Without Podravka, Končar, and Zaba, the stock market would have grown half as much

Investors, both in Croatia and globally, can be quite satisfied with the stock market year coming to a close, even though the nice increase in stock indices was achieved thanks to just a handful of companies. After closing 2022 with a nearly 20 percent decline, the leading American stock index S&P 500 has risen 21 percent this year, of which as much as 13 percent since October when the negative sentiment that pushed the largest global stock market into correction ended.

Although it might seem that Wall Street has achieved a comprehensive recovery this year on the wings of inflation suppression and last week’s Fed announcement of interest rate cuts as early as mid-next year, the growth in index value this year is primarily due to just ten companies. These are technology giants such as Apple, Meta, Microsoft, and Nvidia.

Fantastic Growth

A very similar situation has occurred in the Croatian market. Namely, this year’s jump of nearly 25 percent in the CROBEX index can be attributed to just three stocks – Podravka, Končar – Elektroindustrija, and Zagrebačka banka. A good portion of analyses of the stock market in 2023 highlights the stock of Končar – Distributive and Special Transformers as the leader in the growth of CROBEX. This stock, as of December 6, has jumped (by the standards of Croatia’s more liquid stocks) a fantastic 167 percent, achieving the convincingly largest increase in value within the domestic stock measure.

The three-digit jump in the stock price is grounded in business results. According to the nine-month report, Končar D&ST recorded consolidated business revenues of 244.9 million euros in the first three quarters of 2023, 34 percent higher than last year. Net profit after taxation rose to 30.4 million euros, which is 176 percent higher, while the profitability indicator EBITDA of 39.5 million euros increased by 137 percent. However, the impact of Končar D&ST on the growth of CROBEX is actually symbolic for two reasons.

The first is that this stock was only included in the index in September, after the regular revision. From the beginning of the year until September 18, when the new calculation of CROBEX began, Končar D&ST had already risen by 115 percent. The second reason is that the weight of this stock within the index is relatively small, at 3.7 percent. It should be noted that the weight of each stock in the index is determined according to its free float market capitalization. When this is taken into account, Končar D&ST contributed only 3.3 percent to this year’s growth of CROBEX, as shown by Lider’s calculations.

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Đivo Pulitika

foto Rene Karaman

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On the other hand, Podravka is the most responsible for this year’s index result. The stock of the Koprivnica company has increased by nearly 87 percent this year, and since it has the largest weight in the index at 10.8 percent, it contributed more than a third to the growth of CROBEX. The contribution of Končar-EI, whose weight in the index is 10.1 percent, amounts to over 24 percent, given that the price of that stock has strengthened by 61 percent this year. In third place is Zagrebačka banka, which has contributed nearly 16 percent to this year’s CROBEX result with a stock price increase of 64 percent. If dividends are included, the domestic stock market has strengthened by an additional five percent this year, emphasizes Đivo Pulitika, fund manager at InterCapital Asset Management.

Impact of the Pivac Brothers

Commenting on the performance of the leading trio, Pulitika says that Podravka recorded a revenue growth of seven percent in the first nine months, with a stable normalized operating (EBITDA) margin. – In other words, they have managed well with inflation and have been able to pass the cost impact onto customers. However, we do not attribute the price increase to that, but rather to events on the stock market itself. The Pivac brothers have been buying Podravka shares this year and currently hold just over five percent. This year, they purchased over 130,000 shares, which is 42 percent of the total trading volume of Podravka’s stock on the stock exchange – emphasizes Pulitika.

As for Končar, we can indeed talk about excellent results here, adds Pulitika. – The company recorded revenue and profit growth above 20 percent in the first nine months, and it also announced a significant increase in contracted projects that are the basis for future revenues. We believe that this news has attracted investors. Therefore, next year could also be good, but we still need to be cautious about what the macro environment and economic trends will be, not only in Croatia but also more broadly – notes Pulitika.

Zagrebačka banka is another company with excellent results this year. – It achieved a 74 percent increase in net interest income. Banks have generally performed well during this period of rising interest rates because interest rates on loans have mostly risen, while those on deposits have not significantly increased. The bank’s profit has risen by 67 percent. Additionally, Zaba has paid a high dividend of 1.69 euros per share this year, which is nearly 20 percent of the stock price at the beginning of the year – points out an analyst from ICAM. As things stand, banks will enter next year with an above-average difference between active and passive rates. However, care must be taken regarding how this will affect the quality of loans and whether some placements will need to be written off due to the burden of interest, adds Pulitika.

On the other hand, eight stocks dragged CROBEX down. These include hoteliers Plava Laguna (-0.01 percent) and Arena Hospitality Group (-2.2 percent), shipping companies Alpha Adriatic (-0.15 percent), Jadroplov (-0.17 percent), and Atlantska plovidba (-0.6 percent), the agricultural company Kutjevo (-0.2 percent), then Ingra (-1.6 percent), while the largest negative contribution of 4.3 percent came from Ericsson Nikola Tesla, whose stock weakened by 14 percent by December 6. In the context of a financially excellent tourist season, it is interesting that representatives of the tourism sector also found themselves in this unfortunate group.

‘Tourists’ Are No Longer Cheap

Davor Špoljar, a capital market analyst at Erste Bank, says that this year’s tourist season was good and that hoteliers achieved results that were generally within expectations. – The fact that the market did not react positively to such results is most likely a consequence of the macroeconomic, geopolitical, and regulatory uncertainties that the sector is facing. It is interesting to note that since the outbreak of the pandemic, every year has been uncertain for the tourism sector, and the results, after the initial pandemic shock, have improved each year. There is still a gap in the stock prices of hoteliers compared to pre-pandemic levels, and it remains to be seen whether they will manage to at least partially reduce that in the coming year – claims Špoljar.

Continuing on prices, Đivo Pulitika adds that tourism stocks are not necessarily cheap. – They are trading at an EV/EBITDA multiple of 8 to 10, which is higher than the index average (e.g., HT is at 4.4, Končar at 6.5, Podravka is around 12). Additionally, investors have become more aware of the risks in that sector after years of a craze for tourism companies over the last few years, especially now that an economic slowdown is being mentioned in the markets from which most of our tourists come. High multiples usually justify expectations of high growth rates. It seems that the market does not expect that for tourism companies at this moment – assesses Pulitika.

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Davor Špoljar, Erste

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The mentioned risks will certainly shape investor sentiment in the year ahead. Although an increase in earnings is expected for most domestic companies, it is unlikely that the intensity of growth will continue at the previous pace, believes Davor Špoljar. – The biggest challenges for the markets are the uncertain macroeconomic and geopolitical environment, which primarily reflects through results in export markets, along with additional inflationary pressures in the labor market. However, a calming of prices in commodity markets could largely negate the aforementioned negative effects – says Špoljar.

Đivo Pulitika adds that macroeconomics and related central bank policies regarding interest rates will certainly be in focus for investors. Therefore, expecting another year with a 30 percent return (including dividends) is difficult.