Nordic’s “Last Mile” Innovator in Effecting Climate Change Action | H.E.R.O. Issue 11, 23 November 2020
A stunning and little-known fact is that buildings are responsible for 40% of worldwide energy consumption and climate-damaging CO2 emissions. 40% of the energy used in buildings by HVAC (heating, ventilation & air-conditioner). With proper building controls systems, energy savings of up to 50% can be achieved compared to buildings without.
And technical and sustainable installation services are the critical “last mile” in green buildings, analogous in how efficient last-mile delivery and faster fulfilment services are the critical competitive edge to Amazon and e-commerce companies.
This week, we highlight one of our portfolio companies, Nordic Leader in Climate-Smart, Energy-Efficient Technical and Sustainable Installation Services in Heating & Plumbing, Electricity, Ventilation, Cooling and Industrial Solutions, a recent new stock purchase which is up +11.7% during the week (16 to 20 Nov 2020), after reporting on 9 Nov 2020 a healthy set of 3Q2020 results, in which sales climbed 16.1%% yoy, operating profit rose 23.9% yoy with operating margin improving from 8% to 8.5% and ROE (= EBIT/Equity) of 32.7%, on continued demand and growth for its energy-efficient solutions for indoor and outdoor climates to protect the environment. This rising dividend-yielding profitable and cashflow generative innovator has also compounded +236% in capital gains in the recent 3+ years since its listing in May 2017 vs MSCI ACWI World index +32.8%. The company has very stable, low-risk and consistent revenue, earnings and operating cashflow growth with low capex investment requirement and cash conversion rates of 100-112%, providing a strong foundation for its dividend policy of distributing 30% of its net profit. Over 84% of sales are from repeated customers.
Many of this innovator's customers have seen their energy consumption cut in half after the project planning and solutions implementation undertaken by the company. The company's strengths come from its expertise and knowhow in discovering and designing new, smart, energy-efficient solutions for its customers.
One example of a project with high sustainability requirements is in designing and install an entirely unique and customized geothermal heating system for 650 new apartments in a new city district of Upplands-Bro municipality in Stockholm County, and is the first of its kind in Sweden. A unique solution was designed based on the client’s high energy demands using extremely efficient and powerful heat pumps. What is special about this system is that the company is using a cooling agent that has a lower environmental impact, yet with a higher efficiency than what is standard. It results in higher overall efficiency, saving 10-15% compared to a standard geothermal heating system. The company had designed the system prior to having it built in Italy.
Another is the unique energy-efficient heating and plumbing, cooling and ventilation solutions connected to 20 energy wells for geothermal heating for the high-profile and prestigious new cycling velodrome in Asker, near Oslo in Norway. The velodrome will meet the standards for holding international competitions, with a 200-metre-long track that has a multi-sport area in the middle. It will also serve as the Norwegian cycling team’s training and competition centre.
The company also co-develops energy optimization technology systems with its property company customer. One of the company's subsidiary specializes in property automation, along with control & regulation technology. It has developed a Energy Reduce System that optimises the indoor climate and energy supply for heating at the properties based on a variety of data about the indoor and outdoor environments. Temperature sensors have been installed in each apartment in order to optimise the energy supply. In addition to that, weather forecasts from SMHI (Swedish Meteorological and Hydrological Institute) are used for estimating and calculating, in advance, how much energy the buildings will need, before the outdoor temperature changes.
These solutions are classified under the company's pioneering "Sustainable Installations" program that was implemented on 14 Feb 2020. With the new sustainability programme, the company has also become a signatory of the UN Global Compact and is committed to doing its part in achieving the Sustainable Development Goals (SDGs) of the 2030 Agenda. Founder and CEO Mr. S shared: “Every single day, our company generates benefits to society via its climate-smart, energy-efficient installations that lead to lower consumption of resources. Now, we're expanding our approach and taking even greater responsibility in the area of sustainability with our classification system, 'Sustainable Project'".
There are many types of technical systems and applications of digital technology in the form of IT solutions, alarm & security systems and systems for more efficient use of energy. The installations themselves have become more complex. Accordingly, technical installations are becoming an increasingly important component of the building process and installation services are expected to account for a larger share of the total building cost. Complex installations place high demands on service suppliers. They must have a broad knowledge base, the right technical expertise and also the capacity to both complete the installations and provide services. Projects are becoming increasingly complex, with a greater need for planning and coordination prior to the start, and management activities throughout the duration of the project. This trend is expected to benefit companies with broader technical expertise. The company's unique business model enables the company to offer multidisciplinary expertise in coordinated projects covering several areas of technical expertise, which makes things easier for the client.
The company’s business model is akin to the Berkshire Hathaway decentralized model of strategic acquisitions of successful companies with strong local ties and mature leadership that wants to develop the business further, while maintaining their local identity and operational autonomy. The company is the kingpin consolidator in a fragmented market. It combines local proximity with a large company’s opportunities to offer end-to-end solutions for its customers. The business model is based on the following: (1) Local proximity – the Group chose the optimal company for each project. (2) End-to-end solutions between technical areas, cross sales between companies. (3) Best practice to learn from each other and use the best methods. (4) Efficient internal organisation – decentralised responsibility and a strong leadership culture. (5) Acquisitions and organic growth in selected regions. The company’s acquisitions are made based on four clear requirements: (1) Strong local market position, (2) Strong financial position and many years of experience, (3) Competent entrepreneurs as leaders who want to continue developing the business, (4) Culture and values on par with the company's set of values.
The company was founded by CEO Mr. S in 2014 through the consolidation of five installation companies; all with vast business experience and favourable profitability. Mr. S is the CEO of various construction and installation companies for 27 years, including NEA Group and Midroc Electro AB, and he was the former Head of major projects at the Swedish Transport Administration. The group has since grown fast into a closely connected group of 68 companies, as the business concept attracts many successful local businesses. The company's unique model that makes it possible for the acquired companies and their entrepreneurs to run their operations in a larger context, where they can benefit from the economies of scale available to a larger Group of affiliated companies. The CEO of each company retains a great deal of autonomy as regards management of projects, employees and customers. In this way, local units are able to maintain their entrepreneurial spirit and identity, while benefiting from having shared accounting/finance functions, purchasing agreements, cross-selling, sharing of resources, spreading best practice and access to the company’s business development function. Being a part of the company also means that the new unit can participate in the kinds of multi-disciplinary projects that they would not have access to on their own. From having financed all acquisitions via loans, the operating cashflow in the company has grown to a strong base to finance acquisitions with internally-generated cashflow.
Notably, the company is an important partner in several major prestigious projects, including construction of new foundry in Södertälje and expansion of Malmö Hospital, but the backbone of its operations primarily focuses on medium-sized projects valued at between SEK 1 and SEK 75 million which require a high level of expertise, whereby the main competitive advantages of the company provide are high quality, long-term customer relations and short lead times, ensuring that the quality delivered in each project is high. Many of the customers are construction companies and property owners working with commercial facilities, as well as offices and residential property. Some of the company’s major customers are government authorities engaged in the construction of schools, daycare centres and hospitals. Other customers include major retailers, refrigeration companies, caterers, companies in the food industry, county councils, municipalities, municipal companies, public administration organisations and industrial companies.
Contracts for installation services are typically entered into early in the development phase of a project, which makes it possible to get a good overview and plan operations well in advance. Services that the company has been hired to deliver are typically planned and contracted up to 12-18 months in advance, which means that there is a high level of predictability and ability to adjust the cost base according to the demand. The company’s strategic focus on specialized medium-sized projects, which account for 80% of its revenue, enables them to avoid the risks associated with very large projects, while limiting the number of very small clients. This market strategy provides the company with lower risks and greater growth opportunities.
Technical and sustainable installation services are the critical “last mile” in green buildings. The Swedish market for technical installation and services, which contributes to 74% of the company's revenue, amounts to SEK 122 billion. The largest area is for electrical installations, with it representing more than half of the total market. One of the main reasons for the size of the electrical installations areas is the higher level of complexity in buildings, where more time-consuming, comprehensive electrical installations are required. The rest of the Nordic markets accounts for 26% of the company's revenue.
The market for technical installation and service in Sweden, Norway and Finland has been stable over time and resilient to fluctuations in economic activity and there is high visibility as regards future projects in a supplier’s project portfolio.. To a large extent, it is fuelled by several long-term trends, such as urbanisation, housing shortage, development of technology, infrastructure investments, ageing property holdings in need of major investments, Increased regulation of energy use, and a higher level of complexity in buildings. The rate of growth for construction in the public sector (e.g. schools, preschools and hospitals) is still high. The same applies to construction of commercial property, such as offices and business facilities. In the Nordic region where the company operates, there is a strong and growing demand by property owners of both newly constructed and older properties on investments in energy efficient installations. In part, it is to lower the energy costs of properties, which typically account for a large portion of total operating costs. However, these investments are also required to meet the increasingly high demands of end customers as regards both energy efficiency and sustainability. The company’s offering is on the cutting edge as regards both energy efficiency and environmental awareness. The company’s technical solutions help customers achieve efficient energy use. Photovoltaic systems, technical installations with renewable energy, LED lighting and energy savings programmes are all examples of products that help lower the environmental impact.
A large proportion of property holdings in the Nordic region were built in the late 1960s and early 1970s, which is typically referred to as the period of the Million Homes Programme. This is particularly noticeable in Sweden, where 25% of property holdings were built during this era. Many hospitals, clinics and schools were also built during that same era. Ageing property holdings also result in a higher need for renovation, upgrades and modernisation in order to create sustainable and healthy indoor environments. The company has specialist expertise in technical installations at buildings. This applies to renovation work, upgrades and new construction. The company has completed many assignments at public sector properties and in doing so, it has acquired specialist expertise and become a leading player for installations at, for example, hospitals and schools.
The company has been active in making bolt-on acquisitions during the pandemic, and has also initiated a share repurchase program in an announcement on 19 Nov 2020. The purpose of the repurchases is primarily to use the shares as payment in connection with future acquisitions. Some of the recent acquisitions made include: (1) On 16 Oct 2020, the company acquired a leader who specializes in installation and retrofitting of Ballast Water Treatment Systems (BWTS) and Exhaust Gas Cleaning Systems (EGGS) for the marine industry, which is undergoing a significant transformation resulting from current and future regulations on emissions. The acquired company has a strong position in the market and good profitability and it is one of a selected few companies with a contract for upgrading the fleets of both Carnival Corporations and Royal Caribbean Cruises, which, combined, account for approximately 60% of the global shipping fleet in the cruise industry. (2) On 2 July 2020, the company made its first major acquisition in the area of ventilation solutions. (3) On 3 April 2020, the company acquired a specialist welding leader who has established a niche in welding services in sensitive environments, such as the pharmaceutical, food and nuclear power industry, with clients that include GE Healthcare, Forsmark and Galderma.
CEO Mr. S sums up: “I often talk about the “X effect”, where the companies that we acquire begin reporting higher growth and profitability after having joined the Group. It stems from the stimulating environment and collaboration within the Group, along with the motivation that comes from allowing companies the freedom to run the business as they have successfully done before. All of it promotes entrepreneurial spirit. Companies belonging to the Group have access to all of our central supplier and purchasing contracts, benefit from our examples of best practice, along with participating in various trainings, team-building activities and incentives for higher performance. In short, they are invited to participate in a thriving, motivating and supportive environment that they previously did not have access to. When a new company joins the Group, it opens up new, significant opportunities for them to become an active member of a team, and strive for high performance via internal competition with their sister companies. It’s a way of fostering entrepreneurialism, because nobody wants to be at the bottom of the class. Many companies are interested in becoming part of the Group and we are continually discussing new acquisitions with many interesting, well-run companies. We will continue actively pursuing our acquisition strategy.”