Year-end report 2020

Period January-December 2020

• Book value of fixed assets 16,400.9 (8,660) TEUR
• Equity amounts to 0.7 (0.645) EUR per share
• Property holdings amount to 5,423 (3,816) hectares
• Timber volume is estimated to 611,000 (332,000) cubic meters
• Net sales 259.6 (25.8) TEUR
• Operating profit -605.2 (-1,356.4) TEUR
• Changes in value, forest 1,722.6 (1,312.9) TEUR
• Net profit 1,142.5 (816.0) TEUR

 Period October-December 2020

• Net sales 13.7 (10.1) TEUR
• Operating profit -158.3 (-130.7) TEUR
• Changes in value, forest 451.1 (1,312.9) TEUR
• Net profit 220.5 (1,265.5) TEUR

 (Data in brackets refer to the corresponding period last year)

Latvian Forest Company

Latvian Forest Company AB (publ) is a Swedish listed company that acquires and manages forest properties, preferably but not exclusively in Latvia. The starting point is the belief that forests are a safe investment, and that forestry is a stable and value-creating business.

In addition to forest being a sought-after asset that grows on its own, the main foundations of the business consist of: (1) value creation for shareholders through active forest management, (2) value creation by consolidating a larger holding of real estate, and (3) the belief in a general increase in price levels for Latvian forest and agricultural properties.

The expansion is financed by carrying out share issues in stages as properties are acquired and the business develops. Through Latvian Forest being a partner in several properties, shareholders receive a good risk diversification.

The prices of Latvian forest properties are today significantly lower than the EU and in Sweden. The price of the final timber product, on the other hand, is in many cases in line with what can be obtained on the common timber and pulpwood markets around the Baltic Sea. This creates the opportunity for profitable forestry and a good future return at low risk. Most indicators suggest that the conditions will remain favorable for investments in Latvian forest properties.

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 and property holdings

As the business is structured and the strategy is formulated, property holdings in Latvian Forest do not have to reach a certain given volume. The holdings that exists today are deemed sufficient to generate enough revenue over time to cover the costs of the current expansion-oriented organization. The goal is to continue expansion until it is no longer considered beneficial for existing and new shareholders to continue with an acquisition-driven expansion.

Investments in forest properties have been made continuously and holdings amounted to a total of 5,423 (3,816) hectares at the end of the period. Of these, 3,734 (2,074) were forest and 1,319 (1,292) hectares of agricultural land and 370 (449) hectares of other land. At the same time, the total growing stock was estimated at approximately 611,000 (332,000) cubic meters after felling and purchases/sales of property.

In 2020, a total of approx. 6,782 TEUR was invested in 2,015 hectares with a growing stock of approx. 320,000 cubic meters acquired. During the period Oct-Dec, a total of 1,162 hectares with an estimated growing stock of about 150,000 cubic meters were acquired. The average growing stock was 175 cubic meters per hectare of forest land. As a comparison, there were 126 cubic meters per hectare of forest land when sold to SCA. The average acquisition price was approx. EUR 21 per cubic meter in 2020.

(Map of existing property holdings)

During the fourth quarter, the company completed the purchase of all shares in Latfolde AB. The purchase price was 675 TEUR and the total asset value 2,050 TEUR. Latfolde AB is a 100% owner of the Latvian subsidiary Latfolde One SIA. The assets of Latfolde One SIA consists of a total of 961 hectares. Of these, 706 hectares are forests, 149 hectares agricultural land and 106 hectares other land. Total growing stock is estimated at 105,000 cubic meters. Many of the properties that the company own after the purchase border or are close to properties that LFC already owns.

(Map of property holdings before and after acquisition of Latfolde One SIA near Rezekne)

On November 6, the purchase of 407 hectares of forest land with approx. 49,500 cubic meters were completed and registered at the Latvian Land Survey. The registration of the properties was scheduled to be completed in June but were postponed for bureaucratic reasons caused by the coronavirus pandemic. The company had already started the divestment of the agricultural land a year ago. The purchase was secured by the company with an advance deposit. The properties are located around the Koknese region of Livonia.

Latvian Forest management has continued to streamline the use of different agricultural land types. Of 1,319 hectares of agricultural land, the company has leased out 697 hectares to local farmers generating an annual income of 63 TEUR. The company has started selling 592 hectares of productive agricultural land to Latvian farmers. Considering the company's strategy and the Board's decision to divest agricultural land, the company has in 2020 completed a sale of 193.4 hectares of agricultural land for 386.8 TEUR to a Latvian agricultural company. The purchase price corresponds to EUR 2,000 per hectare.

The company has during the year 2020 planted 98,710 spruce and 5,000 oak plants, totaling 54.35 hectares. Only additionally 15 hectares needs to be cleared, as the company has limited amount of young forest. Latvian Forest has not carried out any felling or clearing during the fourth quarter. The company has cleared a total of 13.72 hectares during 2020.

Together with hired forest managers, the company management has formulated the goal for forest management during 2021. Latvian Forest plans, among other things, to carry out felling equivalent to 35,000 m3 if the conditions on the timber market are favorable. The company plans to plant 200 hectares with a total of 400,000 spruce seedlings during the year 2021.

Sales and earnings

Net sales in the fourth quarter amounted to 13.7 (10.1) TEUR and mainly consists of revenue from felling, i.e., sale of root items, as well as lease income from agricultural land. Total sales for the year amounted to 259.6 (27.3) TEUR. The costs of day-to-day operations have continued to develop satisfactorily. An increase in external costs is explained by legal costs related to the arbitration with Fredrik Zetterström and a settlement with former Chairman Ted Alvenius, equivalent to 339 TEUR. Those were one-off costs related to historical profit-sharing commitments. Consequently, operating profit was -605.2 (-1,356.4) TEUR for 2020. Operating profit was -158.3 (-130.7) TEUR for the fourth quarter. The increase in costs is due to legal costs related to the acquisition of Latfolde AB. Earnings before interest and taxes for the fourth quarter was -210.2 (-130.7) TEUR, of which capital gain from the sale of real estate 182.1 TEUR. In the fourth quarter, the result was 220.5 (1,265.5) TEUR. Latvian Forest Company has settled all previously outstanding disputes with the former Chairman of the Board and the CEO.

Fair value of forest assets

The estimated value of fixed assets totaled 16,743.6 (8,795.4) TEUR. The increase in value can mainly be attributed to the company´s acquired new properties. The value of growing forest has been 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 average net income from the sale of root items is set at EUR 23 per cubic meter.

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

External costs largely consists of other purchased services related to forest management, other consultancy services such as accounting, auditing, legal advice, travel, rent and transport, etc. Variable costs for purchase commissions have to some extent been recorded as part of the acquisition costs of the individual properties and in those cases do not burden the result. Other variable renumeration for clearing is recorded under raw materials and supplies (previously cost of goods sold).

Financing

Following comments from 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. This does not prevent directed issues from being carried out, for example in the case of acquisitions of property portfolios or in specific situations where a directed issue may be required (see section "Significant events after the end of the period").

In October 2020, according to the Board's decision, the Company has taken out a loan corresponding to 1.1 MEUR from Swedbank in Latvia. The loans are due for payment in five years´ time and have a mortgage payment rate of 27,500 EUR per year. The loans were taken up at market rates. The loans will be used to finance continued expansion. The Board of Directors considers the business sufficiently established and the cash flows sufficiently predictable for this to be part of the total financing. The goal is, over time, to have a loan-to-value ratio of no more than about 20 percent of the total assets, not to place too high demands on the ability of the business to generate cash flows.

The company has also borrowed 19 MSEK on market terms from two of Latvian Forest's shareholders to finance the purchase of all shares in Latfolde AB. The loans mature in full March 30, 2022.

Equity and valuation

In connection with the transition to IFRS, it was decided to no longer publish an estimated net asset value on an ongoing basis, but instead to account for equity per share. The difference is mainly that net asset value also considers estimated excess values on the soil. According to IFRS, however, only forest assets are taken up at a calculated fair value. Equity per share at the end of the period was 0.7 (0.645) EUR per share.

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 (1.0 SEK) in share capital. According to the latest data, the five largest shareholders in terms of voting control approx. 50% of the capital of Latvian Forest.

Timber and forest property market

The Latvian Ministry of Agriculture annually publishes an information sheet for the coming year based on data from the previous year on the Latvian forest industry. In short, Latvia has 3.412 million hectares of forest land, representing 53% of the entire country's area. The forest industry represents 5.1% of Latvia's GNP and about 21% of the country's annual exports. The total timber volume corresponds to 682 million cubic meters, which is almost four times more than in 1935 or 1.6 times more than in 1988. The predominant tree species in privately owned forests are birch 37%, pine 22% and spruce 15%. In state-owned forests, pine dominates by 47%. Ownership of forest land is divided between the state, 49 % and private forest owners, 51 %.

According to the report, 67,900 hectares were cleared last year, which is slightly less than before. In the past, more was cleared in the state forests. During the last five years, however, the same number of hectares have been cleared in private and state forests. Each year, 17,000 hectares are planted in Latvia with a focus on spruce and pine. During the year 2020, pine has been planted on 6,447 hectares and spruce on 8,627 hectares. An important parameter that has received a considerable amount of attention lately is that Latvian forests bind 700,000 million tons of carbon dioxide.

Timber prices have fallen significantly in 2020 due to a decrease in demand because of the COVID-pandemic. According to the statistical report published by the Latvian Ministry of Forestry, total timber exports have decreased by 4.3% during the 11 months of 2020 compared to the same period in 2019. This drop corresponds to 2.34 billion EUR. A particularly large decline has been noticed in the exports of timber and pulpwood. Within this segment, volume has decreased by 21.6% to 2.6 million cubic meters from 3.3 million cubic meters last year. The total export value has decreased by 34,1 % from 217 MEUR to 142 MEUR during the first 11 months and timber exports almost halved, which did not reflect in the average price level. This can be explained by the fact that during the first six months the market was at a standstill within the segment.

In pre-processed timber, the export volume has decreased by 4.5% from 3.2 million cubic meters to 3.1 million cubic meters with a price decrease of approx. 5 % as a result. In energy forests, the volume has fallen by 2.7% while the export value has not changed. This is because actual prices per cubic meter have risen.

The interest among investors for forest assets in Latvia has been at a record high in 2020. However, the management of Latvian Forest still consider the market for acquisition of individual properties and property portfolios to be favorable. For Latvian Forest, there are several sources to purchase properties with favorable qualities:

• Many of the local logging companies have suffered liquidity shortages. This may lead to an increased need to divest property holdings or felled forests to free up funds for the acquisition of new properties.
• Liquidity shortages also affect individuals who, in a situation with lower timber, have started selling properties instead of carrying out the felling themselves.
• There is a planned administrative reform with the intention of merging the country's smaller municipalities into larger administrative units. This is expected to result in most Latvian municipalities selling out their property holdings before the merger.

In addition to the above factors, we note that some of the smaller Scandinavian forest owners are probing the possibility of selling their property holdings for various reasons. Two of the main reasons for sales are (1) increasing administrative operating costs related to forest ownership on the foreign market and (2) a generational shift in which the new generation no longer wants to invest in owning foreign forests as an asset class. The acquisition of Latfolde AB is an example of this. Latvian Forest is still evaluating acquiring such assets by paying partly with cash and partly by issuing new shares.

Significant events after the end of the period

The company has signed a purchase agreement with a local agricultural- and energy company to acquire 82.79 hectares of forest land near Sigulda and Belava on 12,000 cubic meters of timber volume. The transaction is scheduled to be completed in the third quarter of 2021 after the company completed the subdivision of agricultural land. The company has paid 26 TEUR in advance deposit.

(Picture of forest in one of the properties, Sigulda portfolio)

Transactions with related parties

During the year, the parent company received market-based interest on its dealings with subsidiaries.

Next report

The interim report for the period Jan-Mar 2021 is scheduled to be published on May 24, 2021.

Dividend

The Board of Directors and the CEO propose that no dividend be paid for the financial year 2020.

Annual Report and Annual General Meeting

The Annual report for the financial year 2020 is scheduled to be published in the usual manner by the end of May or early June 2021. The annual report will be available at the company's office and website and will be available on Spotlight Stock Market's website. The Annual General Meeting is scheduled to be held in Stockholm in June 2021. The date of publication of the Annual report and the time and place of the Annual General Meeting will be presented as soon as possible but no later than in connection with the notice of the Annual General Meeting.

Accounting principles

The year-end report has been prepared for the Group in accordance with IFRS and IAS 34 Interim Reporting and the Annual Accounts Act. For the parent company, the interim report has been prepared in accordance with the Annual Accounts Act, which is in accordance with the provisions of RFR 2 Accounting for legal entities. Amounts are indicated in TEUR unless otherwise stated.

The fair value of growing forest has been calculated on the assets that existed in the company as of December 31, 2020. The value of growing forest has been 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%). See also the section "Sales and earnings".

For a description of risks, uncertainties, and risk management, please refer to the company's Annual report for 2019, Note 20.

About this report

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

Stockholm, February 18, 2020

The Board

For further information, please contact Aleksandrs Tralmaks, CEO  info@latvianforest.se

Or visit our website: www.latvianforest.se

More information:

Year-end report 2020