NYAB - Infrastructure and Specialist Builder

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Here is a dedicated thread for Skarta, in case there are others on the Forum who are interested.

From Skarta’s website:
"Skarta is a builder of a clean future with decades of experience in demanding construction projects.

Skarta’s current business focuses mainly on carbon-neutral industrial and energy projects in specialized construction. Skarta leverages its strong position in the Norrbotten region of Northern Sweden, where planned investments related to carbon-free industry for the coming decades amount to tens of billions of euros. Our goal is to expand our operations in the value chain of wind power, solar energy, and hydrogen solutions toward comprehensive clean energy projects, where we see excellent growth opportunities. We aim for profitable growth and see excellent growth opportunities in all our business areas in Finland and other Nordic countries."

Skarta entered the stock market… shall we say, by reversing in. That is, through a share swap with Privanet, and Privanet changed its name to Skarta :slight_smile: Well, here the listing costs are, so to speak, small, and at the same time, Privanet’s losses can be offset by Skarta, which will likely reduce tax payment needs in the coming years.

The company prospectus (https://skartagroup.fi/wp-content/uploads/2021/07/Skarta-Group-yhtiöesite-.pdf) mentioned that the order backlog was over 60 million, and Kauppalehti mentioned that at the end of June it was 70 million (https://www.kauppalehti.fi/uutiset/miljoonia-on-tullut-ja-mennyt-privanetin-syoneen-skartan-takana-on-mies-jonka-liikkeissa-on-dekkarin-ainekset/38182656-c4e6-4f3b-b84f-0ad2a71b5bfe); presumably the LKAB project came after the prospectus (https://skartagroup.fi/skartalle-10-miljoonan-euron-tilaus-lkablta/). Since June, at least a couple more projects have come in (https://skartagroup.fi/skarta-alkaa-rakentaa-tuulipuistoa-puhurille-kolmas-yhteinen-hanke-puhtaan-energian-markkinoille/ and https://skartagroup.fi/skartalle-uusi-projekti-metsa-groupin-biotuotetehdastyomaalla/).

The company’s management and board have significant ownership in the company. The board is led by Markku Kankaala, a well-known figure from Enersense. The company’s weak period was around 2017-2019 when the CEO started to run out of steam and “outside labor” was hired for management. The board and management should be in good shape following the changes in 2019-2021.

The share is currently being weighed down by a 2 million loan that Arvo Sijoitusosuuskunta converted into shares. They have been selling through Nordea every day at least since the summer. At the end of September, they still had 11,796,546 shares, so they won’t run out anytime soon.
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The Board of Directors of Skarta Group Plc has approved the company’s medium-term financial targets and the main outlines of the new strategy for the strategy period 2021–2024.

“Skarta aims for strong growth in the coming years, both organically and through acquisitions. The company’s Board of Directors has set a medium-term financial target of at least 300 million euros in annual revenue and a 10 percent EBITDA margin by 2024.” (full release: https://www.inderes.fi/fi/tiedotteet/skarta-group-oyjlle-uudet-taloudelliset-tavoitteet-ja-strategian-paalinjaukset-toimintaa). For this year, the target for the full year is 70–80 million euros in revenue and about five million euros in EBITDA (they probably use EBITDA to describe the business due to large depreciations).

The wind power project pipeline can be followed on the https://tuulivoimayhdistys.fi/ website. There are currently just over 800 turbines in Finland, and Skarta has been involved in about 100 turbine construction projects at some level.

The share can also be significantly diluted: “The Extraordinary General Meeting of Skarta Group Plc held on 30 September 2021 decided to authorize the Board of Directors to decide on the issuance of a maximum of 100,000,000 shares through a share issue or by granting stock options or other special rights entitling to shares in one or more installments.” (full release: https://www.inderes.fi/fi/tiedotteet/skarta-group-oyjn-ylimaaraisen-yhtiokokouksen-paatos)

The Privanet deal also brought along a bunch of small stakes in unlisted companies, about which I won’t bother to say more than that some of them actually made a small profit… most will likely go bankrupt. Though some interesting ones were found.

List of companies here:
Company / Number of shares / Ownership stake
BCaster Oy / 68,519 / 1.61 %
Before Holding Oy / 13,388 / 49.63 %
Buddy Healthcare Ltd Oy / 4,559 / 8.36 %
EKOGRID Oy / 27,097 / 0.68 %
Emergence Oy / 2,005 / 0.13 %
Euroeat Oy / 21,710 / 3.17 %
Fly Nano Oy / 7,500 / 6.22 %
FusionLayer Oy / 753 / 3.47 %
Golfhubber / 353,878 / 0.63 %
Imagine Intelligent Materials Limited / 405,351 / 5.58 %
Monttu Ventures / 10,000 / 1.35 %
Neolitics Inc. A-share / 5,371 / 0.44 %
Osuuskunta KPY / 100 / 0.00 %
ProtectPipe Oy / 111,912 / 3.73 %
Proventia Group Oy / 2,000 / 0.00 %
Sagasystem As / 120 / 4.62 %
Siltaraha Oy / 316,359 / 25.27 %
Somesoft Oy / 962 / 13.63 %
Splizzeria Oy / 53,335,990 / 12.18 %
Spotless Tea Bag Oy / 120 / 0.05 %
St1 Nordic Oy / 16,668 / 0.04 %
Suomen Energianeuvonta Oy / 3,707 / 0.01 %
Tracegrow Oy / 93,886 / 2.95 %
Zeropoint / 4,688 / 3.07 %
Zsar Oy / 36,759,456 / 7.93 %

The valuation picture is challenging at the current price and result, and measured by P/E, it will certainly remain challenging for the near future due to the amount of depreciation. However, the company is positioned quite well in the market and has a management that seems competent. I wouldn’t, however, fully buy into the stories of even credible management until there is some track record with the new structure. The old Skarta grew quite well over the last couple of decades until those problems mentioned earlier emerged during those specific years.

I would rather estimate this for 2024 with 220 million in revenue and 20 million in EBITDA. I believe that reaching that is very possible if you look at the pace of contracts that has emerged recently. The company’s market cap is about 141 million, relative to which that would seem reasonable if there is growth visibility in the pipeline for 2024 as well.

On November 5th, we will know more when the Q3 business review is released.

Disclaimer:
I own shares in the company, I bought today, I may sell whenever I feel like it and without telling anyone if I change my mind or if information comes out that makes me sell. There may be errors in the information (certainly at least typos), so read the company prospectus yourself. This is not an investment recommendation; read the company information (as there is no analysis available) and make good stock picks.

ps. I don’t want the fate of @timontti; I am too young to be crucified.

Edit: I didn’t bother copy-pasting the whole website here because you should look into the company’s site anyway… hardly anyone actually invests based solely on forum information. Similarly, the prospectus should be read; there is good information there :slight_smile:

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Good analysis of Skarta :slightly_smiling_face:

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Skarta Group

Skarta Group Oyj

Skarta Group Oyj Acquires Sitema Oy’s Share Capital Through Share Exchange and Strengthens its Expertise in the Value Chain of Clean Energy Projects

18.10.2021 09:00:00 EEST | Skarta Group Oyj | Company Release

Skarta Group Oyj
COMPANY RELEASE, INSIDE INFORMATION
18.10.2021 at 9:00 AM

Skarta Group Oyj Acquires Sitema Oy’s Share Capital Through Share Exchange and Strengthens its Expertise in the Value Chain of Clean Energy Projects

Skarta Group Oyj, a builder of a clean future, has signed a share exchange agreement on October 18, 2021, according to which it will acquire the entire share capital of Sitema Oy. To implement the share exchange, a directed share issue will be arranged for the current shareholders of Sitema Oy, in which 10,112,756 new shares of Skarta Group Oyj will be issued. The subscription price per share in the share issue is 0.51 euros, which corresponds to the trade volume-weighted average price of Skarta Group Oyj’s shares for 30 days before the signing of the share exchange agreement. The share issue will be paid entirely as in-kind contribution with Sitema Oy’s shares, the value of which has been defined as 5.175 million euros in the share exchange agreement.

Sitema Oy is a company owned by its key personnel, founded in 2018, providing design and expert services for electricity grids, renewable energy solutions, real estate infrastructure, and telecommunications. Thanks to its digital solutions, the company is able to serve its customers in real time regardless of location. Sitema Oy has 35 employees, and its domicile is Oulu.

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https://www.inderes.fi/fi/tiedotteet/aku-valiaho-skarta-group-oyjn-talous-ja-rahoitusjohtajaksi-112022-alkaen

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Yes, it feels like there’s some buzz going on in the company. The next few quarters will be interesting to see if this really moves in the direction it seems to be heading and what has been promised.

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Skarta’s 2021 revenue forecast is approximately €75 million. Enterprise Value/Revenue = 1.9.
If I calculated correctly, Skarta is valued at approximately 3X-6X the price compared to Consti or YIT!
With 150 employees, the EV/employee = 144.7 / 150 = €964k revenue per employee, which in my opinion is quite a lavish valuation.
If Skarta aims to achieve a €300 million revenue target in 2024, it requires approximately 50% annual growth compared to the 2020 revenue level, which is a challenging growth rate for many companies.
The operations are unprofitable.

I am not a construction professional, but in light of the numbers, Skarta’s valuation seems quite full, even looking ahead to 2024. Do you agree or disagree?

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Hi! Good point, and you’re on the right track regarding valuation, but I’d consider this case more like this:
If one wants to analyze key figures through personnel count, I would use Revenue/person instead of EV/person, because the company has projects in its order book that do not directly depend on the number of employees at that moment, and they still have some calculated revenue + operating margin. A few years ago, I worked for an infrastructure construction company, where the target was 1.5 million euros in revenue per project management person (a large company with a non-aggressive growth target at the time. Heavy fixed costs due to organizational structure). However, such a target is quite theoretical thinking, as jobs cannot really be chosen due to tenders, at least if profitability is to be maintained. In construction contracting, there is hardly any pricing power in this sense.

50% growth is not, in my opinion, a realistic goal if we look even a bit further ahead. Even if the market is hot and growing fast now, there probably wouldn’t even be enough to buy, even if pockets were bottomless. Almost every construction company is now busy with wind farms, etc., and competition will surely remain until the market cools down.
However, whatever the 2024 revenue, I would grant a medium-sized and well-performing company in this sector 6-8% of operating profit from revenue. 2024 revenue of €170 million and a profit of, for example, €12.5 million, I would consider a very, very optimistic scenario, and in that case, I would accept the current valuation of about €180 million. Taking into account the uncertainties, I think there is a poor return/risk offered for a long-term investment.

P.S. As comparables, I would rather use Dovre and Kreate.

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Management and the old owners bought considerable amounts at these prices.

Would they really be completely adrift with those purchases?

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In my understanding, Skarta is still a construction company, even though there’s plenty of fancy marketing talk. The foundation there is still in line with the old Maastorakentajat, which is now trying to boost itself as a “builder of future energy.” There are certainly dynamic individuals behind the scenes, but there seems to be very little happening. For me to understand this level of valuation, it would need to show something more than just construction activities, and that it also leaves something on the bottom line. I would perhaps compare it to Kreate in terms of its current operations.

Compared, for example, to the booming wind power construction, Skarta’s activity seems quite minimal. If I counted correctly from the news, Skarta (or the old Maastorakentajat) has started work on a total of 32 turbines this year. Compared to Dovre’s subsidiary Suvici, mentioned by Tsaver, the corresponding number based on news is 116 units. This is just one example, and there are clearly other bigger players in the wind power boom than Skarta currently. Everyone should check the numbers themselves, but these are what I calculated.

A 6-8% result for a construction company in these circumstances is already a very strong performance. And at least previous years for Skarta do not indicate that this would be easily achievable.

More acquisitions are certainly coming, and what they will be is a good question. The Sitema acquisition was very surprising, and for me, at least, a big question mark remains about its purpose.

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Forecasting the valuation for 2024 is difficult, and I agree that in the shorter term, the valuation is at least full.

I personally approach this case more with scenarios. I’m on an autumn holiday trip so I don’t have my notes with me right now, but illustratively, it was something like this:

Roughly, if the company barely grows but becomes profitable, there’s half the air in the valuation (bear case?) (-50%?).
If the company reaches a turnover of 220 million with a reasonable margin, there’s room for upside in the stock, just off the top of my head, 100% (I don’t remember the exact calculations by heart) (base case?).
I don’t believe they will achieve their turnover or profitability target, but if it were to somehow succeed and fairy dust were sprinkled on every project, it would likely happen through very profitable acquisitions (extreme bull case?) and then there would be 200% upside.

From there, it’s about weighing the scenarios to see if it’s worth the risk or not. It’s not cheap, but in my opinion, it also has potential at its current valuation. We’re still operating a bit in the fog here, but I’ll look at it quarter by quarter and change my mind if it looks like it. As comparables, I would rather use Dovre and Kreate, as @Tsaver does, than giant behemoths.

There are still many question marks. The company is just going through a quiet period, so we won’t get answers to them yet. At least one was about their involvement in building 1/8 of Finland’s wind turbines, and an estimated 800 more turbines would be added by 2024, so how do they intend to get involved in more than one in eight projects, because at that project pace, they won’t reach their targets. And if the answer is with fairy dust and cotton wool, then I don’t believe it, nor do I include it with any weight in the scenarios. If the answer is credible, however, I will give it some weight.

I also looked at the competitive situation, and there’s plenty of it. I went through all the construction permits for this and next year and looked at who is doing what, and for whom, and there is indeed a considerable array of builders. I don’t remember the names of a couple of competitors that I found most interesting, but one was an NCC spin-off and the other was a joint venture of energy companies. A similar company to this one was also founded in Oulu in 2018, I just don’t remember its name either.

Most importantly, however, when considering the whole case from an investment perspective, once you’ve drawn up a reasonably fair current valuation risk/reward roadmap for your own assessment of the company, for example, up to 2024, it’s whether the company follows it or not. If the company repeatedly exceeds or falls short of my estimate, then I will likely have to update my estimate and look at the matter in light of new information.

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I personally see insider purchases as a positive indicator, but I don’t really use it for anything other than to make myself feel good that, in a good scenario, I might be on the right track.

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I’ve recently been looking for interesting companies in the renewable energy sector to add to my portfolio. OX2 is the only one that has made it into my portfolio so far, and it has been doing well lately, probably due to the news about the energy crisis.

Skarta’s business should be looked at beyond wind power. They are involved in more traditional infrastructure sectors, as you can read on their website, and wind power is currently only a part of Skarta’s business (albeit an increasingly larger part).
In addition, I find the Vierivoima concept interesting. It involves producing energy close to where it is consumed. This sounds quite good, especially now that electricity prices have risen sharply. The concept should be of great interest to large energy consumers, such as industry, municipalities, and also anyone who cannot easily access an electricity connection. The forms of production are wind and solar power, which Skarta is already implementing.

In renewable energy, it is worth looking at how its production is evolving from current practices. Wind power is moving offshore, solar power is becoming part of wind farms, so-called hybrid parks, etc. And from there, try to pick out those factors that have future potential and competitive advantage. OX2 ended up in my portfolio, for example, because they are already the largest wind power developer in Europe, but they have good capabilities to move offshore in construction projects, meaning there will be plenty of volume far into the future.
Skarta is seeking differentiation from the rest of the pack with this Vierivoima concept. We’ll see if it’s a winner.

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Q3 business review out: https://www.inderes.fi/fi/tiedotteet/skarta-group-oyjn-liiketoimintakatsaus-17-3092021-uuden-strategian-toteuttaminen-ja

Regarding key figures, I’m looking at continuing operations so that private equity doesn’t distort the picture too much
Revenue 9 months (1000 EUR): 51,989
EBITDA 9 months (1000 EUR): 3,335
EBITDA % 9 months: 6.4%
Net profit for the period (1000 EUR) 9 months: 2,730
EBIT % 9 months: 5.3%

For the group, I’m interested in
Equity/share, EUR 0.18
Solvency ratio: 70.6%

The Group’s untaxed order book totals 57 million euros.
Intangible assets primarily consist of group goodwill, which amounted to approximately 33 million euros in connection with the share exchange implemented in July. So there’s plenty to depreciate for years to come.

Regarding the Sitema acquisition:
Sitema Oy has 35 employees and aims for a turnover of 3.6 million euros and an operating profit of over 0.5 million euros for the current financial year. The share issue was paid entirely as a contribution in kind with Sitema Oy shares, valued at 5.175 million euros.

Thus, it would appear that Sitema operates with a higher margin than the rest of the business on average, and the price was not unreasonable in relation to profit and profitability, though not super cheap either. It will slightly improve next year’s figures if the trend continues.

Referenced from the CEO: guidance remains
“In line with the Group’s typical business cycles, projects are completed before winter arrives, so the business result is weighted towards the end of the year and the result for the first three quarters is well in line with the guidance provided.”

For the current year, my estimate of PE 30 is expensive; the growth slope determines the earning potential. In my opinion, inorganic purchasing power is sufficient in the short and medium term. For next year’s “required” revenue level, a little over half is now in the order book.

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Was a profitable result a negative surprise in some way?

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No way, a small exchange works wonders :slight_smile: and only OP sells properly, others are net buyers…

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Yesterday’s business review was, in my opinion, exactly as expected. It confirmed the development they had predicted for this year. Perhaps the lack of a “positive earnings revision” (posari) caused the stock to slide, and the moon’s alignment was simply unfavorable.

A big plus I see in this company is the large ownership stake of the management. Usually, when operational management has significant ownership, decision-making is flexible, and they are keen on achieving growth.

And as a disclaimer, I also own shares in the company.

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As a former owner of Privanet, who at one point divested their shares, I have now reviewed Skarta more closely. I haven’t been involved in this change, and @anttirs’s excellent opening post helped me get a better grasp of the saga.

The construction industry as an investment target is not necessarily that appealing, given the struggles of SRV, YIT, and Lehto. However, Skarta has its own clear area of expertise and focus, which allows it to gain a small edge in the market. Additionally, the transition phase in utilizing wind and solar energy provides support. As previously stated, there are many players vying for a share of the pie, so margins remain smaller than desired.

But, for example, comparing it to Dovre, Kreate, or even Solwers as a provider of expert services adds value to the overall picture and specifically improves profitability compared to basic bulk operations.

In my view, Sitema specifically offers better profitability and synergy to the overall business. @UpandDown, could you elaborate a bit on why you found this acquisition surprising?

Dilution is to be expected, but it will presumably target new acquisitions. The authorization is now in place, so a separate general meeting is not required when a suitable acquisition target comes along. Listing specifically opens up better opportunities to utilize one’s own shares as part of the payment. If dilution occurs, the company’s value will also presumably rise, and for my part, this is entirely justified when the acquisition valuation is correctly assessed. With Skarta’s current valuation, using own shares for acquisitions is, in my opinion, profitable and even value-adding.

There are still many risks to be seen here, for example:

  • The lingering legal actions of Privanet and potential disputes over the corporate restructuring
  • Various insider risks and arrangements; will similar practices continue as a listed company?
    – IPO prosp, p 59-> https://skartagroup.fi/wp-content/uploads/2021/07/Skarta-Group-yhtiöesite-.pdf
  • The construction industry, potential post-payments,
    – e.g., The adjusted operating profit includes a one-time write-down made during the 2020 financial year, which concerns a contract made in 2017 for the completion of the Mt167 Lahti southern access road project and resulted in a loss of 2.3 million euros for the company.
  • Dilution through share issues, this is of course +/- depending on the implementation.

At this pricing, I’m not making any major purchases yet, especially considering the selling pressure of approx. 10M remaining shares from Arvo Sijoitusosuuskunta (Arvo Investment Cooperative), but I will add Skarta to my watchlist.

So, Skarta is not yet in my portfolio, but I do own shares in somewhat similar or at least related companies, such as Saxlund Group AB and Solwers Oyj. Through these, Skarta is now also of interest.

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Skarta Ab is carrying out modification work on the Kiruna railway yard.

An LKAB ore train derailed from Gällivare towards Kiruna. Traffic will be suspended for at least a few days, as the derailment occurred further away from the road network. Power lines are down, and this will certainly require some repair work.

This may cause some delays to the work, even if it doesn’t directly affect the immediate area. And potentially also a small additional contract for Skarta.

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Regarding Skarta’s growth targets, the industry is highly competitive. In my opinion, Skarta’s growth targets presented earlier in this thread are quite ambitious, considering the targets of major competitors such as Kreate or GRK. How will there be enough revenue in the sector to be distributed among all competitors’ growth targets?

It’s very difficult to see that, for example, in the wind power business, competition will not be as fierce in the future as it is currently in other categories of infrastructure and special construction. It is very difficult to build any lasting competitive advantage in this industry that competitors would not copy very quickly.

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Skarta Group Aims for the Forefront of the Hydrogen Economy – Acquired a Fuel Cell Car Even Though the Refueling Network Is Not Yet Available | Kauppalehti

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