Time to Buy "Everything" in Baltic Revival, East Capital Says

Assets in Estonia, Latvia and Lithuania are undervalued and stand to benefit from an economic recovery in Russia, according to eastern European investor East Capital Group.

“At the moment, with the type of valuations that you have in the Baltics, I would be buying everything,” East Capital Chairman Peter Elam Hakansson said in a Stockholm interview. “As a long-term investor, this is a time to invest.”

The Stockholm-based fund with about 3 billion euros ($4.5 billion) under management owns stakes in Lithuanian dairy foods maker Pieno Zvaigzdes, telephone operator TEO LT AB and Estonian retailer Tallinna Kaubamaja AS. TEO trades at about eight times estimated earnings, compared to about 16 for the Dow Jones Stoxx 600 Index, a measure of European companies, Bloomberg data show.

After the region suffered the worst recessions in the European Union, signs of stabilization are luring investors back. Finland’s Pohjola Bank Oyj said last month it will open Baltic offices and that it plans to buy local insurers. Latvia is talking to possible buyers of state-owned Parex Banka. Sweden’s Swedbank AB and SEB AB, the largest lenders in the Baltic countries, said last month that growth in bad loans in the region has peaked.

Lack of Securities

Hakansson said investor interest in the Baltics jumped after Sweden’s largest telecommunications operator, TeliaSonera AB, offered to buy out minority shareholders of its Estonian and Lithuanian subsidiaries, AS Eesti Telekom and TEO, in August.

East Capital temporarily turned away potential investors in its Baltic fund earlier this year, citing high demand and a lack of securities that could be readily bought or sold. The fund, which resumed accepting new subscriptions on Sept. 7, has returned 19 percent in kronor so far in 2009, compared with a 23 percent increase in the OMX Baltic All-Share index.

Lithuania’s benchmark OMX Vilnius Index has risen 51 percent this year, Latvia’s OMX Riga Index gained 12 percent and Estonia’s OMX Tallinn Index increased 51 percent. All three underperformed the MSCI EM Eastern Europe Index, which jumped 88 percent.

Baltic governments may sell more state-owned businesses, Hakansson said. Neighboring Poland is offering stakes in power, oil, copper, phone and insurance companies to help plug a budget deficit that the government says will almost double next year.

“The Baltics have to catch up there,” he said, adding that utilities may be the first to be auctioned. “There are plenty of assets left to be sold.”

Slowing Decline

Lithuania’s economy contracted at a slower pace in the third quarter, shrinking at an annual rate of 14.3 percent, as the country showed the first signs of recovering from the EU’s deepest recession. Estonia’s economic decline slowed in the same quarter for the first time since the end of 2007, as improving demand from abroad helped compensate for weaker consumer spending.

Hakansson said Baltic consumer goods companies will benefit from a return to growth in Russia as well as recovery in home markets.

“What I always loved about the Baltics, which is a bit of the same thing as in the Nordics, is that you have small countries with small home markets having to look outside,” he said.

(Adam Ewing and Niklas Magnusson - Bloomberg - 19/11/09)