The main part of the Croatian Tourism season has ended, and the results are in. In today’s blog, we’ll look at how the industry is doing, as well as a selected group of companies within it. A special focus will be placed on comparisons to 2019, the last “record” year.
Whenever comparisons to how well Croatian tourism does, it is always made to 2019, considered not only the last “normal” year before the pandemic but also a record one. 2022 turned out to be quite good in terms of “normalcy” but it still failed short of being a “record” year. While 2023 is yet to be over, the majority of tourist arrivals and nights are recorded during the Q3 summer season, and as such conclusions about the sector’s performance could be made even before the year’s end.
Total tourist arrivals and nights in Croatia (January 2019 – October 2023)
Source: HTZ, InterCapital Research
In the first 10 months of 2023, tourist arrivals and nights increased YoY by 9% and 3%, respectively. The distribution between foreign and domestic arrivals showed similar percentage growth, but as foreign tourists make up the majority of arrivals, they were the ones driving the increase. Furthermore, compared to 2019, both tourist arrivals and nights narrowly missed the record, reaching 99% of the 2019 figures. Notably, foreign arrivals declined by 3% compared to 2019, while domestic arrivals increased by 16%. On the other hand, foreign nights remained stable, while domestic nights decreased by 6%.
Furthermore, if we were to zoom in on the Q3 data only, total arrivals increased by 5% YoY, but tourist nights remained the same, mainly due to unchanged foreign nights. Compared to 2019, Q3 2023 had 1% higher total arrivals, driven by increased domestic arrivals as foreign arrivals remained unchanged. However, total tourist nights declined by 2%, with both foreign and domestic nights decreasing by 2% and 8%, respectively. Although official tourism revenue data for the year is unavailable, H1 2023 showed approximately 21% YoY revenue growth, suggesting a similar trend for the rest of the year. If this happens, the total tourism revenues in 9M2023 are about to amount to EUR 14.3bn at least.
Select Croatian tourism companies revenue change (9M 2023 vs. 9M 2022, 9M 2023 vs. 9M 2019, %)
Source: Companies’ data, InterCapital Research
On average, the presented companies recorded 16% YoY growth in revenue during 9M 2023, with Plava Laguna leading the way at 24%. Compared to 2019, the selected companies on average recorded a 30% increase in revenue.
Select Croatian tourism companies EBITDA change (9M 2023 vs. 9M 2022, 9M 2023 vs. 9M 2019, %)
Source: Companies’ data, InterCapital Research
During 9M 2023, the featured companies recorded an avg. EBITDA increase of 14% YoY, and 22% compared to 2019. The difference in op. profitability is of course due to different accommodation mixes between the companies. For example, Plava Laguna and Sunce Hoteli saw an impressive EBITDA increase of 32% and 27% YoY, and 50% and 44% compared to 2019, respectively. In contrast, Liburnia Riviera recorded a 2% higher EBITDA YoY but 5% lower than in 2019, and Arena Hospitality Group reported a 1% decrease in EBITDA both YoY and compared to 2019.
Select Croatian tourism companies net income to majority change (9M 2023 vs. 9M 2022, 9M 2023 vs. 9M 2019, %)
Source: Companies’ data, InterCapital Research
In terms of net profitability, during 9M 2023, the avg. YoY growth amounted to 9%, and 16% compared to 2019. Once again a similar trend of both double-digit growth, and a decline is recorded, both on a YoY basis and compared to 2019. With the increase in business activity during Q3, costs are also more pronounced. As such, the avg. net income to majority grew by 2% YoY, and 17% compared to 2019 in Q3. However, to fully understand the situation, it’s essential to consider these numbers in the context of EBITDA and net income margins.
Select Croatian tourism companies EBITDA margin comparison (9M 2023, 9M 2022, 9M 2019, %)
Source: Companies’ data, InterCapital Research
The average EBITDA margin for 9M 2023 was 38.9%, showing a 0.75 p.p. decline YoY and a 3 p.p. drop compared to 2019. Notably, there are variations among companies, with Arena Hospitality Group experiencing a 5.13 p.p. YoY decline in its margin, while Sunce Hoteli recorded a 3.64 p.p. increase in EBITDA. In Q3 2023, the average EBITDA margin was higher at 53.5%, reflecting a 0.63 p.p. YoY decline but a 1.07 p.p. improvement compared to 2019. Notably, Valamar contributed significantly to the EBITDA margin improvement with a 16.1 p.p. increase compared to 2019, while Liburnia recorded an 8.24 p.p. decrease in the EBITDA margin.
Select Croatian tourism companies net income margin comparison (9M 2023, 9M 2022, 9M 2019, %)
Source: Companies’ data, InterCapital Research
In terms of net income margins, the average for 9M 2023 was 22%, while for Q3, it was 42.3%. In both periods, compared to 2022 and 2019, net income margins decreased, averaging between 2.3 p.p. and 2.99 p.p. during 9M compared to 2022 and 2019, respectively, and between 4.95 p.p. and 4.63 p.p. during Q3 2023 compared to 2022 and 2019, respectively.
Having all of this data in mind, what can we conclude? The companies managed to improve their top line at double-digit rates, both YoY and compared to 2019. On the other hand, profitability suffered, due to higher costs across the board, especially material, energy, and labour costs. Because of this, the price increases of accommodation were one of the only choices the companies had left. In other words, without them, profitability would have suffered a lot more. But price increases came not only due to cost and inflationary pressures but changes in the accommodation mix. For a while now, accommodation, private and commercial alike have been upgraded towards higher-end and more luxurious tourism. During 2023, the observed hospitality companies are expected to invest a little less than EUR 200m in accommodation. As such, price increases came due to this development as well.
Estimated investments of the featured tourist companies* (2023, EURm)
Source: Companies’ data, InterCapital Research
*Includes both investments done during 9M 2023 and estimated investments for FY 2023, depending on the company in question
However, the numbers in terms of arrivals and nights do not lie. While prices grew by double-digit rates YoY in 2022 and 2023, the arrivals and nights stagnated. Furthermore, the pandemic ended more than a year ago, and tourism countries to which access was restricted are fully open. Due to this, competition is mounting, and many other countries have already taken the opportunity to offer more competitive prices, swaying potential customers from Croatia.
As such, one very important conclusion can be made. Price growth was tolerated this year and the last, but it would be hard to justify it going forward. Companies are striving to return their profitability to pre-pandemic levels, but this can only happen in 3 distinct ways. Firstly, of course, price increases. Secondly, cost management and optimization. Thirdly, investments, possibly focused on the higher end. The first option has happened. The second is ongoing. The third, at least in regards to new projects, is unlikely in the current high-interest rate environment. Due to these factors, going forward it would be hard to imagine that 2024 will be able to beat 2019 by a large margin, across both top-line growth and profitability levels.
On Friday, Moody’s Investors Service (Moody’s) changed the outlook on the Government of Croatia to positive from stable, while at the same time affirming its long-term issuer and senior unsecured ratings at Baa2.
Moody’s shift to a positive outlook for Croatia is influenced by the growing probability of a more substantial reduction in the country’s debt burden than initially anticipated. This is expected to contribute to enhanced fiscal strength. Additionally, the positive outlook is supported by the potential for increased economic growth in Croatia, along with signs of improved institutional effectiveness and governance. Notably, the effective implementation of the extensive investments and reforms outlined in Croatia’s Recovery and Resilience Plan (RRP) further reinforces Moody’s assessment of the country’s institutional and governance strength.
The Baa2 ratings affirmation for Croatia underscores its robust fiscal, institutional, and governance strength, surpassing its peers. However, economic vulnerabilities persist due to heavy reliance on tourism, coupled with challenges related to an aging population. Ongoing exposure to geopolitical and banking sector risks remains a credit constraint. Croatia’s long-term country ceilings for local and foreign currency bonds remain at Aa2, reflecting a typical six-notch gap between the local currency ceiling and rating in the euro area. This aligns with the region’s strong institutional framework, legal regulations, and crisis management mechanisms, indicating minimal exit risk from the euro area.
Moody’s anticipates Croatia’s government debt will reach 61.1% of GDP by end-2023, decreasing further to 58.3% in 2024 and 56.3% in 2025. This represents a substantial reduction from its pre-pandemic level of 70.9% in 2019 and the pandemic peak of 86.8% in 2020. The accelerated decline surpasses Moody’s prior expectations. While Croatia’s elevated debt has been a historical credit weakness, the decreasing debt-to-GDP ratio aligns it more closely with its Baa-rated peers. Moody’s foresees Croatia’s debt affordability metrics remaining stronger than most peers, as the government effectively refinances maturing debt at lower rates despite global interest rate shifts.
The rapid debt reduction results from robust GDP growth in 2021-2022 post-pandemic, alongside nominal growth in the high-inflation environment of 2022-2023. Although the pace will moderate, with real GDP growth at 2.8% in 2023 and 2.6% in 2024, continued reduction is expected. Moody’s attributes this to a broadly balanced primary fiscal position, even though rising demands for expenditure and loan-funded investments may lead to deficits of 1.9% of GDP in 2024 and around 1% in 2025. Despite fiscal balance improvements from a 7.3% deficit in 2020 to a 0.4% surplus in 2022, efforts to support households and businesses during the inflationary shock could result in a small deficit of 0.4% of GDP in 2023.
After a period of robust growth in 2021-2022 post-pandemic, Moody’s projects Croatia’s growth to hover around 3% in 2023 and the following years, surpassing expectations for the euro area and many Central and Eastern European peers. Croatia’s economic resilience is attributed to its service-oriented structure, particularly in tourism, which has fared better than manufacturing amid energy price increases and the broader European economic slowdown. Steady wage growth, matching inflation due to a tight labor market, has fueled robust consumption. While the tourism sector’s growth potential is deemed limited, Moody’s anticipates continued moderate growth in exports and consumption. The primary driver of the improved growth outlook is the substantial EU investment funding available to Croatia. With the revised national Recovery and Resilience Plan, Moody’s expects Croatia’s total Recovery and Resilience Fund (RRF) to reach around 13% of 2023 GDP, complementing the approximately 10% from the EU’s regular 2021-2027 budget.
The RRF investments, focusing on green and digital transitions, labor supply, and education, are set to directly boost GDP growth in the coming years. Coupled with reforms in public administration, health, judicial, and education systems, Moody’s anticipates a meaningful contribution to Croatia’s long-term growth beyond the RRF’s conclusion in 2026. Croatia’s smooth implementation of reform and investment projects under the Recovery and Resilience Plan positions it as a front-runner in accessing RRF funding. Progress suggests enhanced institutional and governance effectiveness, aligning with Moody’s sovereign methodology. Croatia’s successful efforts to meet the criteria for the Euro and Schengen areas in 2022 further underscore institutional improvements.
The Baa2 ratings affirmation underscores Croatia’s fiscal resilience and institutional strength, surpassing rating peers, despite lingering challenges in controlling corruption. High-income levels and the ability to withstand economic shocks further support the ratings. However, Croatia faces constraints due to a heavy reliance on tourism, limited economic diversification, and structural issues related to an aging population. Additional credit constraints include moderate exposure to geopolitical and banking sector risks.
Croatia’s ESG Credit Impact Score stands at a neutral to low level (CIS-2), indicating moderate negative exposure to environmental and social risks. The country’s institutional strengths are highlighted by its commitment to euro adoption and the effective implementation of the Recovery and Resilience Plan. Environmental risks are moderately negative (E-3), primarily due to physical climate risks that could impact tourism demand. Given the concentration of tourist arrivals during peak summer months, rising temperatures and extreme weather conditions in the Mediterranean may pose challenges over time.
Social risks for Croatia involve adverse demographics, net migration outflows, and relatively high youth unemployment, although access to basic services is deemed satisfactory. The overall social issuer profile score is assessed as moderately negative (S-3). The country’s institutions and governance strength receive a positive G issuer profile score (G-1). This reflects the government and central bank’s high credibility in managing economic policy, leading to Croatia’s successful adoption of the euro in January 2023. The effective implementation of the Recovery and Resilience Plan further underscores institutional competence.
Moody’s would upgrade Croatia’s ratings if the government debt burden continues to fall more significantly than expected, while debt affordability is maintained. Continued, effective implementation of Croatia’s RRP would also support our assessment of Croatia’s economic as well as institutions and governance strength, thus also supporting the case for an upgrade.
Moody’s would consider changing the outlook back to stable, and in an adverse scenario, to negative if there was to be a reversal in the trend of debt reduction, accompanied by a significant loosening of government fiscal policy. A significant weakening of the growth outlook relative to Moody’s expectations, as well as a weakening of Croatia’s ability to effectively implement its national RRP, would also support the case for a stabilization of the outlook. An increase in geopolitical risks negatively impacting the Croatian economy and public finances would also be credit-negative.
At the share price before the announcement, this would imply a DY of 1.4%. The ex-date is 27 December 2023.
On Friday, HPB held its SB and MB meeting, and during it, the Bank proposed the distribution of profit in the amount of EUR 5.28m. On a per-share basis, this would imply a dividend of EUR 2.61. At the share price before the announcement, the DY would amount to 1.4%.
The ex-date is set for 27 December 2023, while the payment date is set for 24 June 2024. It should be noted that recently (2 November 2023), the Croatian Government announced that all state-owned enterprises (either majority-owned or minority-owned but an enterprise of special interest) will have to pay into the State budget a certain proportion of their 2022 net income, depending on the company in question.
For HPB, it was determined that the Bank will have to pay 30% of its 2022 net income, which amounted to EUR 17.6m. As such, the dividend payment is directly tied to this decision.