Four years of decline - ratio of the total value of TOP101 companies to Estonia's GDP falling
Illar Kaasik
Prudentia Tallinn, Senior Partner
The recently completed summary of this year's TOP101 ranking of Estonia's most valuable companies compiled by Prudentia Advisory and Nasdaq Tallinn unfortunately highlights a worrying trend in our economy - the ratio of the total value of companies to the nation's GDP in current prices is decreasing for the fourth consecutive year. But as with any economic recession, there are winners and losers. This year's winners are clearly the banks and the car trade sector, the losers are mainly enterprises operating in the wood sector as well as Synlab AS and Icosagen AS, which increased their sales turnover during the COVID-19 pandemic period.
Today where everybody is looking for new balance and drivers for the Estonian economy, compiling the ranking of Estonia's most valuable companies and analyzing its changes provides important source information in guiding the economy towards future growth. It is well known that entrepreneurs are the source of wealth for the Estonian economy. In their personal life, entrepreneurs often lack possibility to enjoy leisure time or peaceful risk-free living arrangements, to say nothing of the fact that also trade unions do not protect their rights. The motivation to succeed, the curiosity to start something new, the ability to learn and good tolerance to risk ensure that at some point, entrepreneurs succeed in creating jobs and national wealth, ensuring growth in both tax revenue and social well-being. In this situation, entrepreneurs surely appreciate every positive recognition. The purpose and mission of compiling the TOP101 ranking which started in 2019 is to introduce and promote the concept of company value as well as the Estonian capital market and M&A transactions as a means of increasing company value.
Two price tags: 31.6 billion euros of TOP101 versus 19.2 billion euros of TopTech30
In this year's TOP101 the total value of 101 Estonian companies operating in the conventional economy, ie companies registered in Estonia and with significant assets and accumulated profits, is 31.6 billion euros, which is marginally higher (by 1 percent) than the corresponding figure in the 2023 ranking. By way of comparison, the total value of TopTech - 30 most valuable technology companies in Estonia that are being ranked for the second year – was 19.2 billion euros, down by 6% over the year. Of course, these rankings are not directly comparable because companies can qualify to be ranked based on different principles, and their value is also assessed by different methodologies. At the same time, the two rankings provide intriguing evidence that the valuation of different types of companies plays an important role in today's world also in the investor's or analyst's assessment of the potential of the respective sector and a specific company, in addition to the anticipated financial results. Of course, each assessment depends on the current sentiment and forecasts of both the market and the ranking compiler. In case of tech companies, investors' faith plays an immeasurably greater role in the company's value generation in terms of one or another technological solution, business model, employee quality and business scalability than companies operating in conventional sectors.
As to the measurable results reflected in the TOP101 ranking, it can be pointed out that the combined value of EBITDA of companies has increased from 2.46 billion euros to 3.11 billion euros in the last three years which is almost 26 percent. It should be said that significant part of the growth came from companies such as VKG and Eesti Energia, whose multipliers, however, are not very high due to their dependence on fossil fuels and, as a result, the impact on the total value of the TOP101 was not large.
This year's winners are clearly the banks and the car trade sector, the losers are mainly enterprises operating in the wood sector as well as Synlab AS and Icosagen AS, which increased their sales turnover during the COVID-19 pandemic period. Surprisingly, even one of Estonia's leading industrial manufacturers Ericsson Eesti AS lost value as its sales to Sweden have decreased by almost 100 million euros over the year. Another company that saw its value fall like a rock was Tavid AS, but one should add that as a result of a combination of different risks, it had a surprisingly successful previous year when its value in 2023 went up by 127 percent followed by a 65 percent decrease in value in 2024. Some companies that should be singled out for their strong performance in building value include Veho Baltics OÜ, GO Group AS , Elisa Eesti AS, Mootor Grupp AS, Maxima Eesti OÜ, Elke Grupi AS and Adole Invest AS. The value of these enterprises ranged from 40 to 84 percent. The increase in value was also posted by grocery and consumer goods retailers Maxima Eesti OÜ, OG Elektra AS and Rimi Eesti Food AS.
2024 ranking is dominated by the financial and real estate sector
The companies in the 2024 TOP101 ranking can be divided by sector as follows: financial service providers accounted for 21.9 percent, real estate companies for 16 percent, utilities for 14.5 percent, transport companies for 9.3 percent, and energy producers for 9.2 percent. In comparison with the 2023 ranking there are more companies operating in financial services, utilities and energy production sectors, while the share of manufacturing companies continues to decline from 10.6 percent in 2023 to 5.6 percent in 2024. It should also be noted that for four consecutive years, the ratio of the combined value of companies in the TOP101 ranking to Estonia's gross domestic product in current prices has also declined. It is important to take into account the fact that the GDP-linked value, ie the value adjusted for inflation, has been declining, but in current prices the growth of GDP has been significant.
Some of the events influencing previous years include the COVID pandemic, sharp rise in inflation rates, the Russian aggression in Ukraine and the resulting turbulence in the energy sector, as well as a marked increase in interest rates. Considering that the 2024 TOP101 was compiled on the basis of the companies' 2023 reports, one can say that last year was relatively calm, although tensions due to the war in Ukraine and the tensions surrounding Taiwan crushed hopes for stable development. The impact of inflation is noticeable primarily in the growth of the sales of retail trade companies. Also, there was no economic growth in Estonia's main export markets in Scandinavia, as a result of which the wood sector significantly lost its profitability.
The rise in interest rates did not have a negative impact on the results of Enefit Green, as the company is in a rapid investment phase and was able to capitalize interest expenses in cost of fixed assets, and also the real estate sector as a whole has relatively well absorbed the growing cost of money. This can be attributed to the positive impact of inflation in the retail sector.
Meagre hopes for rapid growth in value
Tõnu Mertsina, chief analyst of Swedbank, wrote in August 2024 that the outlook for economic growth in the world is volatile. While growth in the US and China is slowing, the euro area expects growth to accelerate. The European Central Bank will continue to cut interest rates this year and in 2025, and also the US Federal Reserve is expected to continue cutting interest rates. Mertsina also added that the Estonian labour market has been resilient, but the government's tax plans will put pressure on the profitability of companies and inflation.
Estonian central bank Eesti Pank forecasts that economic growth in constant prices will be around 2 percent in 2025/2026. Prices are forecast is increase between 3.5 and 4 percent while wage should grow 5 percent in the same period. Based on the above, one fears that the combined value of large TOP101 companies will not grow in 2025 either. The profitability of banks can be expected to decline due to the fall in the Euribor rate, while the EU economy is expected to return to faster growth. This should contribute to the economic recovery of our major trade partners Finland and Sweden, and support the recovery of the Estonian manufacturing sector. 2024 is also the beginning of the rapid development of AI technologies, which in 2025, in combination with the rapid development of the 5G network, may lead to exciting changes in companies' business models and, as a result, shifts in their accounting values.
In conclusion, one can say that as the whole Estonian society is waiting and hoping for the economy and the real value of the national wealth to start growing, also companies ranked in TOP101 and their owners are hoping for the same positive sentiment and the start of the growth cycle, so that the value of companies' assets would start recovery. Company owners should also not forget that there are other ways to increase company value such as the listing of shares on the stock exchange or through M&A transactions, in addition to the improvement in the economic climate and the increase in financial indicators that result in growing efficiency of work.
