Strong performance in July – a large part of the portfolio rose more than 10%

Performance

Adrigo Small & Midcap L/S Class A and Class C rose 14.15% in July, net of fees. The Carnegie Small Cap Return Index Nordic rose by 0.76 % in July.

The fund’s larger holdings in Dolphin Drilling (oil service) and Bonesupport (medtech) provided good contributions. We noted several strong contributors among our mid-sized positions. In total, 11 mid-sized positions rose more than 10 % during July, where Arjo (medtech), OssDsign (medtech), and BHG Group (e-commerce) contributed nicely. We also received a cash offer for our shares in Kahoot (e-learning) in July. Our short positions had a positive contribution in aggregate, driven by good shorts within the basic material and “serial acquirers” sectors. 

Adrigo Small & Midcap L/S Class A has returned 75.6% since inception, net of fees. The compounded return has been 10.3% per year since inception. In the same period, the benchmark STIBOR 1M rate has returned 2.0% and the Carnegie Small Cap Return Index Nordic gained 69.7 %.

Market comment & the companies

After a stronger June, global stock markets developed favorably in July. MSCI World rose 2.8 % while EURO STOXX 50 rose 1.6 %. The Nordic markets were lagging; only Norway was in positive territory. Swedish large caps (OMXS30GI) fell 2.5 %, while Swedish small caps rose approximately 1 %. Overall, commodities developed strongly in July. Oil rose some 15 % and the commodity index CRB rose 8 %.

Most of the Nordic stock exchange's medium and larger-sized companies have now presented their half-year results. Market expectations had come down before the results, but we note negative price reactions mainly driven by a somewhat more cautious outlook for the second half of 2023. Order intake has slowed even within the previously stronger general industry end markets.

During the last trading days in June, we took a medium-sized position in Arjo, a company we have followed for many years. Arjo's Q2 report, driven by stronger organic growth, solid cost control and good cash conversion, beat. Mr. Market has been worried about the balance sheet risk, which is why a strong cash flow probably contributed to a stronger share price reaction after the report. We closed the position mid-July and got a 20% return over two weeks.

It is with mixed feelings that we divested our shares in Kahoot after the NOK 35 cash offer in July. The 13% premium seems somewhat modest, but the share has nevertheless recovered strongly from its NOK 15 low in mid-January. The valuation multiples are high on next year’s earnings, but the growth rate, on the other hand, is also expected to remain high. We divested as we see the likelihood of competing bids to be low, and the bid is well-anchored amongst the larger owners, who to a large extent are part of the bidding consortium. We initially invested in Kahoot in October 2018. At the time, the company was starting to monetize its customer base having some 15k paying users, compared to several million playing. In addition to high customer satisfaction and a clear value-add offering, we saw a scalable business model driven by negligible marketing costs, high gross margins, and advance payments from its customers. The pandemic drove growth rates higher, which in hindsight turned out to be abnormally high. The share has been volatile over the years (peaked at NOK 130), and we have been actively trading the share but always with a long-term focus; staying close to the company/management over the years. Our active trading and long-term approach have proven beneficial to our co-investors, and Kahoot's contribution to the gross return has been approximately 13.5% points.

About half of our long positions reported Q2 earnings in July. In addition to the above-mentioned Arjo, both Bonesupport (medtech) and Camurus (pharmaceuticals) stood out with strong results. Bonesupport delivered 107% organic growth in the US driven by continued strong demand for its flagship product Cerament G. We also note that cannibalization on the standard product Cerament BVF was lower than expected. Camurus also reported strong growth figures. However, our and the market's focus is on the second half of the year, where partner Braeburn, in September will launch Brixadi (Buvidal in other markets), Camurus’ drug for opioid addiction.

During the first week of July, we reinitiated a mid-sized position in Enea (software) after divesting in Q3 2021. The share has lost almost 80% of its value since we divested and 85% since its Dec 2021 post-internet 2000 bubble peak. We added Enea to the portfolio after Chairman Mr. Lidbeck (former CEO) was announced as acting CEO and simultaneously launched a cost-reduction program equivalent to almost SEK 2.8 per share (share price was at SEK 44). No doubt Enea faces uncertainties and a tough 5G market in the coming years, however, its operations in cyber security and large parts of the telecom operations excl. 5 G is growing. We view the financial risk as low, and the company initiated a share buyback program in mid-July. 

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