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Info about the company
Olvi Oyj is a Finnish beverage company that manufactures and distributes both alcoholic and non-alcoholic beverages. The company's product portfolio comprises various drinks, with the following distribution of total sales volume: beers (55%), soft drinks (14%), mineral waters (11%), kvass (10%), long drinks (4%), ciders (2%), juices (2%), and other beverages (4%).
In addition to producing beverages, Olvi Oyj provides beverage-serving equipment rental services to hotels, restaurants, catering customers, and cooler rentals to retailers. Olvi was established in 1878, and the company is headquartered in Iisalmi, Finland.
Geographical sales: Finland (35% of revenue), Estonia, Latvia, Lithuania (Baltic Sea 37,7% of revenue), Belarus (21,3% of revenue), and others (5,7% of revenue).
Competitors: Kopparbergs, A-B InBev, Royal Unibrew, Boston Beer
Moat: Medium (→↑)
Prologue
Olvi is a beverage company focused on sales in East Europe. Recently, the company has received negative attention due to the war between Russia and Ukraine. While Olvi does not participate in the war, it has notable sales and activities in Belarus, which play some part in it. Olvi has tried to sell these assets in Belarus, but instead of finding a buyer, they have been fined for attempting to sell them. Therefore, Olvi has seen it essential to write down the assets in Belarus to zero. It indicates activity in Belarus is worthless or has the potential to be worthless. However, Olvi still gains the cash flow from the activity in Belarus. The stock has already fallen 42% from an all-time high to today. It means the market has priced the stock, where the activity is worthless, meaning a surprise event can result in a hike in the stock price. At the same time, the downside is already priced into the stock. Therefore, the market may change its view on Olvi by selling activities in Belarus, or an end to the war will make it possible for other institutions to invest in Olvi again.
Something to remember is that most institutions don't want to buy companies with a potential ethics issue because fund managers need to explain why they hold a company that indirectly plays a part in the war. This means the potential stock's return will not be much during the war. Questioning when the war will end and how it will impact the company in different scenarios is hard to predict, but the maximum potential is significant.
Growth 2 out of 5
Firstly, the industry is viewed as non-cyclical, and the company is relatively small, providing more significant growth opportunities. While there isn't a primary trend driver that Olvi can directly capitalize on, there are smaller cyclical trends from which the company can benefit. Consequently, brands are the most crucial assets that Olvi possesses and should be prioritized. Customer opinions and habits can provide a significant competitive advantage, enabling Olvi to increase prices above its competitors. This habit can result in consumers preferring Olvi's products above others. Olvi tries to make a moat by focusing on local brands and expansion.
The industry relies heavily on key suppliers such as barley, sugar, and hops, which they have no control over. Additionally, beer sales are subject to seasonal fluctuations, and weather conditions can impact sales and the Cost of Goods. However, this is a short-term risk inherent in the entire industry. Moreover, in some countries, there is a positive perception of the industry, leading to higher taxes. For instance, Finland has the highest beer tax in the EU at EUR 1.7 per liter, 50% higher than Sweden, which is 4th at EUR 1.0. Estonia, Latvia, and Lithuania also rank high on this list. Belarus illustrates a geographical risk, with activities rendered worthless at the moment due to the war in Ukraine. (4)
Business 3 out of 5
Historically, Olvi has achieved growth through organic expansion and acquisitions. The company acquires local brand names at favorable prices, leveraging customers' habits to create a competitive moat. With a negative net debt position and a resilient, non-fluctuating business model, Olvi's financial risk is minimal, providing the capital needed for strategic investments and potential revenue growth. The company has built a robust portfolio with strong branding through previous acquisitions, leading to an expanded portfolio and increased revenue. Additionally, Olvi has communicated to shareholders its focus on profitability and the development of local brands. (1)
In 2023, Olvi's two largest customers comprised 23% of total sales, a slight decrease from 27% in 2021. Retail prices in Finland are renegotiated twice a year, causing a minor delay in responding to inflationary pressures. Additionally, operating in East Europe is perceived as riskier than in Central Europe, especially considering ongoing events in Russia that pose a risk to profitability. However, Olvi has taken proactive steps to mitigate this risk. The acquisition of Vestfyn Byggeri in Denmark has significantly reduced its exposure to government-related risks in East Europe, which should instill confidence in its risk management strategies. (5,6)
Manager 4 out of 5
The Olvi Foundation, as the largest owner, holds about 15% of shares with 52% of votes, a significant stake. Despite this relatively small percentage, the recent share purchase by the management clearly demonstrates their unwavering commitment to the company's growth and success. Insider holds around 5% of the total shares outstanding. CEO Patrik Lundell, CFO Tiina-Liisa Liukkonen, and Chairman Nora Hortling have significantly contributed to Olvi's leadership. Lundell joined in 2023, Liukkonen joined in 2018, and Hortling has been with the company since 2015. While the management has yet to face critical issues, some members' short tenure poses a challenge in assessing their competence. (2)
Management's ownership of the company's shares is small, with insiders holding around 112k shares as of August 2023, equivalent to about 0,5% of the total outstanding shares and valued at $3,5 million. While not impressive, it is not insignificant. Additionally, the Hortling family, although ownership is distributed among several members, still holds a considerable number of shares. Nora Hortling, who is actively working as the chairman, is one notable family member involved in the company. (2)
Financial
Looking at the financial statement, Olvi has consistently grown in revenue, with only a year, 2015, of decreasing revenue in the last ten years. The issue in Belarus has resulted in a lower margin. Still, the management expected to retain to a previous level, which seems likely. Furthermore, the return on investment (ROI = EBIT/Total Assets) has been stable at around 13,7 to 11,2%. Lastly, Olvi's debt is very low and doesn't constitute any deb issue in the short and long term. The quick ratio is close to 0,95, and the total debt to EBITDA is around 0,1.
Overall, the financial statement seems healthy and doesn't indicate any critical issues.
| Selected key figures | ||||||||||||||
| EURmm | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | Avg. Growth | |||
| Revenues | 321 | 311 | 321 | 345 | 384 | 409 | 415 | 462 | 584 | 631 | 7,8% | |||
| Operating Income | 41 | 38 | 40 | 45 | 50 | 53 | 56 | 60 | 58 | 55 | 3,3% | |||
| Net Income | 33 | 22 | 32 | 36 | 41 | 42 | 41 | 48 | 8 | 38 | 1,8% | |||
| Diluted EPS | 1,57 | 1,08 | 1,57 | 1,73 | 1,97 | 2,02 | 1,96 | 2,31 | 0,39 | 1,85 | 1,8% | |||
| Dividends Per Share | 0,65 | 0,70 | 0,75 | 0,80 | 0,90 | 1,00 | 1,10 | 1,20 | 1,20 | 1,20 | 7,0% | |||
| Payout Ratio | 41% | 65% | 48% | 46% | 46% | 50% | 56% | 52% | 308% | 65% | 5,1% | |||
| Diluted Shares Outstanding | 20,76 | 20,76 | 20,75 | 20,73 | 20,71 | 20,71 | 20,71 | 20,71 | 20,70 | 20,69 | 0,0% | |||
| Balance Sheet Total | 333 | 316 | 329 | 339 | 365 | 397 | 420 | 490 | 490 | 490 | 4,4% | |||
| Total Equity | 193 | 185 | 204 | 217 | 237 | 264 | 268 | 298 | 282 | 289 | 4,6% | |||
| Equity Ratio | 57,9% | 58,6% | 62,0% | 64,1% | 64,9% | 66,4% | 63,8% | 60,7% | 57,5% | 59,0% | 0,2% | |||
| Total Debt / EBITDA | 1,10 | 0,86 | 0,42 | 0,21 | 0,07 | 0,05 | 0,04 | 0,04 | 0,05 | 0,09 | -24,3% | |||
| Operating Margin | 12,8% | 12,2% | 12,6% | 13,0% | 13,0% | 13,0% | 13,6% | 12,9% | 9,9% | 8,7% | -4,2% | |||
| Net Income Margin | 10,1% | 7,2% | 10,1% | 10,4% | 10,6% | 10,2% | 9,8% | 10,4% | 1,4% | 6,1% | -5,5% | |||
| Return on investment (ROI) | 12,3% | 12,0% | 12,3% | 13,2% | 13,7% | 13,4% | 13,4% | 12,2% | 11,8% | 11,2% | -1,1% | |||
Valuation
Firstly, using the historical valuation, multiple price-to-earnings (P/E), on Ovli, the average P/E is 19 and is currently traded with an expected P/E of 7,91. The expected P/E ratio reflects current sales and expected future profit margins. The spread between the average and current P/E gives a potential return of 140%. The possible return illustrates that Olvi doesn't sell activities in Belarus, and the market gets the same view on the stock.
| Relative analysis | P/E |
| Potential (realistic) | 7,95 |
| Average (historic) | 19,00 |
| Valuation change in % | 139% |
| Price target (12 months) | 71,19 |
Looking at the estimated value, I have generated three scenarios. In the worst-case scenario, Belarus activities are sold or lost, revenue falls by 25% in one year, and the margin falls to 6.5%. Afterward, the margin stabilizes at 6.5%, and revenue grows by 5% annually because Olvi still has the capital to invest. In the realistic-case scenario, Belarus isn't sold or lost, and margin and revenue usually continue smoothly. In the optimist-case scenario, Olvi grows more than expected, improving the margin even more. As can be seeni, in the table below, in the realistic and optimistic case, there is a significant potential return, while in the worst case, the loss is limited, which makes for a good return/risk scenario. The question is still when the war is over. Still, Olvi continues to have an earning power above 1. In that case, the value should increase more yearly than the required return of 7% annually.
| Scenario | Worst | Realistic | Optimistic |
| Expected growth | 2,0% | 5,7% | 7,0% |
| Expected payout rate | 50% | 50% | 50% |
| Earning power | 0,79 | 1,31 | 1,50 |
| Expected margin | 6,5% | 9,5% | 11% |
| Expected P/E | 11,62 | 7,95 | 6,87 |
| Expected EPS | 2,56 | 3,75 | 4,34 |
| P/E (Fair) | 11,22 | 18,78 | 21,43 |
| Price target (12 months) | 29 | 70 | 93 |
| Price target in % | -35% | 60% | 111% |
| Price target in % (current price) | -3% | 136% | 212% |
Conclusion
Olvi is facing regulatory risks in some countries due to societal attitudes towards alcohol. Operation in Belarus can be regulated and significantly impact Olvi's business. Belarus, a significant revenue contributor, accounts for approximately 20% of revenue and a substantial 40% of operating margin. The potential loss of operations in Belarus could lead to a critical 11% drop in the estimated margin. The notable customer risk is that the two largest clients will contribute 23% of total sales in 2022. The uncertainty in Belarus and the potential loss of a major customer significantly affect Olvi's sales, and the risk should be reduced over time. (3)
Key Performance Indicator:
- Reduce risk from Belarus and customers
- Expand to new markets, innovate new products, and acquire new brands
- Annually growth of 6% and maintaining its dividend
- Maintain an EBIT margin above 12%
Link
Company Information
Name: Olvi Oyj
Exchange Code: OLVAS
Market Value $: 647,03 MM
Sector & Industry
Sector: Consumer Staples
Industry: Beverages
Price Information Price
Price Target: 70
P/E: 7,92
Moat: Medium
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