On Wednesday, LJSE held a webinar with 6 listed Slovenian blue chips. During the event, the companies commented on their FY 2022 financial results and gave insight into what they expect for 2023. Here are the main takeaways from the event.

The following companies participated in the webinar: Triglav, Sava Re, Cinkarna Celje, Krka, Petrol, and NLB. Out of these companies, we listed the most important highlights below. Webinar started with an overview of the Slovenian Capital Market presented by Danijel Delač, the board member at InterCapital.

Slovenian Capital Market – The Slovenian capital market has been facing the same threat that most of the European and American ones have – high inflation and uncertainty. All the macroeconomic trends are still present. Despite this, the SBITOP index recorded 14% growth YTD. Besides this, there is one more big story to mention – that of the Slovenian government’s capital market strategy.

Even though details are still scarce, as it stands right now, this strategy has four pillars:

• Creating a Fund with state-owned companies, which are to be listed on the LJSE, at least partially.
• Offering additional types of bonds, similar to national bonds in Croatia.
• Increasing financial education and creating a single platform for investing in SMEs.
• Creating special investment accounts, which contain tax benefits for retail investors.

These pillars and the overall goal of the strategy are for Slovenia to reach Emerging market status as soon as possible, with the goal being by 2030. However, if we look at the classification of what it means to be an Emerging market, the requirements are still too high (the top 3 largest blue chips doubling their turnover). On the other hand, the Slovenian market also faces many problems, such as the lack of institutional (pension funds) investors’ willingness to invest more actively, the lack of a share buyback problem, and the overall low liquidity. The companies themselves have attractive valuations but are still trading at a discount compared to peer companies in the more developed markets because of this. Slovenia also remains a solid dividend play, but improvements to the tax benefits could help drive this even further.

Triglav – the company shortly glanced through its FY 2022 results. It was emphasized that the effect of inflation occurred, both on claims and premiums. Group’s combined ratio stood at a „very low and favorable level“ at 88.1% (down 0.8 p.p. YoY). The solvency ratio stood at around 200%, which is at the lower end of the target range set by the Group itself. Further, Triglav’s equity decreased primarily due to the lower fair value reserve and high dividend payment in 2022. We remind that Triglav paid EUR 3.7DPS this year, which implied a yield of 9.5%. Overall, Triglav is satisfied with the overall results and with client satisfaction. Regarding dividend policy, Group plans to make a dividend proposal next week and as announced last year it will be within the dividend policy with the starting point at 50% of total consolidated net profit. Also, Triglav says it will take the current capital position and capital adequacy in the calculation. Finally, Group notes that the reinsurance market has become „harder“ and consequently, more expensive.

After the results briefing, 2023 expectations came to the agenda. In 2023 Triglav expects to increase its operations and for profitability to remain on favorable levels. Net profit is estimated to be in the range of EUR 95-110m. However, the company emphasized that it will further elaborate on how to „judge“ and look at Triglav’s operations due to the new IFRS 17. Overall, the whole picture is in line with Triglav’s expectations. Also, Triglav additionally decreased some equity exposures due to the tax efficiency and the transition to the IFRS 17. Finally, Triglav said it is naturally hedged regarding the current movement of interest rates, but that will be elaborated on in a more detailed manner in the annual revised report.

Sava Re – First the company glanced through its unaudited 2022 results. Generally, Sava noted that the management board is very satisfied with the results and that the main focus currently remained on strategic goals. Also, the company talked through the 2020-2022 strategic goals that were set and achieved. Operating revenues remained at EUR >720m, the combined ratio stood below 95%, ROE amounted to >12%, while Return on investment portfolio stood at >1.5%. The combined ratio, as the most important profitability KPI will remain unchanged. However, Sava emphasized its equity decreased by 18%, but that the Group did not realize any material losses due to its liquid financial position. Sava noted that the investment portfolio stood with more than 86% of the investment grade of all fixed-rate investments. Also, Sava Re emphasized that new higher interest rates mean that future P&L will benefit from the investment segment in the future. Finally, Sava glanced through its strategic plans for 2023-2027 which were already published by the end of 2022 (you can read them here). In short, Sava expects ROE of over 9.5%, which is after the inclusion of the new IFRS 17 standards impact. However, it was said that the new standards are „just a new accounting standard“. Nothing changes in the operations of the Group overall. Also, the distribution of dividends will stay in the range of 35%-45% of the Group’s profit, just like before. Finally, Sava said that inorganic growth will be in focus in the upcoming years.

Cinkarna Celje – Cinkarna kept its presentation short & sweet. The company emphasized the drop in demand in Q4 of 2022, which continued into 2023. Currently, the lower customer activity is present combined with excess Chinese capacity, besides the obvious inflationary environment, which overall resulted in lower selling prices. The company also said its inventories built up, but it is expected by the end of 2023 for it to be reduced. Overall, the company said its 2023 plans are still as previously stated with lower sales than expected, but with EBITDA and bottom-line profitability as expected.

Krka – In 2022 Krka faced a volatile business environment and there were many challenges that they overcame due to the integrated business model. In 2022 they achieved 10% YoY sales growth, which is the highest sales figure in the history of Krka. Krka is very proud of the development of the company which will celebrate next year the 70th anniversary of its founding. This year Krka has achieved positive net financial results of EUR 52m due to the appreciation of the Rouble. When we asked for expectations for Rouble in the next year, Krka replied that they do not plan for FX losses, but the fact is that last year’s gain came from the appreciation of the Rouble. They do not have financial instruments to hedge their exposure in Russian currency as these hedging instruments are far too expensive. They use a lot of natural hedging and factoring so in Russia they do sell their account receivables. This way they lower their currency risk and lower their credit risk. Factoring is favorably priced in Russia so after they make a sale in Russia, they very soon sell their account receivables, and it turns into cash. They have previously mentioned that they do not have problems moving money out of Russia as pharmaceutical activity is not under sanctions. So, in case Rouble would depreciate further in this year due to the factoring in receivables that the worst-case scenario would not be so black. They lost a little bit so far this year as this currency pair is down a bit since YE but is not significant. According to our estimates, FX loss in the first quarter of 2023 should not be bigger than EUR 9m. Management guidance for 2023 expects sales up 2.2% in 2023 (from EUR 1,717m to EUR 1,755m) and a net income of EUR 300m.

Krka operates in many low-income countries, and they provide safe and affordable medicine to many countries. It also opens space for growth in volume in these markets. Looking at markets, in 2022 Eastern Europe remained the biggest market with a 36.5% share in sales. In the Russian market, Krka is present for more than 50 years and there the collection of receivables goes smoothly as insurance of receivables is done while the collection is done via factoring. Only Ukraine sales were down in 2022 in this region. All other markets excelled in growth. In Germany, Krka recorded in 2022 a 10% growth in sales which is Krka’s 4th biggest market, and sales have amounted to EUR 89m. SE Europe region plus Slovenia account for 19% of total sales and sales growth was realized in all countries. In 2022 Krka has entered new markets and examples are Egypt, Australia and Kuwait.
Prescription pharmaceutical sales have increased by 7%, while non-prescription products (OTC) have increased by 33% YoY. Cardio medicine is 50% of the portfolio. Others are the Central nervous system and gastro products. Krka has more than 100 unique single pill combinations(‘SPC’). It is their competitive advantage as SPC contains a few active ingredients in them at the same time. In 2022 11 new launches were done. The product life cycle of their real product shows that over a 17-year time span, the price of prescription pharmaceuticals also increases in some later periods. In 2023 capex is expected to increase by 22.6% to EUR 130m from EUR 106m.
Improved product mix, economies of scale and cost control has allowed Krka in 2022 to increase its EBITDA margin to 28.5%. In the future, they estimate that they will be able to keep it above the strategic threshold of 25%.
ESG Governance of Krka Group is a very important part of their strategy, and it is divided into 6 pillars. It is a strategic document published on their website and they plan to obtain an ESG rating in 2023.
Krka has no additional comments concerning media writing on Krka’s potential takeover of an Indian supplier, but it is known that they are not a company that makes quick and irrational decisions. It can be expected Krka to make an acquisition in the future, and it will definitely be a well-thought-out decision.

Petrol – Petrol Group’s performance in 2022 was down 60% YoY affected by the regulation of motor fuel prices and disruption in the supply of natural gas due to the war in Ukraine. The energy transition commitment level is satisfactory even though they had to reduce investments from the level of EUR 100m to EUR 60m, out of which 48% was made in the energy transition. They are committed to energy transition and meeting sustainability commitments. In 2022 sales volumes of fuel went up by 25%, and due to imposed regulations they had negative margins. As a result, only 2.6% of EBITDA same from fuels and fuel products. Their EBITDA was negative in Q2 and Q4, EUR -17m and EUR -2m and, respectively. Petrol Group is not vertically integrated into the oil industry as they have no upstream or refining business, and they are only an energy retailer. Extra profits were realized in the upstream and refining part of the oil value chain, so they missed this positive effect as they only operate in retail. There were no limitations of mobility but significantly higher prices so all governments in the region have put regulations on fuel and natural gas and electricity prices. Negative effects of EUR 189m in 2022 are due to the regulation of motor fuel prices in all markets. A proceeding for amicable dispute resolution has been initiated with the Slovenian and Croatian State Attorney Offices for the compensation for the damage resulting from the capped fuel prices in Slovenia (EUR 107m) and Croatia (EUR 56m). There is a 3-month period in which this could be resolved amicably through agreement otherwise it will go to court. Regulation is still in place on fuel margins, and they are still facing hard conditions. Therefore, they have planned lower profitability for 2023 than what they had planned before the start of the energy crisis. Electricity and natural gas prices were very high which had a negative effect on their business. The negative effect of natural gas non-delivery in Geoplin amounted to EUR 51m due to the stoppage of delivery of Gazprom. Now they have diversified to other suppliers so from 2023 Geoplin plans to generate positive results in 2023. S&P Rating Services have put Petrol on Credit Watch Negative due to the introduction of government regulation on 20 July 2022. On 12 December 2022, they removed Petrol from CreditWatch Negative as they assume Petrol suffered a one-off negative effect because of the price regulation and they assume that regulation in that form will not be repeated.
Merchandise sales is up 11% YoY due to strong consumer spending, but it is down 3.4% compared to the plan due to a change in regulation as DARS changed vignette to E-vignettes. Now for vignettes, Petrol is only showing margins that they make not the total amount, so this is why sales are lower than planned. The merger of Crodux derivati into Petrol was successfully completed. Sharing of best practices and legal integration happened at the beginning of November. Part of the synergies was realized during the integration process.
Comparing energy prices to periods of the highest level of prices, now they are on average down 50% when looking at gasoline, while natural gas prices are down also due to the warm winter. For 2023 Petrol plans to achieve a Net debt/ EBITDA of 1.7x, which will show that they are a financially sound company. Investments are down from EUR 135m (strategic business plan for 2023) to EUR 75m due to lower margins and fixing of margins.
Despite the difficult business situation, the Petrol Group will continue to pursue its objective of ensuring stable operations, hence appropriate returns for shareholders. Petrol’s audited results will be announced in the second week of April when data on potential dividends will be announced. The management of course gave no hint on what to expect, but we see a possibility of positive dividend yielding of up to 1%.

NLB – To end things on a positive note, NLB’s 2022 results have been extremely good. This was reiterated by the Group’s CEO, Blaž Brodnjak. Besides 2022 recording solid balance sheet developments in terms of loans and deposits, contributing to solid op. income and net profit, NLB also continued integration of N banka into the Group, with integration to be done by the end of August/early September 2023. Given the current banking sector developments we have witnessed, with SVB bank in America and Credit Suisse in Europe, a lot of focus, and almost all the questions were pointed in this direction. The answer from NLB was simple – materially, they aren’t connected to any of the affected companies. Furthermore, as the largest regional player, the Group’s focus has been growing in the region and investing back in the region. As such, their capital and liquidity is quite secure, and no asset types, be it bonds or any other securities, are currently under threat as was the case with the other already mentioned banks. Not only is the Group well positioned in this case, but they also continue signalling their intentions for the next couple of years. As was already known, in the 2022-2025 period, they intend to pay out EUR 500m in the form of dividends, with 2023’s payment amounting to EUR 110m (EUR 5.5 DPS), 2024’s expected to be EUR 130m (EUR 6.5 DPS), and 2025’s expected at the remaining EUR 160m (EUR 8 DPS).

Furthermore, NLB noted that it keeps improving its capital position and liquidity not only because of the MREL requirements (which means they will have to issue app. EUR 300m of senior preferred notes during this year) but also due to the fact that they’re willing to do an M&A at any time if an opportunity arises. Because of this, the issuance of the senior preferred notes might go up to EUR 500m (+EUR 200m more than previously communicated) just for this purpose. In fact, by 2025, NLB will have app. EUR 2bn of RWAs that could be used to support an M&A. Currently, no actionable target exists, but they did note that across all the sectors they operate it, be it Banking, Asset Management, or Leasing, they’re on the lookout. In this sense, despite the current situation in the banking sector pointing towards all the issues and cracks, NLB stands steady to step in and help, like their CEO himself said: “NLB’s balance sheet is a fortress!”.