Q4 2024: Results, three M's and demographics

Results for 2024

The portfolio had a great year. The performance was +39.9%, which is explained by a combination of growth and revaluation and some currency movements. My result is measured in SEK, so a weaker SEK had a positive effect. Overall, the big and simple explanation is that my larger holdings did very well. I don't see this as the new normal and I am cautiously pessimistic about 2025. The top five performers for 2024 were Karooooo (+85%), Argent (+82%), Century Pacific (+35%), Sarantis (+31%) and RFM (+29%) excluding dividends. The only detractors were Ekadharma (-14%), Uni-Charm (-24%) and Delfi (-30%). The portfolio at the time of writing is shown above. 

A few holdings, namely Century Pacific and Karooooo, are now reasonably valued or perhaps a little stretched, at least for a Graham-inspired investor (trading above 20-25x P/E). I still own them because of their excellent quality combined with growth (Century) and strong growth (Karooooo). However, I think a P/E below 15 is to be expected when looking 3 years ahead, at least for Karooooo. As for Century, I may be laughed at by saying this, but it's hard to find non-cyclical companies of the same quality, even if you look at all the listed companies in the world. Nevertheless, I'm thinking of reducing my holding a little, despite some tax implications. 

Most of the portfolio consists of cheap or very cheap non-cyclical companies, despite higher share prices. The median P/E is 14, the median EV/EBITDA is 8 and, importantly, the FCF yield is around 10%. All but one of the companies has net cash. At the portfolio level, the 10-year CAGR is around +8% for sales and +20% for EPS. Future growth is important, but overall, I think I have high quality companies with some growth and reasonable valuations. Now let us move on to today's topic.

Demographics: Always important for consumer companies?

If you like boring defensive companies, as I do, I think demographics are an underrated thing to look at as a long-term investor. For consumer companies and local based companies, demographics could be critical. Ok, I know that "what company at what valuation" is the most important and what you invest in. But in the long term, the market in which the company operates, and structural changes should not be neglected. Focus Compounding used to say something like "the market in which a company operates makes up about 50% of the investment" (if I got that right, I am not sure).

Let us take a quick look at ASEAN (Indonesia and the Philippines), Germany and the USA and try to "predict" the changes that will occur by 2030 and 2040. Let's look at the number of people and GDP, with OECD and Population pyramid as sources.

• Indonesia
• 2024: 283m GDP: 1 400
• 2030: 296m
• 2040: 312m GDP: 4 000
  
  
• Philippines
• 2024: 116m GDP: 471
• 2030: 121m
• 2040: 130m GDP: 1400
  
  
• Germany
• 2024: 85m GDP: 4 700
• 2030: 83m
• 2040: 80m GDP: 5 300
  
  
• USA
• 2024: 345m GDP: 29 100
• 2030: 355m
• 2040: 370m GDP: 32 000
  
  
• Sweden (my home country)
• 2024: 11m GDP: 610
• 2030: 11m
• 2040: 11m GDP: 800

Put simply, a consumer related domestic-focused company in Indonesia or the Philippines should, all things being equal, have a better future than one in Germany, the US, or Sweden. At least if they can capitalize on a country with more and richer people. This is a simplistic and uncertain idea, but still, at least demographics is the most "certain" of the long-term predictions. It's also interesting to note that the US has quite good demographics compared to most of Europe.  

The three M:s, and a D?

I listened to a Swedish podcast some time ago, I can't remember which one, but there was an interesting rule of thumb: you should always be aware of changes in the market, market share and margins when you invest.  

• Market growth: How much will the market grow in 5-10 years? I usually look at some market growth reports. I e telematics (Karooooo) is growing about 15-20% per year and the Indonesian tape consumption not so much. A growing market is good (all other things being equal), but only a start. There are two more M's. The demographic changes if one of many things that affect whether the market is growing or not. 
• Market share: Will the company gain, maintain or lose market share? When a market is growing, the market leaders, which I usually invest in, will sometimes have declining market shares. It's nice with market growh but it also attracts competitors. You could also argue that the simple measure of market share isn't enough, and that relative market share is the most important measure. For example: If the market leaders have 25, 21 and 19% respectively, it's not a big difference. But if the leader has 12% and the next company has 2%, the leader could be in a much stronger position, and there is more of the market to take from weaker competitors.
• Margins: If a company must lower its price to maintain market share, this is very important. Changes in margins should be monitored. If a company can't protect its margins (moat anyone?), it won't benefit from a growing market or larger market share, at least not in a sustainable way.

The best case is a company that benefits from all three M's. They operate in a growing market, they gain market share and can increase their margins over time. 

Now let us go back to the beginning of this article. You might want to start with these three M(usketeers) and add a D('artagnan). As you might have guessed, D stands for demographics. It will in some way affect market growth for any business, at least consumer businesses. But it could go much deeper than that if you think about it. With big demographic and GDP growth, the nation may have more international recognition, its currency may be stronger, more and richer local investors will put more money into the local stock market, and more foreign investors will be attracted. It will become a bigger and more recognized country, which could have a knock-on effect on its stock market. 

As a long-term investor, the three M's are what you should focus on in any investment. But as a bonus, if you are a long-term buy-and-hold investor, you should at least think about demographics.