SHORT SANDVIK

Sandvik’s capital markets day passed without event and puts the short case back into play. Instead of extensive portfolio restructuring that the market wanted we got a reshuffle and no sale of SMT. We got 2018 guidance that aims for margin improvement to 15% through cycle (which won’t be an easy task) and we still only ended with 3% upgrades after accounting for FX.

There may still be some more self help in the story and the market absolutely loves the new management team. However that will take several years to play out now and in the short term the risks are to the downside. The valuation is expensive vs peers and history on 13x next years EBIT on what are still not yet trough earnings.

The early cycle data also appears to be pausing in the US. Regional ISMs were poor and saved by a blowout supplier delivery number which doesn’t reflect particularly well on demand. Fastenal which has been seen as the bellweather is reporting a slowdown in YoY sales again. The +7.7% print in Feb signaled the end of the industrial downturn in the US, they printed -0.9% in April. The May print comes on June 6th.

The mining rally is running out of steam (SAND vs SXPP correlation is very good) with commodity prices plummeting after the curbing of speculation in China. Renewed growth concerns following a slowdown in the data after the lending binge in Q1 and the article in the local press from an authoritative figure citing continued credit growth as ineffective in creating economic growth. We agree. We think increasing short exposure to China related stocks is sensible here.

The short interest has come down to 7% of the freefloat from 11% 3 months ago which is helpful, and you sense a sentiment shift at the same time. The short is worth revisiting since we last put in on in January with a 20% return.

PT 65 SEK.