Welcome to Inderes TV! Nokian Panimo has come under Inderes research, so let's have a chat. In this video, we'll discuss Nokian Panimo as an investment target together with analyst Rauli Juva, but before that, let's have a small taste test. Out of these alcohol-free products by Nokian Panimo, we have cream soda here, a cherry drink and other soda, so I'll at least have the Cream Soda.

Still, a soda option is better with the drink.

I was supposed to have beer for this video as well, but I left my ID in the pocket of another jacket. I've got such a baby face that I didn't have it with me. Well, cheers.

Yeah, yeah, just good lemon soda. Yeah, good.

What kind of investment case is Nokian Panimo really?

So yeah. Well, the company ended up in a pretty big crisis some twenty years ago when the waters in Nokia got contaminated, and then in that context they had to suspend production and a new owner came along, and under their leadership things have gone a lot better, so it has grown for 20 years and been able to take market share. It's still a craft brewery, a very small company, but production operates in Finland, one production facility in Nokia. And indeed, they started out as a brewery making beers back in the day, and then around the mid-2010s other drinks came along in a bigger way, non-alcoholic ones, also soft drinks, ciders, and now in recent years long drinks and waters have also been added to the product categories, little by little they've been able to grow distribution and the product portfolio and take market share in a market that, as regards beer and other alcoholic beverages as well, has been pretty clearly declining for practically the entire same twenty years. How much has Nokian Panimo grown during this time? One important thing to remember here is that they indeed have so-called craft brewery status.

Explain that term.

Meaning that craft breweries receive this kind of support in Finland. Excise duty is always levied on alcohol, which the manufacturer pays, so craft breweries get a markdown on it, meaning they have to pay less tax.

That is practically comparable to turnover tax.

Well, sort of, yes. It is determined by production volumes, practically by the alcohol content. But yes, yes. It always steps down so that the very smallest craft breweries get more support, and then it gradually decreases, and after 10 million litres of production specifically in alcoholic beer, this threshold relates solely to alcoholic beer. You can produce as many other drinks as you like. But. After that 10 million litres, there is no additional support. Then if you go over 15, you lose that support, and Nokian Panimo does not want to do that, because this support is very significant, as it practically corresponded to their EBITDA for last year.

A good chunk of the earnings would disappear if this tax support didn't exist.

That's what happens, a good couple of millions, but this year we assume that around seven million litres of that alcoholic beer will be sold, so they could still double that production before reaching the threshold where they would be close to losing it.

Right. And here we hit this important milestone. Was it 2024 when they exceeded five and a half litres of beer, or 5.5 million litres of beer was produced in a year, and that was exceeded now. Was it a couple of years ago now. And that threshold. That threshold lies right there, that after that 5.5 million litres, the tax benefit decreases. Was it some 7 to 10 percentage points anyway, around that, so there is sort of a significant difference in that the more Nokian Panimo increases beer production, the lower the new litre is per produced litre, because you get that tax benefit significantly less. Yeah, and 7 percent is quite a lot. If EBITDA is some 15 percent, then yeah.

Yeah, exactly, it steps down from there. But indeed, that was sort of the final notch, that from 5.5 to 10 million litres you get the smallest additional support. There is a bit of a funny situation there, that normally in a company it goes so that when volumes grow and scale grows, your costs don't even decrease. But here you sort of face a headwind to margins as you grow due to this tax impact, which you kind of have to compensate for with other scale benefits.

Right, then we move on to my next question, meaning that since there is this clear tax restriction on beer, how attractive do you see these other categories? These sodas and mocktails, alcohol-free beers that they are starting to produce, and then water is also made. What can be said about these other categories?

Well, they are. They're.

Quite good.

These. Yeah, they're good products, and they are more attractive to begin with, as there is a big production difference in that beer requires quite a lot of equipment and beer takes over a month to mature, which means that capital is naturally tied up there for that time. And those machines cost something too, whereas these other drinks, as well as alcoholic drinks other than beer, practically involve putting the ingredients in a tank and mixing them, and it's ready in a day. So it's terribly much more efficient, and their price point and margin profile are still not very different. To begin with, products other than beer are actually more interesting in terms of their profit profile, and that makes total sense. It makes sense for that reason too. It makes sense to grow, and not just there. And not just because the beer category will eventually hit that limit. Of course the company has grown and surely will grow both ways. Still for many years here.

Right, and this is a domestic market company, and beer is probably a seasonal product like this. It's probably in the summer. You'd think that maybe more of it sells. It's probably not being exported anywhere else.

Yeah, somewhat more is sold in the summer, as seen in the report, yes, but there are indeed no plans for significant exports right now at least. And practically the majority goes through these grocery stores, over 80 percent of sales. So in that sense quite straightforward, yes.

So a domestic market company, and the main product is beer anyway, whose demand, structural demand, is decreasing. The research report said, I believe, that it decreases by two percent a year, and it's down 25 percent from its peak years. Beer sales are down in volume, so how attractive a market is this to be in, if demand is structurally shrinking for you anyway?

Well yes, from that perspective it's not a very attractive market, of course. The market is coming down and has shrunk quite significantly. There is a good side to it, though. Perhaps for Nokian Panimo, and why they have done well in this, is that the demand has specifically decreased in the bulk category. Bulk beer is not on the side of this kind of campaign beer, which Nokian Panimo has never been in until now. And then these small microbreweries. Craft and specialty beers have largely grown, or at least grown relative to that market, almost for the same 15-20 years that the market has been coming down, taking market share from the overall market in such a way that they are positioned in a somewhat better position then.

But of course, if you look at the market completely objectively from the outside, there are still three big players, huge breweries: Olvi, and then Koff owned by Carlsberg and Hartwall owned by Royal Unibrew. They are giant players, controlling perhaps around 90 percent of that market, and the market is declining. So with those specs, it's not very interesting, of course. And it wouldn't be, either, if there wasn't this microbrewery tax subsidy, otherwise a small player like this wouldn't be able to operate there sensibly.

Yes. And yeah, it is indeed completely true that I haven't bought much regular blueberry or mass-market lager myself either. Usually if I buy something, then I usually grab some flavored Fat Lizard or specialty beers like that. What do the viewers think? Do you buy specialty beers, or do you buy Sandels or some of these other bulk products? But let's move on to the next topic. Nokian Panimo has significant investments ahead. In the IPO, funds were raised to increase this production capacity. Was there some warehouse thing going on there as well? And you wrote in the report pretty much like this, that the investment falls short of the required rate of return. So what is this based on?

Yeah, yeah, warehouses were indeed built around the time of the IPO. Yeah. A warehouse expansion, and now this summer they announced that 7 million investment, which includes both equipment for non-alcoholic beer production and general production expansion and streamlining as well, so quite a big package. And they have talked about a total of roughly 10 million in growth investments, which was raised in the IPO back then, so those will now probably be used in the next few years. That's a huge amount. Of course, the company's market cap is 25 million. Revenue is a bit over ten million, also tangible assets there before that at the end of last year were something like 13 million, so a very significant amount of more stuff is being pumped in there. More of that stuff.

Well, it's simply based on the fact that I don't believe they can accelerate growth from that good trend they are in, over the coming years, nor significantly increase profitability, even though those investments are made. From that good trend they are in, over the coming years, nor significantly increase profitability, even though those investments are made. So I'd imagine the company itself thinks so, too. That too, in my opinion, are at least partly longer-term investments. Especially this non-alcoholic one. Non-alcoholic beer, so they haven't separated how much it costs, but surely some amount anyway. And a return won't be made on that right in the next few years. So I would believe that the company itself sees that these are longer-term than just for the next few years, and the return will of course rise in our estimates as well at the company level above the required return once we head into the 2030s. But in any case, so much is being invested that the return on capital will definitely dilute from what it has been in recent years.

In other words, you don't believe that earnings will improve significantly. At least returns on capital won't stay at such a good level.

Well no, they will clearly come down in the next few years. And of course, when you invest so much, depreciation increases quite a lot. So even though you get more volume and EBITDA, that also bites. Out of it, which then shows in the figures.

Okay, so to summarize the investment case for Nokian Panimo. This operates. The company operates in a market that is structurally shrinking. To a small amount. Beer consumption is decreasing every year. This is also an investment-heavy business. Large investments have to be made if you want more production capacity.

As for beer indeed, for these others you don't really need to.

Especially regarding beer, we assume that returns on capital will decrease. Our research coverage started with a reduce recommendation, so let's ask this: what would make you turn positive regarding this share?

Well yes, of course one obvious thing is always a lower share price, price down. But quite simply, there is. Well of course the fact that they can show that once this big investment actually finishes next year, this 7 million package, that it could be used to raise the growth slope or profitability more than what we have thought. Because we do have quite positive estimates, after all. So if you think that the company itself targets something like a solid 10 percent annual growth up to 2028, where they have. They have that revenue target of 20 million, so we pretty much go along with that. And we also assume that they reach their profitability target, an EBITDA margin of over 18 percent, so that way. The estimates are quite close to what they are targeting, but it is. That is of course one thing, that it would now accelerate in the next few years.

The other obvious one is simply the passage of time until now, because there is a massive negative cash flow and capital-diluting investments in the next few years. So when we go a year or two forward and those are behind, then. In a way, the cash flow profile looks completely different. And going forward, if and when at least we think that those significant investments are not needed. So that's perhaps two essential things there.

Let's keep following the situation regarding Nokian Panimo. Thank you Rauli for this video and thanks also to the viewers for watching the video. Do go and buy Nokian Panimo's products from the store. These can also be found in slightly more special, better-equipped stores like Citymarkets and others. Let's return to the matter later. And read the research, so you make good stockpicks.