Trention AB analysis: The value and business model in this Swedish holding company Trention AB has been so well hidden in so many aspects, that it shouldn’t surprise anyone as it trades over 40 percent under its NAV, while yielding around 9 percent for its asset base (at SEK 54.5 per share per 24.11.2017). Luckily there are possible catalysts, and meanwhile, the 9 percent earnings yield does not hurt either.
- SEK 434m of unutilized tax carry forwards, of which only SEK 25m capitalized in Q3 2017, that the company can utilize fully with unlimited time horizon
- Trention’s old heavily loss making business that has been fully exited, is still haunting in the backs of potential investors. The new business will be slowly revealed to investors as the company turned profitable for ttm figures in Q2 2017 and will most probably post full year earnings at around SEK 10 per share, thus having a 2017 P/E of 5.5x (currently P/E of 8.7x)
- Value creating management and strong core owner Mats Gabrielsson (owns 30 % of the company), who is behind the turnaround, give a strong backbone to the realization of the potential of the previously underutilized assets
Today’s Trention looks for small and medium-sized companies in an expansion phase, who seek funding options where Trention can provide the companies with both financial resources and advice. Trention takes active engagement and, together with the company, creates sustained growth and profitability.
At the moment, most of Trention’s assets are invested in the short term to various financial solutions such as bridge loans and / or different forms of hybrid financing for targeted small and medium-sized companies. Of the total assets of SEK 318m, 77 % (SEK 246m) are in short term loans with less than 12 month maturity, 5 % (SEK 16m) in long term loans and 12 % (SEK 39m) in equity investments (securities).
On top of the well yielding bridge/high yield –financing book, the company’s most valuable asset is its SEK 434m unutilized tax loss carry forwards. Before Q3 2017 none of the sum was capitalized, as the company was in a different line of business and loss making, before Mats Gabrielsson took it over and sold all the assets to change the business to financial services and investing. Also, it has to be mentioned that the company does not want to capitalize any more than necessary, as they only capitalized SEK 25m (less than 80 % of trailing 12 month (ttm) net revenue and 140 % of ttm EBIT), thus leaving SEK 409m still off the balance sheet.
I estimate the value of the total tax losses at approximately SEK 65m, compare to the capitalized SEK 5m, which comes to SEK 17 per share. To land at that amount, I use AUM CAGR (net profit margin) of 10 %, assuming no dividends to be paid before the tax losses are covered, Swedish statutory tax rate of 22 % and discount the future profits at 8 % from the Q3 2017.
On top of the idea that Trention should pay significant taxes next time in 2026, they also have a strong track to show profits on their loan book. Post the liquidation of former businesses that was finalized during Q4 2016, the company has shown increasing positive returns on the loan book, and has carried only marginal loan losses so far.
Trention’s quarterly revenues and EBIT development, SEK thousands
Finally, the equity investments of SEK 55m, relate to 4.1 million shares in a Swedish energy plant contractor Saxlund (c. 16 % of the company), that actually is one of the assets Trention exited during the liquidation by performing a dividend out to shareholders. Post the separation, Saxlund organized a share offering at SEK 3 per share, where Trention acted as an underwriter, and thus ended up with 16 % of the company. The shares trade currently at SEK 2.35, giving a value of SEK 9.6m for Trention. Other equity investments include SEK 10m investment of online casino starup Codeta and shares in Sound Dimension AB.
Trention itself utilized its first debt financing in Q3 2017, when it announced new overdraft facility from Handelsbanken worth SEK 20.0m to bring flexibility and more muscle to operational activities.
To Conclude, Trention is an emerging investment company that has done a complete change over by liquidating all of its former assets, and now focusing in financing and investing activities with its SEK 287m investable asset base, that generate profits making it possible to utilize company’s sizable (SEK 434m) tax loss carry forwards left over from the liquidated business lines.
Adding the current investable net assets of SEK 76 per share and the PV of the tax loss carry forwards of SEK 17 per share, we arrive at SEK 93 NAV, leaving the company to trade at over 40 percent NAV discount. Additionally, the company trades at EV/EBIT of 8.9x and P/E of 8.7x (where the earnings part is set to normalize upwards for full year 2017, as the Q4 2016, still in the ttm figure, was not yet operationally fully utilizing the company’s potential).
Disclaimer: This memorandum is for discussion purposes only and is not intended to be, nor should it be construed or used as, financial, legal, tax or investment advice or a general solicitation. This memorandum is as of the date posted, is not complete and is subject to change. The data contained herein are prepared by the author from publicly available sources and the author’s independent research and estimates. Certain information has been provided by sources believed to be reliable, but has not been independently verified and its accuracy or completeness cannot be guaranteed and should not be relied upon as such.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do hold a material investment in the issuer’s securities.