To promote the strengthening of local capital markets, CFA Society Croatia published a paper that could serve as a template for the preparation of the Croatian Capital Market Strategy. We warmly support the initiative, timing, and recommendations. In this article, we are bringing you an overview of this paper, while emphasizing the need to take it to the next level and engage stakeholders with a higher level of influence.
Last year our neighbouring country Slovenia, with a comparable capital market, received its 1st Strategy for the Development of the Capital Market, which will be implemented by the Slovenian Government. To remind you, the template was based on the following pillars:
1) the introduction of funds containing shares of state-owned companies listed on LJSE (a solid example is Fondul Proprietatea in Romania)
2) additional bond offering on the market – we’ve seen solid development on this topic both in Croatia & Slovenia
3) Providing a single platform for investing in SME & financial education
4) Investments accounts – tax benefits for retail investors to support trading on LJSE
In order to promote the strengthening of local capital markets, CFA Society Croatia published a paper that could serve as a template for the preparation of the Croatian Capital Market Strategy. We warmly support the initiative, timing, and recommendations. CFA Croatia conducted a comprehensive survey of market participants’ views on our capital market. Research of this type and scope has not yet been carried out in Croatia, so this effort is highly commendable and worthwhile. At this early stage of the process, it is good that different stakeholders were involved, like the ones that supported the CFA initiative: Zagreb Stock Exchange, the Croatian financial services supervisory agency(‘HANFA’), The Central Clearing Depository (‘SKDD’), The Croatian Chamber of Economy (‘HGK’) and Croatian Ministry of Finance. We consider the main goals to be ambitious, but achievable and we are highly supportive of the initiative. We urge the Croatian Government also to get involved and take the lead in the project, so coordination between main stakeholders can be achieved with ease and in a timely manner.
In this blog, we are bringing you the summary of the template for the capital market development strategy for Croatia with the key takeaways outlined. The long-term goal for the development of the Croatian capital market lies in the achievement of the “emerging market” classification by MSCI. The quantitative criteria for achieving this goal are in line with EM criteria which implies at least three companies listed with: a) market capitalization >EUR 1.92bn, b) free-float market capitalization >EUR 1bn, c) annual turnover >15% of free-float market cap value of a share. This is not easy to achieve as the only company with a similar Market cap is Hrvatski Telekom (Market cap of EUR 2.2bn, Free-float market cap of app. EUR 850m). The third criteria for HT is not likely to be achieved as its free float liquidity is not remotely achievable and its free float is decreasing which reduces the share’s availability to traders. The qualitative criteria are focused on increasing the number of listed shares and mobilization of available savings by encouraging the involvement of small investors. The timeframe suggests tripling the turnover on ZSE (from EUR 372m to EUR 900m) by 2028, which could be supported by increasing citizens’ involvement in domestic capital markets and increasing the number of newly listed companies with a market cap above EUR 2bn. InterCapital, as the biggest broker on the ZSE, highly supports this initiative.
Specifically, the basis for the strategy consists of 4 pillars of the strategy and 25 individual initiatives. Below we present you the summary of 4 pillars of the strategy and our view of the pillars:
1) Creating a stimulating investment environment – The basis for achieving this is the mobilization of savings and initiatives that enable a greater number of investment services through simpler processes combined with a higher general level of financial literacy. Looking at this pillar, we emphasize that real opportunity lies in the simplicity of the implementation.
2) Increasing the number and activity of issuers –This is intended to be resolved by the inclusion of new issuers, which should improve the domestic capital market picture. The paper highlights the existence of many large unlisted companies that outperformed the ones currently listed in terms of both size & profitability. However, regarding this point, we think it’s highly unlikely for this kind of development to happen due to the ownership structure of our large unlisted companies, rather than just looking at size and profitability. Besides increasing the number of issuers, the paper also suggests a more optimal tax treatment of debt in relation to equity. Debt is considered tax deductible, while dividends are not. In line with the EU initiative The Debt Equity Bias Reduction Allowance (DEBRA), the paper suggests tax relief for increasing equity and limiting the tax deduction for interest payments.
3) Mobilizing market participants – This pillar lays on the fact that existing market participants are highly restricted in their activity, mainly due to a regulatory framework. The paper suggests that privatization can go in different directions, with a solid example being the Romanian fund Fondul Proprietatea, where state-owned companies are managed in the form of investment funds, by foreign expert management. This could lead to more efficient corporate management and more market participants on the stock exchange. This kind of example has already resulted in a significant breakthrough for Romanian capital markets.
4) Increasing efficiency by removing obstacles – This could be achieved by harmonizing the legal framework with EU standards combined with changes in tax system administration.
In the next part, we divide proposed initiatives by their priority and the complexity of their implementation.
High Priority & High / Medium Complexity Implementation Initiatives
wdt_ID Initiative Priority Complexity of implementation
1
Introduction of investment accounts with tax benefits
High
Medium
2
Harmonization of the implementation of corporate actions with EU standards
High
High
3
Digitization of processes
High
High
4
Determining the residency of funds for tax purposes
High
Medium
5
Raising the standard of corporate governance
High
Medium
6
Equalization of the tax treatment of debt and equity
High
High
Source: Template for Croatian Capital Market Strategy
In this category, the initiative we would like to outline is the introduction of investment accounts with tax benefits. This would imply individual investment accounts with the goal of long-term savings based on an investment in financial instruments. The key characteristic would be more optimal taxation combined with less administration to allow easier financial instrument trading. This way, savings could be directed to capital markets with a bigger retail base. Further, the main feature of this kind of investment account would be trading without incurring tax liabilities. The tax liability will occur by paying funds back to the depositor’s basic payment account in the bank. These kinds of accounts are already present in France, Hungary, Finland, Italy, the UK, and a few other countries.
Regarding the digitalization of processes, something we would like to outline is electronic voting at GSM. This would increase the practicality and participation of shareholders’ meetings. Further, it would also speed up the decision-making processes and make them more transparent. The next initiative is Determining the residency of funds for tax purposes. As domestic funds do not have“legal personality” and consequently can’t obtain the tax administration certificate, funds are liable to pay income tax on foreign markets they are not entitled to a refund. Consequently, the initiative suggests legislative framework adjustments so that the funds can have a clearly defined tax status with the aim of applying the threat of the avoidance of double taxation for mandatory and voluntary pension funds.
High Priority & Easy Fix Initiatives
| wdt_ID | Initiative | Priority | Complexity of implementation |
|---|---|---|---|
| 1 | Establishment of a community of investors at HGK | High | Low |
| 2 | Facilitating digital onboarding of clients | High | Low |
| 3 | More active involvement of small investors in public offers | High | Low |
| 4 | Changes in the legislative environment related to custody matters | High | Low |
Source: Template for Croatian Capital Market Strategy
The first category we wanted to highlight is the one with a high priority and low complexity of implementation. Regarding the 1st initiative, it is stated that the research has shown there is a need for this kind of association. Establishing a community of publishers can have a significant impact through contribution, transparency, and security. Such a community would include various issuers to protect the issuer’s interests and strengthen investor trust. We highly approve of the initiative, especially considering the ease of its implementation. The same case is with the digital onboarding of clients. This has been a common European practice for quite some time now, while not yet digitalized enough in Croatia. Regarding the activation of retail investors in public offers, some countries have implemented the practice. For example, Australia reserves c. 25% of each IPO for retail investors, while the rest is available to institutional investors. Singapore, Hong Kong, and France have a similar practice. This paper suggests the threshold is set at 15% of the issue with at least 100 private entities as shareholders.
During 2023, INA recorded a revenue decrease of 16% YoY, an EBITDA decline of 22%, and a net profit to majority of EUR 250m, a 1% decrease YoY.
Starting off with the net revenues, they amounted to EUR 3.89bn during 2023, decreasing by 16% YoY. This came mostly as a result of lower hydrocarbon prices, and product quotations. INA notes that after 2022, the global economy found its footing, marking a period of stability. Energy prices, which were quite erratic in 2022 have mostly steadied. This is visible in both the prices of oil and gas. The benchmark for oil, Brent oil, amounted to USD 83/one barrel (bbl) in 2023 on average, decreasing by 18% YoY. Furthermore, gas prices decreased even more significantly, from EUR 126/MWh to EUR 42/MWh, a decrease of 67% YoY.
Besides the decrease in energy commodity prices, INA also recorded lower production of crude oil, natural gas, and condensate, leading to overall lower hydrocarbon production. Crude oil production dropped by 6% YoY to an average of 11.6k barrels of oil per day (boe/d). This came due to lower production in Croatia, where it dropped by 4% YoY to 9.67k boe/d, but also more significantly, due to a 68% drop in Angola, to 180 boe/d. INA notes that production declined in line with the expected natural decline (Croatia) but also due to the divestment in Angola. For natural gas, a 7% decrease in production was recorded, both of which came from lower production in Croatia – offshore (-2% YoY) and Croatia – onshore (-9% YoY). Finally, condensate sales dropped by 11% YoY, mostly due to lower production in Croatia. All taken together, this meant that a 28% lower average hydrocarbon price was recorded.
Due to these reduced prices, EBITDA also decreased by 22% YoY to EUR 523m during 2023. Besides normal EBITDA, INA also reported EBITDA excl. special items, which decreased by 32% YoY to EUR 496m, as in 2022, the op. result was negatively impacted by impairment and reversal of impairment of asset in the amount of EUR 23.6m. Lastly, INA also reports CCS (current cost of supply) EBITDA excl. special items, which decreased by 30% YoY to EUR 536.3m.
In terms of operating expenses, they amounted to EUR 3.64bn during 2023, decreasing by 15%, or EUR 640m YoY. This came mostly as a result of the lower cost of raw materials and consumables, with a decrease of 25% YoY to EUR 1.29bn, as a result of different dynamics of refinery operation and lower price environment. The cost of other goods sold was also lower by 9% and amounted to EUR 1.58bn. Furthermore, other material costs were 25% lower and amounted to EUR 220.6m, mainly due to lower transportation costs and lower crude oil price impact. On the other hand, staff costs grew by 7% YoY to EUR 255.3m, as a result of inflation-driven salary corrections.
The net financial result was negative at EUR 31.9m, (2022: EUR -16.5m), mainly as a result of lower financial income (-36% YoY), while financial expenses increased by 7%. All taken together, this led to a net profit to majority of EUR 250m, a 1% decrease YoY. INA does note that the income tax expense was EUR 54.9m in 2023, as compared to EUR 156.2m in 2022, while including the extra profit tax on the Company, (in the amount of EUR 81.1m) in that period.
INA key financials (2023 vs. 2022, EURm)
Source: INA, InterCapital Research
In terms of CAPEX, in total it amounted to EUR 311m, decreasing by 14% YoY. Domestic CAPEX decreased by 14% as well, to EUR 293.5m, while international CAPEX declined by 9% YoY, to EUR 17.5m. INA notes that the lower CAPEX was primarily due to lower Croatia Offshore activities. In terms of the main CAPEX activities in 2023, these pertained to Croatian exploration: Drava-03: Veliki Rastovac-1 well, Drava-03, Obradovci-1J well, and Mikleuš-1 well. Croatia offshore: Ivana D decommissioning project. Croatia onshore: Production optimization: 58 well workovers performed. Finally, several developments in Egypt.
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