Sola's opinion on the Swiss stock market (Episode 33)

The Plutos Switzerland Fund rose 1.3% in February, maintaining its positive annual balance, while the broader Small Mid/Cap Index lost half a percent.

In addition to the numerous, mostly cautiously positive annual financial statements for 2024, the main topics for the Swiss stock market were of course the German federal election, the US economic data and the war in Ukraine: the early election of the German parliament brought little surprise, but the formation of a majority government seems at least questionable in the near future. The US economic data and the rise in inflation expectations have even given rise to fears of stagflation in some cases, and a resolution of the Ukraine conflict currently seems a long way off. This, coupled with fears of new US tariffs, has made investors rather hesitant, volatility has increased and follow-up purchases have been lacking.

However, we are positive about the inflow of large capital flows into European funds - the appetite for shares from the old continent is growing. Funds on US technology stocks, on the other hand, have had to accept outflows. We see this as the first sign that the years of underperformance in Europe and in particular in small/mid caps could be coming to an end.

The strongest value in the Plutos-Switzerland Fund in the reporting month was ams OSRAM – here the knot has finally burst, because with the Q4 results the Austrians added another solid quarter to the last and surprised positively with the profitability and free cash flow. Adecco, long spurned, was able to please despite a significant but rather liberating dividend cut. A cyclical upturn, particularly in Europe, which probably corresponds to around 50% of sales, will be reflected in an initial phase by more temporary employees. Adecco has improved its margin potential and free cash flow by cutting costs and still gained market share. A dividend cut makes much more sense than financing a dividend with higher debt.

Very volatile, but with a strong increase in value, Pierer Mobility: the leading European manufacturer of motorcycles has tackled the challenges of a far-reaching restructuring at KTM in a timely and aggressive manner and can now already record its first goals. The demand for motorcycles, influenced by high interest rates, US inflation, and weak cycles in Europe and China, is likely to increase again in the coming quarters and increase sales from a low base - we assume that the share is fairly valued, which is significantly higher than today's prices.

GAM were doing a little better in the market: we hear that the Chinese sales partner in Hong Kong is currently building up a share package. Understandable, since we are still talking about ridiculously low share prices.

Within the R&S Group still weighed on the equity placement - the private equity seller still holds a position, creating a mental equity overhang. Hopefully this week's FY24 results will untie the knot - we are positioned for that.

medmix was not able to convince, particularly with its outlook, and the share came under considerable pressure - it had risen sharply beforehand without any real news and had run ahead of corporate developments. We had previously taken some profits and increased the position again at a 16% lower level - even if medmix is ​​facing a transition year, the equity case is absolutely intact.

Accelleron, one of the big winners in 2024 and a company of the highest quality, with a business model that is difficult to copy, was somewhat surprising to us, on offer all month. The underperformance that has continued since November 2024 probably has two reasons: Firstly, Accelleron was a victim of its own success, the performance was 'lured in' by many investors after a mixed year on the stock market. Secondly, Accelleron can be seen as more of a defensive stock, because the service share, i.e. recurring business, is enormously high at the company at 75%. Nevertheless, the company also grew in 2024 in terms of sales far above IPO expectations. The dividend policy is crystal clear. Accelleron plays a major role in its industry in decarbonization in the coming years and decades. Shipping accounts for around 3% of global CO²emissions and aims to become climate neutral by 2050. This will be impossible without the Accelleron turbochargers.

Komax, ideally positioned for an anticipated cyclical upturn, also had to give up some of the previous month's gains - given the low valuation, the high market share and the absolutely intact future prospects, we naturally remain invested.

In the reporting month, ahead of the 2024 results, we initiated a position in OC Oerlikon We made good money with the stock last year, but were only able to acquire a small weighting at under CHF 4. Now we have been able to use the very low prices for a 'real' investment. The equity case is still as good as it was a year ago, but the valuation is significantly lower. Achieving a margin of 16.6% with significantly lower sales deserves a lot of respect.

“Don't be afraid to be a loner but be sure that you are correct in your judgment.”

Walter J. Schloss, US value investor, philanthropist and fund manager (1916-2012)

Oerlikon: 'Cloudy, with a chance of meatballs'

As a contrarian, I pay attention when a major financial portal headlines: 'Price collapse continues, Investors should sell OC-Oerlikon shares' – but does not support this with any relevant, forward-looking arguments and only cites performance as the reason.

The Plutos Switzerland Fund already made good money with Oerlikon between February and August last year and since the motto 'no worse is good' still applies, we decided to build up a new position in Oerlikon shortly before the FY24 figures were released. Because not much has changed: Oerlikon still makes money with surface coating, where it is the absolute world market leader. Orders in the polymer sector are still in short supply and sales are under severe pressure. But what has also not changed, and I pay my respects to Oerlikon management for this, is the margin: 16.6% EBITDA margin for the group, 18% for Surface Solutions, 12.8% for Polymer Processing.

The sale of the polymer processing activities, with preference for a sale rather than an IPO, is still pending - the proceeds are likely to be between CHF 800 million and CHF 1 billion. This transaction will not be complex, as the two areas no longer overlap - they never had any synergies anyway. As there is 'nothing good' (VRP's exact words) to buy at a fair price, these sales proceeds will not be used for M&A, but in my opinion will flow very directly to the shareholder for extra dividends, share buybacks or similar - hence my choice of title

The only small downside is that the completion of the transaction will probably take another 12-18 months.

But why am I buying the shares in the Plutos Switzerland Fund now? Simply because we are paid to wait (dividend yield >5%) and the slightly increasing cycle increases both polymer sales and the price of the asset. Chairman Dr. Süss will sell the polymer division at the right time, but not at a crisis valuation - under his leadership, Oerlikon has always stayed true to its words. For me, Oerlikon has an intrinsic value of CHF 11 - today the share is at CHF 4. Below this mark, Oerlikon is an 'all-day long' buy for me.

Germany is building: which Swiss companies are positioned for it  

According to a recent analysis, there is a shortage of around 550 apartments in Germany. While more than half a million apartments are needed, only 000 units are expected to have been completed last year. Affordable housing is particularly lacking. The parties did not present any concrete construction targets to close this gap before the federal election, and the issue of housing seemed to play a subordinate role in the election campaign. The outgoing traffic light government had set itself the goal of building around 250 new apartments across Germany every year, but had not achieved this even once. High construction prices and capacity bottlenecks in the construction industry had prevented a faster ramp-up.

None of this is new, but in the hope that a new government will not only repeat this goal verbally but also achieve it, I have been thinking about which Swiss stocks could benefit most from a possible construction boom in Germany in the coming years.

The Swiss stock indices are at their 52-week highs, the SMI is even at an all-time high. But many construction-related stocks have barely made any progress yet and have a lot of potential and are of high quality. Obvious candidates are Forbo, Zehnder, SIKA, Belimo, Schweiter, SFS, Bossard, Geberit, Arbonia, Implenia and of course Holcim, but also Georg Fischer, dormakaba, Landis & Gyr, the R&S Group and Schindler.

Since Holcim, Schindler, Georg Fischer, Implenia, dormakaba and Geberit are moving less than 10% or even at their 52-week highs, we'll leave them to one side. Not because they are bad companies or can no longer continue, but simply because I want to find the really cheap ones. Since Arbonia has sold its air conditioning business and is concentrating on its doors business, we're leaving the stock in the selection, even though it's not far from its short-term highs.

If I now combine the gap to the 52-week high and the performance since the 52-week low, some high-quality stocks stand out: SIKA, Bossard, Schweiter, SFS, Forbo, Arbonia, Zehnder, Belimo and the R&S Group. According to this assessment, Landis & Gyr has the greatest potential, but I find it difficult to classify the company as 'high-quality'.

My personal opinion: Since I assume that a lot of construction will take place in Germany in the next few years ., with the exception of Belimo, SIKA, Bossard and Arbonia, all of the companies mentioned are represented in the Plutos-Switzerland Fund. But that can change quickly

SIG Group: 'Last is the least'

The Neuhausen-based SIG Group has been on our watch list for some time now, as its aseptic beverage and food packaging makes it predestined for further growth in an attractive duopoly with TetraPak. And since Plutos-Schweiz had already invested once between the fund launch in October 2022 and mid-2023 and achieved a performance of around 25%, it was actually only a matter of time before we would buy again at around 30% lower levels.

But that does not seem urgent at the moment:

The reason for this is the dispute between Clean Holding owned by Laurens Last, the largest shareholder with 10%, which I only learned about last week. Last sold Scholle to SIG in 2022, receiving around CHF 1.4 billion in cash and shares - and agreed on a kind of 'earn-out': if Scholle grows between 2023 and 2025% at SIG between 6 and 11.5, he will get something extra, in the best case EUR 100 million. SIG now sees this growth as not having been achieved, Laurens Last does and is going to court. Of course, he will no longer be proposed as a member of the Board of Directors. SIG has not made any provisions for the up to EUR 300 million. With net debt/EBITDA of 2.6x, SIG is already not in a good place - although some people think that EUR 300 million more or less doesn't matter...

SIG and Laurens Last will probably no longer be friends - and Last will sell his shares sooner or later. In my view, the best solution for SIG would be a quick end: pay off the unloved shareholder and place his 10% with institutional investors. And do it as quickly as possible, because otherwise the case will hang like the sword of Damocles over an otherwise well-run company for a long time. In the worst case, the court case will be lost, the shares will come under pressure and Last will throw his 10% onto the market in a placement - that could put a significant strain on the share price.

My conclusion: SIG is a respectable company, with good products and good future prospects - but with a more than unpleasant shareholder. For now, we'll wait and see what happens and stay on the sidelines. Perhaps Mr. Last will soon offer a few shares at a discount price.

European Bureaucratic Madness

The European economy is groaning under the enormous flood of regulations. In addition to the major challenges facing the new German Chancellor on the issues of migration, the war in Ukraine, pensions and energy prices, the equally important issue of the economy should have the reduction of bureaucracy at the European level at the top of the priority list. The over-regulation emanating from the EU hinders more than it helps, costs enormous amounts of time and money. It would probably be the simplest step to bring a little more dynamism into the European economy.

During a very informative exchange with the IR manager of a portfolio company, I was able to get a rough idea of ​​the many requirements - here are some of the regulatory requirements, here in relation to ESG, which Swiss companies are increasingly having to meet. They are important, but the number is totally out of control - you don't have to read everything to get an impression:

The Corporate Sustainability Reporting Directive (CSRD) is an EU directive on corporate sustainability reporting. It came into force in January 2023 and replaces the previous NFRD (Non-Financial Reporting Directive). The CSRD aims to increase the transparency and comparability of sustainability information and to oblige companies to provide detailed information on environmental, social and governance (ESG) issues. The CSRD applies to more companies than the NFRD. Affected are: All large companies (according to the EU definition: at least 250 employees, turnover over EUR 40 million or balance sheet total over EUR 20 million, listed SMEs (from 2026 with transition periods), EU branches of non-European companies with significant activities in the EU. Companies must report on their impacts on the environment, society and governance, including: climate change, biodiversity, human rights, working conditions, anti-corruption. Double materiality: Companies must analyze and disclose both the impacts of their activities on the environment/society (inside-out) and the risks of sustainability issues on the company (outside-in). The reports must be prepared in accordance with the European Sustainability Reporting Standards (ESRS), which contain detailed specifications on content and metrics. The sustainability reports must be audited (assured) by independent bodies to ensure the reliability of the data. Schedule: From 2025 for companies already subject to NFRD (reporting year 2024). From 2026 for other large companies. From 2028 for non-EU companies with EU activities. The aim of the CSRD: The EU wants to promote sustainable business, prevent greenwashing and enable investors and consumers to make informed decisions. The reports are published in the EU KonarG Register to ensure transparency.

The European Sustainability Reporting Standards (ESRS) are the EU's uniform reporting standards developed as part of the CSRD (Corporate Sustainability Reporting Directive). They specify how companies must disclose their sustainability data to ensure transparency and comparability. Here are the most important points: The ESRS standardize sustainability reporting in the EU. They define precise content, metrics and formats that companies must cover in their reports. The ESRS are the "manual" for implementing the CSRD. Companies that are required to report under the CSRD must apply the ESRS. Concrete requirements on the environment (e.g. climate change, biodiversity), social issues (e.g. labor rights, diversity) and governance (e.g. risk management, corruption prevention). Companies must analyze and disclose both their impact on the environment/society (impact materiality) and the risks of sustainability issues for their business (financial materiality). Quantitative data: CO₂ emissions, energy consumption, supply chain risks. Qualitative information: strategies, objectives, due diligence processes. Forward-looking information: plans to reduce environmental impacts. The reports prepared according to ESRS must be independently audited (Limited Assurance, later Reasonable Assurance). Timetable: From 2024 for companies that already fell under the NFRD (reporting year 2023). From 2025 for other large companies. From 2026 for listed SMEs (with simplified standards). Objectives of the ESRS: Comparability: Uniform data for investors, customers and regulators. Combat greenwashing: Through clear disclosure obligations. Integrate sustainability into the core business: Companies should systematically manage ESG risks. The ESRS were developed by EFRAG (European Financial Reporting Advisory Group) and finally adopted by the EU Commission. They are closely coordinated with other global initiatives such as the GRI (Global Reporting Initiative) to avoid duplication of work.

The Responsible Minerals Initiative (RMI), formerly known as the Conflict-Free Sourcing Initiative (CFSI), is a cross-sector organization committed to promoting ethical and sustainable minerals supply chains. It was created to reduce risks such as human rights violations, conflict financing (e.g. through “conflict minerals”) and environmental damage in mining. Objectives of the RMI: Due diligence compliance: helping companies implement the OECD Due Diligence Guidance for responsible minerals supply chains. Transparency: identifying risks in raw material sourcing (particularly tin, tantalum, tungsten, gold and cobalt). Conflict minerals avoidance: ensuring that minerals do not come from regions where mining finances armed conflict (e.g. in the Democratic Republic of Congo). The Conflict Minerals Reporting Template is a standard tool for recording mineral origins in supply chains. Companies use it to verify their suppliers. Assessment programs: Responsible Minerals Assurance Process (RMAP): audits of smelters and refineries. Responsible Labor Initiative (RLI): focus on labor rights in mining and supply chains. Due diligence resources: guides, training and risk assessment tools for companies. Multi-stakeholder cooperation: collaboration with companies, NGOs, governments and mining communities.

The Supply Chain Due Diligence Act (LkSG), colloquially known as the Supply Chain Act, is a German law that requires companies to respect human rights and environmental standards in their global supply chains. It came into force on January 1, 2023 and is intended to help prevent exploitation, child labor and environmental destruction in production processes. Objectives of the Supply Chain Act: Protection of human rights: Prevention of child labor, forced labor, discrimination and unsafe working conditions. Environmental protection: Avoidance of environmental damage associated with human rights violations (e.g. toxic wastewater, deforestation). Avoid liability: Companies should identify risks in their supply chains and take countermeasures. Company size: From 2023: Companies with at least 3.000 employees in Germany. From 2024: Companies with at least 1.000 employees. Foreign companies with branches in Germany are also affected. Geographical scope: Own business activities (direct subsidiaries) and immediate suppliers (Tier 1): Full due diligence. Indirect suppliers (from Tier 2): Only if there are concrete indications of irregularities. Due diligence obligations: Risk analysis: Systematic identification of risks in the supply chain. Preventive measures: Introduction of a risk management system and training. Remedial measures: In the event of violations, companies must take action (e.g. terminate supplier contracts). Complaints mechanism: Establishment of a reporting point for those affected. Documentation and reporting: Annual public report on implementation.

The Corporate Sustainability Due Diligence Directive (CSDDD): The German supply chain law is stricter than the planned EU CSDDD. The EU directive is expected to apply from 2027 and applies to more companies, but has lower penalties. Until then, the LkSG will remain in place in Germany. Relevance for companies: Compliance: Affected companies must establish due diligence processes. Reputation risk: Violations can cause damage to their image. Interaction with other standards: Synergies with the CSRD (sustainability reporting) and the EU taxonomy. Objectives of the CSDDD: Human rights protection: Prevention of child labor, forced labor, exploitation and discrimination. Environmental protection: Prevention of environmental damage such as deforestation, pollution or climate impact. Liability: Companies should be able to be held responsible for violations in their supply chains. Harmonization: Uniform EU-wide rules instead of national isolated solutions (e.g. LkSG in Germany).

Violations of these guidelines result in both fines and sanctions: they can be punished with fines of 2-5% of global turnover and exclusion from public contracts for up to 3 years. There is also civil liability: injured parties (e.g. workers, municipalities) can sue in EU courts.

This is just a small excerpt of the many rules and regulations. In mid-2024, the EU member states passed the world's first law to regulate AI (AI Act) - this must now be implemented in national law - what fruit will this bear?

Best regards,

Stephan