HKFoods as an investment

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580

Just as you mentioned, HKFoods is subject to the same laws as other listed companies, but the controlling power of the LSO Cooperative (LSO-Osuuskunta) is visible in the company’s decisions. I’ll nitpick a bit and point out that HKFoods does not buy animals from the LSO Cooperative. The contracts are between the company and the producer. A contract producer can also operate without being a member of the LSO Cooperative.

This is where I disagree with you. The cooperative’s will may be contrary to the interests of an ordinary investor. Let’s look back at the past. The company fell into a debt spiral because the investment in the Rauma poultry plant hit a major snag. The mountain of debt currently being cleared was partly built on birds that were practically bought straight into waste. The production lines didn’t work, and the birds had to be hauled directly to Honkajoki. Following the Rauma investment decision, producers had been given contracts for larger production volumes, so they invested in new poultry houses, and since broiler production is such fast-paced farming, the birds started coming in quite heavily. At this point, the company should have restricted production until the plant was in shape. This was not done. Here, one can wonder if the decision was in the company’s best interest or if the LSO Cooperative producers’ own interests influenced the decision. This is my own perception of the events. There are no sources for these claims, so it’s at the reader’s discretion.

As the controlling shareholder, the LSO Cooperative has dictated, through the producers’ voice, that meat processed by the company in Finland must be domestic. This policy is quite understandable, and given the cost of Finnish labor, it’s not worth processing foreign raw materials in Finland anyway. Now that HK Ruokatalo—after its era as the Baltic Sea region’s HKScan and the sale of all significant foreign operations—is once again HKFoods operating in the domestic market, one might wonder if the company’s crisis sales would have been different with a different controlling owner? In the end, all three domestic producer sectors—pork, beef, and poultry—remained.

If you invest in HKFoods, it’s good to understand that for the controlling owner, domestic meat production takes precedence over shareholder value creation for the retail investor.

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581

HKFoods’ board’s decision in December to return 5c has been questioned, as was also done last winter; it’s worth reading the criticisms from last February in this thread regarding the board’s proposal. Credit to the Inderes analyst for the neutral stance.

At the end of Q3, the company had about 200 MEUR in interest-bearing debt and about 39.6 MEUR in cash reserves. Additionally, there is a 20 MEUR hybrid loan. Of the 200 MEUR debt, about 85 MEUR is long-term leasing debt. Outstanding bonds (jvk) and other interest-bearing debt, such as commercial papers, thus amount to about 115 MEUR. The 5c capital return was about 4.5 MEUR. What should the board have done, what options were there, since the Annual General Meeting (AGM) had left that 5c decision to the board? The hybrid loan cannot be amortized, and similarly, the 85 MEUR in leasing debt probably cannot be paid down quickly. Buying back the bond with that sum at this stage is likely not possible; it will potentially be rolled over during 2026. Commercial papers could possibly have been reduced from 20 MEUR → 15 MEUR. Or they could have anticipated it already in the fall and raised only 15 MEUR in the new hybrid. Or left the money in the bank to generate about 1% interest income.

Assuming pessimistically that the interest rate on commercial papers is the same as the hybrid, i.e., 8% p.a., the saved interest expense for 2026 would have been 360,000 EUR. Leaving it in the bank, the 4.5 MEUR would have yielded perhaps about 50,000 EUR. EBIT (liikevoitto) forecasts for 2026 are 35-36 MEUR (Inderes and OP). The reduced interest expense corresponds to a change of about 0.04 percentage points in the EBIT margin or a 1% change in EBIT (EUR).

In Inderes’ estimate, financial expenses in 2026 are about 12 MEUR, while OP estimates about 10 MEUR. For 2027, the figures are respectively about 8 MEUR and 7 MEUR. The amount of debt is slowly melting away; the success of rolling over the 90 MEUR bond, perhaps already during 2026, is important. The price of the outstanding bond has recently moved above 105, so from that one can estimate that refinancing at a lower interest rate is hardly a problem. Repaying the hybrid is possible in 2028; should the company focus on this over the next couple of years?

During the coming spring, there will likely be discussion again about paying dividends/capital returns. If the company decides to return, for example, Inderes’ forecast of 7c, i.e., about 6.3 MEUR, the interest expense impact of this sum is a maximum of 0.5 MEUR. Is that sum material for a company with 1 billion in revenue? If depreciation is at the same level as investments, then a 35 MEUR EBIT leaves a buffer for debt repayment even after interest and the return. If the capital return endangers the company’s financing, then paying out funds to owners makes no sense. But if the return does not endanger the financing, then it has no significance; the share price will drop by the amount of cents paid out. This is the theory, at least—investors do not always act according to theory in the short term.

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582

HKFoods is very much the same kind of company it was before the merger with Scan (2007). In those years, revenue was indeed lower than it is today, but there were also more than 50% fewer shares. However, the company paid dividends as follows (it is possible that the 2025 level will be the new “normal,” i.e., half of the old):

24.04.2006 0.27
13.04.2005 0.29
23.04.2004 0.28
10.04.2003 0.27
16.04.2002 0.17
20.04.2001 0.07
583

Yes, that’s exactly how it was: HK’s market capitalization was 500 MEUR at the end of 2006 and 550 MEUR in 2007. At the latter point, the share price had already turned downward as a result of the debt burden and increased risks following the acquisition of Scan.

If the company can still improve slightly while gradually lowering its debt level, it could become a very defensive dividend machine, cf. half of the 2003-06 dividend mentioned above. There is still a way to go to reach the new strategic target of 5% operating profit, but it’s good that the target has been set there, as long as the net gearing target (below 80%) is also maintained.

The target is challenging, but there can indeed be very high-quality companies in the food industry, such as Cranswick Plc. Its roots are in a feed mill founded by pig farmers in Northern England, from which it has expanded into the entire pork and poultry food chain. Currently, Cranswick’s revenue is nearly 3 billion GBP, P/E is nearly 20, and the dividend yield is just over 2%. The operating profit margin has been approx. 7.5%, meaning the company is truly high quality, which is why its market capitalization is 2.7 billion GBP. Net debt is about 10% of revenue, so it is not debt-free either.

584

The current HK still has some quite good holdings left that are or could be valuable. The first that comes to mind is the Polish bacon unit, but then there are Kivikylä and Honkajoki as well. The latter are, of course, only about half-owned.

585

In my assessment, the assets you mentioned are not “good divestment targets” because they are already profitable as they are, and a sale transaction would not unlock any hidden value.

Historically, the divestments that have unlocked value (such as the Baltics and Denmark) were loss-making or had very weak profitability. For example, the sale of the Polish operations was evaluated over the summer, but the company stated that it didn’t get a sufficiently high purchase price for the asset. Poland is quite profitable, but in these deals, buyers often emphasize balance sheet-based valuations more than the stock market does.

My own view is that there are no significant value-unlocking divestment targets left.

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586

Yes, back in the day, an “overprice” was indeed obtained for Sokolow (a profit of EUR 67 million was recorded vs. book value), and dividends on top of that. The year was 2014. This is according to the February article from IS below. In the 2014 annual report, a gain of EUR 77.6 million and a dividend flow of EUR 8.3 were recorded for the transaction. These latter ones are likely the correct figures.

587

True, Sokolow was sold for more than its book value. However, it wasn’t an overpayment relative to earnings, as the sale price was likely just under EV/EBIT 10x, which is close to fair value for the company. The market reacted positively to the news, but it might have been more about easing balance sheet risks. Admittedly, I’m not that deep into this 2014 transaction, as I hadn’t even started as an equity analyst back then :blush:

My main point is that if the company were to sell a profitable business now at an EV/EBIT 9-10x valuation, it wouldn’t necessarily have a significant impact on the share price.

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588

According to the 2012 financial statement data, Sokolow’s figures in the 2012 annual report were as follows (i.e., these figures are half of the total revenue/operating profit, as the ownership was structured this way):

2012
Revenue 343.70 €
Operating profit 15.80 €

The 2014 annual report states that the total purchase price was EUR 178.7 million. So, with this, I get an EV/EBIT value of 11.31. This is, of course, cross-calculated using 2012 and 2014 figures, as reporting practices changed in 2013.

In this case, the larger rise in the share price followed logically only when they started paying a dividend of EUR 0.49 in the spring of 2015. It generated quite a bit of interest.

589

Sokolow was sold back in the day, as the analyst mentioned, to strengthen the balance sheet. Following the acquisition of the loss-making Swedish operations, the company found itself in a situation where it was carrying too much debt. Sweden was, however, a major purchase for the company. Sokolow was sold to the Danish company Danish Crown, with whom Sokolow was jointly owned (I don’t remember the exact ownership stake). Sokolow was a profitable unit, but something had to be sold (even then), and Danish Crown was a natural buyer.

Estonia’s Rakvere meat processing plant (Rakvere lihakombinat) was loss-making at the time of the sale, but the losses were largely due to pig farming. Pig farming was part of the meat processing plant, and this was apparently a legacy of the Soviet era. The company was acquired back in the day, sometime in the 90s after the collapse of the Soviet Union. The plant was quite new at the time and, in my opinion, a good purchase. Rakvere also contributed to the company’s results. Finland, Estonia, and Poland were profitable, while Sweden posted losses for a long time.

If we now think that the company is the same as before the HKScan era, this is not true, because a portion of HK Ruokatalo’s results came from Estonia and Poland. I personally see the company as being smaller now than it was 20 years ago. Of course, the domestic poultry segment is larger, but beef and pork have contracted correspondingly. Revenue is a poor metric for comparing company size across different decades because inflation increases revenue simply due to the rising costs of livestock procurement.

HKFoods’ growth prospects in the future are quite a bit worse than before. Previously, there was debt because growth had been bought. Now, debts are being paid off based on domestic growth.

And one further disadvantage of the sale of the Estonian operations is that it is no longer possible to shuffle meat between these two markets, for example, when there is a strike in Finland.

590

I only know of one year, 2012, when Sweden had a negative operating profit. In its own way, Sweden somehow kept the company afloat when the poultry investments in Finland failed miserably and the losses were substantial.

Of course, there is still a way to go from that “operating profit” to the bottom line, but that has not been reported. The years 2016–2024 for the various countries are still available on the website: HKFoodsin tunnusluvut

591

Buying the Swedish operations was a major risk for the company at the time, but it ultimately paid off. The Finns restructured the loss-making Swedish business into shape. HK Ruokatalo had experience in that kind of work because Simo Palokangas did an excellent job as CEO and got the near-bankrupt LSO back on its feet precisely by restructuring and taking the company public. I don’t remember everything by heart, but it was painful for the Swedes when the Finns made the decisions they didn’t dare to make themselves. Honestly, out of laziness, I can’t be bothered to look it up in the annual reports, but I believe the Swedish business was in the red for several years. And it’s true that Sweden was profitable when Finland was making a loss. It is also unfortunate that the Finnish poultry investment turned out the way it did, as it was a justified and smart investment. The goal there was to get much-needed additional capacity for the poultry side. The Rauma investment might have been made earlier if the company’s financial situation had allowed it (this is complete guesswork).

The company’s investments in Estonia, Poland, Sweden, Rauma, and many others have been good, but unfortunately, the debt-heavy balance sheet was poison once things didn’t go as planned. After Russia invaded Ukraine, grain prices rose, which forced producer prices up. On top of that, the rise in interest rates meant that all the ownership stakes built up abroad were lost. There has been some bad luck involved in this story as well.

592

Would HKFoods benefit from further divestments if such an opportunity arose? There is speculation that selling the stakes in Honkajoki and Kivikylä could significantly melt down the 115m in long-term interest-bearing debt—specifically, debt that is repayable within a year. According to an analyst, selling these assets would not affect the share price because their impact is already included in the company’s P/L estimates. True. Does the market still hold the view that there is too much debt? If so, then lightening the debt burden would lower the risk premium, and its impact could be greater than the decrease in net profit due to the divestments. Or what would be the impact of the divestments on the net profit when interest expenses also decrease?

According to forecasts, in 2027, financial expenses will be below 10m/year. Do they need to be below 5m for the company to no longer be considered too indebted? Or zero? When revenue is over 1 billion, is focusing on debt and interest expenses relevant with the current figures, meaning divestments do not create additional value? Or is the reason for the ”cheap” valuation the expectation of poor earnings growth potential, either the impossibility of volume growth or maintaining profitability?

The market price of a share is always correct or efficient at any given moment, just as it was a year ago, since when the share has returned approx. 70%. HK’s share price was at its bottom in August 2024, after which it has approximately tripled, taking into account the capital returns paid. Institutional investors have not bought HK shares at all between August 2024 and December 2025—though they haven’t sold either—but the small share of instos and funds on the shareholder list is somewhat interesting. The owners include two large pension investors, one pension fund, and one (1) mutual fund. At the end of December, among those on the list of the 30 largest owners, only Finnish private investors have increased their holdings since August 2024—not institutions, not nominee-registered owners. Will institutions only become owners once the numbers are ”in order”?

593

The market has indeed already spoken, meaning that 2024 bond has been steadily increasing in value on the German stock exchange. So originally it was a nearly 9.572% interest-bearing security, and if you buy now, you only get a bit over three. This is, however, a 90 million EUR loan amount. The most important thing is to maintain that profitability.

594

Yes, the bond price is a good indication that the company’s financing costs will decrease significantly; that is certainly one reason why the projected 2027 interest expenses could already be below 8m.

Of course, the bond’s current yield reflects its approaching maturity; the company won’t get its next 3–5 year bond at such a rate, but could it be 5–6%? It remains to be seen.

595

That’s a good point, that the market has spoken through the bond price. I don’t know if the bond price has risen because of buying activity, or if the yield has simply drifted down over time as maturity approaches and, in the absence of selling interest, this is the result. The investors in this bond are, of course, institutions, but this is still a completely different instrument than “ultimate subordinated debt,” i.e., equity. The investors in the bond and the hybrid bond rolled over last year are the ones the company approached hat in hand during times of crisis; in my view, they are different investors than the stock pickers scanning the markets.

On the list of shareholders, only retail investors have spoken, not institutions. It seems that for pension companies with tens of billions and funds with billions, it makes no sense to put a few million into the shares of an uncertain turnaround company, as the impact of any potential excess return on the total portfolio’s performance is negligible. When analyst coverage of the company is weak and other large investors haven’t made a move, going solo with an investment like this could, in the worst case, get you fired. This is what I mean by saying that institutions will become owners once the numbers are in order—if they do at all.

596

To pass the time on this holiday, I cross-referenced these HK owners from December 2015 and then 2025. Of course, the number of shares has changed during this period, and the same may have happened to organization names, etc.

It is indeed the case that Finnish funds and employment pension insurers have sold their shares (including the Swedes and HK itself), but they have been replaced by risk investors, and the old “loyalists” have increased their holdings (LSO, the Pharmacists’ Pension Fund, and MTK). Furthermore, the top 10 accumulators have bought 11.9 million additional shares, so nothing has been lost in this transition.

The funds will still have time to get on board when the share price is slightly over 3 EUR.

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597

The bond’s maturity is about 1.4 years, and an investor could currently buy it at a yield of approximately 3.5%. For comparison, for example, the German 2-year rate is 2.1%, so if that were used as a benchmark for the spread, HK would be paying a margin of about 1.4% on top of the risk-free rate.

The German 5-year rate is about 2.45%, so what would HK’s 5-year risk be? 2.5–3.5%? Thus, we could indeed be in the 5–6% range at these interest rate levels.

The current 3-year bond was priced pretty much at the 3% interest rate level, so at that time, investors felt a premium of just over 6.5% for a three-year bond was sufficient.

One more note on the pricing of the current bond: the interest rate level has fallen by about one percentage point, which also has an upward effect on the secondary market price.

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598

That has probably happened over the course of 10 years. The 10 largest owners now hold approx. ½ of all shares (approx. 47m shares). In 2019, there was a share issue where approx. 28m new shares were created. If we assume that even then the 10 largest owned half, then 14m new shares went to the top 10 owners through the issue. I believe the top 10 accumulators for 2015–25 increased their holdings through the issue, not from the secondary market. And over the last 1½ years, owners categorized as institutional investors haven’t added a single share.

That might indeed be the case if the company further improves its profitability and financing costs decrease. The company’s management has done a very good job over the last couple of years; it’s hard to believe that the improvement in profitability would be risked by the company’s own (poor) actions in the near future.

600

Improved profitability (albeit still not as good as competitors) and attractive valuation! @Pauli_Lohi and @Pia_Maljanen discuss the case.

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