LHV Institutional "Tallink Group Valuation Update, August 21st, 2023"

* Considering the current global developments, clearly, the major near-term risk for TAL relates to somewhat depressed economic environment and uncertainty connected to Russia-Ukraine war potential implications. This also have an impact on PAX flow recovery in the Baltic Sea region. Currently, the Group has been profiting from efficient chartering operations which has allowed to optimize its capacities, further supporting its profitability. However, we are skeptical that TAL can find such profitable options to operate those vessels currently on a short-term charter when the charter periods end. Although the PAX flows are continuously recovering, we believe that it could take a couple of years for full recovery. All in all, we anticipate the shipping market in the Baltic Sea to gradually recover with TAL utilizing the opportunity and bringing its operations to stable state.

* Despite market disruptions caused by the pandemic and high inflation environment due to disrupted supply chains, TAL has declared that its focus is on realising past investments in its core operations, but the group also seeks for different growth opportunities, and it would like to expand onshore operations. Along with the optimal fleet deployment, the emphasis is on improving efficiency and profitability. Thus, in our view, the group has entered into a mature stage of development in its existing operations and should be considered a “cash-cow”, with relatively hefty dividend payments in coming years. Overall, based on our current projections for TAL and other assumptions, we decided to update our fair value range (FVR) for TAL share at EUR 0.82-1.01 per share. Furthermore, we believe the group will continue to generate solid cash flows and one of the core attraction of the investment case is TAL’s hefty dividend distributions, keeping its payout yield above 7%.

* In valuing the shares of TAL, we have used the weighted average of values derived from the DCF and the peer group data (P/E, EV/EBITDA and ROE&P/B correlation), applying different weights to each method. Given the broad spectrum of values derived from peer valuation and rather weak selection of regional peers, we see the income approach as more suited for the group. Thus, we assigned an 80% weight to the DCF in the total value, leaving the peer valuation weight at only 20%, including a 10% weight for the EV/EBITDA comparatives and 5% for P/E and P/B comparatives each.