Latvian Forest : Interim report Jan-Sept. 2022

Interim report Jan-Sept. 2022

• Book value of fixed assets amounts to TEUR 37,817 (25,815)
• Equity amounts to EUR 0.928 (0.841) per share
• Earnings per share EUR 0.059 (0.172)
• Property holdings amount to 7,417 (5,851) hectares
• Timber volume is estimated at 1,104,255 (710,740) cubic meters
• Net sales TEUR 1,943 (670)
• Operating profit TEUR 1.174 (280)
• Change in value, forest TEUR 836 (5,620)
• Net profit TEUR 2,181 (5,716)

Latvian Forest Company

Latvian Forest Company AB (publ.) is a Swedish listed company that acquires and manages forest properties on advantageously valued forest in Latvia. The three main foundations of the business are, in addition to forest being a sought-after real asset that grows by its own power,

• an expected increase in the price levels of Latvian forest and agricultural properties.
• to create added value through active forest management.
• to create value by building up a larger property portfolio.

The expansion is financed by carrying out new share issues in stages as properties are acquired and the business develops. Through Latvian Forest Company, shareholders become co-owners of many properties instead of one individual, which provides a good spread of risk. The activities carried out in ongoing forestry create the turnover needed to cover the company's costs over time and, in the long term, generate a surplus.

Latvian Forest Company AB has Euro as its accounting currency and all reporting takes place in Euro. Trading in the share on Spotlight Stock Market takes place in Swedish kronor.

Status & property holdings

Investments in forest properties have been made continuously and the holdings at the end of the period amounted to a total of 7,417 (5,851) hectares. Of these, 6,099 (4,318) hectares were forest and 1,319 (1,534) other land whereof 866 (1,105) hectares agricultural land. At the same time, the total growing stock was estimated at about 1,105,000 (711,000) cubic meters after felling, property purchases and sales. Of the total of 7,417 hectares and 1,105,000 cubic meters of growing stock, the company owned 5,964 hectares with 786.000 cubic meters of growing stock in Latvia and 1,453 hectares with 318,000 cubic meters in Lithuania at the end of the third quarter.

On the total of 6,099 hectares forest land that the company owned at the end of this period, the growing stock is estimated at 1,105,000 cubic meters. The management estimates that 310,000 cubic meters can be felled immediately. The company intends to fell 465,000 cubic meters within the next 10 years. The management estimates that there are 181 cubic meters of growing forest per hectare. Almost 71% of the company holdings consist of land types corresponding to site fertility classes IA (G36), I (G32) and II (G28). Only 1.2% of the company holdings have management measures prohibited due to nature conservation restrictions. Almost 78% of the growing stock consists of the three most important industrial wood species: birch, pine, and spruce.

(Map of existing property holdings)

During the third quarter, a total of approximately TEUR 953 was invested in 12 individual properties of 194 hectares with a growing stock of approximately 28,154 cubic meters. The average acquisition price was EUR 33/m3 of growing stock. The average timber stock was approximately 209 cubic meters per hectare of forest land. The company management has assessed that there are still favorable conditions for the acquisition of individual properties since some foreign property owners consider it favorable to leave the Latvian market.

Felling and clearing

During the third quarter, the company has felled 9,930 cubic meters. The average felling price was EUR 48 per cubic meter with an income equivalent to TEUR 476. The company has cleared 10 hectares and carried out planting on 5 hectares during the third quarter. A total of 38 hectares have been cleared and 80,000 spruce seedlings planted on 41 hectares during the nine months

(The company has purchased oak, spruce, and birch plantations in Lithuania)

Sales and earnings

Net sales in the third quarter amounted to TEUR 493.0 (241.3) and relate to income from felling volume, i.e., the sale of root items, and income from agricultural land. Total net sales for the first nine months have been TEUR 1.943.1 (669.8). Operating expenses have continued to develop satisfactorily even considering the high inflation rate. An increase in external costs is explained by costs related to the preparation and analysis of possible new acquisition opportunities. Operating profit was TEUR 1,173.7 (280.1) for the nine months period and TEUR 216.1 (114) for the third quarter. Total profit for the year was TEUR 2,181,1 (5,716).

The estimated value of fixed assets totaled TEUR 37,817.6 (25,815.4). The company's board of directors has decided to change the discount rate to 7.25% from the previously adopted 6.75%. The decision has been made in the light of the board's decision to adjust the discount rate to more market-based return requirements among companies that invest in real assets. As a result, assets are revalued at a more current market value. Also, the increase in value can be attributed to the company's acquisition of new properties, as well as an estimate of the average long-term price level of sawlogs and pulpwood. The company management believes that the sharp rise in prices caused by the high inflation rate at the beginning of the year should be reflected in the long-term price level that the company uses when developing the present value of biological assets. The fair value of growing forest has been calculated on the assets that were in the company as per September 30, 2022. The value is calculated by discounting a 100-year series of estimated felling volumes/sales revenue and forest management costs at a discount rate of 7.25 % (6.25%).

Otherwise, the result is affected by normal costs for clearing, property-related costs such as new property measurements, inventories and stamping of stocks before felling, as well as certain costs in connection with felling.

External costs largely consist of purchased services related to forest management, other consulting services such as accounting, auditing, legal advice, costs for travel, rent and transport, etc. Variable costs for purchase commissions have been recorded to some extent as part of the acquisition costs of the individual properties and in these cases do not affect the result. Other variable compensations for clearing are recorded under raw materials and supplies (previous cost of goods sold).

Timber and forest property market

The company management follows how the market develops for sawn timber and pulpwood. The global timber market has been very volatile in recent years and especially in 2022. Trading in timber on the NASDAQ stock exchange began at about USD 1,329/LBS in January 2022. By the end of the third quarter, the price has stabilized around USD 410/LBS. This corresponds to the price level of timber on the NASDAQ before the corona pandemic.

The same trends can also be observed on the Latvian and Lithuanian markets with the purchase price for softwood timber 155 EUR/m3 in mid-June with a rapid decline to the equivalent of 100 EUR/m3 in early September. This outlook suggests that the prices of softwood timber will be further adjusted downwards.

The development of the Latvian pulpwood market has been incredible. An example, while the purchase price for one cubic meter of hardwood pulpwood was about EUR 58,28 in January 2022, by the end of September it had risen to EUR 125 per cubic meter.

Demand for birch veneer logs, and therefore also price, has reached record levels equivalent to EUR 232 per cubic meter of premium class range at the beginning of September 2022. However, it can be predicted that these record prices will not be long-lasting.

The geopolitical concern has been most reflected in the price level of energy wood, including raw material for wood chips. When in 2021 the price of branches was around 8 EUR/cubic meter, they have risen to the peak figure of 25 EUR per cubic meter. However, this may be affected by a mild winter that leads to sharp correction in the price level.

Considering all above mentioned, the prices of forest properties has been affected and sellers are beginning to expect more aggressive valuations for properties. This can be observed both in Latvia and Lithuania. However, LFC have succeeded in acquiring new properties, as the company's management actively uses its experience and knowledge to identify and acquire forest properties at a favorable price.

Financing

During the third quarter, no loans were raised, and no new issues were carried out.

Financing strategy

Following comments from and probing among shareholders and potential investors, the Board of Directors has decided that future financing in the form of new share issues will primarily take place within the framework of new share issues with preference for existing shareholders. However, this does not prevent that directed issues may be carried out, for example, in the case of acquisitions of property portfolios or in special situations where a directed issue may be required. The objective is that existing shareholders should not be disadvantaged if a directed issue is carried out.

Share

At the end of the period, the share capital amounted to EUR 4,106,436, divided into 80,000 Class-A shares and 36,583,521 Class-B shares. Class-A shares represent ten votes and Class-B shares one vote each. Each share has a quota value of 0.112 Euro in share capital. According to the latest data obtained by the company, the five largest shareholders in terms of voting rights control 67.6% of the capital and 67.2% of the votes.

Significant events after the end of the period

The property holdings at the time of this report amount to 7,610 hectares. At the same time, the total growing stock was estimated at about 1,125,400 cubic meters after completed felling, property purchases and sales.

(The felling of 12,000 m3 in Nica has been completed in Q3)

Next report

The year-end report for 2022 is scheduled to be published on February 20, 2023.

About this report

This report has not been subject to special review by the company's auditor.

Stockholm, 2022-11-24

Board

For further information, please contact:

Aleksandrs Tralmaks, CEO

[phone]

[e-mail]

Or visit our website: www.latvianforest.se