SSM Holding AB

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

SSM Holding AB is a Swedish property development company that focuses on residential properties primarily in the Stockholm region.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

SSM Holding AB (SSM) primarily develops and sells residential properties in Stockholm, Sweden. Their business model centers around identifying land, developing housing projects (often apartments), and then selling these completed units to consumers, primarily individuals. Unlike traditional construction companies, SSM focuses on the development of the product and the marketing, selling, and customer experience that goes along with it, instead of focusing on the construction itself.

SSM generally targets customers seeking to purchase new construction, with a focus on well located properties. The company has an eye towards sustainability and efficient design with cost effectiveness. The average size of their projects are between 100 to 400 apartments.

The Swedish property development market is influenced by several factors, including interest rates, the availability of mortgages, and population growth in urban areas like Stockholm. Lately, there has been a general slowdown in the Swedish housing market, in large part because of rising interest rates and the economic uncertainty. These challenges can cause a drop in demand for new housing projects which can result in pricing pressure.

The ongoing war in Ukraine has had a major impact on the cost and availability of materials (for example, steel) and energy prices, making it difficult to accurately cost future projects. This is a major recent problem that the company has encountered and is still facing now. The competition is getting tougher with many players all having issues with costs while the need for apartments hasn’t declined enough to reduce competition.

Revenue Distribution

SSM’s revenue comes primarily from the sale of residential units, although some revenue may be derived from other sources such as land sales. The majority of sales come from the Stockholm region. A good amount of their revenue is based on contracts that have a set sales price at the time the contract is signed, but it can take several years before the apartment has been built. This adds complexity when costs change over those years.

Competitive Landscape

The competitive landscape is tough, and there are many players in the property development sector. Competition includes well-established construction companies, as well as newer, smaller niche players. Factors such as location, price, building quality, and the strength of customer relationships determine market share. There is very little to differentiate these companies with their products, so a brand name, or specific value add (like a focus on design) can make a big difference.

Financial Analysis

After a very rough year, their most recent financial release states that they have started reducing debt, but they are still relying on large amounts of debt to fund their operations. This is a point of concern, and a reason to give it a negative balance sheet rating. Management has also said that profits from selling new units aren’t expected to be realized before 2025. This is a significant cause for worry.

Historical Performance: The company had a rough 2023, especially in the beginning of it. The company reported its worst loss in its history, as the housing market slowed down substantially because of the high interest rates, uncertainty, and the rising cost of material and labor.

Recent Earnings:

  • SSM’s Q1 2024 report is very positive, and management is starting to see light at the end of the tunnel.
  • Net sales for the period was 337m, compared to 29m in the same period last year.
  • Operating profit was -42.7m compared to the -204m loss in same period last year. This is a huge improvement year over year, but a loss is still a loss.
  • Net profit for the period was -155.8 million, compared to -347.5m in same period last year.

Debt and Capital: SSM is known to be highly leveraged, meaning it uses borrowed capital to fund its operations, and a lot of its debt is due in the next few years. Management is taking steps to reduce that debt, which is very encouraging, they have decreased debt by over 300 million and are planning on selling more assets to pay down more debt. But this is still a big risk, and a high-debt situation can mean quick collapse in situations of trouble.

Margins:

  • In 2023, they lowered costs considerably to help improve margins, which resulted in better Q1 performance.

Growth:

  • Given the economic situation, the company was unable to deliver many new projects during the last year, but this is expected to rebound in coming years.
  • Sales grew substantially in Q1 2024, but the growth is not sustainable, and this is likely a short-term recovery.

Moat Assessment: 2/5

Based on our resources and research, SSM receives a 2/5 moat rating.

Justification:

The company has a narrow moat based on the local nature of their business and the strong brand they have in their region. They have a strong local network and are generally the leaders when it comes to residential apartments in Stockholm. However, the company doesn’t have much pricing power, and as seen from the financial numbers, prices are often determined by factors outside of the company’s control. Furthermore, since the company only focuses on Stockholm, it is particularly exposed to problems specific to the Swedish market.

Risks to the Moat and Business Resilience

  1. Economic Cycles and Interest Rates: SSM’s sales and profitability are highly susceptible to changes in the economic environment, especially interest rates. Rising interest rates increase the cost of borrowing for customers, which reduces their purchasing power and demand for new homes, resulting in lower prices for their properties.
  2. Construction Costs and Material Prices: The recent volatility in prices of materials and labor means that profits might not be what they appear on the books. Many contracts are signed years before the final units are delivered, so higher prices in material and labor will result in losses.
  3. Overleveraged Capital Structure: With a debt-to-equity ratio of around 4, the company is heavily reliant on lenders. If sales slow down or prices drop, they won’t have the cash to pay back their loans.
  4. Location Dependence: SSM’s extreme focus on Stockholm makes it heavily reliant on that single market. If anything negative happens in that market (economic downfall, population decline), the company would not be able to perform as needed.
  5. Competition: High competition and not being able to differentiate their products can severely hamper their ability to realize higher prices for their properties and maintain long-term profitability.
  6. Regulation: The company is subject to various rules and regulations regarding construction and real estate, this is a risk factor because changing rules can create major issues for them.

Business Resilience:

The company is attempting to address the above-mentioned issues by trying to cut costs, but they face immense pressure from the current economic environment. In general, the company is not able to easily mitigate external factors as these problems are industry-wide and a part of the nature of the business itself. Management has expressed hope that the market will improve in the future, but they cannot do much more than that. Given their high debt, reliance on one market, and inability to control outside pressures, the business is deemed to be very vulnerable if any other outside problems should arrive in the short and mid-term.

Understandability: 3/5

The core business is not hard to grasp, as it is a relatively simple concept-buy land, build apartments, sell them. But the many nuances in the financial statements, the many moving parts, the difficulty in understanding their market position, as well as the unpredictability of a heavily cyclical business make it difficult to understand the business completely. Given those considerations, a 3/5 seems appropriate.

Balance Sheet Health: 2/5

While they are moving in the right direction (attempting to pay off some of their debt), their balance sheet remains a major liability for the company, and therefore warrants only a 2/5 rating. The company is heavily dependent on debt to keep afloat, which makes their situation highly unstable if any adverse situations would occur.