Monthly Report November 2022

Performance

Adrigo Small & Midcap L/S Class A fell 0.91% and Class C fell 0.90% in November, net of fees. As of November, Class A is down -0.75% in 2022. The Carnegie Small Cap Return Index Nordic rose 6.22% in October and is down -21.27% in 2022.

The fund’s larger holdings in Sinch (software), Attendo (elderly care), and Nolato (contract manufacturing) provided good contributions to our return. The fund’s Norwegian holdings underperformed where Dolphin Drilling (oil service), a quite illiquid stock, had a significant negative contribution. A short position in the OMX future also had a negative contribution and our short positions impacted performance negatively in aggregate.

Adrigo Small & Midcap L/S Class A has returned 78.0% since inception, net of fees. The compounded return has been 12.0% per year since inception. In the same period, the benchmark STIBOR 1M rate has returned -0.4% and the Carnegie Small Cap Return Index Nordic has a gain of 61.4%.

Market comment & the companies

Developed stock markets have recovered some of their declines and have continued to be highly news sensitive. The market is turning more optimistic as it looks for signals that the peak of the interest rate cycle is near.

The e-commerce company Pierce Group, one of the largest European online retailers of motorcycle parts (with a large share of their own brands), is a new holding since August. It is active in a niche market with low e-commerce penetration, and we view the outlook for organic growth as good given more customers will go online.

The company was listed in March of 2021, i.e., at a time when the IPO market was red hot. Sales were, in hindsight, boosted by Covid-19 thus sales growth slowed significantly post its IPO. Simultaneously, costs for shipping goods from Asia to Europe skyrocketed squeezing gross margins. Inbound freight costs accounted for some 2.5% of sales during 2019 and 2020 compared with 6.5% over the last quarters. However, the container market has slumped recently, and rates are today some 50% lower than in Q4 2021. We expect to see a positive impact from this during H2 2023. Should gross margins normalize in 2024, one would expect an increase of some 400 bps corresponding to SEK 1 per share compared with the share price today of SEK 10.

Pierce was forced to refinance and raised equity in June 2022 and is now in a net cash position. In connection with the rights issue, Verdane Capital acquired its first shares and became the largest shareholder, holding close to a 30% position. We believe that Verdane is a hungry wolf after recent setbacks in Swedish Desenio and Babyshop, but Verdane has a proven track record from e-commerce, e.g., Boozt. After an announced EGM in December, Verdane will also have board representation, and we expect the firm to take the driver’s seat going forward. The share has very high return potential that should materialize as its margins normalize going forward.
 
Adrigo Small & Midcap L/S was launched on November 1st, 2017, and we have recently celebrated our five-year anniversary. Five years can be described as both a short time and a long time. Nonetheless, the market has been volatile, and a lot of events have taken place over these years. We have gone through macroeconomic shocks, with interest rate hikes and monetary tightening, to hefty monetary stimulus measures, and finally tightening once again. We have seen companies leverage their balance sheets, make acquisitions by issuing shares, and play the multiple arbitrages to later turn around and "focus on its core business" again via divestments and subsequent extraordinary cost reduction programs. In recent years, Covid-19 and Russia's invasion of Ukraine have created turmoil in the market. The next five years will most likely be volatile, but one fact remains; we will see companies, to a larger extent, small and mid-sized, developing strongly despite an uncertain macroeconomic environment.

Since our inception, we have managed the fund according to the basic concept we started with; to focus on individual companies and their value drivers. Over the years, we have maintained the strategy but with a continuous twist, because you, as an investor, must adapt to the current market conditions. We have generated an annualized return of 12% (net of fees), which is in the middle of our stated range of 8% to 16%. On a relative basis, and compared with the Nordic small and midcap stock market, we have generated value. However, we are never satisfied and will continue to work hard to generate even better returns for our co-investors. Finally, we want to thank you for your trust, and wish you and yours a Merry Christmas and prosperity in 2023!