Olvi plc – A Finnish Sin-Stock

This very brief article looks at Olvi – a Finnish brewer and distiller. We expect a 7-10% return over the next decade. Olvi will not set the world on fire, but a lot must go wrong for this to be a poor investment.

Olvi is a beverage and distiller company based in Finland, founded in 1878, and is the biggest Finnish privately-owned “sin-stock”. It became a public company in 1987, and in 1998 it became part of the main list on Nasdaq Helsinki. It has a dual share class, A and K, where the A-share is the listed one, and the K-share is not public. The K-share has 20 voting rights per share, while the A-share has one. This is, of course, a set-up to make sure it’s immune to a hostile takeover.

It’s a small brewer with only 900 million EUR in market cap. Sales volume, in liters, was 718 million in 2019. For comparison, the Danish giant Carlsberg sold 11 250 million liters in 2019. Olvi’s distilling segment is small: Olvi owns 67% of Helsinki Distilling Company which makes whisky, gin, and akvavit.

Olvia’s operations:

Finland:

Operations in Finland are mainly beer and soft drinks, and additionally ciders, long drinks, and mineral waters. The market share for alcoholic drinks has been steady around 20-25% over the last decade. The brand is Olvi.

Estonia:

Olvi owns 100% of Estonia’s largest and oldest beverage company: A. Le Coq. The main product is beer, followed by soft drinks, energy drinks, kvass (an Eastern Europe specialty) water, and juice. A. Le Coq has many times won the title of the most valuable brand in Estonia.

Latvia:

Olvi owns 100% of Cesu Alus, the oldest brewery in Latvia, and the market leader in terms of value, due to its premium brand, despite being the second largest in liters. Sales have been slightly falling, mainly due to increased excise taxes and less border sales to Estonians. Beer is the most important product, followed by kvass, ciders (market leader), energy drinks, and juice.

Lithuania:

In 1999, when Cesu Alus was acquired, Olvi acquired the Lithuanian brewery Volfas Engelman, a producer of beer, cider, kvass, and non-alcoholic drinks. It ranks three in terms of beer volume but is the market leader in kvass and juices.

Belarus:

In 2008 Olvi entered the Belarussian market and bought a majority stake in Lidskoe Pivo (the ownership has later been increased to almost 100%). Beer is the main product, together with kvass, cider, water, and soft drinks. Sales have improved and Lidskoe has gained market share.

The share price-performance:

The chart below shows Olvi’s share price performance from 2001 until January 2021:

The blue line shows the logarithmic share price on the left axis, while the right axis (red line) shows the five-year rolling CAGR of the share price. The lowest five-year rolling CAGR was in 2018 when it bottomed at 5%. The days of rapid growth seem over.

The dividend policy and history:

In 2019 Olvi changed its dividend frequency from annual to semi-annual . The dividend history looks like this:

 

The aim is to pay out around 50-60% of the earnings as dividends. Buybacks have historically been negligible.

Valuation:

The chart above shows Olvi’s share price has performed well over the last two decades, but this is partially explained by multiple expansion:

The valuation has gradually increased alongside the falling interest rates. The current P/E is around 20.

Olvi’s earnings per share:

The EPS has grown at a rate of 10% since 2005, which is higher than the sales growth, mainly due to productivity gains. In 2019 the sales per employee were substantially higher in Finland than in the other countries. For example, the number of employees per produced liter of beverage is twice as high in Belarus compared to Finland, and about 30% higher in the Baltic states. Olvi has, and is still doing, heavy investments in production facilities to reduce the productivity gap. We believe this will give a boost in the EPS over the next ten years.

	EPS
2005	0.47
2006	0.72
2007	0.92
2008	0.61
2009	1.2
2010	1.07
2011	0.65
2012	1.24
2013	1.61
2014	1.57
2015	1.08
2016	1.57
2017	1.73
2018	1.97
2019	2.02

Olvi’s shareholders:

The main shareholder is the Olvi Foundation which owns 15.7% of the shares and 52.5% of the voting rights. This is both positive and negative. It’s positive because it shields the company from short-term activists, but it might be negative because the largest shareholder might have other interests than the smaller shareholders. However, we have no reason to believe that interests diverge.

The investment case for Olvi:

• Pretty predictable business, high barriers to entry.
• Alcohol is less influenced by market cycles.
• Solid owners that think long-term, not liable to short-term activists.
• High returns on equity and invested capital, better than for example Carlsberg.
• Potentially a takeover target. The most likely acquirer is the Danish Royal Unibrew.
• No interest-bearing debt to speak of.
• Olvi has made sensible acquisitions.
• Conservative management.
• Spends much on R&D (CAPEX).
• Productivity gains outside Finland.

Arguments against investing in Olvi:

• Small scale compared to the global players.
• High unemployment in the Baltic states – poor social safety net.
• Political risk in Belarus.

Conclusion:

What rates of return can we expect? The current dividend yield is 2.25% and we expect 5-7% EPS growth (inflation and productivity gains), in total 7-9%. We believe this is a conservative estimate. However, if the valuation multiples contract, the return will obviously be lower, vice versa if it expands.

 

Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.