customers. To my understanding, Sto’s business is less dependent on new buildings.
2. Rockwool (1,0%)
Rockwool is a Danish company that produces as the name says mostly insulation products based on Rock wool. The big advantage of rock wool is that it doesn’t burn. Rockwool has a market cap pf ~4,3 bn EUR and trades at 14,3x P/E and 10,7x EV/EBIT. Ebit margins are historically between 10-14%, returns on capital at around 15-17%. The company has net cash and 80% of their sales are in Europe. The stock has lost more than -50% since its peak.
3. Kingspan (1,0%)
Kingspan is an Ireland based Insulation company that manufactures mostly plastic based insulation material. With a market cap of 10,7 bn EUR it is larger than Rockwool and Sto combined, and with a 2022 P/E of 16,8 and EB/EBIT of 14,7 also more expensive. Returns on capital are between 15-17%, EBIT margins quite constant at 10-11%. Kingspan clearly has the best growth record of the big players. 80% of the sales are in Europe. The biggest issue is in my opinion that 70% of the products are used for new builts. Nevertheless, Kingspan seems to be a high quality company that should be in this basket.
4. Steico (0,5%)
Steico is the second German company. Steico concentrates on sustainable, wood based insulation solutions. With a market cap of 1 bn EUR, Steico trades at 21x P/E and 17x EV/EBIT. Returns on capital have been historically been at around 6-8% with the exception of 2021, EBIT margins in the range of 8-10%. However Steico managed to grow strongly, doubling sales in the 5 years from 2016-2021. Despite the recent pull back, the stock was a 10x over the last 6 years or so. 6M 2022 look pretty Ok. I weighted the stock lower as besides the higher valuation, Steico products seem to be mostly used for higher end single family new builts and might not benefit as much from a renovation push as the other players.
5. Va-q-tec (0,5%)
Va-q-tec is a relatively young 155 mn EUR market cap company that has developed a technology to produce isolation panels that use vacuum in order to insulate against cold or heat. The company got famous because they produced containers that could keep Covid vaccines cool for 5-10 days without external refrigeration. This boosted the stock price, however now, the stock price is back at pre Covid levels. The company has grown 3x overt he last 5 years, results are currently at around break even. The panels are quite expensive but can be used for a lot of other energy efficiency use cases. The stock is clearly more speculative then the classic insulation companies, but I do think that there is potential.
6. Belimo (0,5%)
With Belimo, I am cheating a little bit, because this is not an insulation company. However Belimo focuses on control valves, sensors and meters to control heating and cooling systems in order to save energy. With returns on capital of 30% and EBIT margins in the “high teens”, Belimo plays in another league, however at 36x P/E and 28x EV/EBIT, this is clearly already reflected in the valuation and results in a valuation of 4,6 bn EUR. I still like the company a lot and have it included with a small weight.
Summary:
I do think that the insulation and energy efficiency industry could represent an interesting opportunity to benefit indirectly from rising energy prices. Better insulation and energy efficiency in my opinion is the only way to mitigate the dependency on Russian oil and gas and also to decouple the economy better from energy prices and this should give a nice tailwind to this companies for the next few years. In addition it is also beneficial for the future of our planet.
The timing might not be optimal, as new built activity might slow down in the near future,but I am quite optimistic on the outlook for these companies. In addition, many of these stocks are down between -30% to -50% compared to their highs, so some slow down might be priced in.
As my other basket, this is a more “tactical” position, so the time horizon for this is ~1-3 years compared to my usual 3-5 years (or more) for “core” investments.
Disclaimer: This is not investment advice. Never trust any anonymous dude on the internet. PLEASE DO YOUR OWN RESEARCH !!!
