ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
Initiating coverage with BUY Rating BUY
Aspo targets EBIT-% of 7% vs. 4.5% achieved in 2016. We 10 expect 7% to be achievable by 2020 with ESL moving towards 9 its 20-24% EBIT-% target with new LNG vessels and Telko 8 moving towards 6-7% EBIT-% target with mix and pricings, 7 6 improving logistics and new value added services. We initiate 5 coverage with a BUY recommendation and target of EUR Price/EUR 4 10.50. 3 2 ESL’s new ships add capacity and cut costs 1 ESL receives two new LNG-fuelled ships in H1 2018. The total 0 12/12 12/13 12/14 12/15 12/16 12/17 investment is 60 MEUR. The vessels are intended to replace ESL’s current vessels covering SSAB’s raw material transports. The Aspo DJ STOXX 600 vessels will increase ESL’s shipping capacity by 20%. The new ships have 25% better fuel efficiency and also better personnel Share price, EUR (Last trading day’s 9.26 closing price) efficiency than the current ships. While we expect the new ships Target price, EUR 10.5 to burden earnings in H1 of 2018, we expect EBIT-% to improve to 18.5% in 2019 and 20.8% in 2020. Latest change in recommendation 20-Dec-17 Latest report on company N/A Telko targets sales of EUR 300-350m and EBIT of 6-7% Research paid by issuer: YES With new targets announced in November 2017 Telko targets No. of shares outstanding, ‘000’s 30,579 sales of EUR 300-350m and EBIT-% of 6-7% by 2020. We expect No. of shares fully diluted, ‘000’s 30,579 Telko to benefit from solid market growth in its markets and Market cap, EURm 283 actions in pricing and mix, operations and growth in services to support margin improvement to 6% reached by its peers. Free float, % 100.0 Exchange rate EUR/RUB 69.579 Leipurin – profitability recovering Reuters code ASPO.HE Profitability of Leipurin showed clear improvement in Q3, and we Bloomberg code ASPO FH expect better performance to carry over to Q4 and 2018 with Average daily volume, EURm 0.1 strong order book in machinery. Next interim report 15-Feb-17 Web site www.aspo.com
BUY with target price of 10.50 Based on 2018 multiples Aspo has only limited upside. We expect Analyst Markku Järvinen Aspo to gradually improve towards its targets in 2018-2020 with Olli Pöyhönen 2018 burdened by ramp up of ESL’s new capacity. We have a E-mail [email protected] positive view of Aspo’s prospect and initiate coverage with a BUY Telephone +358 9 4766 9635
recommendation and target of EUR 10.50. Our target values Aspo at 13.1x 2019E EV/EBIT and 2019E P/E of 11.5x. BUY HOLD SELL KEY FIGURES
Sales EBIT EBIT Ptx profit EPS P/E EV/Sales P/CF EV/EBIT DPS EURm EURm % EURm EUR (x) (x) (x) (x) EUR
2015 446 21 4.6% 21 0.65 11.6 0.8 9.2 17.1 0.41 2016 457 20 4.5% 17 0.52 15.7 0.8 15.4 18.5 0.42 2017E 500 24 4.9% 22 0.64 14.6 0.8 8.2 17.0 0.44 2018E 528 28 5.3% 25 0.72 12.9 0.8 7.7 15.5 0.46 2019E 560 35 6.2% 31 0.92 10.1 0.8 6.7 12.1 0.50
Market cap, EURm 283 BV per share 2017E, EUR 3.1 CAGR EPS 2016-19, % 20.8 Net debt* 2017E, EURm 132 Price/book 2017E 2.9 CAGR sales 2016-19, % 7.0 Enterprise value, EURm 415 Dividend yield 2017E, % 4.8 ROE 2017E, % 21.0 Total assets 2017E, EURm 329 Tax rate 2017E, % 6.3 ROCE 2017E, % 9.9 Goodwill 2017E, EURm 43 Equity ratio* 2017E, % 29.2 PEG, P/E 17/CAGR 0.7
All the important disclosures can be found on the last pages of this report. *EUR 25m hybrid bond included in debt
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
Contents 1. Investment summary ...... 4 2. Scenario Analysis ...... 6 2.1. Base case: ESL and Telko improve ...... 6 2.2. Bull case: Telko and ESL reach high end of margin targets ...... 6 2.3. Bear case: ESL volume growth disappoints, Telko’s margins flat ...... 6 3. Aspo ...... 7 3.1. History...... 7 3.2. A portfolio of companies ...... 7 3.3. Management ...... 8 3.4. External boards ...... 8 3.5. Benefits of the conglomerate structure ...... 8 3.6. Net sales and profitability ...... 8 3.7. Geographies and currencies ...... 11 3.8. Russian economy ...... 11 3.9. Financial targets ...... 13 3.10. Balance sheet ...... 13 3.11. CAPEX ...... 14 3.12. Depreciations and amortizations ...... 15 3.13. Dividend and EPS ...... 15 4. ESL Shipping ...... 16 4.1. Services and customers ...... 16 4.2. Steel industry...... 17 4.3. Energy industry ...... 18 4.4. New vessels...... 19 4.5. Fleet ...... 19 4.6. Operating costs ...... 19 4.7. Cargo volumes ...... 20 4.8. Marine shipping markets ...... 21 4.9. Competition ...... 22 4.10. Taxation ...... 23 4.11. Net sales and profitability ...... 23 4.12. Outlook ...... 25 4.13. Estimates ...... 25 5. Telko ...... 26 6.1. Products and customers ...... 26 6.2. Suppliers and principals ...... 28 6.3. Geographies ...... 28 6.4. Chemical distribution market ...... 29
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
6.5. Fragmented but consolidating market ...... 30 6.6. Iran ...... 31 6.7. Strategy and financial targets ...... 32 6.8. Exchange rates and operating costs ...... 32 6.9. Net sales and profitability ...... 32 6.10. Outlook ...... 34 6.11. Estimates ...... 34 7. Leipurin ...... 35 7.1. Products, services and customers ...... 36 7.2. Markets and competition ...... 37 7.3. Strategy and financial targets ...... 39 7.4. Net sales and profitability ...... 39 7.5. Outlook ...... 41 7.6. Estimates ...... 41 8. Kauko ...... 41 8.1. Mobile knowledge work ...... 42 8.2. Energy efficiency solutions ...... 43 8.3. Relationship with Panasonic ...... 43 8.4. Legal proceedings ...... 43 8.5. Geographies ...... 43 8.6. Net sales and profitability ...... 44 8.7. Outlook ...... 44 8.8. Strategy and financial targets ...... 45 8.9. Estimates ...... 45 9. Estimate summary ...... 46 10. Valuation ...... 47 10.1. ESL Shipping ...... 47 10.2. Telko ...... 49 10.3. Leipurin ...... 50 10.4. Historical valuation...... 51 11. References ...... 51
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
1. Investment summary
A conglomerate with 4 Aspo is a conglomerate operating mainly in Northern and Eastern Europe through separate businesses subsidiaries ESL Shipping, Telko, Leipurin and Kauko. Two thirds of Aspo’s revenue comes from Finland, Russia, Ukraine and other CIS countries. Thus the Russian economy is important to Aspo and the Russian economy has returned to growth in 2017.
Financial targets: EBIT-% Aspo’s primary financial target is operating profit of 7%. In 2016, Aspo’s EBIT-% was of 7% sought 4.5%. Target for ROE is >20%. In 2016, the ROE was 14.6%. Gearing target is up to 100%. Gearing was 89.8% at the end of 2016. The company aims to distribute on average at least half of the annual profit as dividends. Starting from 2017, Aspo has adopted a twice-a-year distribution policy.
ESL: specialised on dry bulk ESL Shipping is a dry bulk shipping company operating mainly in the Baltic Sea. Steel shipping in icy conditions industry is ESL’s largest customer segment and SSAB the most important customer. The business is based on long-term customer relationships and on an ice-strengthened fleet. ESL’s net sales amounted to 71.4 MEUR in 2016 and 56.7 MEUR in Q1-Q3’17 (15.6% and 15.3% of Aspo’s revenue, respectively). Meanwhile, ESL’s operating profit was 12.6 MEUR (17.6%) in 2016 and 9.4 MEUR in Q1-Q3’17 (16.5%), 61.8% and 56.6% of Aspo’s total operating profit, respectively. A 20-24% EBIT-% target by 2020 has been set for ESL. ESL benefits from tonnage taxation, meaning a flat of some 100,000 euros p.a. instead of income tax.
ESL: new ships add ESL will receive two new, energy-efficient LNG-fuelled ships from China during the first capacity and cut costs half of 2018. The total investment is 60 MEUR. The vessels are intended to replace ESL’s supporting revenue growth current vessels covering SSAB’s inbound raw material sea transports within the Baltic and 20-24% margin target Sea and the North Sea. The vessels will increase ESL’s shipping capacity by 20% from the 2016 level (266 000 DWT). According to ESL, there is high demand for the replaced vessels elsewhere, and addition in capacity should thus result in increase in revenue. The new ships are also 25 % more fuel efficient than the current ships of similar size.
ESL: we expect EBIT-% to With the increased capacity we expect ESL’s cargo volumes in tons to grow by 6% in move gradually towards 2018, 7% in 2019 and 4% in 2020. We expect sales growth of 7.8% in 2018, 9.6% in 2020 target of 20% 2019 and 5.7% 2020. In 2018 we expect ESL’s EBIT-margin to decline to 15.9% in 2018 from our estimate of 17.5% in 2017 with ramp-up of new capacity. We expect EBIT- margin to improve to 18.5% in 2019 and 20.8% in 2020, reaching the targeted 20-24% range.
Telko: chemical and Telko is one of the leading chemical and plastic raw material distributors in Northern plastics distribution in Europe and the CIS countries. The 200 principals include many reputable chemical Nordics, Russia and CIS manufacturers and 7000 customers imply a limited customer risk. Telko’s net sales amounted to 240.3 MEUR in 2016 and 196.6 MEUR in Q1-Q3’17 (52.5% and 53.1% of Aspo’s revenue, respectively). Meanwhile, the operating profit was 10.1 MEUR (4.2%) in 2016 and 7.8 MEUR in Q1-Q3’17 (4.0%), 49.5% and 47.0% of Aspo’s total operating profit, respectively.
Telko: targets 300-350 Telko targets 300-350 MEUR net sales in 2020 or 8% revenue growth in 2016-2020. MEUR of sales and EBIT of Growth in third party distribution is to continue at a rate of 6-7% and on-going growth 6-7% by 2020 projects, such as Iran are to drive growth. Growth in emerging markets where Telko has established positions GDP growth should support product demand. Telko is also looking at acquisitions. Telko aims to increase its operating margin to 6-7% by 2020. Primary avenues for margin improvement are: pricings discipline and improved mix, improving logistics and new value added services.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
Telko: we expect steady We expect Telko’s net sales to grow at 7.3% in 2018, 7.0% 2019 and at 5% after that, growth and improving supported by 5.8% growth in Russia, Ukraine and other CIS in 2018-2020; ramp up in margin Iran; and revenue to grow of 4.0% in other countries. We expect Telko’s EBIT margin to improve gradually towards its target of 6-7% by 2020. While 6% margin level is achieved by peers, we expect it should be achievable also for Telko.
Leipurin: raw materials and Leipurin distributes raw materials and equipment along with services for bakeries and equipment for bakeries other businesses operating in the food industry. The company is currently focusing on its out-of-home eating strategy in the West. The long troubled machinery business has recently achieved a turnaround. Leipurin’s net sales amounted to 112.7 MEUR in 2016 and 89.4 MEUR in Q1-Q3’17 (24.6% and 24.2% of Aspo’s revenue, respectively). Meanwhile, the operating profit was 2.0 MEUR in 2016 and 2.4 MEUR in Q1-Q3’17 (9.8% and 14.5% of Aspo’s total operating profit, respectively).
Leipurin: turnaround in Leipurin’s performance was strained from 2014 by the crisis in Russia. But in Q3’17, machinery, improvement in Leipurin’s EBIT-% improved clearly and reached similar levels as before the 2014 crisis. Russia Profitability improved particularly in the Western market, which was driven by machinery sales with the order book was at a good level, extending to the first half of 2018. In the East, Leipurin sees that the decline of consumer purchasing power has stopped.
Leipurin: turnaround in Profitability of Leipurin showed clear improvement in Q3, and we expect better machinery performance to carry over to Q4 and 2018 with strong order book in equipment. We expect EBIT of EUR 4.1m in 2018, EUR 4.5m in 2019 and EUR 5.0m in 2020.
Kauko: Limited Kauko provides solutions related to mobile knowledge work and energy efficiency. Kauko contribution to earnings operates mainly in the Finnish market but the company has also expanded to Germany. Volume-wise, Kauko is a market leader in Finnish solar panel sales. Kauko’s net sales amounted to 33.0 MEUR in 2016 and 27.3 MEUR in Q1-Q3’17 (7.2% and 7.4% of Aspo’s revenue, respectively). Meanwhile, the operating profit was -0.1 MEUR in 2016 and -0.2 MEUR in Q1-Q3’17. Kauko remains in a development phase and we expect contribution to group profitability to remain limited.
Guidance: EBIT of EUR 23- Aspo guides operating profit to be EUR 23–26 (20.4) million in 2017. We expect EBIT of 26m in 2017 EUR 24.5m for 2017.
We expect earnings to We expect Aspo’s EBIT to amount 28.2 MEUR (5.3%) in 2018, 34.9 MEUR (6.2%) in 2019 improve gradually to 2020 and 41.2 (7.1%) in 2020. We expect ESL to generate EBIT of 13.2 MEUR (15.9%) in 2018, 16.9 MEUR (18.5%) in 2019 and 20.0 MEUR (20.8%) in 2020. Meanwhile, we estimate that Telko will generate 14.5 MEUR (5.1%) in 2018, 16.8 MEUR (5.5%) in 2019 and 19.1 MEUR (6.0%) in 2020. On our estimates, Leipurin will earn 4.14 MEUR (3.3%) in 2018, 4.46 MEUR (3.5%) in 2019 and 5.03 MEUR (3.9%) in 2020. We expect Kauko to earn 0.38 MEUR (1.0%) in 2018, 0.77 MEUR (2.0%) in 2019 and 0.95 MEUR (2.5%) in 2020.
BUY with target of Based on our estimates Aspo is currently trading at 2018E and 2019E EV/EBIT multiples EUR 10.50 of 15.5x and 12.1x respectively. Next 12 month EV/EBIT for Aspo has averaged 14.4x in 2011-2017. On P/E Aspo currently trades at 12.9x and 10.1x on our estimates for 2018 and 2019 respectively, vs. average next 12 month P/E of 13.4x in 2011-2017. For Aspo P/E is particularly relevant with low tax rate driven by ESL’s low tax rate. While the 2018 multiples leave only limited valuation upside, we expect Aspo to gradually improve towards its targets in 2018-2020 with 2018 burdened by ramp up of ESL’s new capacity. We have a positive view of Aspo’s prospect and initiate coverage with a BUY recommendation and target of EUR 10.50. Our target values Aspo at 13.1x 2019E EV/EBIT and 2019E P/E of 11.5x.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
2. Scenario Analysis
18 Aspo 16 16 (+72.8%)
14
12
10 9.26 10.5 (+13.4%)
8
6 6 (-35.2%)
4
2
0 18-Dec 28-Jun 5-Jan 17-Jul 14-Jan 31-May 15-Oct Historical Stock Performance Current Price Base Case (Dec-18) Volume 2.1. Base case: ESL and Telko improve
Evli target price at 2019E Our base case “BUY” recommendation is based on sales growth and earnings EBIT of EUR 35m and improvement by ESL and Telko to 2019 supported by ESL’s new ships and Telko’s solid EV/EBIT of 13.1x: EUR 10.5 underlying growth and earnings improvement program.
2017E 2018E 2019E Bull: ESL: sales growth 17-19 25%, Sales growth 9,3 % 9,0 % 9,3 % EUR 16.0 2019 EBIT 24%. EBIT-% 4,9 % 6,0 % 8,0 % +73% Telko: sales growth 17-19 25%, EBIT, EURm 24 33 48 2019 EBIT 7%. EV/EBIT of 12.9x 2019E. Base: ESL: sales growth 17-19 18%, Sales growth 9,3 % 5,8 % 6,0 % EUR 10.5 2019 EBIT 18.5%. EBIT-% 4,9 % 5,3 % 6,2% +13% Telko: sales growth 17-19 15%, EBIT, EURm 24 28 35 2019 EBIT 5.5%. EV/EBIT of 13.1x 2019E. Bear: ESL: sales growth 17-19 5%, Sales growth 9,3 % 2,4 % 2,5 % EUR 6.0 2019 EBIT 16%. EBIT-% 4,9 % 4,6 % 4,8 % -35% Telko: sales growth 17-19 5%, EBIT, EURm 24 24 25 2019 EBIT 4%. EV/EBIT of 13.0x 2019E.
2.2. Bull case: Telko and ESL reach high end of margin targets
Bull case fair value at Our bull case is based on assumptions that sales growth is stronger than we expect as 2019E EBIT of EUR 48m ESL fills its new capacity while Telko’s markets develop favorably and top line is and EV/EBIT of 12.9x: EUR supported by pricing, mix and sales of value added services. Both ESL and Telko reach the 16.00 high end of their targets or 24% EBIT for ESL in 2019 and 7% EBIT for Telko in 2019.
2.3. Bear case: ESL volume growth disappoints, Telko’s margins flat
Bear case fair value at Our bear case is based on assumptions that sales growth is slower than we expect with 2019E EBIT of EUR 25m ESL struggling to fill its new capacity and Telko’s markets develop unfavorably and top and EV/EBIT of 13.0x: EUR line support from pricing, mix and sales of value added services is limited. Both ESL EBIT- 6.00 % is 16% in 2019 and Telko’s EBIT-% is 4%.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
3. Aspo
3.1. History
Aspo is a Finnish conglomerate operating mainly in Northern and Eastern Europe. Aspo’s operations started with the importing of coke for central heating in 1929. The shipping and chemical operations were established in the 1940s and 1960s, respectively. In 1999, the company was split into Aspo and Aspocomp as the electronics business grew. Aspocomp focused on electronics while Aspo specialized in industrial logistics services. The current Aspo is a combination of the old operations and the restructured Kauko- Telko Oy which was acquired from Kesko in 2008.
3.2. A portfolio of companies
Aspo operates four fully owned subsidiaries which focus mainly on wholesale and logistics for industrial clients.
ESL Shipping is a dry bulk shipping company operating mainly in the Baltic Sea. Steel industry is ESL’s largest customer segment. The business is based on long-term customer relationships and on an ice-strengthened fleet. Telko is a chemical and plastics distributor. The company earns most of its revenue in Finland, Russia, Ukraine and other CIS countries. The company has an established position in the selected markets. The principals include many reputable chemical manufacturers. Leipurin distributes raw materials and equipment along with services for bakeries and other businesses operating in the food industry. The company is currently focusing on its out-of-home eating strategy in the West. The long troubled machinery business has recently achieved a turnaround. Kauko provides solutions related to mobile knowledge work and energy efficiency. Kauko operates mainly in the Finnish market but the company has also expanded to Germany. Volume-wise, Kauko is a market leader in Finnish solar panel sales.
Aspo’s core expertise is related to the growing and internationalization of medium sized enterprises. Aspo can be seen as a portfolio of companies which are at different stages of strategic development. Kauko is at an early stage of the cycle with its focus on mobile knowledge work. Similary, Leipurin is still in the process of penetrating the out of home (OOH) market and accelerating its machinery business. Meanwhile, ESL Shipping and Telko represent established businesses.
Aspo acquires new companies and divests old ones without any predefined schedules. The latest attempt was in 2014, when Aspo tried to list Leipurin to Helsinki Stock Exchange. However, the listing was cancelled as the Russian ruble devaluated strongly. Aspo is not currently considering the listing of Leipurin even though the company has recently improved its profitability by a significant degree.
A new company for the Aspo group would likely be an SME involved in trade and logistics and serving B-to-B customers. The new company would likely be lighter in assets that ESL Shipping.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
3.3. Management
Aspo is a conglomerate in which the parent company Aspo operates as the holding company of the four group companies. The parent company leads and develops the operations of its group companies as well as their financing and strategic planning. In addition, the parent company plans and implements investments. Risk management, HR, treasury and the Finnish accounting activities are executed at the group level.
Group companies run their operational businesses independently. In addition, each group company has its own communication and marketing functions. This simplifies potential divestments since each group company’s brand can be separated from Aspo. Although Aspo emphasizes group level financing, each group company may also look for financing on its own.
3.4. External boards
The boards of the group companies consist of individuals who have first-hand experience in the respective industry. This allows the CEO of each group company to exchange ideas with the industry’s experts – instead of professional board members. The CEO of Aspo is also the chairman of each board.
3.5. Benefits of the conglomerate structure
Although the four group companies have limited business synergies, Aspo sees that its broad presence in the Eastern market allows synergies in strategy work and improves the group’s ability to identify market opportunities. This view is supported by the fact that, in recent years, Aspo has earned a consistently positive operating profit despite the difficult economic environment in the East.
Aspo’s conglomerate structure also yields tax benefits. Although all four group companies are domiciled in Finland, their subsidiaries are domiciled in a wide range of countries, which lowers the average tax rate of the group. Aspo is also able to optimize its group level taxes due the combination of businesses which are at different stages of strategic development.
The conglomerate structure yields financing benefits, as well. The combination of different businesses diversifies the overall risk of the group, which allows lower overall financing costs. In addition, ESL’s vessels serve as collateral for ESL’s loans, which lowers the borrowing costs for Aspo as a whole. The companies are not ring fenced which allows further financial flexibility.
3.6. Net sales and profitability
The revenue distribution between the four group companies has remained quite stable during the last six years. Telko generates the most revenue while ESL typically generates the most operating profit. On the other hand, ESL’s return on capital is much lower than that of Telko’s and Leipurin’s. Aspo’s operating profit is seasonally lower during the first quarter.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
Aspo’s euro denominated revenue has stagnated during the last six years, which is largely due to the challenging macro situation particularly in Russia and Ukraine. In addition, the general uncertainty of the European economy and the financial markets has negatively affected overall economic development within the European Economic Area. In 2014, the crisis between Russia and Ukraine escalated and the resulting economic sanctions negatively affected Aspo’s target markets.
Close to the end of 2014, the price of oil declined substantially to a historically low level. ESL’s revenue correlates with the price of oil, due to fuel price clauses. Telko’s earnings also correlate with oil price to some degree.
Aspo’s profitability declined sharply in 2012 due to ESL Shipping which incurred extra costs with the launch of two Supramax vessels. In 2013, ESL’s profitability improved but Kauko’s losses depressed group level profitability. Aspo’s profitability improved significantly in 2014 as ESL Shipping’s earnings continued to improve and Telko reached a record profit.
During the year, Aspo’s target markets have showed signs of improvement. Since spring 2016, Aspo has seen that the decline in the Russian economy has stopped. In H1’17, Aspo’s market environment has turned to a positive direction. So far, the positive economic trend has particularly benefited ESL Shipping overall and Telko’s business in the west. The two companies usually benefit during the early stage of the cycle. The positive development in the Russian market is initially reflected in the value of the ruble, which has appreciated. The turn has a particularly positive impact on the long-term expectations of Telko and on the post-cyclical Leipurin.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
Aspo expects industrial production to increase in the main market areas of Aspo’s business operations during 2017. In Russia, Aspo sees that the national economy and industrial production have turned into growth. However, general political risks have increased, which may have a rapid impact on the operating environment or reduce free trade in the long term.
Operating margin, by group company MEUR Operating profit, by group company 25 % 20
20 % 15 15 %
10 10 %
5 % 5
0 % 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 -5 %
-5 -10 %
-15 % -10 ESL Leipurin Telko Kauko Other operations ESL Leipurin Telko Kauko Source: Aspo, Evli Research Source: Aspo, Evli Research
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
3.7. Geographies and currencies
The geographical sales distribution has remained stable over the years. About two thirds of Aspo’s revenue comes from Finland, Russia, Ukraine and other CIS1 countries.
In general, Aspo’s operating costs are denominated in the local currency. However, raw materials are oftentimes purchased in euros or dollars. For the most part, the group does not hedge against currency risks, except in the case of large investments. Aspo’s considers currency hedging unnecessary as long as there is a continuous flow of trades.
3.8. Russian economy
Due to Aspo’s significant exposure to the Eastern European markets, the Russian economy is particularly important to Aspo. In 2014, economic crises lead to negative GDP growth and to a collapse in the value of ruble. However, the Russian economy returned to growth in the beginning of 2017.
Aspo primarily benefits from an expensive ruble, as long as the exchange rate reflects a strong Russian economy. An expensive ruble increases the competitiveness of imported materials offered by Telko and Leipurin. In addition, Telko and Leipurin benefit from a gradually appreciating ruble since they purchase raw materials in western currencies and sell them in local currencies. However, an appreciating ruble also increases Telko’s fixed costs in Russia. An appreciating ruble also decreases the competitiveness of Russian raw material exports, which may have a negative effect on ESL’s freight volumes.
Industrial production reflects in the volumes of chemicals supplied by Telko and the cargo volumes shipped by ESL. The two companies benefit from the early stage of economic cycle. Higher consumer purchasing power should support Leipurin’s revenue and profitability through increased demand for higher quality bread and raw materials.
1 CIS: Commonwealth of Independent States is an organization of 9 member states that are located in Eurasia. Member states: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan and Uzbekistan.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
The GDP in Russia and Finland has been on a positive trend in since the beginning of 2016. Forecasts on GDP and industrial production indicate an approximate 2% annual growth. In the West, the estimates have been recently revised upwards.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
3.9. Financial targets Aspo has set the following three financial targets for 2020:
Operating profit of 7% with the current structure ESL and Telko have specified their own 2020 targets: ESL aims for a 20-24% margin while Telko aims for a 6-7% margin. Leipurin and Kauko have not yet specified their targets. In 2016, Aspo’s operating margin amounted to 4.5%.
Average return on equity of over 20% In 2016, the return on equity amounted to 14.6%.
Gearing of up to 100% Aspo sees that the diversified business risk reduces the need for capital buffers. Therefore, Aspo aims to maintain a relatively high average gearing. The company emphasizes that acquisitions may temporarily increase the group’s gearing to much higher levels than 100%. At the end of 2016, Aspo’s gearing amounted to 89.8%.
3.10. Balance sheet
Most of Aspo’s goodwill is allocated to Leipurin whose balance sheet includes 27 million euros of goodwill, 4 million of which is related to the acquistion of Vulganus machine manufacturing business in 20112. The Vulganus goodwill is based on, among other thigs, Vulganus’ Russian customer relationships and the company’s technical expertise in spiral-type bakery machines. Leipurin estimates that the probability for writedowns in Vulganus’ goodwill is decreasing as the situation in the Eastern market improves. The rest of Leipurin’s goodwill is mostly attributable to the Kauko-Telko acquistion.
The rest of the group’s goodwill is allocated to Kauko and Telko. Most of this goodwill was created in 2008 when Aspo acquired Kauko-Telko.
MEUR Allocation of goodwill 50 45 40 35
30 Other operations 25 Kauko 20 Telko Leipurin 15 ESL 10 5 0 2011 2012 2013 2014 2015 2016 Source: Aspo, Evli Research In 2013, Aspo issued a EUR 20 million hybrid bond. The bond was redeemed in 2016 while Aspo issued another hybrid bond of EUR 25 million. The fixed coupon rate of the bond is 6.75% per annum. The bond has no specified maturity date, but the company may exercise an early redemption option after four years of its issuance date. The instrument is treated as equity in the IFRS financial statements. However, this report treats the instrument as a long-term liability.
2 Leipurin acquired Vulganus Oy in 7.12.2011 for EUR 4.9m. The acquisition was intended to renew Leipurin’s machine offering, improve competitiveness in the machinery business and increase sales in Russia.
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Aspo has a common inventory policy for all of its group companies: When an inventory is 12 months old, 100 percent of it is written off. The process is reversed if the products are later sold.
Liabilities 100% 24 % 30 % 25 % 27 % 80% 40 % 35 % 37 % 7 % 8 % 60% 7 % 7 % 40 % 37 % 39 % 31 % 40 % 40% 31 % 28 %
20% 34 % 33 % 29 % 28 % 28 % 27 % 29 %
0% 2010 2011 2012 2013 2014 2015 2016 Short-term liabilities Hybrid bonds Long-term liabilities (excl. hybrid bonds) Equity Source: Aspo ,Evli Research
3.11. CAPEX
Almost all of Aspo’s CAPEX is attributable to ESL Shipping. A large part of ESL’s CAPEX consists of repairs which are done during the docking of vessels. ESL’s vessels need to be docked typically two times every five years for maintenance. ESL expects the maintenance CAPEX of its vessels to stay at a similar level as previous years. The cash flow suggests that the annual maintenance CAPEX amounts to less than 5 MEUR per year.
Another part of ESL’s CAPEX consists of new vessel purchases. ESL ordered two new LNG powered vessels in 2015 and they should start operating in H1/2018. We estimate the new ships to contribute 35 MEUR to Aspo’s CAPEX in 2018.
Aside from the two LNG vessels, ESL has not disclosed other vessel investments. ESL estimates that it is unlikely to scrap or sell current vessels within the next five years. However, we expect some investments to take place in the 2020s since the service life of the overhauled pusher-barge fleet should end at that time. After that, the next
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candidates for scrapping are Pasi and Tali which were built in 1995-1998. A typical lifetime for a cargo vessel does not extend much past 30 years.
3.12. Depreciations and amortizations
Overall, ESL guides that depreciations should remain at a similar level as previous years. We expect the two new LNG vessels to slightly increase the level of depreciations. The depreciation period for ESL’s vessels is between 25 and 30 years. Five of ESL’s barges and two of its pushers reached the age of 30 in 2016-2017 but the 2011 overhaul of those vessels has extended their service life until approximately 2021.
MEUR Amortization of intangible assets MEUR Depreciation of tangible assets 3 10
9 2,5 8 7 2 Unallocated 6 Unallocated 1,5 Kauko 5 Kauko Telko 4 Telko 1 Leipurin Leipurin 3 ESL 2 ESL 0,5 1 0 0 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 Source: Aspo, Evli Research Source: Aspo, Evli Research
Aspo’s amortizations are almost entirely attributable to Kauko, Telko and Leipurin. Most of the amortizations are related to the principal relationships of the acquired Kauko- Telko. The amortization of these assets continues until May 2018. In addition, approximately one fourth of Leipurin’s amortizations are related to the acquisition of Vulganus in 2011. Those amortizations will continue until 2021. The rest of the group’s amortizations are related to ERP systems, among other things.
3.13. Dividend and EPS
Aspo has an active dividend policy. The company aims to distribute on average at least half of the annual profit as dividends. Starting from 2017, Aspo has adopted a twice-a- year distribution policy, which should decrease volatility in share price.
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4. ESL Shipping
ESL Shipping is a dry bulk shipping company operating mostly in the Baltic and North Sea. The company mainly ships materials such as coal, limestone and iron ore pellets for the steel, energy and mining industries. ESL Shipping focuses on long-term customer relationships which partially shield the company from the more volatile spot market and stabilizes capacity utilization. The company sees itself as an integral part of the Finnish energy and steel industry’s security of supply.
SWOT Strengths Fleet particularly suitable for the Baltic Sea and icy waters Long-term customer relationships Most ships equipped with cranes for loading and unloading operations Weaknesses Majority of income from the steel and energy industries Global marine shipping markets are highly competitive Decreasing usage of coal in energy production Opportunities Two new LNG vessels should improve fuel efficiency Artic possibilities due to global warming Upcoming environmental regulation takes shipping capacity off the market Further automation of ship functions The transition from coal to biofuels may increase freight volumes Threats Transition to biofuels may increase land based competition Losing significant customers – particularly SSAB Coal-free steel manufacturing in the distant future Sensitivity of Supramax vessels to the volatility of global freight prices
4.1. Services and customers
ESL’s vessels are designed to carry dry bulk. Dry bulk materials comprise raw materials and semi-manufactures which are shipped in high volumes and don’t require special treatment during the voyage. The major bulks include iron ore, grain, and coal. Minor dry bulks include, for instance, steel products and forest products.
ESL Shipping operates dry bulk vessels and carries dry bulk materials for mainly steel and energy industries which are the most important industries for the whole bulk shipping market. ESL also provides services related to the loading and unloading of ships at the sea. Most of ESL’s vessels, excluding the pushers and barges, are equipped with separate cranes to perform these services. The loading and unloading services are significantly more profitable than ESL’s overall business.
ESL stopped reporting its geographical sales distribution in 2015. However, the 2011- 2014 data indicates that most of the sales occurred in Russia and Sweden while the share of Finnish customers has been steadily increasing.
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The 2011-2015 cargo distribution indicates that the share of energy coal has decreased significantly while the share of other materials has increased. A significant share of ESL’s cargo still consists of coal which is increasingly under pressure due to its high CO2 emissions. However, ESL is skeptical about the replacement of coal in the steel industry. Meanwhile, ESL expects biofuels to open new opportunities in the energy industry.
In the Baltic Sea, ESL’s operations are mostly based on long-term contracts and established customer relationships which balance the utilization rate of its fleet. However, ESL aims to keep some 20% of its shipping capacity outside long term agreements in order to maintain some flexibility.
ESL’s largest vessels class, the Supramax, appears to be more exposed to the troubled global spot markets than the rest of ESL’s fleet. In recent years, the Supramax vessels have occasionally put significant strain on ESL’s results.
4.2. Steel industry
ESL ships raw materials including iron ore, coal and limestone for the steel industry in the Baltic Sea. The steel manufacturer SSAB is ESL’s largest customer. ESL also serves other large steel manufacturers such as ArcelorMittal. SSAB reports that it sources iron ore pellets, metallurgical coal and injection coal from Russia.
ESL’s relationship with SSAB was strengthened in 2015 when the two companies signed a new inbound raw material shipping agreement including ESL Shipping’s commitment to order two new environmental-friendly LNG-fueled ships. The ships will start operating in 2018.
In steel production, economic cycles are reflected more in prices than in production volumes. The reason is that steel production facilities need to be run at a sufficiently high utilization rate.
SSAB operates five blast furnaces in the Nordics (in Luelå, Raahe and Oxelösund). Depending on market demand, SSAB can bring down the number of active furnaces to three. Due to this limited flexibility, variations in steel price have only a moderate impact on ESL’s shipping volumes. ESL sees that the current positive trend in the steel industry makes capacity reductions unlikely. In 2016, SSAB Europe produced 5.7 million tons of crude steel while the total capacity amounted to 6.4 million tons.
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The demand for steel is expected to grow 1.4% in the EU in 2018 (World of Steel Association, 2017). The demand goes typically well hand-in-hand with the economic activity measured with GDP. Overall, the steel market suffers from overcapacity particularly in China where the steel demand has contracted during the last few years (Zacks Equity Research, 2016).
SSAB is developing a way to replace coal with hydrogen in the production of steel. However, the transition seems to take a very long time, perhaps decades. The new production method’s pilot plant trials are scheduled to take place in 2018-2024 while demonstration plant trials are scheduled to take place in 2025-2035 in Sweden (SSAB 2016, 2017). The coal-free production process would still require the use of iron ore pellets.
4.3. Energy industry
Power and heat plants along the Finnish coast are significant customers to ESL. The consumption of coal has been declining in Finland for the last ten years and the country is planning to abandon the usage of coal altogether in the 2020s. For example, the Hanasaari power plant in Helsinki will be closed by 2024. In recent years, four coastal coal-powered plants have been closed along Finland’s coastline while seven coastal plants still remain (Yle News, 2017). The consumption of hard coal increased in H1’17 relative to last year but this was due to unusually cool weather (Statistics Finland, 2017).
Coal is increasingly replaced with other energy sources such as biofuel. In Finland, coal will be replaced with mostly wood (Yle News, 2017). According to the country’s National Renewable Energy Action Plan, the production of energy from biomass should increase from 10 900 GWh in 2017 to 12 900GHw in 2020.
New bioenergy plants are being opened and current coal plants are being transformed into biofuel plants, which may increase the transportation of biofuels in the Baltic Sea. ESL sees great potential in the shipping of biofuels since materials such as woodchips require significantly more3 transportation capacity than coal for the same energy content.
3 According to ESL, the energy content of coal amounts to 5.6 MWh/m3 while woodchips have an energy content of just 0.8 MWh/m3. Wood pellets have a much higher energy content of some 3 MWh/m3 although that is still well below the energy content of coal.
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ESL Shipping entered the renewable energy market in 2015 when the company signed an agreement with AB Fortum Värme for the transportation of biofuel. In Q3’17, ESL announced that it had started to operate a smaller vessel class which would transport various materials such as biofuels in the Baltic Sea.
Wood pellets are difficult to store and power plants prefer a continuous flow of pellets instead of large and infrequent shipments. Therefore, a smaller vessel class serves the biofuel plants particularly well.
In urban locations such as the Salmisaari power plant, transportation of biofuel by road could be problematic (Laasonen, 2013). However, in other locations, we see that road or rail based transportation could be an option to ESL’s shipping services. For example, Ahlholmens Kraft sources its wood fuels from nearby pulp factories, sawmills and the region’s forests. Meanwhile, in Fortum Värme, the biomass arrives to the plant both by trains and ships (source: Power Technology). In Naantali, the upcoming multifuel power plant can source renewable materials from nearby areas until their share reaches 40% of combustion (Maaseudun Tulevaisuus, 2017).
4.4. New vessels
In November 2015, ESL ordered two new, energy-efficient LNG-fuelled ships from China. The vessels are intended to replace ESL’s current vessels covering SSAB’s inbound raw material sea transports within the Baltic Sea and the North Sea. The vessels will increase ESL’s shipping capacity by 20% from the 2016 level (266 000 DWT). According to ESL, there is high demand for the replaced vessels elsewhere. Therefore, the increase in total shipping capacity should increase revenue directly.
ESL will receive the two vessels during the first half of 2018. The total value of the investment is around 60 MEUR, of which 35 MEUR will be paid in 2018. ESL will receive EU funding of at most EUR 5.9 million due to the environmental impact of the two vessels. EUR 2.1 million was received in 2016.
According to ESL, the new ships produce 50% lower CO2 emissions than ESL’s current ships. The new ships are also 25 % more fuel efficient than the current ships of similar size.
4.5. Fleet
ESL’s current fleet comprises 14 ships, two pushers and five barges. The pushers are smaller ships required to move the barges. 13 of the vessels are owned and one operated under a long-term lease agreement. Most of the vessels are equipped with cranes, excluding the pushers and barges.
In addition to its fleet of 14 vessels, ESL currently operates four smaller (about 10 000 DWT each) time-chartered vessels. The vessels are intended to transport wood pellets in the Baltic Sea. The vessels may also transport recycled raw materials, such as recycled energy fuel or steel, wood-based products or grain.
For now, all of ESL’s vessels have been registered in Finland. However, the domiciliation of the second LNG-powered vessel is still under consideration. The re-domiciliation of ships from one country to the other takes no longer than a few days.
4.6. Operating costs
ESL’s operating costs consist of two key components: fuel and labor. Most of ESL’s vessels run on hybrid fuel which is provided by multiple suppliers. ESL’s shipping contracts contain clauses, which ensure that the customer carries the fuel price risk.
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Therefore, ESL’s revenue moves in tandem with fuel price while the operating profit stays unaffected. The euro-denominated fuel price also correlates with the value of US dollar. The fuel consumption correlates with the amount of ice in the Baltic Sea.
ESL aims to reduce labor costs through automation and by slowly increasing the share of foreign labor. The two new LNG powered vessels will be equipped with automated cranes, which should reduce labor demand. Meanwhile, ESL actively negotiates with the Finnish Seafarers’ Union, the Finnish Engineers’ Association and the Finnish Ship’s Officers’ Union. Currently, one third of the positions in each profession can be filled with non-EU citizens. Excluding two ships, ESL’s entire fleet is already operated by mixed crews.
4.7. Cargo volumes
ESL’s total cargo volume has varied between 10 and 14 million tons per year in 2011- 2016. However, there are various factors that this headline figure does not reflect. First, the measure does not indicate how far the cargo is shipped. For example, in 2016, the decrease in volume was mainly caused by the long distances that the Supramax vessels travelled. Meanwhile, the distances travelled during the loading and unloading operations are relatively short.
The cargo volume also does reflect the nominal weight of different cargo types. For example, renewable bioenergy has a relatively low nominal weight and therefore contributes little to the total cargo volume.
Despite the above mentioned limitations, the ratio of net sales to cargo volume has remained stable through the years. This suggests that the mix of different cargo types is fairly stable. The fleet utilization has also remained quite stable: the ratio of annual cargo volume to the number of vessels has stayed in the range of 0.74-0.83 million tons per vessel during 2011-2016.
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4.8. Marine shipping markets
In 2016, the international seaborne trade amounted to over 10.3 bn tons while dry cargo shipping amounted to 5.5 bn tons (UNCTAD, 2017). Up to one billion tonnes of cargo traffic is handled in the Baltic Sea each year, representing some 15% of the world’s cargo traffic. This makes the Baltic Sea one of the busiest maritime places on earth. By comparison, ESL ships some 10 million tons of cargo per year.
The intra-European shipping cargo volume is expected to grow at a CAGR of 2.5% until 2020 and at CAGR of 2% after that. The transport of cargo (gross weight) increased by 18% from 2004 to 2013. The growth has been particularly strong in the Russian ports. (Baltic LINes, 2016)
There are about 2 000 ships in the Baltic marine area at any time. Each month around 3 500–5 000 ships navigate the sea. More than 40% of the ships in the Baltic Sea are general cargo ships that, for the most part, stay inside the Baltic Sea or in Northern Europe. (Clean Baltic Sea Shipping, 2013)
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The Baltic Dry index4 is an often cited health indicator for the global dry bulk shipping industry. In recent years, the index has reflected the industry’s troubles. In 2011-2013, a large amount of new ships entered service, which created significant overcapacity when the Chinese demand for raw materials turned out to be lower than expected.
Clearing overcapacity in the shipping markets takes time since a ship’s lifespan is typically 25 to 30 years. However, ESL sees that the balance between the supply and demand is improving due to declining deliveries and order books for dry bulk vessels. In addition, the amount of scrapped vessels increased significantly in 2015 and remained high in 2016. IMO’s5 upcoming regulation on ballast water, nitrogen and sulfur should take further shipping capacity off the market from 2020 onwards.
The Baltic Dry index has only limited significance to ESL since only some of its vessels are large enough to represent Baltic Dry’s size categories. Furthermore, the Baltic Dry index reflects the prices on the spot market while a large share of ESL’s ships is tied to long term contracts. Still, ESL’s two Supramax vessels have had to occasionally operate in the international spot markets.
The decreasing ice cover on the Arctic Ocean could open new shipping routes. Presumably, the new routes would initially require ice-strengthened vessels to ensure reliable deliveries. This would allow some first moving companies to sign long-term agreements before the competition intensifies. The most significant potential in the Arctic is associated with dry bulk shipping and offshoring due to the rich natural resources in the area (CBS Maritime, 2016). The shipping in arctic regions is expected to increase over the next decade, particularly with the development of Russian oil and gas fields in Siberia (New York Times, 2017).
4.9. Competition
According to ESL, traffic on the Baltic Sea consists of mostly vessels which are significantly larger than ESL’s ships. ESL does not attempt to compete on this high volume market. However, ESL benefits from the high volume traffic by offering loading and unloading services for vessels which are too large to enter the shallow ports of the Baltic Sea.
4 The Baltic Dry Index is an economic indicator issued daily by the London-based Baltic Exchange. The index measures the rates for chartering dry bulk carriers in the range of Capesize and Handysize classes. Contrary to its name, the index is not restricted to the Baltic Sea but considers multiple shipping routes around the world. There is a two to three year lag from the ordering of new vessels until their launch. Therefore, the Baltic Dry index can experience high levels of volatility if global demand increases or declines suddenly. 5 International Maritime Organization
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ESL focuses on niche routes on the Baltic Sea in icy regions. All of ESL’s vessels are ice- strengthened which allows them to operate reliably in the Baltic Sea as well as in artic environments of Russian and Canadian arctic. ESL attempts to ensure that at least one leg of each shipping route is in an icy region.
ESL sees that the decreasing amount of ice in the Baltic Sea does not threaten the company’s competitive advantage. As long as icy winters occur once in a while, reliable shipments can only be ensured with an ice-capable fleet. The maps below illustrate how much the maximum ice cover varies from one year to the other.
Our understanding is that ESL’s opportunities in the arctic areas are mostly limited to the Supramax class which is sufficiently large to compete on the longer shipping routes outside the Baltic Sea.
The shallow draft of ESL’s vessels is another source of competitive advantage in the Baltic Sea. While the Baltimax standard allows vessels with a draft of 15 meters to enter the Baltic Sea, many ports in the Baltic Sea are shallower than that. ESL’s largest vessels have a draft of 13 meters while its other vessels have a draft of 10 meters or less.
4.10. Taxation
ESL was included in tonnage taxation retroactively from January 1, 2011. In practice, ESL shifted from taxation of business income to tonnage-based taxation. In effect, the tax burden is minimal, amounting to around a hundred thousand euros per year.
4.11. Net sales and profitability
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The shipping income is a function of the shipping capacity, its utilization and the shipping prices. The variation in demand is mostly customer specific and not driven by broader market seasonality.
Weather: Colder temperatures increase the demand for coal and other fuels, which supports ESL’s revenue. However, difficult ice conditions in the Baltic Sea increase ESL’s fuel costs. Heavy rainfalls increase the availability of hydro power, which then reduces the need for coal in power generation. Coal prices: Lower coal prices lead to higher coal consumption which increases ESL’s freight volumes. Steel prices: Higher steel prices increase the production of steel which is reflected in ESL’s freight and revenue. However, the volatility in steel production is relatively limited.
In 2010-2012, ESL’ EBIT margin declined from 15% to 5%. The profitability was strained by the expenses of outfitting M/S Alppila in 2011. Next year, the profitability was strained further due to the reception and outfitting of the two Supramax vessels. In addition, the transport volumes for the steel industry declined due to lower production volumes. In addition, electricity prices were low, which significantly reduced the quantity of coal imported to Finland. Also, depreciation expenses increased.
Profitability improved in 2013-2014 due to growing shipping volumes to new profitable customers outside the Baltic Sea and due to improved efficiency. The profitability was also supported by the exceptionally active loading and unloading of larger vessels.
In 2015, net sales declined primarily due to the steeply declining ship fuel prices. Lower transportation volumes of energy coal also contributed to the decline. In 2016, the extremely low international cargo prices strained the results of ESL’s Supramax vessels. However, other vessel categories improved their profitability.
In 2017, ESL Shipping's net sales and profitability have been supported by the significantly improved agreement and market situation of the Supramax vessels. The capacity utilization of the Supramax vessels has been ensured for 2017, with one of the vessels operating in the Baltic Sea6 and the other in the Canadian Arctic. The profitability of other vessels remained at the previous year's good level. Increased fuel prices have also supported ESL’s revenue.
6 An annual agreement on the transportation of iron pellets from Russia to Europe.
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4.12. Outlook
In Q4 2017, ESL expects the demand for loading and unloading operations to continue higher than year ago. The company is also negotiating several projects related to biofuel transportation. Despite the high general demand in the steel industry, transportation volumes are expected to decrease during the rest of the year due to annual maintenance schedules and the optimization of stock levels. In the long term, transportation volumes are expected to return to normal. The company does not expect a major impact from the recently announced coaster operations this year.
4.13. Estimates
While ESL indicates Q4 volumes to decrease on Q4 2016 we also expect sales and EBIT in Q4 to be slightly below the level of Q4 2016. Still, Q4 is typically seasonally strong for ESL.
In H1 of 2018 ESL will receive the two new LNG-powered vessels. The new vessels will be utilized on SSAB’s transport volumes, which will free capacity from current fleet operating this business. Capacity increases by 20%. We expect a gradual ramp up of the freed capacity from Q2’18. With the increased capacity we expect ESL’s cargo volumes in tons to grow by 6% in 2018, 7% in 2019 and 4% in 2020. We expect sales growth of 7.8% in 2018, 9.6% in 2019 and 5.7% 2020.
We estimate energy coal volumes to decline7 at a CAGR of 10%8 from 2018 onwards. Energy coal represented 17% of ESL volume in 2015. Meanwhile, we estimate that other cargo, mainly biofuels, will increase clearly to replace coal and with new available shipping capacity. Still, the new biofuel power plants will aim to source much of their fuel from nearby areas, shipped by land. Thus, the declining coal cargo tons may not be fully substituted by biofuel cargo tons. However, we expect biofuel volumes to generate significantly more revenue/ton than coal, iron-ore or limestone due to the light weight of renewable materials such as woodchips. Energy content of wood per volume is also clearly lower than coal, leading to higher shipping volumes in m3. Therefore, we estimate ESL’s revenue to grow faster than its cargo volumes. On the other hand, we estimate that the freed capacity will not initially operate under long-term agreements, nor be immediately fully utilized, which limits revenue growth and profitability for some time. In addition, we expect the time-chartered coasters to earn a lower revenue/ton than they would under long-term agreements.
We expect ESL’s EBIT-margin to decline to 15.9% in 2018 from our estimate of 17.5% in 2017. We expect margins in H1 2017 to be strained by the transfer costs of the new LNG vessels. While the new vessels have lower personnel cost per shipping capacity than current vessels, total personnel costs will increase with the addition of two new vessels. The fuel efficiency of the new vessels is 25% better than the current fleet. This should support profitability as soon as the ships are in normal utilization. However, we expect there to be a gradual ramp up for the new business to be conducted on the current vessels that are freed from SSAB volumes. We expect EBIT-margin to improve to 18.5% in 2019 and 20.8% in 2020, reaching the targeted 20-24% range.
7 During the past 10 years, the consumption of hard coal has decreased at a CAGR of 7 percent. 8 Our estimate is based on the announced future operating plans of Finnish coal-based power plants.
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5. Telko
Telko is one of the leading chemical and plastic raw material distributors in Northern Europe and the CIS countries. Telko operates in Finland, the Baltic countries, Scandinavia, Poland, the Czech Republic, Slovakia, Ukraine, Russia, Belarus, Kazakhstan, Turkmenistan, Tajikistan, Kyrgyzstan, Azerbaijan, Georgia, and China.
The core of Telko’s business is to bridge suppliers to customers. Telko emphasizes a wide product offering, efficient logistics and close relationships with both the customers and the suppliers. The efficiency of logistics is based on the centralized sourcing of raw materials, local inventories and the management of the entire supply chain.
SWOT Strengths Established position in the Nordic countries and CIS countries Very limited customer risk: 7000 customers Principals include many highly reputable chemical manufacturers Growing chemical and third-party distribution markets Weaknesses Russia and Ukraine are highly volatile markets Majority of the revenues comes from Finland, Russia and Ukraine Opportunities Highly fragmented customer segments create growth possibilities Sufficient size to compete in the selected markets with the largest distributors Expansion to Iran Growth through add-on acquisitions in a fragmented market Recovering economies in the East and increasing industrial production in the West should increase the demand for plastics and chemicals Increasing the share of specialty chemicals and technical plastics Threats Losing markets to the largest distributors Losing principals would limit product offering and sales Customers growing sufficiently large to be served directly by principals Consolidation among principals Potential renewal of US sanctions against Iran
6.1. Products and customers
At the end of 2016, 58% of Telko’s revenue came from plastics and 42% from chemicals. The ratio has stayed mostly unchanged during the last five years. The two categories have different products, customers and suppliers.
Telko’s offering ranges from bulk volume chemicals and bulk plastics to speciality chemicals and engineering plastics. Telko’s main focus is to offer speciality chemicals and engineering plastics since the distribution of volume products is easier and often handled by the principals themselves. Distribution of specialized materials is also more profitable and resistant to economic cycles.
Telko’s aims to operate close to its customers in order to understand their processes and business. This approach allows Telko to provide the right chemicals at the right time and to suggest new chemicals to improve the processes or product quality. This approach also helps Telko to maintain long-term relationships. The company serves over 7 000 customers in many different industries.
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Telko sees that its strengths include efficient logistics, technical customer service and deliveries which adapt to customers' production process.
Telko sees that its value proposition consists of traditional distribution and solution based distribution (SD). A good example of solution based distribution is Telko’s agreement with Castrol: Telko represents Castrol in the Finnish market and maintains a constant supply of chemicals for Castrol’s customer’s such as Bilia. Another example of SD is the contract with Volvo Car Corporation. Under the contract, Volvo outsourced the chemicals, lubricants and metal working fuilds supply chain to Telko.
In Telko’s view, the company’s business has high entry barriers: Telko has long-term relations with world-class principals and parts of the business require a license. In addition, the solution-based value added services serve as further entry-barriers.
The prices of Telko’s chemicals and plastics are set in negotiations between Telko’s customers and principals. Telko then earns a margin over the set price. Oil is the main raw material used in the production of Telko’s products. Other significant materials include ether and propen.
The development of a specific material in cooperation with a customer typically incurs significant development expenses to Telko. Therefore, Telko aims to ensure that the associated chemicals are eventually ordered via Telko.
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Chemical segment
In the field of chemicals, the range of customers is wide. Telko’s customers include companies operating in paint, mining, machine shops, print, packaging and chemical industries. The chemical products comprise industrial chemicals, industrial lubricants, car chemicals and environmental products. Some of the chemicals are tailor-made, although this is only a minor part of Telko’s business.
Plastics segment
Plastics are used in many applications. Telko’s customer’s consist of companies operating in the packaging, construction and automotive industries as well as electronics and consumer goods sectors.
6.2. Suppliers and principals
Telko has about 200 principals which include ExxonMobil, Dow Corning and BASF. Telko’s principals are generally focused on the production of chemicals and they sell directly only to large customers. Meanwhile, the smaller or less accessible customers are typically left to third-party distributors.
Agreements with principals are usually signed for a period of three years. Overall, the cooperation is typically long term and losing a principal is very rare for Telko.
Although exclusive distribution rights are very rare9, the principals tend control who distributes their products. Therefore, Telko’s access to many first-class principals is a source of competitive advantage.
The principals may choose to compete with Telko. For example, if Telko’s customer grows sufficiently large, a principal may choose to bypass Telko and serve that client directly.
Consolidation among chemical producers poses significant risks to Telko. The company may lose a principal due to a merger between suppliers.
6.3. Geographies
Telko operates 25 sales offices and 40 warehouses in 18 countries. Typically, Telko does not own its warehouses. The distribution target time from the local warehouses to a customer is 1-3 working days.
Telko has subsidiaries in Finland, the Baltic countries, Scandinavia, Poland, Russia, Belarus, Ukraine, Kazakhstan, Azerbaijan and China. One of the latest expansions was Azerbaijan in 2016. The company is currently expanding to Iran.
The product mix varies from country to country. For example, in Poland, Telko’s sales consist of mostly plastics, 80% of which are technical plastics used in equipment manufacturing. In contrast, 2/3 of Russian sales consist of chemicals while the plastics sales consist of mostly bulk plastics used in packaging.
In 2013, the company started to significantly expand its network of warehouses and sales offices in Russia in order to work closer to its customers. In Q1’17, Telko completed the first phase of this expansion by establishing sales offices in all parts of the Russian Federation. The company now has seven warehouses across Russia. The next phase is to solidify the company’s presence in the regions.
9Telko is the exclusive provider of AkzoNobel's asphalt chemicals in the Nordic countries.
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Telko could consider acquisitions particularly in the Central-Eastern Europe and the Nordics. In Russia, Telko prefers organic expansion to avoid excessive risks.
The principals vary from country to country. When Telko enters a new country, its principals may have already a distributor there. Therefore, a strong product offering in one country can’t necessarily be replicated in another.
Telko’s network of sales offices spans from Scandinavia to China. Overall, Telko operates 25 sales offices and 40 warehouses in 18 countries.
Telko is in the process of expanding to Iran.
6.4. Chemical distribution market
In 2014, the chemical distribution market was valued at EUR 185 billion (Falter, 2015). Over 85% of global chemicals are sold directly by the producers. Meanwhile, 15% are sold indirectly, either through agents, traders or chemical distributors. In 2013, the market for specialty chemical distribution amounted to €71 billion while commodity chemical distribution amounted to €97 billion (Jung et al., 2014).
On average, the European chemical distributors earn a 17% margin. After transportation costs (3%), warehousing, refilling, bulk breaking and formulation costs (5%), SG&A (2%) and regulatory (REACH, HSE, Responsible Care, etc.) (1%) costs the average EBITDA margin amounts to 6%. Profitability varies significantly between the distribution of bulk chemicals and specialty chemicals, among other factors. (Falter, 2015)
The chemical distribution market is growing the fastest in emerging markets. Growth rates in the Asia-Pacific region, the Middle East and Africa, and Central and Eastern Europe all averaged around 10 percent in 2008-2013. (Jung et al., 2014)
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In Europe, the chemical distribution market grew at 5% during 2007-2014. In Europe, (incl. Eastern Europe, Russia and Turkey) chemical distributors generated revenues of approximately EUR 47.5 billion in 2014. The Eastern European market amounted to about EUR 13.3 billion. (Falter, 2015)
In 2008-2013, the share of outsourced distribution to third-parties grew from 9.1 to 9.7 percent of all distribution. Suppliers are increasingly focusing their direct sales on large strategic clients while outsourcing distribution to smaller clients. This effect is strongest in the specialty segment. (Jung et al., 2014)
Third-party distributors can efficiently serve the fragmented small customer segments which demand more flexible and fast deliveries, tailor-made products and technical know-how (Elser et al., 2010). In general, the smaller the customer, the higher the need for a distributor to provide a proper access to markets.
The global third-party chemical distribution market is expected to grow at a CAGR of around 6% until 2020 as increasing manufacturing volumes drive chemical demand (Chen, 2016).
6.5. Fragmented but consolidating market
Overall, the market for chemical distributors is very fragmented. In Europe, the top three chemical distributors hold 15 to 20 percent of the market (Jung et. al., 2014). However, in emerging markets, the top three players collectively hold just 6 to 10 percent. There are more than 2000 chemical distributors active in the larger Europe (incl. Eastern Europe, Russia and Turkey)(Falter, 2015). The chemical manufacturing industry is also very fragmented: The largest manufacturer BASF has a global market share of less than 4% (Falter, 2015).
Acquisition activity in the chemicals industry has increased rapidly in recent years. Acquisitions are mainly executed by large players entering new geographies (IMAP,
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2016). The chemical distribution market is expected to continue its consolidation (Technavio, 2016). The consolidation is partly driven by increasing regulation which is straining smaller companies (Chen, 2016).
Competition
Telko was the 53rd largest distributor of chemicals and plastics in the world in 2016. Telko’s presence in the Nordic and Eastern markets is particularly extensive. According to Telko, it is among the top three raw material distributors in all its chosen markets, and the leading Western company in its field in Eastern Europe.
Telko belongs to the category of full liners which distribute both specialty and commodity chemicals. In Europe, the leading full liners are Brenntag, Univar, Omya and Biesterfeld (Jung et. al., 2014).
According to Telko, the company does not have a very close competitor since the offering varies significantly between chemical distributors.
The largest distributors can utilize significant economies of scale to their advantage. In addition, their reputation and large global customer base attracts the most reputable chemical manufacturers. Meanwhile, smaller third-party distributors can rely on a niche based on geography, customer industry or service offering. In Europe, distributors with less than EUR 40 million revenues have over 40 % market share (Falter, 2015).
The optimal situation for a distributor is a market with many producers, few chemical distributors and many fragmented customers who require technical solutions and other services. In these kinds of market segments, distributors typically grow more than 5% per annum and earn 10% EBITDA margins. (Falter, 2015)
6.6. Iran
Telko is preparing to start operations in Iran. According to Telko, the market lacks many specialty chemical products. Registration of Telko's company in Iran was completed in July 2017. According to Telko, a country manager has been hired, a business license has been obtained, and the company already has some significant principals in the country.
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The operations are expected to start by the end of the year, once the official import and export permit has been obtained.
Iran is the second largest economy in the Middle East and North Africa, after Saudi Arabia and the country represents 4.8 percent of the global petrochemical market. During 2015–2016, refinery utilization was at about 50 percent but that is expected to increase significantly by 2018. The nuclear related sanctions were lifted in January 2016 and Iran has since then engaged in discussions with European companies such as Total, Shell and BASF to invest and explore opportunities in the petrochemical industry. (KPMG, 2017)
Recent developments in the US have caused some headwinds for Iran’s nuclear deal. President Trump has threatened to quit the nuclear deal if the Congress does not strengthen it. The agreement is now subject to significant uncertainty until Congress decides how to react. Brenntag is among the companies which are waiting for the situation to stabilize before doing business in Iran (Reuters, 2017).
6.7. Strategy and financial targets
Telko targets 300-350 mEUR net sales in 2020 or 8% (CAGR) revenue growth in 2016- 2020. Telko expects the on-going growth projects, such as Iran, to drive growth. Telko also expects the growth in third party distribution to continue at a rate of 6-7%. Finally, Telko sees that the company stands to benefit from its established position in the emerging markets since GDP growth correlates strongly with Telko’s product demand. Telko also aims to grow through acquisitions and the company has identiefied several interesting small to medium sized targets. The revenue target does not reflect the potential impact of these acquistions.
Telko also expects to increase its operating margin to 6-7% by 2020. Telko aims to achieve this by correcting mispricings in some products and by further improving its logistics in the eastern markets. Telko also aims to develop and commercialize new value added services, particularly in the field of solution based distribution (SD). Telko also aims to increase the share of higher margin products such as technical plastics and specialty chemicals.
6.8. Exchange rates and operating costs
Telko sells materials in local currency but purchases them in euros and, to some extent, in dollars. Therefore, the EUR/RUB exchange rate is particularly important for the company while the USD/RUB exchange rate has a smaller impact. For the most part, Telko does not hedge its currency risks. The impact of exchange rate fluctuations is larger in markets where the inventory turnover times are longer, such as in Russia.
In general, changes in raw material prices have only a limited impact on Telko’s profitability. However, higher prices allow Telko to earn a larger absolute margin.
Warehousing contracts are denominated in local currency. The costs adjust in accordance with the required floor space.
6.9. Net sales and profitability
In 2011-2013, Telko’s profitability declined due to volatility in raw material prices, weakening industrial demand for raw materials and changes in exchange rates in the east. In 2014, declined raw material prices depressed both net sales and profitability. However, in 2014 and 2015, the declining value of currencies in Russia, Belarus, Kazakhstan, Ukraine limited euro-denominated costs, which supported profitability. Meanwhile, the decline in manufacturing activity continued in the west.
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In 2013, Telko started to significantly expand its presence in Russia. At that time, Telko was mostly operating from St.Petersburg and acted as an importer instead of a distributor. After 2013, Telko has opened numerous new offices and warehouses in Russia and doubled its personnel in the country.
In 2016, Telko’s net sales improved significantly. During spring, the decline in the Russian economy seemingly stopped. Telko's strong investments in the east paid off and Telko was able to increase its net sales significantly as the prices for chemicals and plastics increased. Meanwhile, the turn of the Russian economy has initially reflected in the value of the ruble, which increases local costs and limits profitability. Telko tried to control its costs by improving its inventory management and centralizing some of its inventories to St.Petersburg.
In Q2’17, Telko launched a program to lower the fixed costs and to improve efficiency in its Russian operations. The improvements already showed results during Q3’17.
According to Aspo, the turn of the economic trend has been especially clear in Telko’s western markets. Meanwhile, the ruble denominated y/y sales growth in Russia has decelerated since Q2’17 (see chart on the next page).
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6.10. Outlook
Telko expects the industrial economic development to continue to be positive in all of its market areas. Telko expects the efficiency program in Russia to improve profitability during the second half of the year. Full impact of the program should be visible from Q1’18. The limited availability of some chemicals may cause a slight decrease in sales during Q4’17.
6.11. Estimates
Telko targets 300-350 MEUR net sales in 2020 or 8% CAGR revenue growth in 2016- 2020. Growth in third party distribution is to continue at a rate of 6-7% and on-going growth projects, such as Iran are to drive growth. In emerging markets where Telko has established positions GDP growth should support product demand. Telko is also looking at acquisitions. Telko aims to increase its operating margin to 6-7% by 2020. Primary avenues for margin improvement are: pricings discipline and improved mix, improving logistics and new value added services.
We expect Telko’s net sales to grow at 7.3% in 2018 and 7.0% 2019, and at a growth rate of 5% after that. We expect Telko’s net sales in Russia, Ukraine and other CIS countries to grow at a CAGR of 5.8% in 2018-2020, partly accelerated by the recently expanded warehouse network. Our growth estimates are largely based on BCG’s market growth estimates (Jung et. al., 2014). We expect Telko’s Iranian revenues amount to 6.5 MEUR in 2018 and to reach 13 MEUR in 2019.
In the remaining countries, we expect revenue to grow at a rate of 4.0%. Our understanding is that Northern Europe accounts for some ¾ of the category’s revenues. We estimate a 3.1% CAGR growth there. Meanwhile, we estimate that Eastern Europe and China account for the remaining ¼ of the category’s revenues. We estimate a 6.5% CAGR growth there.
While Telko indicates economic development to be positive in all its markets and H2 profitability to be improved by efficiency program in Russia we expect EBIT in Q4 to increase to EUR 3.6m on sales of EUR 68m with EBIT-% of 5.3%. The efficiency program which focuses particularly on Russia was launched in Q2’17, it showed results in Q3’17 and Telko expects to see the full impact from the first quarter of 2018.
Telko has identified some mispricings in its product portfolio, which should allow further profitability improvements. After some initial ramp-up costs in Iran, we expect the new subsidiary to have a positive impact on Telko’s profitability. The reason is that higher- margin specialty chemicals should make a relatively large share of the subsidiary’s
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revenue. Over the long-term, Telko’s focus on Solution Based (SD) distribution services should also support profitability.
We expect Telko’s EBIT margin to improve gradually towards its target of 6-7% by 2020, supported by pricings discipline and improved mix, improving logistics and new value added services, as well as operating leverage in the growing markets. While 6% margin level is achieved by peers, we expect it should be achievable also for Telko.
7. Leipurin
Leipurin offers solutions and products related to bakery, confectionery, out-of-home eating and other food industry. Leipurin distributes raw materials, frozen products and bakery equipment for bakeries, restaurants, cafes and other companies operating in the food industry. The company also sells and manufactures bakery equipment. Leipurin is positioned between the raw material and equipment suppliers and the food industry, bakeries and foodservices whole sellers.
Leipurin has operated in Finland for 100 years. In the 1990s, the company expanded its operations to the Baltics, Poland and Russia. Today, Leipurin operates in Finland, Russia, the Baltic countries, Poland, Ukraine, Belarus and Kazakhstan. In Russia, Leipurin has operations in several large cities in addition to St. Petersburg and Moscow. Raw material sales take place in local currency while machine sales are denominated in euros.
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SWOT Strengths Unique offering ranging from raw materials to machinery Wide network of relationships across the food industry allows Leipurin to quickly develop solutions for changing consumption habits Weaknesses Unclear synergies between recipe design services and raw material /machinery sales Consolidated industrial baking in the West leaves limited room for growth outside OOH Opportunities OOH solutions could lead to growth in the segment of smaller cafeteria and confectionary customers, improving profitability in the West A recovery in the Russian purchasing power could reflect to the demand for more expensive bread Depending on Leipurin’s responsiveness, new food trends can be seen as an opportunity Threats Volatility in machinery business Consolidation among customers in the East
7.1. Products, services and customers
Leipurin’s approach to the bakery and OOH market is somewhat unique in the sense that it offers both machinery and raw materials. Leipurin sees each product/service category as a marketing channel for each other. Therefore, contracts don’t usually tie the sale of raw materials machines or services together. For example, developing a recipe for a customer is not conditional to any raw material orders or machine sales.
Leipurin sees that its wide network of relationships from food universities to bakeries, suppliers and retailers allows Leipurin to develop innovative products that allow its customers to respond to changes in consumption habits and tastes.
Raw material sales
Leipurin sells and distributes food industry raw materials mainly to bakeries but also to the dairy, meat and convenience food industries. Raw material contracts are typically valid for a year. Small customers don’t usually commit to long term agreements.
The bakery products include volume products such as flours, fats and starch and technical products such as frozen baked goods and bakery fillings and toppings. The key ingredients used in Leipurin’s products include wheat, oats, rye, sugar and oil. The raw material inventories are on Leipurin’s balance sheet. Some 20 % of the sold raw materials represent Leipurin’s own brands.
In 2014, Leipurin estimated that the volume products made approximately half of the raw material sales. Leipurin prefers to sell higher quality technical materials which also earn higher margins. However, a wider selection of raw materials is essential for Leipurin’s smallest customers.
Machinery sales
Leipurin sells bakery machinery and baking lines to industrial, retail and in-store bakeries. In 2014, approximately half of the sold machines were manufactured by Leipurin. Other machines are manufactured by other reputable machine manufacturers. Leipurin does not lease machines.
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Leipurin operates a factory in Lahti where the machines are designed and built. The manufacturing work consists of mostly labour intensive assembly. There is no machinery inventory since the machines are manufactured to order. The factory operates in leased premises.
Before the Russian economic crisis near the end of 2014, Leipurin saw significant machine sales potential in Russia where approximately half of bakery machinery date back to the 1980s. However, the crisis mostly cut off machine sales to Russia. Since then, Leipurin has turned to new market areas both in Europe and outside Europe. In addition, the machines are sold to a wider range of sectors within the food industry – not just for bakery.
Services
Leipurin offers product, process and concept development services to its customers. For example, Leipurin may design a complete product for confectionary and find a suitable producer for it. Overall, the services act as a marketing channel for Leipurin’s raw materials and machinery.
Leipurin’s service offering revolves around its test bakeries which develop new recipes. The company operates several test bakeries in various countries, collaborating with food universities in Russia, Kazakhstan and Ukraine.
Out-of-home products and solutions
The out-of-home (OOH) products and solutions cover raw materials, services and machinery. For example, the company sells frozen products and semi-finished products to OOH customers such as cafes and restaurants. Gelato machines and recipes are also a part of Leipurin’s OOH offering. The gelato machines are manufactured by an outside partner. In general, the OOH-offering is more focused on the Western market, where the OOH trend is stronger.
7.2. Markets and competition
West
Finland makes the majority of Leipurin’s Western segment’s sales. Other markets include the Baltics and Poland.
In 2008-2014, the Finnish bakery market was mostly flat at EUR 1000m per year (Hyrylä, 2015). In 2013- 2015, the market contracted by 3% while the Finnish foodstuff market suffered from recession, declining food prices and declined exports to Russia (Hyrylä, 2015). Meanwhile, the overall demand for Finnish bakery products has decreased while the import of frozen products has increased. In addition, the low-carb trend has reduced the consumption of bread overall. In 2017, Leipurin estimated that the growth in imported frozen bakery products to Finland has finally evened out. Still, Leipurin sees the Finnish bakery market as at best stabilized.
The market of industrial packed bread is decreasing, whereas the market of instore bakeries and baking units is increasing.
In Finland, the bakery markets are dominated by the two large bakeries, Fazer Leipomot and VAASAN, which represented 45 % of the total bakery industry revenues in 2014. The top 10 bakeries made slightly under 60 % of the total revenues. In 2014, the bakeries having under 10 employees accounted 80 % of the companies but had only 10 % aggregated market share. (Hyrylä, 2015)
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In the West, Leipurin’s profitability has been on a long term decline due to market consolidation and concentrated sourcing among the largest bakeries. The large bakeries are able to source raw materials independently, which limits the growth prospects of raw material distributors.
Leipurin sees itself as the 1. or 2. in the Baltics. In Poland, the company is a small player.
In the Finnish wholesale of bakery raw materials, Leipurin competes with companies such as Condite which is a part of Orkla’s Ingredients division. Orkla Ingredients has earned about 5% EBIT margin during 2013-2016 while its revenue has declined.
We see that Leipurin’s strategy to focus on OOH in the West is rational since growth prospects in the Western industrial bakery market seem limited for now. In particular, the gelato offering could have significant potential. During the past decade, Orkla’s ice cream ingredient sales have increased rapidly (+21% CAGR in 2008-2016). Meanwhile, the adjusted (adj.) EBIT margin of the business has improved from 4% to 11%.
East
Russia represents a great majority of Leipurin’s Eastern segment’s sales. Other markets include Ukraine and other CIS countries.
The Russian bakery market is highly fragmented and controlled by local producers. In 2014, the leading company, the Fazer-owned Khlebny Dom, had only a five percent value share of the Russian baked goods market (Euromonitor International, 2014).
Before the crisis, the price point of bread was increasing as Russians were increasingly visiting supermarkets where the bread offering is of higher quality. However, the crisis directed consumption again towards cheaper bread and the demand for products in the higher price categories remains lower than in the previous years. Meanwhile, the demand for biscuits has remained stable. Leipurin sees the biscuit market as attarctive and aims to increase its presence in that market.
Sanctions against Russia have not affected Leipurin’s sales as much as the value of ruble. The changes in the value of ruble are transferred directly to the prices which affects demand. In effect, the declined value of the ruble has reduced the competitiveness of
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Leipurin’s raw materilas, even though Leipurin has increased the share of locally sourced raw materials.
In the East, Leipurin’s customers are typically larger than in the West. One reason is that artisan businesses are less commonplace in the East. Another reason is that the bakery market is less concentrated among the largest producers. The increasing market share of supermarkets is however increasing the market share of large industrial bakeries which have a higher negotiation power over raw material distributos.
Many food trends that are strong in the West are also present in the East, but they play a much smaller role overall. The OOH trend is also stalled by a relatively underdeveloped cold chain, which complicates the baking of frozen bread.
7.3. Strategy and financial targets
Leipurin’s goal is to provide best solutions for in-home and out-of-home bakery and confectionary customers by 2020. The company aims to achieve this goal with conceptualized solutions which support customer differentiation.
The management believes that increasing the share of higher value-add OOH-solutions relative to raw material sales should support profitability in the West. In addition, customers in the OOH-segment are on average smaller than in the industrial baking segment, which increases Leipurin’s pricing power. Despite its focus on OOH markets, Leipurin aims to keep serving the industrial baking industry. However, Leipurin attempts to decrease the share of lower margin raw materials.
The machinery business is under strategic review. No other business in Aspo’s portfolio involves manufacturing.
7.4. Net sales and profitability
Leipurin’s raw material sales tend to increase at the time of Eastern, Christmas and New Year. Strongest seasonality is related to the machine sales which are typically the strongest during summer and close to the year end. In contrast, the first quarter is typically weak. A large portion of sales usually consists of a few large orders. The operating margin goes hand-in-hand with the world food prices as higher prices allow larger absolute margins. In additon, machinery sales have a significant impact on the margin.
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Leipurin’s net sales declined from 2014 onwards due to declining food prices, declining sales in Finland and weak demand for machinery in the East. In 2015, the crisis in Russia continued to strain machine sales which generated losses. Meanwhile, net sales in Finland continued to fall due to decreasing industrial baking. In 2016, the negative development in machine sales persisted. Investments associated with the implementation of the new OOH strategy put further pressure on Leipurin’s operating profit.
In 2017, the Finnish fresh bread market has remained challenging. Meanwhile, the sale of bakery raw materials have been supported by artisanal and OOH customers. Leipurin has continued its investments to the OOH market. The company has opened a cafeteria in Tapiola and a fresh ice cream bar G’lato Fresco in Helsinki. The sites act as conceptual model sites.
The company has long considered the profitability in the West as unsatisfactory. In Q4’15-Q2’17, Leipurin’s operating margin in the East amounted to 6-7%, which suggests that the margin in the West has varied between -1% and 1%. In the Finnish market, Leipurin has likely generated losses since profitability in the Baltic region should be somewhat higher than in Finland.
In Q3’17, Leipurin’s quarterly EBIT margin improved significanlty and reached similar levels as before the 2014 crisis. The operating profit included a sales gain of EUR 0.4 million from the divestment of the meat industry raw materials business. Our understanding is that the sales gain was relfected particularly in the Western market’s profits, which improved significantly.
In Q3’17, profitability in the West was also supported by machinery sales which increased nearly 90% y/y (30% in Q2’17 and 45% in Q1’17). The strong growth in machinery sales was partly the result of a soft comparative period. At the end of Q3’17, the machinery order book was at a good level, extending to the first half of 2018.
The OOH business is improving towards profitability but its revenue share is still small. In Q3’17, investments in growth and new business operations slowed down the development of the operating profit of raw material operations in the Western markets.
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7.5. Outlook
Leipurin expects the market situation to remain challenging in its key markets. The company expects net sales and operating profit to increase in 2017. Leipurin continues to invest in the OOH market and expects significant growth in the area in the West. Leipurin expects the equipment investments of bakeries to increase in Finland and the Baltic countries and also slightly in Russia. According to Leipurin, the purchasing power in Russia is expected to improve. The divestment of the meat industry raw materials business at the end of August is expected to impact the net sales of Leipurin by EUR 4 million per year.
7.6. Estimates
In the West, we expect the growing OOH-sales and the strong machine order book to support revenue growth in 2018. Meanwhile, the sale of the meat raw material business limits revenue growth. We estimate 2.0% CAGR sales growth in 2018E and 2.3% in 2019E.
In the East, the recovering Russian economy may support the the consumption of higher quality bread. Accordingly, we estimate Leipurin’s sales in the East to grow at a CAGR of 2.8% in 2018E and 2019E, which is slightly faster that the expected GDP growth in the region.
We expect Leipurin’s operating margin to decline from Q3’17 as the one-off sales gain no longer supports the quarterly figures. On the other hand, we expect the machinery business to continue supporting profitability in the West since the order book extends to the first half of 2018. We also expect the OOH business to continue improving its profitability since the bulk of investments should be over at this point. Overall, we estimate 3.3% EBIT margin for Q4’17, 3.3% for 2018E and 3.5% for 2019E.
8. Kauko
Kauko offers solutions related to mobile working and energy efficiency. Kauko’s offering for mobile knowledge work comprises for instance medical carts, security communication solutions and emergency alarm systems. Meanwhile, the energy solutions include heat pumps, solar power solutions and energy accumulators offered to whole sellers, retailers and constructors. Synergies between the two business segments are limited.
In 2016, the company was rebranded from Kaukomarkkinat to Kauko.
Kauko’s current focus is on mobile knowledge work in demanding conditions. The business represents roughly two thirds of the company’s revenue. The segment is more profitable than Kauko overall, which is largely due to its consulting services and software customization services.
The remaining one third of Kauko’s revenue is attributable to the energy efficiency business. The segment is of secondary importance to Kauko but not under strategic review.
Kauko’s net sales consist mostly of project revenue and a small amount of software license sales. Ten largest customers account for about half of Kauko’s revenue while the largest 100-150 companies account for 90% of the revenue.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
SWOT Strengths Exclusive rights to sell Panasonic electronics to B-to-B clients in Finland Leading position in the solar panel sales in Finland Among top 3 in air source heat pump sales in Finland Strong position in the sale of rugged tablets Weaknesses Limited competitive advantages Reliance on Panasonic Profitability has been unsatisfactory Opportunities Quickly growing markets for solar panels Increasing the share of profitable software and consulting services Rugged laptops being replaced with rugged tablets Threats Panasonic could terminate the exclusive contract in a year’s notice The turnaround in profitability might not materialize
8.1. Mobile knowledge work
Kauko’s offering includes equipment and accessory sales as well as software and equipment installation services. The most important customer segments are industry, officials, healthcare and logistics. The largest individual customers include the Finnish Border Guard and the Finnish Customs. Kauko has also sold tablets to Finnair. Kauko estimates that it has a market share of 60-70% in Finland. The main competitors include Chinese manufacturers.
Panasonic’s tablets and laptops
Most of the sales consist of Panasonics’ tablets and laptops. According to Kauko, the company holds a particularly strong market position in the sector of rugged tablet computers for demanding environments. According to Kauko, long-term estimates indicate that rugged tablets are substituting rugged computers, which Kauko sees a as a positive development.
A single ruggerized laptop may cost anywhere between one and four thousand euros. Tablets cost more than a thousand euros each and almost all of them run a fully featured Windows operating system.
A typical laptop/tablet order is valued between tens of thousands and a few hundred thousand euros. However, some orders amount to a couple of million euros although the sum is typically distributed over a longer period of time.
Other Panasonic products
Kauko also sells other Panasonics products which are unrelated to mobile knowledge work or energy efficiency. These products include screens, projectors, broadcasting equipment and security cameras.
Tailored products
In addition to reselling Panasonic’s products, Kauko also puts together computers and other tailored products for industries like healthcare. A key product is a mobile workstation developed for hospitals. The product is designed by Kauko and built by a contract manufacturer in Germany. The software is modified by Kauko. The computer is
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
designed to be used in specialized medical care which sets strict criteria for the specifications of the product.
The number of computers required by an individual hospital is usually small. A typical order for Kauko’s medical computer amounts to 5-30 units and is valued between tens of thousands and a few hundred thousand euros.
Other products
Kauko offers walkie-talkies from various brands such as Hytera, Motorola, Peltor and Kenwood. Kauko is not the exclusive retailer for these products in Finland.
8.2. Energy efficiency solutions
Kauko’s energy efficiency products are mostly aimed at consumers but Kauko also sells them to retailers. An overwhelming share of products is sold as part of small scale projects that involve only a single household. However, the company has been expanding its offering to medium sized projects10.
Kauko sells Panasonic’s air source heat pumps, air to water heat pumps and ventilation systems. Kauko sees itself is among the top 3 companies selling in air source heat pump in Finland.
Kauko also sells solar panels which are manufactured by various German companies. The solar panel sales are a minor but quickly growing part of the segment’s revenue. The profitability is still low. Kauko estimates that the market for solar panels is growing at a rate of tens of percent per year. The company considers itself as the market leader in terms of solar panel sales volume in Finland.
8.3. Relationship with Panasonic
Kauko has an exclusive right to sell various types of Panasonics’ electronics to B-to-B customers in Finland. Meanwhile, Panasonic sells its products directly to Finnish retail customers. Kauko has done business with Panasonic since the 1960s and the contract is renewed annually. Kauko’s product offering is largely based on Panasonic’s heat pumps, tablets and notebooks.
8.4. Legal proceedings
In 2016, key employees resigned in Finland and Germany from the organization of mobile IT units delivered to hospitals. The reorganization caused some slowdown in Kauko’s operations but no IP was compromised. In 2017, Kauko took legal actions against two of the individuals due to breaches of the non-solicitation and non-compete clauses.
8.5. Geographies
Kauko’s main market is in Finland. In 2016, Kauko established a subsidiary in Germany to support IT sales to the healthcare sector in Germany and to other markets in Central Europe. The German subsidiary is at a startup stage and currently employs only one person.
Kauko is also seeking growth in the Baltics where Panasonics’ own sales activity is low. Kauko is already selling some audio/video equipment in the area.
10 >20 000 kWh / y
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Kauko is not planning to expand to Eastern markets since the price point of its products too high for the region.
8.6. Net sales and profitability
In recent years, Kauko’s net sales and profitability have been affected by numerous divestments and closures. In summer 2014, Kaukomarkkinat closed down some loss- producing, non-strategic functions. In 2015, the company sold its loss-making Industrial business and recorded a non-recurring impairment of EUR 1.3 million. In Q3’17, Kauko decided to discontinue its project operations in Beijing. The company does not expect the termination to have any significant impact on its results.
8.7. Outlook
Kauko expects the net sales and profitability of total solutions for mobile knowledge work to improve. Kauko also expects the solar power market to continue its strong growth.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
8.8. Strategy and financial targets
The company sees software sales as an important source for future growth. A larger share of software revenue would also decrease Kauko’s dependence on Panasonic. Currently, half of Kauko’s personnel work with software while the other half works with hardware.
Kauko also aims to expand its operations to larger solar power systems. The company is already a market leader in residential systems in Finland.
8.9. Estimates
Kauko’s business contains some growth areas such as solar power. However, our understanding is that these business areas still represent only a small part of Kauko’s total revenue. Accordingly, we estimate Kauko’s revenue to grow only slightly faster than the Finnish GDP at a CAGR of 3 % in 2018E and 2.3% in 2019E. We estimate Kauko’s operating margin to improve to 1% in 2018E as the Kauko-Telko related amortizations end.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
9. Estimate summary
2016 2017Q1 2017Q2 2017Q3 2017Q4E 2017E 2018Q1E 2018Q2E 2018Q3E 2018Q4E 2018E 2019E 2020E ASPO Revenue 457 119 124 127 130 500 119 133 139 138 528 560 584 Growth, y/y 2.6% 21% 6.5% 7.6% 4.2% 9.3% -0.4% 7.6% 9% 6.3% 5.8% 6.0% 4.2% EBITDA 32.0 7.3 8.0 10.0 10.8 36.1 7.9 9.3 10.9 12.7 40.7 47.7 54.0 EBITDA margin 7.0% 6.1% 6.5% 7.9% 8.3% 7.2% 6.7% 7.0% 7.8% 9.2% 7.7% 8.5% 9.3% Depreciation of tangible assets 9.5 2.4 2.4 2.4 2.4 9.5 2.4 2.7 3.0 3.0 11.0 11.9 11.9 Amortization of intangible assets 2.10 0.53 0.53 0.53 0.53 2.10 0.53 0.53 0.23 0.23 1.51 0.92 0.91 Operating profit 20 4.4 5.1 7.1 7.9 24.5 5.0 6.1 7.7 9.4 28.2 34.9 41.2 Operating profit margin 4.5% 3.7% 4.1% 5.6% 6.1% 4.9% 4.2% 4.6% 5.5% 6.9% 5.3% 6.2% 7.1%
ESL Revenue 71 19 20 18 20 77 19 20 21 23 83 91 96 Growth, y/y -6.3% 17% 17% 2.2% -0.7% 8.1% 1.1% 4.2% 12% 14% 8% 9.6% 5.7% EBITDA 21 5.1 5.2 5.4 6.2 22 4.5 4.9 6.2 7.6 23 28 31 EBITDA margin 29% 27% 27% 30% 30% 28% 23% 24% 30% 33% 28% 30% 32% Depreciation of tangible assets 8.3 2.1 2.1 2.1 2.1 8.3 2.1 2.4 2.7 2.7 9.9 10.8 10.8 Amortization of intangible assets 0.06 0.01 0.01 0.01 0.01 0.06 0.01 0.01 0.01 0.01 0.06 0.06 0.06 Operating profit 12.6 3.0 3.1 3.3 4.0 13.5 2.4 2.5 3.5 4.9 13.2 16.9 20.0 Operating profit margin 18% 16% 16% 18% 20% 17% 12% 12% 17% 21% 16% 18% 21% Cargo volume, total 10.7 2.5 2.8 2.8 3.1 11.2 2.5 2.8 3.1 3.5 11.9 12.7 13.3 Growth, y/y -3.6% 4.2% 16.7% 0.0% -1.7% 5.0% -0.4% 1.7% 10% 11% 6.0% 7.0% 4.0% Revenue/cargo volume 6.7 7.6 7.0 6.5 6.5 6.9 7.7 7.1 6.6 6.7 7.0 7.2 7.3
Telko Revenue, total 240 64 66 67 68 265 62 74 76 72 284 304 319 Growth, y/y 12% 29% 5.6% 5.5% 4.8% 10% -2.4% 12% 13% 6.3% 7.3% 7.0% 4.9% Revenue, Russia, Ukraine and other CIS countries 110.8 28.7 30.4 33.5 33.3 125.9 29.6 34.9 35.4 33.3 133.2 141.0 149.1 Growth, y/y 16% 49% 6% 7% 5.8% 14% 3.1% 15% 5.8% -0.1% 5.8% 5.8% 5.8% Revenue, Iran 0.5 1.0 2.0 3.0 6.5 13.0 13.8 Growth, y/y 100% 5.9% Revenue, other countries 130 35 35 34 35 139 32 38 38 36 144 150 156 Growth, y/y 8.2% 15.9% 5.1% 4.3% 4.0% 7.1% -8.3% 7.0% 13.5% 3.8% 4.0% 4.0% 4.0% EBITDA 11.6 2.7 2.8 3.5 4.0 12.9 3.3 4.0 4.0 4.4 15.7 17.9 20.2 EBITDA margin 4.8% 4% 4% 5% 6% 4.9% 5% 5% 5% 6% 5.5% 5.9% 6.3% Depreciation of tangible assets 0.7 0.2 0.2 0.2 0.2 0.7 0.2 0.2 0.2 0.2 0.7 0.7 0.7 Amortization of intangible assets 0.8 0.2 0.2 0.2 0.2 0.8 0.2 0.2 0.1 0.1 0.6 0.4 0.4 Operating profit 10.1 2.3 2.4 3.1 3.6 11.4 3.0 3.6 3.8 4.1 14.5 16.8 19.1 Operating profit margin 4.2% 3.6% 3.7% 4.6% 5.3% 4.3% 4.8% 4.9% 5.0% 5.7% 5.1% 5.5% 6.0%
Leipurin Revenue, total 113 29 30 30 33 122 30 31 30 33 124 127 130 Growth, y/y -4.3% 12.2% 4.5% 10.7% 5.9% 8.2% 2.0% 1.3% 1.8% 2.4% 1.9% 2.4% 2.0% Revenue, Eastern markets 30.6 8.3 8.1 8.3 10.6 35.3 8.5 8.5 8.5 10.8 36.3 37.3 38.0 Growth, y/y 0.3% 36% 5.2% 15% 10% 15% 2.4% 4.9% 1.8% 2% 2.8% 2.8% 2.0% Operating profit, Eastern markets 0.5 0.5 0.6 0.6 2.2 0.5 0.5 0.5 0.6 2.2 2.2 2.3 Operating profit margin, Eastern markets 6.0% 6.0% 7.0% 6.0% 6.2% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% Revenue, Western markets 82 21 22 22 22 87 22 22 22 23 88 90 92 Growth, y/y -6.0% 5.0% 4.3% 9.1% 4% 5.5% 1.9% 0.0% 1.9% 3% 1.6% 2.3% 2.0% Operating profit, Western markets -0.10 0.11 0.82 0.44 1.27 0.43 0.44 0.44 0.45 1.76 2.03 2.75 Operating profit margin, Western markets -0.5% 0.5% 3.8% 2.0% 1.5% 2.0% 2.0% 2.0% 2.0% 2.0% 2.3% 3.0% EBITDA 3.2 0.7 0.9 1.7 1.4 4.7 1.2 1.3 1.2 1.4 5.1 5.3 5.8 EBITDA margin 2.8% 2.4% 3.0% 5.7% 4.2% 3.8% 4.1% 4.1% 4.1% 4.2% 4.1% 4.1% 4.5% Depreciation of tangible assets 0.3 0.1 0.1 0.1 0.1 0.3 0.1 0.1 0.1 0.1 0.3 0.3 0.3 Amortization of intangible assets 0.9 0.2 0.2 0.2 0.2 0.9 0.2 0.2 0.1 0.1 0.7 0.5 0.5 Operating profit 2.0 0.4 0.6 1.4 1.1 3.5 0.9 1.0 1.0 1.2 4.1 4.5 5.0 Operating profit margin 1.8% 1.4% 2.0% 4.7% 3.3% 2.8% 3.1% 3.1% 3.4% 3.6% 3.3% 3.5% 3.9%
Kauko Revenue 33.0 7.1 8.5 11.7 8.7 36.0 7.3 8.8 12.1 9.0 37.1 37.9 38.7 Growth, y/y -9.6% 6.0% 0.0% 23.2% 5.0% 9% 3.0% 3.0% 3.0% 3.0% 3.0% 2.3% 2.0% Adj. EBITDA 0.4 -0.4 0.2 0.3 0.3 0.4 -0.2 0.2 0.3 0.3 0.7 0.9 1.1 Adj. EBITDA margin 1.2% -5.3% 2.7% 2.8% 2.9% 1.2% -2.3% 2.7% 2.8% 3.1% 1.9% 2.3% 2.7% Depreciation of tangible assets 0.11 0.03 0.03 0.03 0.03 0.11 0.03 0.03 0.03 0.03 0.11 0.11 0.11 Amortization of intangible assets 0.40 0.10 0.10 0.10 0.10 0.40 0.10 0.10 0.00 0.00 0.20 0.00 0.00 Adj. operating profit -0.10 -0.50 0.10 0.20 0.13 -0.07 -0.29 0.11 0.31 0.25 0.38 0.77 0.95 Adj. operating profit margin -0.3% -7% 1% 2% 1.5% -0.2% -4.0% 1.3% 2.6% 2.8% 1.0% 2.0% 2.5%
Other operations Operating profit -4.2 -0.8 -1.1 -0.9 -1.0 -3.8 -1.0 -1.0 -1.0 -1.0 -4.0 -4.0 -4.0
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
10. Valuation
Due to Aspo’s conglomerate structure, we put more emphasis on our SOTP analysis than the DCF model. The multiples for Kauko and Aspo’s other operations are based on the OMX Helsinki 25 consensus multiples.
SOTP Analysis Group company Metric Est., EURM Multiple EV ESL 2018 EBIT 13.2 17.1 226 Telko 2018 EBIT 14.5 14.6 211 Leipurin 2018 EBIT 4.1 15.0 62 Kauko 2018 EBIT 0.4 13.4 5.1 Other operations 2018 EBIT -4.0 13.4 -54 Total 450 Net debt (end 2017), including hybrid 132 Equity value 318 Per share 10.4 Source: Evli Estimates
10.1. ESL Shipping
ESL’s peer group consists of marine shipping companies that operate mainly dry bulk carriers and are domiciled in North America or Western Europe. The consensus estimates suggest that revenues among the peer group will grow on average 25% in 2018 and 14% in 2019. The growth seems to be driven by both rising freight rates and expanding capacity. Meanwhile, the consensus estimates suggest that profitability among peers will improve markedly in 2018 and 2019. While median EBIT margins are well below ESL’s figures in 2017, the peer group is expected to surpass ESL’s profitability already next year.
Typically, ESL’s long-term agreements would justify premium multiples over the peer group, as well as ESL’s low tax rate. However, given the peer group’s expected earnings improvement, we choose not to apply a premium over the peer group’s median multiples.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
MCAP EBIT % EBIT % EBIT % EBITDA % EBITDA % EBITDA % ROCE % ROCE % ROCE % ESL SHIPPING PEER GROUP MEUR 17 18 19 17 18 19 17 18 19 Golden Ocean Group Ltd 927 13.7 27.6 34.5 38 49 54 1.6 4.0 6.1 Ship Finance International Limited 1 192 40.7 39.7 34.2 64 64 65 5.6 6.0 5.2 Pangaea Logistics Solutions Ltd. 136 7.2 8.0 11.3 13 14 15 6.3 8.5 12.6 Star Bulk Carriers Corp. 596 10.4 29.6 37.6 42 52 59 1.4 5.6 7.8 Navios Maritime Partners LP 287 15.7 14.7 18.9 54 54 57 2.5 2.5 3.4 Genco Shipping & Trading Ltd 380 -9.5 17.8 28.5 30 46 54 -1.2 3.0 6.5 Diana Shipping Inc. 367 -34.2 -1.1 16.5 23 41 50 -3.2 -0.1 3.1 Scorpio Bulkers, Inc. 463 -8.4 13.6 22.7 24 38 45 -0.9 2.0 4.1 Safe Bulkers, Inc. 275 14.2 30.7 38.4 51 58 65 1.9 5.2 Seanergy Maritime Holdings Corp. 31 6.7 34.4 46.0 36 55 63 Euroseas Ltd. 17 -8.6 21.9 27.2 24 39 44 Peer Group Average 424 4.3 21.5 28.7 36 46 52 1.5 4.1 6.1 Peer Group Median 367 7.2 21.9 28.5 36 49 54 1.6 4.0 5.7 ESL Shipping (Evli est.) 226 17.5 15.9 18.5 28 28 30
MCAP ROE % ROE % ROE % P/B P/B P/B P/E P/E P/E MEUR 17 18 19 17 18 19 17 18 19 Golden Ocean Group Ltd 927 -0.7 3.5 7.4 0.7 0.7 0.7 21.2x 9.6x Ship Finance International Limited 1 192 9.8 8.3 9.4 1.3 1.3 1.3 12.6x 15.5x 14.1x Pangaea Logistics Solutions Ltd. 136 16.5 18.9 1.2 1.1 0.9 13.3x 7.0x 5.2x Star Bulk Carriers Corp. 596 -1.7 3.9 9.0 0.7 0.6 0.6 16.8x 6.7x Navios Maritime Partners LP 287 1.1 1.9 3.2 0.5 0.5 0.5 31.0x 24.0x 14.6x Genco Shipping & Trading Ltd 380 -1.6 -0.4 5.6 0.5 0.5 0.4 8.3x Diana Shipping Inc. 367 -7.6 -3.4 1.0 0.4 0.4 0.4 44.4x Scorpio Bulkers, Inc. 463 -4.4 -1.0 2.7 0.6 0.6 0.6 22.3x Safe Bulkers, Inc. 275 -3.5 2.9 7.9 0.7 0.7 0.5 24.6x 7.5x Seanergy Maritime Holdings Corp. 31 25.0x 4.3x Euroseas Ltd. 17 4.4x 2.4x Peer Group Average 424 -1.1 3.6 7.2 0.7 0.7 0.7 19.0x 17.3x 12.7x Peer Group Median 367 -1.7 2.9 7.4 0.7 0.6 0.6 13.3x 19.0x 8.3x ESL Shipping (Evli est.) 226
MCAP EV/S EV/S EV/S EV/EBITDA EV/EBITDA EV/EBITDA EV/EBIT EV/EBIT EV/EBIT MEUR 17 18 19 17 18 19 17 18 19 Golden Ocean Group Ltd 927 6.4x 5.0x 3.9x 16.8x 10.1x 7.2x 46.7x 17.9x 11.3x Ship Finance International Limited 1 192 8.0x 7.6x 7.5x 12.5x 11.7x 11.5x 19.8x 19.1x 21.8x Pangaea Logistics Solutions Ltd. 136 0.9x 0.7x 0.6x 7.0x 5.2x 3.9x 12.9x 9.1x 5.3x Star Bulk Carriers Corp. 596 5.4x 4.1x 3.0x 13.1x 7.8x 5.1x 52.2x 13.7x 8.0x Navios Maritime Partners LP 287 3.9x 3.3x 2.8x 7.1x 6.1x 4.9x 24.8x 22.5x 14.8x Genco Shipping & Trading Ltd 380 4.2x 2.9x 2.0x 14.0x 6.3x 3.7x 16.3x 7.0x Diana Shipping Inc. 367 6.5x 4.4x 3.1x 28.5x 10.9x 6.2x 18.9x Scorpio Bulkers, Inc. 463 7.2x 5.2x 4.2x 29.2x 13.6x 9.2x 38.1x 18.3x Safe Bulkers, Inc. 275 6.2x 4.7x 3.7x 12.3x 8.2x 5.7x 44.0x 15.4x 9.6x Seanergy Maritime Holdings Corp. 31 Euroseas Ltd. 17 Peer Group Average 424 5.4x 4.2x 3.4x 15.6x 8.9x 6.4x 33.4x 19.0x 12.8x Peer Group Median 367 6.2x 4.4x 3.1x 13.1x 8.2x 5.7x 34.4x 17.1x 11.3x ESL Shipping (Evli est.) 226 2.9x 2.7x 2.5x 10.3x 9.8x 8.2x 16.7x 17.1x 13.4x
Sales growth Sales growth Sales growth Net debt / Net debt / Net debt / Equity ratio Equity ratio Equity ratio MCAP % % % EBITDA EBITDA EBITDA % % % MEUR 17 18 19 17 18 19 17 18 19 Golden Ocean Group Ltd 927 24.7 27.8 17.6 7.8x 4.7x 3.0x 52.7 52.8 58.3 Ship Finance International Limited 1 192 -8.6 0.9 -1.2 6.7x 6.0x 5.7x 37.9 39.0 41.8 Pangaea Logistics Solutions Ltd. 136 25.3 18.3 6.6 2.9x 2.0x 1.1x 34.3 36.7 41.6 Star Bulk Carriers Corp. 596 20.5 30.3 15.7 6.8x 3.9x 2.2x 48.9 50.7 58.0 Navios Maritime Partners LP 287 7.1 5.1 2.6 4.1x 3.2x 2.2x 56.1 58.0 60.2 Genco Shipping & Trading Ltd 380 35.9 29.3 19.2 5.9x 2.2x 0.8x 64.3 65.5 71.4 Diana Shipping Inc. 367 33.1 36.2 25.8 16.1x 5.7x 2.9x 61.8 62.9 65.1 Scorpio Bulkers, Inc. 463 105.3 32.4 14.4 15.4x 6.9x 4.2x 56.6 57.4 62.8 Safe Bulkers, Inc. 275 29.4 23.0 16.6 7.8x 5.0x 3.2x 49.6 49.4 Seanergy Maritime Holdings Corp. 31 11.6 50.4 21.5 Euroseas Ltd. 17 37.6 25.9 9.8 Peer Group Average 424 29.3 25.4 13.5 8.2x 4.4x 2.8x 51.3 52.5 57.4 Peer Group Median 367 25.3 27.8 15.7 6.8x 4.7x 2.9x 52.7 52.8 59.3 ESL Shipping (Evli est.) 226 8.1 7.8 9.6
Source: Factset, Evli Research Updated on 14th December 2017 at 11:09 PM GMT
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10.2. Telko
The fragmented nature of the chemical distribution market is evident in Telko’s peer group: There exists only a handful of listed companies that distribute chemicals broadly to industrial customers, are domiciled in the West, don’t manufacture chemicals and have sufficient analyst coverage.
Most of the companies on our list are domiciled in the West. The exceptions are AKR and Sinochem which are domiciled in Indonesia and mainland China, respectively. In addition, AKR is also engaged in the production of chemicals. Meanwhile, IMCD provides chemicals not only for industrial applications but also for the food and medical industries.
The peer group indicates that Telko’s EBIT margin target of 6-7 percent is close to the maximum in the industry, but not atypical.
MCAP EBIT % EBIT % EBIT % EBITDA % EBITDA % EBITDA % ROCE % ROCE % ROCE % TELKO PEER GROUP MEUR 17 18 19 17 18 19 17 18 19 Brenntag AG 8 354 5.9 6.1 6.2 7.2 7.4 7.5 12.2 12.6 12.9 Nexeo Solutions, Inc. 683 1.9 3.1 3.3 5.1 5.3 5.4 3.9 6.5 7.0 IMCD N.V. 2 730 6.8 6.8 7.0 8.9 8.8 8.9 Univar, Inc. 3 711 4.4 5.2 5.9 7.4 7.8 8.3 8.5 10.3 11.8 PT AKR Corporindo Tbk 1 512 7.9 8.5 8.9 10.1 10.6 10.8 12.8 14.8 15.5 Sinochem International Corporation Class A 2 237 3.6 3.9 4.3 6.4 6.8 7.2 6.1 6.8 7.7 Peer Group Average 3 204 5.1 5.6 5.9 7.5 7.8 8.0 8.7 10.2 11.0 Peer Group Median 2 483 5.1 5.7 6.1 7.3 7.6 7.9 8.5 10.3 11.8 Telko (Evli est.) 211 4.3 5.1 5.5 4.9 5.5 5.9
MCAP ROE % ROE % ROE % P/B P/B P/B P/E P/E P/E MEUR 17 18 19 17 18 19 17 18 19 Brenntag AG 8 354 13.5 13.7 13.6 2.7 2.5 2.3 20.4x 18.8x 17.5x Nexeo Solutions, Inc. 683 1.2 5.7 6.7 0.9 0.8 0.8 47.3x 15.2x 12.0x IMCD N.V. 2 730 14.4 15.5 15.4 3.5 3.3 3.0 25.4x 22.0x 20.3x Univar, Inc. 3 711 16.2 19.2 20.7 4.3 3.6 3.1 29.2x 20.2x 16.0x PT AKR Corporindo Tbk 1 512 15.8 16.3 17.0 3.1 2.8 2.5 20.9x 18.2x 15.6x Sinochem International Corporation Class A 2 237 6.0 7.9 8.6 1.5 1.4 1.3 25.3x 18.3x 15.8x Peer Group Average 3 204 11.2 13.0 13.7 2.7 2.4 2.2 28.1x 18.8x 16.2x Peer Group Median 2 483 14.0 14.6 14.5 2.9 2.6 2.4 25.3x 18.6x 15.9x Telko (Evli est.) 211
MCAP EV/S EV/S EV/S EV/EBITDA EV/EBITDA EV/EBITDA EV/EBIT EV/EBIT EV/EBIT MEUR 17 18 19 17 18 19 17 18 19 Brenntag AG 8 354 0.9x 0.8x 0.8x 12.0x 11.0x 10.3x 14.8x 13.5x 12.5x Nexeo Solutions, Inc. 683 0.4x 0.4x 0.4x 8.7x 7.7x 7.0x 23.7x 12.9x 11.2x IMCD N.V. 2 730 1.7x 1.4x 1.3x 18.9x 16.4x 15.0x 24.5x 21.2x 19.2x Univar, Inc. 3 711 0.8x 0.8x 0.7x 11.4x 9.9x 8.6x 19.2x 14.8x 12.1x PT AKR Corporindo Tbk 1 512 1.4x 1.2x 1.1x 13.9x 11.6x 9.7x 17.9x 14.6x 11.9x Sinochem International Corporation Class A 2 237 Peer Group Average 3 204 1.0x 0.9x 0.9x 13.0x 11.3x 10.1x 20.0x 15.4x 13.4x Peer Group Median 2 483 0.9x 0.8x 0.8x 12.0x 11.0x 9.7x 19.2x 14.6x 12.1x Telko (Evli est.) 211 0.8x 0.7x 0.7x 16.4x 13.4x 11.8x 18.5x 14.6x 12.6x
Sales growth Sales growth Sales growth Net debt / Net debt / Net debt / Equity ratio Equity ratio Equity ratio MCAP % % % EBITDA EBITDA EBITDA % % % MEUR 17 18 19 17 18 19 17 18 19 Brenntag AG 8 354 10.6 3.4 3.7 2.0x 1.6x 1.3x 41.0 43.3 45.7 Nexeo Solutions, Inc. 683 0.0 5.1 4.5 4.3x 3.7x 3.2x IMCD N.V. 2 730 10.8 12.8 5.4 2.7x 2.0x 1.4x 47.7 47.9 48.7 Univar, Inc. 3 711 1.1 4.4 2.8 4.1x 3.3x 2.6x 18.4 20.1 23.5 PT AKR Corporindo Tbk 1 512 24.2 12.0 15.3 1.3x 0.9x 0.6x 47.8 49.0 50.3 Sinochem International Corporation Class A 2 237 24.3 10.7 10.8 34.5 33.4 34.4 Peer Group Average 3 204 11.8 8.1 7.1 2.9x 2.3x 1.8x 37.9 38.7 40.5 Peer Group Median 2 483 10.7 7.9 5.0 2.7x 2.0x 1.4x 41.0 43.3 45.7 Telko (Evli est.) 211 10.1 7.3 7.0
Source: Factset, Evli Research Updated on 21st December 2017 at 11:03 PM GMT
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10.3. Leipurin
Leipurin’s peer group consists of five food and food ingredient wholesalers as well as four companies that sell kitchen equipment for commercial use. The EBIT and EBITDA margins are much higher in the machinery business but EV/EBIT multiples are comparable in both groups.
Leipurin has not disclosed the sales split between machinery and raw materials for several years. In 2014, the split was 19/81 in favor of raw materials. We believe that raw material sales still represent a great majority of Leipurin’s revenue. Therefore, our valuation puts more emphasis on the food and food ingredient wholesalers.
MCAP EBIT % EBIT % EBIT % EBITDA % EBITDA % EBITDA % ROCE % ROCE % ROCE % LEIPURIN PEER GROUP MEUR 17 18 19 17 18 19 17 18 19 Booker Group PLC 4 568 3.6 3.8 4.0 4.1 4.3 4.5 MARR SpA 5 877 5.9 6.0 6.1 6.9 7.1 7.1 US Foods Holding Corp. 809 2.8 3.0 3.2 4.3 4.5 4.6 9 11 11 Total Produce Plc 500 1.7 1.8 1.8 2.2 2.3 2.3 11 11 11 Chefs' Warehouse, Inc. 2 651 3.2 3.5 3.8 5.0 5.3 5.6 8 9 10 Welbilt Inc 5 426 16 17 19 19 21 22 15 17 19 HOSHIZAKI Corp. 6 206 13 13 14 15 16 16 16 16 16 Middleby Corporation 6 120 21 21 22 23 24 24 18 19 RATIONAL AG 3 730 27 28 28 28 30 30 41 42 41 Peer Group Average 3 730 10.3 10.8 11.3 12.1 12.6 12.9 16.9 17.8 18.1 Peer Group Median 4 568 5.9 6.0 6.1 6.9 7.1 7.1 14.9 15.5 13.5 Leipurin (Evli est.) 62 2.8 3.3 3.5 3.8 4.1 4.1
MCAP ROE % ROE % ROE % P/B P/B P/B P/E P/E P/E MEUR 17 18 19 17 18 19 17 18 19 Booker Group PLC 4 568 26 28 29 6.5 6.4 6.2 25.2x 23.4x 22.1x MARR SpA 1 416 20 21 20 4.6 4.4 4.1 23.5x 21.7x 20.6x US Foods Holding Corp. 5 877 11 13 12 2.5 2.2 1.9 22.5x 18.1x 16.6x Total Produce Plc 809 16 15 14 3.0 2.7 2.5 19.6x 18.8x 17.9x Chefs' Warehouse, Inc. 500 50.1x 34.9x 27.3x Welbilt Inc 2 651 29.9x 24.0x 19.6x HOSHIZAKI Corp. 5 426 12 12 12 3.6 3.2 2.9 30.3x 27.8x 25.6x Middleby Corporation 6 206 23 22 20 5.2 4.2 3.4 24.1x 21.0x 18.8x RATIONAL AG 6 120 34 35 35 14.5 12.9 11.4 43.5x 38.4x 34.7x Peer Group Average 3 730 20 21 20 5.7 5.1 4.6 29.9x 25.4x 22.6x Peer Group Median 4 568 20 21 20 4.6 4.2 3.4 25.2x 23.4x 20.6x Leipurin (Evli est.) 62
MCAP EV/S EV/S EV/S EV/EBITDA EV/EBITDA EV/EBITDA EV/EBIT EV/EBIT EV/EBIT MEUR 17 18 19 17 18 19 17 18 19 Booker Group PLC 4 568 0.7x 0.7x 0.7x 17.6x 16.2x 15.3x 19.9x 18.2x 17.0x MARR SpA 1 416 1.0x 0.9x 0.9x 14.3x 13.4x 12.7x 16.9x 15.7x 14.7x US Foods Holding Corp. 5 877 0.4x 0.4x 0.4x 10.0x 9.1x 8.2x 15.7x 13.3x 11.9x Total Produce Plc 809 0.2x 0.2x 0.2x 10.5x 9.7x 9.2x 13.7x 12.5x 11.7x Chefs' Warehouse, Inc. 500 Welbilt Inc 2 651 2.9x 2.7x 2.5x 15.3x 13.2x 11.2x 18.8x 15.8x 13.2x HOSHIZAKI Corp. 5 426 1.9x 1.8x 1.7x 13.0x 11.6x 10.3x 15.2x 13.6x 12.1x Middleby Corporation 6 206 3.4x 3.0x 2.7x 14.7x 12.7x 11.3x 16.8x 14.3x 12.4x RATIONAL AG 6 120 8.5x 7.7x 7.0x 29.9x 26.1x 23.5x 31.9x 28.0x 25.1x Peer Group Average 3 730 2.4x 2.2x 2.0x 15.7x 14.0x 12.7x 18.6x 16.4x 14.7x Peer Group Median 4 568 1.5x 1.4x 1.3x 14.5x 13.0x 11.3x 16.8x 15.0x 12.8x Leipurin (Evli est.) 62 0.5x 0.5x 0.5x 13.3x 12.1x 11.8x 17.9x 15.0x 13.9x
Sales growth Sales growth Sales growth Net debt / Net debt / Net debt / Equity ratio Equity ratio Equity ratio MCAP % % % EBITDA EBITDA EBITDA % % % MEUR 17 18 19 17 18 19 17 18 19 Booker Group PLC 4 568 2.3 1.8 1.9 -0.7x -0.7x -0.7x MARR SpA 1 416 7.6 3.4 3.6 1.6x 1.4x 1.2x US Foods Holding Corp. 5 877 5.0 4.2 4.1 3.3x 2.9x 2.4x 30.8 33.5 35.7 Total Produce Plc 809 26.4 3.7 2.1 1.3x 0.9x 0.6x 25.2 27.1 29.0 Chefs' Warehouse, Inc. 500 8.8 9.0 5.6 31.9 35.1 37.0 Welbilt Inc 2 651 0.5 3.7 3.2 4.1x 3.2x 2.3x 4.3 11.6 20.9 HOSHIZAKI Corp. 5 426 5.6 4.4 5.3 -4.2x -4.3x -4.3x 65.9 67.8 70.0 Middleby Corporation 6 206 3.3 9.6 7.4 1.3x 0.7x 0.1x 45.3 52.6 67.7 RATIONAL AG 6 120 13.2 9.8 10.2 -1.1x -1.0x -1.1x 74.7 75.8 76.6 Peer Group Average 3 730 8.1 5.5 4.8 0.7x 0.4x 0.1x 39.7 43.4 48.1 Peer Group Median 4 568 5.6 4.2 4.1 1.3x 0.8x 0.4x 31.9 35.1 37.0 Leipurin (Evli est.) 62 8.2 1.9 2.4
Source: Factset, Evli Research Updated on 21st December 2017 at 11:14 PM GMT
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10.4. Historical valuation
Aspo’s next 12 month EV/EBIT, EV/EBITDA, P/E and P/B multiples are currently close to their 2011-2017 averages. Next 12 month EV/EBIT for Aspo has averaged 14.4x in 2011- 2017. During the same period, the average next 12 month P/E amounted to 13.4x.
Based on our estimates Aspo is currently trading at 2018E and 2019E EV/EBIT multiples of 15.5x and 12.1x respectively. On P/E Aspo currently trades at 12.9x and 10.1x on our estimates for 2018 and 2019 respectively.
11. References
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
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VALUATION RESULTS BASE CASE DETAILS VALUATION ASSUMPTIONS ASSUMPTIONS FOR WACC Current share price 9.26 PV of Free Cash Flow 194 Long-term growth, % 2.0 Risk-free interest rate, % 2.25 DCF share value 11.43 PV of Horizon value 296 WACC, % 7.1 Market risk premium, % 5.8 Share price potential, % 23.5 Unconsolidated equity 0 Spread, % 0.5 Debt risk premium, % 2.8 Maximum value 13.1 Marketable securities 23 Minimum WACC, % 6.6 Equity beta coefficient 1.00 Minimum value 10.1 Debt - dividend -163 Maximum WACC, % 7.6 Target debt ratio, % 35 Horizon value, % 60.4 Value of stock 350 Nr of shares, Mn 30.6 Effective tax rate, % 10
DCF valuation, EURm 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Horizon Net sales 457 500 528 560 584 605 626 645 661 678 691 705 Sales growth, % 2.6 9.3 5.8 6.0 4.2 3.7 3.5 3.0 2.5 2.5 2.0 2.0 Operating income (EBIT) 20 24 28 35 42 42 41 39 33 34 35 35 EBIT margin, % 4.5 4.9 5.3 6.2 7.1 7.0 6.5 6.0 5.0 5.0 5.0 5.0 + Depreciation+amort. 12 12 11 13 13 13 12 12 12 12 12 - Income taxes -2 -2 -2 -2 -3 -3 -3 -3 -3 -3 -3 - Change in NWC -11 0 0 -3 -2 -2 -2 -2 -2 -2 -1 NWC / Sales, % 11.3 10.3 9.8 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9 + Change in other liabs 0 0 0 0 0 0 0 0 0 0 0 - Capital Expenditure -6 -23 -41 -8 -7 -11 -6 -13 -12 -12 -15 -15 Investments / Sales, % 1.4 4.6 7.7 1.4 1.3 1.8 0.9 2.0 1.8 1.8 2.1 2.1 - Other items -3 -1 -1 -1 -1 -1 -1 -1 -1 -1 0 = Unlevered Free CF (FCF) 10 11 -5 33 41 38 41 31 27 28 28 550 = Discounted FCF (DFCF) 11 -5 29 33 28 29 21 17 16 15 296
= DFCF min WACC 11 -5 29 33 29 30 21 17 17 15 343 = DFCF max WACC 11 -5 29 33 28 28 20 16 16 14 259
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INTERIM FIGURES EVLI ESTIMATES, EURm 2016Q1 2016Q2 2016Q3 2016Q4 2016 2017Q1 2017Q2 2017Q3 2017Q4E 2017E 2018E 2019E Net sales 99 116 118 125 457 119 124 127 130 500 528 560 EBITDA 6 8 9 9 32 7 8 10 11 36 39 48 EBITDA margin (%) 6.2 6.6 7.5 7.5 7.0 6.2 6.5 7.9 8.3 7.3 7.4 8.5 EBIT 3 5 6 6 20 4 5 7 8 24 28 35 EBIT margin (%) 3.4 4.1 5.1 5.1 4.5 3.7 4.1 5.6 6.1 4.9 5.3 6.2 Net financial items -1 -1 -1 -1 -3 0 -1 -1 -1 -2 -3 -3 Pre-tax profit 3 4 5 6 17 4 4 6 7 22 25 31 Tax 0 0 0 0 -1 0 0 0 0 -1 -2 -2 Tax rate (%) 11.5 12.8 3.8 8.8 8.6 7.1 6.8 7.8 4.3 6.3 7.0 7.0 Net profit 2 3 5 5 16 4 4 6 6 19 22 28 EPS 0.08 0.11 0.16 0.17 0.52 0.13 0.13 0.19 0.18 0.64 0.72 0.92 EPS adjusted (diluted no. of shares) 0.08 0.11 0.16 0.17 0.52 0.13 0.13 0.19 0.18 0.64 0.72 0.92 Dividend per share 0.00 0.00 0.00 0.00 0.42 0.00 0.00 0.00 0.00 0.44 0.46 0.50 SALES, EURm ESL Shipping 16 17 18 21 71 19 20 18 20 77 83 91 Leipurin 26 29 27 31 113 29 30 30 33 122 124 127 Telko 49 62 64 65 240 64 66 67 68 265 284 304 Kauko 7 9 10 8 33 7 9 12 9 36 37 38 Total 99 116 118 125 457 119 124 127 130 500 528 560 SALES GROWTH, Y/Y % ESL Shipping -11.0 -8.2 -10.1 3.5 -6.3 16.7 16.8 2.2 -0.7 8.1 7.8 9.6 Leipurin -7.4 -3.0 -4.6 -2.5 -4.3 12.2 4.5 10.7 5.9 8.2 1.9 2.4 Telko -1.2 12.7 12.9 21.1 11.6 28.7 5.6 5.5 4.8 10.1 7.3 7.0 Kauko 21.8 19.7 39.7 -51.5 -9.6 6.0 0.0 23.2 5.0 9.1 3.0 2.3 Total -3.4 5.4 6.0 2.0 2.6 20.8 6.5 7.6 4.2 9.3 5.8 6.0 EBIT, EURm ESL Shipping 2 3 3 4 13 3 3 3 4 13 13 17 Leipurin 1 0 0 1 2 0 1 1 1 3 4 4 Telko 2 3 2 3 10 2 2 3 4 11 14 17 Kauko 0 0 1 0 0 0 0 0 0 0 0 1 Other operations -1 -1 -1 -1 -4 -1 -1 -1 -1 -4 -4 -4 Total 3 5 6 6 20 4 5 7 8 24 28 35 EBIT margin, % ESL Shipping 13.6 17.4 19.0 19.9 17.6 15.9 15.9 18.0 19.8 17.4 15.9 18.5 Leipurin 1.9 1.4 1.5 2.3 1.8 1.4 2.0 4.7 3.3 2.8 3.3 3.5 Telko 4.7 4.8 3.6 3.9 4.2 3.6 3.7 4.6 5.3 4.3 5.1 5.5 Kauko -4.5 -3.5 5.3 0.0 -0.3 -7.0 1.2 1.7 1.5 -0.2 1.0 2.0 Total 3.4 4.1 5.1 5.1 4.5 3.7 4.1 5.6 6.1 4.9 5.3 6.2
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
INCOME STATEMENT, EURm 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales 482 476 483 446 457 500 528 560 Sales growth (%) 1.1 -1.1 1.4 -7.7 2.6 9.3 5.8 6.0 Costs -460 -455 -448 -413 -425 -463 -489 -513 Reported EBITDA 21 22 35 33 32 36 39 48 Extraordinary items in EBITDA 0 0 0 0 0 0 0 0 EBITDA margin (%) 4.4 4.5 7.2 7.4 7.0 7.3 7.4 8.5 Depreciation -11 -11 -11 -12 -12 -12 -11 -13 EBITA 11 11 23 21 20 24 28 35 Goodwill amortization / writedown 0 0 0 0 0 0 0 0 Reported EBIT 11 11 23 21 20 24 28 35 EBIT margin (%) 2.2 2.3 4.8 4.6 4.5 4.9 5.3 6.2 Net financials -3 -4 -4 1 -3 -2 -3 -3 Pre-tax profit 7 7 19 21 17 22 25 31 Extraordinary items 0 0 0 0 0 0 0 0 Taxes 3 2 -1 -1 -1 -1 -2 -2 Minority shares 0 0 0 0 0 0 0 0 Net profit 11 9 18 20 16 19 22 28 BALANCE SHEET, EURm Assets Fixed assets 126 119 127 128 124 135 165 160 % of sales 26 25 26 29 27 27 31 28 Goodwill 45 45 44 43 43 43 43 43 % of sales 9 10 9 10 9 9 8 8 Inventory 51 48 47 48 57 57 58 62 % of sales 11 10 10 11 12 12 11 11 Receivables 65 58 56 58 60 65 69 73 % of sales 14 12 12 13 13 13 13 13 Liquid funds 21 28 19 24 23 25 26 28 % of sales 4 6 4 5 5 5 5 5 Total assets 311 302 298 305 310 329 364 368 Liabilities Equity* 90 83 84 83 90 96 105 119 % of sales 19 17 17 19 20 19 20 21 Deferred taxes 11 8 6 5 4 4 4 4 % of sales 2 2 1 1 1 1 1 1 Interest bearing debt* 140 150 144 148 150 157 180 166 % of sales 29 31 30 33 33 31 34 30 Non-interest bearing current liabilities 68 60 62 68 64 70 74 78 % of sales 14 13 13 15 14 14 14 14 Other interest free debt 2 1 1 2 1 1 1 1 % of sales 0 0 0 0 0 0 0 0 Total liabilities 311 302 298 305 310 329 364 368 CASH FLOW, EURm + EBITDA 21 22 35 33 32 36 39 48 - Net financial items -3 -4 -4 1 -3 -2 -3 -3 - Taxes -1 -3 -2 -2 -2 -1 -2 -2 - Increase in Net Working Capital -6 0 -8 -4 -11 0 0 -3 +/- Other -3 1 2 -2 0 -1 -1 -1 = Cash flow from operations 9 16 22 25 16 31 33 38 - Capex -30 -4 -18 -15 -6 -23 -41 -8 - Acquisitions 0 0 0 0 0 0 0 0 + Divestments 0 0 0 0 0 0 0 0 = Net cash flow -21 12 4 10 10 8 -8 30 +/- Change in interest-bearing debt 39 10 -6 3 3 7 23 -14 +/- New issues/buybacks 0 0 0 0 0 0 0 0 - Paid dividend -13 -13 -6 -12 -13 -13 -13 -14 +/- Change in loan receivables 4 0 3 5 0 0 0 0 Change in cash 8 9 -4 6 0 2 1 2
*EUR 25m hybrid bond included in debt
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
KEY FIGURES 2013 2014 2015 2016 2017E 2018E 2019E M-cap 186 173 229 250 283 283 283 Net debt* 121 125 124 128 132 154 138 Enterprise value 309 298 353 378 415 437 421 Sales 476 483 446 457 500 528 560 EBITDA 22 35 33 32 36 39 48 EBIT 11 23 21 20 24 28 35 Pre-tax 7 19 21 17 22 25 31 Earnings 9 18 20 16 19 22 28 Book value 83 84 83 90 96 105 119 Valuation multiples EV/sales 0.6 0.6 0.8 0.8 0.8 0.8 0.8 EV/EBITDA 14.3 8.6 10.7 11.8 11.4 11.1 8.8 EV/EBITA 28.6 12.7 17.1 18.5 17.0 15.5 12.1 EV/EBIT 28.6 12.7 17.1 18.5 17.0 15.5 12.1 EV/operating cash flow 19.2 13.5 14.1 23.3 12.0 11.8 10.0 EV/cash earnings 20.0 10.7 11.4 13.9 12.8 12.7 10.0 P/E 21.5 9.4 11.6 15.7 14.6 12.9 10.1 P/E excl. goodwill 21.5 9.4 11.6 15.7 14.6 12.9 10.1 P/B 2.2 2.1 2.8 2.8 2.9 2.7 2.4 P/sales 0.4 0.4 0.5 0.5 0.6 0.5 0.5 P/CF 11.6 7.9 9.2 15.4 8.2 7.7 6.7 Target EV/EBIT 9.6 0.0 0.0 0.0 18.5 16.8 13.1 Target P/E 12.1 0.0 0.0 0.0 16.5 14.6 11.5 Target P/B 2.3 0.0 0.0 0.0 3.3 3.1 2.7 Per share measures Number of shares 30,784 30,402 30,496 30,579 30,579 30,579 30,579 Number of shares (diluted) 30,784 30,402 30,496 30,579 30,579 30,579 30,579 EPS 0.28 0.61 0.65 0.52 0.64 0.72 0.92 EPS excl. goodwill 0.28 0.61 0.65 0.52 0.64 0.72 0.92 Cash EPS 0.50 0.92 1.02 0.89 1.06 1.12 1.38 Operating cash flow per share 0.52 0.72 0.82 0.53 1.13 1.21 1.38 Capital employed per share 6.58 6.88 6.77 7.11 7.47 8.45 8.38 Book value per share 2.68 2.77 2.71 2.93 3.14 3.42 3.88 Book value excl. goodwill 1.21 1.31 1.31 1.53 1.75 2.03 2.49 Dividend per share 0.21 0.40 0.41 0.42 0.44 0.46 0.50 Dividend payout ratio, % 74.9 66.1 63.1 80.8 69.2 63.8 54.5 Dividend yield, % 3.5 7.0 5.5 5.1 4.8 5.0 5.4 Efficiency measures ROE 10.0 22.1 23.8 18.5 21.0 21.9 25.1 ROCE 4.7 10.1 9.0 8.7 9.9 10.5 12.3 Financial ratios Capex/sales, % 0.8 4.1 3.4 1.4 4.6 7.7 1.4 Capex/depreciation excl. goodwill,% 36.8 186.1 133.5 54.8 192.3 367.7 58.9 Net debt*/EBITDA, book-weighted 5.6 3.6 3.7 4.0 3.6 3.9 2.9 Debt*/equity, market-weighted 0.8 0.8 0.6 0.6 0.6 0.6 0.6 Equity ratio*, book-weighted 27.5 28.2 27.1 28.9 29.2 28.7 32.2 Gearing* 1.46 1.49 1.50 1.43 1.38 1.47 1.16 Number of employees, average 0 0 0 0 0 0 0 Sales per employee, EUR 0 0 0 0 0 0 0 EBIT per employee, EUR 0 0 0 0 0 0 0
*EUR 25m hybrid bond included in debt
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
COMPANY DESCRIPTION: Aspo is a conglomerate operating mainly in Northern and Eastern Europe through subsidiaries ESL Shipping, Telko, Leipurin and Kauko. Two thirds of Aspo’s revenue comes from Finland, Russia, Ukraine and other CIS countries. Thus the Russian economy is important to Aspo and the Russian economy has returned to growth in 2017.
INVESTMENT CASE:
OWNERSHIP STRUCTURE SHARES EURm % Havsudden Oy Ab 3,142,941 29.104 10.3% Vehmas Tatu Antti Aleksi 2,306,676 21.360 7.5% Varma Mutual Pension Insurance Company 1,438,412 13.320 4.7% Vehmas Tapio 1,375,827 12.740 4.5% Ilmarinen Mutual Pension Insurance Company 1,000,676 9.266 3.3% Robinson Joanna 754,259 6.984 2.5% Nyberg Gustav 731,667 6.775 2.4% Nordea Nordic Small Cap Fund 721,040 6.677 2.4% Mandatum Life Unit-Linked 555,857 5.147 1.8% Nordea Bank Ab (Publ), Suomen Sivuliike 482,121 4.464 1.6% Ten largest 12,509,476 115.838 41% Residual 18,069,822 167.327 59% Total 30,579,298 283.164 100%
EARNINGS CALENDAR February 15, 2018 FY 2017 Results May 03, 2018 Q1 report August 14, 2018 Q2 report October 25, 2018 Q3 report OTHER EVENTS
COMPANY MISCELLANEOUS CEO: Ojanen Aki P.O. Box 70, Lintulahdenkuja 10, FI-00501 Helsinki CFO: Meitsalo Arto Tel: +358 ,9 5,211 IR: Harri Seppälä
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
DEFINITIONS
P/E EPS Price per share Profit before extraordinary items and taxes Earnings per share income taxes minority interest Number of shares
P/Sales DPS Market cap Dividend for the financial period per share Sales
P/BV CEPS Price per share Gross cash flow from operations Shareholders' equity taxed provisions per share Number of shares
P/CF EV/Share Price per share Enterprise value Operating cash flow per share Number of shares
EV (Enterprise value) Sales/Share Market cap net debt minority interest at market value Sales share of associated companies at market value Number of shares
Net debt EBITDA/Share Interest bearing debt financial assets Earnings before interest, tax, depreciation and amortisation Number of shares
EV/Sales EBIT/Share Enterprise value Operating profit Sales Number of shares
EV/EBITDA EAFI/Share Enterprise value Pretax profit Earnings before interest, tax, depreciation and amortisation Number of shares
EV/EBIT Capital employed/Share Enterprise value Total assets non interest bearing debt Operating profit Number of shares
Div yield, % Total assets Dividend per share Balance sheet total Price per share
Payout ratio, % Interest coverage (x) Total dividends Operating profit Earnings before extraordinary items and taxes income taxes minority interest Financial items
Net cash/Share Asset turnover (x) Financial assets interest bearing debt Turnover Number of shares Balance sheet total (average)
ROA, % Debt/Equity, % Operating profit financial income extraordinary items Interest bearing debt Balance sheet total interest free short term debt Shareholders' equity minority interest taxed provisions long term advances received and accounts payable (average)
ROCE, % Equity ratio, % Profit before extraordinary items interest expenses other financial costs Shareholders' equity minority interest taxed provisions Balance sheet total non interest bearing debt (average) Total assets interest free loans
ROE, % CAGR, % Profit before extraordinary items and taxes income taxes Cumulative annual growth rate Average growth per year Shareholders' equity minority interest taxed provisions (average)
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
Important Disclosures
Evli Research Partners Plc (“ERP”) uses 12-month target prices. Target prices are defined by utilizing analytical techniques based on financial theory including (but not limited to) discounted cash flow analysis and comparative valuation. The selection of valuation methods depends on different circumstances. Target prices may be altered on the basis of new information coming to light in the underlying company or changes in interest rates, changes in foreign exchange rates, other securities prices or market indices or outlook for the aforementioned factors or other factors that may change the conditions of financial markets. Recommendations and changes by analysts are available at https://research.evli.com/JasperAllModels.action?authParam=key;461&authParam=x;G3rNagWrtf7K&authType=3 Detailed information about the valuation or methodology and the underlying assumptions is accessible via ERP: http://research.evli.com Investment recommendations are defined as follows:
Target price compared to share price Recommendation < -10 % SELL -10 – (+10) % HOLD > 10 % BUY ERP’s investment recommendation of the analyzed company is in general updated 2 – 4 per year.
The graph above shows the distribution of ERP’s recommendations of companies under coverage in 22nd of February 2017. If recommendation is not given, it is not mentioned here.
Name of the analyst: Järvinen, Pöyhönen
This research report has been prepared by Evli Research Partners Plc (“ERP” or “Evli Research”). ERP is a subsidiary of Evli Bank Plc. Production of the investment recommendation has been concluded on [21.12.2017, 9:15]. This report has been published on [21.12.2017, 9:15].
None of the analysts contributing to this report, persons under their guardianship or corporations under their control have a position in the shares of the company or related securities.
The date and time for any price of financial instruments mentioned in the recommendation refer to the previous trading day’s closing price(s) unless otherwise stated in the report.
Each analyst responsible for the content of this report assures that the expressed views accurately reflect the personal views of each analyst on the covered companies and securities. Each analyst assures that (s)he has not been, nor are or will be, receiving direct or indirect compensation related to the specific recommendations or views contained in this report.
Companies in the Evli Group, affiliates or staff of companies in the Evli Group, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in the publication or report.
Neither ERP nor any company within the Evli Group have managed or co-managed a public offering of the company’s securities during the last 12 months prior to, received compensation for investment banking services from the company during the last 12 months prior to the publication of the research report.
ERP may pursue an assignment from the issuer(s) of the financial instruments mentioned in the recommendation or this report. These assignments may have a limited economic or financial impact on ERP and/or Evli. Under such assignments ERP may perform services including, but not limited to, arranging investor meetings or –events, investor relations communication advisory and production of research material.
ERP has signed an agreement with the issuer of the financial instruments mentioned in the recommendation, which includes production of research reports. This assignment has a limited economic and financial impact on ERP and/or Evli. Under the assignment ERP performs services including, but not limited to, arranging investor meetings or –events, investor relations communication advisory and production of research material.
ERP or another company within the Evli Group does not have an agreement with the company to perform market making services.
For the prevention and avoidance of conflicts of interests with respect to this report, there is an information barrier (Chinese wall) between Investment Research and Corporate Finance units concerning unpublished investment banking services to the company. The remuneration of the analyst(s) is not tied directly or indirectly to investment banking transactions performed by Evli Bank Plc or any company within Evli Group.
This report has been disclosed to the company prior to its dissemination. The company has not made any amendments to its contents. Selected portions of the report were provided to the company for fact checking purposes only.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
This report is provided and intended for informational purposes only and may not be used or considered under any circumstances as an offer to sell or buy any securities or as advice to trade any securities.
This report is based on sources ERP considers to be correct and reliable. The sources include information providers Reuters and Bloomberg, stock-exchange releases from the companies and other company news, Statistics Finland and articles in newspapers and magazines. However, ERP does not guarantee the materialization, correctness, accuracy or completeness of the information, opinions, estimates or forecasts expressed or implied in the report. In addition, circumstantial changes may have an influence on opinions and estimates presented in this report. The opinions and estimates presented are valid at the moment of their publication and they can be changed without a separate announcement. Neither ERP nor any company within the Evli Group are responsible for amending, correcting or updating any information, opinions or estimates contained in this report. Neither ERP nor any company within the Evli Group will compensate any direct or consequential loss caused by or derived from the use of the information represented in this publication.
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EVLI EQUITY RESEARCH ASPO Commercial Services & Supplies/Finland, December 21, 2017 Company report
Contact information SALES AND TRADING HELSINKI
Equity Sales Trading ETFs and Derivatives
Ari Laine +358 9 4766 9115 Lauri Vehkaluoto (Head) +358 9 4766 9130 Tobias Björk (Head) +358 9 4766 9130 Lauri Ahokanto +358 9 4766 9117 Pasi Väisänen +358 9 4766 9120 Joachim Dannberg +358 9 4766 9123 Niclas Henelius +358 9 4766 9116 Antti Kässi +358 9 4766 9120 Kimmo Lilja +358 9 4766 9130
Structured Investments Corporate Bonds sales and trading Derivatives Trading
Heikki Savijoki +358 9 4766 9726 Jukka Hyvönen +46 8 407 8138 Sami Järvinen +358 9 4766 9110 Aki Lakkisto +358 9 4766 9123
Evli Investment Solutions
Johannes Asuja +358 9 4766 9205 Markku Reinikainen +358 9 4766 9669
SALES AND TRADING STOCKHOLM
Urban Lawesson (Head) +46 8 407 8021 Thomas Kåhrström +46 8 407 8018
EQUITY RESEARCH
Forestry, Pulp&Paper, Chemicals, Utilities, Packaging Retail, Consumer Goods, Telecommunications, Construction, Real Estate Healthcare Markku Järvinen (Head of +358 9 4766 9635 Joonas Häyhä +358 9 4766 9662 Tomi Lindell +358 9 4766 9204 Research, Finland)
Technology, Software Strategist Research Analysts
Jonas Forslund +358 9 4766 9314 Valtteri Ahti +358 9 4766 9773 Olli Pöyhönen +358 9 4766 9643 Jerker Salokivi +358 9 4766 9149
EVLI BANK PLC
Aleksanterinkatu 19 A P.O. Box 1081 FIN-00101 Helsinki, FINLAND Phone +358 9 476 690 Fax +358 9 634 382 Internet www.evli.com E-mail [email protected]
EVLI BANK PLC, STOCKHOLMSFILIAL Kungsgatan 27, P.O. Box 16354 SE-111 56 Stockholm Sverige [email protected] Tel +46 (0)8 407 8000 Fax +46 (0)8 407 8001
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