Interim report Jan-Sept. 2020

• Book value of fixed assets 13,426.5 (0) TEUR
• Equity amounts to 0.689 (0.604) EUR per share
• Earnings per share 0.045 (0.464) EUR
• Property holdings amount to 4,261*(0) hectares
• Timber volume estimated at 521,000* (0) cubic meters
• Net sales 245.9 (15.6) TEUR
• Operating profit -446.9 (-806.6) TEUR
• Change in value, forest 1,271.5 (0) TEUR
• Net profit 922.0 (9,523.4) (0) TEUR

 (Parentheses data refer to the corresponding period last year)

 * Information entered includes 408 hectares with 49,500 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 4,261 (0) hectares at the end of the period. Of these, 2,591 (0) were forest and 1,670 (2,554) other land including 1,203 (0) hectares of agricultural land. At the same time, the total growing stock  was estimated at approximately 521,000 (0) cubic meters after felling, purchases and sales of property. The listed holdings include 407 hectares of woodland with approx. 49,500 cubic meters of growing stock for which the company has not yet completed the purchase.   Registration of the properties scheduled to be completed in June has been postponed until October 29 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.

Of the total of 4,261 hectares that the company owned at the end of this period, the existing growing stock is estimated at approximately 521,000 m3. Of these approx. 173,500 m3 are immediately fellable. Within the next 10 years, the company management estimates that 238,000 m3 will be fellable. In total, the company estimates that there are 198 m3 of growing forest per hectare, which is 60 m3 per hectare more than in the portfolio sold to SCA last year. Almost 70 % of the company's holdings consist of land types corresponding to Site productivity class IA (G36), I (G32) and II (G28). 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.

(Map of existing property holdings)

During the third quarter, a total of approximately 0.48 MEUR was invested in 5 individual properties and 131 hectares with a growing stock of approximately 19,500 cubic meters. Of these, about 3,400 cubic meters are immediately fellable and a further 7,200 cubic meters will be fellable within the next 10 years. The average growing stock was about 180 cubic meters per hectare of woodland. The company management has assessed that there still are favorable conditions for the acquisition of individual properties because of some foreign property owners considering that leaving the Latvian market is favorable.

Picture of recently acquired  property that was purchased in the third quarter and consists of a total of 51.3 hectares of which 20.7 hectares are agricultural land. The growing stock amounts to 4,707 m3 of which approx. 1,000 m3 are directly fellable. The company has acquired the property for 130 TEUR and has an  agreement to dispose the farmland to a local farmer for 52 TEUR.

The company has sold 193.4 hectares of farmland for 386.8 TEUR to a Latvian agricultural company. In connection with the sale, the company has granted the buyer a 15-year annuity loan which will yield an annual return of 9.41%. LFC secures the loan through bottom mortgages in the properties sold. According to the purchase agreement, the buyer will invest approximately 800 EUR per hectare in land improvement measures. In addition, the company has sold a 2.3 hectare farm cut off from a previously acquired property. The farm was sold at a profit of 75.7 TEUR. The original property, which consists of 65.5 hectares with a growing stock of 16,503 m3, was purchased for 250 TEUR in October 2019.

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

Felling and clearing

During the third quarter, the company has felled 3,688 cubic meters, which is only part of the planned felling-volume, i.e., sales of root items. This is due to a continued weakening of the timber market at the first half of the year caused by the coronavirus pandemic. The average felling-price was 34 EUR per cubic meter with an income of 125 TEUR. The company did not carry out any clearing or planting during the third quarter.

Sales and earnings

Net sales in the third quarter amounted to 142.2 (0.2) TEUR and mainly consist of revenue from felling, i.e., sales of root items. The total turnover for the first nine months was 245.9 (15.6) TEUR. 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 and a settlement with former Chairman Ted Alvenius, equivalent to 339 TEUR. These were one-off costs associated with historical profit-sharing commitments. Consequently, operating profit was negative with -446.9 (-806.6) TEUR for the nine months. However, operating profit was 51.7 (-50.1) TEUR for the third quarter. Earnings before interest and taxes for the third quarter was 233.8 (-50.1) TEUR, of which capital gain from the sale of real estate was 182.1 TEUR. During the nine months, net profit for the year was 922.0 (9,523.4) TEUR.

Fair value of forest assets

The estimated fair value of fixed assets totaled 13,426 (0) TEUR. 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 forest has been calculated on the assets held by the company as of September 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%).

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, and certain costs associated with felling.

External cost largely consists 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 those cases do not burden the result. Other variable renumeration for clearing are recorded under raw material and supplies (previously cost of goods sold).

Timber and forest property market

The company management follows closely how the market develops for timber and pulpwood.

In September, demand for softwood timber recovered sufficiently to reach the level of the higher diameter at the beginning of 2019, namely 86-90 EUR per cubic meter. The company management observed a sharp increase in the price of birch roundwood intended to produce veneer. The increase in price was 19%. In April the price was 55-60 EUR per cubic meter, but had already in September risen to 75-80 EUR per cubic meter depending on the region. This is because exports of veneer and glued wood board increased by as much as 17% compared to last year in June and July.

Demand for coniferous pulpwood continued to decline. In May, demand for coniferous pulpwood and therefore also the price, fell significantly.  Some of the biggest players cut back on the purchases of such pulpwood. This is due to a 6.9% drop in demand for graphic paper and fine cardboard during the first quarter according to the largest producers –SCA, UPM, Stora Enso, etc. Further, there are still surpluses of softwood because of spruce bark beetle infestation in Central Europe.  However, demand for birch pulpwood rose in late September and it is expected to bring higher prices for this range.

Demand for soft- and hardwood used for pallet production also grew during the third quarter.

The ongoing unrest in Belarus will affect the export of timber and pulpwood as well as manufactured wood products equivalent to 15.7 million cubic meters, because EU most likely will sanction such exports if the companies are owned by the Belarusian state or people close to President Lukashenko. In such a case, the impact will mostly be in sectors such as broad-leaved pulpwood, biofuel (wood chips) and to some extent also coniferous timber. This may result in a further price increase in raw material on the Baltic Sea market.

All this signals that the timber market is recovering to some extent. On the other hand, companies that fell forests have had reduced cash flow. This means that they will seek liquidity through sale of their forest portfolios. LFC sees this as an opportunity to acquire forest portfolios at a favorable price.

Financing

During the first quarter, no loans were taken, and no new share issues were carried out.

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.

Shares

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

The company has completed the purchase of all shares in Latfolde AB on October 30. The purchase price amounted to 2,050,000 EUR. The purchase includes all shares in Latfolde AB. 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 will own after the purchase border or are close to properties that LFC already owns. Latvian Forest Company AB (publ.) signed a conditional purchase agreement regarding the purchase of all shares in Latfolde AB on September 18, 2020.  In connection with the acquisition, the company borrowed 19 MSEK on market terms from two shareholders in Latvian Forest Company AB, to finance the purchase.

According to the Board of Directors' decision, the company has taken out a loan equivalent 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 out at market interest rates, which the company cannot disclose in accordance with the confidentiality requirements of the bank. The loans will be used to finance continued expansion. The business is considered sufficiently established and the cash flows sufficiently predictable for this to be part of the total financing. The goal is to have a loan-to-value ratio of no more than about 20 percent of the total assets over time. This is in order not to place too high demands on the business's ability to generate cash flows.

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

(Example of forest property from the Latfolde portfolio) 

Next report

The year-end report for 2020 is scheduled for publication on February 22, 2021.

About this report

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

Stockholm, October 20, 2020

The Board

For further information, please contact

Aleksandrs Tralmaks, CEO

+37129203972

info@latvianforest.se

Or visit our website: www.latvianforest.se 

 More information:

Interim report Jan-Sept