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February 2020 Newsletter: “A Month to Remember’’

The majority of days on stock market are usually idle when trading is triggered by some buzz around the economy, global trends, short-term results. However, the end of February 2020 was different and will likely remain in the memory of stock trading. Amid the news on coronavirus development, corporate results no longer mattered and investors dumped the stocks disregarding enviously successful earnings growth.


Sell-off in the last week of February 2020 in Baltic stock market


Baltic stock market performance was down by 8.19% (OMX Baltic Benchmark GI Index) in February as investors were in panic mode, selling off their holdings. To compare, US S&P 500 and European Stoxx 600 lost 8.6% and 8.5% respectively. Since 2000 it was the 6th largest weekly drop.


Fig.1. Weekly performance on Baltic Stock Market 2000-28.02.2020

On Thursday, index fell below 1000 points which is considered to be a psychological support/resistance level that OMX Baltic reached just this year in January.


Fig.2. OMX Baltic Benchmark Index since inception chart 2000-28.02.2020


Baltic market index is “sticky” to round numbers, e.g., 200, 600, 1000 points etc.; therefore, if subdued sentiment remains, we could witness market falling to 900 point mark. Considering valuation level, Baltic market appears to be attractive now with Price/Earnings ratio of 12.2, which is roughly on the same level as its historical median.


Sell-off had a different effect on individual stocks. The biggest losers last week were Novaturas, which lost more than a quarter of its market cap in 5 days (-27.1%), Apranga with -12.9%, Siauliu Bank with -11.5%, LHV -11.1% and Vilkiskiu Pienine -10.9%. In contrast, losses were relatively well contained in PST, Grindeks, ESO, Ignitis Gamyba –all 4 stocks are quite illiquid and the last two (ESO and Ignitis Gamyba) investors find appealing in turbulent times because of Lithuanian State intention to buy back stock, thus providing support to the share prices of both companies.


Fig.3. Baltic Stock Market Main List companies performance


Abandoned commissions lead to higher volumes.


Since the beginning of December 2019, in Estonia and Latvia Swedbank (in Lithuania since February) offers commission-free trading for Baltic stocks. This move was followed by LHV cancelling fees starting with February. Chart below clearly demonstrates that this move resulted in a significant growth in number of trades as well as boosted motivation to take more action on Baltic market.


Fig.4. Number of Trades done on Baltic Main List

Over the last three years, the average daily number of trades for Baltic Main List was 444, while now the volume exceeds 1000 and is close to 1500 trades a day. Increased volatility and stock market activity experienced during last week of February led number of trades to shoot up to 3000, 4300 and on Friday this number reached 5600 high. Such activity wasn’t detected even on the most “bloody” week since 2000 (10.10.2008), when market lost 17.8%, back then, the number of daily trades peaked at ~3700. Therefore, it is no wonder that LHV Bank’s stock trading IT system crashed on Friday, being totally unprepared for such a spike in opportunistic trading.


February – reporting season


Overall, FY 2019 turned out to be successful for the majority of Baltic companies in terms of positive revenue dynamic – out of 29 companies, 20 reported higher revenues than in 2018. Average sales growth for 2019 was pretty decent for Baltic companies reaching 8.8%.

4 companies reported a loss for 2019– AUGA Group, Vilkiyškiu pienine, Baltika and Pro Kapital Grupp as some of them are in the heavy investment mode, while others have significant business model problems.

On the other hand, a number companies were able to please investors with good bottom-line figures. However, one should always consider the underlying drivers of profit growth: successful operations, one-off items or efficiency improvement. As such, Tallink posted flat revenues, but was able to increase profits by 24% to EUR 49.7 mn thanks to lower fuel cost as well as tighter control over other expenses. Port of Tallinn, which posted no growth in revenues, reported profit growth of 81.8%, reaching EUR 44.4 mn, mainly because of lower dividend tax in 2019 -a year before company paid extra-large dividend to its main shareholder – Estonian government. Latvian pharma company Olainfarm reported record profit of EUR 27mn (155.7% growth), which translates in Price/Earnings ratio of just 3.39x, which at first sight positions company as a very attractive investment. But if one dissects the numbers, it becomes apparent that such terrific accretion in annual profit was a one-off event, largely driven by Russian clients stocking up their inventories ahead of the changes in pharmacy legislation in 2020. Therefore, it was not a great surprise really that in January selling pattern corrected and Olainfarm saw their sales from Russia dive 98%., This will lead to a lower profit in 2020: company guided for flat sales and profit drop of almost x2 to EUR 14.3 mn in 2020.


February 2020 was a rich month for events. It has proved once again that the homework prior to the investment decision has to be made for one to be sure in the fundamental quality of the company. Then, one might sleep well and be less vulnerable to the short-term shocks such as Coronavirus outbreak.

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