Sulev Raik | TOP101 methodology, i.e. what mark did this year's corona crisis leave on the ranking compiled on the basis of last year's results?

Although the ranking of the most valuable enterprises in Estonia in 2020 is based on the companies' 2019 financial reports, which COVID-19 did not yet have a significant impact on, the effects of the corona virus are already strongly reflected in the ranking. This is due to changes in the average sector multipliers expressing the perspectives of different economic sectors. These can be calculated on the basis of shares listed on European stock exchanges, in order to be able to also provide a market value based assessment of those companies where otherwise there is no feedback as their shares are simply not freely tradable.

During the spring corona wave, panic sales took place on stock exchanges, as is customary when an event occurs that cannot be quantified in the first instance. At that time, everything is sold indiscriminately, wherever possible. OMX Baltic Benchmark and OMX Tallinn decreased by 30% in a month (17.02—16.03.2020). By comparison, S&P and Nasdaq fell by about the same amount. The 30% drop is not in itself unprecedented. I have experienced many bigger falls. For example, the Russian market lost 80% in half a year in 2008 and 90% in 12 months in 1998. Fortunately, the situation has calmed today. The corona factor was added to financial models and the result was not so bad. For some companies or economic sectors, as it turned out, it is actually positive.

What is happening in the markets is important for the TOP 101 as we use multipliers based on stock exchange statistics to find the value of companies. As a reminder, in the case of TOP 101, we assess the value of the enterprise as a whole regardless of capital structure. Three multipliers are used to compile the ranking. For financial service providers, the market capitalization-to-equity ratio (P / B) and, for other companies, the value-to-sales ratio (EV / S) and the value-to-EBITDA ratio (EV / EBITDA). The multipliers are calculated on a sector-by-sector basis and the sectors are determined according to the GICS - General Industry Classification Standard. Companies listed on European stock exchanges are used as comparable companies.

As mentioned, this year's TOP 101 has been compiled on the basis of the companies' financial results for 2019, which were not yet affected by the coronavirus. Multipliers can be calculated on an ongoing basis and therefore contain more up-to-date information. The newly published TOP 101 multipliers have been calculated as of the end of June. By that time, the markets had overcome the first shock of the pandemic and investors had come to assess the impact of Covid on economies and various sectors of the economy. As covid-19 is still relevant, it is not worth rushing to draw definitive conclusions, however it can generally be said that the markets underwent a V-shape recovery, i.e. stock market indices recovered relatively quickly, leaving behind V-shaped charts.

Enterprise value is partly down to market sentiment.

If we take a closer look, a much more interesting picture opens up. It is not the case that we closed our eyes in spring and opened them again in summer, and it was as if nothing had happened, because the OMX Tallinn index is trading in more or less the same place. In fact, we know that a lot changed over that time, and perhaps in some cases permanently. Although the indices recovered quickly, the picture is very different across industries and individual companies. For example, Amazon's stock has risen from a pre-Covid $2,000 level to over $3,000 today, while American Airlines stock has lost half its value.

Ratios of all kinds are affected by market sentiment. This is the case for individual stocks and sectors, as well as across markets or even globally. Market sentiment globally was affected by the financial crisis of 2008 or, for Russia, by the sharp fall in oil prices in 2014 and the military conflict with Ukraine. As a positive example, e-commerce is clearly a very hot topic at the moment. One of the largest IPOs in Europe this year took place in Poland, when the e-commerce company Allegro entered the market, with a more than 60 percent rise in share price on the first trading day. E-commerce is one of the areas that has benefited from the corona crisis.

Arenguseire Keskus has compiled covid-19 confidence indices for sectors on a scale of -5 to +5. The most vulnerable are hospitality, catering and travel companies (-3.9). At the other end of the scale are information and communication, health care, production of basic necessities. Looking at the sectors represented in the TOP 101 and their multipliers, the biggest losers are transport, transit and logistics. Compared to the previous year, the average EV / EBITDA ratio in these areas has decreased by 22%. This can be expected as we recall the problems in supply chains and long queues at borders. People travel much less due to restrictions and human caution. Businesses like accommodation and airlines have suffered as a result. In the context of the TOP 101, this has most affected Tallink Group, which has had to give up its first place to Eesti Energia due to these difficulties. The EV / EBITDA ratio of energy carriers has also had a bigger decrease of 15%. The reason is the fall in oil prices due to lack of demand. If you recall, the price of oil (the price of the May contract) even fell below zero in April for the first time in history. At the same time, it can be said that the Estonian energy carriers Graanul Invest and Viru Keemia Grupp have done relatively well, especially Viru Keemia Grupp, which has been able to increase its value. Next come services, where the multiplier has dropped by 9%. The services sector is still in difficulty due to the lack of customers on one hand and the restrictions imposed by Covid on the other. For a while there, it was difficult to find a hairdresser or a place to eat lunch. Talking about Estonia, this problem impacted (impacts) mainly Tallinn, where the flow of foreign tourists has been higher than elsewhere. Outside Tallinn, the situation is better, and companies have even benefited from the increase in domestic tourism. We did not yet mention banking where the average P / B ratio has decreased by 29% compared to the previous year. In connection with this, the banks have given up their places in the ranking, with the exception of Luminor, the increase in the value of which is due to the inclusion of the Latvian and Lithuanian business units in the consolidated financial statements of Luminor Estonia.

On the positive side, the multipliers have risen in industrial production (+ 13%) and trade (+ 6%). It has already been said above that, if anyone can be satisfied with the situation in economic terms at all, it is e-commerce that has received a powerful boost from the corona crisis. Sectors where the multipliers have risen significantly are technology and healthcare. In this respect, the picture is in line with the reliability index from Arenguseire Keskus.

What ranking – where are the unicorns?

When it comes to technology, one might ask where are the Estonian technology companies in the TOP 101? Only recently we celebrated the birth of the fifth unicorn, but there are none of them in the TOP, even though both Bolt and Pipedrive are registered in Estonia. The reason is that companies can be evaluated in a variety of ways. To compile the TOP 101 ranking, we chose the method of comparable ratios, i.e. the market-based approach. This has several advantages over other methods. Perhaps the most important of these is that it is based on market statistics and companies' public reports i.e. factual information. We do not predict or make any additions of our own and as a result there is minimum subjectivity in this method. For this reason, fast-growing technology companies, whose values in terms of funding rounds are based primarily on an estimate of future potential, may not be included in the ranking.

It is also important to note that the TOP 101 is not only based on financial indicators. In compiling the ranking, the value calculated on the basis of financial indicators is adjusted with a qualitative assessment of the company to obtain the final value. This estimate may affect the final value of the company by 20% according to a coefficient expressed on a 100-point scale. Nasdaq provides a qualitative assessment of the company's operations. The following factors are assessed: transparency of the ownership structure, thoroughness of the information published in the financial statements, communication in publishing the financial results and information available on the company's website.

Sulev Raik, Partner at Prudentia Estonia

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