Today we bring you an overview of the main takeaways from the first day of the CEE Investment Opportunities (ZSE and LJSE Investor Days) conference.
Triglav
Triglav Group showed a strong set of results in Q1 2022 on the back of strong underwriting profitability and its PBT was up 20% YOY to 38.1m. Good results were based firstly on strong 10% growth of premiums YoY (total revenue up 12% YoY). Slovenia is still the major market, and it grew 5% YoY. Other markets that make together Adria region all together grew 13% YoY. Other markets make almost 20% of their business, together with international (insurance and inward reinsurance) business it presents 1/3 of their premium. The group is focused on growth in Croatia and Serbian market as these are the biggest markets of former Yugoslavia region and have good macro trends. Triglav Group currently have 21% market share in Adria region and their ambition is to growth further. Second reason for continued success in Q1 are good underwriting practices while thirdly extra care was taken on reservation for claims during the pandemic and conservative approach was used. Therefore, in Q1 2022 underwriting profitability improved. It is measured with combined ratio which went down to 87.3% from 87.9%. Investment result was down due to influence of reserving and impairment of Russian bonds (EUR 6m), while declining values of bonds and equity are evidenced on decrease of equity of 4% YTD. It must be added that additional growth was realized on the sale of real estate, which together with much smaller income from Asset Mgmt. amounted to EUR 7m (PBT).
Another important note from Triglav presentation is that their strong divided paid in was confirmed this Tuesday by AGM of shareholders and it has amounted to EUR 84.1m while 74% pay-out ratio was used. Usually, Triglav follows its guided dividend policy, but due to regulator decisions during previous years they decided to pay-out higher dividend this year. But in following years Triglav will return to its previous policy that has envisaged pay-out ratio of around 50%.
2022 outlook and 2025 strategy show positive outlook as digitalisation is underway and Triglav will be first mover due to its highest market share on majority of its markets. Due to decreasing interest and falling equity, coupled with increasing expenses ROE of 10% is expected in 2022 (vs. 12.5% in 2021.) ROE of 10% is expected also for the whole period form 2022 till 2025. Increase in interest rates on the market are positive for insurance sector in general and Triglav expects negative effects from it only in the short-term.
Končar
Končar communicated its main strategic objectives to reach until 2024 – which will be published officially soon, with more details. Nevertheless, the company emphasized its main objective among them: top line growth. The company plans to achieve EUR 500m by 2024, primarily through organic growth (excluding M&A, which will be mentioned afterward). Also, the company’s strategic plan is to hire 400 new engineers to increase their know-how.
Another strategy object company set was to improve its competitiveness. This should be achieved via internal processes. Končar also invests in development and strategy. To be specific, around EUR 50m, on top of usual CAPEX, is expected to be invested into new production processes. In 2022, Končar expects CAPEX amounting to EUR 28m, mostly intended for a new laboratory for R&D for the high-voltage program. Also, in terms of production, ongoing investments in new machinery are currently in process, which should increase capacity significantly. Overall, cumulative expected growth in CAPEX should come from every business segment. The company emphasized an internal restructuring that wasn’t visited on the „outside“, which should reflect higher profitability. Also, a corporate controlling and project management office was set up.
Competitiveness-wise, the company commented on its competitive advantage. Končar does not look to compete for a high market share (currently standing at c. 3-4%). But Končar can deliver the products in a much shorter time-span, than its market leaders peers., Also, the company has customized solutions, which can too, be delivered in a shorter time.
The last strategy object for Končar is to expand its geographic focus, achieving four new major markets (increasing from three up to seven major markets) – as currently, Končar generates 60% from export.
Končar noted it will start an M&A journey – as currently, Group has a lot of financial power. The company said it started looking for M&A activities with nothing specific yet.
Hrvatski Telekom
During the conference, HT Group talked about the business developments in Q1 2022, but also mentioned some further plans for 2022. Currently, they maintain strong market shares across all the business segments in both Croatia and Montenegro (e.g. mobile market in Croatia they have 46% market share, and 34% in Montenegro). They continue their investment into infrastructure & different technologies, with 25% of the yearly revenue going in this direction, giving a direct contribution of 3% to the Croatian GDP. They also mentioned the fact that the Company gives shareholders improved returns through dividends and shareholder buyback, with the current SBB program amounting to HRK 600m in total, and expected to run until 2026.
The Company also mentioned the key challenges facing them (war in Ukraine, supply chain disruptions, etc.) and that through increased supply storage during the last couple of months and adjustments, as well as the fact that they aren’t directly exposed to the geopolitical situation, the situation is currently under control and should not pose that big of a risk. Considering that HT is part of the DT Group also helped with these issues.
Lastly, they talked about the key objectives for 2022. First of all, they expect profitable growth in the core telecom segment, in line with economic developments, as their focus remains on increasing their competitiveness and providing more benefits to consumers. They plan on continuing the investments in the fiber network, especially in the urban and semi-urban areas, combined with the 5G investments, both of which will partially be funded by the EU funds. This is done to maintain the current leadership position the Company has, and they aim to improve it even further through the best customer experience, and a best-in-class network. HT is also focused on continuing its accelerated operating model transformation, using digitalization to improve the efficiency of the business, as well as working with the govt. to make a more investment-friendly regulatory framework. Finally, the Company also said it will keep improving the employee experience, investing and rewarding them, as well as attracting the best talent to improve the overall quality of the experience.
Arena Hospitality Group
Arena Hospitality Group’s conference answered a lot of the questions we were asking ourselves about the Company, and the tourism industry as a whole. As most of the revenue achieved by the Company is done in Q3, Q1 was a slow, soft quarter. However, the Company recorded normalization across all its regions, with Hotel franz ferdinand, in particular, carrying a lot of the revenue and in particular, profitability for the Company, reportedly growing by over 20% as compared to 2019 levels. It should be noted that while both the EBITDA and net profit were negative during Q1, this comes from two factors: Firstly, the fact that the Company did not receive any COVID-19 related govt. grants, as compared to 2021/2020. Secondly, the pre-season buildup was significantly stronger this year, in turn, leading to higher expenses.
In their outlook for 2022, the Company expects that Croatia is going to have a very strong performance, with bookings already coming very close to 2019’s levels. Germany experienced solid performance in April and May, with most of the events that were canceled during COVID-19 times coming back. The hotel in Budapest is expected to reopen in June, which combined with the 88 rooms hotel in Serbia is expected to have similar results to Germany. Hotel Brioni has been opened to the public a couple of weeks ago, and added to the Radisson collection, making it the first on the Adriatic and in Croatia. As the PPHE Group (majority stakeholder in Arena Hospitality Group) has an agreement with Radisson for its brands, Arena Hospitality Groups can use these brands as well.
The Company touched on some of the current challenges facing the Company. Starting off with the labour market, they have already secured app. 1000 employees, most of them already employed in the pre-season buildup. Out of those, app. 250 are foreign workers, as there has been a shrinking of skilled workforce in the last 2 years, leading to an increasing need of importation of workforce. Overall, Croatia, Austria, and Germany are secure in terms of the workers, while Serbia and Hungary are not facing labour shortages but the overall price of labour is increasing. Moving on to the supply chains, they are working very closely with their suppliers, and the most that can be expected is not supply shortages but higher costs. In terms of energy prices, they have a signed fixed contract in Croatia, while their costs in Germany are hedged, meaning that energy costs will not impact the Company this year, but next year they expect increases of 20-150%. Meanwhile, because of the overall inflation, they expect their expenses to increase by at least 5% to as much as 20%, especially driven by food prices increasing across all regions.
In terms of debt, 92% of their debt is fixed rate, and their weighted cost of debt is around 2.4%, even with the recently announced loans. In terms of CAPEX, they estimate approximately HRK 325m during 2022, however, only the Hotel refurbishment in Zagreb (HRK 135m, expected to open in December), and Riviera in Pula (HRK 75m, will start refurbishment after the summer season) and Budapest art’otel refurbishment (HRK 24m, expected to open in June) are set in stone, while the remaining HRK 91m (investments into Arena Stoja, Ambrela, smaller camps, and Belgrade 88 Rooms) have not yet been initiated and the Company is waiting to see how the situation develops.
Overall, the Company is expecting a strong summer season, and all indicators are that it will be better than 2019 across the board.
Podravka
Business in Q1 performed well and top line was up +8.6% YoY. There was a change in organisation corporate structure and new internal organisation is now divided into 8 business unit. The highest increase of sales in Q1 2022 was realized in the following units: BU Soup, BU Basic Food and BU Bakery. There was increase in sales in all regions except Eastern Europe. In Q1 there were two negative influences on the total business: surge in raw material prices and escalation of Ukraine and Russia tension. Due to inflation in Food segment Podravka increased products’ prices from 7% – 10% and no volume decrease was evidenced. Pharma segment volume decrease was evidenced as they cancelled all import of products to Russia. Discontinued deliveries of Pharma was done due to deterioration of foreign exchange rate. In Q1 there was slight deterioration of margins in Food segment, while in Pharma deterioration of margins was bigger due to negative influence on foreign exchange differences. All receivables were secured, but there was problems with the conversion in Russian roubles. In Q1 Podravka continued with decrease of indebtness and it had weighted average costs of debt at 1% excluding IFRS 16. Concerning indebtness, new bonds are not considered now but if they would be issuing bond, they would also be looking at ESG bonds.
The Group expects diversified price increase across the portfolio. All input side price increases are going to be resulted in increases on the output side. High single digit increase is expected on average.
Pharma products are not being shipped to Russia from March. Pharma products are not on the list of sanctioned products, so Belupo has continued to ship its products to Russia from April. The goal was talk with buyers and to shorten the period of receivables. So new terms with buyers were renegotiated, and they are much shorter that what they were in past. It will be done like this until the Rouble remain to be convertible to other global currencies. If it will not be so anymore, Podravka will again cease to ship the products to Russia.
Strong cash flow from operating activities stood at 318m in Q1 2022 and it increased to 27.2% of sales. Planned investments in this year is HRK 500m and in 2023 HRK 500m.
Krka
Situation in Ukraine & Russia has not significantly affected Q1 sales. In Q1 Krka Group recorded Q1 2022 sales of 430.6 m +9% YoY: 1Q results encouraging but it is difficult to predict how 2022 will come out.
On 7 July AGM will be held and dividend of EUR 5.63 per share will be decided on. In Russia in volumes Krka increased sales, which is very important to them as they are generic producer. China sales reached EUR 4.5m and they are very satisfied with these results. China has potential to become one of main markets to Krka.
RUB 14bn is amount of trade receivables in Russian business. They have long position in roubles which are partly offset with liabilities. From April it is not possible to hedge roubles anymore. All payments in Russia and Ukraine are going normally. It is possible to convert roubles in hard currency.
In Ukraine sales are conducted directly from Slovenia, so all parts of business are moved to west part of country where there is better situation.
OTC segment increased 74% YoY due to end of pandemic and those patients are coming back to doctors. Krka has strong pipeline of cardiovascular products, anticoagulants, and new oncology products. R&D is working on 170 products and their goal is to be first on the markets after patents expire. They invest app. 10% of sales in R&D.
Capex for upgrading productions facilities and increasing the capacity of production. Investment capex of EUR 130m expected in 2022. API production is always done inhouse and new capex will help it evolve. It will start in the second half of the year. Majority will be spent for new API plant. In Russia they are not increasing capacity, so they are only completing the current plant that can produce 3bn tablets annually.
Krka still has elevated margins, and they plan to keep them high as long as possible, but it depends on competitors and how they will position themselves on the market. M&As are planned and they will spend part of OCF money for that while part will be used for dividend and part for investments.
Telekom Slovenije
Telekom emphasised that there is strong competition on the mobile segment in Slovenia, as there are four service providers. IPKO in Kosovo is performing well and it will continue to be so. Telekom has goal to be a leader in user experience and to perform digitalisation of operations. By doing so they will strengthen their long-term strategic position to remain the first choice of users. They are in the process of taking over ACTUAL I.T., which is operating in ICT services segment and this segment is projected to have much higher growth rates than telecom segment and therefore they are acquiring it. Another goal is stabilisation of the level of revenues as it is shrinking due to level of prices. Telekom plans to preserve revenue through accelerated digitalisation and the development of digital services, the further development of the network, the development of services based on 5G technology, successful cooperation with regulators. Consolidation of individual markets like B&H market.
Telekom Slovenije was named top employed in 2022. Their payment system VALU has more than 100, 000 users that have executed more than 2 million transactions in 2021. Other companies in the Group have grown their revenue mostly due to investments and building fibre network. The trend will improve in the next months.
Net debt/EBITDA is lower than 1.8x and it is below the level of their comparable companies. They have no knowledge on the privatisation. Situation with privatisation and there is no information on the potential privatisation. When looking at investment, there’re was EUR 40 m was spent on fibre in 2021 and in 2022 the amount is lower due to regulation. In 2022 planned investments are on the level of EUR 203.1m ESG project started at the beginning of this year. End of June they will publish their KPI’s.
Their financial objectives for 2022 say they plan operating revenue at EUR 660.6m, EBITDA at EUR 211.2m and net profit of EUR 27.9m. They are estimating that net profit will decline from EUR 38m in 2021 to EUR 29m due to two main reasons. First reason is the increases in prices of electricity while second is the announced change in regulation. The regulator has announced lowering of prices of access network which is expected to decrease Telekom’s profit for a couple of million.
Following up on our overview of the impact the positive and negative periods on the stock exchange had on the trading on the ZSE, today we bring you an overview of how these periods affected the trading on the Ljubljana Stock Exchange, by looking at the SBITOP index and its constituents.
Before we start, it should be noted that looking at the average turnover during a certain period can tell us a lot, but to get the entire story, one should also look at how the stock performed in that period.
However, the last two years were marked by multiple events that had a significant impact on the market as a whole (COVID-19 pandemic and the measures put in place to combat it, supply chain disruptions, inflation, and the current geopolitical uncertainty related to the conflict in Ukraine), we decided to look at how the average turnover of Slovenian companies changed in those periods, as compared to when the market was growing. This was done to answer a fundamental question, was more trading done during the positive days, or was the opposite true?
The best way to show this is to look at the daily changes of the SBITOP index, and then class them as either “bearish” (when the index declined as compared to the day before), or “bullish” (when the index increased compared to the day before). After doing this, the average daily turnover of all the SBITOP constituents is taken and classed into either one of those categories.
This would mean that since the beginning of 2020, there was a total of 602 trading days on the Ljubljana Stock Exchange. As we are using the SBITOP index as the benchmark for the market performance on the exchange, 354 days can be considered bullish, while 248 days can be considered bearish. This means that since the beginning of 2020, 59% of the days were bullish, while 41% of the days were bearish. Now the question remains, how did this affect the turnover of SBITOP constituents?
Average turnover of SBITOP constituents since the beginning of 2020 (EUR 000)
The most traded stock, Krka, had a turnover of EUR 685.3k during the positive days, and a turnover of EUR 715.2k during the negative days, meaning that the company’s turnover when the market was green was 4.2% lower. So what can this tell us? First of all, as the most traded company on the exchange, any changes and developments in the market (and by extension, the world) will surely affect Krka first, regardless of the development. Furthermore, as to “compound” this effect, the news that did come out in the last two years had a real effect on the company (COVID-19 as Krka is a pharmaceutical company, the war in Ukraine as Russia and Ukraine made up app. 27% of the Company’s sales at the end of 2021). Combined, this does explain why it was more traded during the negative days, but like we said, to get the full picture one should look at the performance of the stock in any of these periods. Next up, we have NLB, which has a turnover of EUR 231.9k during the positive days and EUR 229.8k during the negative, meaning that the difference is below 1% (0.94% to be exact), which when taking into account the strong performance of the company, as well as the stability of the financial sector in the last couple of years does not surprise.
Following them is Petrol, which had an average daily turnover of EUR 148.4k during the positive days and EUR 156.9k during the negative days, a -5.4% difference. Considering that Petrol is an Oil & gas retailer, energy trader and in small part energy producer company, it depends on the changes in prices of those commodities. This means that when those prices increase or drop, they directly impact the company’s level working capital and top line. Petrol hedges itself against changes in prices of all energy products its sells so it fixes the margins and changes do not influence its profitability. But in moments like this, when due to strong disruptions in energy flows Government interventions take place, and their profitability is also impacted. In its 1Q 2022 report Petrol has announced that under the Price Control Act which instructs the government to reimburse the economic loss and the lost profit as a result of fuel price limitation, Petrol submitted a claim to the Government of the Republic of Slovenia in the amount of EUR 51.3m for the period between 15 Mar and 30 Apr 2022. The part of the claim referring to the period of Jan–Mar 2022 has amounted to EUR 18.4m. This claim is not included in the financial statements of Petrol for 1Q 2022. This leads to the conclusion that the net profit of the Group in the amount of EUR 32.4m (+17% YoY) could have even been higher.
In relative terms, Telekom Slovenije is the company that has the highest difference in its turnover during these two time periods. When the market is green, its average daily turnover is EUR 59.9k, while when the market is red, it’s 15% lower, at EUR 52k. Considering they operate in a strongly regulated telecom sector, where changes to the operations do not happen so fast, and where most of the current negative factors do not have that strong of an impact, higher trading during the positive days is expected. The only other company that should be noted is Luka Koper, whose turnover is EUR 46.1k during the positive days, and EUR 53.9k during the negative days. Taking into account that the supply chain disruptions and COVID-19 lockdowns directly influence the company’s ability to do business, this isn’t surprising.
Increase/decrease in turnover on positive days compared to the negative days (%)