Yesterday, LJSE in cooperation with InterCapital held a webinar with 6 listed Slovenian blue chips. During the event, the companies commented on their H1 2023 financial results and answered investor’s questions. InterCapital, the organizer of the event together with LJSE, presented an overview of the Slovenian Capital Market.

The following companies participated in the webinar: Krka, Triglav Group, NLB, Petrol, Cinkarna Celje, and Telekom Slovenije. The main takeaways from the event and the most important information provided by the companies are presented below.

Slovenian Capital Market – InterCapital analyst Domagoj Grčević presented the latest developments in the Slovenian capital markets. Looking at the macroeconomic environment he pointed out that Slovenia’s GDP per capita expressed in purchasing power standards (PPS) in 2022 stood 8% below the EU average but compared to its 2009 level it is 7% higher which is a direct sign of progress. When we look at Slovenia’s real GDP growth rate in 2022 it was marked by a slowdown in personal consumption and exports. Slovenia achieved a GDP growth rate of 2.5% YoY which stood below the EU average of 3.4%. The main contributor to GDP growth household consumption slowed down to 3.3% (from 9.5% in 2021). The inflation in the second part of the year was too high for the average consumer to keep spending more in real terms. Headline inflation in June 2022 exceeded 10% and didn’t go south before the turn of the year. The average inflation in 2022 stood at 8.8%. External trade balance continued to fall as a contributor to GDP. It was still positive at EUR 1.3bn, but it was the lowest in the last ten years. After being a locomotive for close to a decade, Slovenian net exports became a drag in 2022 and we expect this change to last at least until 2024. Yesterday, the EU Commission published a revision of EU GDP growth and reduced it to 0.8% for 2023 in its Summer 2023 Interim Forecast. In its Spring Forecast 2023 EU GDP growth stood at 1%, while Slovenian GDP growth stands at 1.2%. We believe that in its Autumn Forecast EC will reduce Slovenia’s 2023 growth to average EU GDP growth, as we expect a negative current account balance to continue in 2023 as well, with elevated inflation and slower growth of exports due to slow-down among the Slovenian main trading partners.
Looking at the Slovenian capital market YTD we can say that double-digit returns during 2023 fully compensated for 2022 already, while as we all know August did evaporate part of those returns. We see local pension funds being not too active in equity due to their already overinvested position. ETFs as a relatively new product did not bring significant demand, but that is still a work in progress, especially regarding the 7BET ETF that as previously mentioned tracked the Romanian BET total return index. In Slovenia, real estate prices in Q1 increased even further by 1.6% QoQ, while they are up 8.8% YoY. This brought retail investors back to the market but the US still gets most of the attention.

We consider Slovenia to be a solid dividend play in the future. For 2023 DY of the index currently amounts to 5.5%, which still does not consider the second dividend tranche of NLB that was announced to be paid by the company still in this year. This second dividend tranche is expected to amount to EUR 2.75 per share, which would make NLB’s DY this year to amount to 7.7% and the DY of the SBITOP index to amount to 6.2%. Furthermore, this year Cinkarna and Telekom Slovenije both didn’t pay dividends due to receiving state aid. Cinkarna received State Aid in 2023 for the Energy crisis in the amount of EUR 5m-7m. The intention is to decide on the dividend again at the beginning of next year. So, both dividends could be paid early next year and for 2024 we expect higher yield due to these mentioned 2023 one-offs and solid financial results of heavyweights in the index in 2023. From a valuation perspective, the Slovenian index is traded at 7.2x P/E, which can be considered favorable compared to regional markets while at the same time, it offers a high and stable dividend play combined with being undervalued. From a liquidity perspective looking at TTM turnover, it fell due to slow demand, while no new supply is available on the horizon. A great example would be the Romanian stock exchange, where Hidroelectrica was listed this summer. This brought a growth of liquidity for the Romanian equity market and promoted the Romanian market from a frontier to an emerging market. We think that aside from new listings, tax incentives are needed for a deep long-term liquidity boost.

Krka – Very good results in H1 with sales growth in all markets and in the majority of sales markets. Volatility of ruble affected operating and net financial results and net financial result was EUR -29.4m. Krka’s position on the global market of generics and biosimilars production is ranked 16th among all global players and in some segments, they are in the top three. Krka is present in 70+ markets and in 6 sales regions. Growth in sales and volume over the 2005 and 2022 period is 7.4% and 6.9%, respectively. Sales in Russia in H1 are 4% higher YoY. In Uzbekistan, the sales grew 21% YoY and all other markets in this region are growing strongly. Sanctions have never been imposed on medical products. 76% of sales in Russia is covered by the factory in Russia while the rest is imported. In Ukraine, many people left the country, so the market shrank, while Krka remained the second biggest supplier of generics. The second largest region is Central Europe, which grew 9% YoY. Czech Republic and Latvia are all growing, West Europe grew 8% YoY, while in Germany they were successful as they introduced a new diabetic product. Slovenia oversees 1/5th of Krka sales, and it grew 15% YoY, and it contributed the most to sales growth. Sales in China are expected to exceed all previous levels. In H1 2023 Krka has added five new market authorizations for products. Capex in 2023 is expected to be EUR 130m, and for Slovenian factory Sinteza 2, they were asked to provide a chemical safety permit, which they will soon. After that, they plan to obtain a building permit and start the construction. The effective tax rate stood at 17.8% and is projected to move back to an average of 16% which was at this high level due to very strong profitability in 2022 as appreciation of ruble happened.
They are purchasing materials from China, India, and other European countries. They were asked about a potential acquisition of the Indian company Unichem. So, the Finance director replied that in this case, the company was acquired at the beginning of this year by its competitor. They were asked about competition in the Indian and Chinese markets, and they replied that competition in these markets is healthy. They were asked how long can they sustain 5% sales growth. They replied that the prices of their products are all under pressure from competition. So, they are working all the time to increase market share to achieve sales growth. They do not plan to sell any of their patents, but they are looking to acquire another company or new products to achieve growth in sales. Depreciation of the ruble influences their gross profit, but they try to have the highest costs in local currency to manage risk and also, they are increasing prices of their products in local currency from time to time.

Triglav Group – Firstly, Triglav glanced through the H1 financial results, where one could notice a solid double-digit GWP growth, mainly driven by the Non-life segment, even though almost all categories noted a positive development. Finally, Triglav emphasized that other markets, except Slovenia, are growing at a faster pace. Further, returns on financial investments are growing on the back of much higher rates, which can already be seen in the latest results. Insurance service results were down 17% to EUR 20m due to a loss in Health insurance (PBT from Health EUR -31m). This material impact came from changes in Slovenian healthcare so in H1 Group a high negative result was booked due to the price cap regulation and other restrictions in Slovenia. In short, Slovenian insurers are forced to sell products below their cost price, creating losses until the end of the year when their obligation to pay for supplemental health insurers will cease. Last, but not least, major CAT loss events that occurred during H1 will be seen in the upcoming quarter. The group estimates CAT claims to be in the range of EUR 150m – 200m. However, taking reinsurance coverage into account, the negative impact on the Group’s EBT is estimated between EUR 40m – 50m. This will result in the bottom line at around 80% lower than planned. Finally, the Group emphasized that they will stick to the dividend policy.

NLB – NLB commented on their solid results during H1 2023, with the growth in profitability driven by higher NII, which by itself was supported by the higher interest rate environment, and continued albeit slower low single-digit loan volume growth. NLB’s capital base is solid, the bank has been increasing it through regular operations and profitability, but also through the issuance of the EUR 500m bond. This bond is the first green bond issued by the bank, and it will not only help it fulfill the MREL requirement but also create a solid base for further expansion in the form of M&As. With the integration of N banka into NLB Group, NLB managed to achieve several successful integrations in the last 3 years. Further M&A opportunities are possible in the coming years, especially in the leasing segment, albeit no current targets are available. Expansion into Croatia is also possible, and further growth in the countries where NLB is already present is expected. NFCI is stable, repricings haven’t been done for a while now, while net income grew in organic terms excl. N banka’s negative goodwill contribution in H1 2022. On the liabilities side, deposits are slowly increasing which will have some influence on profitability. NLB has been trying to incentivize their customers to switch to other forms of savings, term deposits, etc., but this has been rather unsuccessful due to the general macroeconomic environment. NPL book is in a good position, both in terms of asset quality and interest risk. The flooding in Slovenia, as well as the proposed 0.2% total asset tax, have also been discussed. In terms of the flooding, estimates for the total damages varied, but they helped the people affected and are continuing to do so. In terms of the bank tax, NLB noted that it would yield EUR 30m of costs, and EUR 150m in total over 5 years. This wouldn’t affect the capital position or profitability significantly, and as such their outlook remains unchanged.

Petrol – Petrol highlighted that stabilization on the market is evident and that they are well on track to achieve financial objectives. They touched upon the flood in Slovenia during August, and for them, no material impact occurred due to good insurance coverage. Due to floods, they had to close 10 points of sales while 3 were severely hit and they are still in the process of renovating them. Solidarity is expected from everybody in society, so their solidarity fund supports citizens there. After a year of discussion with Standard and Poor in 2023, Petrol obtained an ESG rating from S/P Global rating and their score is 56/100 while the industry average amounts to 54/100. Petrol commented that they are adequately prepared to do this energy transition even if they face challenges ahead. In the process, they have found that there are weaknesses in the reporting segment which they will adjust so they expect to increase their rating in the next period. One of Petrol’s three business pillars is merchandise and services sales and Petrol is the 5th largest retail store in Slovenia. When we look at H1 2023 Petrol said that energy prices are lower compared to last year. GDP is slowing down while inflation remains quite high. Prices of electricity have gone down from peak levels. Prices of natural gas are the same but it will depend on demand for it and how strong the winter will be. Demand in the economy is cooling down and there is an expectation of a mild start of the winter. When we look at one of their pillars (Fuels and petroleum products), over the course of last and this year 39 regulations have been put in place, and they are still operating under a tight regulatory environment, so they must be cost-sensitive. In 2022 regulated prices were below market prices so demand has increased by 40%. In Croatia in June margin was increased and this effect will be evidenced in the remaining part of the year. The CAPEX plan was reduced to EUR 75m, and they are well on track to deliver this plan. They are committed to a sustainable development plan which is evident from the fact that 17% of their CAPEX goes to electricity generation, 10% to mobility, and 7.5% to energy solutions. Gross profit also takes this into account as 33% of their gross profit comes from Energy and solutions. In H1 2023 EBITDA increased due to positive net derivatives result and revenue from claims against Borzen (state company) for compensation of the difference in prices for natural gas and electricity. They have received payments for January, and they are still waiting for payments for the rest of the months this year. This is included in revenue, but it is still awaited in cash flow in the amount of EUR 50m. There should not be any problem in collecting this. In H1 2023 achieved EBITDA amounted to EUR 116m, while the plan for this year is EUR 250m. They are diversifying away from fuel and petroleum products and when you look at their EBITDA composition, this is evident.

Cinkarna Celje – Cinkarna mainly elaborated on industry trends occurring during FY2022 and remaining throughout this year so far. In short, till the end of 2022 the selling prices of titanium dioxide were steeply rising, resulting in an improvement in Cinkarna’s margins. However, at the end of the year, the trend of selling prices reversed due to the import of China’s cheaper pigments combined with lower demand for end products in which TiO2 is used, overall resulting in lower prices. Further, Cinkarna noted that they see no sign of demand picking up in the next 6months. The company thinks the selling prices will continue decreasing and consequently, for margins to be under pressure. Looking at the copper segment, sales also decreased. The main reason is that Cinkarna lost one customer who was bought by a competitor. Further, the previous season was not good for the use of copper and therefore larger stocks of unsold products are still in the supply chain, that are being sold during this year. Not only for Cinkarna but all its competitors. However, financial stability is maintained as the company has no financial debt to this date. Further, the general assembly is expected to be held at the beginning of 2024 and then further decide on any dividend payment. This is the exact reason the company did not buy any treasury shares during the year.

Telekom Slovenije – Telekom Slovenije saw improvements in its top and bottom line in H1 2023, and the growth was recorded across almost all of the segments except Fixed Telephony, which is in line with the trends in the industry. In terms of Broadband, a reversal of the trend of decline that was present for the last couple of years has been recorded, which is positive news. Wholesale also recorded slight growth, with Mobile also improving and in particular, adding app. 50k new subscribers in Kosovo. This can also be seen as the start of the trend turning. As a result, total op. revenue grew by 6% YoY, EBITDA by 4%, and net profit by 1%. EBITDA in fact would have grown by 8% YoY, if the electricity prices remained the same as last year. In terms of the focus, it has been on expanding the optic fiber network as well as overall 5G adoption. This will be primarily recorded in 2024, a year when CAPEX will be the largest, after which it should normalize below the levels seen in the past couple of years. For its 2023 outlook, they’re expecting to achieve EUR 680.8m in operating revenues, an EBITDA of EUR 206.2m, a net profit of EUR 20.1m, and total investments of EUR 205.5m. A new strategy regarding its objectives will be published by the end of the year.