A year ago we wrote that some of the headwinds facing environmental equities were beginning to subside at a time when valuations in the universe had seen a material decline. As a result, we had record upside in the strategy, and illustrated this by picking five stocks that we believed had the potential to double over the following three years. In the piece below we provide an update on what has happened to these stocks over the past year.
Smurfit WestRock Nov 23-Nov 24 return: 47%*
*All share price returns in this article are calculated from 1 November 2023 to 1 November 2024.
What does the company do?
Smurfit WestRock is a paper-based packaging company. More specifically, it is the world’s largest producer of corrugated boxes, occupying the #1 position in Europe and the #2 position in North America, as well as having a substantial presence in Latin America. Smurfit WestRock also has a presence in paper-based consumer packaging. The company was formed in July this year by the acquisition of WestRock by Smurfit Kappa, and is dual- listed in the US and the UK. Standalone Smurfit Kappa had an excellent track record of returns, and had seen margins and ROCE improve through the cycle. There is now a very significant opportunity for Smurfit’s highly regarded management team to improve the returns profile in the recently acquired WestRock assets, unlocking significant value through realising cost synergies and delivering operational and commercial improvements.
What’s happened over the past year?
As we expected this time a year ago, the fundamentals for the paper- packaging sector have improved from cyclically depressed levels. Specifically, box volumes have inflected positively in both North America and Europe, having declined in both 2022 and 2023 after the Covid boom, and while the growth this year has been modest, with the European demand backdrop in particular remaining weak, we do expect volumes to continue to gently improve. We have also seen box pricing turn positive, most notably in the US, but also in Europe, and this is a key driver of profitability.
Since the completion of the combination in July, the management team has been focussed on integrating the business and extracting the synergies and operational improvements. Indeed, they have made very good progress on this front. At the time of the original announcement of the deal, they gave a target of at least $400m of hard cost synergies, and at the recent Q3 results, in addition to reiterating their confidence in this target, they introduced a new target of unlocking operational and commercial improvements over and above the cost synergies of at least another $400m.
From the 1 November 2023 to 1 November 2024, the shares have increased by 47%.
Can the shares still double?
We absolutely believe that the shares are firmly on track to at least double over the 3-year time frame. Our original framework for the shares doubling was based on applying a 10-year average legacy Smurfit Kappa EBITDA multiple 3 years out to give a price target for the end of 2026. Applying the same methodology today with our updated forecasts would imply a price target for end 2026 of 50% higher than the price in November 2024, which would be c.130% higher than the price from November last year.
Furthermore, there is a strong argument to be made that this is very conservative as it would still leave the stock trading on a significant discount to its US-listed peers, and we do not believe this discount is justified given that the returns and growth profile of Smurfit WestRock compare very favourably with those peers. A higher multiple than the 10-year average is also easily justified by the fact that the company will be more diversified, with its core markets being much more consolidated than historically.
How does it help the planet?
Smurfit WestRock’s paper-based packaging products are 100% renewable and produced sustainably. They they provide an important alternative to plastic packaging, which is highly damaging to the environment. Paper-based packaging has the highest recycling rate of all packaging materials, and as part of the paper supply chain Smurfit WestRock is heavily involved in recycling. Recycled fibres make up the majority of the company’s primary raw material, with the rest being sustainable virgin wood fibres.
What’s the biggest risk?
The biggest risks would be a deterioration in the US and European economies, given that packaging demand is cyclical, and any unforeseen issues with the integration of the two businesses.
KWS
Nov 23-Nov 24 return: 21%
What does the company do?
Founded in 1856, KWS is one of the few remaining independent seed technology companies in the world. It is the market leader in sugar beet seeds, with a global share of over 65%, and correspondingly high margins and returns on invested capital. In addition, it has profitable niche presences in cereal seeds (rapeseed, rye and barley). Seed development is a lengthy process, with new varietals often taking a decade to come to market. KWS’s family ownership and commitment to R&D (spending is typically in the high teens as a percentage of revenue) make it well placed to prosper in such an industry.
What’s happened over the past year?
The last 12 months have heralded an important transformation within KWS as the company has started to divest non-core, lower return business and deleverage its balance sheet. In addition, its core sugar beet franchise has continued to perform extremely strongly and may possibly pass EUR1bn of sales in FY25. Having announced its exit from its China joint venture at the end of ’23, in March ‘24 KWS confirmed it would be selling its South American corn business for a ‘mid three-digit million-euro’ figure, which implies a mid-teen EV/EBIT multiple. Not only does this highlight the stark undervaluation of core-KWS (trading on less than 7x EV/EBIT on our 2025 expected earnings) but also essentially fully de-gears the balance sheet. Between Nov 1st 2023 and Nov 1st 2024 the share price increased by 21%.
Can the shares still double?
Absolutely. We believe that, one year on from our initial note, KWS is in a stronger position with a de- geared balance sheet post asset disposals, and with higher quality assets (namely the sugar beet franchise) representing a greater share of the remaining business. This mix-shift, as well as the organic improvement in profitability in the cereals and vegetables businesses as they achieve greater scale, supports our view of structurally higher returns on invested capital over the medium term. On our forecasts KWS is trading on c.11x forward earnings versus a 10-year average of c.17x. KWS remains one of the largest positions in the strategy.
How does it help the planet?
KWS’s products have a number of environmental benefits including: consistent agricultural yield enhancements, reduced chemical applications, and climate adaptation. KWS’s yield enhancements have allowed productivity to increase by over 1.5% per annum due to seeds alone. This in turn is helping to reduce the acreage required for sugar beet planting, whilst output continues to rise. KWS’s Conviso SMART sugar beet seed has been developed to require significantly fewer chemical applications, while new products such as ‘Maruscha’ are Virus Yellows tolerant. The EU aims to reduce chemical inputs by 50% by 2030, which requires increasingly sophisticated seeds to respond to biotic and abiotic threats. KWS is well placed in this regard as it aims to spend over 30% of its R&D budget on targeting the reduction of inputs. Its hybrid crops such as hybrid-rye are proving very popular because of their drought resistance, allowing farmers to attain acceptable yields even in a more climate-stressed world.
What’s the biggest risk?
A sharp deterioration in sugar beet grower economics would limit their willingness and ability to pay higher prices for improved seed varietals.
Serena
Nov 23-Nov 24 return: -5%
What does the company do?
Formerly Omega Energia, Serena operates 2.8 Gigawatt (GW) of renewable energy capacity. The vast majority of this capacity is onshore wind, with the balance being solar. Brazil benefits from some of the most consistently high onshore wind speeds in the world, supporting project profitability; Serena’s recent Assurua 4 project has an anticipated load factor of above 60%. The company benefits from long-duration, inflation- linked contracts covering over 96% of its output until 2032. We believe that Serena’s contract structure is almost without parallel amongst its renewable genco peers.
What’s happened over the past year?
By and large the factors that were within Serena’s control went to plan, while exogeneous factors were firmly against them. Within their control was the delivery of their growth projects, most notably Assurua 5 (244MW, Brazil) and Goodnight 1 (266MW, Texas), which were delivered within budget (Assurua actually below budget) and on time (a minor four week slippage for Assurua 5). Outside of their control has been the about- turn in Brazilian monetary policy. Brazil’s SELIC policy rate was cut from 11.75% at the end of 2023 to 10.5% by May 2024, before a combination of fiscal indiscipline and sticky inflation forced the central bank to resume hiking. Rates are currently 11.25% but will potentially go higher. This change in rate trajectory has placed strain on the entire Brazilian equity market, but particularly on leveraged, long-duration small-caps such as Serena. Furthermore, Serena suffered from another year of poor wind resources in 2024, with the overall portfolio experiencing a 6% underperformance of resource versus p50. Between 1 November 2023 and 1 November 2024 the shares fell 5% in local currency terms.
Can the shares still double?
Serena’s shares are now trading at extremely depressed levels. Taking the bottom end of EBITDA guidance for 2024, the shares are on less than 8x EV/EBITDA. The implied real equity IRR for Serena – taking into account the highly contracted inflation linked volumes – is now above 15%. We have over 100% upside to our mid-26 price target for Serena and it remains one of the largest positions in the portfolio.
How does it help the planet?
Serena exclusively develops 100% renewable energy projects and has been instrumental in building out Brazil’s onshore wind industry. The company aspires to continue growing at a 20% volume CAGR in the future. MSCI gives the company an ‘A’ ESG rating.
What’s the biggest risk?
Brazilian interest rates remain high, possibly caused by US rates moving higher under a Trump driven higher inflation scenario.
Cadeler
Nov 23-Nov 24 return: 111%
What does the company do?
Cadeler was established in 2008 and operated under Swire Blue Ocean from 2010-2020. It owns and operates a fleet of self-propelled jack up vessels with the ability to install wind turbines and foundations. Cadeler operates in a major bottleneck for its clients, providing mission-critical installation that has substantial time value for customers due to the long-lived nature of the infrastructure being installed (>20years). The company’s track record and relationships within the industry make it the supplier of choice for almost any offshore wind farm developer, and it is widely recognised as having not only the best assets, but also the best team that deliver the desired outcome at a lower risk. This team is led by CEO Mikkel Gleerup and backed by BW Group owner and Cadeler Chairman Andreas Sohmen Pao. Since its establishment, Cadeler has installed 8.3GW of wind power, comprising 528 foundations and 668 turbines.
What’s happened over the past year?
The last 12 months have been a vindication of the CEO’s conviction that 2024 would be a very big year for offshore wind markets. This was a highly counter-consensus call at the end of 2023, given that in September, sentiment was deeply wounded by the 16bn DKK impairment taken by Orsted, one of the leaders in the space. Such weak sentiment manifested in the equity trading at a significant discount to NAV and a large double-digit FCF yield. Since then, the backlog has expanded at greater duration with higher day-rates, the business has taken delivery of its first new build vessel, and the outlook has improved materially in terms of the utilisation of the vessels. This strong operating performance has led to a greater appreciation for the quality of the assets, earnings and the management team by investors. Between November 2023 and 1st November 2024 the share price rose by 111%.
Can the shares still double?
A further doubling of the equity from the current price remains our base case, despite the rally we have already witnessed. The backlog has been filled with an increasing number of longer contracts at much higher prices. In value terms, this is a non-linear expansion as discount rates will naturally compress as cash flow visibility increases with longer duration contracts. It also removes the risk of gaps in scheduling, which can lead to under-utilised assets and fixed cost leverage working in reverse. We are now entering a regular cadence of newbuild vessel deliveries, and the earnings growth should start to materially accelerate. Simultaneously, as Cadeler’s market power expands, we are yet to see any additional newbuild orders from competitors, meaning the vessel supply deficit remains intact, supporting even more lucrative contract wins further out.
How does it help the planet?
The offshore wind industry cannot grow and help the planet decarbonise if there are no vessels to install the turbines and foundations they rest on. At the leading edge, where wind farms are moving further offshore towards greater wind resources, using larger turbines and operating at greater seabed depths, the pool of capable players that can conduct installation work is very limited, with Cadeler being the clear leader. The company is a key facilitator of wind power, and is addressing an acute bottleneck for the industry, helping it to achieve its potential.
What’s the biggest risk?
Very large corporate pools of capital from strategic players with relevant maritime experience and industry relationships (both wind farm developers and shipyards) accepting the long and uncertain payoffs, hence pressing ahead with several vessel orders which would reduce the deficit the market is experiencing. However, with a four-year lead time from shipyards for a new vessel, Cadeler should deleverage to a net cash position in that time frame, meaning that equity risk is reducing with every passing day an incremental vessel is not ordered.
Infineon
Nov 23-Nov 24 return: 7%
What does the company do?
Infineon is a German semiconductor company that was spun off from Siemens AG in 1999. Its products serve various end markets such as automotive, industrial power and consumer electronics. Infineon is known for its expertise in power semiconductors, which are crucial for controlling and managing power in many electronic systems. Power semiconductors account for ~55% of group revenues, placing Infineon as the clear global market leader, with over 20% share in power discretes and modules.
What has happened over the past year?
A combination of weakening end markets and excessive inventory in the channel caused downward revisions to Infineon’s top line, with sales ending FY24 8% lower y/y. The environment is deteriorating within Automotive (weaker car volumes, slower BEV penetration with the exception of China) and Industrial remains sluggish (weighed by high inventories). Despite BEV weakness, Infineon’s auto silicon carbide sales were +30% y/y in FY24. In this weak topline environment, Operating Margins declined by over 600bps. As we had anticipated, much of this potential end-market weakness had been reflected in prices a year ago, and between 1st November 2023 and 1st November 2024 Infineon’s share price rose by 7%.
Can the shares still double?
We believe the shares are attractively priced and can still double. They currently trade on 18x forward earnings versus a 5-year average of 20x, despite the current forward earnings representing a cyclical trough. Consensus estimates for earnings in FY27 are 65% higher than those in FY25. We believe that such a recovery looks reasonable based on the high visibility of demand that Infineon has (e.g. MCU, which is 1/3 of Auto, should double from ’23 to ’28 simply on the basis of design wins they already have, auto SiC having achieved over 20 design wins etc). We see much of the margin pressure from 2024 as a result of operational deleveraging and corresponding cyclical underutilisation charges, which will reverse as the top line recovers. Furthermore, we see Infineon’s earnings mix improving in quality over the next few years as a higher proportion of revenues are generated from structural growth themes, warranting a higher multiple on the earnings.
How does it help the planet?
Infineon’s products are critical in enabling electrification for applications such as renewable energy generation and electric vehicles. Revenues from these two sources currently account for ~20% of turnover, but are expected to increase to more than a third over the next few years. We are particularly excited by Infineon’s silicon carbide portfolio. Electric vehicle inverters using this technology will have superior energy efficiency, resulting in emissions savings and fast charging capabilities, which should help drive further penetration of EVs. We believe that there is a strong possibility that Infineon can replicate the success it has had in silicon insulated-gate bipolar transistors with its SiC portfolio. MSCI gives the company an ‘AA’ ESG rating, supporting our view that Infineon is contributing to a sustainable society.
What’s the biggest risk?
China accounts for approximately 25% of Infineon’s revenues as it has a strong position in power semiconductor solutions for automotive and industrial applications in the country. Chinese domestic manufacturers of semiconductors are attempting to ramp up and increase the quality of their solutions, which could lead to market share loss for Infineon, particularly as China encourages domestication of strategic supply chains. This would lead to earnings shortfall risk, as well as a potential multiple de-rating as Infineon’s growth prospects are reappraised. As of yet, local manufacturers have been unable to dislodge Infineon owing to the superior performance characteristics of its products.
Conclusion
We hope that the examples above illustrate our continued optimism in the portfolio over the medium term. Indeed, while this piece has provided an update on the five stocks we picked as potential doublers from a year ago, there are many other stocks in the portfolio where we also see very significant upside. This is illustrated by the average upside to our price targets across the portfolio currently being c.45%.
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*All share price returns in this article are calculated from 1 November 2023 to 1 November 2024.
This information has been prepared by Copia Investment Partners Limited (AFSL 229316 , ABN 22 092 872 056) the issuer, distributor and responsible entity of the TT Global Environmental Impact Fund. This document provides information to help investors and their advisers assess the merits of investing in financial products. We strongly advise investors and their advisers to read information memoranda and product disclosure statements carefully and seek advice from qualified professionals where necessary. The information in this document does not constitute personal advice and does not take into account your personal objectives, financial situation or needs. It is therefore important that if you are considering investing in any financial products and services referred to in this document, you determine whether the relevant investment is suitable for your objectives, financial situation or needs. You should also consider seeking independent advice, particularly on taxation, retirement planning and investment risk tolerance from a suitably qualified professional before making an investment decision. Neither Copia Investment Partners Limited, nor any of our associates, guarantee or underwrite the success of any investments, the achievement of investment objectives, the payment of particular rates of return on investments or the repayment of capital. Copia Investment Partners Limited publishes information on the document that is, to the best of its knowledge, current at the time and Copia is not liable for any direct or indirect losses attributable to omissions from the document, information being out of date, inaccurate, incomplete or deficient in any other way. Investors and their advisers should make their own enquiries before making investment decisions. © 2021 Copia Investment Partners Ltd. The TT Global Environmental Impact Fund invests all or substantially all of its assets in TT Environmental Solutions Fund, a sub-fund of TT International Funds plc. TT International Asset Management Ltd (“TT International”) serves as investment manager to the Fund and is authorised and regulated in the United Kingdom by the Financial Conduct Authority. TT International is not affiliated with Copia Investment Partners. TT International does not take any responsibility for the accuracy or completeness of any information contained herein, or the performance of the TT Global Environmental Impact Fund offered by Copia Investment Partners. TT International disclaims any liability for any direct, indirect, consequential or other losses or damages, including loss of profits, incurred by you or by any third party that may arise from any reliance on these materials. TT International is not responsible for, nor involved in, the marketing, distribution or sales of shares or interests in the TT Global Environmental Impact Fund and is not responsible for compliance with any marketing or promotion laws, rules or regulations. No statement in this document is or should be construed as investment, legal, or tax advice given by TT International, nor is any statement an offer to sell, or a solicitation of an offer to buy, any security or other instrument, or an offer to arrange any transaction, or to enter into legal relations with TT International. Past performance by any other funds or accounts advised by TT International, including the TT Environmental Solutions Fund, is not indicative of any future performance by the TT Global Environmental Impact Fund.
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