Today, we bring you a brief analysis of their EBITDA and profit margins for the first nine months of 2023 for Croatian blue chips.

Before we start, we would like to note that comparing these margins across different industries is not necessarily the best way to give a comparable overview. The reason why is that the EBITDA and profit margins vary significantly across sectors, and as such, the best way to compare any of these companies through these margins would be to compare it to the companies in the same industry in the form of a peer group or a median value for the select industry. Despite this, it is still worth looking at these margins, especially as turbulent a year 2022 was, companies across industries have experienced significant cost & top-line growth, varying degrees, and as such all recorded developments in their margins.

9M results also include the Croatian tourist season. As the tourist companies make the majority of their profitability in this period, their margins will be somewhat “inflated”, as compared to using the FY data or quarter-on-quarter data only.

9M 2023 vs. 9M 2022 EBITDA margins of Croatian blue chips (%)

Source: Companies’ data, InterCapital Research

9M 2023 was influenced by the easing in inflation, and an ongoing macroeconomic uncertainty, due to high interest rates and geopolitics. In this environment of higher costs, companies have increased their prices, but the growth in OPEX remains the biggest pressure for the majority of companies’ op. profitability. Q3 also marked strong activity for Croatian tourism, with top-line growth supported by stable tourist nights and strong price increases, while profitability has been mixed due to cost growth.

As can be seen in the graph above, the highest margin recorded was by HT,  with an EBITDA margin of 42.9%, followed by Valamar Riviera & Atlantska Plovidba at 40.5% and 39.6%, respectively. HT remained resilient to inflationary pressures, despite seen cost pressures. HT noted profitability expansion despite cost growth, on the back of growth across most segments, while keeping OPEX under control. Also, HT updated its 2023 outlook as it increased prices on its products by 5% from October. This is in line with the regulation approved by HAKOM at the beginning of 2023 for all telecommunication companies due to high inflation. Valamar expects 2023E adjusted EBITDA to amount between EUR 107m and EUR 109m (+5.8% YoY). Ericsson NT achieved a margin of 14.2% during the first nine months of 2023. Podravka and Kraš are to follow with a margin of 13.8% & 11%, respectively. On the flip side, there are a few blue chips that achieved an EBITDA margin of 10% or below. Atlantic Grupa noted a 10.1% EBITDA margin during the first nine months, closely followed by Končar with an EBITDA margin of 9.3%. However, if we compare the margins to 9M 2022, we can see that almost half of the companies recorded at least a slight decline in their margins. The largest decline was recorded by Atlantska Plovidba, whose EBITDA margin decreased by 11.1 p.p, which is a continuation of a trend that already occurred during Q1 & Q2. Also, we note that it makes more sense for companies like Končar to look at normalized margins due to significant non-recurring effects during the previous year. During Q3, Končar noted an improvement in normalized margins due to strong top-line growth & stabilization on the cost side, which was not the case during the previous quarter. Finally, regarding Končar, the strong Backlog growth compared to FY 2022 should be a thing to emphasize. AD Plastik is still materially under the impact of the geopolitical situation regarding Russia and Ukraine. Further, AD Plastik’s margins were also affected due to the semiconductor shortages in the automotive industry, which is finally looking like it’s coming to an end. Combined with the disruption of the company’s operations in Russia, the pressure could continue in the upcoming period.

9M 2023. Vs. 9M 2022 profit margins of Crotian blue chips (%)

Source: Companies’ data, InterCapital Research

Moving on to the net profit margins, Valamar Riviera recorded the highest profit margin of 18.8% on the back of the aforementioned operating profitability, followed by HT with a 13% net profit margin, which represents a strong increase of 3.2 p.p. YoY due to strong top-line growth from most segments. Next up, we have Podravka with a profit margin of 11.1%, which represents a strong increase of 3.9 p.p. YoY which is due to tax incentives booked for investment in logistics, distribution, and production. Ericsson NT is to follow with a profit margin of 9.9%, an increase of 4.8 p.p.

Overall, during Q3 the companies were under partial easing of margin pressure & cost increases, a slightly improved situation compared to the previous quarter. However, inflation keeps eating away at the disposable income of customers as well, which might result in reduced companies’ ability to pass costs further down the line in the future, if the pressures do not loose up. For the upcoming period, lower economic growth is anticipated. Inflation is expected to be slightly higher than the central bank’s target, although a clear and evident downward trend in inflation is apparent. So far, in the context of high inflation, companies could pass on costs to end customers. However, we believe that this trend is coming to an end, and future wage growth will surpass companies’ ability to transfer those costs to the final customer, thus hindering further margin growth.

At the end of December 2023, the Slovenian mutual funds AUM recorded a 2.7% increase MoM, and a 21.7% increase YoY. However, it should be noted that net contributions contributed 8.6 p.p. to this growth. This would mean that the “real” asset growth amounted to 13.2%, and if we were to include the management fees as well, the return was closer to 15.7%.

According to the latest report on the developments recorded by the Slovenian mutual funds, released by the Slovenian Securities Market Agency (ATVP), the Slovenian mutual funds assets under management (AUM) recorded an increase of 2.7% (or EUR 125m) MoM, and an even more significant 21.7% (or EUR 858m) increase YoY. The last time that the Slovenian mutual funds recorded a large double-digit growth was in 2021, at the end of which the YoY growth amounted to 34%. Of course, back then, this happened for several reasons. Firstly, 2021 was in general a good year for equity and other investments. Secondly, quantitative easing was still in effect, while the interest rates were not elevated. Thirdly, inflation and geopolitical disruptions that we saw in the last couple of years have still not manifested to a significant extent. Lastly, the COVID-19 pandemic has mostly run out of steam by then, fuelling even more positive sentiment.

The last 2 years, on the other hand, have been anything but filled with positive sentiment. However, the last couple of months could be said to have seen some dashes of hope, such as the inflation cooling off, and subsequently, the ECB talking about interest rate cuts by the summer of 2024.

Returning to the mutual funds, in December 2023 and on an MoM basis, the largest absolute increase was recorded by shareholdings, which grew by EUR 120.8m, or 3.6%. Following them there are bonds at EUR 40.6m, or 5.5%, as well as the money market holdings at EUR 14.5m, or 12.4%. On the other hand, cash holdings decreased by EUR 38.6m, or 18.7%, while investment funds declined by EUR 11.8m, or 5%. Moving on to the YoY basis, during 2023, the largest increase was once again recorded by shares, which grew by EUR 709m, or 25.8%. Following them are bonds, at EUR 136m, or 21%, while the remaining categories remained roughly unchanged.

Total assets of Slovenian mutual funds (June 2007 – December 2023, EURm)

Source: ATVP, InterCapital Research

As such, the growth was primarily driven by the changes recorded in shareholdings and bonds to a lesser extent. Of course, the increase in these asset types can come from several directions, primarily the increase in the inherent value of the underlying assets, but also due to the net contributions into the funds. During 2023, the net contributions amounted to EUR 338m, growing by 62.6% YoY, but being app. 30% lower than the net contributions in 2021. As such, 39% of the increase in value of the Slovenian mutual funds came from net contributions, while the remainder came from higher value of assets. In other words, 8.6 p.p. of the YoY growth came from the net contributions, which would mean that the “real” asset value growth was closer to 13.2%. If we also add fund management fees, which we estimate at app. 2.5%, the return for the funds is closer to 15.7%. Meanwhile, the number of subscribers amounted to 520.5k, decreasing by 1.6% MoM, but growing by 2.2% YoY. Compared to 2021, this represents a growth of 5.3%.

Net contributions into the Slovenian mutual funds (January 2016 – December 2023, EURm)

Source: ATVP, InterCapital Research

As equity holdings constituent both the majority of assets held in the funds (71.9%) and were also the main drivers of the growth recorded by the funds, it is also prudent to take a closer look at what drove that performance. At the end of 2023, home issuers’ equity securities amounted to EUR 56.4m, growing by 2.1% MoM, and 0.8% YoY. On the other hand, the much larger foreign issuers’ equity holdings (representing 98.4% of all equity holdings) amounted to EUR 3.4bn, growing by 3.6% MoM, and 26.3% YoY. As such, the main drivers of growth in the Slovenian mutual funds were the foreign equity holdings, which also recorded a solid year in 2023.

Equity holdings of Slovenian UCITS funds (October 2007 – December 2023, EURm)

Source: ATVP, InterCapital Research

Lastly, taking a look at the current asset structure of the Slovenian mutual funds, shares make up 71.9% of all holdings, growing by 0.66 p.p. MoM, and 2.32 p.p. YoY. The 2^nd largest share is held by bonds at 16.3%, which also grew by 0.43 p.p. MoM, but declined by 0.10 p.p. YoY. On the flip side, the money market, deposits & cash held 6.5% of the total, declining by 0.65 p.p. MoM, and 1.05 p.p. YoY. A similar story is present with investment funds, which held 4.7% of the total, and declined by 0.38 p.p. MoM, and 1.12 p.p. YoY.

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