Today, @Aapeli_Pursimo and I initiated coverage of Inderes’ first unlisted company (or more accurately, a cooperative). The target is Pohjanmaan Arvo Sijoitusosuuskunta, listed on Privanet, which, as the name implies, manages an investment portfolio consisting of financial investments, unlisted equity investments, and unlisted debt investments. The comprehensive report on Arvo published today can be read here.
Because this is an unlisted coverage target, our operating model regarding Arvo differs slightly from the norm. We will update our view on Arvo twice a year (in the spring after the annual financial statements and in late summer/autumn after the H1 report). We will not comment on the news flow between updates, but discussion will certainly take place on the forum, and you can always ask us about Arvo as an investment. We do not provide a recommendation or target price for Arvo; instead, we state our view on the fair value of an Arvo share (excluding any potential liquidity premium or investment company discount) and comment on its relationship to the prevailing market price of Arvo shares on Privanet.
Yes, it does, and the return has been good, especially historically as capital returns. Inderes starting to cover it is positive and will increase returns simply by increasing visibility.
Found it. Thanks for the good report, and it’s nice that an unlisted company was included in the analysis. This provided confirmation for my own spreadsheets. In my calculations, the fair value is about 3% higher than your estimate.
@Antti_Viljakainen how does “monitoring” differ from “valuation”? I’d be interested to understand this better, as KPY is very similar to ARVO (co-operative, not listed on the stock exchange, etc.). At a quick glance, KPY has published a couple of reports per year on average, and there has been no reaction to news. Does Inderes sell different products to different co-operatives, and is this why there’s a different service? KPY bought a valuation and ARVO bought monitoring
I guess the co-op itself has bought the monitoring service. I recall ARVO’s CEO mentioning at some event that something should be invented to develop the co-op price upwards.
I didn’t find any mention of this in Inderes’ report, at least not quickly, but how does the taxation of cooperative interest work in this case? Is the normal dividend tax rate (25.5%) applied to them, or the 7.5% tax rate familiar from S-cooperatives, for example?
Quoting directly from the tax authority: “If there are at least 500 members who have paid the membership fee, 25 percent of the surplus is taxable capital income and 75 percent is tax-exempt income up to an annual total of 5,000 euros (TVL 33 e.3 §). This 5,000 euro relief is per taxpayer and can only be claimed once. Of the amount exceeding 5,000 euros, 85 percent is taxable capital income and 15 percent is tax-exempt income.”
We have an agreement with Arvo, which is, of course, mentioned in the disclaimer. For clarity, I also emphasize that, naturally, when monitoring companies outside the stock market, the same logic applies to us as with listed companies, meaning the commissioning party does not know the conclusions or the outcome of the research in advance.
I can’t go into details, of course, but the overall packages we’ve agreed upon with Arvo and KPY differ significantly from each other. For example, for KPY, we are creating a package that is considerably more extensive than the published summary, but my understanding is that they have chosen to publish only a summary in their own channels and not, for example, the entire package on our platform. In both cases, however, it’s essentially the same type of recurring monitoring, meaning reports are provided at an agreed frequency, but we do not comment on news between reports (valuation is not the name we give to our product).
On the unlisted side, we have some flexibility regarding monitoring, as companies (or in this case, cooperatives) and their needs are very different (cf., for example, Arvo’s quite broad portfolio and KPY’s more focused one). In contrast, in stock market company monitoring based on recommendations and target prices, our template is restricted and cannot practically be modified.
This was not covered, indeed. But fortunately, the matter has already been clarified!
Adding value for our owners is central to our investment cooperative, but openness and transparency are also important to us. We decided to commission an analysis service from Inderes because it is a respected and independent expert company. Inderes is able to analyze our investments and our investment portfolio while preserving trade secrets.
Our investment cooperative has over 24,000 owners, and this service enables the comprehensive and simultaneous sharing of information with our owners and stakeholders.
Although we are not a listed company, our member shares are traded, and our primary goal is to help our owners value their holdings. However, an impartial analyst’s assessment also allows for an increase in the value of the share, if we have earned it through our work.
We’re on board and are interested to see how ARVO succeeds in creating value for the shares and their owners in the shadow of the coronavirus. External analysis increases the transparency of this kind of stranger and less liquid investment. Until now, investors have been required to do more homework to analyze such a target and the opportunity to achieve some additional good with it.
Today, Arvo published a release on its website regarding its results for the last financial year. The co-operative’s profit was EUR 4.7 million (2019: EUR 4.1 million), and the board’s proposal for the co-operative interest was EUR 40 per share (2019: EUR 40/share), totaling approximately EUR 3.3 million. This represents a profit distribution ratio of approximately 70%, which is slightly below the average of 77% for the previous six years, but within the co-operative’s target level (60-80% of the financial year’s profit). Generally, both the result and the co-operative interest were at a stable level compared to previous years, with no major surprises.
In the relatively short release, the numerical aspects were not elaborated upon, except for bridge financing, from which the revenues were at the previous year’s level of approximately EUR 0.7 million. Last year, Arvo focused on supporting its target companies amidst the COVID-19 pandemic. This practically meant that at least some of Arvo’s target companies received temporary relief on loan terms, which may be reflected slightly in the interest income received by the co-operative. However, a more detailed analysis based on this information is still difficult to make and will be postponed until later in the spring, coinciding with the publication of the annual report.
Arvo has not made any new regional or national investments or divestments since our comprehensive report published in December, which is still relevant and can be read here. In the release, the co-operative commented that the COVID-19 pandemic has caused delays in the implementation of new investments, but the project flow has remained relatively strong despite the prevailing conditions, and potential projects are under investigation.
In late February, Keliber, one of Arvo’s unlisted equity investments, published a release about a EUR 40 million financing arrangement with Sibanye-Stillwater. Sibanye-Stillwater is a large (group revenue 2020: approx. USD 7.7 billion) South African mining company focused on precious metals. Based on the release, it is not possible to calculate the valuation or the impact on Arvo’s ownership stake according to Keliber’s arrangement. However, we believe that a strong international player significantly reduces the project’s risk level and provides muscle for the investment phase, clearly increasing the likelihood of the project reaching production.
According to a release published by Privanet Group today, the company has signed a preliminary agreement today to acquire the entire share capital of Skarta Group Oy (formerly Suomen Maastorakentajat). The transaction is intended to be implemented by an exchange of shares, which is conditional on due diligence reviews yet to be carried out, the approval of Skarta Group’s financiers, and the necessary Privanet Group general meeting decisions. The implementation of the corporate arrangement is targeted to take place in July 2021, but no later than the end of Q3’21. Should the arrangement be completed, Privanet Group’s name is intended to be changed to Skarta Group.
Skarta Group is one of Arvo’s most significant unlisted debt investments, in which Arvo made a EUR 2 million convertible loan investment at the end of 2019 and also granted the company EUR 2 million in bridge financing in 2020. In connection with the corporate arrangement, Skarta Group’s bondholders have the opportunity to convert their investment into new shares on terms corresponding to the share issue directed at Skarta Group’s current shareholders.
We view the potential corporate arrangement positively from Arvo’s perspective, as the convertible loan investment offers the possibility to convert the debt investment into shares of the new company if the conversion terms satisfy Arvo. At the same time, the liquidity of the investment would clearly improve with the stock exchange listing. However, in the event of a possible conversion, the cash flow Arvo receives from the investment will, in our estimation, clearly decrease, at least in the short term. An alternative is, of course, that Arvo does not wish to convert its debt investment into shares, in which case the cooperative would eventually get back the principal of its debt investment. Without knowing the outcome of the corporate arrangement, its final terms, and Arvo’s position, it is impossible to draw final conclusions at this point.
Today, we published an updated report on Arvo, which you can read freely here.
In conjunction with the report, we updated the parameters of our sum-of-the-parts valuation, which increased Arvo’s fair value before investment company discount and liquidity premium to EUR 102 million (previously EUR 99 million) or EUR 1,248 per share (previously EUR 1,211 per share). This was primarily due to the positive development of unlisted equity investments and Partnera’s approximately 30% share price increase compared to our initiation of coverage report. Currently, Arvo is priced on Privanet at approximately a 40% discount relative to our determined fair value. We do not consider the pricing of the share challenging, even though our determined fair value does not include an investment company discount or a liquidity premium.
Overall, last year was a year of stable development for Arvo, in line with its strategy. The cooperative’s objectives regarding the investment allocation remain unchanged, aiming for an equal distribution of wealth among asset classes (financial investments, regional investments, and national investments) by 2025. We expect Arvo to progress calmly towards its goal over the next few years and would be surprised if rapid changes occurred in the distribution (financial investments accounted for 61% at the end of 2020).
For Arvo’s target companies, last year was varied, and we expect the same to continue this year. However, overall, last year and the forecasts for the next few years turned positive for unlisted equity investments, which was also reflected in the market values we estimated for these investments. And during the spring, Arvo acquired a new significant investment target, contract manufacturer Leden Group. Leden Group was formed when Arvo’s relatively small regional investment LaserComp and its subsidiary Celermec merged with Ojala Group and Estonian Favor AS. You can learn more about Leden Group from our updated report, the company’s website, or here. Regarding unlisted debt investments, based on last year’s development, we do not see any significant financing risks.
Arvo announced yesterday that it has agreed to sell its stake in the national equity investment RealMachinery to Wihuri Oy. The press release did not disclose the transaction price, but in light of RealMachinery’s development in recent years, we do not believe that Arvo will record a significant capital gain from the sale. The transaction still requires the approval of competition authorities to proceed.
The cooperative’s investment period ultimately lasted less than 3 years, which is significantly shorter than Arvo’s typical investment period of 5-7 years. In our assessment, this was influenced at least by the interest of a suitable buyer candidate (it is generally slightly more difficult to divest minority investments). In addition, with the formation of the Leden Group in the spring (including Arvo’s significant role in this), it is possible that the cooperative wanted to reduce the weight of industrial investments in its portfolio.
We will get the next checkpoint on Arvo’s development in connection with the brief half-year review, which the cooperative has typically published at the turn of August-September.
Arvo’s semi-annual review has now been published and can be read here. The distribution of the group’s investment portfolio had not undergone significant changes by the end of June compared to our previous update. The cooperative’s result for H1 was EUR 4.5 million (2020: EUR 2.4 million), which included EUR 1.5 million in dividends paid by Arvo Invest Nordic and EUR 1.0 million in earnings from associated companies.
During the review period, several bridge financings were returned to the cooperative, and Arvo granted new bridge financing to one of its regional investments. At the end of June, bridge financings constituted approximately 15% (approx. EUR 7.5 million) of the portfolio of regional and national investments. According to the cooperative, the demand for loan investments has increased, which means growing cash flow returns for the cooperative in the coming years.
After the review period, Arvo divested RealMachinery and participated in Antell’s financing package. In addition, Arvo and Suomen Kuntakiinteistöt (Finnish Municipal Properties) have agreed on new construction-phase financing for the Oulunsalo major district’s daycare project. The press release did not disclose the size of the financing packages. Furthermore, the listing of Skarta Group, a target company in the regional investment portfolio, was completed, and Arvo’s EUR 2 million bridge loan was converted into company shares. We are not aware of any potential additional investments at this point. Based on the number of shares listed at the end of July and the current share price, Arvo’s ownership value is approximately EUR 6.8 million, so the investment appears excellent at least for now.
Regarding its outlook for the rest of the year, the cooperative stated that the economically vibrant operating environment in the Finnish SME sector also offers opportunities for a minority and loan investor like the cooperative. Arvo also stated in the release that it is actively exploring possibilities to facilitate trading in Arvo’s share after trading on Privanet’s unlisted securities platform was closed in June. For now, transfer applications where parties have agreed on the transfer among themselves are handled at the cooperative’s office.
Arvo announced on Friday that it has committed to being an anchor investor in a wind power project development (200 megawatts) in North Ostrobothnia. The project is backed by renewable energy project developer Semecon and investment company Korkia. Project development is financed with the help of Korkia’s investors, which also include Arvo. Arvo has committed to the project with a EUR 3 million investment.
In our opinion, the wind power project appears to be an initially interesting addition to Arvo’s investment portfolio, as market interest in renewable energy production investments is strongly growing. However, it is still difficult to assess the exact return potential or holding period of the investment at this stage.
We have published a new update report for Arvo, which can be read freely here.
We updated the parameters of our sum-of-parts calculation and added deferred tax liabilities to the calculation to reflect well-developed investments and the capital gains taxes that will eventually be realized from them. Despite this, Arvo’s fair value before investment company discount and liquidity premium rose to EUR 104 million (previously EUR 102 million) or EUR 1,266 per share (previously EUR 1,248/share). The positive development was mainly due to the well-developed Leden Group and Skarta Group investments (taking into account the latter’s sales). With the closing of Privanet, there is no trading venue or market price for Arvo’s share, making it difficult to comment on the share’s valuation at the moment.
