Sola's opinion on the Swiss stock market (Episode 26)

The Pluto-Switzerland Fund will be launched in July 2024 1.11% to, in accordance with the SPI Small/Mid Cap Index, the 1.34% quoted higher.

The global stock markets have now entered a new phase at the start of the second half of the year: Since mid-July and positive inflation figures, a new trend has developed on the US markets - a market cap rotation from the "safe" megacaps to small caps. In the reporting month, the Russell 2000 outperformed the Nasdaq 100 by almost 14 percentage points - more than at any time since 2011.

There has been no differentiated reaction from the European stock markets so far and the sell-off of the 'Magnificent Seven' has led to increased volatility. Added to this were weak EU economic indicators.

A highlight of the month was undoubtedly the surprising guidance increase of Accelleron – the already very positive performance in FY24 was expanded by a further 22.5%.

The climate specialist Belimo grew again in the first half of 2024 and presented a strong half-year result. The company was confident about the second half of the year and increased its sales forecast.

Positive comments from Sandoz-CEO Saynor, have sent the generic drug maker to new heights – investors appear to be positioning themselves for the Q224 earnings release on August 8.

Lonza impressed with a H124 result in line with the full-year forecast. Core EBIT exceeded expectations, with an attractive margin of 29,2%. The company sees itself on track to meet the FY24 guidance and the targets for the years up to 2028 were also confirmed.

The transformer manufacturer R&S Group has developed well in H124. Both sales and order intake have increased significantly for the newcomer to the stock market. The outlook for the full year is confirmed. Sales growth of more than 12%, an EBIT margin of around 20% and a free cash flow margin in the mid-double-digit percentage range are expected. We see profit-taking as an opportunity for new investors.

SFS spoke of a difficult environment with a weak international economy, geopolitical tensions and lower investment demand in the H124 report, but a marginal economic recovery is expected in H224. For FY24, SFS is forecasting slight organic growth and an improved EBIT margin. Previously, a margin at the previous year's level (11,7%) had been forecast.

Also Roche GS were doing very well on the market in July: the news that Roche is developing a GLP-1 product seems to have been the deciding factor here – and suddenly everyone is positive about the previously neglected stock.

Despite repeated media speculation that a relaxation in the Middle East would be bad for freight rates, Kuehne + Nagel A H124 result that exceeded expectations on both sales and profit levels and the comment that K+N sees a revival in demand in air freight and expects further efficiency gains in the second half of the year caused the value to rise. We took advantage of a brief period of weakness to increase our position.

Holcim grew more slowly but more profitably in the first half of 2024. The outlook for profitability has been raised slightly, with an increase in the operating margin to 18,5% now expected. Sales growth is still forecast to be in the low single-digit range, and free cash flow is forecast to be over CHF 3 billion.

ams OSRAM was again very volatile in the reporting month: in the wake of encouraging statements from Samsung regarding sales development, the value initially rose, as Samsung is an important, long-standing major customer. The surprisingly solid order intake from Aixtron also helped.

ams OSRAM itself delivered a solid result and increased profitability in the second quarter. The implementation of the "re-establish-the-base" program, which includes the sale of the micro-LED factory in Malaysia, is progressing well. However, negative voices prevailed in the market and the weakness in the tech sector put the stock under pressure.

A lowlight in July for us was Bystronic, are going through difficult times - but the stock is now at a sell-off level and does not reflect any recovery. The new CEO Iacovelli faces some challenges.

Also medmix could not convince with the figures for H124 and even had to reduce the guidance – the new CEO is also required to do this.

DocMorris' Competitor Redcare presented positive H124 figures, which the Swiss company cannot match for the time being. However, the first data point on electronic prescriptions redeemed online (eRx) in Germany shows that the momentum is continuing unabated. Despite doubling its market share and confirmation of guidance, DocMorris came under excessive pressure. We consider a quarter to be absolutely irrelevant for the medium and long-term investment case and have therefore used the very low prices to further increase our position.

Of course, the Nasdaq sell-off particularly weighed on Swiss tech stocks: VAT presented very solid figures, but did not increase the outlook. In tow, despite intact H2 prospects, Comet clearly. Also u-Blox lost some ground – the H124 report on August 7 will hopefully provide more clarity.

In the reporting month of July, the Plutos Switzerland portfolio underwent some changes:

We have the position TX Group after a strong performance. We also Rieter sold completely before the H124 figures were released - this also resulted in an attractive performance. We currently see a lot of positives priced into both stocks.

We have started to establish a new position in LEM Holding to build up: the western Swiss company for electrical measuring solutions is feeling a rough economic headwind. Sales fell in the first quarter, which was reflected in a drop in profits. The operating margin fell into the single digits - very unusual for Lem. This is the worst result in Lem's recent history, and sentiment in the markets has not yet improved. However, the measures introduced are showing initial improvements. It is also encouraging that order intake - albeit at a low level - has increased over the last three quarters. The company expects an improvement in sales in the second half of the year.

The LEM share has suffered greatly, but corresponds exactly to our parameters in terms of quality, margins and market share. An end to the inventory reduction seems to be in sight in H224, especially in the automotive sector. In our opinion, this should bring the focus back to the attractive underlying market growth, e.g. in the area of ​​electromobility, where faster, albeit somewhat lower, growth is still expected. LEM Holding AG continues to have a solid dividend yield combined with an underestimated ROCE level of >30%. In our view, LEM is around 40% undervalued.

“Bad companies are destroyed by crises, good companies survive them, great companies are made better by them.” 

Andrew “Andy” Grove, Hungarian-American businessman, co-founder of Intel (1936-2016)

Rotation is the lifeblood of a bull market – US small caps are rising

The USA, the strongest global growth engine to date, is beginning to stutter: orders for durable goods are down 6.6%, after an increase of 0.3% had been expected, and the labor market - with significantly fewer new jobs created and a higher unemployment rate - is tending to be weak. Inflation figures are falling slightly. Although this makes a rate cut by the Fed in September increasingly likely, it is by no means certain.

But the prospect of falling US interest rates in the foreseeable future has abruptly triggered a change in favorites in the USA. Smaller and medium-sized companies are likely to benefit more from cheaper corporate loans than the tech giants. And the increasing market breadth is certainly positive, even if the Nasdaq 100 is currently suffering greatly: 'Rotation is the lifeblood of a bull market” Ralph Acampora was once quoted as saying.

The movement has a lot of potential, as the gap between US tech and global small/mid caps has widened to an unsustainable level: The Nasdaq 100 gained around 2023% from October 2024 to June 50 and we are currently less than 10% below the highs. The MSCI World SMID was only able to gain 8% during this time:

There has been no differentiated reaction on the European stock exchanges so far and the sell-off of the 'Magnificent Seven' has led to increased volatility and pressure on the market. Added to this were weak EU economic indicators: in particular, the German purchasing managers' indices for construction, industry and trade were disappointing and fell well short of expectations.

It is surprising that consumer confidence increased compared to the previous month - but at -18.4 it is still well below the pre-pandemic level of +10. This was probably due to the European Football Championship, the Olympics in Paris and the upcoming vacation...

My personal opinion: We continue to assume that lower interest rates in the USA and specifically in Europe will be very beneficial for small/mid caps. The market will then enter a new phase. The weakness of the European economy is increasingly becoming a major political issue. And the European small/mid caps reflect this very clearly: the performance gap of this asset class compared to the European large caps has grown to around 35% over the last three years.

Temenos' homework

I recently had the privilege of speaking personally with new Temenos CEO Jean-Pierre Brulard, CFO Takis Spiliopoulos and IR Adam Snyder.

Shortly before, Temenos had announced an increase in revenue in its H124 report - however, the banking software manufacturer now expects significantly less growth in the area of ​​'software licenses' for the full year and has lowered its growth forecast for related revenues to 3-6%. However, operating profit is still forecast to be between 7-9% higher, and free cash flow is expected to increase by at least 16%. The medium-term targets will be reviewed and presented on November 12 at an investor day in London together with a strategic plan.

The main topic of our conversation was not the first half of the year – rather, I was interested in finding out about Mr. Brulard's most important new approaches and what state he sees Temenos in since its launch around 1 days ago.

In particular, attracting and retaining talent seems to be very important to the new CEO. The USA is an employee market with many options for people who are dissatisfied. In addition, Temenos should be perceived as 'American'.

In his many discussions with customers, quality was the most important topic: quality in implementation, quality in the product and quality in planning. With 800 customers and over 1200 modules, ensuring quality is of the highest priority.

Culture and leadership are absolutely essential to opening a new chapter for Temenos. Too many managers were oriented and compensated for the short term, and there was often little clarity about the purpose and long-term plan of the leadership. There was also resistance to change. To reduce the complexity of leadership, the Executive Committee will be reduced to six members. A Senior Leadership Team (SLT) will be created for this purpose.

The USA will be an important part of the growth: the number of representatives will be increased from six to 224 in H16, in particular to better serve the sweet sport Lower Tier 2 and Tier 3. With around 160 banks in the USA, the potential is very large. The focus is specifically on corporate customer business.

The UK plays an important role in Europe: with the new Head of Europe, the wealth management business has come into focus. Cross-selling to existing customers BIL, ABN Amro, KBC, Nordea and Socgen must also improve.

If the FY24 EBIT forecast is to be achieved, costs in the second half of the year would have to rise by 2 million from today's perspective - this is unlikely and the buffer is high enough. The outlook for the 'Maintenance' area has been increased, something that many investors do not seem to be aware of. The only volatile segment is subscription, the rest of the areas have very good visibility.

My personal opinion: I have a very positive impression of JP Brulard. The short seller report resulted in two months being lost and it is understandable that it is not easy to complete 12 months' worth of business in 10 months. But when I asked how much pressure the competition was under, the CEO and CFO answered in unison: 'If we do our homework, there is no way around Temenos.'

ams OSRAM is developing positively

I was particularly looking forward to the conversation with ams OSRAM CEO Aldo Kamper and IR Juliana Baron, as the company is one of the most controversial and currently most discussed – and an extremely important portfolio company in the Plutos Switzerland Fund.

This much in advance: Aldo Kamper is in a good mood and he seems to be very satisfied with the development of the company, apart from the microLED shocker.

When asked about the plans for the newest fab in Kulim, Malaysia, Mr Kamper said that they are still planning to sell it. The situation is somewhat different with regard to the microLED capabilities acquired in the project. When asked about a possible further development of this technology, Mr Kamper said that large-area displays are no longer the focus. In the future, two areas in particular would be very interesting: in cars, the trend is towards smaller pixels. The head-up display, and even the entire windshield or side windows, are new design elements that are only visible when they are switched on. Projection surfaces for glasses could also be developed. However, the fab in Kulim is not necessary to make this happen. Therefore, they are looking for a buyer or new lessee in an orderly process. The equipment will either be reused/converted or sold. Implementation will probably come in 2025.

[I would place much more emphasis on Eviyos technology below. Laser taillights are a less revolutionary, smaller trend.] Innovative solutions for headlights and taillights continue to grow well in the various verticals of the semiconductor business. Business is currently booming with EVIYOS, a highly pixelated LED headlight module with 25.000 individually controllable light points. The company sees considerable interest from car manufacturers due to the additional safety features this makes possible. So far, design wins totaling EUR 450m have already been booked. In the future, ams OSRAM also sees considerable potential for its 'Aliyos' technology for taillights. "Light out of nowhere" is a film solution that is very popular. Overall, the proportion in cars (bill of material) is constantly increasing. As an innovation leader, ams OSRAM must also develop at its own risk and expense, which then lasts for one to two decades.

The multiple design wins mentioned in Q224 were particularly evident in this area.

In the Industrial and Medical Technology (I&M) division, ams OSRAM is very strong in the CT sensoring area and is already represented in many CT scanners. The market leaders want to invest more in this area. A new Japanese customer was acquired. The segment is currently being held back by inventory reductions and weak demand.

In the consumer sector, i.e. various applications in Android and Apple phones, Android is now running significantly better again. ams OSRAM is installed in eight of the ten best camera phones. The ambient light sensor for a 'major customer' (Editor's note: the market is coming from Apple) is running the ramp - the chip and the packaging come from ams OSRAM - this will be reflected in the figures in the H224.

Automotive is also important in the Lamps & Systems (L&S) segment, i.e. in the more 'normal' applications: this area will probably remain stable at best, because only around 20% of vehicles today are fitted with halogen lamps. [% for newly installed halogen lamps. The proportion of the fleet with halogen equipment is significantly higher in percentage terms.] It is a typical cash cow strategy, without much R&D. ams OSRAM has a very high installed base and is increasingly displacing Philips. GE threw in the towel four years ago.

There are a huge number of areas of application for special lamps, from gardens and greenhouses to the entertainment industry and lamps for curing various products. A very interesting, diverse area, but one that I don't think will be a big game changer in the near future.

There are no distortions in market shares, the supply chain is almost completely back to normal and ams OSRAM is very innovative throughout, which makes it very difficult for new competitors.

After an increase in Q224, CAPEX will be significantly lower in the second half of the year, which will of course also have a strong impact on net debt.

My personal opinion: Almost branded as a perma-bull at ams OSRAM, I will not change my actually very positive opinion, especially not after the very insightful conversation with Aldo Kamper. The turnaround is in full swing - now it needs two or three such 'normal' quarters to be able to convince investors again.

Swiss industrial stocks – bottom out

With their publications for the first half of 1, most of our portfolio companies in the industrial sector painted a similar picture:

Too few new orders, low capacity utilization, rising wage costs, resulting pressure on margins and often a very cautious outlook for H224.

Visibility remains low and despite an ECB interest rate cut, demand in Europe is not picking up; the German PMIs and the ifo business climate index from Germany continue to disappoint and are below expectations.

In addition, work morale in Germany seems to be deteriorating – some call this the zeitgeist – and employees are more likely to take sick days, not show up at work for no reason or want more money for the same work.

The German wafer factory of TSMC, the world's largest independent contract manufacturer of semiconductor products from Taiwan, is also experiencing this first hand and is faced with three main obstacles to profitability: strong unions, high costs and a limited workforce.

The economy in the USA also seems to be facing a downturn – but unlike in Europe, this is intentional…

The status quo is therefore extremely bad and it is possibly the biggest European economic crisis in recent years - and therefore it is the right time to add high-quality, innovative companies to your portfolio, because many are now trading at levels that do not factor in any kind of recovery.

Two investor darlings deserve special mention here: LEM and Forbo.

Both are undoubtedly of the highest quality, but are currently suffering enormously from the challenges listed above.

Forbo missed analysts' estimates with its half-year results. The EBIT margin was still 10,8% (previous year 12,2%). The outlook for the full year 2024 is nevertheless confirmed, but "the coming months will continue to be challenging" - the start of another share buyback is likely imminent.

LEM, the western Swiss company for electrical measurement solutions, is feeling a rough economic headwind, as already mentioned in the monthly report. Sales fell in Q124, which was reflected in a decline in profits. The operating margin fell - very unusual for Lem - into the single-digit range. In the period from April to June, the first quarter of the 2024/25 financial year, sales fell by almost 28% to CHF 81 million, the company announced. Currency effects had only a minor impact. At constant exchange rates, the minus is only marginally more moderate at 26,9%. This is the worst result in Lem's recent history, explained CFO Andrea Borla. Sentiment in the markets has not yet improved. According to Borla, however, the measures introduced are showing initial improvements. It is also encouraging that order intake - albeit at a low level - has increased over the last three quarters. The company has not yet given a specific outlook for the 2024/25 financial year. However, business in the current second quarter is likely to develop similarly to the first quarter. The company expects sales to improve in the second half of the year.

But also from Zehnder, Bystronic, Komax, medmix investors turn away:

Zehnder expects improved performance for H224 due to the low previous year's base, is attractively valued with an EV/EBITDA 2025E of around 7x and the last acquisition will contribute to earnings from H224 onwards - our fair value is around 20% above the current price.

The Bystronic The persistently weak market dynamics led to a sharp decline in sales and a half-year loss. Economic uncertainty is putting a strain on demand and orders received and sales are falling compared to the previous year. Despite savings, the low sales resulted in a loss. High start-up costs and unplanned additional expenditure in the implementation of automation and complete solution projects further reduced the result. Bystronic does not see any significant recovery in H224. However, the value has now reached a sell-off level and is not pricing in any recovery.

Komax recently had to issue a profit warning for the year as a whole. Stagnating car production, further shifts to the Far East, excess capacity in cable processing and excess inventory in the supply chain have led to a slump in Komax's business.

Komax is unlikely to be heard to be anything other than cautious in the final H124 report. The order backlog is low and the low level of incoming orders is alarming. However, if incoming orders bottom out, there should be legitimate hope for a better year in 2025.

Also medmix disappointed with its H124 results and even revised its annual forecast. Sales fell by 2,8% to CHF 241 million. Currency effects reduced the result by a further 2%. Adjusted for currency effects and excluding takeovers, sales fell by 6,1%. The adj. EBITDA of CHF 46 million remained below the previous year's figure of almost CHF 50 million. Net profit fell to CHF 5 million.

The new guidance sees organic growth as only flat to even negative, with an adjusted EBITDA margin of 18%-19%. The reduction in guidance is not entirely surprising to us, as the new CEO Willi would probably prefer to be measured on a lower basis.

My personal opinion: My list of Swiss industrial stocks, which are becoming increasingly interesting, is of course far from complete. Many other high-quality companies are valued at a reasonable price, even cheaply. I am absolutely convinced that investors with a time horizon of three years can see lucrative profit potential in the stocks mentioned.

A small side note:

With a market capitalization of CHF 220 million, Meyer Burger hardly in the focus of many investors anymore. But the name seems to be the focus of interest at 'Finanz + Wirtschaft' - in a single week in July, no fewer than five negative articles appeared. That could suddenly come back to haunt me if MBTN manages to turn things around - in any case, I find the Meyer Burger bashing by FuW ridiculous.

Best regards,

Stephan