During 2023, numerous sectors in the region like Banks, Infrastructure, Food & Pharma yielded strong double-digit returns. In 2024, we see regional sectors of Industry, Finance and Pharma as well positioned for further growth. Results in the finance sector should be further improved in the higher interest rates environment, industrials could see benefits from the trend of production being returned in the EU, while regional pharma looks relatively attractive due to the aging population which is fulling demand growth.
For this analysis, we observed primarily the median YoY share price performance of companies in our wider coverage from Croatia, Slovenia, Bulgaria, Romania, and Serbia.
2023 so was characterized by the positive development in the regional equity markets overall as participants saw the risks tempering with other risks coming to the surface during the previous few weeks. As a result of this sentiment, all sectors besides insurance noted positive share price developments with some solid double-digit returns. The only sector to note a negative median development was Insurance. However, the decline of these shares was still low single-digit.
Observing the graph below, we can see that Banks outperformed every sector on the regional stock exchanges with a median share price increase of 32.9% YoY. Banks are currently achieving higher NIM (net interest margin) due to higher interest rates on the market that were raised to shrink elevated inflation. Banks’ shares growth were mainly driven by Zaba with a 76% return throughout the year and NLB with a 37% return. Finally, the largest Romanian BET constituent, Banca Transilvania, too, noted a gain of c. 30%. Banks will enjoy a strong NIM (net interest margins) in 2024, as rates on loans grew much more pronouncedly compared to interest on deposits. Deposits are slowly migrating into other types of assets like bonds which is as expected, but at a low pace. Even though higher rates should shrink demand for loans, net interest income in nominal terms should rise significantly both in the US and EU.
Banks are closely followed by Diversified also with a high median share price performance of 30.8%. Diversified noted a positive development due to Podravka, Adris and Petrol. Podravka noted a very strong YoY development with a 90.7% return! Currently, Podravka is trading at EV/EBITDA 12.9x taking TTM results into account. Further, within the sector, Petrol has seen a slow but steady recovery in its P&L due to stabilization in energy prices and the market priced it in, while Adris yielded more than 30% in 2023.
The third sector by performance was Telecommunication, with each of the regional telecoms yielding a solid double-digit yield (HT, Telekom Slovenije & Digi). Telecom companies are solid dividend payers while they were able to growth their sales and increase their prices in Q4 (Hrvatski Telekom). Telecoms are followed by Infrastructure and Food with a 25.4% and 22.8% median return, respectively. Infrastructure was mainly driven by both Luka Ploče and Luka Koper on the back of solid results, while the Food sector noted good results due to Atlantic Grupa & Kraš on ZSE. Pharma also reported strong growth on both the top & bottom line (Krka and Sopharma). Regional pharma looks relatively attractive due to the aging population representing even more resilient /inelastic expected demand. Besides the aging population, a sedentary lifestyle provides a strong base for mid & long-term financial modeling. Overall, the global pharmaceutical market is expected to grow at an average rate of 6% in 2024, after growing at app. 5.1% in 2023. Finally, higher R&D expenses might contribute to better operating efficiency in the upcoming period.
The last sector to emphasize is Industrials, driven by Končar Elektroindustrija [KOEI CZ] and its subsidiary quoting on ZSE – KOD&T due to exceptional results mainly driven by strong sales growth, which translated to higher operating profitability margins. Both KOEI & KOD&T should report strong results throughout 2024 due to industry trends. First, Končar Group reported an exceptional backlog, which will materialize as strong sales in the upcoming ~2 years. Further, Končar Group’s operations should be further boosted by a recent trend within the industry, where the production & demand are being returned to Europe with limited capacities and the growth of the backlog occurring, consequently. The production and demand for products produced in Europe noted a robust expansion as final consumers seek safety over the contract terms. The delivery time increases significantly, but therefore, the price of projects becomes a completely secondary factor. In other words, operating profitability still has space to improve for the Končar Group.
2023 Returns by sector (%)
Source: Bloomberg, InterCapital Research
Finally, the only sector in red was insurance, driven by Slovenian insurers, Triglav and Sava Re. 1st major event this year for Zavarovalnica Triglav was the issuing of Profit Warning. The group issued a profit warning as a result of the Slovenian Government setting the maximum price of supplemental health insurance premiums. The group’s estimate compared to the initially planned EBT of EUR 95 – 110m was a 25-40% decrease. Further, Slovenia unfortunately witnessed strong storms, rails & floods during July & August, which will drive claims growth for both both Triglav and Sava, while the numbers will be seen in Q4. Consequently, Sava also cut its FY 2023 profit target by 25%. Nevertheless, those companies should long-term benefit from a higher interest rate due to their portfolio being invested with higher yields.
We see Financial & Industrial sectors to be well-positioned for 2024 performance. Financials will experience further positive results from a higher interest environment, which should result in even higher NIM for banks as rates on loans grew much more pronouncedly compared to interest on deposits, while insurers will report better investment portfolio returns. Further, regional industrial representative, Končar, should report another strong year on the back of a combination of its backlog position and industry trends that should enable further expansion of operating margins. Regional pharma focused on generics looks attractive due to the expected volume growth based on aging population and potential change in regulation on EU level which is looking to shorten the timeframe a new medicine remains patented in a bid to reduce the cost of medicines for its citizens with a faster shift to cheaper generics.
By the end of December 2023, the Slovenian CPI growth has decelerated to 4.2% YoY, while also recording a decrease of 0.5% on an MoM level. Furthermore, during the entirety of 2023, the average annual inflation in Slovenia amounted to 7.4%.
The Slovenian Statistical Office, SURS, has recently released its latest report on the consumer price indices (CPI), for the month of December 2023. According to the report, the Slovenian CPI grew by 4.2% YoY during December, as compared to 10.3% in the same month last year. This would mean that the CPI growth has decelerated significantly, but still remains above the historical target of 2 to 2.5% percent.
The average inflation in 2023 meanwhile, amounted to 7.4%, again showing that despite the deceleration, the CPI numbers were still quite high and above the desired levels. On the other hand, on the MoM basis in December, the CPI decreased by 0.5%, marking the 2nd month in a row that the CPI recorded a MoM decrease.
Slovenian CPI change (January 2011 – December 2023, YoY, %)
Source: Slovenian Statistical Office, InterCapital Research
Moving on to the drivers of inflation, on a YoY basis, prices of food and non-alcoholic beverages grew by 4.6%, leading to a 0.8 p.p. contribution to the overall inflation. Price increases in recreation and culture, at 6.3%, impacted the overall inflation by 0.6 p.p. Finally, higher prices in alcoholic beverages and tobacco (+9.4% YoY), health (+8.5% YoY), restaurants and hotels (+7.9% YoY), and miscellaneous goods and services (+6.2% YoY) each added 0.5 p.p. to the annual inflation growth.
Meanwhile, on a monthly basis, the inflation decreased by the aforementioned 0.5%. The primary drivers of this deflation were the lower prices of petroleum products (-8% for diesel, -7.6% for liquid fuels, and -5.3% for petrol), which contributed 0.4 p.p. to the monthly deflation rate. Additional price decreases were recorded by refuse collection (-8.1% MoM), package holidays (-3.1% MoM), and purchase of vehicles (-0.9%), as well as all other price drops, which each contributed 0.1 p.p. to the monthly deflation rate.
On the other hand, prices in the health category (+2.9% MoM) contributed 0.2 p.p. to the overall MoM inflation, followed by 0.7% higher prices of furnishings, household equipment, and routine maintenance, which contributed 0.1 p.p. to the overall MoM inflation.
In terms of the Harmonized Index of Consumer Prices (HICP), Slovenia recorded a 3.8% increase YoY, and a 0.6% decrease MoM in December. As compared to other countries, Slovenia did record elevated inflation as compared to most EU countries, but it was still below countries like Slovakia (+6.6% YoY), Austria (+5.7% YoY), Croatia (+5.4% YoY), and even France (+4.1% YoY), while it was tied with Germany. On the MoM basis however, it has recorded one of the largest decreases, only surpassed by Cyprus (-1.2% MoM), Portugal (-0.8% MoM), and Latvia (-0.6% MoM).
HICP comparison between select EU countries (December 2023, YoY, %)
Source: Eurostat, InterCapital Research