IC Market Espresso 28 Jan 2019

Smaller In Number Are We But Larger In Mind

Zagreb Stock Exchange said they would begin calculating a new index – CROBEXprime. As the Yoda reference from the title implies we are happy to see an index focusing on less constituents, but the right ones. There is still work to be done (adding more companies to the Prime Market) but we believe CROBEXprime will ultimately become a better peer for Croatia than the current CROBEX index.

The Zagreb Stock Exchange announced last week that on February 18th they would launch a new equity index named CROBEXprime. The index itself will be a free float market capitalization weighted total return index (so it will take dividends into account). The new index will include all shares listed in the Prime Market of the Zagreb Stock Exchange, while the weight of each constituent share will be capped to 30%. The base level of CROBEXprime will be set at 1,000 points on December 28th, 2018, while the currency will be the HRK.

Introducing the companies

As mentioned earlier, the index will include all shares listed on the Prime Market, which is the Stock Exchange’s most demanding market regarding the requirements set before the issuer, especially in relation to transparency. Among other things, the companies need to publish a dividend strategy, financial calendar, organize investors’ calls and participate at conferences. The Prime Market currently consist of only four companies (AD Plastik, Arena Hospitality, Atlantic Grupa and Podravka).

One should also note that these four companies have been some of the market’s top rising starts in the previous years. AD Plastik, a Croatian car part manufacturer, has successfully overcome their troubled years and is currently on a hot streak. The company has been regularly posting strong and improved results year in and year out for some time now and has just recently acquired a Hungarian car part manufacturer which will open them up for new deals in the industry. Arena Hospitality is a company that operates several hotels and campsites in Croatia and Central Europe. A few years back they were acquired by PPHE Group. Afterwards, Arena successfully raised roughly EUR 100m through an SPO which they intend to use to finance future CAPEX in Croatia and abroad. We believe that once this is completed and the CAPEX effects start to fully show, the company will post an even further boost in their results. Atlantic Grupa is Croatia’s largest listed distribution company which operates as a principal for many foreign brands but also sells their own products. The company recently started divesting their non-core assets in order to fully focus on their core activities and further enhance their profitability.  Podravka has proven to be last year’s star performer with the company’s share price soaring 39% since the begging of the year. The result came on the back of a strong performance in the first nine months of the year. The result is even more commendable considering how fast the company managed to bounce back after the Agrokor crisis, which occurred just after Podravka undertook a change in management.

We already have CROBEX

However, all of the companies mentioned above do have one thing in common and that is that they are all members of CROBEX, the current major index of the Zagreb Stock Exchange. At this point one might ask oneself why the Zagreb Stock Exchange would need another equity index which consists of only a part of their current major index. Well, for starters, CROBEX consists of a large number of shares which many fund managers would not even include in their investment universe (due to extremely low liquidity, poor corporate governance, going in and out of pre-bankruptcy procedures etc). These issues made the issuers prone to large price changes. As a result, one could have easily been misled on how the Croatian market has been actually performing.  It also led to investors having a hard time comparing CROBEX to other major indices in the region.

This might be best explained when looking at the chart below. The chart represents the share price performance of current CROBEXprime members over the past several years. As one can notice all of them have successfully outperformed CROBEX in the observed period. This is very important considering that these four shares are among the top ten most traded shares in Croatia. Therefore, it seems as if the major market index recorded a negative performance in the observed period, even though almost half of the most traded shares in Croatia outperformed the index.

Source: Bloomberg, InterCapital Research

What CROBEXprime brings and what remains to be done

The new index will unquestionably bring improvements to the market as it will help investors choose shares according to their liquidity. Furthermore, the index will put a spotlight on the companies with top corporate governance that focus on creating shareholder value. However, the fact remains that the index is currently just too small and until other major Croatian companies, such as HT, Valamar or Adris join the Prime Market it will probably remain out of the scope for most investors.

EUR 1bn of RHMF-T-019X To Be Issued on Tuesday

On Friday around noon, Croatian Ministry of Finance invited investors to participate on issuance of new 1.5Y FX treasury paper in order to partially finance EUR 1.5bn worth of RHMF-T-906X that matures on February 7th. Auction of EUR 1bn worth new paper, RHMF-T-019X, will be held on the last day of January with settlement taking place on February 7th, so investors that hold RHMF-T-906X could just roll maturing bill with freshly issued one. It is worth mentioning that maturing paper was issued at 10bps while on the last few EUR T-bill auctions yield was pure zero. 

Meanwhile, earlier Poslovni dnevnik said that Ministry of Finance plans to issue EUR 1bn worth of FX treasury bill while the rest of the outstanding EUR 500m could be rolled into 3y EUR indexed paper and 10Y LCY bond.

Furthermore, according to the same article, MinFin could use still low yield environment and elevated liquidity surplus in the financial system to issue even more, i.e. HRK 3-4bn to finance 2019’s budget deficit that was projected around HRK 4bn.  All in all, we’ll have interesting two weeks on Croatian bond market and then Ministry of Finance could go on auto-pilot until November when USD CROATIA 2019 and RHMF-O-19BA should be rolled.

Transgaz Signs Two Loan Contracts Amounting to EUR138m
The Loans will be used for the funding of a new 308.2 km long gas transmission pipeline and to finance Vestmoldtransgaz.

Transgaz published a document stating they have signed a loan contract for EUR 100m which represents the second tranche of the loan approved for Transgaz amounting to EUR 150m.

The contract for the first tranche of EUR 50m was signed on 17 December 2018. The EUR 150m were granted by the European Investment Bank (EIB) for the funding of a new 308.2 km long gas transmission pipeline to connect Romania’s Black Sea off-shore sources both to the National Gas Transmission System and to the BRUA Corridor.

Furthermore, Transgaz also signed a loan contract of EUR 38m, where the EIB gives funding to Eurotransgaz SRL, Transgaz’ subsidiary in Moldova, to finance Vestmoldtransgaz SRL regarding the Ungheni – Chisinau interconnection project.

As of Q3 2018, Trasgaz’s net financial debt is RON -692.8m, meaning that cash and cash equivalents over exceed their financial debt.

Victoria Group Announces Intention to Buy the Remaining Shares of Sojaprotein
At the moment Victoria Group owns 68.2% shares of Sojaprotein’s (9.4m shares) which would make them the 100% owner of Sojaprotein.

Victoria Group Ad Beograd has published a document stating their intention to buy 31.8% of Sojaprotein’s shares (4.3m shares).  At the moment, Victoria Group owns 68.2% shares of Sojaprotein’s (9.4m shares) which would make them the 100% owner of Sojaprotein.

Sojaprotein is the largest soybean processing factory in Serbia, whose market capitalization is EUR 20.9m.

Last year, MK Group took over Victoria, after buying out its debts from the banks. After this event, the obligation to announce a take-over bid for its subsidiaries Veterinarski Zavod and Sojaprotein occurred.

The bid is still subject to regulatory approval, which Victoria expects in the next 15 days.

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