As we leave Q3 behind us, we also leave behind the bulk of Croatia’s usually booming tourist season as well. Since this year was all but usual, we take a closer look at the latest information published by the Croatia’s National Tourist Board regarding the number of arrivals and overnight stays in order to see just how much damage can we expect to see when Croatia’s tourists publish their Q3 results.
For years Croatia has been experiencing a strong growth in tourist arrivals and overnight stays on the back of an attractive tourist offer and later due to the status of safe destination while some Mediterranean countries were experiencing political turmoil.
Croatia’s Historic Arrivals & Overnight Stays
However, this time not even all of Croatia’s competitive advantages were enough to retain the amount of tourist activities witnessed in previous years. As the COVID-19 pandemic has significantly diminished the World’s tourist industry, Croatia’s tourist sector has suffered as well. Due to measures imposed which prohibited people from traveling and the fear of infection, Croatia recorded a 60.7% YoY decrease in arrivals and a 49.1% YoY decrease in overnight stays during the 9M 2020 period. When looking at the busiest part of the year, the third quarter, September was the worst performing month (in relative terms). Namely, in September 2020, Croatia observed a fall in tourist arrivals by -76.5% and a fall in tourist nights by -62%. The high decrease in arrivals could somewhat be explained by the increased restrictions imposed by some European countries, which made traveling complicated.
Meanwhile in the 9M period the average number of nights spent in Croatia has increased from 5 to 7. This comes as no surprise, as tourists remained longer at one place, rather than traveling to multiple destinations due to the travel restrictions imposed.
Croatia’s 9M 2020 Arrivals & Overnight Stays
As June – September account for the vast majority of the Croatian tourist season it is also worth looking at the value of taxable invoices to further observe the impact of a lower performing tourist season. According to the Tax Administration of the Republic of Croatia in the period from 24 February until 27 September 2020, the value of taxable invoices dropped by 18.4% YoY (or HRK 23.35bn) in the period from 24 February till 27 September. Drop in taxable invoices in wholesale and retail trade in the same period was only at 9.97% while drop in accommodation and food services was at 46.6%.
Hotel Occupancy
Since Croatian tourist companies generate most of their revenues through their hotel segment it is worth taking a closer look at the net occupancy rate of bed-places.
As one can see from the table, the occupancy of hotel beds during the peak of the season has been almost full in all of the observed years prior to the COVID-19 pandemic, meaning that the demand for hotel accommodation in Croatia was met by the supply. When looking at the number for July one can notice that the occupancy was sliced in half, and while the numbers for August haven’t been published just yet, we can expect them to be marginally better, but still way below what we were accustomed to.
Net Occupancy Rate Of Bed-Places And Bedrooms In Hotels And Similar Accommodation (%)
| wdt_ID | Month | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
|---|---|---|---|---|---|---|---|---|---|
| 1 | January | 13,40 | 14,30 | 15,90 | 16,10 | 18,40 | 20,50 | 18,20 | 19,20 |
| 2 | February | 18,30 | 19,10 | 21,20 | 22,90 | 26,60 | 26,50 | 28,60 | 27,30 |
| 3 | March | 23,80 | 22,50 | 22,50 | 27,00 | 27,20 | 30,10 | 30,80 | 12,80 |
| 4 | April | 31,40 | 34,40 | 34,10 | 32,60 | 46,30 | 42,20 | 45,40 | 2,60 |
| 5 | May | 47,60 | 44,60 | 47,20 | 49,10 | 49,40 | 55,70 | 52,70 | 3,90 |
| 6 | June | 64,40 | 66,00 | 66,50 | 65,80 | 77,50 | 74,60 | 75,70 | 21,20 |
| 7 | July | 87,60 | 84,80 | 90,70 | 94,40 | 95,90 | 94,30 | 93,20 | 47,00 |
| 8 | August | 96,70 | 92,50 | 97,40 | 98,40 | 98,30 | 97,30 | 98,00 | 0,00 |
| 9 | September | 68,50 | 66,70 | 69,80 | 75,40 | 72,80 | 73,10 | 71,50 | 0,00 |
| 10 | October | 37,00 | 37,70 | 36,30 | 41,00 | 44,10 | 54,60 | 49,20 | 0,00 |
Source: Eurostat, InterCapital Research
This also raises an additional question. Before the breakout of the COVID-19 pandemic the number of beds in private accommodation was rising much faster than the number of beds in hotel accommodation. Back then, this didn’t play a major role as hotels had consistently been operating at full capacity during the summer and with a higher number of arrivals, they were able to steadily raise their room prices.
However, now as consumer habits change, and visitors are asked to keep a safe distance from one another the large number of private accommodations which offer greater privacy poses a significant threat to the recovery of the hotel segment. Now, the question remains will Croatian tourists be able to handle the new normal.
For today, we decided to present you with a DuPont analysis of Romanian 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) H1 2020 results.
Return on Equity of Romanian Companies (%)*
*using trailing 12m net profit (H1 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
Of the observed 11 companies, 4 recorded a double-digit ROE, while 1 (Digi Communications) observed a negative ROE due to a trailing 12m net loss. Purcari leads the list with a ROE of 20%. Such a solid result came on the back of a relatively high profit margin of 19.8%, while its asset turnover stood at 0.56, in line with the average of the observed companies. Next comes Romgaz, with a ROE of 12.4%, which is quite impressive given that the company operates with almost no debt (negative net debt).
Transgaz has the highest profit margin of 24.6%, however the company has a relatively low asset turnover of 0.25, which could indicate that the company is not efficiently using its assets to generate sales. However, one must remain aware that Transgaz operates in quite an asset heavy industry.
On the contrary, Sphera Franchise Group is the only company whose asset turnover is higher than 1. The Group’s profit margin stood at 1.89%, as the company’s bottom line was severely hit by the pandemic (the most of all observed companies). To be specific, the company had to struggle with measures taken to prevent the spread of the Covid-19 virus which led to the closure of their restaurants. In 2019, Sphera’s profit margin stood at 5.8%.
Of the observed companies, MedLife has the highest financial leverage measured by the equity multiplier of 4.7, indicating that leverage was the primary driver of ROE. As of H1, the MedLife’s net debt/EBITDA stood at 4.4x.