August 2020 Newsletter: ‘Summer of '20’

As kids in Baltic countries are flocking back to school, summer of 2020 has also wrapped up on Baltic stock market, with August bringing 1.79% decline to the stock index. Overall, summer ’20 was positive for Baltic equity investors who gained 3.34% since June, but if that is compared to how ‘’hot’’ the summer was across the Atlantics, one can just gasp with awe - in just 3 months, S&P 500 index has returned stellar 15.48%. European STOXX 600 index was also trying to catch up with USA, however fell short and closed 5.3% higher.

Since the beginning of the year, Baltic stock market is down by 4.8%, Europe - by 9.89%, but USA is up by 9.74%.

Figure 1. Baltic Market drifts away, while USA is hitting new records: Performance of Baltic, USA and European indices since the beginning of the year until 31 August 2020

Source: Alphinox, Thomson Reuters, NASDAQ Baltic

Mixed revenues and cost cutting

August was a month when all listed companies have completed reporting half year results. As opposed to Q1 numbers, this time impact of COVID-19 on companies’ operations and financial conditions can be evaluated more objectively, especially management responses to the top –line development and efforts to implement cost controls in order to safeguard profitability.

52% of Baltic main list constituents experienced a decline in sales over the last 6 months. The “leaders” were: tour operator Novaturas (-72%), real estate company Pro Kapital Grupp (-60%) as completion of new apartments virtually stalled, fashion retail Baltika (-50%) and Tallink Grupp (-49%). Overall, Baltic companies reported a median decline in sales of 8% in the first half of the year. To compare, GDP in Estonia fell by 3.9% and in Latvia by 5.4% over the same period. However, not all companies were hit equally hard or hit at all for that matter – some have seen pandemic situation to be quite beneficial for business. The strongest growth in revenue have managed to deliver mostly Estonian companies: real estate Arco Vara (+80%) as sale of properties increased, construction company Nordecon (+36%) and both of the listed banks – Coop Bank (+35%) and LHV Group (+34%). Close to them was also Latvian pharmaceutical manufacturer Grindeks, with revenue increase of 37% in 6M’20.

Figure 2. Change in revenues and expenses of Baltic Main List companies’ over first 6 months, year-over-year

*Pieno Zvaigzdes 6M financial report was not available on 31.08.

For Linas Agro, PRFoods, SAF Tehnika numbers were taken for the last two quarters available

Source: Alphinox, Thomson Reuters, NASDAQ Baltic

From companies that managed to cut their expenses most proactively, stands out Novaturas, which succeeded in slashing operating expenses by 57% versus 6M’19. Reduction in operating costs by as much as one third was also successfully implemented by Tallink Grupp, followed by two other Estonian companies: Silvano Fashion Group and Tallinna Vesi. With respect to cutting another line of expense - costs of goods- Silvano, Klaipedos nafta and Grigeo did the job the best, managing to deliver an over proportional cut in abovementioned costs versus magnitude of the decline in their respective sales. On the other hand, although both Tallink and HansaMatrix also adjusted their base for cost of goods, it wasn’t nearly sufficient to safeguard their margins and profitability.

Baltic Main List performance

If one would think that July was a boring month (from trading perspective), then August came in with even lower market activity. Turnover of Baltic Main List fell below 20 million mark at EUR 19.14mn, which compares to EUR 28.14mn in July and EUR 35mnin June. Having reached lowest activity point in summer’20, we can expect that to pick up in autumn as everyone returns to active working regime.

Figure 3. Performance of Baltic Stock market companies & world indices as of 31.08.2020

Source: Alphinox, Thomson Reuters

August was a month of losses for investors of the Baltic market and of Estonia in particular, where only performance of Baltika (+3.2%) and LHV Group (0.00%) managed live up to investors’ expectations. Major laggards in August to a great extent were those, who suffered from the depressed tourism - Novaturas and Tallink lost 13.55% and 7.46% of their value respectively. Also, the share price of Ekspress Grupp dropped by 7.64% mainly due to weak results in all of its segments being exposed to lower advertising volumes.

Top performers in August came from Lithuania and Latvia. Dairy food producer Pieno Žvaigzdes climbed 18.81%, while Grindeks by 12.58% upon release of the best 6M results in company’s history (revenue was up by 37%, net profit – up by 67%).

Summer has passed mainly positive for investors. Now the question is whether ongoing monetary support will succeed in further pushing equity markets higher?


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