IC Market Espresso 19 Aug 2019

CERP Announces Another Wave of Privatization
The privatization should be realized within 3 turns which would include the sale of 30 minority holdings each.

According to the media, the Republic of Croatia Restructuring and Sale Center (CERP) announced another wave of privatization which will include the sale of 1% of shares of Arena Hospitality Group, 0.03% of shares of Maistra, 0.93% of FTB Turizam.

Also, by public offering, 0.7% of shares of Laguna will be offered with the initial price of HRK 252 per share.  0.17% of shares of Tankerska Plovidba will be offered in the same way with the initial price of HRK 1,745 per share.

This will be the first privatization attempt to which Croatia has committed itself in the preparation of the introduction of the Euro, which should include the announcement of tenders for a total of 90 companies in the Government’s portfolio. The mentioned sale should not relate to the strategic companies, but to minority holdings (up to 25% in the companies from CERP’s portfolio).

The privatization should be realized within 3 turns which would include the sale of 30 minority holdings each. According to the media, the first sale of 30 holdings should occur in September, while the second turn should occur by the end of the year. The last turn should occur in Q1 2020.

The mentioned sale should be carried out until 1 April 2020.

Energia Naturalis Acquires 10.39% of Shares of Luka Ploče at HRK 412 per Share
The company published the bid on 10 July 2019, offering HRK 412 per share. Currently Energia Naturalis holds 36.1% of the total shares of Luka Ploče.

Following up on Energia Naturalis’ takeover bid for Luka Ploče, the company published a document stating that the shareholders of Luka Ploče have accepted the takeover bid. With this takeover, Energia Naturalis, acquired 43,947 shares of Luka Ploče, which makes up for 10.39% of the total shares. After the mentioned takeover, the company holds 36.1% of the total shares of Luka Ploče.

As a reminder, the mentioned takeover bid, came as a result of the regulatory requirement, as Energia Naturalis has passed the 25% threshold and currently holds 25.62% of the shares of Luka Ploče.

Energia Naturalis published the bid on 10 July 2019, offering HRK 412 per share.

Purcari Publishes H1 2019 Results

In H1 the company observed an increase in sales of 25% YoY, increase in adj. EBITDA of 30% and a net profit of RON 17.1m (+7%).

As Purcari Wineries published their H1 2019 report, we are brining you key takes from it. According to the report, the company observed an increase in revenue of 25% YoY, amounting to RON 87.8m.

Such an increase could be attributed to the strong performance in core markets. Poland contributed most to the growth, increasing 47% YoY, Czechia and Slovakia increased 24% YoY, while Romania and Moldova both grew 16% YoY. When observing the sales by market, Romania makes for 40.4% of the total sales. Moldova and Poland follow with 20.5% and 12.1%, respectively.

Gross margin declined to 49% YoY (decrease of 2 p.p.) pushed down by higher costs of raw materials, while gross profit amounted to RON 43.2m (+20%).

When observing Purcari’s G&A, it amounted to RON 11.4m which represents a decrease of 8% YoY. The company also maintained a stable share of marketing and selling expenses (RON 6.84m), slightly below 8% of revenue, despite the accelerating revenue growth.

As a result, the adjusted EBITDA grew up by 30%, amounting to RON 30.11m.

Going further down the P&L, Purcari observed a high increase in net financial loss of 951%, amounting to RON – 5.4m (compared to RON -0.52m). Such an increase was impacted by one-off non-operating, non-cash FX loss on revaluation of the foreign currency-denominated debt of Moldovan entities, as a result of weakening Moldovan Leu, the local currency for Bostavan, Purcari and Bardar operations.

In H1, the company observed an increase in net profit of 7% YoY, amounting to RON 17.1m

It is also noteworthy that in H1, Purcari announced a share buyback program which provides for the purchase of a maximum number of 200,000 shares. To read more about the mentioned buyback, click here.

Purcari Performace (H1 2018 vs H1 2019) (RON m)

*Adjusted for non-recurring G&A expenses related to IPO

Croatia’s Equity Risk Premium Development
For this week’s blog, we are bringing you an overview of the historical development of Croatia’s equity risk premium (ERP) and the comparison of current ERPs by countries.

The equity risk premium (ERP) can be explained as an excess return an investor would demand to invest in the average equity over the risk-free rate. This excess return compensates investors for taking on the relatively higher risk of equity investing. The size of the premium varies depending on the level of risk in a particular portfolio and also changes overtime as market risk fluctuates. As a rule, high risk investments are compensated with a higher premium.

Although there are many disagreements when it comes to determining a country’s ERP, it is still one of the crucial components of calculating the cost of equity and is therefore an important factor in valuing companies. It is negatively correlated with the value of a company, meaning that other things held constant, a higher ERP would lead to a higher cost of equity and therefore a lower valuation (and the other way around). 

According to Aswath Damodaran, to estimate the equity risk premium for a country, one should find the premium for a mature market and add an additional country risk premium, based upon the risk of the country in question. To estimate the mature market risk premium, one has to compute the implied equity risk premium for the S&P 500 index. This is done by calculating the implied expected return on stocks which is than deducted by the risk-free rate (T. Bond rate). As of 1 July 2019, the ERP for a mature equity market (such as the USA or Germany) amounts to 5.67%, which is close to the median ERP in the past 10 years (5.60%). In the graph below, one can notice a couple of sharp decreases in ERP such as the one during the dot com bubble and the housing market crisis, which in a way, signaled a bubble. As a comparison, current ERP is quite above the historic median of 3.89%.

Historical ERP for Developed Markets (1961 – July 2019)

Source: Aswath Damodaran, InterCapital Research

In order to calculate the equity risk premium for Croatia, one would, according to Damodaran, have to add an additional country risk premium to the premium for the mature market. Damodaran calculates the country risk based upon the local currency sovereign rating for the country from Moody’s or with the CDS spread for the country (if one exists). This would mean that based on Croatia’s credit rating since January 2019, the country risk of Croatia would amount to 4.17%, which would translate into an ERP of 10.13%.

However, since than Croatia received credit rating upgrades by both S&P (in March) and Fitch (in June), which took it to the investment grade territory. Besides that, ERP for developed markets observed a decrease of 0.29 p.p. since January 2019. Therefore, as of July 2019, Croatia’s ERP would amount to 9.06%.  

Croatia’s ERP Development (2009 – July 2019)

Source: Aswath Damodaran, InterCapital Research

In the graph above, you can see the historic development of Croatia’s ERP which has been fluctuating in the past 10 years. In the observed period, the Croatia’s country risk reached its peak in 2016, when it amounted to 4.7% and has been gradually decreasing since.

In the graph below, one can notice the comparison of equity risk premiums by selected countries as of July 2019. As prior mentioned, mature markets are given an ERP of 5.67%, while, on top of that, we add an additional country risk for other markets. As noticeable in the graph, it comes as a no surprise that Bosnia and Herzegovina has the highest country risk (7.33%), which translates into an ERP of 13%. North Macedonia and Serbia follow both with a country risks of 4.06%, translating into an ERP of 9.73%.

When looking at what makes one country risker than another, one should look at the sources of country risk. Such can be political and legal risk, but also the economic structure of the country. This means that the more dependent a country is on a certain industry, the more exposed it is to global macroeconomic shocks (and the other way around). Besides that countries experiencing high growth are usually more exposed to shocks than mature countries.    

ERP by Country (July 2019)

Source: Aswath Damodaran, InterCapital Research

It is important to note that when calculating the cost of equity for companies from the same country, the same ERP should not always apply just because they are incorporated in the same country. As certain companies have a significant portion of their operations outside of the country of their incorporation, the risk of operating there should be reflected in the ERP. This can be done by weighting the ERP based on revenues (or another key performance indicator) it makes in each country it operates. So, for example, when calculating the ERP for Apple one should not just use the ERP for developed markets as it does not reflect the risk of Apple operating outside of the USA.