Great article! I never spent the time before digging deeper into Eastnine. Very interesting indeed.
So MFG holding could be sold for €190m while the company has a market cap of SEK2400m? So low are the expectations? (Some days ago Ferronordic was able to sell their Russian operations, which reminded me of this case).
Maybe the only but I have is the very low ICR (2.4 times) which can be worrisome these days. Ofc totally unimportant if the MFG deal closes.
You are correct that the ICR is on the low side currently. One explanation is of course that a lot of the value of the company is still in MFG shares. Another reason is that central admin is not spread out on as much revenue yet, making overhead unfeasibly high. ICR will also improve a bit going forward from lower vacancies in the recent quarter.
A mitigating factor for the ICR in a comparison to many others is that when you already are at 3.1% avg interest rates, they are relatively less sensitive to the hikes, as long as your assets are deemed good risks, which is the case here. And of course, the wider yield gap should makes possible acquisitions from internal cash flows, which over a longer time time should improve ICR even without divesting MFG.
They have also interest swapped most of the loan book, 40% until 2027 and another 24% until 2024, which gives some breathing room, although a chunk of 23% will reset in 2023. Bond covenants are at 1.75 and 65% LTV. You can certainly imagine a bleak future where that comes into play, but it's a way off at the moment.
As for the asset values vs market cap, the ruble has been volatile in the last week or so and lost a bit since the sale was announced. It would now be worth ~€160m. On the other hand, EUR has strengthened against SEK too, making the real estate assets go up in value from 6.58b sek end of Q3 to 6.72b. It's also likely that we will see some yields rising in Q4, pulling down asset values somewhat. This is a given for most Swedish RE, but it's a bit harder to guess at the exact magnitude in the Baltics with their combination of higher inflation, higher yields and less liquid transaction markets.
Lastly, since Christmas has now come and gone, it seems less likely that the MFG deal will close before 2023. I don't know if this has any implications for the risk of a deal break, though.
I was going to write you some days ago arguing that the depreciation of the ruble didn’t have an impact on the valuation according to EAST last report (they had closed the sale in EUR). Well, it doesn’t matter anymore 🥺 the sale was cancelled. Let’s ser if they can find another buyer!
Yes, that's correct. Currency might still have had something to do with the failure to finalize the deal. If - big if - that's the case they should be able to find a new buyer at some relevant price point, keeping in mind that they did say after striking this deal that they had several interested parties.
If on the other hand the issues are more on the "regulatory" (scare quotes due to jurisdiction) side it will be tougher. But then talking to new potential buyers would likely be futile.
The stock is hardly expensive even if MFG is a 0 here. Which I really don't think it is. Eastnine should be more functional than the absolute majority of listed Swedish peers as they still have a healthy yield gap.
Hey alwaysinvert!
Great article! I never spent the time before digging deeper into Eastnine. Very interesting indeed.
So MFG holding could be sold for €190m while the company has a market cap of SEK2400m? So low are the expectations? (Some days ago Ferronordic was able to sell their Russian operations, which reminded me of this case).
Maybe the only but I have is the very low ICR (2.4 times) which can be worrisome these days. Ofc totally unimportant if the MFG deal closes.
Thanks for your comment!
You are correct that the ICR is on the low side currently. One explanation is of course that a lot of the value of the company is still in MFG shares. Another reason is that central admin is not spread out on as much revenue yet, making overhead unfeasibly high. ICR will also improve a bit going forward from lower vacancies in the recent quarter.
A mitigating factor for the ICR in a comparison to many others is that when you already are at 3.1% avg interest rates, they are relatively less sensitive to the hikes, as long as your assets are deemed good risks, which is the case here. And of course, the wider yield gap should makes possible acquisitions from internal cash flows, which over a longer time time should improve ICR even without divesting MFG.
They have also interest swapped most of the loan book, 40% until 2027 and another 24% until 2024, which gives some breathing room, although a chunk of 23% will reset in 2023. Bond covenants are at 1.75 and 65% LTV. You can certainly imagine a bleak future where that comes into play, but it's a way off at the moment.
As for the asset values vs market cap, the ruble has been volatile in the last week or so and lost a bit since the sale was announced. It would now be worth ~€160m. On the other hand, EUR has strengthened against SEK too, making the real estate assets go up in value from 6.58b sek end of Q3 to 6.72b. It's also likely that we will see some yields rising in Q4, pulling down asset values somewhat. This is a given for most Swedish RE, but it's a bit harder to guess at the exact magnitude in the Baltics with their combination of higher inflation, higher yields and less liquid transaction markets.
Lastly, since Christmas has now come and gone, it seems less likely that the MFG deal will close before 2023. I don't know if this has any implications for the risk of a deal break, though.
I was going to write you some days ago arguing that the depreciation of the ruble didn’t have an impact on the valuation according to EAST last report (they had closed the sale in EUR). Well, it doesn’t matter anymore 🥺 the sale was cancelled. Let’s ser if they can find another buyer!
Yes, that's correct. Currency might still have had something to do with the failure to finalize the deal. If - big if - that's the case they should be able to find a new buyer at some relevant price point, keeping in mind that they did say after striking this deal that they had several interested parties.
If on the other hand the issues are more on the "regulatory" (scare quotes due to jurisdiction) side it will be tougher. But then talking to new potential buyers would likely be futile.
The stock is hardly expensive even if MFG is a 0 here. Which I really don't think it is. Eastnine should be more functional than the absolute majority of listed Swedish peers as they still have a healthy yield gap.
Great read thank you! Will look closer at Gotlandsbolaget, happy to own Eastnine via my shares in Arbona. =)