Description
Investment opportunity
We find the current valuation of Fjordkraft to be appealing post a series of negative events that have completely changed the sentiment in the stock. At 11x EBIT we think the share price has fallen too much, and expect the company to continue to deliver stable earnings and return cash to shareholders. For us this is a stable low risk, but with good earnings yield.
Business model
Fjordkraft (FKRFT) is the dominant electricity retailer in the Norwegian consumer market and the second largest in the business market. The company went public back in 2018 after the merger between BKK Kraftsalg AS and the distribution business of Skagerak Energi AS.
Retailing electricity in Norway is a very transparent market with fairly low switching costs for the consumer. There are numerous websites where consumers can compare electricity contracts and easily enter into a new contract with a different company without any real costs. However, this has been the case for a very long time and Fjordkraft still manages to make good return-on-capital in this market.
The investment case is that Fjordkraft is one of the largest players in the industry and manages to make small tuck-in acquisitions to further consolidate its market. There has been quite a few successful acquisitions post listing, but also some bad ones where changing the brand to Fjordkraft has had a larger impact on churn than management expected at the time of acquisition.
Fjordkraft is working on bundling sales to its consumers, such as mobile, as it sees that customers who buy bundles have significantly lower churn than a customer with only an electricity contract. This means that even if Fjordkraft does not make money on providing the mobile contract (roughly break even) it is a big contributor to profits.
Why the situation is interesting today
After going public at a share price ~30 NOK per share the company became a darling among many investors, and after a while reached a market cap where it got included in indices, creating even more buyers. The shares peaked at 95 NOK per share in september 2020 but has since been weak to to 1) allegation of price fixing and fine from the Norwegian government 2) increased regulation in the sector on price transparency.
The allegation of price fixing included 28 companies in the Norwegian market and this definitely impacted Fjordkraft’s brand negatively. However, this is already reflected in todays numbers and is not a recurring problem for the business. This is also the case for the increased price transparency where this is already reflected in the stock price.
Valuation
We find the shares attractive at todays share price of 54 NOK. It is a stable earner that trades at 11x EBIT and makes 30% return on capital. Growth will be limited given that it already has a dominant market position, but we do expect some small tuck-in acquisitions that will create shareholder value.
Risks
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Increased regulation can increase churn and increase customer acquisition cost
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Large M&A that does not create shareholder value, most likely due to churn post integration
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst