Today, we are bringing you a quick analysis of the indebtedness and the capital structure of Croatian blue chip companies which make up the CROBEX10 index, using the newest 9M 2022 results.
With the publishing of all the 9M 2022 results for the Croatian companies behind us, we decided to look at how these results changed the indebtedness and capital structure of some of the largest Croatian blue chips. In order to do this, we looked at the net debt to EBITDA ratio, as well as the percentage of debt the companies use to finance their operations and investments. Furthermore, we looked at how much additional debt the observed companies could take to reach the 3x EBITDA. The 3x EBITDA mark is usually considered an “upper” limit of how much debt the companies could take, without putting their operations at risk with the repayment of said debt. This upper limit is usually considered when a company makes new investments, especially in the case of M&As.
Of all the Croatian blue chips, Adris, Ericsson NT, and Hrvatski Telekom operate with a negative net debt. This means that their current cash positions (which include short-term financial assets combined with cash and cash equivalents) are more than enough to cover their entire financial debt. Consequently, their net debt to EBITDA ratio would also be negative. Because of this, these companies were excluded from the net debt to EBITDA comparison. Finally, the EBITDA data is based on the trailling twelve months (TTM) results (meaning 9M 2022 + Q4 2021), as this is the only way to show full-year data. This is done because components of the balance sheet (like in this case, debt) always reflect their numbers on a certain date, while components of the P&L reflect only financial data for a select period (in this case 9M 2022). As such, the last quarter of 2021 is needed to get a full-year picture.
Net debt to EBITDA of Croatian blue chip companies
Source: Companies’ data, InterCapital Research
Out of the remaining 7 companies, the largest indebtedness goes to AD Plastik, with 14.5x. Following them, we have Arena Hospitality Group with 4.9x, Valamar with 1.8x, and Atlantic Grupa, with 1.0x. The remaining companies all have net debt to EBITDA of less than 1. For AD Plastik, the reason for the highest net debt/EBITDA is the low EBITDA that the Company has recorded during the last 12 months, under the influence of the semiconductor shortage in the automotive industry at first, and then the Russian invasion of Ukraine, as AD Plastik derives significant revenue and production from Russia. In terms of Arena Hospitality Group, the Company the answer is twofold; on the one hand, the Company invested and continues to invest a significant amount of money into its portfolio, which increases debt levels. On the other hand, profitability from these investments (e.g. Hotel Brioni) has yet to fully manifest itself, as the newly added assets have only operated for several months. Valamar Riviera is also in a similar boat in terms of investments requiring higher levels of debt. The remaining companies retain pretty low levels of indebtedness, which considering that the current macroeconomic situation makes taking new debt significantly more expensive, makes sense. Končar is the only “new” addition to this, as they increased investments in the 9M 2022 period, and as such, took more debt (as compared to H1 2022, when their net debt was negative).
Potential additional debt (HRK) to reach 3x EBITDA
Source: Companies’ data, InterCapital Research
Taking a look at how much new debt these companies could take to reach 3x EBITDA, Arena Hospitality and AD Plastik were excluded as they already are over this number. Of the remaining companies, HT could by far take the most, at HRK 12.56bn, followed by Adris with HRK 4.62bn, Podravka with HRK 1.63bn, Atlantska Plovidba with HRK 1.43bn, Končar with HRK 1.4bn, Atlantic Grupa with HRK 1.16bn, Ericsson NT with HRK 1.0bn, and finally, Valamar with HRK 925.5m. This would mean that in case these companies see any potential for further expansion or even a need to finance their operations, they could take on significant amounts of debt. Of course, as mentioned, new debt is more expensive now than it was a year ago, and it will only keep on getting more expensive, as ECB’s interest rate hikes have already taken place and are expected to continue in 2023.
Finally, we looked at the capital structure of these companies. All of the observed companies have the majority of their funding from equity (>50%). If we were to rank them from highest to lowest, HT has 100% of their operations financed from equity (as they have no debt), Podravka has 87.8%, and Končar has 85.9%. On the other hand, the only 2 companies that have less than 60% of their finances from equity are Valamar Riviera and Arena Hospitality Group, at 56.8% and 52.5%, respectively. Considering they both operate in the tourism industry, this is to be expected.
Capital structure of CROBEX10 constituents
Source: Companies’ data, InterCapital Research
