Interim report Jan-June 2020

Interim report Jan-June 2020

• Book value of fixed assets 12,264.8 (0) TEUR
• Equity amounts to 0.669 (1.154) EUR per share
• Earnings per share 0.024 (0.474) EUR
• Property holdings amount to 4,324* (0) hectares
• Timber volume estimated at 500,000* (0) cubic meters
• Net sales 103.7 (15.6) TEUR
• Operating profit -498.6 (0) TEUR
• Change in value, forest 1,080.7(0) TEUR
• Net profit 498.3 (9,726.4) (0) TEUR

(Parentheses data refer to the corresponding period last year)

* Information entered includes 410 hectares with 47,500 m3 of growing stock storage of the holding where completion of the transaction is underway.

This is Latvian Forest Company

Latvian Forest Company AB (publ.) is a Swedish listed company that acquires and manages forest properties in Latvia. The three main foundations of the business are, in addition to forest being a sought-after real asset that grows on its own merits,

• an expected increase in the price levels of Latvian forest and agricultural properties.
• increase in value through active forest management.
• increase in value by building a larger property portfolio.

The expansion is financed by new share issues in stages as properties are acquired and the business develops. Through Latvian Forest Company, shareholders become partners in many properties instead of an individual, which gives a good risk spread. The activities carried out in the day-to-day forest sector generate the turnover needed to cover the company's costs over time and generate a surplus in the long term.

Latvian Forest Company AB has Euro as accounting currency and all reporting takes place in Euro. Trading in the share at Spotlight Stock Market takes place in Swedish kronor.

Status & property holdings

Investments in forest properties have been made continuously and holdings totaled 4,328 (0) hectares at the end of the period. Of these, 2,516 (0) were forest and 1,808 (2,554) other land including 1,321 (0) hectares of agricultural land. At the same time, the total growing stock was estimated at approximately 500,000 (0) cubic meters after felling, purchases and sales of property. The listed holdings include 410 hectares of woodland with approx. 47,500 cubic meters of growing stock that the company has not completed the purchase of. Registration of the properties that was planned to be completed in June was postponed to September due to bureaucratic delay caused by the corona pandemic. The subdivision of farmland has been carried out and documentation for registration has been submitted to the country register. The company has secured the purchase with an advance deposit.

On the total 4,059 hectares that the company owned at the end of this period the existing growing stock is estimated at approximately 500,000 m3. Of these approx. 170,000 m3 are immediately fellable. Within the next 10 years, the company management estimates that 230,000 m3 will be fellable. The company estimates that there is a total of 198 m3 of growing forest per hectare, which is 60 m3 per hectare more than in the portfolio sold to SCA last year. Close to 70 % of the company's holdings consist of land types corresponding to Site productivity class IA, I and II. Only in 0.6% of the company's holdings, maintenance measures are prohibited due to nature conservation restrictions. More than 70% of the growing stock consists of the three most important types of wood, i.e. birch, pine and spruce. The average acquisition price was approximately 21 EUR per cubic meter, including the cost of acquiring agricultural land.

(Map of existing property holdings)

(Examples of naturally afforested agricultural land in Cornaja municipality, near Rezekne)

Of 1,307 hectares of agricultural land, about 753 hectares of farmland are leased to local farmers with an average income of 70 EUR/hectare per year excluding VAT. The remainder consists mostly of naturally afforested land, which the company gradually converts into woodland by making new forest plans and implementing plantings of spruce. In a conservative view, the existing growing stock on such land amounts to 25,000 m3. The company plans to convert 600 hectares of agricultural and other land into woodland within the next two years.

Turnover and earnings

Net sales in the second quarter amounted to 85.9 TEUR (-59.3) and mainly consist of revenue from felling, i.e. sales of root items. The total turnover for the first half of the year was 103.7 TEUR (15.6). Operating costs have continued to develop satisfactorily. An increase in external costs is explained by legal costs related to the arbitration with the company´s former CEO Fredrik Zetterström, settlement with former Chairman Ted Alvenius and review of potential acquisition opportunities. Consequently, operating profit was negative, -137.2 TEUR (-215) for the second quarter. In the first half of the year, the loss was, -489.6 TEUR (-756.7).

Fair value of forest assets

The estimated fair value of fixed assets totaled 12,265 TEUR (0). The increase in value can mainly be attributed to the company's acquired new properties, as well as the average long-term price level of saw logs and pulpwood. Fair value of growing forests has been calculated on the assets held by the company as of June 30, 2020. The value is calculated by discounting a 100-year series of estimated felling volumes/sales revenue and forest management costs at a discount rate of 7.25% (7.25%). The sale of assets to SCA at the beginning of 2019 valued 1 m3 of growing stock at 16.51 EUR according to the same method. Today, according to the same method, 1 m3 is valued at 18.42 EUR. This is explained by the fact that the company has holdings with a significantly larger share of fellable forests.

In the latter part of 2019, subsidiaries containing mainly forest and agricultural properties were acquired, without dividing the value of standing forest and land. The land was also not divided into agricultural, forest or other land.

A division and classification of the properties began in the first quarter and was completed in the second quarter of 2020. The division led to a redistribution between the land and forest lines in the balance sheet, as shown in this report. The change has not led to differences in the asset mass at the overall level.

Further, the result is affected by normal costs for clearing, property-related costs such as new property measurements, inventories and stamping of stocks for felling, and certain costs associated with felling.

External costs consist largely of other purchased services related to forest management, other consultancy services such as accounting, auditing, legal advice, travel, rent and transport costs, etc. Variable costs for purchase commissions have partly been recorded as part of the acquisition cost of the individual properties and in these cases do not burden the result. Other variable allowances including management and clearing are recorded with raw material and supplies (previous cost of goods sold).

Felling and clearing

During the second quarter, the company has felled 1781.38 cubic meters, which is only part of planned felling-volume, i.e. sales of root items. This is due to a continued weakening of the timber market at the beginning of the year. The average felling-price was 50.52 EUR per cubic meter with an income of 90,000 EUR.

A total of 7.27 hectares were cleared during the second quarter. The company management has carried out planting 69,184 spruce plants on 65.61 hectares during the second quarter.

Timber and forest property market

The company management follows how the market develops for timber and pulpwood. In May, demand for conifers fell significantly to 27-28 EUR per cubic meter as the main operators closed the purchase of such pulpwood. The volume of coniferous pulpwood on export was in April reduced to 65,000 cubic meters. The spot market for such pulpwood ceased completely. The same hit birch pulpwood in late May.

In April, the purchase of veneer roundwood was limited both for local production and export to China. In January, the price for veneer roundwood was 80-90 EUR per cubic meter. However, as early as April, the price had dropped to EUR 65 per cubic meter and the largest Latvian veneer producer had ceased purchasing.

As early as June, a slight improvement was felt as demand for conifers and deciduous trees used to produce pallets grew. Subsequently, the company management noticed that purchase prices for sawn timber began to improve. In March, the average price was just under 60 EUR/m3 for premium quality coniferous timber (28 cm in diameter). At the end of June, prices already reached between 65-68 EUR/m3 and, with some exceptions, closer to 70 EUR/m3. This corresponds to the price level before the corona pandemic. This is also shown by statistics showing that exports of sawn timber slowed by 27% compared to April 2019. Already in May, the deviation from last year was only 7%.

All this indicates that the timber market will recover to some extent. However, the first half of the year will have a real impact on the cash flow for the companies that fell forests. As a result, they will seek liquidity through the sale from their forest portfolios. LFC sees this as an opportunity to acquire the forest portfolios at a favorable price

Financing

No loans were taken, and no new issues were carried out during the first quarter.

Financing strategy

Following comments from and probing among various shareholders and potential investors, the Board of Directors has decided that future financing in the form of share issues will primarily take place within the framework of share issues with preferential rights for existing shareholders. However, this does not prevent directed issues from being carried out e.g. in the case of the acquisition of property portfolios or in specific situations where a directed issue may be required. However, the aim is that existing shareholders should not be disadvantaged if a directed issue is carried out.

Share

At the end of the period, the share capital amounted to 2,297,307 EUR divided into 80,000 Class-A shares and 20,431,061 Class-B shares. Class-A shares represent ten votes and Class-B shares one vote each. Each share represents 0.112 EUR in share capital. According to the latest data, the five largest shareholders in terms of votes control 67.6% of the capital and 67.2% of the votes.

Significant events after the end of the period

Latvian Forest Company AB's (LFC) Board of Directors has approved the sale of 193.4 hectares of agricultural land for 386.8 TEUR to a Latvian agricultural company. LFC has granted the buyer a 15-year annuity loan which shall yield an annual return of 9,41 %. LFC secures the claim by pledge in the properties sold. The buyer will invest approx. 800 EUR per hectare in soil improvement measures.

(Sold farmland in Nautrenu municipality, north of Rezekne)

In addition, the company has cut off a 2.3-hectare farm from a previously acquired property. The farm was sold for 78 TEUR. The 65.5-hectare property with 16,503 m3 of growing stock was purchased for 250 TEUR in October 2019. After the sale, we have acquired for 10.41 EUR per cubic meter of the timber stock.

(The farm in Priekuli, near Cesis)

These sales were carried out within the previously adopted framework to streamline the company's asset base with a focus on forestry and implement active asset management measures with the aim of creating value for shareholders.

Next report

The interim report for the period January to September 2020 is scheduled for publication on November 22, 2020.

About this report

This report has not been subject to special examination by the company's auditor.

Stockholm, 2020-08-26

Styrelsen

For further information contact

Aleksandrs Tralmaks, CEO
+37129203972
aleksandrs.tralmaks@latvianforest.se
Or visit our website: www.latvianforest.se