Equity Analysis /
Croatia

Končar Group: 100 HRK upside for 100th Anniversary

  • Our analysis values Končar Group at HRK780 per share

  • Such a target price indicates a 14.7% upside; Buy

  • The valuation translates into 2021 P/E of 17.8 and EV/EBITDA of 6.9

InterCapital
1 April 2021
Published byInterCapital

Our analysis of Končar Group values the company at HRK780.0 per share, giving it a Buy recommendation with potential upside of 14.7%. This translates into 2021 P/E of 17.8 and EV/EBITDA of 6.9. The key reasons behind our recommendation are as follows.

Relatively unscathed by the pandemic

As the demand for Končar’s products and services does not go hand in hand with business cycles, the Group walked through 2020 almost completely unscratched. The Group was the only CROBEX10 constituent to recorded top line, EBITDA, and bottom-line increase in 2020. During the pandemic, the Group has managed to adjust their business processes in quickly and successfully continuing positive business trends.

A very solid year ahead on the back of train delivery to HŽ

In 2021 we expect a solid increase in operating revenue of 9.8%, which can mostly be attributed to the train delivery to HŽ Passenger Transport. To be specific, the deal relates to the contract signed back in 2016, which has not yet been fully realised. The value of the transaction under the III Addendum amounts to HRK 464.9m (HRK 581.1m including VAT). Additionally, Končar signed another SPA in November of 2020 with HŽ for 21 electric multiple units, worth HRK 844.7m.

KPT (JV with Siemens) to show better results, however the "golden days" seem to be behind

The JV has historically been a very solid value driver of the Group, with the highest EBITDA (17.2%) and profit margins (11.7%) in the past 10 years. However, in 2019 the company showed its worst sales and net profit since available information (2007). As 2020 showed quite a solid result, we do expect to see better performance ahead with 2021 EBIT growth close to 50%, we also expect to see a deterioration of profitability with an estimated avg. profit margin (2021 – 2025) of 8%.

Fierce competition in some Končar companies and lack of reinvestment poses a threat

Končar is experiencing quite a fierce competition on their foreign markets, especially in their transformer segment with South Korean and Chinese companies, which are competing with "unrealistically" low prices (KPT). Additionally, certain companies within the Group have noted quite a high decrease in tangible assets in the past years, with a few of them having an average CAPEX/D&A ratio below 1. However, the Group announced higher CAPEX in the following period, and we expect that over the next 5y CAPEX/D&A will be in the 1.1-1.2 range.

New management showing effort to increase transparency, further emphasising that value creation to shareholders is a top priority

As of 2020, the Group operates with a basically completely new management which has been working on increasing the transparency of all Končar companies. The Group held a conference call regarding FY 2020 results, in which the management provided detailed information on the company’s operations. The management noted that they plan on having such calls frequently, which we welcome.

Excess cash needs to be used wisely

The Group operates with a very high cash position which is almost entirely equity funded. We see this as an opportunity for the new management to optimise the capital structure of the company, while we also note that such a capital structure opens an opportunity for optimisation of funds on the Group level or higher investments in order to increase return to shareholders. We find inorganic growth as a key milestone for turning Končar away from value to growth play.