Ovaro will release its Q3 report on Thursday, and here are Frans’s comments regarding it.
We expect the operational result to have decreased following property sales and the reported result to remain at a weak level, weighed down particularly by losses from apartment sales in line with the strategy. At the core of Ovaro’s strategy is transforming into a full-fledged real estate developer, and the fruits of this change will only be reaped in the coming years. The company’s earnings outlook for the rest of the year is foggy after the profit warning, and on results day, we are particularly interested in the status of the residential portfolio, the impact of the Kukkula project’s development projects on the figures, as well as the progress of the development projects.
Ovaro’s Q3 report fell short of our expectations, weighed down by significant losses from apartment sales. The company was able to sell more apartments than we expected, and although the sales occurred at clear losses, the sales prices obtained were higher than the company’s stock market valuation. Operationally, the report was only slightly weaker than our expectations. At the core of Ovaro’s strategy is the transformation into a full-blooded real estate developer, and the company’s development projects seem to be progressing according to plan.
Frans interviewed Ovaro’s CEO Marko Huttunen after Q3.
Topics:
00:00 Introduction
00:11 Q3 highlights
00:54 Apartment selling prices
02:02 Share of apartments in the balance sheet
02:25 Delay in the sale of building rights in Hervanta
03:35 Kukkula development project
05:46 Situation of the Kortepohja business center
It has been a long journey from Orava’s residential investments, but now the balance sheet is finally starting to be cleared of poorly performing apartments. According to the company, at the end of Q3, there were only 4 MEUR worth of apartments left in the balance sheet that were not yet subject to the write-downs made now. In my own forecasts, I have now written down the apartments with sales losses of about 22%, and we are still talking about “only” a -1.2 MEUR negative write-down.
Here is Ovaro’s historical NAV valuation. A turnaround was seen in the development of NAV (per share) in 2021, from which it turned upwards, even though write-downs have continued. Next, the earnings development must be turned to a sustainably good level, which is the most likely way to raise the low valuation level.
Commercial property projects form a profitable backbone
Summary
Note!
The author owns shares in the company.
IR-ikkuna is a channel for corporate partners of SalkunRakentaja and Sijoittaja.fi for background and analytical articles as well as other interesting investor information. The article is part of a commercial collaboration with the company. The article does not contain investment recommendations.
Interesting post. Ovaro seems to be moving purposefully in a good direction.
How does the company/group plan to handle the financing for the repayment of the €6 million capital loans at the end of the year? The parent company’s cash reserves do contain nearly that amount, of course.
Some of the apartments already sold were not yet reflected in the cash assets in Q3, and the company has continued apartment sales. The company also has just under 2 MEUR in undrawn loans, and debt levels are currently low, meaning that bank loans are also available if needed.
Marko Kaarto of Ovaro is moving to Investors House. Kaarto has played a key role in Ovaro, simply due to the company’s small organizational size. Kaarto has been particularly responsible for the leasing of commercial premises, which Ovaro has managed clearly better than the market average. Ovaro will need additional reinforcement for its organization in the coming years as it scales up its real estate development activities (especially the Kukkula project), and I believe that Kaarto’s replacement will also be hired relatively soon.
@popo1 Yes, this is the same deal. Now Ovaro is building the building and has made a capital lease agreement with Esperi. So the care home and the plot will remain in Ovaro’s ownership for now. However, I believe that the company will also seek an investor partner for the project quite soon, in accordance with its current strategy.
Aiming for a high-quality and feasible urban design
The goal of the competition is to develop the area into a future city district, where a spatially interesting environment would offer various forms of housing, health and well-being services, commercial services, and diverse recreational and green spaces. The diverse, high-quality block structure, in terms of urban design, must naturally integrate with green areas and connections. In addition, the design must consider functional parking arrangements and smooth movement within the initial blocks. Architecturally, the plan must be timelessly sustainable and include high-quality solutions related to the functionality, flexibility, and economic feasibility of the buildings.
The main emphasis in evaluating the competition entries will be on the urban design and architectural appearance of the proposals, as well as their integration into the environment and landscape. The competition proposals must also be technically and economically feasible and capable of being implemented in phases.
Four architectural firms invited to the competition
The competition organizers have selected four architectural firms as participants: Arkkitehtitoimisto Arco Oy, Arkkitehtitoimisto Muuan Oy, Arkkitehtipalvelu Oy, and Arkkitehdit MY Oy.
Fransin’s pre-game thoughts, as Ovaro publishes its Q4 results on Thursday at 8:30 AM.
We expect the operating result to have remained weak due to housing sales and high administrative costs, but the reported result will still rise to a good level, driven by a positive fair value change in the associated company. There is uncertainty associated with the 2025 outlook, but we estimate the company will guide for improved results after a weak 2024. Ovaro’s strategy focuses on transforming into a full-fledged real estate developer, and the fruits of this change will only be reaped in terms of results in the coming years.
Frans wrote his quick comment on Ovaro’s Q4 in the morning.
Frans interviewed the company’s CEO Marko Huttunen.
Topics:
00:00 Introduction
00:22 Q4 and year 2024
01:02 Operating profit
02:22 Positive taxes
03:20 Guidance
04:07 Hervanta care home project
05:30 Kukkula
06:58 Construction business
Frans has made a new extensive report on Ovaro, and like other extensive reports, it is readable by everyone, meaning there are no paywalls.
Ovaro has sold its low-quality apartments and is scaling up its buy-develop-sell business model in the coming years, centered around the Jyväskylä Kukkula project. The ramp-up of construction activities has been pushed forward in a radically weakened new construction market, and the earnings growth we expect is still subject to significant uncertainty, especially due to external risks. The balance sheet valuation (P/B 0.62x) is low, but when reflected against the high-risk profile of the current transition phase and the ~7% ROE in the coming years, the expected return falls short of our high return requirement in the short term.
Today we chatted with Frans about Ovaro and the Kukkula project in a video :
Topics:
00:00 Introduction
00:16 Buy-develop-sell
04:09 Kukkula project in a key position
08:30 Risks related to the key project
11:28 Kukkula project revenues
13:42 Other projects
15:35 Financial situation and financing of investments
17:35 Is the company’s current valuation justified?
