In this overview, we’re bringing you an analysis of the ROE and capital structure of the Croatian blue chips, according to the latest available data, i.e. H1 2024, as well as how it compares to the same period last year.
Before we start, we would like to note one thing. As the return on equity is calculated by dividing the net income from the equity of a given company, adjustments had to be made. This refers to the fact that equity is a balance sheet item, i.e. showing value on a certain date, while net income is a P&L item, i.e. showing value throughout a given period. As such, the H1 equity value, in the case of ROE can only be used with the trailing twelve months data for net income, which was done for this comparison. A similar adjustment has been made for the H1 2023 data and its ROE value.
ROE of Croatian blue chips (TTM H1 2024 vs. TTM H1 2023, %)
Source: Companies’ data, InterCapital Research
The largest ROE of the CROBEX10 constituents has been recorded by Ericsson NT, at 29.4%, and this represents a decrease of almost 1 p.p. YoY. While the situation with the company is stable, it has recently been facing issues regarding cost growth and a slowdown in profitability improvements. In fact, the reduction in ROE presented here came both as a result of lower net income, and lower equity YoY. Next up, we have Končar, which recorded an ROE of 21.5%, while at the same time, on a yearly basis, this marks a strong increase of almost 12.1 p.p. YoY. Končar has in the last year and a half, 2 years recorded some of the best results (both in terms of stability and growth) out of the Croatian blue chips, which is reflected here. The growth came on the back of a massive backlog (contracts signed which are still to be fulfilled) which continually keeps increasing, demonstrating demand for Končar’s products. The Company has benefitted in particular with its transformer segment, which is crucial for the green transition currently planned in the EU.
The next company on our list is HPB, which also recorded solid ROE improvement YoY, amounting to almost 8.5 p.p., with an ROE of 14.4% in H1 2024. Being the only bank observed here, HPB has benefitted significantly from the elevated interest rate environment (as did to be fair, many of the other banks). Besides this, in 2022 it acquired the Sberbank subsidiary in Croatia (later renamed Nova Hrvatska banka, and even later on, integrated into the HPB Group). This not only caused a massive increase in net income due to negative goodwill, as the purchase price of the assets held by Sberbank was far lower than the value of the assets, but it also allowed the Bank to expand its market share in Croatia, practically for free.
Following them is Podravka, the only other Company with a ROE of >10%, at 10.7% to be exact, representing a decrease of 1.8 p.p. YoY. Podravka has been one of the best performers in the last couple of years on the Exchange, supported by good and consistent results, and it has largely managed to contain the inflation spiral which has affected other food companies in the region more significantly. However, the decrease in ROE present here did not come due to an organic decline in the business, but because the Company received tax incentives during the same period last year, which are treated as one-off items. As such, normalized ROE grew.
Moving on, Hrvatski Telekom recorded an ROE of 8.5% in H1 2024, an increase of 2.23 p.p. YoY, supported by the steady revenue and profitability growth, which in turn came both due to a higher number of users, but especially price increases due to price indexation. Next up, Atlantic Grupa recorded an ROE of 7.7%, a 1.9 p.p. improvement YoY, and this came mostly because the Company was struggling with strong increases in input material prices, such as coffee, aluminum, and lately, especially cocoa. While the former two have largely been put under control, which combined with price increases have led to improved profits, cocoa still poses a challenge and is significantly above its historical price at the moment.
On the flip side, the lowest ROE was recorded by Atlantska Plovidba, at 3.2%, representing an improvement of 13.5 p.p. YoY, as it was negative during the same period in 2023. This was due to the shipping industry dynamics, where prices were quite low during this period in 2023, as they have largely stabilized after the pandemic’s supply chain shock. Improvements were seen this year, supported by higher daily transport fares due to the (almost complete) closing of the Red Sea due to the conflict in the Middle East, which led to a lot of ships going around Africa on a longer route, increasing costs. Span meanwhile, recorded an ROE of 4.45%, a decline of 13.85 p.p. YoY, as the Company has been investing significantly in the last year, a year and a half into new employees who have to be trained for a certain period of time before they become profitable for the Company. As such, higher costs were incurred, leading to a (temporary) reduction in net income.
Capital structure of the Croatian blue chips (H1 2023 left, H1 2024 right, % of the total)
Source: Companies’ data, InterCapital Research
Before we take a look at the capital structure, HPB was excluded due to its inability to make this comparison, as it operates in the banking sector. Among the remainder, HT remains the only debt-free company on the list, with 100% of its financing coming from equity. Next up, we have Podravka with 90.8% of equity financing, a 2.1 p.p. increase YoY, followed by Končar at 89.5%, with a similar 2.1 p.p. increase, and Span at 88.4%, declining by 9.1 p.p. YoY. The higher debt levels in Span came due to investments and acquisitions the Company has been pursuing.
On the other hand, lower equity financing is recorded by Valamar Riviera at 56.5%, a 1 p.p. improvement YoY, but this relatively lower level of equity is expected in the asset-heavy tourism industry Valamar operates in. Next up, we have Atlantic Grupa at 63.7%, a 7.4 p.p. decline YoY, as a result of the increased debt the Company took to purchase its headquarters building and the Strauss Adriatic M&A.
