Probably, the majority of the companies listed on the Baltic stock exchanges have never seen so turbulent times as the last three years and that is, indeed, the greatest challenge for them to navigate through the unfavorable environment. This is definitely a time when the role of the management expands exponentially, putting pressure on the team to successfully deal with ever-mounting challenges. Therefore, when assessing corporate quality as a part of Baltic Corporate Excellence Award framework, we pay a lot of attention not only to the quality of firm’s business model and their financial health, but also to the quality of corporate governance.
The goal of Corporate Excellence Award, which we administer since 2008, is to examine and recognize companies included in the main lists on the Baltic stock exchanges 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, decent development pace, and good financial health, complemented by strong corporate governance and plausible investment strategy.
Local capital banks have rushed into the Top 3 this year given their active expansion on the local markets, which has been tracking the economic development of the region. The long-term dwellers of the Top, such as Telia and Tallinna Kaubamaja, remained among the companies offering the best corporate quality in Baltics but saw slight deterioration of their positions.
TOP 5 Baltics 2022
Source: Alphinox, Reuters (Companies with less than three years data history are not included in the evaluation)
In 2022, Telia Lietuva has given up its first place to Lithuanian Šiauliu bankas, which was somewhat expected given the slight decline in profitability of Telia due to cost inflation and heavy capital investments in the infrastructure – a typical case in the telecom space. On the revenue side, Lithuanian communications behemoth remains as stable as possible even during current trying times, generating decent cash flows in all of its segments. Being the first company to introduce 5G network in Lithuania, Telia has cemented further its top position in the Lithuanian telecom market. High quality of the business model as well as governance, alongside technological synergies with its parent company, allows Telia to sail safely during the stormy weather and to reward its shareholders with dividends.
Historically, LHV used to occupy high positions in the Baltic Corporate Excellence Award Top, given its rapid growth and plausible business model; therefore, it is not a big surprise that also this year it earned 3rd position among listed Baltic companies based on corporate quality. 4th largest Estonian bank is well-represented in all the business niches and has become a serious competitor to Scandinavian banks, especially when it comes to adapting new services and implementing technological innovations. Being in the aggressive growth mode, Estonian bank actively attracts capital to expand its business at a double-digit rate, with deposits growing by 41% and loan portfolio increasing by 21% in 2021. Current environment is fairly favorable for the bank as rates continue to increase, providing opportunities for growing income streams. Those are complemented by increase in demand for consumer credit driven by rapid inflation that encourages consumer spending.
As already mentioned above, 2022 winner is Šiauliu bankas, Lithuanian 4th largest player in banking sector. This financial institution is also in the aggressive growth mode and is actively attracting new customers to its business and consumer segments. However, bank’s capital structure looks more conservative when compared to LHV, which may play a crucial role in case the number of critical loans increase as the economic situation worsens. The bank currently is a local leader in renovation financing, benefitting from interest rate increase and higher demand for consumer loans, same as LHV and the sector as a whole.
On average, the financials of the Baltic companies have improved last year, even surpassing pre-COVID 2019 results. 2021 saw increase in capital profitability, while debt levels declined. However, market environment has changed drastically in 2022 – central banks are rising interest rates in an attempt to cool down skyrocketing inflation, while catch-up demand in the post-COVID era caused significant disruptions to supply chains. Security tensions resulting from Russia’s invasion in Ukraine only aggravated the situation further. All these challenges indeed pose a threat to growth in 2022 and 2023. However, high-quality companies remain an attractive long-term investment as they have a good track record of remaining resilient, they possess fundamental strength and show the ability to navigate through tough waters. All industries have their leaders and laggards – the aptitude to identify the former and stay away from the latter is what differentiates active management from passive.
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 and Šiauliu Bankas in personal investment portfolio.
Author: Alphinox team, alphinox.com
Alphinox is part of an independent asset manager group with expertise in capital management operating in accordance with Quality investment style. By combining investment expertise and long-term experience in analysing global financial markets, Alphinox develops customized investment solutions and provides analytical research.