A look at cyber security market A high growthandfragmented ... NIP monthly.pdfThe investment focus...

End May 2019 update www.nordic-investment-partners.com

Nordic Investment Partners

Nordic Investment PartnersJune 2019 update

A look at cyber security marketA high growth and fragmented market



Key investment view towards 2030

• Fiscal and monetary stimulus since 2008 have created ever larger imbalances such as government debts. This will probably continue even as it gets beyond sustainable in some countries

• Global economic growth has been declining since 1960s from 6% to around 3% in late 2010s. Productivity and population growth points towards lower economic growth in the coming decades. The underlying growth in global affluence will however continue and with Emerging Markets having 2-3 times faster growth than Developed Markets

• There’s nothing wrong with 1-2% GDP growth, but many investors have been accustomed to 8% annual return, while the realistic forward return is more likely to be below 5% and achieved with 3% earnings growth and 2% dividend. Annual swings are likely to remain in the 15-20% interval, so it’s not going to be boring no matter what

• The traditional business and inventory cycle still applies, so from period to period growth and inflation will change. In a world with evermore data and analytics the efficiency of eco systems will likely reduce the magnitude of economic swings as end-to-end value chains reduce slack and inefficiency. Risks of financial mis-allocation of capital is the same

• In a investment world on those conditions Advice Capital Vision Fund and I focus on identifying companies and business clusters with unique structural growth and then invest in these when growth/profitability/valuation triangulation justifies it. The investment focus in Advice Capital Vision Fund is on identifying, holding and harvesting multibaggers based on these principles. Good stewardship and ESG applies to the companies invested in.

‘Be patient – multibaggers takes time’



EU and World GDP growth as illustration of lower pace

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-4

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1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017

GDP growth (% / year)

European Union World Linear (European Union) Linear (World)

Source: World Bank 🌍



Snapshot 2019 – GDP growth rates. Most people live in green areas



The 5 trillion dollar tweet

Global stock markets fell 6% in May 2019. For the year

stocks are up 8%

On 5th of May Donald Trump tweeted a surprise 25% import tariff on Chinese goods into USA. Not the kind on news financial markets like.

The rest is history and it’s clear that US is playing hardball against everyone. The outcome in unpredictable, so investors have rewarded the news flow with 15% declines in trade sensitive sectors and an overall decline of 6% in global market capitalization from 80 trillion $ to 75 trillion $.

The early estimates of an trade war impact have been calculated at -0.6% of global economic activity or 500 billion $, which equals the GDP of Sweden.

An economic slowdown or recession normally gives 20% reduction in earnings, so if it’s going to be a reality we face further downside in the stock markets. In rough terms S&P500 would find fair value around 2.400 (13% lower than today), while Stoxx600 would be looking at 325 (12% lower than today).

Slower economic growth will reduce tax receipts at a point in time when more government spending is needed, so budget deficits will likely increase and beyond sustainable levels in many countries.

For a live version of US and world debt link

If you have lots of debt you want to get rid of you either increase your income and/or hope for inflation which will dilute the value of the debt. Inflation is not expected to rise from the current turtle speed and higher taxes (income to government) would only make a economic downturn worse, so we are in a bit of a Catch-22 situation.

Fortunately there’s a lot of countries that have sound financials, but US is not one of them as debt to GDP is 105%. Norway with its oil fund hold above 200% cash to GDP is in the other league

Getting around all this will not be easy, but constructive talks is most likely the best way forward, so lets see when Trump, who measure his success by the level of S&P500, send out a comforting tweet

https://www.usdebtclock.org/



PMI’s suggest slower pace aheadGlobal economic activity is trending towards slower pace. Trade war or not, the reaction from governmentswill be increased alertness towards more fiscal spending and easier monetary conditions. With interest rates already below 0% in many countries its hard to see the monetary tool work effectively.

Easy monetary policy is good news for financial assets, while the slower economic pace is a headwind for earnings growth. The net effect is positive in shorter term and negative on a 1-2 year view



Stock market patterns after bear markets

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2005 2007 2009 2011 2013 2015 2017 2019

Stock market performanceIn USD

North America MSCI World ex US

The bear market of 2008 ended in early 2009

The US market has had an unusual performance after the 50% bear market in 2008/09 as seen on the figure. 50% bear markets are fortunately seldom, but there nevertheless a few ones to learn from. The 1929/32 US recession took 9 years to get back in shape. The 1989/92 valuation collapse in Japan has still not recovered and the dot com bubble and burst took 11 years to recover.

For MSCI World ex US it’s now 10 years of flattish performance, so we might be close to the end of desert walking. Non-US valuations are supportive at 11-13x vs 16-17x in US and the financial health of companies is good.

The strong US market has been driven by companies in dominant market positions (Apple, Boeing, Google and Microsoft) and supported by significant stock buy backs. In many cases by borrowed capital, so the general health of US companies is not as good as the stock market performance suggest.

Keep an eye on future capex plans as the trade war makes US capex more risky. Just ask GoPro after moving production from China to Mexico only to hit by another import tariff.

https://edition.cnn.com/2018/12/10/tech/gopro-china-tariffs/index.html



Sector positioning /selected sectors

Cyclical sectors declined more than 10% in May as fears of slower economic activity due to trade war jitters hit sentiment

The growth/valuation PEG ratio measure suggest US is a better place to invest than Europe

Similarly the method suggest cyclical sectors (excluding banks) over stable earners

Investors have pulled 7% of their funds in Europe in 2019 compared with 1% net outflow of funds in Global and US funds. The capital moves to index funds, but its nevertheless noteworthy.

Given the trade war narrative and slower economic pace the defensive sectors will likely perform better in the the coming quarters

US growth rate is boosted by the tax reduction in 2018. Underlying earnings growth is estimated at 6%

Sector performances (price in local currency)

1 month 20192018-21 EPS

CAGRP/E19 PEG ratio

Auto -14,7% -7,1% 5% 6,5 130Banks -9,6% 7,6% 4% 10,4 260Food/beverage -2,0% 9,2% 5% 18,3 366Healthcare -2,9% 1,1% 8% 15,2 190Oil/gas -8,4% 1,6% 10% 17,0 170Retail (incl Amazon) -6,1% 12,8% 11% 17,3 157Tech -9,0% 15,0% 9% 16,5 183Semiconductors -17,0% 12,2% 9% 14,2 158

S&P500 -5,7% 9,8% 11% 15,6 142

Auto -14,1% 4,0% 5% 6,4 128Banks -10,2% 3,0% 1% 8,6 860Food/beverage 0,7% 21,9% 7% 19,0 271Healthcare -1,3% 9,4% 6% 15,4 257Oil/gas -5,4% 4,9% 9% 11,3 126Retail -9,0% 10,6% 4% 15,5 388Tech -5,1% 17,5% 12% 19,9 166Telecom -3,0% -2,7% 4% 13,5 338

Stoxx 600 -5,1% 9,3% 6% 13,3 222

Based on consensus

31/05/2019



Digital security



Cyber security is a huge opportunityI extended the April 2019 thinking around telecoms not being priced for their essentials (imagine your day without communication tools). And I came across a case from Myanmar

In Myanmar there were 2.5 million people with a mobile connection out of 53 million people in 2013. 6 years later there’s 57 million connections for 54 million people and an urbanization rate of 31%.

21 million use social media actively and mainly use inexpensive smartphones as GDP per capital is 6.200$/ year and hence iPhones etc are out of reach. Smartphone penetration is 40%.

In Europe and US the mobile penetration is close to 100% and Denmark with 82% smartphone penetration is one of the highest in the world. The affluent part of the world has come to this point over 30 years, while Myanmar has made half of the move in just 6 years. And since there’s hardly any traditional copper and fiber to households in Myanmar the mobile internet penetration will likely be on par with developed markets in 5-10 years

The enthusiasm around smartphones has opened the doors for cyber crime. A phenomenon unheard of 25 years ago, but look at the facts to the right. How much do you spend on cyber security protection as a person/family or as a business?

Its like insurance – you wish you had bought it only after the the accident happened. So with more awareness and easier to install solutions the business niche of cyber security protection is expected to show healthy growth in many years forward

Things to know about cyber attacks

• 24.000 malicious mobile apps blocked every day…

• Wonder where the information from your robotic hoover from Xiomi end up?

• Market was 120bn $ in 2017. Expected to be 300bn$ in 2023. That’s 12% annual growth

• 38% of malicious files comes via Microsoft Office applications. 71% of attacks starts with phishing mails

• 20% of attacks comes from China, 11% from USA and 6% from Russia

• 61% hacks hits small businesses – and this segment has lower protection levels

Source: Global Markets Insight a.o.



Hyperscale data centers and smartphones have opened the doors for hackingGlobal cyber security market was 120bn $ in revenues in 2017. It is expected to grow 12% per year towards2023 and reach 300bn $ in revenues. But it doesn’t stop there and the growth after 2023 could easilyaccelerate as the amount of data in streaming, IoT, social media, corporate data etc just keep growing.

It is estimated that the global power consumption for data (smartphones, computers, storage/cloud etc) in 2030 will exceed the total global power consumption in 2008. So we look into a potential power shortage, but that’s another story.



Cyber security companiesAs I analyzed the telecom sector in April it was natural to move on to cyber security within the scope of how essential telecom services are. Just image your computer or smartphone didn't work…following that road I passed the cyber security companies and one of them was in Copenhagen recently. In overall terms I sorted all the pro’s, con’s and triggers into buckets;

Pro Con Triggers

1. Fragmented industry2. Low return on invested

capital in the past3. Poor capital discipline

with some players4. High valuations

1. High growth and high margin business

2. Growth in data3. Essential – we cant

live without data and communication services

4. Hacking is lucrative, so we need protection

1. Consolidation of industry

2. Big cyber attacks makes attention and more sales

3. On-going growth in the back-bone systems that embed cyber security in the services you buy (cloud storage etc)

The value of cyber security stocks is based on their expected cash flows in years to come. Not all of them will be successful at the high growth rates the valuations suggest



Cyber security stocks have performed wellIt is still a niche within the tech sector



100bn € for the leading cyber security companiesThe niche is expected to grow rapidly so valuations are highIn a greater perspective they could be seen as insurance stocks

Orange is included as the French telecom company is making a new leg in cyber security to complement the broadband and mobile business. Cisco have aprx 10% of sales in cyber security to support their internet network equipment sales

Company Ticker Price Currency Market capMarket

cap in EURNet debt

Net

debt/EBITSales 2019

Sales in

EURP/S

EBIT

growth

2018-21

EV/EBIT20 P/E20Div yield

2019ROE 2019

Check Point Software CHKP 110,25 USD 24.012 24.012 -2.156 -2,1 79.000 1.828 13,1 2% 21,1 19,0 0,0% 20,8%

Cyan AG CYAN 28,00 EUR 249 249 -20 -0,8 760.000 49 5,1 36% 8,1 11,1 0,0% 24,4%

Cyberark Software CYBR 132 USD 4.965 4.369 -721 -5,8 11.500 438 10,0 32% 34,2 86,3 0,0% 6,6%

FireEye FEYE 14,36 USD 2.610 -300 -3,8 11.501 858 3,0 25% 33,3 -19,7 0,0% -31,0%

Fortinet FTNT 73,25 USD 11.007 0,0 2.090 5,3 26% 16,8 43,3 0,0% 15,8%

F-Secure FSC1V 2,38 EUR 378 378 12 0,8 18.885 234 1,6 21% 27,3 39,7 0,0% 1,0%

Palo Alto Networks PANW 195,50 USD 16.511 -3.300 -4,2 3.036 5,4 28% 19,8 260,7 0,0% -2,4%

Qualys QLYS 88,61 USD 3.470 3.054 -360 -3,1 4.506 330 9,3 21% 26,8 66,6 0,0% 9,0%

Sophos Group SOPH 4,17 GBP 2.010 2.251 -83 -0,8 48.700 935 2,4 29% 17,8 52,1 1,4% 11,1%

Splunk SPLK 114,00 USD 14.968 13.172 -1.593 -3,5 44.800 2.156 6,1 53% 29,5 -74,0 0,0% -15,5%

Symantec SYMC 18,73 USD 10.189 8.967 950 0,6 44.800 4.363 2,1 -1% 6,9 25,0 1,7% 5,4%

Growth EV/EBIT P/E Div yield ROE

Averages 86.579 2,3 - 16.317 6,1 27% 23,5 48,5 0,1% 4,0%

Selected large companies with cyber security divisions

Orange ORA 14,00 EUR 37.240 37.240 26.400 4,4 41.600 46.592 0,8 3% 10,6 12,5 5,4% 8,2%

Cisco CSCO 53,25 USD 200.594 -0,8 47.344 4,2 4% 12,3 17,8 2,6% 35,4%

Intel INTC 46,03 USD 182.225 0,5 63.052 2,9 5% 9,4 10,9 2,7% 19,9%

Pure play cyber security stocks overview

Source: Marketscreener consensus

Roadmap 2019 check



Follow up on key assets for route 20195 months along the roads and we have reached destination for 2019 in April in terms of expected return. Mutual fund outflow in Europe has been significant and the trade war jitters in May caused some investors to sellMarkets are expected to be volatile over the summer period and before markets can resume the upward trajectory based on 2020 earnings. A recession is not factored in as there’s no recession.

Asset/item Actual End 2018

Forecast end 2019

Forecast return 2019

Actual YTD May 2019

Residual return 2019 Comment to expectation for 2019

MSCI World 453 505 11% 9% 3% 3% dividend and 8% earnings growth

S&P500 2.607 2.900 11% 6% 6% 2.5% dividend, 1% multiple contraction and 8% earnings growth

Stoxx 600 336 385 15% 10% 5% 3.7% dividend, 8% multiple expansion and 3% earnings growth

MSCI Asia Pac 146 160 10% 4% 5% 3% dividend, 6% earnings growth and 1% multiple expansion

Brent oil 54,2 70 29% 14% 15% New oil exploration is low. Givng supply/demand balance a lift

Copper 2.648 3.200 21% 1% 20% Electrification (EV etc) lift demand for copper

10 year bond € 0,28% 0,75% -0,21% Normalization of ECB quent easing will increase yields

10 year bond $ 2,91% 2,85% 2,13% Slower economic pace will reduce bond yields

Smartphone sales 1.435m 1.460m 1.420m Flattish 1.5bn since 2016, so replacement starts in 2019

Car, SUV sales 97m 99m 98m Europe and US flattish, China weaker and EM stronger

Data center traffic 11.6 ZB 14.1 ZB 15.0 ZB Streaming, games and crypto mining create very high growth



Summary

2019 roadmap is for a fairly good investment year due to a mix of continued but uneven economic expansion and fair valuation of stocks. To get a really good investment climate it requires a few things;

1. the trade war threat and subsequent risk of a global recession gets solved

2. the economic activity levels grow 3%. 1-2% in developed regions and 4-7% in emerging markets

3. inflation and interest rates continue to be around 1-3%

4. wage growth is moderate, but provides enough comfort for consumers to continue spending

5. expectations for earnings growth has come down significantly and fast, and 2019 most likely will be a flat year (a recession obviously will take earnings into negative territory). 2020 earnings must show at least 5% growth

6. 2019 can be a 10%+ year as valuations normalize to 20 year averages. Expect the first half to be volatile and very sensitive to new data points. And second half the fundamentals improve and confirm investors that got on the slopes early

The global demographic glacier is moving and unstoppable. Products and services that can reduce healthcare cost while improving the quality of living will see increased demand. So healthcare will continue to provide good growth and high profitability

Some sectors like Automotive have seen significant declines and several companies with massive net cash positions are now valued as if they don’t exists in 3-4 years. A rerating of beaten up sectors is likely but be alert as those sectors are often of cyclical nature



Advice Capital Vision Fund was launched in November 2018 and is part of Advice Capital, an investment fund

boutique founded in 2009 in Copenhagen.

Ole Søeberg, founder of Nordic Investment Partners, is board member and advisor for Advice Capital Vision Fund.

The fund is an Alternative Investment Fund (alternativ investeringsforening) as defined and regulated by

Finanstilsynet in Denmark. The minimum investment is 100.000 €

The fund strategy is long only, absolute return and focus on structural growth. The fee model is 0.00% fixed fee,

20% performance fee, high-water mark and a entry/exit fee applies.

The investment philosophy is based on the belief that financial markets are not efficient in valueing financial

assets. The fund selection criteria is growth at an reasonable price (GARP). Companies in the investment portfolio

are characterized by a strong franchise with growth, good profitability, a solid financial position as well as good

stewardship and discipline in operational and financial matters

For further information please contact Ole Søeberg at +45 4030 0004/[email protected], Stefan Rasmussen at

++45 3930 6081/[email protected] or Lars Fetterlein at +45 2216 4081/[email protected]

Vision Fund



Disclaimer

This material has been prepared by Nordic Investment Partners.

The material is for educational and personal information only and only for individuals who have received the material from Nordic

Investment Partners. The material is based on public available information’s and own analysis of data. Nordic Investment Partners do not

have responsibility for the correctness, accuracy or the full scope of the information's in this material. Any opinion or viewpoint should not be

taken as recommendation to buy or sell the financial assets discussed in the material. Nordic Investment Partners has no responsibility for decisions taken based on content in the material.

Information about historical performance and stimulation of previous and future performance is not to be used as a reliable indicator for

future returns. Performance and returns can be negative as well as positive and several factors such as currency moves can impact performance. The material is not to be used as an offer to buy or sell and investment product.

This material is confidential and to be kept private. It is not allowed to forward or distribute the material without prior consent by Nordic

Investment Partners.

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