Anora - Brands for the bunker

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Let’s add the December figures here as well. Development in December was clearly weaker in Norway, where the market for wines dropped by 5% and spirits by 7%. Due to the large volumes in December, this pushed the entire Norwegian market’s Q4 down by 2-3%. December was also weak in Finland, with wines and spirits decreasing by about 12%, which led to a Q4 drop of about 9% for spirits. Alko’s wine sales show a shift to 8% wines in grocery stores, so a complete picture cannot be obtained from that, as noted above.

Q4 figures for Sweden are not yet available, but the December figures from Norway and Finland thus pushed the Q4 outlook in a weaker direction, although I would guess that the Anora volume expectation mentioned above would still be met, at least for the market. Product-specific differences and changes in market shares (where Anora has been more of a loser in recent years) can, of course, create differences in Anora’s development relative to the market.

EDIT:

That concerned Norway, and indeed it is so. In Finland, however, levels have already fallen significantly below 2019 levels. In Sweden, wine levels are about at 2019 levels, and spirits are above.

For Anora, it is a bad thing that normalization from the corona pandemic continues to push markets lower, as the change is likely more permanent than, for example, fluctuations due to economic cycles, and because that volume partly shifts to tax-free trade, where Anora’s market share is weaker than in monopoly chains.

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One might wonder about the market decline, if one didn’t know the explanation..
The decline is as expected considering that society is still normalizing after the pandemic, says Jens Nordahl, press officer at Vinmonopolet.
From experience, we know that Vinmonopolet’s sales decline when there is noticeable growth in cross-border trade and air traffic abroad, says Nordahl.
So, the explanation for the current decline can thus be sought from the corona pandemic. Sales in liters in 2019 were 82.6 million liters and in 2023 were 95.6 million liters. So there is still room for decline to pre-corona figures, without being able to draw conclusions about total consumption…From Anora’s perspective, sales volumes are only one part, the other part is sales prices, which have seen increases and thus likely also slightly reduced demand.

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Koronan jälkeen Norjassa viini haetaan Ruotsista… The volume of wine consumed in Norway has grown by 3 per cent per annum in the last five years. This is largely due to a decline in cross-border purchases made in Sweden during the pandemic and remaining subdued in 2023; this translates to more wine being purchased in the Norwegian alcohol monopoly – Vinmonopolet. Sales are expected stabilise in the next five years.

In contrast to the other Nordic markets, Norway has a very high share of wine sales sold in the premium segment (above 128 NOK per bottle). 43 per cent of wine sales are premium, and this share is expected to grow to 45 per cent by 2028. This high share is driven by the affluence of the Norwegian consumer – GDP per capita in 2023 was US$88,000, compared to US$56,000 in Sweden[

Suomi:
Wine has a much lower share of the alcohol market in Finland compared to the other Nordic markets, due to the popularity of beer and RTDs. Unlike Sweden, population growth has not helped to increase the number of wine drinkers – the number of regular wine drinkers declined by 11 per cent between 2017 and 2023.

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I watched the Q3/24 webcast and was extremely confused when the CEO and CFO constantly repeated EBITDA figures in different segments. Why does Anora prefer to talk about EBITDA and ignore EBIT-level figures in their presentation? The earnings release felt incomplete to the listener when basic information was left on the “dark side”. Well, next I will, of course, delve into the Q3 earnings report…

Can @Rauli_Juva or some other Anora follower say if there’s some company-specific reason for this, or what?

Edit: Quoting Buffett
“We won’t buy into companies where someone’s talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don’t, I suspect you’ll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft — they’ll never use EBITDA in their annual report."

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Has the share price fallen to an attractive level?

The share price is only 2.8e and even in the worst years, EPS has been around 0.20-0.25e, but on what basis can a turnaround be expected for the years 25-27, as Inderes’ forecasts expect? What are the drivers for the predicted earnings turnaround?

Has this underperformance in recent years been due only to problems that are receding? (Apparently not, since the CEO is leaving??)

I have only been reading and looking at reports for one day, so my understanding of the company is still very limited. Hopefully, those who have followed the company longer can provide answers to my numerous questions.

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Rauli has prepared a new company report on Anora. :slight_smile:

Of Anora’s main markets, at least Finland and Norway continued negative development during Q4’24, and we do not expect a turnaround this year either. We lowered our forecasts by 5-10% for the coming years due to the subdued market development and outlook. With the reduction in forecasts, our target price decreased to EUR 3.0 (previously EUR 3.4). We reiterate our reduce recommendation.

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Good observation/criticism. Anora’s segment reporting and guidance are indeed at the EBITDA level, which is why it’s mainly discussed. I honestly don’t remember how Anora has justified this, but the reasons are generally not very good. In Anora’s case, one reason could be that the segments share production facilities, so depreciation does not naturally allocate to different segments. Typical reasons I’ve generally heard include “this is how we look at it internally” and “this is common practice in the industry,” which I don’t consider particularly good reasons.

Looking at EBITDA made some sense before the IFRS 16 change (i.e., the treatment of leases) as it was a good measure of operational cash flow, and if depreciation and investments were at very different levels for one reason or another, looking at EBITDA was/is even beneficial. However, in current accounting, it also ignores lease expenses, so I don’t consider focusing on EBITDA very good. Of course, by looking at it, one can talk about larger and generally positive figures if such are no longer available at the EBIT level :wink:

I had also been thinking about this, and today the forecasts for the coming years were lowered so that the earnings turnaround is not very significant. A small improvement is expected this year through efficiency gains, but as the markets are still rather declining, a larger improvement is difficult.

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One could argue that a rather bearish view has been taken again.
In a way, it’s easy to be wise after the event when the stock price is ATL (All-Time Low); any previous reduction and sale relative to the current price is a success.

But when looking at the recommendation and forecasts, one could argue that they don’t believe in their own forecasts again. In an analyst-like manner, they forecast growing earnings with cheap multiples, yet a negative recommendation :man_shrugging: → forecasts hit :partying_face: or forecasts fail, so they were still “right” because there was a negative recommendation :partying_face:

It’s also repeatedly stated how difficult it is to make a profit or grow profitability. Yet, the forecasts show an outright explosive growth in earnings:

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The company is cheap based on non-earnings-based EV/S, P/S, P/B multiples.
According to Inderes’ forecasts, the dividend yield alone is at least the same as the cost of capital or the stock market’s expected return.
Anora certainly has a heavy balance sheet, so EV-based multiples would be good, but the balance sheet with leases is tricky. However, if one looks at the current price with a P/E ratio or EV/EBITDA, it doesn’t look expensive.
IF Anora makes a net profit of EUR 29 million in 2026 and EUR 34 million in 2027 as per forecasts, I would expect the stock price to rise significantly. To my eye, either the forecasts will be undershot or the price will rise significantly! This again looks like an intermediate solution, where good earnings are forecast, but for safety’s sake, it’s recommended to reduce the stock.

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Last night, I took the 2023 annual report for bedtime reading, and it contained quite harsh write-downs, even related to the most recent Globus Wine acquisition. I’m trying to say that a very attractive P/B is now low, but how sound is the balance sheet, and are there still write-down risks? At least the write-downs indicate that Anora’s track record for fairly priced acquisitions is rather weak. Based on this, the EBITDA-based reporting policy, in my opinion, received more grounds for criticism. The investor is somewhat in the dark as to which years write-downs might occur in different segments, as it’s not easy to pick out the D&A (Depreciation and Amortization) portion from the reports, unlike what clear company reports allow.

Screenshot from the 2023 annual report, page 10.

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Quite a valid criticism, which I would probably say myself if I read the report :slight_smile:

It wasn’t far from me leaning towards a ‘buy’ recommendation, but when, in my opinion, a dividend cut, declining earnings, and declining markets are in sight, and there’s a history of quite poor performance and continuous underperformance of forecasts/guidance, I didn’t really feel enthusiastic about giving a positive recommendation. The problem with the valuation is that the EV figures are not really usable, and on the other hand, P/E is quite sensitive to earnings changes for a highly leveraged company. Because of this, those low P/E ratios of 26-27, even considering the aforementioned, do not yet inspire a positive recommendation.

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Of course, as a shareholder, one looks at things through rose-tinted glasses. For example, depreciation exceeds investments, meaning that even if the company made zero profit, the cash flow would enable current dividends. Q4 cash is likely to be over 100 million, from which 15 million in dividends can easily be paid. It’s another matter whether the company wants to do this, or if it settles for a dividend level of approx. 5% and prefers to reduce debt. The EV (Enterprise Value) figure itself is a bit vague and thus only indicative, as it generally does not account for accounts receivable as cash. And it’s quite misleading that sold accounts receivable in cash would not be real money. A corporate buyer, for example, would presumably count these as real money. There isn’t an exceptionally large amount of debt currently, but high inventory levels do require some, and reducing these is indeed the company’s goal.
The biggest problem with Juva’s recommendations is probably the 1-year timeframe. Other analyst firms have a longer one, and thus the target prices are of a completely different magnitude (i.e., Juva’s is the most pessimistic).

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I can agree with the analysis. Furthermore, if financing costs (around 40% of adjusted operating profit, when adjusting for intangible amortizations & one-time write-downs) could be brought down, this would also have significant upward earnings leverage.

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Same thoughts. One point I’d like to raise about the analysis’s target price and recommendation is that the target price + estimated dividend (€3.15) relative to the share price at the time of the analysis (€2.80) would yield a 12.5% annual return, which, in my books, should definitely lead to an ‘add’ recommendation.

Of course, target prices are opium for the masses, but it always strikes me when a recommendation is negative even if the expected return at the target price is >10%. Especially since this isn’t the riskiest company in the world, even though it has performed poorly for three years.

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Regarding the usability of EV multiples, cf. also the recent report: “The usability of EV multiples is weakened by lease liabilities and, on the other hand, off-balance sheet sold receivables.” If a lease liability is comparable to a company taking out a loan and buying real estate, increasing interest-bearing debt, then where exactly is the problem? On the other hand, isn’t selling receivables comparable to receiving payment, adjusted by the buyer’s fee, of course, which in turn relates to margins. The working capital requirement decreases, assuming that accounts payable are not paid at the same time and the received payment is not tied to inventory. So, in case you have time to comment on this, why are EV figures not really usable?

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I deleted this as confusing and unclear writing.

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Of course, there’s time to comment on this; there’s always discussion about these from time to time, and there can be different views on what the right way is. Here are my own thoughts.

This was/is the idea behind the accounting change where leases were brought onto the balance sheet, meaning that property purchase and leasing would be treated similarly. However, the problem immediately lies in the fact that technical lease liability is not normal financial debt, meaning no interest is paid on it, nor is it repaid. Therefore, in my opinion, it should not be considered when thinking about the company’s value.

Another problem from the perspective of key figures is that when leases are recorded in the income statement as depreciation and partly as financial expenses, EV/EBITDA, in particular, is not a good figure when lease liabilities are included in EV but there is no corresponding depreciation entry. Similarly, in companies with very large lease liabilities (Anora is not among these, but for example, Stockmann/Lindex), a significant amount of rental expenses also remains under EBIT in financial expenses.

Yes, from a cash flow perspective, the cost arising from selling accounts receivable is recorded in financial expenses and is accounted for there. It can also be reasonably argued that since the risk of receiving payment has shifted away from Anora, it should not be considered as the company’s debt.

However, the problem arises especially when the company changes its practices. For example, when Anora significantly increased (over 100 MEUR) its sold accounts receivable last year, did the company’s value (EV) decrease / did the equity value increase by over 100 MEUR? And if it did, why don’t all companies increase their value this way? Or conversely, when Olvi reduced its sold receivables a couple of years ago due to its good balance sheet situation, did the value of the company/shares change by tens of millions? I personally think that the value cannot (at least significantly) change in these situations, so I prefer to treat sold receivables as debt. When the figures are available, everyone can handle them differently in their own assessments.

A bit off-topic, but it’s also worth noting in Anora’s case that its balance sheet is clearly strongest at the end of the year. It therefore needs a lot of money for working capital financing during the year, which makes the year-end figures look better.

EV is not a balance sheet figure but the market value of shares + net debt. If one theoretically considers the value of inventory and receivables, accounts payable should also be considered. For Anora, the sum of these, i.e., net working capital, is zero. So no value is found there, and in any case, working capital is needed to run the company’s operations.

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Approximately 90% of these trade receivables are directed at monopoly channels, which means they are almost risk-free and very favorable compared to, for example, other debts.

EV/EBITDA is, in principle, quite usable in the IFRS-16 world if EBITDA is before lease depreciation and net debt includes lease liabilities. For Anora, the majority of lease depreciation relates to the building of the Gjälleråsen production facility. This agreement expires no later than 2037, and Anora apparently wants to get rid of it.

The company should try to terminate the agreement prematurely, and net debt would automatically decrease through this :thinking:

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@Rauli_Juva: thanks for the answer. A couple of comments: if I remember correctly, your last paper’s EV (Enterprise Value) however includes lease liabilities (which, in my opinion, is a perfectly justified solution). On the other hand, if the significance of rent is large relative to the entity being examined, apparently EV/EBIT is indeed a more meaningful level of analysis than EV/EBITDA. The meaningfulness of selling accounts receivable is based on 1. the price of the transaction and 2. the change in working capital needs, and EV can therefore decrease as a result of the transaction, through the reduction of interest-bearing debt. However, this must therefore be proven separately. I personally don’t see a reason to treat sold receivables as debt, but it is from these differences that the market is born. And, companies have different debtors; receivables from, for example, monopolies are certainly easier and cheaper to sell than many other receivables.

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The significance of 100 million as additional debt in the calculation otherwise apparently corresponds to about half of the stock’s current market value, if I understood the matter correctly.

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The enterprise value (forecast 2024) is 315m at Inderes. When you subtract the market capitalization of 190m from that, the debts are about 125m, and EV/revenue = approx. 0.5. These are, in my opinion, quite correct and reasonable figures. It’s surprisingly difficult to grasp the different figures now, especially when accounts receivable are also mixed into the calculations.

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