Welcome to Inderes TV! In this video, we are going to discuss Apetit as an investment based on a new comprehensive research report. Hello, Pauli. Hi. How would you summarize Apetit's investment case?

For the past couple of years, Apetit has been a defensive company that nevertheless delivers quite moderate earnings in a low-growth market, has been able to pay quite a good dividend, and at times has been a very affordable share relative to its earnings. With this new strategy that the company launched late last year, ambition has clearly been raised and it wants to grow more strongly. That in itself is a good objective, but at least right now it looks like these growth targets and perhaps some other factors as well have contributed to earnings dropping practically to zero this year. And the uncertainty surrounding the company's earnings trajectory for the next few years has indeed increased significantly, because there are perhaps as many as two somewhat soft areas where it is a bit difficult to predict how they will develop. And the other big one actually relates to growth, namely the acquisition of the Swedish pea business. So this business has been unprofitable throughout its history. Of course, it is still a fairly young business with a very modern plant, so when you manage to increase volume and so on and improve its operations, there is potential for better things. But it is difficult to estimate. And then the other side has been the oilseed products. Where you are actually more at the mercy of market margins. The strong foundation here is the Finnish Food Solutions. After all, the company has a strong market position in domestic frozen food aisles, frozen food aisles, and frozen pizzas.

Right, let's move on to the earnings trend. At its best in past years, Apetit has generated an EBIT of around 10 million euros. Roughly speaking, anyway. You estimate zero earnings for this year, so I touched on this a bit already, but I wanted to elaborate on it. Yes, we didn't quite reach ten, it was around that altitude back in 2019, I believe. Yes, and we are heading towards zero this year, and that is because both oilseed products have slumped this year; among other things, when rapeseed and turnip rape are pressed from oilseed products, you get oil that is sold for food use, for example, and you get rapeseed expeller meal, which is sold mainly for feed use, and the price of feed has been under pressure. Among other things, soybeans have been imported to the market, and as a result, the total crushing margin has turned out weak. It fluctuates a bit from time to time depending on market conditions. And then indeed this loss in the pea business that I mentioned here: Sweden had a weak pea harvest, which is now delaying the turnaround that is being pursued there, but in itself the outlook is... Quite good regarding Food Solutions, and the harvest in Finland was also very good.

Right. Apetit was one of the companies that stumbled a bit over there in Sweden. This it was. This Swedish pea business was acquired last year. At the same time, a competitor, a local competitor, shut down its operations there a year ago. Do we have any visibility into this Swedish pea business, which has always been unprofitable? You mentioned that there is a new plant, but is there a timeframe within which a scenario can be drawn where this starts to be profitable? There are several elements through which earnings can be improved. One is improving the plant's capacity utilization rates and thus being able to spread the fixed costs over a larger output. However, this requires a good harvest from the local market, so if harvests are weak, then you cannot run the plant at high utilization rates. But the company definitely wants a change in this and aims to get more raw material in the coming years by acquiring more contract... Contract volume from among the farmers, then commercial measures are one thing that can clearly be used to develop this, and I think visibility on that is quite good. The company has now introduced Skånska ärtor, Skåne peas packaging, to retail stores this autumn. Previously, peas were exported from that Swedish plant to the world or to wholesalers or industry, but now they are also investing in these higher-value channels, such as retail and food service, and I see that this also supports Apetit's overall brand image in Sweden as the closest domestic option in Sweden. Still, Sweden imports the vast majority, so this way it has an opportunity to stand out. Meaning a more valuable product, rather than just offering bulk to the wholesale trade.

Indeed, since earnings have lately been at a loss of around 3 million euros, quite a lot relative to... ...revenue and also Sweden's revenue, so if the revenue of the Swedish pea business is somewhere around 15 million euros, a 3 million euro EBIT loss is quite a lot. I think part of that will certainly be achieved through commercial measures and cost savings, but then the rest, to reach zero and beyond, requires volume, and that is not so clear. However, we do have an earnings improvement of well over 3 million euros in our estimates for the two-year period, so we have already priced some of that in. We'll wait and see how that develops.

The other thing that affects Apetit, did you talk about it? You talked about that too at the very beginning, these are... Are they oilseed seeds? Is the correct term that in these you have to live somewhat according to the world market price? So you get good years and then bad years. Whatever price you happen to have to buy at? Yes, and this comes both from the raw materials and then also from the prices of the final products, and that forms the margin. So the company is able to hedge its position in such a way that they know at what price they can sell the product when they buy the raw material. But if the prices are unfavorable, then inevitably weaker results will follow, until... They can indeed be hedged against. Downstream is not so much the problem, but rather it is just that if the feed price is low and the raw material price is high, then very little is left for oneself. Then take food oil, for example. A quite okay price could be obtained for that. So in that business you are somewhat at the mercy of the market, but efforts have also been made there to develop things such as using higher value-added revenue both in food-grade oils and then from that rapeseed expeller.

In past years, the majority of Apetit's earnings came from these Finnish operations, meaning vegetables and peas in frozen food aisles. So what can be said about these? Yes, indeed this Finnish Food Solutions business has developed favorably in the big picture and earnings have grown. Of course, there have also been relatively significant investments made there. There are indeed basic frozen... ...vegetables, but there are also further processed foods that are closer to ready meals, such as cauliflower wings, meatballs, or patties. Healthy and plant-based solutions for consumers who perhaps don't want to spend as much time making everything completely from scratch starting from raw materials. And a lot goes to food service as well. A vegetarian option must be available in lunch cafeterias, schools, and elsewhere. It is developing well, and of course it is also partly dependent on these harvest seasons. Last year was a somewhat weaker harvest season and this year it looks like it is quite favorable. So we expect earnings to improve on that side again.

Then over the next 12 months Apetit has this BlackGrain. Fun to shed a little light on this for the listeners. Yes, indeed in oilseed products, that rapeseed expeller which has traditionally perhaps been used for feed, but it can also be processed into this very nutritious... ...ingredient for the food industry that contains fiber, protein, and other healthy components. And its commercialization had been promoted for many years, and now additional investments have been made in its production capacity and partly introduced to retail stores. However, food service is perhaps an even more important channel for this product, thereby adding more value to oilseed products. This is not, however, something that would be profitable immediately; rather, now that it has been invested in and staff is working on it, the expectation is that it will be... The next few years will perhaps still be unprofitable operations, and then more volumes need to be achieved for it to turn profitable. The company itself has stated 2028 at the earliest. That could happen, but of course visibility into it is still low. But indeed an element in the company's story that has been simmering and bubbling in the background for several years, and now we have reached the stage where the product is actually being commercialized and sold. The market is interesting.

We talked earlier about Apetit's earnings being close to zero this year, so where do we believe they will settle in the coming years? Well, that peak earnings was a good 9 million euros back in 2020... 2024. That was the peak earnings, and let's say that in order to get there, both oilseed products and... Then... The Swedish business should significantly be able to improve their profitability, and visibility on that is a bit weak right now, so we have baked earnings improvements of several million euros into both in our estimates, but this still looks relatively pricey or at least fully valued even on a horizon of a few years. And then there is the risk that if these earnings improvements do not materialize, then this is genuinely expensive relative to those earnings, and perhaps the P/B ratio, i.e. relative to the book value, is admittedly more affordable, but it must be taken into account that this includes the Swedish business, which was also acquired below book value. So it was kind of known that it wouldn't produce what it's supposed to produce. That capital there. Of course, if a major change is achieved there in the future, that is a different story. But in a way, it is quite justified that it trades clearly below its book value. Right now we are actually left waiting to see what happens on the Swedish side and also in oilseed products. But Food Solutions is still a backbone here that is progressing well in Finland. We will keep following the progress of the case. Thank you very much for those comments. Thanks also for watching the video. Read the research, and happy stockpicking.