Nekkar ASA NKR.OB / DB:0TT @FeathertopCap // @ajb_02 Market cap 123m (USD) Sector Industrial Shares outstanding 106m 4Y Price return 467% Company reports in Norwegian Krole. Returns Yields Growth Price Balance Sheet Health Efficiency Return on Invested Capital (5Y Avg) Return on Common Equity (5Y Avg) Return on Assets (5Y Avg) Return on Capital 7% 8% 0.4% 48.8% Earnings Yield FCF Yield LTM EBIT yield Dividend yield 23.9% 5.8% 14.9% 0% Avg EPS Growth (5Y) Gross Margin / Operating Margin ROCE ROIC 182% 47.1% / 28.7% 52.3% 45.7% P/E EV/EBIT P/LTM FCF P/Sales 8.7x 6.6x 17.3x 2.3x Adjusted Debt to Equity (%) Piotroski Score Altman Z Score Beneish M-Score1 2.2% 5 9.5 -1.87 Inventory Turnover Cash Conversion Cycle / Days Sale Outstanding Inventory Turnover Asset Turnover / Asset Efficiency 35.2x 109 / 126 days 35.2x 0.9x / 17.7% 1 An M-Score of less than -1.78 suggests that the company will not be an earnings manipulator. An M-Score of greater than -1.78 signals that the company is likely to be a manipulator Page 1 of 32 Elevator pitch What is the opportunity? Nekkar is a small/obscure industrial company based in Norway that operates in a concentrated oligopoly, where Nekkar is the largest player in the space and claims to hold an eye watering 75% market share of ‘shiplift’ installations through its flagship product, Synrolift™. It has a hidden software arm within a ‘boring’ shipping business, and two potential moonshot products in development stages (one in aquaculture, the other wind energy) that come with the company for free*. It trades at an EV/EBIT of 6.6x, a P/E of 8.7x, gross margins of 47% and high (~45%) returns on capital. It has no debt, no preferred stock, options or convertibles. A DCF calculation suggests an approximate 50% margin of safety (with a bearish discount rate and growth assumptions, with no multiple re-rate). While revenue is linked to lumpy, large bespoke construction contracts - half of the company’s construction revenue is paid for up-front by customers, reducing customer risk and evening out revenues. Perceived moats are: 1) barriers to entry 2) proprietary technology/designs 3) pricing power through assurance benefits to customers. The firm has a mild cost advantage vs competitors (by subcontracting construction). Why does the opportunity exist? The company has just come out of an adverse arbitration/settlement regarding the sale of its legacy cargo assets to McGregor. The company accurately provisioned for the down-adjusted price payable on the sale contract (was due to liabilities accrued through the now sold Chinese assets). Having sold its cargo/crane business (along with the legacy brand, ‘TTS’) the company is now deriving ~90% of its revenues through the Shiplift segment of the business, a rare oligopoly. The ex-CEO also resigned in late 2020 (on ‘good’ terms) but I presume due to the botched management of the McGregor transaction and the transition of the company’s focus away from cargo and toward shiplifts and the ‘moonshots’, though this certainly doesn’t come across in official messaging - just my inference/best guess. These factors may also explain the valuation gap, in addition to the fact that it is extremely obscure/small - it is only covered by one analyst with a price target around the current price. Strong predictable cash generation (Y/N) Yes, at least in the last 3-5 years. Sustainably high returns on capital (Y/N) High ROC, ROIC and ROE post-divestment. Attractive growth opportunities (Y/N) > Recurring service revenue opportunity > Structural tailwinds > 2 embedded moonshot technologies Pros: ● High barriers to entry where the firm has a majority market share already, proprietary advantages through patented technology ● Market is comprised of regional monopolies ● Good margins ● High returns on capital ● Hidden moonshots within the business Page 2 of 32 ● Subcontract out construction (but keep design inhouse). This allows for lower capex and therefore lower prices in the bidding process while maintaining a decent margin this is probably what has allowed them to become the industry leader by market capture. However, not being vertically integrated, they do not have control over the construction process - being a potential risk where brand power and reliability is extremely important for the business. Cons: ● Corporate customers, large projects with focus on costs and a bid/tender process. Not a good price environment. This is partially offset by constructing offshore (where their competitors construct onshore). Offshore construction isn’t a moat though. ● Competes against the son of the creator of their patented technology. ● Investor sentiment softened due to an arbitration (now settled) ● Management limbo (underpaid interim CEO), not an ideal comp structure, no red flags though. ● R&D is capitalised not expensed under IFRS - margins may appear better than they really are. Decision? Ahoy mateys! I am going to take a position in the company. The stock price is forming a base of support at 9NOK, which is only 2NOK above the firm's earnings power valuation as of today (and substantially below my calculation of intrinsic value). Stock is currently trading just north of 9NOK. I’ll need to take a position through its dual listing, DB:0TT on the Frankfurt Exchange, due to broker requirements. Valuation Fair Value DCF EBITDA Exit (5Y): 14.78 NOK Current price 10.00 NOK 47.79% margin of safety Assumptions in the DCF: 1. Discount rate: 10% 2. Growth into 2026 is as follows: 2022 20.0% 2023 12.5% 2024 7.5% 2025 3.5% 2026 2.0% 3. Exit EBITDA multiple: 7.1x (current multiple, assumes no multiple expansion). 4. EBIT margin of 21% is sustained through to 2026. 5. CAPEX remains 3.4% of revenues (used the average over the last 5 years). Page 3 of 32 Company Summary The Company has 3 main business arms, one is the crown jewel revenue generator, and the other two are our ‘Moonshots’. ● ● ● “Syncrolift” shiplift solutions “Starfish” open-ocean fish cage “Skywalker” wind turbine installation solution It also has a digital solutions arm which provides services to the three main business units (and other businesses) which it holds 51% of. It has 63 employees, is HQ’d in Kristiansand Norway and is listed on the Oslo Stock Exchange (with ADR filings elsewhere). It holds subsidiaries in Norway, USA and Singapore. It has a sales/service office in Dubai. The company has “a 50 year heritage business” created out of the “world’s number one shiplift company, Syncrolift”. Management proclaims that they are the “global market leader for shiplifts and transfer systems offered to repair and new-building yards”. The other business arms are moonshots/high disruptor businesses that are in early product development stages. The crown jewel revenue generator for this business was purchased off Rolls Royce in 2015. The asset deal gave Syncrolift ASA (then TTS Handling Systems AS) an exclusive and unlimited right to conduct future business based on Syncrolift™ products and relevant intellectual properties and includes takeover of drawings of 250 shiplifts, patents and the brand (Syncrolift™). The Company sold to MacGregor/Cargotec in 2019 its legacy offshore assets business. Those assets were the company’s cranes and winches, internal and external covers and doors, handling equipment for offshore construction and support vessels for drill ships, rigs, accommodation and service units and heavy lift and utility ships, as well as the ‘TTS’ brand. The company’s history from 1999 through to 2015 (particularly the early 00’s) saw the company create numerous JVs with Chinese entities to engrain itself into the Chinese shipbuilding industry with a focus on cargo and cranes (which have been sold off). These JVs (loss making) have largely been sold off to Cargotec. The Company’s renewed focus is on taking the revenue from its oligopoly crown jewel and using it to reinvest into that business, plus two in-house moonshot products. Operations The service or product offering Syncrolift / Shipyard solutions Page 4 of 32 The Shipyard Solutions segment includes shiplift, docking/transfer systems and related service activity for shipyards. The main operating entity in this segment is Syncrolift AS with its head office in Vestby, Norway. As noted above, Syncrolift was acquired from Rolls Royce in 2015 (who had originally bought it off the founder, who is now a competitor to Nekkar - see Competitors below). Syncrolift has a local presence in important markets through subsidiaries in the US and in Singapore alongside a sales/service office in Dubai. Note though that the vast majority of the company’s revenue is derived from its Shipyard solutions in the South/South-East Asian regions and Europe. It faces competition in the US from two main competitors. A shiplift is a large elevator platform that raises the ship out of water for dry-docking ashore and lowers it back into water after completion of work. It is also used to launch new ships from shipyards. The ship transfer system has electro-hydraulic trolleys, which are designed to transfer ships from shiplifts to dry berths on land. Shiplifts & transfer systems fall into three categories: winched, hydraulic lift docks & floating dock lifts. Syncrolift is the self described global market leader for shiplifts and transfer systems offered to repair and new-build yards. They claim to have about a 75% market share.2 They deliver turnkey, customized solutions to commercial yards and navy bases around the world. Most revenue is paid upfront and is for bespoke, engineered-to-order shipyard solutions. The product range includes shiplifting systems for launching and retrievals of vessels and transfer systems for a fast and reliable way of moving vessels around the yard. They also deliver FastDocking™ products for efficient operations during docking and maintenance of vessels. The Company claims that 90% of shiplift systems globally are Syncrolift™ installations. However Syncrolift/Nekkar ASA only serve ~15% of its total combined installed base with services and aftermarket part provision. The company’s targeted focus going forward is to acquire the recurring revenues associated with servicing and repairing their own product installations. Nekkar doesn’t build the shiplifts themselves, but are instead doing the design and drawings of new lifts which usually are highly customised. The assembly of new lifts is sub-contracted to third parties, often in Asia which is the largest market for shipyards. On one hand you can argue that Nekkar should be in control of their own production, but on the other hand the company is not very capital intensive (capex and D&A of ~1% of sales), which enables high return on capital and strong cash flow conversion. This structure also enables a great cost-advantage to its competitor Pearlson that assembles their lifts in the US (presumably to a much greater cost). The lower EBIT margin has allowed Nekkar to offer their lifts with a lower topline cost in RFPs/tenders (beating out competitors) and still generate high margins. In FH FY21, the main revenue stream for the business was related to the new building construction contracts in Shipyard Solutions which accounted for more than 90 percent of revenues.3 The group’s revenue derives from contracts with customers in one of the 2 Page 4, https://lisgb48458y3t494s3m096yp-wpengine.netdna-ssl.com/wp-content/uploads/2019/09/20190912 _Nekkar_-Pareto-conference.pdf 3 Note that revenue is booked per IFRS 15, meaning it is recognized when a customer obtains control of the goods or services. Determining the timing of the transfer of control, at point in time or over time, requires several judgmental factors. Page 5 of 32 following revenue streams; 1. Long-term construction contracts (engineer-to order), where either: a. The company has no other use for the goods (i.e. they are highly bespoke) in which case revenue is recognised over time in accordance with the percentage of completion method under IFRS 15; or b. The company may have another use for the goods (i.e. they could be adapted to another client) - where revenue is recognised when the goods are delivered to and accepted by the client. 2. Service contracts - where revenue is recognised over time; and 3. After sales (parts, replacements) - where revenue is recognised when the goods are delivered to and accepted by the client. Long term construction contracts have a typical duration of 18-48 months (from the date contracts are signed to the date projects are closed). These projects are engineer-to-order projects, which deliver highly customized turnkey systems for shipyards around the world. Revenue is measured based on the consideration/contract price specified in a contract with a customer. The breakdown of project revenue by category is as follows: Company aims to create more recurring revenue. Adhoc services and spares are aiming to be developed into inspections, guaranteed expert services and predictive maintenance to create “lifetime partnerships” with customers. This service/maintenance work would include: ● Control systems light upgrades ● Complete control systems upgrades ● Midlife modernisation Page 6 of 32 ● ● ● Capacity upgrades Extensions Total replacements The Company aims to lock the installation clients in with decades-long service contracts. For example, for a Navy client in south-east asia, after a life extension project is completed (August 2021), Syncrolift Singapore will enter into a 20-year service contract for the same project. They have an order backlog of NOK 1 billion, which is its highest backlog figure yet.4 The backlog is intended to provide the company with work for years to come. The Shipyard Solutions business area has not lost any tenders in the second quarter of FY21, but at the same time, have not been able to tender for as many jobs as they were in the same period last year. No newbuild contracts have been tendered for so far in 2021. Order intake for new deals was down this half, in line with Company expectations (and in light of the backlog, not a huge problem… for now): COVID has created a slowdown in the newbuild decision making process which the company expects to alleviate as the pandemic passes. The below shows the regions where Syncrolift installations have been made. 4 Order backlog represents the estimated value of remaining work on signed contracts. Page 7 of 32 Aquaculture “Starfish” is a solution that could reduce operating expenses dramatically for the fish farming industry, while simultaneously improve fish welfare (captures 90% of biological waste, avoids problems with salmon lice, and is double bagged to prevent escapes). Fish farming has structural macro tailwinds (especially in Norway), growing population/food demands etc. SaaS opportunities in connection with the cage are: ● Cameras under and over water level ● Compressors ● Flow sensors ● GPS for external data (wind etc.) ● Sludge management ● Inlet pipes, pressure and ocean current management “Starfish” appears to be intended to work along with Aquarius (an open source, web-based software backed by the EU) to automate aspects of fish farms (feeding times, fish health, scheduling and AI analytics) in addition to the net itself. The net is still in testing phases. Skywalker ● Prototype wind turbine installation system (for on and offshore). ● Current wind turbine installation requirements need 80 trucks and large mobile cranes. Skywalker only needs 8-10. Les OpEx for customers. In addition, assuming a 20 turbine park: ○ Less space is required (the solution allows more wind turbines to be placed closer to one another, reducing square meterage required by 63%) ○ 88% reduction in Co2 emissions (transport costs) ○ 82% reduction in hours to prepare the farm Page 8 of 32 ● Status: Innovation Norway 21.5M NOK funding grant has been approved. Concept design development is complete. Q4 ‘21 planning for test of prototype on site. Cooperation with turbine OEM and Fred Olsen Renewables. Digital solutions / Intellilift ● ● The Digital Solutions segment is the competence hub that serves the other business areas in Nekkar along with external customers outside Nekkar. The business segment possesses unique competence within engineering, electrification, digitalisation and automation. Intellilift AS, 51% owned by Nekkar, is the driving force behind the Digital Solutions business segment and the company aims to develop open software platforms for collection, monitoring and control of data for numerous industries. This team mainly provides software services to the other business units (especially the Starfish and Skywalker) but also works on Syncrolift which is: ○ A business which was acquired in April 2019 (51% of the shares) in Intellilift AS, a software company established in 2017 with ambitions to develop open software platforms for collection, monitoring and control of data for the aquaculture industry and a variety of offshore energy industries. ○ Remains 51% owned by Nekkar. Concerningly 21% of the shares were acquired from Skeie Consultants AS. 5 ○ High-end automated lifting, handling and drilling equipment which allows Syncrolift to be the facilitator for efficient information flow between oil companies and drilling contractors. ○ Through its Remote Operator Environment software, Phoenix, offshore operators can be located anywhere on a vessel or onshore. The efficiency of our solution comes in the multitude of control systems built into a single chair: crane; gangway; cargo logistics system or any other complex machinery. 5 Skeie Consultants AS, which is owned by primary insiders of Nekkar ASA, holds 19.9% of the shares in Intellilift AS as per 31 December 2019. Page 9 of 32 ○ ○ ○ Two out of three first Syncrolift projects have been commissioned. One is a five year contract with a US customer. “Solid leads” on oil & gas SaaS projects upcoming, according to management. Top-tier end customers AkerBP (drilling operations) and Ørsted (offshore wind). Revenue breakdown and reporting lines Revenue breakdown is as follows (Other = Skywalker and Starfish) Geography for revenue breakdown is as follows: Reporting lines are: ● ● ● ● Shipyard Solutions: Rolf-Atle Tomassen Aquaculture: Mette Harv Renewables: Mette Harv Digital solutions: Stig Trydal Unit economics How does the business make money? Nekkar tenders for major engineering contracts, usually for new ports, or port expansions/upgrades. If successful in the tender process, the company signs a bespoke engineered-to-order construction contract with the client with a duration of somewhere Page 10 of 32 between 18-48 months. This is the main source of revenue for the business. It also generates revenue by signing contracts for delivery of pre-designed products (configure to-order) or parts/support services. Order intake and order backlog are presented as indicators of the company’s revenue generation and operations in the future given the nature of large sum infrequent contracts that the company signs. “Order intake” includes new signed contracts in the period in addition to expansion of existing contracts and any cancellations of contracts. For new build contracts, the order intake is based on the signed contract value excluding potential options and change orders. For service contracts, the order intake is based on the value of the service orders received at conclusion. Order backlog represents the estimated value of remaining work for signed new build contracts and the value of service orders (included in the order intake defined above). At the beginning of 2021, Syncrolift AS has secured a solid order backlog for its 2021 new building business that is expected to sustain the company for years. The focus is now to seek recurring service revenue through a stronger services/support division. Scheduled deliveries for the current project portfolio extend into 2024, indicating the business has infrequent but extremely long duration contracts which could produce lumpy financials. How capital efficient is the business? The company treats working capital as short term assets, less bank deposits and cash in hand, less current liabilities adjusted for short term financial debt. Following turnover/efficiency ratios are below. Efficiency Ratio Company Median among comps Inventory Turnover6 35.19 21.96 Asset Turnover7 0.9x 0.9x Gross Margin 47.1% 36.9% Operating Margin 28.7% 12.9% Is D&A less than 10% of Gross Profit Yes (1.15%) - D&A: 2.44m, GP: 209.1m 6 The inventory turnover ratio measures a company's ability to manage its inventory efficiently. A low turnover implies weak sales and possibly excess inventory, also known as overstocking. It may indicate a problem with the goods being offered for sale or be a result of too little marketing. A high ratio, on the other hand, implies either strong sales or insufficient inventory. 7 The asset turnover ratio measures a company's ability to efficiently generate revenues from its assets.A higher asset turnover ratio means the company's management is using its assets more efficiently Page 11 of 32 Q: Is Plant, Property & Equipment (PPE) stable?8 Better has PPE shrunk over time? Yes. A bit cyclical, but overall stable. 2020: 12.3 2019: 7.1 2018: 13.6 2017: 7.3 2016: 94.3 Margin The business presents strong margins at a glance. However, they are also capitalizing development costs onto the balance sheet rather than expensing them in the income statement. This is fine under IFRS but not US GAAP. Capitalizing costs inappropriately could be making the company’s profit margins appear higher than they are. Warning signs that a company may be capitalizing costs inappropriately include: ● ● ● Surprising or unrealistic profit margins combined with sudden drops in free cash flow Increases in capital expenditures Rapidly growing fixed or intangible assets recorded on the books Under IFRS (which the Company complies with, rather than US GAAP), R&D costs can be capitalised on the balance sheet if the company can prove that the asset in development will become commercially viable (meaning the technology or product in development is likely to make it through the approval process and generate revenue). IFRS requires judgment and subjectivity, which creates a risk that managers will be overly optimistic about how commercially viable a new technology is. Keep in mind that without the capitalization of R&D spending, it is more challenging to compare companies in the same industry, as the timing of their research spending can have a big impact on their bottom line in a given year. This will also restrict which comps I can use for valuation and ROIC / ROA. Customer type Unfortunately we add a con to the investment thesis here. All clients are corporate, and what's worse is that they bid through a tender process. This is the worst method of acquiring and securing business as it encourages a race to the bottom on price, and danger to a business’ gross margin. Corporates pay a lot of attention to high priced transactions, and less to low priced transactions, irrespective of volume - which don't require management signoff. Unfortunately, Nekkar does infrequent, large priced projects - the exact kind of cost corporate customers typically try to negotiate down. What's worse is that products are sold through bidding processes or organised negotiations (such as Nekkar’s tender processes). The more the decision is driven by price, the worse it is for the seller. On the upshot, corporates tend to prefer assurance benefits which Nekkar comes with. The consequences 8 Generally, you want stable PPE – can be declining over time (due to depreciation) and sometimes it will be near zero if the business is super capital light. You don't want a constant requirement to invest in more and more PPE. Page 12 of 32 of failure are dire (‘nobody ever got fired for buying IBM machines’). This allows Nekkar to maintain decent margins despite the operating environment and nature of its customers. Company focus Checklist The firm’s products are: a) needed for survival, or desperately desired without a close substitute; and b) not heavily regulated. Sea transport is cheap and more energy efficient as compared to other modes of transport. Currently, seaborne trade accounts for over 90% of the global overseas trade. The business’ products are needed for more ships to be put to sea (and to be maintained for longer). The firm’s products or services are unique, and non-commodity like Products/services are highly bespoke from customer to customer. The firm is solving a simple problem that I understand. Yes. The firm is not subject to massive technological changes. No. Syncrolift has been the market leading technology for shiplifts for decades.9 The firm has tailwinds, not headwinds, in obtaining growth. Yes. There are identifiable customer benefits: ● Intangible benefits (taste, brand, experience) ● Assurance benefits (I’ll pay anything for this to work properly) ● Convenience benefits (I’ll pay anyone to deal with this this because I don’t want to deal with it) Clear assurance benefits for the customer not hard to imagine how a failed shiplift could catastrophically damage a shipyard’s image, reputation and financial stability. There are subtle benefits too. A more efficient yard means that shipyards can service more ships, process more cargo, and lower their OPEX. I understand the fundamental aspects of the Yes. business and it is within my circle of competence. Growth plans 9 Financial and intellectual capital is drawn towards ideas that can change the world, and make big money fast. Operating in a niche, obscure industry (such as Shiplifts) will carry less disruption risk. Page 13 of 32 Underlying EBITDA is growing with margin expansion. Order backlogs are growing. The underlying business is experiencing organic growth. Its the old/core product that sells hard. New products currently account for ~5% of Syncrolift sales. Management states that ~90% of shiplifts globally are Syncrolift / Rolls-Royce installations (designs & drawings owned by Nekkar), however Syncrolift only serves ~15% of its total combined installed base with services and aftermarket part provision. This is where the Company is trying to drive growth through stronger partnerships with customers by taking market share, principally off Pearlson which service a lot of Nekkar’s installations.10 Repair maintenance and overhaul revenue - usually corporate purchasers of equipment, is a proven recurring revenue model. Generally the more complex, expensive long-shelf life and deadly/loss heavy for failure the better (jet / ship engines are a good example - shiplifts too). Generally where the risk of loss is so dire, you want the manufacturer repairing and maintaining not the cheapest alternative. Unfortunately, ex-management at Nekkar failed to see this and ceded much of the service revenue they could have captured to their main competitor. In addition, the shipyard solutions unit provided a more environmentally friendly shiplift to Skarvik AS during COVID. The solution has “attracted attention in the market”, and the CEO “expects this to be an industry standard in the years to come”. However, Syncrolift’s inspection services have been suffering due to travel restrictions and closed borders more generally. What I really like about this business structure is that geographic expansion is going to be extremely difficult for Nekkar’s competitors, and the marketplace is composed of regional monopolies. Pearlson dominates the Americas, Nekkar dominates Europe and Asia, and 10 While gaining market share is the best source of growth, it is difficult to maintain. Taking a competitor's customer is easy at first - getting the low loyalty customers first and fast- but as time goes on you need to entice the harder won customers which is more difficult and may involve larger margin erosion. While growing from 50% to 51% market share is insignificant in the grand scheme of things, going from 1% to 2% doubles the company’s customers - massive. So a low base of 15% means that there is meaningful growth available in this segment of the market. Page 14 of 32 Bardex is growing a niche in France. All parties are clearly able to extract value from the market, but there is little room for new competitors to appear. Perhaps the most nuanced and least weighted form of growth is structural. Ships are getting bigger and more expensive. Shipping also remains the lowest cost form of transport - in a commodity-like business such as transport of commercial goods, shipping has (and is expected to have) a continued advantage over air or road transport. This is going to drive (especially in the regions where Nekkar operates, such as Asia) a higher demand for advanced ports and shiplift systems to keep expensive ships floating in the ocean successfully for longer. Moat / Competitive advantage Prevalence of moat in financials Gross margins vs public comps: ROIC: Page 15 of 32 Physical description of moat Proprietary tech - Nekkar own the proprietary rights to Syncrolift shiplift systems, which comprise the vast majority (according the company well over 75%) of shiplifts globally. Cost advantages - Nekkar do the engineering and planning in-house but subcontract out the construction of the shiplifts. Their competitors, including Pearlson, construct the shiplifts themselves. This allows Nekkar to be more competitive on price in the tender process without compromising margins. This is a weak moat given competitors could reasonably replicate the cost advantage should they choose to do so. Barriers to entry - assurance benefits (i.e. the consequences of a provider getting it wrong are di) require strong brand and reputation in the market. This deters new entrants with no track record. Nekkar (formerly TTS) has a significant deal list, huge amounts of industry recognition and owns the market leading product. Shiplift and hydraulic engineer Moat weak spots Switching costs / Pearlson - my main concern here is that while Nekkar do a lot of project installations, they do very little service revenue on those projects. The fact that customers can get the project done by NKR but have maintenance done by another company suggests there is little to no ‘stickiness’ associated with their projects. As a result, Nekkar’s attempts to capture more market share of services revenue may prove to be more difficult than initially expected. The switching costs would also be low to move back from NKR to Pearlson, other another competitor, and their increased foray into the services space may result in margin contraction for services revenue to win the work off Pearlson. Management believe that acquiring more services work will also result in better positioning for project work going Page 16 of 32 forward. I take that with a grain of salt given that strategy hasn’t worked for Pearlson which has a large service revenue base. Might not be a fair analogy, since Pearlson lack design rights for the Syncrolift system and presumably the manpower/resources to do full builds locally at a good price. Competitors As noted above, the Company has a massive 80% of global market share in Shiplift solutions and operates in an oligopoly where it is the largest player. Its main competitor is Pearlson, which is based in the US. 1. Pearlson: In 1958, the Founder of Pearlson invented Syncrolift. The founder sold his company (including Syncrolift) to Northern Engineering Industries (NEI), a British engineering group that in 1989 became part of Rolls-Royce, plc. In the early 90s, the Founder and his son created a shipyard consulting firm, specialising in drydocking, named Pearlson & Pearlson. In 2008, Rolls Royce closed their Miami HQ for shiplifting, the Founder’s son ‘rounded up the old team’ before Rolls Royce got involved and created a shiplift company. In 2015 Rolls Royce sold its Syncrolift brand and technology to Nekkar ASA (then TTS Group), with non-competes for Rolls Royce, but obviously Pearlson were unaffected. Pearlson occupy this site: https://shiplift.com/. They claim to possess “the most experienced team of shiplift engineers and technical support specialists in the world” and claim to be the “premier choice for shipyards all around the world”. They are careful not to pass off Syncrolift as their own (but do note that the founder created the technology). They have recently done the following: a. 9 new orders for shiplift systems; and b. These orders include four superyacht repair facilities and the largest shiplift system in north america in support of the US Navy, partnering with shipbuilder Fincantieri Marinette Marine. 2. Bardex Ship Elevator: which claims that the elevator system and complementary Shipyard Transfer Systems focus on improved safety and economy, simplicity of operation, and lower maintenance costs. Capital and operational costs can be reduced by as much as 50% when compared to other systems. The use of chain in our systems provide a superior and dependable lifting element with internal strength, integrity, and a useful safe life many times that of a conventional wire rope. These guys are based in Goleta, California, U.S.A but have offices all around the US and one in Korea (where they provided their first solution to a Korean marine company called KTMI in 1970). Recent deals include partnering with Matiere for the design and manufacture of the 4,300 Te Atlas Megayacht Shiplift for La Ciotat Shipyards (La Ciotat, France), with delivery slated for 2022. They have a flawless safety record for all of the company’s shiplift systems since 1975. Total list of major players in the space include: ● ● Bardex Corporation Bosch Rexroth AG Page 17 of 32 ● ● ● ● ● ● ● ● ● ● Damen Shipyards Group GANTREX Larsen & Toubro Limited (LSE:LTOD) Maschinenfabrik Bröhl GmbH Pearlson Shiplift Corporation Ra In Ho Co. Ltd. Rolls-Royce Holdings PLC Royal HaskoningDHV TPK Systems Pte Ltd Nekkar Public Comparisons used for comps ITD Cementation India Limited (BSE:509496) constructs ship lifts and marine installations, amongst other things, so not a great comparison but tangentially related. Havyard Group ASA (DB:1H2) is a shipbuilding technology producer that sells to shipyards. They don’t do shiplifts though. Larsen & Toubro Limited (LSE:LTOD) is an engineering firm. They do shiplifts, but also other projects - so not a direct comparison. Porter’s five forces analysis: 1. Ease of entry for new participants to the marketplace Low. Large technological/CAPEX/R&D startup costs. Brand/image for reliability is critical given nature of the highly bespoke/turnkey products. 2. Number and activity of the company’s rivals Very few. Of those that are active, Nekkar is the dominant player. 3. Possibility of a new good coming into the market and eroding sales Potential, but the underlying shiplift technology which Nekkar uses has been around for half a century. 4. Bargaining power of industry suppliers (the less the better for our company) As the firm outsources construction to low-cost jurisdictions with little differentiation this would appear at first blush to be a good thing - but the Company will prefer to use the same contractors to ensure continuity/quality in the absence of vertical integration. Page 18 of 32 5. Consumer bargaining power (the less the better for our company) Bit of a hit for the company. Due to the bid/tender process and overall high cost, as well as the nature of the corporate customer - the consumer has strong bargaining power. Risks Debt - company has virtually none and doesn’t appear to need it in the near term. Exchange rate / currency risk - The reporting currency for the group is NOK (Norwegian krone). As substantial parts of both income and expenses are denominated in foreign currencies, fluctuating foreign exchange rates may affect the group’s operating results. The Company guards against this using hedging instruments on a 24-month period for firm contracts for sale in currencies other than NOK. Nekkar is using hedge accounting for FX contracts that qualify for hedge accounting (IFRS 9), while the remaining FX contracts are measured at fair value through profit and loss. Credit risk - on its own books, low given lack of debt. For its customers, the latest report says that “developments in the part of the shipyard business applicable for Syncrolift have historically resulted in only modest losses on payments from customers, however a bad debt provision of NOK 13 million is included in the 2020 figures due to uncertainty for payment in one project”. The company has limits on credit availability and continually looks to limit this risk - so at least they are aware of it. Liquidity / rates risk - non issue as they are debt free. A lot of shipbuilders are highly levered which is a potential risk but too remote to meaningfully measure. R&D blowouts - potential for this to occur with two ongoing ‘moonshots’. Management discretion required based on outcomes of pilot tests being done. Market risk - inherent. Inflation - the company holds significant bank deposits (about half its assets). It has little to no debt. As a result, inflation and increased rates stand to benefit the company. One downside is that the contract terms and prices for large projects are negotiated upfront, and I’m not aware whether the contract prices are CPI pegged or something (unlikely). Ideally any offset in contract prices due to inflation are padded out by gains on bank deposits... Capitalised development costs - the firm carries a sizeable development cost: This is related to ongoing research and development (“R&D”) projects and includes materials, direct salaries, personnel and other external costs. The R&D activities are across the whole group. NOK 14.0 million was capitalized in the first half of 2021, and is derived from Starfish, SkyWalker and product development within the Digital Solutions segment which are in the early-mid stages of development. Page 19 of 32 Management take the view that capitalised R&D has shown good signs of fruitful results: ● Successfully commenced ocean testing of Starfish, a highly innovative closed fish cage solution that is designed to reduce environmental impact and operating expenditures for the fish farmers. Starfish has double protection against escapes, avoids problems with salmon lice due to water intake from deep waters, and collects up to 90 percent of biological waste. ● Completed pre-study of our new wind turbine installation technology, SkyWalker. On 7 April 2021, Nekkar was awarded a NOK 21 million grant from Innovation Norway to progress with the development. Concerning is the fact that the grant from Innovation Norway and SkatteFUNN (5m krone) is treated as a reduction of capitalized development costs in 2020 so the underlying R&D costs being concealed are much higher than they might initially appear. Further, management expect R&D to continue to rise: Nekkar’s R&D investments is expected to increase in 2021 with the continuing development of Starfish, SkyWalker and our products within the Digital solutions segment. Cost from other development activities related to customer specific projects, may in some cases be charged to the profit and loss as an operating expense Goodwill The $16m goodwill charge on the balance sheet relates to one acquisition (Intellilift) in 2019 so no stale accrual of bad acquisitions. Large bank deposits Nearly half of the Company’s assets are bank deposits: Strong pre-payments from customers may explain why the bank deposits are so high: Page 20 of 32 Page 21 of 32 Litigation TTS supplied equipment such as hatch covers, cranes, and dedicated side-loading systems and external doors and called itself “the undisputed leader” in the heavy-lift marine cranes market. The brand name (TTS) as well as these aspects of the company’s business were sold for an EV of EUR 87 million: The deal was announced in February 2018. But TTS Group had joint ventures with Chinese state-owned shipbuilding companies CSSC and CSIC, which meant lengthy regulatory approvals were needed. Closing of the Cargotec / McGregor transaction took place 31 July 2019. After closing, McGregor argued about the purchase price and wanted a down adjustment for tax liabilities in China. On 11 January 2021, a global settlement agreement in the arbitration between Nekkar ASA and MacGregor, a subsidiary of Cargotec Oyj, was reached. A provision of NOK 94 million was made as per 31 December and the payment was performed at the end of January 2021. Market responded positively. Corporate structure There are various intercompany arms-length agreements on “commercial terms” but the largest red flag is are the control system deliveries from Intellilift to Syncrolift AS and the management fee charged by Syncrolift to Nekkar. Given Intellilfit is only 51% owned by Nekkar there is scope we’re getting a raw deal here (not sure if its worse that the chairman owns 19% of Intellilift). Perhaps vertical integration is on the cards with a buyout but until then we’re losing (a bit of) value in that particular integration. CEO reshuffle Preben Liltved was appointed interim CEO of Nekkar ASA with effect from 1 October 2020. The CEO Toril Eidesvik “decided to leave Nekkar” and made an agreement with the Board of Directors to be released from her duties end of 3Q 2020. Her agreement was a good leaver agreement, where she was to continue to support Nekkar through the Cargotec / MacGregor legal arbitration process for as long as it took. She went to work for the Port of London in mid September 2020. Contract risk Loss making contracts are listed as ‘onerous contracts’ in the financials. The full loss is recognized immediately if contracts are forecast to be loss making. The full loss includes all relevant contract costs. Page 22 of 32 For accounts receivable that are not yet due, the assessment is, based on previous experience, that there is no need to impair the value. Accounts receivables relate to independent customers who have no previous history of failing to fulfill their obligations to the group. Invoicing is to a large extent carried out in accordance with milestonebased progress in each project. A large part of the overdue accounts receivables is related to invoiced milestones, i.e. prepayments for work not yet performed. Due to delays in delivery, a considerable gap between due date and payment date may arise. As of 31.12, the group had the following maturity distribution on its external customers: The above table is presented net of bad debt provisions. As per 31 December 2020, a provision NOK 13 million is included due to uncertainty for payment in one project. Hence, the gross amount of accounts receivables > 6 months overdue is NOK 17 million. This risk is generally guarded against by the fact that a huge portion of the work done by the company is paid by customers upfront. Customer risk During 2020 BU SYS has five customers that each accounted for more than 10% of the segments revenue. These customers generated revenue of MNOK 66, MNOK 55, MNOK 44, MNOK 43 and MNOK 36 respectively. Warranty risk The group customarily offers a warranty period of one/ two years on its delivered products. Management Insider holdings Have insiders been buying or selling recently? Yes. Skeie Kappa Invest AS, a company controlled directly by Trym Skeie, the Chairman of the Board in Nekkar ASA and primary insider, has on 28th of January 2021 purchased 250 000 shares in Nekkar ASA, at NOK 6.9 per share, from Skeie Alpha Invest AS which is also controlled by Trym Skeie. On 27 October 2021, Mette Harv, of EVP New Business, sold 40,000 shares at an average price of NOK 4,98 per share. Following this transaction, Mette Harv holds 189,958 shares in Nekkar ASA. Page 23 of 32 The Chairman (a VC and engineer by trade) has been chair since 2009 and holds about 30% of the company (see notes below). Rasmussengruppen, the second largest shareholder, is an investment firm that specialises in offshore work and shipping. Gisle Rike sits on the board to represent them and has done so since 2015. His director fee is paid to Rasmussengruppen, not him personally. Bit disappointing and a bit of a wasted board seat. Ingunn Svegården and Marit Solberg both joined in 2019. Both have backgrounds in biotech/chemistry. Ingunn is focussed more on VC work and Marit has a history with the seafood industry and aquaculture. Preben Liltved was appointed interim CEO of Nekkar ASA with effect from 1 October 2020. He remains interim CEO - it's been over a year since he took the helm. I checked by email, and he confirmed he remains interim CEO for now. 75% of the Company is held by the top 20 shareholders. Page 24 of 32 Marit Solberg and Ingunn Svegården are independent of the major shareholders and executive management. The Board does not include executive management. Both Trym Skeie and Marit Solberg own shares in Nekkar. The Board is directly responsible for determining the CEO’s salary and other benefits. The CEO is, in consultation with the chairperson of the Board, responsible for determining the salary and other benefits for the group’s other senior executives. The guidelines for salaries and other remuneration is communicated yearly to the GM. The Boards’ view on management compensation is that “it should be competitive and motivating, but not above observed market levels. Bonuses are determined according to specific targets set for each year. Bonus schemes are limited to a portion of the salary, increasing according to the position category up to a maximum of 50% of base annual salary unless special circumstances apply”. Board remuneration is not linked to the company’s performance. There is no share option program for the Board of Directors. Rem of the board of 30 June is as follows: High amount of remuneration for Trym, seeing as he’s just the chairman. And a payrise in 2020! Presumably they pay him this in lieu of a dividend as the majority shareholder. No stock compensation on performance metrics for any of the directors as far as I can tell. At least they aren't getting free shares - a huge red flag. Would like to see some share comp instead of $ for milestones based on ROE, ROC etc. Executive shareholdings are as follows: Page 25 of 32 The executive team is currently remunerated as follows: Notably the interim CEO is being paid under half of what the previous CEO was being paid. The interim CEO is the president of Eyde Mooring Solutions AS (he owns 24.7% of that business) so potentially having to split his time/passion is not ideal. He holds a tiny position in the company, rough numbers around 0.01% (maybe less). Preben has a background in Science, Mechanical engineering + Management & BA, 16 years in Sales & Management positions in Pusnes and MacGregor, and 10 years in Management positions in Goltens Worldwide. His replies to my questions were candid and appreciated. At least the shareholder interface is good. 🤮) but such is the nature of using an A very nice hire-in fee for the Ernst and Young CFO ( external CFO. Page 26 of 32 Performance Reinvestment rate11 10% currently. Historically, this has been closer to 50%. M&A Historically, management have done way too much M&A: Goodwill is basically gone from legacy M&A after the Macgregor transaction, but was kept relatively flat even during the binge (signalling at least the company did not overpay). Note the old CEO was at the helm for virtually all of this, not the new interim CEO - who is firmly positioned on trying to grow the service business. 11 Divide the company’s capital expenditures by the net income to determine the reinvestment rate. For example, if a company has $100,000 in net income and $50,000 in capital expenditures, the reinvestment rate is equal to 50%. I.e. 50% of the income that the company generates must be redeployed into the business to fund operations. Page 27 of 32 Buybacks Cash retention CAPEX Not a lot of buybacks happening, no regular dividends either (there was a big one off dividend after the divestment). This is fine, I would prefer the buybacks to have been done on the last hard dip (which would have been a good sign) but nothing. Instead cash is being reinvested in CAPEX and R&D. Page 28 of 32 Debt reduction ROCE ROIC ROA (You can tell when the divestment went through) Page 29 of 32 Historically compounded value per share in the right direction but nothing spectacular. BVPS is declining as assets are sold off. Highly skilled managers There are no restrictions to voting, or to the transfer of share who respect shareholders ownership, nor are there any mechanisms in effect aimed at preventing takeovers. Nekkar ASA has one class of shares, and each share confers one vote at the General Meeting. There is no specific representation – neither individually nor jointly – for shares owned by employees of Nekkar. Equal treatment of all shareholders is a core governance principle. None of the Board members hold share options or convertibles. All information must be reported in English. Strikes against them: 1. 21% of the shares in Intellilift were acquired from Skeie Consultants AS. Skeie Consultants AS, which is owned by Trym (the majority shareholder in Nekkar), continues to hold 19.9% of the shares in Intellilift AS as per 31 December 2019. Price paid was 15.3m NOK. It's a bit shady. Preben assures me it's all kosher (how could he not). Intellilift did NOK 13.2 million in revenue and an operational EBITDA of NOK 1.2 million in the first half of 2021, compared to revenue of NOK 10.1 million and an operational EBITDA of NOK 2.1 million If we extrapolate this year’s half yearly EBITDA out for the rest of the year, this means the company paid effectively ~5.5x EBITDA for a controlling stake in a software company growing revenues at ~26% YoY (that has synergies with other arms of the business). At least some of the shadiness needs to be tempered by the price paid. Trym obviously didn’t want to shoot Page 30 of 32 himself in the foot by having Nekkar overpay. If we were to put a 10x sales multiple on Intellilift 2024e revenues, we get a value of about NOK 460m which, given Nekkar’s 51% ownership, roughly equates to Nekkar’s market cap today. Not bad. 2. Obviously the Macgregor arbitration and debacle was a huge fail. The CEO is gone, but the current directors were certainly around to prevent something like this from happening. 3. The business is carrying heavy tax losses which I believe has stemmed from the legacy chinese JVs in TTS which have been sold off to Macgregor/Cargotech. Not a bad thing per-se but a red flag that management didn’t execute so well on the offshore / freight machinery business (which is ok going forward since they’ve sold/discontinued this to focus on their strengths). In addition the old CEO is gone, and a new CEO has come in who is focussing on the shiplift systems and getting service revenue. Are the managers good capital allocators? Management have said in their reports that the “prevailing business strategy is planned to be funded with cash flow from operations.” Their message around risk and return is good: “Nekkar aims to give shareholders a competitive long-term return that reflects the risk inherent in the company’s operations. Based on Nekkar’s capital structure and growth strategy, the shareholders’ return should be realized mainly through an increase in the value of their shares. However, dividends may also be relevant in the future, if and when the circumstances permit it. Growth through acquisitions will be funded through a balanced mix of equity and debt.” Selling the old loss-making expansions into cargo was a smart move. They repaid debt / convertibles. They also changed CEOs. Now they’re focussed on the right things and the crown jewel, where they have a competitive advantage. They have some interesting R&D plodding along, seems sensible the amount of spending they’re deploying now - just need to keep it reasonable. Page 31 of 32 Financial health Company Comp median Current Ratio12 1.95 1.48 Debt/Equity (adjusted for buybacks)13 2.2% 96.4% Total Debt/Assets14 1.2% 20.4% Interest Coverage Ratio15 77x 23x Altman Z-Score16 9.5 6.6 Beneish M-Score17 -1.87 Preferred stock, converts, other debt None (post Macgregor) Don't want increasing goodwill & bad acquisitions - awful combo Reverse direction, see chart above under capital allocation, mergers. 12 Below 1 is dangerous. The best businesses generally don’t need debt. Should be below 50% in most cases. 14 A ratio greater than 1 shows that a considerable portion of the assets is funded by debt and carries higher credit risk. Below 1 suggests more of the Company’s assets are funded by equity. 15 Generally, a higher coverage ratio is better, although the ideal ratio may vary by industry. 16 Should be above 3. 17 An M-Score of less than -1.78 suggests that the company will not be an earnings manipulator. An M-Score of greater than -1.78 signals that the company is likely to be a manipulator 13 Page 32 of 32
