Swedbank wins TOP 101, but Infortar IPO may change things next year

Illar Kaasik, Managing Partner at Prudentia Tallinn

Aleksei Vorobjov, Senior Analyst at Prudentia Tallinn

The winner of this year's TOP 101 ranking, based on 2022 results, is Swedbank, narrowly ahead of Enefit Green and for the second year in a row. However, one company – holding company Infortar which this year was ranked 13th - could have challenged both Swedbank and Enefit Green. Things could have been different if Infortar had completed its planned IPO by the time the ranking was locked, and if the listing would have valued it at more than 1.53 billion euros.

Last autumn, Swedbank CEO Olavi Lepp said in a podcast with the winners of the 2022 ranking that he would not be surprised if next year's ranking is won by renewable energy company, referring to the impact of green transition. Enefit Green did not win, but narrowly finished second after Swedbank and ahead of Luminor. Yet Enefit Green should be satisfied with its performance, especially since it is building the Sopi-Tootsi wind farm in northern Pärnu County which will be the most powerful and modern wind farm in the Baltics which should start production at the end of 2024.

A good year for the winner

Swedbank, the winner of the TOP 101 ranking, also has reason to be satisfied. Euromoney, one of the world's leading economic magazines, named Swedbank the best bank in Estonia also this year. For the banking sector as a whole, the past year has been quite challenging. On the one hand, large retail banks have been benefiting from high interest income to expense ratio. On the other hand, in our region, the banking sector has been under constant pressure from politicians and has had to justify its skyhigh profits to the public and the media. In Estonia, politicians have threatened to additionally tax banks' profits, but the banks and the government agreed that big banks will pay additional dividends in the next two years, which will bring to the state about 120 million euros in extraordinary and additional tax revenue.

The most significant change in the financial sector between 2022 and 2023 has occurred in deposit interest rates. Today, Swedbank is paying depositors up to 4.5% interest per annum, and the volume of fixed-term deposit accounts in the bank is growing rapidly. By the way, Swedbank already uses AI in the bank's chatbot. Swedbank has also remained the largest lender to the Estonian economy, with a market share of 38%. The bank’s loan policy has actively promoted and supported energy conservation.

Could Infortar reshuffle TOP 101?

Infortar is the largest investment company in Estonia, whose portfolio includes controlling holdings in several well-known companies, such as Tallink, Eesti Gaas, Gaso, Gaasivõrk and several different real estate and affiliated companies. By our methodology, Infortar was valued at 0.8 billion euros in the 2023 TOP101 ranking, ending up in the 13th place. However, it is important to note here that the methodology of the TOP101 ranking is based on the EBITDA multiplier, which means that the possible stock market value of the group's assets could be significantly higher. Since the current calculation is based on the consolidated EBITDA rate, the value of its affiliate company Tallink is excluded from the calculation of Infortar's value, for example. Also, some other assets are not reflected in the business value such as real estate development projects that do not yet generate cash flow, nor the impact of business activities of AS Gaso since the acquisition of the Latvian company was completed only in 2023.

This means Infortar group has considerable potential to compete for the top positions in the TOP 101. According to the management of Infortar, the business is divided into four main areas: energy, maritime transport, real estate and supporting fields. 2022 was a very successful year for Infortar, especially in the energy and maritime transport sectors. Sales revenue of Eesti Gaas exceeded one billion euros in 2022 and the net profit was 190 million euros, a record for the company. In 2023, Eesti Gaas signed a contract for the acquisition of the Latvian gas distribution network from Gaso, a subsidiary of Latvijas Gaze, for 120 million euros. Latvia's gas network is four times larger than that of Estonia, serving almost 400 thousand customers, and Infortar is likely to be able to realize the synergies that arise from owning the gas networks of two neighbouring countries. Sales of the Latvian infrastructure company was around 50 million euros. In 2021, Gaso earned a net profit of 11.5 million euros and EBITDA was 24 million euros. The company ended 2022 with a small loss.

Also, the financial results of Tallink, Infortar's crown jewel, improved. Over the past year, the share price of Tallink has increased by almost 40%. The Group's unaudited consolidated sales revenue for the second quarter of 2023 increased by 11.5% to 229.7 million euros (Q2 2022: 206 million euros). Unaudited EBITDA was 68.5 million euros (Q2 2022: 28.7 million) and unaudited net profit was 33.4 million euros (Q2 2022: 0.7 million).

The group's third business, real estate, is under pressure in terms of value due to the rise of interest rates, but overall the real estate portfolio is in good balance with other businesses of Infortar.

But what could be the value of Infortar's IPO analysed by main business areas? The company itself estimated the value of Tallink's shares at 283 million euros at the end of 2022 and using the equity method. The corporate value/EBITDA ratio of energy sector companies remains high, at around 10, and also the commercial real estate sector remains attractive. It is still too early to assess the market price of the Infortar share, but it should be said that the value of Infortar in the latest TOP 101 is 800 million euros, plus approximately 41.66% of the market value of Tallink. In 2023, the value of Infortar will also increase by the revenue generated by the purchase of Gaso. All in all, Infortar could be a strong contender for the top of TOP101 next year. For the investor, Infortar's business structure is well balanced, mitigating the risks arising from both inflation and changes in the economic environment, while creating intra-group synergies between companies. If Infortar goes ahead and lists its shares in the coming year, the company's value number may skyrocket. This means that companies operating in the banking sector, renewable energy sector companies and new players listed on the stock exchange are already lining up for a battle for top spots in next year's TOP 101 based on 2023 results which is due to be published next autumn.