Today, we are bringing you a quick analysis of the indebtedness and the capital structure of Croatian blue chip companies which make up the CROBEX10 index, using the newest 9M 2022 results.

With the publishing of all the 9M 2022 results for the Croatian companies behind us, we decided to look at how these results changed the indebtedness and capital structure of some of the largest Croatian blue chips. In order to do this, we looked at the net debt to EBITDA ratio, as well as the percentage of debt the companies use to finance their operations and investments. Furthermore, we looked at how much additional debt the observed companies could take to reach the 3x EBITDA. The 3x EBITDA mark is usually considered an “upper” limit of how much debt the companies could take, without putting their operations at risk with the repayment of said debt. This upper limit is usually considered when a company makes new investments, especially in the case of M&As.

Of all the Croatian blue chips, Adris, Ericsson NT, and Hrvatski Telekom operate with a negative net debt. This means that their current cash positions (which include short-term financial assets combined with cash and cash equivalents) are more than enough to cover their entire financial debt. Consequently, their net debt to EBITDA ratio would also be negative. Because of this, these companies were excluded from the net debt to EBITDA comparison. Finally, the EBITDA data is based on the trailling twelve months (TTM) results (meaning 9M 2022 + Q4 2021), as this is the only way to show full-year data. This is done because components of the balance sheet (like in this case, debt) always reflect their numbers on a certain date, while components of the P&L reflect only financial data for a select period (in this case 9M 2022). As such, the last quarter of 2021 is needed to get a full-year picture.

Net debt to EBITDA of Croatian blue chip companies

Source: Companies’ data, InterCapital Research

Out of the remaining 7 companies, the largest indebtedness goes to AD Plastik, with 14.5x. Following them, we have Arena Hospitality Group with 4.9x, Valamar with 1.8x, and Atlantic Grupa, with 1.0x. The remaining companies all have net debt to EBITDA of less than 1. For AD Plastik, the reason for the highest net debt/EBITDA is the low EBITDA that the Company has recorded during the last 12 months, under the influence of the semiconductor shortage in the automotive industry at first, and then the Russian invasion of Ukraine, as AD Plastik derives significant revenue and production from Russia. In terms of Arena Hospitality Group, the Company the answer is twofold; on the one hand, the Company invested and continues to invest a significant amount of money into its portfolio, which increases debt levels. On the other hand, profitability from these investments (e.g. Hotel Brioni) has yet to fully manifest itself, as the newly added assets have only operated for several months. Valamar Riviera is also in a similar boat in terms of investments requiring higher levels of debt. The remaining companies retain pretty low levels of indebtedness, which considering that the current macroeconomic situation makes taking new debt significantly more expensive, makes sense. Končar is the only “new” addition to this, as they increased investments in the 9M 2022 period, and as such, took more debt (as compared to H1 2022, when their net debt was negative).

Potential additional debt (HRK) to reach 3x EBITDA

Source: Companies’ data, InterCapital Research

Taking a look at how much new debt these companies could take to reach 3x EBITDA, Arena Hospitality and AD Plastik were excluded as they already are over this number. Of the remaining companies, HT could by far take the most, at HRK 12.56bn, followed by Adris with HRK 4.62bn, Podravka with HRK 1.63bn, Atlantska Plovidba with HRK 1.43bn, Končar with HRK 1.4bn, Atlantic Grupa with HRK 1.16bn, Ericsson NT with HRK 1.0bn, and finally, Valamar with HRK 925.5m. This would mean that in case these companies see any potential for further expansion or even a need to finance their operations, they could take on significant amounts of debt. Of course, as mentioned, new debt is more expensive now than it was a year ago, and it will only keep on getting more expensive, as ECB’s interest rate hikes have already taken place and are expected to continue in 2023.

Finally, we looked at the capital structure of these companies. All of the observed companies have the majority of their funding from equity (>50%). If we were to rank them from highest to lowest, HT has 100% of their operations financed from equity (as they have no debt), Podravka has 87.8%, and Končar has 85.9%. On the other hand, the only 2 companies that have less than 60% of their finances from equity are Valamar Riviera and Arena Hospitality Group, at 56.8% and 52.5%, respectively. Considering they both operate in the tourism industry, this is to be expected.

Capital structure of CROBEX10 constituents

Source: Companies’ data, InterCapital Research

During 9M 2022, Banca Transilvania recorded a net interest income growth of 39% YoY, net fees and commissions income growth of 22%, op. income growth of 22%, and a net profit of RON 1.68bn, +1% YoY.

The net interest income amounted to RON 3.15bn in 9M 2022, representing an increase of 39% YoY. The growth was supported by increases in ROBOR rates and a growth in the number of newly issued loans. In fact, during this period, Banca Transilvania (BT) issued 206k new loans, which is an increase of 32% in terms of corporate loans (compared to YE 2021), and a growth of 7.4% in terms of retail loans. 3.8m customers chose Banca Transilvania as its bank, which is 313k new active customers in the 9M 2022. This is an increase of 4.7% compared to YE 2021.

Moving on, the net fees and commissions income increased by 22% YoY, and amounted to RON 852.4m. This was mainly due to the increase in card transactions as well as the increasing degree of customers’ digitalization. In fact, by the end of 9M 2022, 84% of BT’s customers were digitalized. Meanwhile, net trading income increased by 43% YoY and amounted to RON 553.2m. This came as a result of significantly higher net income from derivative instruments and foreign exchange transactions being recorded in this period. As a result of these increases, op. income amounted to RON 4.43bn, an increase of 22% YoY.

Operating expenses also grew, increasing by 48% YoY and amounting to RON 2.49bn. This growth was influenced by higher net expenses with depreciation adjustments, expected losses for assets, provisions for other lending risks and commitments, which increased from RON 10.5m to RON 369.1m during the period. Personnel expenses also grew, increasing by 26% YoY to RON 1.21bn. In regards to personnel expenses, BT Group continues to increase the number of employees, and since the beginning of the year, this grew by 2.9%. Combined with the high inflation rates in Romania, higher salaries also have to be offered, leading to the growth in personnel expenses.

As a result of fast OPEX growth, the EBT amounted to RON 1.94bn, remaining roughly the same YoY. Following this, the net profit also remained almost unchanged, growing by 0.6% to RON 1.68bn.

Banca Transilvania key financials (9M 2022 vs. 9M 2021, RONm)

Source: Banca Transilvania, InterCapital Research

Moving on to the balance sheet, total assets increased by 6.6% YTD, to RON 141.3bn. Of this, the largest growth was recorded in the financial assets at amortized cost, which increased by 44% YTD to RON 97.3bn. In this category, debt instruments increased the most, by over 16x YTD to RON 25.5bn. Loans and advances to customers increased by 19% YTD, to RON 65.1bn. On the other hand, placements with banks decreased by 48.6% YTD, to RON 5.3bn.

Meanwhile, total liabilities amounted to RON 130.6bn, an increase of 7.1% YTD. This growth was driven by higher deposits from customers, which grew by 5% YTD to RON 113.4bn. Higher deposits from banks were also recorded, in the amount of RON 1.8bn, an increase of 78.1% YoY.

In 9M 2022, MedLife recorded a revenue increase of 27% YoY, an EBITDA decrease of 12%, and a net profit of RON 56.8m, a decrease of 42% YoY.

During the 9M 2022, sales revenue amounted to RON 1.32bn, an increase of 27% YoY. The increase was mainly a result of growth in almost all of the Group’s business lines, as well as the impact of acquisitions completed by the Group in 2022. The best-performing segments were the clinics and the hospitals, with a growth of 50% and 15%, respectively.

Operating expenses amounted to RON 1.24bn, an increase of 38% YoY. The largest increase was recorded in the commodities expenses, which grew by 175.6% YoY to RON 153.5m. This came as a result of the Pharmachem consolidation, the pharmaceutical distributor company. Consumable materials and repair materials also grew, increasing by 26.3% YoY to RON 224.7m. Salary and related expenses also increased, growing by 32% YoY to RON 322.3m.

Due to strong OPEX growth, which outweighed the growth on the top line, the EBITDA decreased by 12% YoY and amounted to RON 198.1m. This would mean that the EBITDA margin also decreased, by 6.6 p.p. to 15%. Moving further down the P&L, the financial result amounted to RON 27.9m, a decrease of 0.5% YoY. Due to the lower op. profitability, the earnings before taxes (EBT) also decreased, by 43% YoY to RON 67.5m. As a result, the income tax declined by 44.7% YoY to RON 10.7m, implying an effective tax rate of 215.9%, a decrease of 0.5 p.p. YoY. Finally, the net income amounted to RON 56.8m, a decrease of 42.4% YoY.

MedLife key financials (9M 2022 vs. 9M 2021, RONm)

Source: MedLife, InterCapital Research

Moving on to the balance sheet, total assets increased by RON 1.88bn, an increase of 32.8% YoY. This came mainly because of the many acquisitions the Company made during the period. Breaking this down further, total non-current assets increased by 36.5%, to RON 1.41bn, driven by higher goodwill (+69% YoY), higher property, plant, and equipment (+25% YoY), and higher other financial assets (+230% YoY). Current assets also increased, mainly driven by higher trade receivables (+39% YoY), and higher other assets (+158% YoY).

On the other hand, growth in liabilities was driven by higher non-current liabilities (+46.3% YoY to RON 909.3m), driven by higher interest-bearing loans and borrowings (+59.1% YoY), and current assets (+27.6% YoY to RON 528.9m). This, in turn, was driven by higher trade and other payables (+26.6% YoY to RON 283.8m), and higher current interest-bearing loans and borrowing (+44.5% YoY).