Earnings Report /
Croatia

Arena Hospitality Group: Bottom line widening reduced by tax incentives

  • The current crises will result in strong deviation of financial results to our recently published estimates

  • Therefore we put our recommendation under review

  • Reported EBITDA in Q1 displayed strong decrease (-30% YoY) as a direct result of the decrease in activity in all markets

Tea Pevec
Tea Pevec

Head of Research

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InterCapital
29 April 2020
Published byInterCapital

Croatia's Arena Hospitality Group published Q1 2020 financial results which are reflecting the start of Covid-19 imposed shut-down measures. The current crises will result in a strong deviation of financial results to our recently published estimates, therefore we put our recommendation under review. Reported EBITDA in Q1 displayed a strong decrease (-30% YoY) as a direct result of the decrease in activity on all the markets the Group operates, triggered by the Covid-19 outbreak. The like-for-like comparison of EBITDA, that excludes the contribution of Hotel Brioni’s operations as the hotel is now closed for refurbishment, is down 37%, driven by a decline in accommodation revenue of 26%. Operating profitability decreased 10 p.p. due to a stronger decrease in total revenue (-22.4% YoY) compared to the decrease in operating expenses (-13.3% YoY). The sales decrease is resulting from a halt in international and domestic travel coupled with lockdowns of countries across Europe and the rest of the world. The decrease in operating expenses, beyond the decrease driven by lower business activity, is also attributable to the delay in opening of all facilities and omittance of preparation costs for the season, coupled with the receipt of the Croatian government support measures to counteract the negative consequences of the Covid-19 outbreak in the amount of HRK 2m. This amount relates to payment of salaries where the Government participated with an amount of HRK 3,250.0 per employee in March. At the end of 1Q the company had 915 employees on all its markets.

Depreciation grew by 12.8% to HRK 26.5m (2019: HRK 23.5 million) due to previously undertaken investments, while fixed assets in the observed period increased by 9%. It is positive that the company is still keen to continue its investments that have already started, like the refurbishment of Hotel Brioni Pula, which will in the future significantly impact its portfolio upgrade and profitability increase. The company’s debt has increased by 11% as it withdrew debt to finance the investments under way during Q1. Its net debt has increased 51% amounting to HRK 728.3m, which puts it at net debt/EBITDA ratio of 3.2x. It increased compared to end of 2019, when it has amounted to 2.1x. But the company emphasized that it is in constant dialogue with its banks in order to ensure that it has the possibility to take all the necessary actions in the best interest for the company in the current environment.

In Q1 net financial loss tripled and amounted to HRK -23.4m, as financial expenses increased significantly to HRK 21.6m (Q1 2019: HRK 6.9m), over half of which relates to unrealized foreign exchange differences related to the translation effect of lease liability in Hungary. As a result, EBT decreased 51% to HRK -70m. In Q1 2020 again tax income was booked in the amount of 23.4m related to the benefits granted by the Ministry of Economy linked to the previous investments Arena has undertaken in Croatia. Therefore, the widening of the net loss was partially offset by these benefits. Net loss therefore increased by 20% to HRK -46.2m.

Total revenue decrease of 22% YoY was as a result of a revenue decrease in Croatian operations of 21.5% YoY and German and Hungarian operations of 25% YoY. In the Croatian portfolio, EBITDA loss decreased (+15.5%) due to the nature of seasonal business and it was negative at HRK 26.2 while in the German and Hungarian portfolio EBITDA decreased strongly by 49% to positive HRK 8.7m (from 17.1m in Q1 2019). We expect that the Croatian portfolio will start getting back into business and improving first due to Croatia’s reputation of being "Covid free" environment, whilst the demand for the city portfolio will continue lagging throughout the year.

Management has announced that it is still not possible to provide meaningful guidance for the current financial year due to ongoing uncertainty caused by the pandemic. We see the results are in line with the current distressed environment where the Covid-19 outbreak is leaving a strong negative impact on the hospitality sector, which is in process of reinventing itself, at least in the current year. We see the recent investments in phase two of the Kažela repositioning and refurbishment of Verudela Beach self-catering apartment complexes as positive for the current development. Until we make our new price estimate we keep the share price under review.