LHV Institutional 'Nordecon (NCN1T ET) Annual Review, September 4th, 2020'

* Nordecon AS (‘Nordecon’ or the ‘Company’; along with its subsidiaries referred to as the ‘Group’) is one of the leading construction groups in Estonia, with diversified operations that generate about 90% of its revenue in the country. The Group’s remaining income comes from its operations in Ukraine, Finland, and Sweden. In terms of business segments, the buildings segment contributed, on average (2015-19), about three-fourths to total revenues, while the rest is contributed by the infrastructure segment. During the last five years, Nordecon’s revenue grew at a five-year compounded annual growth rate (‘CAGR’) of 12.6%, primarily driven by growth in its buildings segment. In 2019, total revenues increased by 4.7% y-o-y to EUR 233.5m, supported by growth in both of its segments.
* Due to the COVID-19 pandemic, the near- to medium-term outlook for the construction market has become negative. Given the coronavirus crisis, the Baltic states’ economies are likely to shrink sharply. The consumer behaviour is expected to change for longer than an actual pandemic; people are likely to travel less, consume less, and save more. The economic confidence regarding the future will be lower (fear of job loss, etc.). Sectors like transport, lodging, entertainment, restaurants, and catering would be hit hard due to the restricted movement of people both within and across national borders. The construction industry will face indirect impacts with the general economic activity being lower, and supply chains having become slower, less reliable, and more costly. The construction workers falling ill and being isolated may disrupt the construction activities. The clients and investors are becoming much more cautious and risk-averse, which will have longer-term impacts on the construction industry and may result in a sharp decline in investments.
* We have reassessed our fair value range for Nordecon based on its operating performance and macro factors in its key markets. Given that the earnings outlook in its key markets is bleak in medium term, we have revised down our forecasts and, accordingly, have changed our fair value range from EUR 1.10-1.20 (valid from 25th April 2019 to 22nd March 2020) to EUR 1.00-1.10. Our fair value range reflects a greater emphasis on the Discounted Cash Flow (‘DCF’) valuation approach. We assigned a 90% weight to the DCF valuation and a 10% one to the relative valuation, divided equally between the values derived from EV/EBITDA and P/E multiples. This report contains a full set of financial forecasts and is useful for gaining an initial insight into the company. Please also refer to the tables and charts in the attachment.