As pandemics continue to rage around the globe, it also continues to heavily affect corporate financial results, pushing them towards opposite extremes – both positive and negative ones. Financial results published by Baltic listed companies for the full year 2020 evidence that about half of the Baltic main list constituents have seen a profound negative impact as a result of the coronavirus outbreak, with their profits slashed by a third. In the most severe cases, however, companies even reported negative bottom lines. Those were predominantly ones that operate in the pandemics-exposed sectors and have large fixed costs base. Naturally, pandemics also spurred a number of positive trends, such as digitalization, and some companies with relevant exposure managed harvest significant benefits from that.
Given so uneven positions among Baltic companies, it was easier this time to distinguish between the best and the worst in Baltics, even though we also take historical results into account and those tend to smoothen out the periods of crises. The goal of the Corporate Excellence award is to examine and recognize companies of the Baltic Stock Exchange based on their past financial performance and to encourage both, their own further development and that of the market as a whole. The best company, ideally, should have had an excellent track record in financial results – above average capital returns and strong solvency position, complemented by good corporate governance quality and plausible investment strategy.
Given such a divergent performance in the current operating environment, it was not a surprise to see some new candidates emerge among the Corporate Excellence Top titles in 2021, although last year award winners made it to the Top yet again, proving their resilience also in the adverse conditions. Telia Lietuva, for instance, managed to keep its number one position, 2nd best last year -Tallinna Kaubamaja – slid to the 3rd place in the face of headwinds caused by COVID-induced restrictions, while Estonian bank, LHV, is gradually surrendering its position in terms of corporate quality to other Baltic companies, mainly because of worsening capital structure and capital profitability.
Telia Lietuva, with operations in the crisis-resilient telecom sector, has kept its top position despite suffering from lower roaming revenues due to restrictions in tourism sector, but, on the other hand, it enjoyed increased traffic from more intense data consumption. Telia Lietuva is able to steadily grow its top line, while also being very cost-efficient. The company proceeds with substantial investments to ensure high quality service to its customers, which assumes also faster data transmission, and to prepare solid ground for 5G service offering.
Tallinna Vesi noticeably improved its position and reached 2nd best place as its resilience towards Covid-related changes allowed the company to stand out among other Baltic listed companies. Together with the improvement in historical fundamentals, it allowed Tallinna Vesi to secure the 2nd best place in the ranking. Tallinna Vesi saw a decrease in water consumption in 2020 but still managed to keep its margins on a high level and ensured balance sheet stability. The company can also be praised for its sense of responsibility in terms of the ESG theme – several standards are implemented to ensure high water quality and environmentally friendly operations. The company takes good care not only of its customers but also of investors by paying high dividends annually.
Bronze-medal winner, Estonian retailer Tallinna Kaubamaja, should be praised not only for remaining in the top according to the fundamental quality but also for active expansion during the critical period for many businesses. Not only did it add capacity to the supermarket network, which further drove its top line, but Tallinna Kaubamaja also managed to keep its leverage under control.
Summarizing this year’s fundamental evaluation, it must be admitted that the gap between the best and the worst expanded and probably will continue to expand until we learn how to cope with the pandemics and all the restrictions are lifted. Apart from the declines in top and bottom-line earnings, another expected phenomenon is the worsening of balance sheets that is driving leverage and net debt to cash flow upwards, and stimulating companies from heavily affected sectors to attract additional financing. This leads to the increased risk profile of the Baltic equity market, which, however, is still more conservative than the pan-European stock market – equity ratio: 45% vs. 35%. Nevertheless, this trend requires careful acknowledgment of such risks in the stock selection process.
Baltic Corporate Excellence Award: Since 2008 on a yearly basis Riga-based financial research company Alphinox, in cooperation with its partner, Hérens Quality Asset Management (Switzerland), evaluates the quality of the companies quoted on the Baltic stock exchanges. Both qualitative and quantitative assessment is applied to determine the best companies listed in the Baltic States, considering the companies included in the Baltic main list with a trading history of at least three years. The quantitative screen contributes 50% to the overall assessment. It considers the main fundamental ratios allowing to make a judgment on the strength of the balance sheet, profitability, capital efficiency, operating efficiency, earnings momentum. Another 50% of the decision is based on the qualitative assessment, which covers business model, corporate governance, social responsibility, quality of financial management, and market environment. The Corporate Excellence Award recognizes historical fundamental performances and ignores companies’ valuation. The results of the Baltic Corporate Excellence Award are therefore not a stock recommendation.
Disclaimer: This press release is for information purposes only and constitutes neither an offer nor a recommendation to undertake any type of transaction or to buy or sell securities or financial products in the broadest sense. Alphinox Quality AS offers no guarantee of the completeness, correctness, or security of this press release. Alphinox Quality AS accepts no liability claims that might arise from the use or non-use of the content of this press release. Alphinox Quality AS employee has Telia Lietuva in the personal investment portfolio.
Author: Alphinox team, alphinox.com