IC Market Espresso 4 Sep 2023

Exploring SBITOP Valuation – The Art of Patience

Today, we decided to dive into SBITOP’s valuation, as some disconcerting developments occurred in Slovenia. Further, we’ll put SBITOP in a broader picture and compare the index with global equity. We’ll try to see what the end of this year might bring us. But, above everything else, we’ll try to demystify why short-term tunnel vision might be inappropriate.

We’re already deep in 2023, so let’s just shortly start with the previous year. Before talking about the numbers and returns, remember what the sentiment was? Inflation was already boiling, with unenviable macroeconomic uncertainty, pressures on margins and supply chain problems. From today’s perspective, how would an investor stand if he remained stoic and cold-headed? If he held US equity, today, his returns would be almost flat. In 2022, the S&P 500 fell 19.4% and YTD retraced for 17.1%. If he held Slovenian SBITOP the situation would be the same – but we’ll talk about that soon enough. In 2022, SBITOP fell 16.9% and YTD retraced for 11%. However, at some point during the year, you would even yield a positive return. So, in this blog, we’d like to focus on why tunnel vision might be harmful for an investor.

2022 Returns (%)

2023 YTD Returns (%)

Source: Bloomberg, InterCapital Research

Looking at SBITOP’s development in more detail, we can see that (almost) all constituents noted a YTD positive share price development, besides a flat/negative development from Slovenian insurers. Overall, the growth came on the back of the index’s heavyweights, like Krka and NLB.

What happened with the insurers?

This party is what we want to emphasize. During the last two months, the region (including Slovenia) has been hit by hard flooding and storms. Consequently, Slovenian insurers will see a steep rise in claims. The market already priced in its expectations for a financial hit on those companies, resulting in lower total returns on a YTD level, compared to the end of June or July. This is the main reason we think tunnel vision is harmful to an investor. We have seen the market put too much focus only on the latest information. If we were to look at YTD returns a month or two ago, one could say „SBITOP is already in green compared to the period before all the macroeconomic tensions“. Today, we are slightly under those level. However, the key takeaway should be that a stoic approach to the market would result in only a slight loss. Which sounds more than perfect if you only remember all those titles in media, right? 😊 So, yeah.. August was bad with a 7.6% decline but let’s put it in a wider context.

With that out the way, we present you SBITOP valuation with an expected valuation for FY 2023 using a forward P/E calculated using outlooks given by the companies themselves along with a valuation comparison to much broader equity.

TTM P/E of European Indices

Source: Bloomberg, InterCapital Research

After putting SBITOP in the context of the global equity market, we decided to present you with an SBITOP forward P/E. As each company within SBITOP has published its 2023 Outlook/Plan and market participants are aware of the mentioned information, we decided to calculate what the P/E would be if the companies were to achieve the same results as planned, using the current market prices. We note that only Equinox did not publish its outlook for 2023 and we excluded the company from the calculation (the company has <1% in weight).

However, before everything is said – disclosure must be emphasized, even though it is common sense. Forward P/E relies on estimated future earnings and is, consequently, subject to miscalculation. Further, companies might underestimate or misstate earnings to beat the consensus estimate P/E in the earnings report. Other companies may overestimate the earnings and later update them in their next earnings announcement. Finally, analysts may provide their independent estimates, which may also diverge from the company estimates. Again, in this case, we use estimates given by each company for itself, adjusted for the latest developments on LJSE. We note that the aforementioned floods in the region resulted in Profit warnings and lower 2023 Outlook levels for both Sava Re and Triglav. Sava’s first estimate is hit on the bottom line for 25% of total net profit for 2023. A few days ago, Triglav published its H1 results and on the conference call it revised its FY 2023 result to around 80% lower compared to the initial outlook. So, given all the outlooks for all SBITOP companies, we adjusted net profit projections for both Sava Re and Triglav in forward P/E calculation.

Forward P/E of SBITOP constituents & SBITOP

Source: LJSE, InterCapital Research

Treating the expected outlook numbers as given, it would imply a forward P/E of SBITOP at 11.9x, while according to Bloomberg, it is currently trading at 7.6x. Even with this slightly higher forward P/E, this still gives us a lot of space for growth in the context of the discount to global indices.

And finally, without going into further details, let’s just not forget the dividend yield offered by all constituents and, consequently, the index as a whole – which is quite elevated when compared to other regional and global indices! Nevertheless, one has to be aware of the market which, for some, has a complex shareholding structure and bears the problem of relatively low liquidity. However, Slovenia still seems to offer quite an attractive story for investors. Let’s end with the classic statement: Does SBITOP still have room for development? Well, that is for you to decide. 😊

NLB Closes the Legal Merger of N Banka

On Friday, NLB announced that it has successfully closed the process of legal merger of N banka d.d. with NLB d.d.

As reported by the Company, the legal merger is one of the final steps of the integration of N banka with NLB. This process started all the way back in March 2022, when due to the Russian invasion of Ukraine and subsequent sanctions against Russia, and specifically, Sberbank, its subsidiaries across Europe were under threat of liquidity issues. In order to protect the customers of these banks in Europe, and in this case in Slovenia, a decision was made to allow NLB to acquire the Sberbank subsidiary in Slovenia, which would mean it could stabilize the bank’s operations, and allow the bank’s customers to regain access to the funds on their accounts.

As such, NLB signed a sales agreement with the Single Resolution Fund to acquire a 100% share in Sberbank d.d., which was subsequently renamed to N banka. Due to the nature of the agreement, NLB ended up with EUR 172.8m of negative goodwill in 2022, which boosted its net income significantly during the period.

Since then, NLB has been working on integrating N banka with NLB, and this latest step refers to Friday’s entry of the legal merger in the Register of Companies, with the operational integration to follow this weekend.

NLB share price (2020 – 2023 YTD, EUR)

Source: LJSE, InterCapital Research

Trading Activity on BELEX in August 2023

In August 2023, BELEX15 increased by 1.22% MoM, ending the month at 884.9 points.

The latest trading activity report has been released by the Belgrade Stock Exchange, Belex, for the month of August 2023. In the report, we can see that the total equity turnover on the exchange amounted to EUR 1.28m, representing a decrease of 73% YoY, and 30% MoM. This would also mean that the average daily turnover amounted to EUR 58.2k.

In terms of the companies, the most traded shares were the ones of NIS, with a turnover of EUR 330k, and a 4.52% change. Following them, we have Lasta, with a turnover of 329k, remaining unchanged in relative terms, and Messer Tehnogas, with a turnover of EUR 272k, with an increase of 10.71%, Dunav Osiguranje, with a turnover of EUR 126k, with a decrease of 3.96%, and finally, Žitopek, with a turnover EUR 46k, and an 8.84% change.

In terms of gainers and decliners, the largest increase was recorded by Grupa Univerexport Bačka, at 30%, Tigar, at 26.7%, and Energoprojekt holding, at 14%. On the other hand, the largest decliners were Ratar at 22.7%, BAS at 6.2%, and Aerodrom Nikola Tesla, at 4.3%. Lastly, the primary index on the exchange, BELEX15, recorded and increase of 1.22% during the month, ending at 839.79 points.

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