Yesterday, all major equity indices surged on the back of positive vaccine progress. CROBEX ended the day in green (+3.09%), marking the largest daily increase since April.

The Covid-19 vaccine being developed by Pfizer and BioNTech SE prevented more than 90% of infections in a study of tens of thousands of volunteers, which can be considered the furthest scientific progress so far in the efforts against the spread of Covid-19.

The findings are based on an interim analysis conducted after 94 participants, split between those who got a placebo and those who were vaccinated, contracted Covid-19. The trial will continue until 164 cases have occurred. The preliminary findings surprised scientists in a positive way about the possible effectiveness of a vaccine, which in turn led to an increased market speculation among investors regarding the potential implications of the above-mentioned news on the end of the pandemic.

The markets reacted, unsurprisingly, positively to the news, as virtually all major equity indices surged. In Europe, DAX ended the day with an increase of 4.94%, CAC 40 increased as much as 7.57%, while FTSE100 went up by 4.67%. It also seems that the investors pulled out of safe havens such as the Bund and redirected the funds into riskier assets, which included equities. This could be observed as the yield on the Bund increased by 11 basis points yesterday (from -0.62% to -0.51%).

Performance of Selected Indices (9 Nov 2020) (%)

Regional markets have followed the “green” trend, as CROBEX increased by 3.09%, representing the highest daily increase since 6 April (when the index increased by 5.1%). CROBEX ended the day at 1636.38 points, at which the index was last time seen in late September.

Meanwhile, SBITOP increased by 1.99%, while BET went up by 3.65%.

On the Croatian equity market, virtually all stocks ended the trading day in green, with Valamar leading the gainers in the prime market (+8.02%). Valamar ended the trading day at HRK 25.6 per share, at which level was the share last time seen in mid-August. Next comes Arena Hospitality Group, which observed an increase of 4.51%, ending the day at HRK 278 per share. Outside of the prime market, Atlantska Plovidba noted an increase of 9.76%.

On the LJSE, NLB Group observed the highest increase of 5%, ending the day at EUR 37.8 per share. At the current share price, the company is traded at a P/B of 0.42. We note that the company will be publishing their 9M 2020 report on Thursday (12 Nov). Next comes, Triglav which observed an increase of 2.94%, followed by Krka with an increase of 2.5%.

Moving on to the Romanian market, all BET constitunets with the exception of Conpet ended the trading day in green. OMV Petrom and Sphera Franchise Group lead the gainers with an increase of 7.85% and 7.14%, respectively.

For today, we decided to present you with a DuPont analysis of Croatian companies, a useful technique used to decompose the different drivers of ROE.

The DuPont analysis is a useful technique used to decompose the different drivers of ROE. This model allows stock analysts and investors to examine the profitability of a company using information from both the income statement as well as the balance sheet. This gives the analyst a thorough view of a company’s financial health and operating efficiency. Note that for this analysis we used (trailing 12m) 9M 2020 results.

Return on Equity of Croatian Companies (%)*

*using trailing 12m net profit (9M 2020)

Speaking in broad terms the equation allows analysts to dissect a company, and to efficiently determine where the company is weak and where it is strong. This allows analysts to quickly know what areas of business to look at (inventory management, debt structure, margins) for more answers. However, the measure is still broad and is not a substitute for detailed analysis.

DuPont tells us that ROE is affected by three things:

• Operating efficiency, which is measured by profit margin
• Asset use efficiency, which is measured by total asset turnover
• Financial leverage, which is measured by the equity multiplier

For this we excluded 3 Tourist companies (ARNT, RIVP and MAIS) as they recorded a trailing 12m net loss. 4 out of 9 observed companies, recorded a double-digit ROE, with Optima Telekom Leading the list (38.6%). However, such a high ROE came on the back of the financial leverage (equity multiplier) which stood at 61.6, by far the highest of all companies. The company currently operates with very low equity, as a result of recording net losses in the recent years. Next comes Ericsson NT with a ROE of 23.2%. The company witnessed the highest asset turnover of 1.8, among the observed companies, indicating that Ericsson NT is efficiently using its assets to generate sales. To read about the Group’s 9M 2020 results, click here.

Dalekovod follows with a ROE of 14.7%, which once again came on the back of a high financial leverage (equity multiplier) of 14.2. Note that the company has recorded losses or very low net profit in the previous periods, which has somewhat decreased the company’s equity. The company’s Equity currently stands at HRK 63.6m, as loss brought forward piled up to HRK -365.96m. Also note that revaluation reserves account for roughly two thirds of the company’s equity.

Next comes Atlantic Grupa with a ROE of 11.8%, which could be considered as quite high, considering that the Group operates with very little debt. To read more about indebtedness of Croatian companies click here.

On the flip side, Kraš observed the lowest ROE of 3.2%. Despite an increase in net profit in 9M of 2020 (+42%), the company still recorded a relatively low profit margin of 2.3%. To read more about the company’s 9M 2020 results, click here.