IC Market Espresso 18 Mar 2022

DuPont Serial Analysis of Croatian Companies – FY 2021 [Final]

This week, we presented you with detailed series – decomposition of Return on Equity (ROE) of selected Croatian companies, using 5-Step DuPont Analysis. DuPont analysis breaks down the underlying components of the ROE in order to analyze the contribution of each component. ROE is a measure of the profitability of a company in relation to equity. Today, we put things into perspective and compare the whole picture given by DuPont decomposition.

The difference compared to industry mean – ROE (p.p.)

We can notice all of the selected Croatian blue chips reported deviation in return on equity from industry mean. Looking further ahead at all DuPont components, we will analyze the contribution of each component on return on equity. This way we will see the reasons for deviations in ROE more clearly, instead of just reporting the deviations in ROE are present.

The difference compared to industry mean – Operating Margin (p.p.)

We can notice that each of the selected Croatian blue chips in FY 2021 reported a lower operating margin compared to its peer group. To put things into perspective, this means that Valamar Riviera and Atlantic Grupa, which reported higher ROE than their peers but lower operating margin than their peers, compensated on other fields of business activity to achieve a higher return on equity.

The difference compared to industry mean – Assets Turnover

Asset turnover compares a company’s assets to its sales. This ratio helps us to determine how efficiently a company uses its assets to generate revenue. This ratio is crucial as every company has to utilize its assets. The higher the ratio is, the more efficient company uses its assets to generate revenues.

As can be seen from the graph above, just as economic theory would indicate, asset turnover of Croatian blue chips closely follow their industry mean. Asset turnover is closely tied to the nature of a company’s assets. It should not come as a surprise that Atlantic Group and Podravka have the highest asset turnover, due to the nature of their sales and business. Also, conversely looking, on the other end, we have Valamar Riviera whose fixed assets amount to 82% of the company’s total assets. Asset-heavy hospitality companies hold a high amount of fixed assets so this also should not come as a surprise that Valamar’s assets amount to EUR 913.6m. Nevertheless, Valamar’s higher assets turnover from its peers indicates Valamar operates its assets more efficiently than its peers.

Končar reports interesting decomposed numbers, which DuPont decomposition lets us see clearly. In the graph above, we can clearly see that Končar has an assets turnover higher than its peers, indicating a more efficient use of assets. Yet again, we looked at the return on equity of Končar and it was by 7 p.p. lower than its peers. The answer lies in another mentioned DuPont variable – financial leverage. How can Končar have a lower ROE than its peers if the company uses its assets more efficiently? The combination of lower operating margin and lower financial leverage, which does not let the company amplify its results as much as its competitors do.

The difference compared to industry mean – Financial Leverage

Financial leverage divides a company’s total assets with the company’s equity, giving us information on how leveraged the company is with debt. Financial leverage can be useful as it emphasizes the financial stability of a company. Financial leverage equal to 1 would indicate the company has no debt – that company financed its total assets with equity.

We can clearly see the trend of lower financial leverage of Croatian blue-chips, when compared with its regional comparable peer group. Only Valamar Riviera has the same financial structure in equity and liabilities, as their peer group. The highest deviation from its peer group is reported for HT. HT has financial leverage of 1.2x, while it’s peer comparables have much higher leverage to boost their operations, with median financial leverage amounting to 2.7x. This difference can be attributed to the large cash position of HT. The roots of this correlation of HT’s cash position and lower leverage lies within industry norms and structure. This industry is highly capital intensive, meaning a lot of CAPEX is necessary in order to operate within the industry. Consequentially, if a company does not have a large equity position, it has to finance – via debt. In this case, debt enables a company to even operate and grow further. As HT has mentioned large cash position, it doesn’t have to finance via debt, thus having much lower financial leverage.

The difference compared to industry mean – Interest burden

Interest burden tells us the extent to how much the net financial result of the company together with profit from associates (20-50% shareholding) and investments (<20% share) impacts its profit. If a company pays more interest on its debt than what it receives as interest from its loans or profits from its investments into associates or joint venture, this ratio will fall below 1, meaning that net financial & investment result has impacted its profit negatively. It is calculated as EBT divided by EBIT.

As can see from the graph above, the interest burden of all Croatian blue chips closely follow the industry mean, which should not come as a surprise. This is just a result of a similar capital structure within the same industry. Within the valuation context, this leads to a similar weighted average cost of capital (WACC), due to more similar capital and debt weights. Also, the reported situation can be partly explained due to companies operating in the same region and generating sales from a similar region. This leads to similar FX gains/losses, which are also affected by the company’s risk management and hedging strategy.

Nevertheless, Končar reported an interest burden of 1.23 as its EBT (HRK 238m) was higher than EBIT (HRK 194m). The reported interest burden higher of 1, by itself, indicates a positive net financial & investment result. Končar reported a net financial result of HRK 5m and net investment result of HRK 39m. The highest impact on net financial gain was achieved by interest revenues (amounting to HRK 6.8m) generated by the interest received on given deposits/loans which were higher than interest on loans paid of HRK 4m. Končar has joint venture with Siemens, Končar-Power Transformers Ltd. (Končar – Energetski transformatori d.o.o., Zagreb) where it has a shareholding of 49%. This company was very profitable in this FY and Končar’s share of profit has amounted to HRK 35.4m.

The difference compared to industry mean – Tax burden

Tax burden gives us a proportion of profits retained after tax. This indicates how much does tax impacts on company’s bottom line. It is calculated as a company’s bottom line, net profit, divided with EBT, pre-tax income. If a company has to pay in the observed period, this ratio will naturally fall below 1, dragging a company’s profitability downwards.

As can see from the graph above, the tax burden of all Croatian blue chips closely follow the industry mean, which should also not come as a surprise. Tax burden indicates how much does tax impacts on company’s bottom line. If any of the blue chips reported significant deviation from the industry mean, it would probably be due to some “one-offs”, for example, a tax incentive. Valamar Riviera reported exactly the above-stated scenario. Valamar reported positive tax expense, effectively meaning it increase Valamar’s bottom line. Positive tax expense is a combination of this year’s tax expense, deferred tax assets and tax benefit, while tax benefit happened due to government incentives for Valamar’s investment in Isabella Resort, Family Life Bellevue Resort and Girandella Village.


To conclude, Valamar reported ROE higher than the industry mean, even with a lower operating margin. This was achieved by having asset turnover higher than the industry mean, meaning Valamar uses its total assets more efficiently in generating revenues. Also, Valamar reported tax burden relatively better than the industry mean due to tax benefits from government incentives for investing in Isabella Resort, Family Life Bellevue Resort and Girandella Village. Atlantic Group reported a similar situation. The company has ROE higher than the industry with an operating margin lower than the industry mean, but it was offset mostly by higher assets turnover.

Končar reported lower operating profitability than its peer group (-6.8 p.p.), but reported the highest positive difference when compared to industry mean assets turnover, indicating a more efficient use of assets. Another positive offset of lower operating profitability is a high positive deviation from industry mean in Interest burden, which is the result of the above-mentioned positive result of Končar’s joint venture with Siemens, with Končar’s share of profit has amounted to HRK 35.4m.

Podravka has ROE slightly below the industry mean, which is just a result of a generally lower operating profitability and lower financial leverage that does not “boost” the bottom line.

Petrol Proposes EUR 30 DPS

At yesterday’s closing price, the dividend of EUR 30 per share would have a dividend yield of 5.98%.

Petrol published an announcement on the Ljubljana Stock Exchange regarding the distribution of net profit from 2021. The Company proposed a dividend of EUR 30 per share, which would mean that out of the net profit of EUR 124.5m achieved in 2021 (which is also an increase of 72% YoY), EUR 62.25m (or 50%) would be used for the dividend payment.

The amount for the dividend is set by taking into account the necessary investments, free cash flow, the Company’s debt level, development plans, retained earnings from previous years, appropriate net debt to EBITDA ratio and the liquidity situation.

At yesterday’s closing price of EUR 502 per share, this would amount to a DY of 5.98%. The dividend proposal is subject to approval at the GSM.

As a reminder, the dividend policy target for the 2021-2025 strategic period is 50% of the Group’s net profit, taking into account the investment cycle, Group indicators and achieved objectives. This is all part of the long-term financial stability of the Company, which combined with the stable dividend policy, is aimed at ensuring a balanced dividend yield for shareholders while at the same time, using the free cash flows to finance the Company’s investment plans.

Dividend Per Share (EUR) & Dividend Yield (%) (2013 – 2022)

Slovenian Mutual Fund Asset Structure – February 2022

In February 2022, the Slovenian mutual funds had EUR 4.14bn under management, a decrease of -2.9% MoM and an increase of 21.9% YoY.

The Slovenian Securities Market Agency has posted its monthly report on the Slovenian mutual funds. In it, we can see that Slovenian mutual funds had EUR 4.14bn AUM (assets under management) in February 2022. This represents a decrease of -2.9% MoM, continuing the trend in January, and a decrease of -4.5% YTD. On a YoY basis, however, this would equate to an increase of 21.9%. This decrease could be attributed to the increase in uncertainty and volatility experienced since the beginning of the year, due to the inflation and interest rates uncertainty, as well as the volatility experienced on the market since the Russian invasion of Ukraine.

Equity Holdings of Slovenian UCITS funds (EUR bn)

Looking over to the net contributions of the funds, in February 2022, they amounted to EUR 28.7m. Compared to the same period last year, when net contributions amounted to EUR 37.2m, this is a decrease of 22.9%. At the same time, the total number of subscribers increased to 497,584, continuing the trend of the increasing amount of subscribers, and once again marking an all-time high. When looking at the net contributions over the last twelve months, they amounted to EUR 457.9m, which is 139% higher than the same period during 2021.

Net contributions in the Slovenian mutual funds (EUR m)

In terms of the asset structure of the funds, in February 2022, shares amounted to 69.4% (or EUR 2.88bn) of AUM, a decrease of -1.6 p.p. MoM, and roughly the same level YoY. Bond holdings, which amount to 16% of total AUM, experienced an increase of 0.6 p.p. MoM and a decrease of -1.3 p.p. YoY and amounted to EUR 660.9m. Next up, we have investment funds, which remained roughly at the same level MoM and YoY, and amounted to EUR 289.1m. Following them,  we have the money market, deposits & cash, which increased by 0.4 p.p. MoM, 0.7 p.p. YoY and amounted to EUR 265.1m, and other assets, which grew by 0.8 p.p. MoM, 0.7 p.p. YoY, and amounted to EUR 51.1m. The effects of the aforementioned uncertainty regarding the effects of the Russian invasion can also be seen here, with the slight reduction in shares percentage in total AUM, and an increase in lower-risk assets, like bonds.

Total assets of all Slovenian UCITS funds (EUR bn)

Of that amount, domestic equity holdings amounted to 63.9m, a decrease of -17.4% MoM, and an increase of 8.7% YoY. The decrease in domestic equity could be attributed to the sell-off of Krka shares (on average, the most traded stock on the LJSE)  which has exposure on the Russian & Ukrainian markets. At the same time, foreign equity holdings which amount to EUR 2.81bn, also experienced recorded a decrease of -4.8% MoM, but still, maintain an increase on a YoY basis of 22.2%.

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