Lassila & Tikanoja

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How many years has this been awaited :rofl:

Inside Information: Lassila & Tikanoja initiates planning for the separation of its circular economy and property services businesses and a profit improvement program

Lassila & Tikanoja Plc
Inside Information
13 December 2024 at 8:00 a.m.

Inside Information: Lassila & Tikanoja initiates planning for the separation of its circular economy and property services businesses and a profit improvement program

The Board of Directors of Lassila & Tikanoja Plc has decided to initiate planning for the separation of the company’s circular economy businesses, i.e., Environmental and Industrial Services, and property services businesses into two independent listed companies. The aim is to separate the circular economy businesses into a new listed company through a partial demerger of Lassila & Tikanoja Plc.

According to the Board’s assessment, the separation of the circular economy and property services businesses could increase shareholder value by enabling both businesses to more effectively implement their own strategies and growth opportunities.

Lassila & Tikanoja’s Board of Directors estimates that the planning for a potential partial demerger will take approximately 12 months, and planning will commence immediately. A potential partial demerger and the listing of the circular economy businesses are conditional on the approval of an extraordinary general meeting of Lassila & Tikanoja Plc.

“Lassila & Tikanoja’s Board of Directors is convinced that the separation of the circular economy and property services businesses would enable long-term shareholder value growth by providing both businesses with better conditions and focus for implementing their strategies,” says Jukka Leinonen, Chairman of Lassila & Tikanoja’s Board of Directors.

Lassila & Tikanoja launches an efficiency program aimed at improving profitability

Lassila & Tikanoja renewed its operating model during 2024. As a continuation of the operating model work, an efficiency program aimed at improving profitability will be launched at the beginning of 2025, targeting both circular economy and property services businesses. The efficiency program aims for an annual profit improvement of at least 8 million euros by the end of 2026 compared to the 2023 level, taking into account the cost impact of the two separate listed companies resulting from the partial demerger.

“The efficiency program focuses, among other things, on simplifying processes and improving the efficiency of direct and indirect procurements and equipment utilization. The overall objectives of the efficiency program are based on the company’s management’s preliminary plans. No targets or measures related to potential reorganizations have been decided,” says Eero Hautaniemi, CEO of Lassila & Tikanoja.

Reportable segments will change from the beginning of 2025

From January 1, 2025, Lassila & Tikanoja will have three reportable segments: Circular Economy Business, which consists of the current Environmental Services and Industrial Services business areas, as well as Property Services Finland and Property Services Sweden. The change in reporting structure will affect Lassila & Tikanoja’s financial reporting from the first quarter of 2025 onwards. Restated comparative figures with the new segment structure will be published before the release of the first interim report of 2025.

And significant write-downs in the same bundle

Inside Information: Lassila & Tikanoja makes total write-downs and provisions of approximately 28 million euros related to its Swedish property services business

Lassila & Tikanoja will make total write-downs and provisions (before taxes) of approximately 28 million euros related to its Swedish property services business in its fourth-quarter 2024 reporting. The entries will be reported as items affecting comparability.

The revenue and operating profit development of the Swedish property services business has been weaker than anticipated. Based on regular impairment testing, an impairment loss of approximately 23 million euros will be recorded for the goodwill of Property Services Sweden. The impairment will be recorded in the fourth-quarter 2024 results and will not affect Lassila & Tikanoja’s cash flow or adjusted operating profit. The carrying amount of goodwill related to the Swedish property services business after the entry is approximately 9 million euros.

In addition, Lassila & Tikanoja will record provisions totaling approximately 5 million euros related to loss-making customer contracts and disputes in Property Services Sweden. The provisions for loss-making contracts relate to two public sector customer contracts, where future expenses are estimated by Lassila & Tikanoja to exceed the expected revenues from the contracts. The provisions will be recorded in the fourth-quarter 2024 results and will not affect Lassila & Tikanoja’s cash flow or adjusted operating profit.

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It would be interesting to know if there have been any tire-kickers (potential buyers) during the strategic considerations, but no agreement has been reached on the price. In that case, it’s certainly good that they haven’t been willing to give up Real Estate Services at a bargain price at the bottom of the cycle. Who knows, the market probably had a hunch that there haven’t been many buyers around, judging by the share price development.

By the way, where do your calculations @Rauli_Juva stand regarding the value of Real Estate Services after that 23 (there’s an error in the press release title and the remaining 5 million are provisions) million write-down? Your previous estimate was probably around 70 million; it would probably be too straightforward to calculate 70-23=47 :slightly_smiling_face: You must have, however, taken into account the continuous problems in Sweden in your analysis, right!?

Furthermore, overall, I’m not sure how to react to this news. The long-awaited demerger is happening, but seasoned with write-downs; it’s certainly good that the company finally admits that the expansion into Sweden hasn’t gone smoothly. It might also be easier to get rid of Real Estate Services as a separate company once the market first prices it on the stock exchange, I just fear that it will become an outcast and all efforts will shift to Environmental Services. These strategic considerations and the demerger also come with a price tag; one could imagine that external advisors have also been used.

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@Iikka has been quick and has already made a tweet thread about this latest news from L&T. :slight_smile:

https://x.com/IikkaNumminen/status/1867461737890378075
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The rest of the tweet thread

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Indeed, we don’t have anything close to balance sheet values or fair value estimated based on them for Sweden. 90 MEUR was a ballpark estimate in the most recent report for the entire Real Estate Services business, with 25 MEUR for Sweden, and today’s announcement does not contain information that would significantly change those. Below is a more thorough morning comment.

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Behind a paywall in Kauppalehti, an article about the morning’s news, because @Rauli_Juva’s opinion should be known to forum members, I will only quote the comments of S-Fennon Senior Portfolio Manager Juha Varis:Lassila&Tikanoja pohtii jakautumista – Salkunhoitaja: ”Ei kovin hyvä idea” | Kauppalehti

S-Bank’s Senior Portfolio Manager Juha Varis points out that the division of a small listed company into two even smaller companies creates its own costs. Lassila&Tikanoja’s market value is approximately 320 million euros.

“I don’t think the proposal is a very good idea at this stage,” he tells Kauppalehti.

Another problem is how interesting the parts of the divided company are separately, Varis says.

“If one part of the company interests very few, then I think it would be good to ask if it’s worth dividing it then. If the management and board cannot find a solution they like, then is it worth giving this as a nuisance to shareholders?”

P.S. Added the word “Senior” to Juha Varis’s title, just in case he happens to read the Inderes forum :slight_smile:

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Well, they managed to make a sensational confrontation out of this in the headline :slight_smile:
The reasonableness of the division, of course, depends a bit on the angle from which one looks at the matter; for an institutional investor, splitting such a small company is certainly not sensible.

This is indeed a big challenge; it’s difficult even for myself to see Kiinteistöpalvelut (Property Services) as a very interesting listed company, but on the other hand, there are many such companies on the lists even today about which I could say the same, and their size isn’t necessarily impressive either. And as I mentioned in the comment, I believe that L&T is still very open to selling operations, so this could partly be a way to extend the sales process alongside the division.

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This could be a very accurate analysis, which also crossed my mind. One could assume that capital markets will be in a more favorable position already next autumn, for example, and interest rates have continued to fall, which could attract buyers in a different way and perhaps there would be room for an increase in valuation multiples. Of course, it would be good to get at least some signs of that turnaround in Sweden’s results; perhaps all contracts will be put on a more sustainable footing at the turn of the year, and will that write-down have a capital-return-boosting effect in the future, assuming, of course, that Sweden manages to turn a profit @Rauli_Juva !?

Repeating myself, this separation will in any case incur costs, regardless of the outcome. Hopefully, they will remain in six figures, though.

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Unfortunately, agreements cannot be renewed all at once; it’s a huge undertaking (which is done continuously), but this certainly gives a little extra time for the turnaround in Sweden, which could be assumed to be the biggest problem for selling operations (at a reasonable price). After writing the morning comment, I also noticed that the 5 MEUR provision made for Sweden partly covers future liabilities from loss-making contracts, which, by my logic, thus improves the results for the coming years (or for how long those contracts are still valid), so a small technical earnings improvement measure was also adopted.

The goodwill write-down naturally also improves capital returns on paper (if/when the result is positive), but hardly any potential buyer would focus on that. From L&T’s perspective, it can be stated with quite good certainty at this point that the Veolia FM acquisition made in Sweden in 2017 (70 MEUR) has been value-destroying for shareholders. At that time, of course, there was a completely different management in the company, so while there was previous criticism towards CEO Hautaniemi, this deal is not his responsibility.

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Antti Leinonen has written a good and relatively comprehensive article about L&T :slight_smile:

In 2003, L&T’s revenue was 306 million euros, and two decades later, it was 802 million euros. At that time, the company’s operating profit was 36 million euros, and last year it was 39 million euros. Revenue has thus grown at an annual rate of about five percent, but operating profit has practically remained stagnant.

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Jussi Halme has made a video about Lassila & Tikanoja :slight_smile:

Lassila & Tikanoja, one of Finland’s leading circular economy companies, has announced that it is considering splitting into two separate listed companies. How will this affect the future of the stock?

The video reviews the company’s challenges, such as its loss-making operations in Sweden and weak stock performance. Can the new circular economy company benefit from the megatrends of the green transition and create long-term value for investors? Is now the right time to buy Lassila & Tikanoja shares, or should one wait for the split to materialize?

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It’s not an easy market for big, old players in the property maintenance business. Has there been discussion here about PHM Group’s expansion and possibly Alltime as another player aggressively seeking nationwide expansion through acquisitions? PHM Group at least succeeded in consolidating its position over the last 5 years. They have certainly brought and are bringing a lot of competition to the industry. Another point is that when these players have expanded through acquisitions, local entrepreneurs have started competitive operations again once non-compete clauses have expired. In my opinion, the property services sector has a very low barrier to entry for competition, and in my view, the advantage is inherently with small, local, entrepreneur-driven players, as large players accumulate middle management personnel and operations become rigid.

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@Rauli_Juva still managed to drop the target price by the end of the year; the add recommendation remains. At current levels, a somewhat certain growing dividend level already guarantees some kind of return (editor’s note):

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If only we could get more positive news like this. L&T has developed a broad patent for industrial maintenance and reported on the matter on 31.1.2025:

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A somewhat insignificant quick news from Kauppalehti, just to refresh the memory that SEB also follows Lassila & Tikanoja: SEB lowers Lassila&Tikanoja’s target price to 9.4 euros (previously 9.7 euros)

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L&T mentioned, yippee :slight_smile: , something will come of this, even if it’s not a groundbreaking matter: Hangon rannikolta löytyneet valkoiset rakeet ovat peräisin Nesteen merikuljetuksesta - Neste

Neste has acquired efficient Lassila & Tikanoja mechanical cleaning equipment for Hanko. Neste also orders cleaning personnel from L&T for locations where machines cannot access, such as rocky beaches.

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Here are Rauli’s pre-earnings comments as L&T publishes its Q4 results on Thursday. :slight_smile:

We expect the adjusted operating profit to have been roughly at the same level as the comparison period. Regarding this year’s outlook, we expect the company to guide similarly to 2024, meaning revenue will be at the same level and adjusted operating profit will be at the same level or better.

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Eero’s team got the result out, the write-downs were already known, the adjusted operating profit for the last quarter looks good, despite that, Swedish property services are still a headache: Lassila & Tikanoja Oyj:n tilinpäätöstiedote 1.1. - 31.12.2024 | Kauppalehti

  • The revenue for the last quarter was EUR 194.2 million (200.9). Revenue decreased by 3.4%. Adjusted operating profit was EUR 10.5 million (6.9) and operating profit was EUR -18.4 million (6.4). Earnings per share were EUR -0.56 (0.13).
  • The operating profit for the last quarter was burdened by write-downs and provisions totaling approximately EUR 27.5 million related to the Swedish property services business. These entries have no cash flow impact and are reported as items affecting comparability.
  • The revenue for 2024 was EUR 770.7 million (802.1). Revenue decreased by 3.9%. Adjusted operating profit was EUR 43.2 million (37.9) and operating profit was EUR 9.8 million (37.3). Earnings per share were EUR -0.05 (0.77).
  • The net cash flow from operations after investments for 2024 was EUR 40.8 million (50.9) and net cash flow from operations after investments per share was EUR 1.07 (1.33). Net cash flow from operations was weaker in the first quarter compared to the reference period. In other quarters, net cash flow from operations after investments clearly strengthened compared to the reference year.
  • The company’s Board of Directors has decided to initiate planning for the separation of the company’s circular economy businesses, i.e., Environmental and Industrial Services, and property services businesses into two independent listed companies. The aim is to separate the circular economy businesses into a new listed company through a partial demerger of Lassila & Tikanoja Oyj.
  • The company has decided to launch an efficiency program at the beginning of 2025 aimed at improving results, targeting both circular economy and property services businesses. The efficiency program aims for an annual result improvement of at least EUR 8 million by the end of 2026 compared to the 2023 level, including the cost impact of the two separate listed companies created by the partial demerger.
  • The Board’s proposal for a dividend is EUR 0.50 per share, which corresponds to approximately 46.8% of the net cash flow from operations after investments for 2024.

Outlook for 2025

Revenue for 2025 is estimated to be at the same level as the previous year, and adjusted operating profit is estimated to be at the same level or better.

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Breaking news, don’t miss this, link to the webcast starting at 10:30 AM: Lassila &Tikanoja Oyj, Financial Statements Release 2024 - Inderes

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And @Rauli_Juva also seems satisfied: Lassila & Tikanoja Q4’24 -pikakommentti: Vahva tulos, odotetun kaltaiset näkymät - Inderes

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Rauli has completed L&T’s company report. :slight_smile:

L&T’s Q4 result was strong, as almost all segments improved from the comparison period and exceeded our expectations. The guidance for this year was as broadly expected, and we slightly raised our forecasts for this year. We still see the company as moderately valued (P/E 11x).

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