Home NewsInterim report Jan-June 2023

Interim report Jan-June 2023

Written by Oksana Kirilova• August 25, 2023

- Book value of land and forest amounts to 41,909 (36,423) TEUR
- Equity amounts to EUR 0.94 (0.9) per share
- Earnings per share EUR 0.035 (0.033)
- Property holdings amounts to 7,992 (7,194) hectares
- Timber volume is estimated at 1,150,000 (1,067,000) cubic meters
- Net sales were 447.3 (1,464.9) TEUR
- Operational loss was -163.1 (957.6) TEUR
- Changes in value, forest 1,577.9 (332.4) TEUR
- Net profit amounted to 1,287.7 (1,137.3) TEUR

Latvian Forest Company

Latvian Forest Company AB (publ) is a Swedish listed company that invests in and conducts forestry on advantageously valued forest in Latvia and Lithuania. 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 price levels for 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 gradually carrying out new share issues as properties are acquired and the business develops. Through Latvian Forest Company, shareholders become co-owners of many properties instead of an individual one, which provides a good risk diversification. The operations conducted in day-to-day forestry create the turnover needed to cover the company’s costs over time and eventually generate a surplus.

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

Status & property holdings

Investments in forest properties have been made continuously and the holdings amounted to a total of 7,992 (7,194) hectares at the end of the period. Of these, 6,534 (5,937) were forest and 1,458 (1,257) other land including 953 (814) hectares of agricultural land. At the same time, the total growing stock was estimated at 1,150,000 (1,067,000) cubic meters after felling, property purchases and sales. Proportionally, the company owns 6,285 hectares with 800,000 cubic meters in Latvia, as well as 1,707 hectares with 350,000 cubic meters in Lithuania.

On the total of 6,534 hectares of forest land owned by the company at the end of this period, the existing growing stock is estimated at 1,150,000 m3. Of these, approx. 266,000 m3 is immediately harvestable. The company’s management intends to harvest 415,000 m3 within the next 10 years. In total, the company estimates that there are 176 m3 of growing forest per hectare. Almost 70% of the company’s holdings consist of land types corresponding to bonity classes IA, I and II (urban index G34/G36, G32, G28). Only 2% of the company’s 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 7% compared to last year.

The company has acquired 133 hectares with a growing stock equivalent to 8,500 cubic meters in the second quarter. The company has completed the sale of 16.72 hectares of agricultural and other land for a total of 69 TEUR during the second quarter.

(Map of existing property holdings)

Felling and clearing

The company has felled 7,940 (30,073) m3, of which 600 (22,891) m3 in Latvia and 7,340 (7,182) m3 in Lithuania during the first half of the year. The average felling price was EUR 43.49 (48.71) per cubic metre.

The company has planted spruce seedlings on 30.29 hectares during the second quarter

Sales and earnings

Net sales for the first half of the year were TEUR 447.3 (1,450.1). As previously reported, the Board decided to divest agricultural and other land considering previous strategic decisions to streamline the property portfolio and increase the proportion of forest land in the portfolio. Revenue mainly refers to income from felling, i.e., the sale of root items. Operating expenses have continued to develop satisfactorily. Operational result was negative at TEUR -163.1 (957.6) for the first half-year and TEUR -42.7 (845.9) in the second quarter. The negative operating result is due to a pause in felling because of the company having entered a letter of intent regarding the sale of assets. Net profit for the year amounted to TEUR 1,287.7 (1,137.3) for the first half of the year.

The estimated fair value of forest assets totalled TEUR 41,056.8 (36,423.4). 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 for sawlogs and pulpwood. The fair value of growing forest has been calculated on the assets that were in the company as of June 30, 2023. The value is calculated by discounting a 100-year series of estimated felling volumes/sales revenues and forest management costs at a discount rate of 7.25% (6.75%). The company’s management has decided to increase the discount rate to 7.25% due to the general increase in expectations regarding the cost of capital.

Otherwise, earnings are affected by normal costs for clearing, property-related costs such as new property measurements, inventories and stamping of stocks prior to felling, as well as certain costs associated with felling.

External costs consist largely 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 to some extent been recorded as part of the acquisition cost for 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).

(Results after mechanical clearing in Latvia)

Timber and forest property market

Experts speculate that the timber market has bottomed out after the sharp decline in late 2022 and early 2023. This is still not noticed in the Baltics. Rather, that the market has not yet reached the equilibrium point. The shortage arose after nearly 10 million m3 of timber products disappeared from the timber market around the Baltic Sea after Russia launched its aggression against Ukraine. In addition, the forecast shortage of natural gas contributes to the rise in the price of forest products. The North American timber market has been shown to be stable during the first half of the year. Trading in timber on the NASDAQ stock exchange is around 500 USD/LBS. The same trend can also be observed on the Swedish and Finnish markets. We predict that these market trends will also be relevant for the Baltics within a short time span. The purchase price of softwood timber reached the lowest level in the last twelve months corresponding to EUR 76/m3 at the end, which corresponds to the price level in June 2018.

Demand for birch veneer logs, and consequently also prices, peaked at EUR 220 per cubic metre in late 2022 and early 2023. At the end of June, it fell by almost 30% to EUR 170 per cubic metre. The purchase price is still significantly higher as the average price was EUR 120 per cubic metre in 2019, which was before the corona pandemic. International demand for veneer boards has been very strong in recent months, but now the economy seems to have turned downwards.

Pulpwood prices have also turned downward and are approaching the price level before the corona pandemic. It has fallen by as much as 50% (twice) compared to the same period last year. For example, one cubic metre of hardwood pulpwood was priced at EUR 55 in June 2023. Last year, the price was EUR 120 per cubic metre. The price of coniferous pulpwood has decreased to EUR 59 per cubic metre from the record price of EUR 89 per cubic metre. Prices for hardwood chips are at a level equivalent to EUR 17.42 per cubic metre compared to EUR 30.06 a year ago. The high price is driven by fears of shortages in natural gas supplies and possible high price levels for natural gas. Natural gas is still widely used in district heat production in many municipalities.

(Logging felling in Lithuania)

The company’s management notes that the economic downturn and higher cost of capital are leading to an increased supply of advantageously priced forest assets in the region. LFC will actively use its experience and knowledge to identify and acquire forest properties at a favourable price in both Latvia and Lithuania.

Financing

During the first half of the year, no loans were taken, and no new issues were carried out.

Financing strategy

The Board of Directors has, following comments from and sounding out among shareholders and potential investors, 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 directed issues from being carried out, for example, in connection with acquisition of property portfolios or in special situations where a directed issue may be required. The objective is that existing shareholders shall not be disadvantaged if a directed share 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 information received by the company, the five largest shareholders in terms of votes control 67.6% of the capital and 67.2% of the votes.

Significant events after the end of the period

Property holdings at the time of this report amount to 8,054 hectares. At the same time, the total growing stock was estimated at about 1,076,000 cubic meters after felling, property purchases and sales. The company has borrowed EUR 1,900,000 at market terms in Latvia to acquire new properties.