With changes occurring in the regulatory requirements related to investing into SIF funds, we focus our blog on the NAV discount to see if we can expect any further development in share price due to the regulatory change.
Background
Back in 1999 Romania listed five investment funds as part of a mass privatization drive, during the process millions of citizens received a little portion of what many hoped would one day grow to become a lucrative big pie. However, years later one could conclude that the initial idea failed to live up to market expectations due to inefficient management, the slow pace of further privatizations and the exclusion of big investors due to ownership limits that have left shares in the funds trading at steep discounts to their NAV.
Current Events
Last week the Romanian Government adopted the law on alternative investment funds (AIF), which repeals the normative act by which investors are capped at a 5% ownership threshold in all 5 listed SIFs.
After the mentioned vote, the law goes for promulgation to the president, and the legislator gives a period of 6 months to Fondul Proprietatea and SIFs to submit the documentation related to the qualification under one of the categories of alternative investment funds. Therefore, the mentioned act should take place in 2020.
Market Performance & Assets Structure
Historical Movement of Selected Close-end Funds’ Discount (%)
When looking at the chart above, right of the bat, one can see how improved investors sentiment had a positive effect on the discount to NAV amid the expected termination of the ownership threshold.
Among the observed funds, the highest discount was recorded by SIF Muntenia with a discount rate amounting to 50.7%, followed by SIF Banat (45.9%), SIF Oltenia (29.1%), SIF Transilvania (25.4%), and SIF Moldova (16.7%). Meanwhile, for comparison, Fondul was trading at a NAV/price discount of 12.9%. One should note that, compared to the begging of the year, all SIFs recorded a decrease in their NAV discount with some of them (Moldova and Trasnilvania) even halving their initial discount.
Meanwhile, the somewhat large discounts posted by some SIFs came despite the rather favourable asset class structure with listed equities accounting for more than half of the fund’s total assets. Furthermore, among their top holdings SIFs usually hold a significant number of shares of BET components. Thus, one might expect further interest from prospective investors. However, one should take into consideration the low transparency issue as some of the SIFs provide very little information about their business operations.
Listed Shares as % of Total Assets
In the third quarter of 2019, GDP of the Republic of Slovenia increased by 2.3% over the third quarter of 2018. As a reminder in Q2, GDP observed an increase of 2.5%.
According to the Statistical Office of Slovenia, domestic expenditure regained its strength increasing by 3.8% YoY and returning to the territory towards 5% where this growth was last time evidenced in Q3 and Q4 of 2018. That domestic demand is gaining momentum was evidenced by an increase in households’ consumption, that was up 4.3% YoY. Increase in household consumption is in line with increase in employment that was up 2.3% YoY in Q3 2019. On the other hand, investment growth decelerated further and it has in Q3 evidenced growth of only 1.2% YoY and surprised on the downside. Government expenditure growth accelerated a bit, rising 1.8% YoY, coming closer towards 3.0% – an average growth in the last several quarters. This figure is in line with expectation of surplus in Slovenian budget for 2019. Exports of goods and services increased by 4.5% YoY, decelerating by 50 bp compared to Q2, while majority of slow-down was evidenced in exports of services. Export of goods increased by 5% YoY, 50bp up from Q2 showing that demand from Slovenia’s trading partners still exists. Imports increased by 6.7% YoY driven by strong domestic demand resulting in negative contribution from external trade balance which continues to be the main reason for deceleration of GDP in the third quarter.
In Slovenia, like in other CEE countries, the strong trend of acceleration of domestic demand is evidenced due to continued rise of employment and loose monetary policy. As investments and external demand weaken, the growth of economy slows and we don’t expect this trend to reverse in the near term. It remains to be seen how long can domestic demand keep the pace and if government will start increasing spending in order to boost economy.
| wdt_ID | Slovenian GDP | Q3 2018 | Q1 2019 | Q2 2019 | Q3 2019 |
|---|---|---|---|---|---|
| 1 | Domestic expenditure | 5,2 | 2,3 | 2,1 | 3,8 |
| 2 | Final consumption expenditure | 2,5 | 2,8 | 3,0 | 3,7 |
| 3 | -Households | 2,2 | 2,4 | 3,8 | 4,3 |
| 4 | -NPISH | 4,9 | 1,2 | 0,1 | 2,8 |
| 5 | -General government | 3,2 | 3,9 | 1,0 | 1,8 |
| 6 | Gross capital formation | 14,5 | 0,7 | -0,7 | 4,4 |
| 7 | -Gross fixed capital formation | 11,9 | 10,0 | 6,9 | 1,2 |
| 8 | -Changes in inventories and valuables | 0,7 | -1,7 | -1,5 | 0,7 |
| 9 | External trade balance | 0,0 | 1,2 | 0,5 | -1,2 |
| 10 | Exports of goods and services | 4,2 | 4,9 | 5,0 | 4,5 |
| 11 | -Goods | 3,9 | 4,4 | 4,5 | 5,0 |
| 12 | -Services | 5,5 | 7,3 | 6,8 | 3,0 |
| 13 | Imports of goods and services | 4,8 | 3,9 | 4,9 | 6,7 |
| 14 | -Goods | 5,6 | 3,5 | 5,1 | 7,2 |
| 15 | -Services | 1,3 | 6,9 | 3,7 | 4,2 |
| 16 | GDP | 4,6 | 3,3 | 2,5 | 2,3 |
Source: Statistical Office of Slovenia
In the first nine months of 2019, the company recorded an increase in sales of 4.7%, increase in EBITDA of 6.7% and a decrease in net profit of 4.1%
As Unior Group published their H1 2019 report, we are bringing you key takes from it. According to the report, the company reported sales of EUR 192.4m, representing an increase of 4.7% YoY or EUR 8.6m.
On an unconsolidated level, Unior d.d generated EUR 132.9 million in net sales, representing an increase of 4.7% YoY. Unior operates in the forgings industry, which supplies its products almost exclusively to the automotive industry. During the first nine months, but more pronounced in the first quarter, Unior was facing slightly lower order status, driven by a 5% decline in car sales worldwide. Consequently, they produced 4.5% YoY less of forgings. The largest increase in revenue was witnessed on the Mechanical engineering segment, where this year the dynamics and value of sales are completely different from last year, rising by 67% or 5.9m (in line with the plan) and amounted to EUR 14.7m.
When observing operating expenses on a Group level, they amounted to EUR 198.4m (+2.6% or EUR 4.7m). Such an increase could mostly be attributed to higher material costs by EUR 2.4m and higher amortization.
Going further down the P&L, EBITDA amounted to 24.87m representing a solid increase of 6.7%. As a result, EBITDA margin stood at 12.92% (+0.33 p.p. YoY). Operating profit amounted to EUR 12.5m, showing an increase of 1.7% YoY.
Despite the solid top-line growth, the company recorded a decrease in net profit of 4.1%, amounting to EUR 9.7m. Such a result puts the profit margin at 5% (-0.5 p.p. YoY). The decrease came on the back of a lower net financial result by EUR 0.77m.
Turning our attention to CAPEX, the Group recorded new investment in buildings of EUR 11.3m in the first nine months of 2019.