Helsinki Stock Exchange is cheap
In recent days, Nasdaq Helsinki has witnessed rare up days. Every dog has its day, no?
In this post, we talk about how Nasdaq Helsinki looks cheap, at least according to the forecasts. There are reasons for the cheapness, but when times are clearer, stocks are likely to be priced higher again.
Helsinki Stock Exchange is cheap
A recurring theme in my posts this fall has been that every dog has its day. The dog in question is Nasdaq Helsinki, which has been drenched in ice cold water for a couple of years. The stock exchange has seen a lot of hurt, but that has led to a significant fall in the stock market's valuation. Or, like some investors like to put it, valuation levels have normalized.
Let's take a deeper look at the valuation multiples of Nasdaq Helsinki, based on Inderes' earnings forecasts for this year. Inderes monitors 157 companies on the Finnish stock exchange, i.e., almost all relevant companies. I left out Caverion because it is about to go private via a takeover bid. Inderes now also monitors four companies from Sweden, which I of course threw aside in this review of the Finnish market. Naturally, the weakness of such an analysis is the reliability of the forecasts, but with the year more than halfway through, I think they're chiefly in the correct ballpark. In big companies it would be better to look at the consensus, the average of several analysts' forecasts, but scraping that together would have made writing this post even more laborious and I think that our forecasts for big companies shouldn’t be too far off either.
The combined net profit of all companies on Nasdaq Helsinki will be around EUR 19 billion this year. These are adjusted results. After all, net profit can fluctuate wildly with one-off items, so looking at it may not give a true picture of a company's operational performance.
Nasdaq Helsinki’s results are very concentrated. This year, six companies will make more than a billion euros. Nordea alone makes a profit of EUR 5 billion. Together, Nordea, Neste, KONE, Nokia, Sampo and Fortum make a total profit of EUR 12 billion. The remaining 151 companies make a total of EUR 7 billion. If you want to become an amateur equity strategist on the Helsinki Stock Exchange, these six companies are worth a look. This year, the results of forest giants UPM and Stora Enso are hurting, with both making over a billion in a good cycle. Thus, in a stable economy, the billionaire club would have 8 members.
Finns are always interested in dividends, so let's briefly mention that Inderes predicts that listed companies will pay EUR 13.4 billion in dividends next spring. In other words, companies collectively pay 70% of their profits to shareholders as dividends and invest 30% back into the business or pay off debts. Nordea also dominates the dividend game, alone accounting for a quarter of the total dividends of the stock exchange. Already at this stage we can conclude that Nordea is a real national treasure and if it were to stumble, Nasdaq Helsinki’s result would plummet, and dividends would go with it. The Helsinki Stock Exchange ranges in scale from giants to Lilliputians. Nordea pays more than EUR 3 billion in dividends, while Honkarakenne, the smallest dividend payer, pays less than EUR 200,000. 49 companies, or one third of the population, abstain from paying dividends altogether for one reason or another.
The combined market capitalization of all companies on Nasdaq Helsinki is around EUR 250 billion. Perhaps at this point it would be worth mentioning SSAB, which is not monitored by Inderes, with a market value of more than EUR 5 billion, even though it doesn't really change the overall picture. The stock exchange is, coincidentally, about the size of Finland's annual GDP. The largest company on the Helsinki Stock Exchange is Nordea with a market capitalization of EUR 37 billion and the smallest is Rush Factory with a market capitalization of less than EUR 1 million.
Relating the net profit of the stock exchange to its market cap, we obtain a P/E ratio of 12.9 for the whole stock exchange. That's pretty close to the Bloomberg data on the P/E ratio for the whole stock market of 12-13 based on forecasts for the next 12 months, as it should be. The median P/E ratio, or average P/E ratio for 157 listed companies, is 12.5x. According to Refinitiv's data, the median P/E ratio on Nasdaq Helsinki has averaged 14x in the 2000s, so historically the stock market could be considered cheap.
The ratio of enterprise value to operating profit, taking into account companies' net liabilities, is 11.4x.
Dividendphiles will be interested in the total dividend yield of the stock market, a hefty 5.4%.
The affordability of the stock market can also be considered in terms of the companies' sustainable return on capital. As all smart investors know, the present value of listed companies is their future cash flows at some rate of return to today. The barbaric P/E multiples and similar are basically simplifications of this fact. The present value of cash flows is affected by the growth rate of a listed company's earnings and how profitably the company can invest its euros to achieve this growth. Furthermore, this figure is naturally driven by the return required by investors for each company. Nobody will pay EUR 10 for a share that will pay EUR 10 in dividends for the next 10 years and then go bust. In this case, the return would be zero, before taxes and transaction costs.
Inderes forecasts a return on equity of around 12.5% for Nasdaq Helsinki. So, there is about EUR 150 billion of equity. Unlike results that fluctuate with the cycle, equity changes quite slowly. Fortum's equity halving in a short period of time due to the failed Russian-German adventure is quite rare in the context of the stock market as a whole. Returns on capital vary widely. For example, KONE and Elisa have a return on capital of over 30%, while Outokumpu's owners are struggling in a weak cycle with a 4% return on capital.
A while ago, I talked in What’s Up with Stonks Special about how the long-term earnings growth of Nasdaq Helsinki could be around 4% in nominal terms. If the return on equity were to remain at 12.5% on average, which doesn’t seem an unrealistic assumption for Finnish companies that are picking up the slack, a fair P/E ratio for the stock market as a whole would be 13.5. Here I used a 9% return on equity. What is ultimately the return on equity is an endless quagmire to debate. The European risk-free rate is now just under 3%. Someone will probably point out that earnings growth can’t be more than the risk-free rate in the long run, but historically the economy and earnings have been able to grow faster than interest rates, so the assumption of total stock market earnings growth is not entirely wrong.
On the risk premium of Nasdaq Helsinki, i.e., what should an investor receive on top of the risk-free interest rate, I have seen estimates in the 5-10% range using various methods. The risk premium in Inderes analyses is 5%. If the return on equity for the whole stock market were 10%, the acceptable P/E ratio would fall to eleven, which sounds very low. However, the Helsinki Stock Exchange paid an average of 13.5 times the forecast performance over the 2000s. In good times 16x, in bad times 13.5x or even less than ten.
Dust-covered value investors often stare at book value. The Helsinki Stock Exchange as a whole trades at around 1.6 times its book value. Because we have banks and a lot of industry, book value still matters. Unfortunately, light balance sheet companies like Qt Group, which do not even capitalize their product development costs on the balance sheet and whose return on capital is therefore less indicative of the profitability of the business, are still quite rare. In good times, that factor too has hovered around two. In turn, in bad crises such as the financial crisis, the stock market has been valued at a price-to-book ratio of one. If we were to go there for one reason or another, it would be time to break out the piggy banks and push the rest of the cash into the market.
Of course, there are risks in the Helsinki Stock Exchange, which is why it has in a world of hurt. The most important market for Finnish companies is Europe, where economic growth is notoriously slow. Europe is at risk of becoming an open-air museum for pensioners as the rest of the world economy continues to grow. Germany, Finland's main trade partner, is teetering on the brink of recession. Many of our listed companies manufacture investment goods, and China, the world's biggest investor, is also plagued by economic problems. The US, on the other hand, has stimulated the economy and poured public money more successfully into the green transition, supporting local companies. In general, growing protectionism harms a small open economy like Finland and Finnish companies.
It’s also worth noting the concentration of the Helsinki Stock Exchange mentioned above. We have a handful of big companies and Nordea's stumble in particular would have a big impact on these calculations. On the other hand, a giant can also surprise in a positive way, as Neste managed to do in the success story of the last decade. Or just think about how Nordea has improved its performance in recent years.
A couple of years ago, investors were complaining about how they would immediately buy cheapened stocks at a 10% dip. Now the stock market has dipped 30% in a couple of years. You've got what you ordered, so no need to complain. Despite these challenges, overall, I dare call the Helsinki Stock Exchange cheap. That's not to say it can't get even cheaper, but it's strange if you can't find something to buy on the stock market at the moment.
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