Taaleri Q2'24: Company available below the SOTP value

Translation: Original comment published in Finnish on 08/21/2024 at 8:21 am EEST

Taaleri's reported Q2 result exceeded our expectations as the operating cost level of Renewable Energy was lower than expected. Garantia’s development was also strong. Based on the report, we raised our earnings forecasts for the coming years somewhat. Although it is hard to see significant upside drivers in the stock price in the short term, the valuation has unjustifiably fallen below the value of our sum of the parts calculation. Thus, we raise our recommendation to Accumulate (previously Reduce) and reiterate our EUR 9.5 target price.

Lower-than-expected expenses pushed the result above expectations

Taaleri's EBIT was 4.4 MEUR, exceeding our 3.9 MEUR estimate. The forecast overshoot is mainly explained by the Renewable Energy segment, whose cost level was well below our expectations. The profitability of Garantia’s insurance business also developed favorably, as claims rates remained very moderate. In other respects, the earnings figures of the report were fairly well in line with expectations and no significant one-off income occurred in the quarter. Like EBIT, EPS also exceeded our forecast. This was supported by lower minority shares than we expected. As expected, the company did not report on the sales development of the spearhead product but expects investment commitments to increase toward the end of the year. Interim information on SolarWind 3 is therefore probably available later in the year. The final closure of the fund should take place around next summer.

Forecasts raised slightly

Our earnings forecasts for the next few years increased by a few percent when we revised our cost level estimate for Renewable Energy. Thus, we are more confident about the profitability-enhancing impact of SolarWind 3. We also raised our forecast for the development of Garantia’s insurance revenue slightly.

In our estimates, the earnings distribution still focuses strongly on performance fees and investment income. Garantia continues to develop steadily in our calculations despite the challenging market. The ramp-up of private equity funds continues lead by SolarWind 3, but the result will mainly come from one-off income. The result based on recurring fees remains modest, as growth investments of Other private equity funds depresses profitability. In line with the updated strategy, Taaleri will invest a significant part of its cash flow in the coming years in biotechnology investments, whose actual return potential will not be seen until the end of the decade when the first exits in bio-investments are seen. In our forecasts, profit distribution is limited to the basic dividend (around 60% of the result for the period in the coming years), as investment portfolio growth ties up a lot of capital.

The stock price has fallen below the value of the parts

We consider the sum of the parts calculation to be the best method for valuing Taaleri, as it best considers the different profit and risk profiles of the parts. The value based on our SOTP calculation is EUR 9.8 per share, and most of the value is still committed to the insurance company Garantia. In the future, however, in addition to the development of operating segments, Taaleri 's value creation will increasingly rely on the Group 's own investment operations in line with the strategy updated in the last financial year. Thus, the key to shareholder value development is how successfully management can allocate capital to higher-risk biotechnology investments. Drivers for a higher sum of the parts value would be: 1) success in bio investments  2) better earnings development in private equity funds than expected, 3) value-creating structural arrangements, or 4) faster growth in Garantia than expected.