2014: Tepid recovery in SEE stops short of recharging corporate batteries

By Nevena Krasteva

Subdued domestic demand and low exports, limited credit growth due to high non-performing loan ratios, market volatility and political uncertainty continued to curb the financial performance of the companies in Southeast Europe (SEE) in 2014. Overdue structural reforms weigh on the economies in the region, which failed to benefit fully from cheaper oil and the recovery of the euro area to offset the downward pressure of the Russia-Ukraine crisis.
The total revenue of the companies in the SEE TOP 100 ranking dropped, and so did their combined net profit. Most of the negative score was posted on the balance sheet of the heavyweights – the energy companies. At the same time car and car parts makers firmed their positions as the new pace setters.
Economic growth, however, is accelerating. Domestic consumption and exports are picking up as activity in the euro area gains momentum, investment flow is strengthening and the M&A market is warming up. The companies are investing heavily as confidence is returning. New players from diverse sectors are entering the ranking.

Economic growth in Southeast Europe (SEE) in 2014 remained muted amid sluggish consumer spending, downsized company investments, limited lending, long-delayed structural reforms and political instability. Despite the stronger-than-expected recovery of the European Union, exports stayed low and foreign direct investments dried up. Falling oil prices managed to only partially offset the negative balance. Geopolitical problems continued to exert pressure on the economies in the region as they remained heavily exposed to Russia and strongly depended on Russian gas. Devastating floods in the Western Balkans hit hard the energy and agriculture sectors.

Regulatory volatility and a large grey economy continued to eat away at the companies’financial results, as the shortage of skilled workers and reluctance to embrace innovations further limited their competitiveness.
Romania stands out as an exception from the general trend and an undisputed market leader. The country’s gross domestic product (GDP) expanded by a real 2.8%, mainly driven by a strong performance of the industrial sector, by 3.6%, and a 4.6% rise in consumption.

After years of tolerating high corruption levels, the country embarked on aggressive anticorruption reforms, which markedly improved the investment climate and helped attract 2.4 billion euro in foreign direct investment (FDI).

The country also sets the pace of the M&A market in the region, accounting for more than one third of the number of deals, according to Raiffeisen Investment figures.

Falling revenues, lower profits

This largely gloomy picture is mirrored in the results of the companies in the SEE TOP 100 ranking. Their total revenue dropped to 100.6 billion euro, compared to 104.0 billion euro reported by the entrants in last year’s ranking.

Furthermore, the combined net profit of the region’s biggest 100 companies fell to 2.3 billion euro against 2.6 billion euro recorded by the entrants in last year’s ranking.

Almost half of the companies in the ranking, 42, saw their revenues go down. The threshold for entry into the SEE TOP 100 ranking fell to 420 million euro from 458 million euro a year earlier. The revenues of both the first and the last one in the ranking were lower than they were a year earlier, suggesting that small and big companies alike have been affected by the general downtrend.

However, a closer look at the companies’ bottomlines reveals that the negative burden is rather unevenly distributed, with companies operating in the oil and gas industry and electricity taking a harder hit, and automobile and car parts manufacturers faring better than the rest.

Automobiles, car parts makers speed up SEE TOP 100 track, Dacia first to the finish line

Over the past years the automotive industry has been steadily expanding its presence in the SEE TOP 100 ranking. After a breakthrough in 2013, when it ended up as the fourth biggest industry in the region, it is firming its positions with the car makers in this year’s edition posting 8.0 billion euro in combined revenues. The combination of low production costs, skilled workforce and a suitable location that enables access to strategic markets has spurred its growth.

Five automobile makers, three manufacturers of car parts and two rubber and rubber products makers, whose core business is manufacturing of car tires, made it into this year’s edition of the SEE TOP 100 ranking.

One of the two car tire makers, Romania’s Continental Automotive Products, is also among the most profitable companies in the region with a 21% return on revenue.
It should be noted here that one of the big car makers in the region, FCA Srbija, formerly FIAT Automobili Srbija, had not published its financial results for 2014 by the time this publication went to print, which is why it was not included in the rankings, distorting the overall picture.

The industry’s top performer is Romanian car maker Automobile Dacia, a unit of France’s Renault, which has overtaken OMV Petrom as the biggest company in SEE. In 2014 its net profit rose 10% to 82.9 million euro, as its turnover edged up 2.2% to 4.25 billion euro.
Worldwide sales of Renault under its Dacia brand rose 19% to 511,465 vehicles in 2014. As of the end of June 2015 Dacia’s sales in Romania totaled 18,369 units, up by more than 25% year-on-year, giving the company grounds to expect a record-high full-year sales result.

Energy companies lose ground, maintain dominance

With combined revenues of 40.6 billion euro, the oil and gas companies continued to dominate the SEE TOP 100 ranking, as this is particularly noticeable in the upper end of the table.

However, their revenue remained flattish, whereas their combined net profit dropped to 263 million euro from 979 million euro.

In tune with this trend, the biggest oil and gas company in the region, OMV Petrom, ceded the no. 1. position it had been holding for six years to Dacia. The company saw its revenues fall only slightly but its profit more than halved.

Oil and gas companies occupy eight of the top ten positions in the ranking. However, they also dominate the list of the biggest loss-makers, with Serbia’s gas monopoly Srbijagas posting the heftiest loss in SEE. A notable exception here is Romgaz, which stands out as the most profitable company in the SEE TOP 100 ranking with a 28% return on revenue. The number of oil and gas companies that made it into the SEE TOP 100 ranking dropped to 27 from 29 a year earlier.
Second in terms of number of representatives in the ranking was the electricity sector, with 18 representatives and combined earnings of 15.3 billion euro, down by 5.6%. For a large number of the electricity companies in the region, the decline in earnings was due to unfavourable regulatory environment and poor weather conditions.

Wholesale and retail had 17 representatives in the ranking, and their combined earnings stood at 14.5 billion euro, up by 7% as compared to a year earlier. Two companies should be singled out – the Romanian unit of French retailer Auchan, which posted the sharpest revenue growth among the companies in the SEE TOP 100 ranking, by 63%, and Metro Cash&Carry Romania, a new entrant which made it straight to the 28th spot in the ranking.

Another industry to put up a good performance was pharmaceuticals, with combined revenues of 2.5 billion euro, up by 7.6% and an 11.7% return on revenue, making it the third most profitable industry in the region.

A total of 15 new companies made it into the ranking. The newcomers were a motley band featuring representatives of ten different sectors.

Romania, with a population of around 20 million and robust economic performance, stands out as the undisputed market leader in the region, placing 53 companies in the ranking. Slovenia, with 13 representatives, outranked Croatia and Bulgaria which had 11 each. Just like in the previous years, none of the biggest companies in Montenegro, Moldova, or Kosovo made the cut.

In solid recovery mode

Economic growth in SEE is expected to quicken as consumer spending, exports and investment continue to recover, real disposable incomes rise and general business sentiment improves. Romania, where planned tax cuts will further improve the business environment, will remain the front runner with GDP growth seen at close to 4%. The economies in the region are also expected to benefit significantly from lower oil prices and substantial support from EU structural funds.

Indications that the prospects before the region are improving are also visible on the M&A market, based on the deals announced since the beginning of 2015. ICT is emerging as one of the most attractive sectors for foreign investors, alongside manufacturing, retail and financial services. Notably, it is still missing from the SEE TOP 100 ranking, which is bound to change at some point. Agriculture companies too are likely to boost their presence in the ranking. Growing domestic consumption and personal income are likely to benefit first sectors such as retail and wholesale.
More good news is expected for the automotive industry, as well, considering the still low car ownership rate in the region and new car sales data for the first half of 2015 for both the EU and SEE.

On the losers’ side, judging by their first-half results, most energy companies are likely to see their financial results deteriorate, as they remain particularly vulnerable to external factors beyond their control. A number of electricity companies too are likely to suffer further losses.