Yesterday Krka held their Annual Shareholders Meeting during which the company’s shareholders approved a dividend of EUR 3.2 per share (DY 5%). During the Meeting, the company’s Management also presented the company’s preliminary H1 2019 results, showing a 12% YoY increase in sales, while EBITDA rose 12% YoY.

Group sales amounted to EUR 761.8m, representing a 12% YoY increase. The largest region in terms of sales was East Europe where sales reached EUR 251.5m (+15% YoY). Russia remained Krka’s largest individual market in the region. In Western Europe, the company’s second largest region, sales grew 17% YoY.  The highest growth was recorded in the Scandinavian countries, Spain, the United Kingdom and Portugal. In Germany, the largest market in the region, Krka recorded a 5% YoY increase in sales. All other regions grew as well with Central Europe up 5%, followed by South-East Europe (+11% YoY), Slovenia (+4%) and Overseas markets (+13%).

The Group reported an EBTIDA of 210.3m, which represents a 10% YoY increase, however EBITDA margin decreased slightly to 27.6% (-49bp). Finally, net profit amounted to EUR 139.9m (+37% YoY) which translates to a net profit margin of 18.4%.

Regarding new products, in the first half of 2019, Krka obtained marketing authorisations for 6 new products in 12 dosage forms and strengths.

Croatian Competition Agency published an announcement stating that HT has delivered the documentation regarding the sale procedure of Optima Telekom. HT is obliged to sell their stake in Optima Telekom until 10 July 2021.

Croatian Competition Agency (AZNT) published an announcement stating that HT has delivered the documentation regarding the sale procedure of Optima Telekom. By doing this, HT has fulfilled the requirement set by the regulatory agency regarding the concentration of HT and Optima from June 2017.

As a reminder, HT was given the approval of AZNT to acquire a stake in Optima Telekom with a condition of its future sale.

HT is obliged to sell their stake in Optima Telekom until 10 July 2021. In case they would fail to do so, HT’s controlling stake in Optima Telekom would seize to exist (effective immediately) and HT would have to transfer their controlling stake to ZABA or a third party (not related to HT).

Yesterday, Croatia has sent a letter of intent for entering the ERM II. By this Croatia has made a first formal move for the introduction of the euro as the official currency.

In addition to the letter of intent, that was signed by the Minister of Finance and the Governer of the Croatian National Bank, Croatia has also submitted an action plan detailing the reforms it will implement before entering ERM II.

With a successful participation in the exchange rate mechanism for at least two years, Croatia should formally meet the exchange rate stability convergence criteria. Croatia has been in line for some time with the remaining criteria – price stability, public finance sustainability and interest rate convergence.

As a reminder, Croatia was under Excessive Deficit Procedure (EDP) that went out in June 2017. Economic recovery, export growth, decrease in unemployment, a decrease of external debt and fiscal adjustment have all reduced the vulnerability of the Croatian economy and allowed it to apply for ERM II.

Action plan reforms Croatia intends to implement are following: i) further strengthening the supervision of the banking system; ii) strengthening the framework for measures targeted at borrowers; iii) strengthening the framework for the prevention of money laundering; (iv) improving the system for collecting, processing and publishing statistical data; v) improving public sector governance; and vi) reducing the administrative and financial burden on the economy.

Croatia intends to implement all the measures stated in the letter of intent and the action plan by mid-2020, after which EU institutions will assess whether measures are adequately implemented.  After receiving a positive assessment, Croatia will begin participating in the exchange rate mechanism.

We see this as positive for the liquidity of the Croatian equity market on the mid-term and supportive for share prices and credit risk of the Croatian companies.