The outbreak of Covid-19 has undoubtedly influenced the estimates for future cashflows, growth and risk and therefore the intrinsic value of the regional companies. Therefore, we decided to present you with an update of equity risk premiums for Croatia and Slovenia.
The outbreak of Covid-19 has had a negative impact on the macroeconomic prospects, global capital markets and introduced additional risks to virtually every listed company. As a result, many global as well as regional indices have witnessed a double digit decreases in Q1.
There is no doubt that the mentioned outbreak has influenced the estimates for future cashflows, growth and risk and therefore the intrinsic value of the regional companies. Consequently, for today’s blog, we decided to present you with an update on equity risk premium (ERP) for Croatia and Slovenia. In short, the equity risk premium (ERP) can be explained as an excess return an investor would demand to invest in the average equity over the risk-free rate.
According to Damodaran, to estimate the equity risk premium for a country, one should find the premium for a mature market and add an additional country risk premium, based upon the risk of the country in question. To estimate the mature market risk premium, one has to compute the implied equity risk premium for the S&P 500 index. This is done by calculating the implied expected return on stocks which is then deducted by the risk-free rate (T. Bond rate).
Historical ERP for Developed Markets (1961 – April 2020)
Source: Aswath Damodaran, InterCapital Research
As of 1 April, the ERP for a mature equity market (such as the USA or Germany) amounts to 6.16%, which is quite above the historic median of 3.94% (since 1961) and is converging towards 2008 levels.
In order to calculate the equity risk premium for Croatia or Slovenia, one would, according to Damodaran, have to add an additional country risk premium to the premium for the mature market. Damodaran calculates the country risk based upon the local currency sovereign rating for the country from Moody’s or with the CDS spread for the country (if one exists and/or has sufficient liquidity to be representable). Another way to estimate country risk would be by calculating the spread of the country’s EUR denominated 10 year bond and the Bund, since Bund is deemed as default free.
By doing so, Croatia’s country risk would amount to 2.6%, while Slovenia’s country risk would amount to 0.92%. As a result, the ERP for Croatia as of April stands at 8.76%, which represents an increase of 2.61 p.p. since the beginning of the year. Meanwhile, Slovenia’s ERP stands at 7.08%, which is an increase of 1.43% since the beginning of the year. We believe that the ERP might significantly change in the coming period if both global and regional economic growth shows further signs of fragility.
Equity Risk Premium for Croatia & Slovenia (%) (January vs April 2020)
Source: Aswath Damodaran, InterCapital Research
It is important to note that when calculating the cost of equity for Croatian or Slovenian blue chips, the same (above state) ERP should not always apply just because they are incorporated in the same country. Many of these companies have a significant portion of their operations outside of the country of their incorporation and the risk of operating there should be reflected in the ERP. This can be done by weighting the ERP based on revenues (or another key performance indicator) it makes in each country it operates.
In March 2020, Croatia observed a fall in tourist arrivals by -74.5% and a fall in tourist nights by -53.0%.
Due to travel restrictions imposed by a great number of countries to prevent the further spread of the virus, it is expected for tourism to record an extreme decline.
According to the Croatian National Tourist Board, in March 2020, Croatia observed 118,236 tourist arrivals, representing a decline of -74.5% YoY. Of that, foreign tourists accounted for 55%. Meanwhile, tourist nights amounted to 518,530, which is a decrease of -53.0% YoY. Foreign tourists took 54% of the total tourist nights realized.
Tourists from Germany recorded the most tourist arrivals, accounting for 16.5%. Tourists from Slovenia and Bosnia & Herzegovina follow, accounting for 13.3% and 8.6%, respectively. However, each of these top 3 tourists by country of origin also observed a drop in arrivals greater than 70%. Meanwhile, the most of the tourist nights were observed by tourist from Bosnia & Herzegovina, representing 19.6% of foreign arrivals.
Tourist Arrivals (March 2020)
Tourist Nights (March 2020)
When observing the arrivals realized by counties, Zagreb leads the list with 16.7% of the total arrivals. The counties of Istria and Splitsko-dalmatinska follow, accounting for 14.4% and 13.8% of total arrivals, respectively. Looking at tourist nights, Splitsko-dalmatinska county comes first with 18.2%, followed by Istria and Kvarner with 16.0% and 15.0% proportion of tourist nights respectively.
When looking at the nights realized by the type of accommodation, one can observe that private accommodation leads the list with 165,615 nights accounting for 32% of total nights. Hotels follow with 31% of nights realized in them, making them the second most important source of accommodation also in low season. Note that hotels recorded a 79.3% decrease in arrivals and 77% decrease in tourist nights realized. It remains to be seen how corona-virus crises will effect hotel’s share in total nights spend once the travel bans are lifted and hotels are reopened.
Triglav will heed the recommendation of the Insurance Supervisory agency and propose no dividend payment at the GSM.
Following up on the recommendation by the Insurance Supervision Agency for Slovenian Insurers to suspend dividend payments, Triglav issued a statement on the Ljubljana Stock Exchange.
In respect to the recommendation, the Management Board and the Supervisory Board of Triglav will propose at the GSM that accumulated profit, which amounted to EUR 60,54m at 31 December 2019, remain undistributed.
The Company notes that is not changing its dividend policy, which in a balanced way seeks to ensure the financial stability of Triglav Group, implement its growth and development strategy, and pay out attractive dividends to its shareholders. However, the Company understands the call of the regulator, which is responsible for the financial stability of the Slovene insurance sector, especially in a situation of great uncertainty caused by the pandemic. The call takes into account the recommendations and actions of EU regulators and authorities (EIOPA and IAIS) to ensure the solvency and capital adequacy of insurance companies in the EU.
As a reminder, Triglav has set the minimum dividend payout of 50% of consolidated net profit for the previous year, with the note that the company will not strive to reduce its dividend payment below the level of the previous year. Since 2015 (for net profit of the previous year), Triglav has been paying out a constant dividend of EUR 2.5 per share, which implied a high single digit dividend yield each year ranging from 7.3% to 9.5%. In order to see Triglav’s historic dividend’s click here.