30 December 2019
Ziņas un Viedokļi
Baltic Stock Market Playlist 2019

As the year 2019 is slowly approaching towards its inevitable end, everybody is in a Christmas mood and soon recaps and reviews of the most important events for the last twelve months will pop up all over the place. We would like to commence a little tradition by taking this time before holidays to look back at a passing year – how successful or challenging, in our opinion, it was for some of the Baltic stock market participants. So, turn your speaker volume up as we have chosen the perfect song for each nomination to set the mood!

Investor’s Best Friend 2019

Without any doubt, this nomination goes to Grindeks’ largest shareholder K. Lipmans, which was often criticized over fat paychecks for Supervisory Council members (3 out of 5 being part of the family). For many years rumors were circulating that Lipmans are controlling over 50% of Grindeks. Financial and Capital Market Commission forced K. Lipmans to announce a mandatory redemption of shares at book value at times when the stock was trading significantly below that. Many investors seized the opportunity to rip some nice profits through selling their shares for EUR 12.59. Funny enough, for some time, even after redemption of proposal announcement, Grindeks was trading in the range between 12.30 and 12.50 making us question the efficiency of the Baltic stock market. Stock is up 130% in 2019 being a clear winner.

Mood-setting song: Jennifer Lopez – Dinero ft. DJ Khaled, Cardi B https://www.youtube.com/watch?v=aEM2kOrrNJI

Going Public

Like it or not, but this one can surely not go unmentioned. As there are already very few companies in the Main List, we are glad to see new issuers joining the stock exchange and not just leaving it. Surely, we do not have a lot of flashy IPOs like Saudi Arabian ARAMCO or biggest flop of the year WeWork, but still – Coop Bank’s decision to offer its shares to the public is noteworthy for a couple of reasons: 1) company was able to attract a large number of private Estonian investors (10 781 or 0.8% of Estonian population), 2) 71% of IPO was subscribed, while very few institutional investors participated. More details on Coop Bank’s IPO can be found in our blog article specifically dedicated to that event: https://www.alphinox.com/post/coop-bank-s-ipo-another-growing-estonian-bank

Mood-setting song: Imagine Dragons – It’s Time https://www.youtube.com/watch?v=qFqMy0ewYFQ

Breakup of the Year

This one is to commemorate Grigeo’s short-lived partnership with INVL Baltic Sea Growth Fund (Invalda INVL Group is a Lithuanian asset management firm), which was cancelled after just 3.5 months after the announcement. On June 10th, Grigeo has signed an agreement with INVL, where the latter agreed to gradually invest up to EUR 30 mn in “Grigeo investicijų valdymas”, comprised of Grigeo’s cardboard companies. In return, Grigeo offered 49.99% of shares in “Grigeo investicijų valdymas”. Investment ambitions for the next 5 years were big both for cardboard and packaging businesses according to the press release – ‘’significant development of cardboard business is expected: about EUR 150 million is intended to be invested into construction of the new paper production plant from secondary raw material, as well as upgrade of the existing cardboard business production capacity and further development of cardboard and its packaging business in the Baltic States and beyond’’.
But the future turned out to be quite different from the one described above as on 30th of September transaction was canceled with a clear and simple explanation that ‘’it is not going to work’’. Termination was initiated by Grigeo due to the changes in its investment strategy and for the breach of contract company has to pay quite a lump sum of EUR 1 million in penalties to its ex-partner INVL. Someone will definitely have a merry Christmas 🙂

Mood-setting theme song: Gotye – Somebody That I Used To Know (feat. Kimbra). https://www.youtube.com/watch?v=8UVNT4wvIGY

Bid Adieu to ESO and Ignitis Gamyba

With one IPO in 2019, we are also having 2 ongoing delisting processes of Energijos Skirstymo Operatorius (ESO) and Ignitis Gamyba. Usually, delisting is not something worth mentioning, but this one attracted our interest due to the way it is carried out. ESO and Ignitis Gamyba both belong to State of Lithuania through the mother company Ignitis Group that is a controlling shareholder. The official position of the State was that it wanted to delist both companies, but after minority shareholders raised their voice about the buyout price, it turned out that State’s genuine ambition was not only to delist the two, but to merge them into one entity Ignitis Group, which would be listed on a stock exchange later. This made minority investors even more upset as a) ESO buyout price is lower than its IPO price 3 years ago; b) State was also not interested in the idea of exchanging ESO/Ignitis Gamyba shares for those of a newly formed Ignitis Group. December shareholder meeting about delisting went as planned and now the ball is in the court of the Central Bank of Lithuania, which has to decide if the State’s offered buyout price for ESO and Ignitis Gamyba is fair or an alternative price calculations made by Investor Association of Lithuania are more plausible. One thing is for sure – the price discrepancy is huge.

Also, we looked deeper into ESO case and assessed its performance in our blog post here: https://www.alphinox.com/post/the-electrocuted-shareholders-of-eso-the-real-return-of-long-terminvestors

Mood-setting theme song: Rick Astley – Never Gonna Give You Up https://www.youtube.com/watch?v=dQw4w9WgXcQ

“Black hole” in Valmiera

Scientists say that black holes (which are the objects exhibiting gravitational acceleration so strong that nothing can escape from it, even light) are very far away in space. Well, we have an “object” with similar properties here in the Baltics – Valmiera Glass company. Although the issuer is in the Secondary list, we could not ignore this ‘’when everything goes wrong with a business plan’’ type of event. Maybe someday it will be a good case study for students in local universities.
It started five years ago with the intention to expand into North American market by establishing a stronghold there – U.S. based production plant, capable of producing glass fiber and finished products. The company calculated it would need USD 110 mn in investments to carry out such project that would span until 2022 and banks were eager to offer financing. But sometimes, as a famous saying goes “the road to hell is paved with good intentions”. Phase 1 was completed in 2015 according to the plan and Valmiera Glass started to work on a much bigger (Phase 2) project – a vertically-integrated fiberglass yarn facility, which was finished in April 2018. That was about time when things escalated quickly as Phase 2 plant started to accumulate losses that were bigger than the rest of the group’s EBITDA (see chart below). Company’s explanation was rather confusing – quality of the workforce was poor (remember, US economy is operating at full employment), discipline and attendance was low, and, obviously, local management needed a shake-up due to the lack of control over its own asset. In the meantime, banks, realizing that the US operating company cannot meet its obligations, stepped up and asked to inject more funds. Valmiera Glass raised more capital, received another revolving credit line and provided additional guarantees from the mother company. But all those measures were not enough to stop “black hole” contagion and US plant filed for Chapter 11, while the group initiated legal protection procedure (LPP). In 2018 Valmiera Glass Group had written down mind-blowing EUR 100 mn in goodwill and total liabilities at the time of LPP amounted for EUR 118 mn. Ouch!

Source: Valmiera Glass 9M 2019 webinar presentation

Mood-setting theme song: Muse-Supermassive Black Hole. https://www.youtube.com/watch?v=OgvLej8ln2w

TV Drama Series of the Year

For the last two years (so we are in the season 2 already), no market review is credible without mentioning the most controversial stock on the Baltic market – Olainfarm, which is constantly delivering tabloid-style headlines. For the whole 2019 we’ve been still witnessing an ongoing proxy war between V. Maligins heirs. To mention all the turns and twists in the plot of this soap-opera would require a series of articles devoted to this topic, therefore, not to spoil the Christmas mood, we just better switch to another channel and enjoy Queen’s song, which is the most suitable soundtrack for this case. Keeping our fingers crossed for Olainfarm’s saga not to follow McLeod’s Daughters (8 season Australian TV series) path and hoping 2020 will bring peace to all the shareholders.

Mood-setting theme song: Queen – The Show Must Go On https://www.youtube.com/watch?v=uKLMYZlbIb8

Happy Meal of the Year

Several companies made an extra effort to expand their portfolio of businesses last year – LHV Group, Apranga, Harju Elekter; however, the most interesting is Tallink’s acquisition of franchise rights for Burger King in Baltic countries. As company’s existing operations are entering late-cycle phase, Tallink is trying to find their ways to diversify onshore. With the acquisition of Burger King’s franchise rights, company expects to open ~50 restaurants in the Baltics creating 800 new jobs.

Mood-setting theme song: “Weird Al” Yankovic – Eat It. https://www.youtube.com/watch?v=ZcJjMnHoIBI

Go-Go Years for Listed Baltic Banks

Long time ago, Baron Rotschild said – “the time to buy is when there’s blood in the streets”. LHV Group’s management probably had this in mind while deciding on using the turbulence in Estonian banking sector to acquire private loan portfolios of fallen angels Versobank and Danske Bank Estonia (EUR 12 mn and EUR 393 mn respectively). These assets, given that their quality would not deteriorate, can serve as a rocket fuel for LHV’s growth in the upcoming years – accretive from December 2019, it will add EUR 0.75 mn a month in interest income. Company reported its best-ever 9 month results (record 9M net profit of EUR 20.7mn, net interest income EUR 34.1 mn, net fee and commission income EUR 19.2 mn)

We should also praise Šiaulių bankas, which, similarly to LHV Group, delivered top-notch results (9M net profit of EUR 40.6 mn, net interest income EUR 52.56 mn, net fee and commission income EUR 13 mn). As bank is in its best shape and enjoying credit cycle expansion, the management is wise enough to explore various strategic alternatives for the bank. So far the market did not buy it and the stock barely moved, but if there is a definitive agreement, it will become an important catalyst for the shares. A fly in the ointment is a higher corporate tax that Šiaulių bankas is facing (raised from 15% to 20%) as government of Lithuania is trying to find ways to raise more money for the State budget. Lithuanian banking sector posted EUR 334.5 mio profit in 2018, EUR 52.64 mn of which was attributable to Šiaulių bankas.

Mood-setting theme song: Neil Diamond – Sweet Caroline. https://www.youtube.com/watch?v=YdW69V34GfY

Lithuanian Tesla

Tesla is the U.S. electric car manufacturer, well-known for two different reasons: 1) its unique and innovative products that set it apart from the other car brands and 2) eccentric major shareholder – Elon Musk. And in Lithuania there is a company that draws certain comparisons – Auga Group, which is led by CEO (and also the largest shareholder) Kęstutis Juščius, who started as a founder of a mushroom business and has been a driving force behing company’s development for the last 20 years. As a visionary, he was betting on a much bigger trend since 2015 – growing number of consumers choosing organic healthy food. Auga Group is a vertically integrated organic food producer, delivering products ‘’from the field to the shelf’’. That’s where we run into third similarity with Tesla – Auga Group is cash hungry. Company proceeded with a capital increase, raising EUR 36 mn with a half (EUR 18mn) allocated to the biggest shareholder ‘’Baltic Champs’’ (Kęstutis Juščius) and another half to Auga Group for ‘’unlocking synergies across its farming activities and projects which would enable to diversify its product range by expanding into poultry farms, building modern dairy farms, combined feedstock production plant, biogas production plant and biogas application to agricultural machinery’’. Six months later, company successfully negotiated an extension of its credit lines with the main lenders. Still, company needed more liquidity to repay existing bank loans and finance working capital needs, so it turned to the bond market, where it raised EUR 20 mn in December 2019. Both (equity and bond issues) were fully subscribed and company expanded its borrowing capacity for up to EUR 60 mn.

Mood-setting theme song: Aloe Blacc – I Need A Dollar. https://www.youtube.com/watch?v=HWQRhAJrKU

The Best News for Private Investors in the Baltic Market

And a cherry on the top of the cake is the most exciting news for private investors in the Baltic stock market. The biggest surprise for the local investment community was delivered by Swedbank, which announced commission-free trading of Baltic stocks for Estonian, Latvian and Lithuanian clients in December. Additionally, there will be no custody fees for portfolios under EUR 30’000 and trading fees for other market securities will be more accommodating for small investors. Swedbank decided to gain a first-mover advantage in the Baltics as its bigger US peers are forced to cut transaction fees to zero, chasing millennials that are fleeing to the platforms like Robinhood or eToro. Wise and respectful move, Swedbank!

Mood-setting theme song: The Prodigy – Firestarter. https://www.youtube.com/watch?v=wmin5WkOuPw

That’s how we saw the year 2019 events, hope we hit the right note! Thank you for trading and happy holidays!

Alphinox team