Today we decided to present you with an overview of this year’s results of blue chip regional industrials, given that the half-year results publishing season is over for both Croatia & Slovenia.

The industrial sector is one of the major drivers of economic growth, both in Croatia and Slovenia. It contributes significantly to a country’s gross domestic product (GDP) and job creation. Looking at Croatia’s GDP for FY 2022 in terms of gross value added, Manufacturing amounted to 11.2% of added value. For the same period, manufacturing had a 19.9% share in GDP (slightly down 3.3% YoY). The sector fosters innovation, increases productivity, and often leads to the development of new technologies. Often referred to as the backbone of modern economies, it plays a pivotal role in economic growth. It encompasses a vast array of activities that involve the production, manufacturing, and distribution of goods and services. Industry can be considered asset-heavy, meaning large-scale operations are conducted with big equipment, high costs, and high barriers to entry. As costs play a big role in this sector, we decided to dive deeper into half-year results as input prices fluctuated during the past year. Unfortunately, only a handful of companies within this sector are listed.

Also, we need to emphasize that in our regional industrial sectors, there’s a lot of variety. Each company is different and important in its own way. To really understand what’s going on, we need to look closely at each company by itself, rather than the sector as a whole. By studying them one by one, we can learn about the challenges the companies face. Recognizing this diversity might result in more informative market decisions.

H1 was influenced by the partial easing in inflation in an ongoing macroeconomic uncertainty. In this environment of high costs, companies across the board have increased their prices to compensate, but the growth in OPEX remains the biggest pressure for the majority of our regional companies’ operating profitability and net profit margins to decrease. However, we might arrive at a different conclusion if we were to look only at our big industrials.

Top line development (H1 2023 vs. H1 2022)

Source: ZSE, InterCapital Research

Looking at Končar’s top-line development, it should be emphasized that Dalekovod was consolidated during the comparable period of the previous year, so the growth came organically, rather than through M&A. Double-digit sales growth is a result of continuous Končar’s efforts in Backlog growth, translating in the current results visible in the P&L. Besides achieved results, a strong Backlog growth itself should be emphasized (+38% YTD!). This pours confidence in the future resilience of sales. Growing demand for transformers across the EU is driven by the accelerating green transition. Overall, new order intake nearly doubled compared to H1 2022. Finally, order intake noted was the most pronounced in foreign markets so consequently, we might expect a bigger part of the sales pie to be derived from export markets. Looking at AD Plastik, the Group noted an increase in virtually all lines. However, the growth came from the low base effect, as the previous year was materially influenced by the semiconductor shortage. The whole automotive sector finally sees improvement. This year should be a year of recovery for AD Plastik. However, the Group’s real recovery still remains to be seen. Also, we note that one factory in Russia still does not work, while the other produces at a reduced capacity. Finally, looking at Slovenian industrial – Cinkarna Celje, we can notice a steep decline in sales revenue both due to lower selling prices & lower volume of Titanium dioxide, the most imporant business segment for Cinkarna. Lower demand occurred in all business segments partly due to imports of cheaper Chinese pigment and partly due to unused stocks and lower demand for the final product where the pigment is used. This is exactly why we noted that our regional industrials need to be looked at individually, due to their specific nature of businesses.

EBITDA development (H1 2023 vs. H1 2022)

Source: ZSE, InterCapital Research

Looking at the operating profitability of taken companies, no conclusion can be said that would represent a whole sector. Looking at Končar, reported numbers show a clear decline in both EBITDA and Net profit levels. However, the decline is caused by one-off items evidenced during the previous year. Consequently, the Group also presented investors with normalized numbers and we think it makes more sense to look at normalized levels. The normalized EBITDA margin amounted to 9% and increased by 1.9 p.p. due to the aforementioned strong top-line growth combined with a slight stabilization on the cost side. It should be said that the cost-side stabilization was not present during Q1, where margins on the normalized level declined. Končar reported an improvement in normalized EBITDA margin due to strong top-line growth but also noted an exceptional further backlog growth during Q2. The improvement of profitability on the operating level spilled to net profit growth. Looking at AD Plastik’s profitability – 2023 finally showed an improvement. Both EBITDA and net profit are finally in positive territory, which was not the case during H1 2022. In H1 2023 EBITDA was up from EUR -7.5m to EUR 5.3m YoY, primarily due to mentioned higher sales and ease within the whole industry, which also resulted in net profit improvement. However, even with the mentioned improvements in the Group’s net profit, the real growth driven by the Group’s core operations remains to be seen. Finally, Cinkarna’s operating profitability margins and net margins mainly suffered due to the aforementioned decline in sales. Lower selling prices resulted in lower margins.

Net profit development (H1 2023 vs. H1 2022)

Source: ZSE, InterCapital Research