Earnings Report /
Croatia

Končar Group: Keeps delivering

  • Q2 sales increasing by as much as 43% YoY, amounting to HRK 1.29bn

  • As a result of all of the above, EBITDA observed a sharp increase of 130.2% to HRK 298.5m

  • Equity accounted companies, one can note a result of HRK 7.2m showing a solid growth of KPT, their JV with Siemens

Tea Pevec
Tea Pevec

Head of Research

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InterCapital
8 August 2022
Published byInterCapital

Firstly, we note that in H1 results, Končar consolidated Dalekovod in the whole Group. Končar Group showed another strong quarter, with Q2 sales increasing by as much as 43% YoY, amounting to HRK 1.29bn. On a H1 level, sales are up by 37% YoY, reaching HRK 2.17bn. Of that, the Domestic market accounts for 38.5% or HRK 737m (+20.9% YoY). There, sales of goods and services to HEP relate to 38.8%, while HŽ accounts for 26.2% of business conducted on the domestic market. In H1, we have seen a solid increase in operations concluded in the EU market with sales accounting for 39.6% of total sales. In the EU market, significant increases were seen in Germany (+10% YoY), where export amounted to HRK 199.8m and in Sweden where export amounted to HRK 144.1m. All other foreign markets (outside of EU) noted single-digit growth, but in nominal terms account for a significantly lower share in sales. Such an increase in the EU market was primarily driven by higher export in Germany and Sweden. Looking at Končar’s segments, one can observe a very solid performance of the transformer segment, which noted an increase in sales of as much as 32.9%, reaching HRK 1.53bn. Besides that, the rail vehicles segment observed a very solid H1 (+56.5%) as contracted deals started kicking in. With the increase in business activity, an increase in operating expenses followed (+36.5%) and reached HRK 2.11bn. The increase in operating expenses was mainly driven by an increase in material costs, while these costs of materials represent 76.9% of the Group’s sales. Materials cost increased due to higher raw materials and commodities price, which increased by 42.6%. However, one should note that the company does hedge this with forward contracts in the case of copper, while for steel, transformer sheet and other important supplies parts the company attempts to mitigate the risk with semi-annual and annual contracts. As a result of all of the above, EBITDA observed a sharp increase of 130.2% to HRK 298.5m. Such a result shows an improvement of EBITDA margin by 5.6 p.p. to 13.7%. Segment-wise, virtually all segments observed a higher EBITDA margin in H1. We note that Končar emphasized its normalized EBITDA (normalized for gain from selling its assets, revenues from transaction related to Dalekovod, provisions, etc.), amounting to HRK 140m. Even using normalized EBITDA, Končar Group (with Dalekovod consolidated) would report a slight increase YoY in its EBITDA.

Going further down the P&L. operating profit increased by 193.9% and amounted to HRK 238.9m, mostly on the back of a very solid sales growth. Looking at the equity accounted companies, one can note a result of HRK 7.2m showing a solid growth of KPT, their JV with Siemens. In H1, the Group noted an increase in net profit to majority of 166.5% YoY, reaching HRK 144.2m. The Group’s backlog of HRK 6.7bn and an increase in new deals provide comfort that the management is on the right pathway to deliver the 2021 target. However, we should note that the consolidation of Dalekovod further boosted the backlog of the whole Group. Dalekovod contributed to a backlog with HRK 989m. Nevertheless, excluding Dalekovod, Končar noted a 14.2% increase in its backlog.

We find the results to be very positive, especially with the Dalekovod consolidation finished. It should be noted that we are in the process of making a new model for Končar to reflect the current situation, as the past price target is not applicable anymore.