Home NewsInterim report Jan-June 2022

Interim report Jan-June 2022

Written by Oksana Kirilova• August 22, 2022

Book value of fixed assets amounts to TEUR 36,423.4 (20,194.4)
Equity amounts to EUR 0.910 (0.703) per share
Earnings per share EUR 0.033 (0.031)
Property holdings amount to 7,194 (5.742) hectares
Timber volume is estimated at 1,067,000 (697,000) cubic meters
Net sales TEUR 1,464.9 (428.5)
Operating profit TEUR 957.6 (166.1)
Change in value, forest TEUR 332.4 (1,030.6)
Net profit TEUR 1,137.3 (1,027.3)

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

Latvian Forest Company

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

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

The expansion is financed by carrying out new share issues in stages as properties are acquired and the business develops. Through Latvian Forest Company, shareholders become co-owners of many properties instead of one individual, which provides a good spread of risk. The activities carried out in ongoing forestry create the turnover needed to cover the company’s costs over time and, in the long term, generate a surplus.

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

Status & property holdings

Investments in forest properties have been made continuously and the holdings at the end of the period amounts to a total of 7,194 (5.742) hectares. Of these, 5,937 (4,226) hectares were forest and 1,257 (1.514) other land, whereof 814 (1.214) hectares agricultural land. At the same time, the total growing stock was estimated at about 1,067,000 (697,000) cubic meters after felling, property purchases and sales.

On the total of 5,937 hectares that the company owned at the end of this period, the existing growing stock is estimated at 1,067,000 m3. Of these, approx. 323,000 m3 is estimated to be immediately fellable. The company intends to fell 465,000 m3 within the next 10 years. The management estimates that there are 180 m3 of growing forest per hectare. More than 70% of the company holdings consist of land types corresponding to site fertility classes IA, I and II (site index G34/G36, G32, G28). Only 2% of the company holdings have management measures prohibited due to nature conservation restrictions. Almost 85% of the growing stock consists of the three most important industrial wood species: birch, pine, and spruce. The company’s growing stock has grown by 35% compared to last year. The company has reduced the proportion of agricultural land and other land from 27% last year to 17.5% by the end of the second quarter 2022.

The company has acquired 180 hectares with a growing stock of approx. 25.000 cubic meters during the second quarter. It has also completed sales of 424 hectares of agricultural and other land for a total of TEUR 1,358 in the second quarter.

(Map of the existing property holdings)

Felling and clearing

The company has felled 30,073 cubic meters, of which in Latvia 22,891 m3 and in Lithuania 7,182 m3 during the first half of the year. The average felling price was EUR 48,71 per cubic meter, with a distribution of EUR 46,45/m3 in Latvia and EUR 55,89/m3 in Lithuania.

A total of 28 hectares were cleared during the second quarter. The company has carried out planting of 70,000 spruce seedlings on 36.5 hectares during the second quarter.

Sales and earnings

Net sales for the first half year were TEUR 1,464.9 (428.5). As previously reported, the Board of Directors decided to divest agricultural and other land, considering previous strategic decisions to streamline the real estate portfolio and increase the proportion of forest land in the portfolio. Capital gain from the sale is equivalent to TEUR 414.1. Net income has been adjusted with the balance sheet value of forest and other land, and the fair value calculation of growing forest. Revenue mainly refers to income from the sale of felling volume, i.e., the sale of root items. Operating expenses have continued to develop satisfactorily. Operating profit was TEUR 957.6 (166.1) for the half year and TEUR 845.9 (43.3) in the second quarter. Net profit for the year amounted to TEUR 1,137.3 (1. 027) for the first half year.

The estimated value of fixed assets totaled TEUR 36,423.4 (20,194). The increase in value can mainly be attributed to the company’s acquisition of new properties, as well as the average long-term price level of sawlogs and pulpwood. The fair value of growing forest has been calculated on the assets that were in the company as per June 30, 2022. The value is calculated by discounting a 100-year series of estimated felling volumes/sales revenue and forest management costs at a discount rate of 6.75 % (7.25%).

Otherwise, the result is affected by normal costs for clearing, property-related costs such as new property measurements, inventories and stamping of stocks before felling, as well as certain costs in connection with felling.

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

(CEO and board of directors on inspection of forest property in Lithuania)

Timber and forest property market

During the first half of the year, the market has demonstrated record prices for sawn timber and pulpwood. In addition, the projected shortage of natural gas contributes to an increase in the price of forest products. The global timber market has shown steady decline in the first half of the year. Trading in timber on the NASDAQ stock exchange began at about USD 1,329/LBS in January 2022. By the end of the second quarter, the price had come down to around USD 600/LBS. This is still a relatively high level considering a five-year history. We can predict that these market tests will also be relevant for the Baltics within a short time span. The weakening Euro will improve the competitiveness of European forest products also in the global market. The general economy is beginning to slow due to rising energy and commodity prices, which will have a negative effect on demand around the world. Moderate trends can also be observed in the Latvian and Lithuanian timber markets with the purchase price for softwood timber of EUR 109/m3 at the beginning of the year and a rapid decline to the equivalent of EUR 64/m3 at the end of June.

The demand for birch veneer logs, and therefore also prices, reached its peak with EUR 145 per cubic meter. As comparison, the price for birch veneer logs at the end of 2021 was around EUR 90 per cubic meter. The international demand for veneer boards has been very strong in recent months, which has contributed to the fact that even with rising energy and personnel costs, veneer manufacturers have been able to raise the purchase price. However, most market participants believe that purchase prices will be corrected downwards in the foreseeable future.

Even pulpwood prices broke all records. For example, one cubic meter of hardwood pulpwood was priced at EUR 110 in June 2022. While the purchase prices for the same range were EUR 64 per cubic meter at the beginning of the year. The price of coniferous pulpwood has almost doubled over the same period from EUR 44 to EUR 80 per cubic meter. This may be since the Baltic market is driven by fears of a lack of natural gas supplies from Russia. Natural gas is still widely used for district heating production in many municipalities. The strong demand means that prices for one cubic meter of wood chips have more than doubled from EUR 11.9 per cubic meter at the beginning of the year to EUR 24.75 at the end of June 2022.

(Recently acquired agricultural land with potential to be converted to forest)

The newly established players have been responsible for rising demand for forest and agricultural properties in both Latvia and Lithuania. However, it has not affected LFC’s ability to acquire new properties as the company’s management actively uses its experience and knowledge to identify and acquire forest properties at a favorable price.

Financing

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

Financing strategy

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

Share

At the end of the period, the share capital amounted to EUR 4,106,436 divided into 80,000 Class-A shares and 36,583,521 Class-B shares. Class-A shares represent ten votes and Class-B shares one vote each. Each share has a quota value of 0.112 Euro in share capital. According to the latest data obtained by the company, the five largest shareholders in terms of voting rights control 67.6% of the capital and 67.2% of the votes.

Significant events after the of the period

The property holdings at the time of this report amount to 7,263 hectares. At the same time, the total growing stock was estimated at about 1,076,000 cubic meters after completed felling, property purchases and sales.