Yritysoston aika, Koskisen Oyj:n Jukka Pahta?

Welcome to Karon Grilli. Our guest is Jukka Pahta, in cooperation with Koskisen Oyj. Today's topic: investment targets. Which is currently a greater concern — high raw timber prices or the four-legged brake on construction? Koskisen Oyj CEO Jukka Pahta joins us.

Of course there are other concerns as well. We have limited time, but if there are other concerns, you can mention them.

Let's go through Koskisen Oyj. Roughly speaking, you have two businesses — sawmill and veneer manufacturing in the timber industry. So you're basically making long wood and flat wood?

Is that right?

So it's about 50%, a good 50% of plywood demand from that sector. And on that side, construction is only a couple of percent of end-use cases.

When you listed about a year and a half ago, sawmill was roughly the bigger business. Now the power balance in terms of revenue is pretty much even. Is Koskisen Oyj a sawmill that also makes flat products, or are you a plywood company with old roots in sawing?

Let's start with the sawmill business. Not just for historical reasons, but also because at the time of listing, I personally visited Kärkölä, Järvelä. There were walls standing there — a new sawmill investment. Now sawing is apparently underway, with presumably still some fine-tuning and optimization happening. What's been done there and what's still in progress?

The investment was completed in July last year, or that's when the button was pushed. At that time, some estimates suggested that the third quarter of last year might have been a low point. But in any case, last year the construction brakes were put on, foundations were being covered. Was this a classic example of a cyclical company investing at the cycle peak, and the investment completing when you're close to the bottom?

The sawmill business is historically cyclical and still is — in good times money is flowing, sawdust looks like green gold, and in bad times sawmills have gone bankrupt or been sold. Yet you're still making profit even in this situation?

Sounds good. Active sales may affect volume, but you can't really influence final prices that much because the number two by two is still four.

So a customer for whom the price of the commodity — the number two by two — isn't that central to their own production could be a good one. Are there such customers?

Then let's move to the plywood business. Birch plywood — you've mentioned the commodity aspect, but plywood is really a quality product that's difficult to produce and where you can differentiate.

And since the customer skips some process — the coating process — because they get the finished product from you. But you've also actively pursued moving forward in the value chain. You have this van body business from Poland. Tell us about that.

Do they use your wood products, or do they buy similar panels from elsewhere?

Then to the plywood business — how did Russia's invasion of Ukraine affect it? Russia was a major, very significant raw material producer — or rather exporter. Was there demand that European customers needed to fill?

Have you been able to raise prices this year, or how does pricing work overall? At what stage?

What kind of investment projects do your competitors have?

As for birch plywood availability — you're a significant user of birch plywood in Finland. In Metsälehti at the end of last year there was a piece saying that birch bark sellers are now in a great position, and it was mentioned that logging companies had been advised not to worry about quality requirements. Is this accurate? Was it Koskisen's subcontractor?

So if there were more birch logs available — birch veneer — you would very much use them?

You can't get all of this through your own procurement. You have to buy birch veneer from your competitors. Do you use species exchange as a tool? Could competitors use that to squeeze you?

You probably get more fiber wood through your own procurement than you need, but your primary interest is the larger wood species?

Is it nowadays mainly energy demand? In Finland there are three main wood species, and fiber is also sold. In Sweden they only sell volume. Should we move to a similar system here? What's optimal?

I won't ask you how Koskisen's share price develops, but since we've started talking about timber prices, we certainly have forest owners here too besides me at the mic. So let's take a spruce log and final felling. I actually checked last week's data: 75 euros per cubic meter is currently the price. Where would it be in 12 months, so in April 2025 — higher or lower?

Should this choice be made from the timber seller's perspective or the timber buyer's, Koskisen Oyj's perspective? Make it based on your own taste — is your view decline or increase? You can take the mustard tube with you and choose the perspective: Koskisen Oyj's or the timber seller's.

Clearly a strong mustard fan. I've been asking this question at the Helsinki Stock Exchange, and green mustard has gone more, but strong is now better. Yes, strong is better — clearly a player, a player. So, of those two core business areas, but then you have an ambitious growth target of 500 million euros in revenue by fiscal year '27, meaning pretty soon. Good lord — that means enormous growth. What should the focus be, especially from the current position, because revenue has declined from the peaks? Which direction should the company look — more towards the sawmill industry or the panel industry?

What kind of role does logistics play, or does it play any role?

Is there movement in the value chain in your opinion? On the sawmill side there was some company and mistake, wasn't there — some project before the listing?

It will go more towards volume than just value chain position?

So you have quite good reserves, both straw-dry and shares to use for acquisitions. Now the market has dived because of this four-wheel braking where we started from. You'd think there'd be things to buy at the moment — prices could be at least better than half a year ago.

You have a background as CFO and finance director, so there are certainly things that a more reckless CEO could drive the CFO to a nervous breakdown. And when a CFO becomes CEO, they know at least to keep the balance sheet in order. You certainly have these projects quite a lot on the CEO's and board's table. What usually stops possible acquisitions that are offered to you, or what have you ended up discussing with brokers?

You also distribute dividends, 32 cents — that gives quite a decent dividend yield. But it's paid from earnings, so it's definitely not excessive. So the idea is to keep shareholders satisfied with the dividend?

Profitability target 15% operating margin over the cycle. For this year, 10 plus or minus is forecasted, so around 12. Well okay, a couple of years ago at the peaks we made absolutely incredible results, so in that sense this goes right into the range. The idea is probably that we'll soon be at 15 again and then above it — it goes pretty much following the cycle.

Koskisen Oyj is by its very name a family company — or rather a 'suku' (clan) company. The family members own the company directly, rather than there being a unified family view. How unified are the family representatives' views? How have you experienced this?

Yes, family companies can be at best or at worst quite difficult places for a CEO because there can be conflicting interests. Perhaps this stock listing and being listed, the obligations and structures — they also protect. Not speaking about Koskisen Oyj specifically, but in general, the stock exchange regulates listed companies with certain regulations and operating models and practices. So if a large owner calls you, you say you don't take instructions except from the board.

You've made a really long career in the forestry industry and know this field like your own pockets. Do you manage to go to the forest yourself?

Skiing in Lapland and checking that the annual growth rates aren't that great here yet, right? I was there last week.

Last week at Pallastunturi there was still over a meter of snow.

Let's take the last question to find out what kind of Jukka Pahta you are as an investor. Do you have tarot cards? The question is hard so you can choose it yourself. You can blame everything but when you read it yourself you also get to interpret my handwriting to your own liking. Your investment has yielded you the most joy.

Oh, and you even got it at a 10% discount.

Excellent. Many thanks for this visit, Jukka Pahta.

Next guest is Seppo Kurkisuo. European stock markets have been underperforming for a long time compared to the United States. If you look at a ten-year history including dividends and reinvestment, the US S&P 500 index has more than quadrupled while the European counterpart STOXX 600 has only a little over doubled. What is this due to? With us is S-Bank's Head of Equity Investment and responsible for European mandate, portfolio manager Seppo Kurkisuo.

Thank you Karo, and a good question. It's not at all because there aren't good companies in Europe. There are actually two factors that have driven the US stock market to these returns you just mentioned compared to Europe. First, this has been a dynamic market — there's an ecosystem that enables good development of technology companies, starting right from early-stage financing and also later development. A major factor has been the lowness of interest rates and money availability, which has caused every dollar made as profit — or made in the future — to have multiplicatively increased company value. Thus these growth companies in the technology sector have been in really strong demand, and they are really good companies in the US. Companies like Apple, Microsoft, and Amazon have multiplied several times over the past ten years, and Nvidia has multiplied over 200 times in the same period. They're good companies. We don't have a comparable technology cluster in Europe. We have many factors — borders, different cultures, language problems. There aren't these platforms that many US companies have utilized to take a global market position. The best-developed large technology company in Europe is the Dutch ASML, which makes manufacturing equipment for the semiconductor industry, and it has a little over tenfolded in the past ten years. These are actually the reasons why Europe's stock exchanges emphasize more industry, healthcare, and banks. Even though they're also good companies growing with the world, they don't scale in the same way as technology companies.

Historical poorness doesn't necessarily predict the future — it's not necessarily so that this European underperformance will continue. What are the factors at this moment that would support investing in European companies?

Yes, there are maybe three basic reasons I see that will support Europe in the near future. First, it depends on these sector megatrends where European companies are in my opinion well positioned. We're talking about the green transition, renewable energy construction, and energy efficiency. European industrial companies are well-positioned as global market leaders in these. We've only seen the overture in this transition, and I believe these companies will get more and more S-volumes due to these massive public funding packages in both the US and Europe, quite significantly for European industrial companies. Second factor is valuation differences between the US and Europe. It's not fully explained — even on comparable sectors with similar growth profiles, companies are valued much more highly in the US than in Europe and for globally operating companies. This isn't fully justified, so one can expect this gap to narrow, especially with interest rate normalization. Third is the macroeconomic factor — in this environment of normalizing interest rates, after a long period of low rates, European companies that are less growth-oriented will benefit as the discount rate rises over the long term.

You mentioned green transition benefiting industrial companies. Is that possibly the sector that interests you most in Europe right now, or what sectors or countries do you follow most?

Good question. I don't really look at country-specific companies unless we're talking about domestic market companies. Mostly I look at sectors. The green transition companies are well represented in our European funds. But at this moment, thinking about what I'd be looking at in a buying mood, what could be at a turnaround — more those companies on the materials side: mining companies and chemical industry companies. There are quite many well-represented in European stock exchanges, and their earnings growth forecasts haven't started rising in the same way, and expectations haven't risen like in industrial companies where we already see some improvement from expectations perspective. So this is a cycle game.

A cycle game, yes, exactly.

Exactly, and in these the cycle turning better hasn't caught on yet.

What about individual companies? What stock have you been interested in lately?

I need to be a bit careful answering these. I should give this caveat that I rarely get excited about any case — everything is based on careful analysis, and I actually fight against that kind of excitement. But at the end of last year I got interested in a company: BE Semiconductor, which is Dutch, a technology leader making packaging solutions for the semiconductor industry. The semiconductor industry was already in quite a hype at that point and valuation multiples were high, growth forecasts also high. Although I usually don't go into strong growth cases, I went in, and in the last couple of months it still looks like this was a really right decision.

This will probably be found in your managed active European fund's portfolio. What changes have you made to the portfolio recently?

Yes, certainly. Recently I've made more changes at the sector level. I've lightened luxury companies' weight — they've gone really well, and their earnings growth forecasts are a lot based on Asian markets pulling and growth continuing there. But I see there isn't necessarily the same glorious future to be expected as some expectations have put into them. China's economic growth forecasts have decreased to around 3%, and the consumer is a bit more cautious. Basic luxury sales could be a bit difficult in coming years. The other, bigger change I've made is increased bank weight in these funds. I see banks can possibly deliver better results even over a longer period than it seems. The European economy stays in reasonably good shape, credit losses stay under control, and interest rate normalization supports quite many banks. Banks have been cheap for a long time. We'll see if they start rising in price — at least through dividend yield there's return.

Many thanks Seppo Kurkisuo.

Thank you Karo.

Karo's verdict. Yes, Koskisen Oyj — I tried to grill Jukka Pahta about acquisitions, because those investments practically must mean that. But quite narrowly I couldn't really get anything other than volume growth. Acquiring competitors has been known for a year and a half — it was all told in the listing prospectus, that they'll soon have money and shares with which to buy. In my opinion Jukka Pahta has done really good work, especially with this balance sheet thinking approach. I think this CFO and finance director background and knowing the cyclicality of operations has partly guided to this. Koskisen Oyj is currently without doubt in a position to build and take the game and operate. The expansion opportunities — acquisition targets — there are quite few, but I could bet one mustard tube that Koskisen Oyj will this year announce some acquisition. Also the result is surprisingly good. I got to know the company when it listed and I subscribed in the share offering and sold immediately because I thought the cycle would turn. But Koskisen has done good results. Certainly Russia's attack on Ukraine and the changes it caused in the panel industry — the panel industry profitability is at this moment probably at an unreasonably high, unhealthy level. But it will certainly come down, and at the same time the sawmill business will recover. The valuation isn't terrible. Is Koskisen Oyj an interesting investment target? We're a bit between the tree and the bark — can't really negotiate much with end customers or raw material suppliers. In both cases they're a small player. But quite credibly Jukka Pahta justified that from certain sawmill products, when you make sufficiently customer-tailored solutions, you can get some pricing power. But it's certainly more world market price fluctuations than significant brand pricing — Koskisen Oyj isn't Coca-Cola. But yes, I had somewhat abandoned all thoughts about Koskisen Oyj, but preparing this episode I really got excited about it again. This is a really suitable target for a value investor. Possible value-creating acquisitions give a small opportunity to jump to a new level. If Koskisen Oyj could grow revenue to 500 million without significant use of own shares as payment and could restore profitability to a bit generously double-digit — not necessarily even to 15% — it would be quite affordably priced. But there were many ifs. I don't currently own it, but I can't guarantee I won't soon.

This was Karo's Grill. Grill master Karo Hämäläinen. Grill place built by Illegal Vision. Cooks Henrik Koivisto and Olli Jalkanen. Marinades paid by S-Bank.