Interim report Jan-Mar 2020

 Interim report Jan-Mar 2020

• Book value of fixed assets 10,161.1 (24,733.2) TEUR
• Equity amounts to EUR 0.680 (EUR 1.117) per share
• Earnings per share -0.022 (-0.028) EUR
• Property holdings amount to 4,059 (10, 614) hectares
• Timber volume estimated at 396,567 (1,015,000) cubic meters
• Net sales 8 (75.2) TEUR
• Operating profit - 361.4 (-541.7) TEUR
• Change in value, forest 863.4 (0) TEUR
• Net profit TEUR 297.1 (-575.3) TEUR

 (Parentheses data 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 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 being a partner in most properties, shareholders receive a good diversification. 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 ownership

Investments in forest properties have been made continuously and holdings totaled 4,059 (10,614) hectares at the end of the period. Of these, 2,434 (8,060) hectares were forest and 1.625 (2,554) other land including 1,306 (1,943) hectares of agricultural land. At the same time, the total growing stock was estimated at approximately 400,000 (1,015,000) cubic meters after felling, purchases and sales of property. Of these, 132,000 cubic meters are immediately fellable.

Within the next 10 years, the company's management estimates that it will be able to fell 177,000 cubic meters. The company estimates that there is a total of 162 cubic meters of growing forest per hectare, which is 40 cubic meters more per hectare 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 EUR 21 per cubic meter, including the cost of acquiring agricultural land.

(Map of the existing property portfolio)

Of 1,306 hectares of agricultural land about 753 hectares of farmland is leased to local farmers with an average income of EUR 70/ha and 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.  The existing growing stock on such land is, in a conservative view, 25,000 cubic meters. The company plans to convert 600 hectares of agricultural and other land into woodland within the next two years. The remaining agricultural land will be disposed of and the management estimates the price of agricultural land in each region at an average of EUR 2,500 per hectare, equivalent to approximately 1,880 TEUR. According to this assumption, the company has been able to acquire one cubic meter of standing forest for EUR 16/cubic meter. A detailed description is available on the company's website.

Turnover and earnings

Net sales for the period amounted to 14.8 (75.2) TEUR and mainly consist of lease income from agricultural land.

The estimated fair value of forest resources amounted to 4.02 (16.52) MEUR. In total, the value of forest land, other land and forest assets amounted to 10.16 (24.73) MEUR.

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. Direct management costs during the third quarter were 29 TEUR.  

The external costs consist to a large extent of 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).

During the first quarter, the company had an extra 87.3 TEUR in legal expenses. These costs are attributed to the arbitration initiated by the company's former CEO Fredrik Zetterström against the company. Fredrik Zetterström demands compensation of 378 TEUR from Latvian Forest based on a profit-sharing agreement. The company has denied the claim in its entirety. Final hearings have been held and arbitration is expected on May 20, 2020.

Felling and clearing

The company has not carried out sale of standing forest timber, which had been planned for the first quarter of 2020, due to a continued weakening of the timber market at the beginning of the year. The situation deteriorated further because of the Corona crisis. Decision has been made to carry out felling of approx. 40,000 cubic meters after a noted improvement of the economic situation. The company has prepared the necessary documentation and applied for logging concessions of the above volume, which has been authorized by the Forest Board. The Board of Directors will evaluate the economic situation of timber products and will instruct the company management to carry out felling at the first signs of improvement.  

A total of 10 hectares were cleared during the first quarter. The company management has planned to carry out planting of 68,360 spruce plants on 45.03 hectares during the second quarter. At the time of publication of this report, the lion´s share of the planting has already been carried out.

Timber and forest property market

As a repeat, it can be pointed out that forest properties in Latvia often consists of small properties of between 5 and 40 hectares. After the War of Independence (in the 1920s), land formerly owned by the Baltic nobility was distributed to those who participated in the War of Independence. As a rule, such a property included both a piece of productive agricultural land and some woodland. A family was supposed to be able to make a living on such a property. Latvian Forest buys such properties to create a more efficient use of the properties and to streamline the forestry business with regard to scalable finances.

Already during the end of 2019, the wood prices had fallen significantly because of a decrease in demand and abundant supply. On the Latvian timber market, wood prices decreased with 11-14 % in 2019 compared to the previous year. The situation deteriorated further since the spread of the Corona virus and various travel restrictions around the world. As a result, the market for timber exports stalled at the end of March and the beginning of April. At the same time, it has created favorable acquisition opportunities. Latvian Forest identifies several sources for the purchase of properties with advantageous outcome:

•  Many of the local logging companies have suffered from liquidity shortages. This leads to an increased need to divest real estate holdings of felled forest to release funds to cope during the crisis.
• The same lack of liquidity also affects private individuals who in such a situation start to sell 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. Most Latvian municipalities sell their property holdings before the merger.
• Some of the smaller Scandinavian forest owners are probing for the same reasons mentioned above the possibility of selling their property holdings. Latvian Forest may acquire such assets by paying partly in cash and partly by issuing new shares.

At the same time, company management has observed a strong interest in investing in other real assets from both institutional and private investors with an ability to pay. These investors predict that the economic measures initiated by world governments to save businesses and jobs will, in the longer term, create a situation for increased inflation rates. Forests and, to some extent, agricultural assets are the asset class with best chances of maintaining the value if inflation increases.

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 EUR 2,297,307 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 Euro (SEK 1.0) 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 Board of Directors monitors developments regarding the Corona pandemic and continuously evaluates how this may affect the company's operations both short and long term. At present, it is not possible to make a reasonable assessment of the extent to which this will affect the business and thus the company's results and position going forward.

Next report

The interim report for the period January to June 2020 is scheduled for publication on August 21, 2020.

Annual Report and Annual General Meeting

Notice of The Annual General Meeting, June 29, 2020 has been issued and the Annual Report and related materials will be available no later than two weeks before the Annual General Meeting. 

Changes in Accounting Principles

Starting from January 1, 2018, the company practice IFRS 15, revenue from contracts with customers, with full retrospective approach. An entity recognises revenue when the customer receive control over purchased goods or services and can make use of it. The effect for the company is as good as none.

For the most part, the company sells felling rights. These are then prepared by the company so that the buyer can start felling immediately. Almost everything the company sells is available to the customer at the same time as payment is made. This means that the customer receives full benefit of the goods or services directly upon payment.

About this report

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

Stockholm, 2020-05-22

Board

For further information, please contact

Aleksandrs Tralmaks, CEO

+37129203972

info@latvianforest.se

Or visit our website: www.latvianforest.se