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National business peculiarities: how do most valuable enterprises differ in Latvia and Estonia?

Even though Baltic economies on a global scale are very similar – size of territories, number of inhabitants and economic structures – there are plenty of essential differences, which highlight the comparison of the TOP101 most valuable enterprises in Latvia and Estonia. Business leaders in Estonia have both higher profitability levels and corporate governance standards.

The aim of TOP101 most valuable enterprises project, which started in Latvia already 14 years ago, is to facilitate public discussion about the role of these enterprises in economy and society. Now for the first time TOP101 creators Prudentia and Nasdaq Riga in cooperation with Nasdaq Tallinn have created an analog list of the most valuable enterprises in Estonia, which was published this April in Tallinn.

Therefore, we have a unique information, which allows us to compare economies of Latvia and Estonia from remarkably interesting analytical angle – embracing the most valuable enterprise lists in order to study economies and societies of both countries.

It should be noted that the list made public in Estonia was created by using company data before Covid-19 crisis. In the autumn this year when the preparation of new TOP101 in both countries will take place, it will be possible to estimate the effect of epidemic.

Analyzing the most valuable enterprises in Latvia for many years, we have observed a tendency that the total value of TOP101 enterprises correlates with nation’s macroeconomic condition expressed in real gross domestic product (GDP). In the following years, we will see whether this correlation will be present also in Estonia. However, the first surprising difference, which already is observable – the total value of TOP101 most valuable enterprises proportion against each country’s size of economy.

Even though the economy of Latvia in 2018 was more than 3 billion euros larger than the GDP of Estonia (29.1 versus 26 billion euros), the total sum of TOP101 most valuable enterprises in Estonia is significantly higher than the total value of list in Latvia – 20.7 billion euros versus 16.9 billion euros. Most likely, this correlation indicates that the economic activity in Estonia is more concentrated towards large enterprises than in Latvia.

One of the most important factors affecting company valuation is profitability margin, and also here conclusion stands – Estonia’s most valuable enterprises EBITDA margin of 26% is essentially higher than in Latvia (16%). To simply put it – TOP101 enterprises in Estonia are more profitable, which results in higher valuations for Estonian enterprises, and it would be interesting to study this in depth in upcoming TOP101 projects.

Another observation – indirect EBITDA multiple of TOP101 enterprises in Estonia (median – 9.5) is higher than for enterprises in Latvia (median – 8.3). One factor explaining this difference is industry composition for TOP101 companies.

Operations with real estate is an example for that, which is the second biggest industry in Estonia’s TOP101 most valuable enterprises (15% proportion), having one of the highest EBITDA multiples (median – 12.4). At the same time, the second biggest industry of Latvia’s TOP101 most valuable enterprises – utilities (13% proportion) – has an EBITDA multiple that is two times smaller (median – 6.1).

Baltic real estate players have emphasized that there is a higher market activity in Estonia – in last 5-10 years more constriction has been done than in Latvia, also overall prices are higher. Essentially, larger and more professional companies manage the development of new projects in Estonia. In recent years, these companies have concentrated capital, allowing them to be part of TOP101 most valuable enterprises list.

The TOP101 list in Estonia is essentially different from the list in Latvia if we analyze capital geography. In Latvia 53.6% of total TOP101 value comes from enterprises with foreign capital, while in Estonia only 38%. Similarly the number of enterprises in Latvia’s TOP101 with foreign shareholders is much higher (64) than in Estonia (46). Respectively the total value of these enterprises in Latvia is 9.1 billion euros versus 7.9 billion euros in Estonia.

On industry level, in TOP101 list Latvia is better diversified than Estonia – five largest industries in Latvia account for 61%, while in Estonia they account for 70%, therefore the total value of enterprises in Latvia has smaller exposure towards specific industry risks.

Unfortunately, what unites TOP101 of both countries is the aspect of unused potential of capital attraction by listing shares in stock exchange. Both TOP101 lists have very low number of publicly listed enterprises – in Estonia there are only 7 listed enterprises, whereas in Latvia even less – only 4 enterprises. Accordingly, the total proportion of the value of these publicly listed enterprises against total TOP101 value in Estonia and Latvia is 14% and 6%, respectively.

Transparency and corporate governance of a company are factors that are also part of TOP101 methodology, which are analyzed in order to estimate the value of a company. In Estonia the most valuable enterprises on average have 70 corporate governance points (100 is the maximum), which is much higher than the average (34) for TOP101 most valuable enterprises in Latvia. Therefore, in Estonia enterprises are valued higher than enterprises from Latvia from the same industry and with similar profitability margins.

One can see in both most valuable enterprises lists that publicly listed enterprises have a direct motivation to improve their corporate governance standards – both due to the regulatory requirements and also due to improved company valuation. This distinction is particularly evident in Latvia’s TOP101, where publicly listed enterprises with average 89 corporate governance points (for non-listed – 33) also have higher average EBITDA valuation multiple – 12.6 (against 8.3 multiple for non-listed enterprises).

The most valuable enterprises are the driving force of every economy, because they have a significantly great influence on economy and society. The attribution of TOP101 most valuable enterprises lists of Latvia and Estonia to the economy of each country highlights interesting regularities, but at the same time, these lists indicate to matters, which should be rearranged and improved by both countries. By doing that, Baltic enterprises would improve their competitiveness on European and global level, and the Baltic region would become more attractive for investors.

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