So far in 2022, the equity market started giving us slacking signs. The majority of regional quality blue chips, included in indices with respectable weighting, reported steady market movement.
There has already been plenty of recent discussions of yield flattening on the money market, as market participants „price in“ the not so good looking equity outlook via bonds. We have seen a negative spread between US 2Y and 10Y bonds, representing so-called „yield inverting“ – meaning money is flowing out of the equity into the bonds. A lot of market distortions are present on top of that – geopolitical situation and boiling inflation which just might not be „transitory“.
US 10-year and 2-year treasury spread
The indicator which has attention of almost every investor is US spread between 10 year and 2 year treasury bonds. The most know recession-wise indicator, one can notice that since 2021 spread kept decreasing, even reporting negative numbers at some point. Spread decreasing means investors are buying more 10-year bonds, thus driving it’s yields one can achieve down. Consequently, 2 year and 10 year bond could potentially yield the same. The aftermath of yield spread decreasing represents important change in money flow – investor’s money outflowing from equity into bonds, meaning investors “price in” their fear of recession and buying “safer” assets – bonds.
So, how did the regional equity perform in 2022, so far?
For general region equity outlook, we took reginal indices (CROBEX10, SBITOP, BET, SOFIX and BELEX15). Indices movement clearly indicate lack of movement in the regional equity market. Last week, indices closed at approximately same levels as they opened in 2021. There are few quality blue chips within CROBEX10 and SBITOP for instance, that reported robust growth in both sales and bottom line, yet movement on market did not follow-up those strong fundamentals. For a more detailed look, we separated CROBEX10 and SBITOP and each of their constituents.
CROBEX10, SBITOP and their constituents YTD performance (%)
For regional equity market representatives, we took CROBEX and SBITOP, as well as each of their constituents. Looking at the graph below, we might easily come up with a wrong conclusion. Graph shows a pretty volatile situation, but we should take a more precise look at the situation. Each one of the most volatile companies is not a real representation of the current market sentiment. Let’s break each one and further elaborate.
The worst-performing stocks were AD Plastik and Krka, with YTD amounting to -43.8% and -23.2%, respectively. Both of these companies were impacted by the Russian invasion of Ukraine. On a FY 2021 basis, AD Plastik generated 27% of its revenues from Russia, where at the moment, car producers ceased their production activities. On top of that, AD Plastik’s European market is further dragged down by the still-present semiconductor shortage – a perfect example of company-specific risk realization. Krka’s price share found itself affected by mentioned geopolitical situation too. Even though the company’s underlying business was not directly and materially impacted, as AD Plastik was, the market priced in the risk connected to Russia and Krka’s share price fell.
On the positive side of the spectrum, the best YTD performer was Atlantska Plovidba with a 41.4% YTD, which was actually a result of really strong Q1 results. The company recorded a strong EBITDA increase of 134.4%, with the bottom line increasing more than fivefold due to favorable market trends. Taking the results into account, for the sake of simplicity, we will not consider Atlantska an outlier, as yield was driven by the operating results and not “one-off” effects. Other than that, Cinkarna reported a strong YTD yield of 17.4%, which was purely driven by strong results driven by supporting the economic situation regarding the Titanium Dioxide segment.
Overall, we can see most of the YTD returns fall in the -10% to 10% domain. We had some quality blue chips with a relatively high weight in the index reporting strong results, like Končar or NLB, but the market moved their share price slightly. In the graph below we can see both median and average of YTD yields, to better present YTD results. With outliers excluded (Dalekovod, AD Plastik and Krka) we can notice that both YTD median and average do not change much, as outliers mostly offset themselves. One can notice even the average YTD not including outliers does not amount to more than 2%, clearly showing the regional equity market reported slacked movement, even though Q1 results were pretty solid with most constituents being in a “green” field, as sales have increased.
On Friday, Valamar Riviera announced that its associate company in Austria is acquiring another ski hotel. Therefore, Valamar is extending the number of hotels under management in Austrian ski-resorts.
The purchase and transfer of 100% of the business shares in Kesselspitze GmbH KG, and acquisition of the Kesselspitze Hotel in Obertauern is done by Valamar A. In this company Valamar holds 24.54% of shareholding, and its financial results on Valamar Riviera are evidenced by equity method (below operating line). Therefore, Valamar is extending its operations by asset-light strategy and it is increasing its management income fee.
The announcement was made after the Supervisory Board of the Company gave its consent in order to further expand the business in Austria. This included the approval of the new Valamar A Business Plan, and the subsequent signing of the purchase and share transfer of 100% business shares in Kesselspitze GmbH KG, through which Kesselspitze Hotel in Obertauern was acquired. The transfer was done between Valamar A as buyers and Lurzer Obertauern GmbH & Co KG as sellers.
Valamar estimates that the hotel would be repositioned as Valamar Collection Kesselspitze Hotel for winter 2022/2023 season. The Hotel is categorized as a 5* hotel, containing 66 keys, a restaurant, a pool, and wellness facilities, combined with a location that has immediate ski-in/out access to the ski resort. The SPA was signed on Friday, while the closing of the entire transaction and the takeover of the hotel’s management is expected in early July 2022.
The acquisition continues the internationalization of Valamar’s business, with a focus on expanding the portfolio towards Austrian winter destinations, through the business cooperation in Valamar A which was established in 2021. As a reminder, Valamar is a holder of 24.54% of the shares in this Company. This makes the Hotel Kesselspitze the third hotel under Valamar’s management in Austria, following the previous acquisition of Valamar Obertauern in 2018 and Marietta Hotel in November 2021.
At the same time, the Supervisory Board also approved the conclusion of several allotment agreements for 2022 with TUI Group companies, with a total estimated value of EUR 7.83m, on the Valamar Group level, and EUR 5.48m at the Valamar Riviera d.d. level. Valamar estimates that the value of the allotment agreement will be app. 26% of the total value of business transactions with TUI Group during the 2019’s season.
At the end of May 2022, SBITOP amounted to 1,145.90 points, decreasing by -2.22% during the month.
The Ljubljana Stock Exchange has published the latest trading activity report for May 2022. According to the report, the total equity turnover (including block transactions) amounted to EUR 33.3m, representing an increase of 9.43% YoY, and 19.5% MoM. With the current geopolitical situation, inflationary pressures, as well as the fact that most Slovenian blue chips published their Q1 2022 results in May, the increase in trading is to be expected. This would also mean that the average daily turnover during the month amounted to EUR 1.5m.
If we were to look at the trading data excluding blocks, the increase on both the YoY and MoM basis is more significant. In this manner, the equity turnover amounted to EUR 32.9m, representing a growth of 16.2% YoY, and 26.6% MoM. This means that less block turnover happened during May 2022, especially compared to May 2021.
Moving on to the most traded companies, Krka leads the way with a total turnover of EUR 12.6m, representing almost 38% of the total turnover during the month. Next up, we have NLB, with a turnover of EUR 5.8m (or 17.44% of the total), Triglav, with a turnover of EUR 4.78m (or 14.34% of the total), Petrol, with a turnover of EUR 3.75m (or 11.3% of the total), and Sava Re, with a turnover of EUR 2.1m (or 6.32% of the total). Together, these top 5 most traded companies represented 87.3% of the total turnover on the LJSE during the month. If we took the top 10 most traded companies, they would represent 98.5% of the total turnover, meaning that a small number of companies do the vast majority of the turnover in Slovenia.
Performance of Slovenian blue chips (May 2022, %)
Taking a look at the performance of the Slovenian blue chips in May, only 3 companies recorded growth, 1 did not experience any change on a MoM basis, and the remaining 6 Slovenia blue chips experienced some sort of decline. The largest increase was experienced by Luka Koper and Cinkarna Celje, with 5% and 3.5%, respectively. Considering that both companies recorded strong Q1 2022 results, with both top and bottom line increases, their growth is expected. On the other hand, Petrol declined the most, losing -7.3% of its value during the month, followed by Sava Re with -3.8%, Telekom Slovenije with -3.4%, and Krka, with -2%. The decline experienced by Petrol is not wholly supported by their results, as the Company posted solid results during the quarter. The current geopolitical situation and uncertainty regarding the embargo on Russian oil (which was still not agreed on in May), could in the future continue to drive oil prices up which puts uncertainty on the size of company’s working capital and margins due to state interventions. State interventions in petrol prices are present across all its markets, but on its main market of Slovenia it is quite unfavorable as the state is also putting a cap on import price. They have a commitment from the Government to compensate them for the losses. They expect to be compensated for EUR 51m and Petrol published that this is the result of the Government’s measure until 30 Apr. Petrol expects 2022 net profit of EUR 158.3m which is a sharp rebound compared to last year. They see tourists coming and they expect a good season. They believe that their plan for 2022 net income will not be jeopardized by Government intervention. As Petrol is only hedging its margins and protecting itself against the volatility of prices, at some points it sells below purchase prices, so they believe they will be compensated by the Government for 2022. For the rest of the year, they hope to renegotiate to a more acceptable model with the government. All these news surely had an influence on the stock’s performance. The remaining Slovenian blue chips remained around the 0% range, showing that despite the situation, May was not a month of strong changes, one way or the other.
This is also reflected in SBITOP, LJSE’s main index, which lost -2.22% of its value during the month, ending May at 1,145.90 points.