Krka published their FY 2019 estimated results last week showing a 12% YoY increase in sales, 18% YoY increase in EBIT and a net profit of EUR 242m (+39% YoY). Today we bring our initial earnings overview with some updates from Friday’s Conf Call.
According to 2019 estimate results, the Krka Group recorded EUR 1.5bn in revenue, representing a 12% YoY increase. All sales regions and most markets recorded sales growth, while sales of all product groups and services advanced as well.
When breaking down revenue, East Europe remained the largest market, accounting for 32.3% of the Group’s total sales. The region recorded sales in the amount of EUR 481.2m, which represents a 17% YoY increase. The largest increase in the region was posted by the Ukrainian market where sales soared 42% YoY. Meanwhile Russia, the region’s key market, posted a 13% YoY increase in sales. Regarding Russia, note that the serialization which was scheduled to start at the beginning of 2020 was postponed until July.
Region Central Europe, comprising the Visegrad Group and the Baltic states, followed with sales amounting EUR 339.6m (+7% YoY). Note that this accounted for 22.8% of Krka’s total sales. Poland, the leading market, generated EUR 159.5m in sales and recorded a 7% YoY growth. Sales also went up in Hungary, Slovakia, Lithuania, Latvia, and Estonia.
Region West Europe made EUR 336.1m, a 22.6% share, and was the third largest Krka Group region in terms of sales value. The region posted a growth of 17% YoY. Germany, the Scandinavian countries, Spain, and Italy generated the strongest sales. Sales through subsidiaries were essential for sales growth and composed 76% of regional sales, while sales through unrelated parties retained the 2018 level. The Scandinavian countries, Benelux, Germany, Portugal, Italy, and the United Kingdom presented strongest growth.
Sales in Region South-East Europe amounted to EUR 191.3m, 9% more than in 2018, constituting a 12.8% share of the Krka Group’s total sales. Romania and Croatia were our two leading markets. However, the highest sales growth was recorded in Bulgaria and Serbia.
In Slovenia, sales added up to EUR 92.4m, accounting for 6.2% of total Krka Group sales. The growth rate was 4%. Product sales accounted for EUR 52.9m, the major portion of sales total, while health resorts and tourist services yielded EUR 39.5m. Region Overseas Markets made EUR 48.6m by product sales, recording 12% growth and 3.3% share of total Krka Group sales.
When talking about China, the Management said that Krka currently holds regulatory approval to produce one drug for the EU market. First approval for the Chinese market is expected in the first half of 2020. Therefore, the plan is to start production this year. First sales from China are expected in 2021.
The improved top line performance also boosted Krka’s EBIT, which amounted to EUR 274m (+18% YoY). Finally, net profit went up 39% YoY and amounted to EUR 242.1m.
Krka’s Selected Financials (EUR 000)
Bribery Accusations
In their statement the company also addressed the recent allegations regarding bribery in Romania. As a reminder, mid-January the Romanian media released an article claiming that they had obtained information that Krka’s employees in Romania acted unlawfully and marketed medications by bribing healthcare professionals. In the aftermath Krka conducted an internal investigation which found no basis for such allegations and now the company denies justification of any allegations.
Dividend
Dividend wise, the Management stated that they aim at pursuing a stable dividend policy which states that the company will pay out at least 50% of the year’s net profit.
2020 Outlook
The Management also released their outlook for 2020, according to which the Krka Group’s sales are projected at EUR 1.52b, while net profit is projected at just over EUR 210m. Meanwhile, Krka intends to allocate EUR 134m for investment projects to increase and modernise production capacities and infrastructure. The total number of employees is expected to rise 3% in 2020 and is projected to exceed 12,300.
Last week we made a brief analysis of the total market capitalization of listed companies as a % of GDP for Croatia. Consequently, for today, we decided to present you with a historic development of the market cap to GDP of the other regional markets (Slovenia, Romania, Serbia).
The historic GDP data was taken from the Word Bank’s latest available publications, while market caps were taken from the statistics published by regional stock exchanges.
It was one of the indicators of the approaching storm and later the crises in 2008, which severely damaged the equity markets. As Buffett said, “The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment”. Therefore, the metric is often used to determine whether the stock is over or undervalued.
Slovenia (Market Cap / GDP) (%)
Croatia (Market Cap / GDP) (%)
As visible on the graphs, all observed markets in the region recorded a high ratio in the pre-crisis year 2007. In Croatia, the market cap / GDP was as much as 109%. Slovenia followed with a market cap to GDP OF 56.2%, while Romania observed the lowest figure of 30.3%.
However, after the financial crisis struck, one can notice that the ratio declined considerably as we were witnessing a lot of companies initiating squeeze out and delisting procedures.
Romania (Market Cap / GDP) (%)
Serbia (Market Cap / GDP) (%)
Of the observed markets, Serbia has the lowest ratio of 10.7%, followed by Slovenia with 14%. On the flip side, Croatia has a market cap to GDP of roughly 38%, however the stated ratio would be even lower if we accounted for the fact that a few largest companies listed on ZSE have a low single digit free float. Therefore, the market cap to GDP adjusted for free float would amount to roughly 19%. It seems clear that the markets still have enough room for new investments and that the current share prices have plenty of room to increase (according to this single indicator).