Strong finish to a volatile month

Performance

Adrigo Small & Midcap L/S Class A and Class C rose 0.99% in September, net of fees. The Carnegie Small Cap Return Index Nordic fell by 4.0% in September.

Among the fund’s larger holdings, Billerud (Packaging) and Frontline (shipping) again provided good contributions. OssDsign (Medical Technology) provided a solid contribution after successfully raising capital and after some good news.  Middle-sized positions with good contribution were Hafnia (Transportation), Camurus (Healthcare) and Dolphin Drilling (Energy). Our short positions had a positive contribution in aggregate, driven by good individual shorts and our index hedge.

Adrigo Small & Midcap L/S Class A has returned 67.0% since inception, net of fees. The compounded return has been 9.1% per year since inception. In the same period, the benchmark STIBOR 1M rate returned 2.6% and the Carnegie Small Cap Return Index Nordic gained 58.0%.

Market comment & the companies

Global stock markets were weak during September. MSCI World fell 3.7% while EURO STOXX 50 declined 2.8%. The Swedish large cap index (OMXS30GI) was down 1.3%, while Swedish small caps underperformed and fell 3.8%. Again, Sweden clearly underperformed its Nordic peers during the month. Oil prices rose sharply with Brent trading up some 6% and WTI 8.5%. The commodity index, CRB, rose by 1.4% with a weak development for nickel while zink rose by some 9%.

The fund's performance was quite volatile during the month but had a strong finish. The fund has a relatively large exposure towards smaller companies and short-term liquidity changes can impact prices both upward and downwards. As an investor, we believe one should look at the performance over a longer period, at least the rolling average over three or six months.

Perhaps the most important event amongst our holdings during the month was the directed equity issue done by OssDsign. The company strengthened its liquidity by SEK 150 million (before transaction costs). At the same time, the company decided to focus entirely on the orthobiologics market in the US – an important step. Thus, the operations within the cranial business will be phased out. Cranial is a tailor-made product with a strong market presence but with low scalability and limited market potential. This decision will result in a substantial reduction in the cost base, future capital needs will be reduced, and the company expects to reach positive cash flow in the medium-term.

Moreover, OssDsign received clearance for its product Catalyst from the FDA for a major indication for use in interbody cages. Catalyst has a gross margin above 90% and grew sales by 453% in Q2 (40% sequential growth).  Market cap of OssDsign is still a mere SEK 600 million and the company is in the early stages of its growth phase. With its growth profile now being fully funded,  we believe more institutional investors will discover the company and the share.

In our July letter, we touched on a new investment, Enea (software). We met with the new CEO, Anders Lidbeck in September, a meeting which clearly strengthened our positive view. Below, we outline the company and why we see substantial upside in the share.

In April, the company announced that one of its customers, a large European telecom operator, had terminated a contract before final delivery. The contract, for Enea's 5G Cloud Network Data Layer, was signed in 2020 with a value of EUR 24 million. This was the prelude to the significant changes that were announced during the summer: change of CEO, cost reductions and efficiency measures (which will strengthen the cashflow by SEK 60 million on a yearly basis) as well as a review of the potential within its product portfolio within telecom. The latter led to a write-down of intangibles of SEK 520 million. In hindsight, the company's plans within 5G Cloud Network Data Layer seems to have been too ambitious and actions were needed. The new CEO, Mr Lidbeck, chose to clean the whole deck, a decision we applaud. Importantly however, Enea is not all about 5G Cloud Network Data Layer. The other nine areas in its software portfolio are developing well with strong cashflows and solid growth. The largest is cyber-security with a strong product offering in a growth area with good secular grwoth. In our meeting, Mr Lidbeck was clear that the sales organisation will be more focused on solutions were Enea has a great chance to win. The company initiated a buy-back program in connection with its Q2 report. This year is a lost year with a significant impact on the P&L from the write-downs. However, the ambitions to deliver 10% top-line growh and 35% EBITDA margin is unchanged. We have faith in Mr Lidbeck's abilities to turn-around the company which implies a significant potential in the share price.

Finally, we would like to thank you, our co-investors, for your continued trust!