2015: SEE corporate sector makes shy steps to growth, retailers lead the way

By Siana Mishkova

After several tough years, economic activity in Southeast Europe (SEE) picked up in 2015 and continued to strengthen in 2016, supporting an improving performance of the region’s corporate sector. The 100 biggest companies saw their combined revenues* increase some 2% in 2015 as compared to the revenues of the entrants in last year’s ranking, slightly below the region’s 2.5% average economic growth, while their aggregate earnings* rose at a slower rate of 1.3%, suggesting that corporate majors still have room to adjust to the complex geopolitical situation, erratic investor behaviour, volatile capital flows and unsettled financial and commodity markets.

Notably, the wholesale and retail sector stood out with all but one of its 20 Top 100 entrants recording revenue growth amid rising consumption that has been a key driver for the region’s economy. The segment achieved a more than double increase in earnings on the back of a 14% rise in revenue.

Regionally, senior executives continue to face hurdles like widespread corruption and red tape, relatively weak institutions, cumbersome regulations, underdeveloped infrastructure, restrained access to funding in the illiquid local financial markets and bad loan-burdened banking sector, as well as political instability and election related macroeconomic weaknesses in some countries. Geopolitical tensions also weigh on investor sentiment, given the region’s geographical proximity to Turkey and the war-torn Middle East and its historically strong ties with Russia. However, SEE remains attractive for investments thanks to relatively cheap and well-educated labour force, low taxes and special incentives for big investors, ongoing EU integration, which presupposes further trade liberalisation, stronger rule of law, and continuing inflow of EU funds, as well as its strategic geographic position as a link between Europe and Asia. Last but not least, SEE offers robust growth potential with GDP per capita standing at just 43% of the EU average and forecasts for strengthening economic expansion in the coming years.

The general environment for SEE businesses has been improving since 2015. This trend is expected to continue with the average GDP growth in the region seen rising from 2.5% in 2015 to 2.8% in 2016 and gradually accelerating to 3.4% by 2021, according to the IMF’s April World Economic Outlook. Hence, the region’s growth is bound to outpace that of Western Europe, with the rates of GDP expansion in the EU and the Eurozone seen largely stable at around 1.8% and 1.5%, respectively, over the same period, bolstering up its economic convergence. Still, SEE has a lot to catch up. Its average GDP per capita, based on purchasing power parity (PPP), was equal to just 43% of the EU average in 2015, and is seen rising gradually to only 47% by 2021, a fact that suggests untapped growth potential for many industries. By country, Eurozone member Slovenia stands well ahead of its regional peers with GDP per capita equal to 82% of the EU average, followed by EU members Croatia, Romania, and Bulgaria with 57%, 55% and 51%, respectively. At the bottom of the table, the former Soviet republic of Moldova accounted for only 13% of the average EU GDP per capita, well below its nearest ranked Bosnia with 28% and Albania with 30%. Data for Kosovo was not available.

To gain a better understanding of the Top 100 SEE companies ranking, we should note that highest populated Romania has also the biggest economy, with GDP equal to 43% of the region’s total of $408.5 billion in 2015, according to IMF data. Next came Bulgaria and Croatia, each accounting for 12% of the total, followed by Slovenia with 10.5% share, Serbia with 8.9%, Bosnia and Herzegovina with 3.9%, Albania with 2.8%, Macedonia with 2.4%, Kosovo and Moldova with 1.6% each, and Montenegro with 1%.

Romania holds firm grip on revenue, earnings rankings, Dacia stays on top

Hence, it is not surprising that the region’s five biggest economies occupied almost all seats of the Top 100 SEE 2016 companies ranking, letting in only one Macedonian and one Bosnian firm, Romania enjoyed a clear dominance with 56 entrants (53 in 2015) with a combined revenue of 55.2 billion euro, more than half of the 102.5 billion euro made by all companies in the list*. Compared to the relative economy size, the data suggests that Romania’s corporate sector is better developed than the average for the region. The divergence is also evidenced by company earnings – Romania’s Top 100 entrants recorded a profit of 1.3 billion euro, 54% of the ranking’s total of 2.4 billion euro. Moreover, Romanian companies occupied half of the top 10 spots in this years’ ranking, including the top 3, with French-owned car maker Dacia keeping the gold medal for the second year, followed by two subsidiaries of Austria’s OMV.

In analysing the trends in corporate performance, we take out Oltchim, which topped the profitability and revenue growth rankings thanks to a controversial half a billion euro state debt write-off, which is being analysed by the European Commission for possible illegal state aid. The move, aimed at making the plant attractive to private investors, turned the company’s debts into revenues, helping it record 507 million euro profit for 2015, a 73% return on revenue, and a nearly fivefold jump in revenue to 697 million euro.

So, the biggest profit, of 264 million euro, was reported by Romania’s largest gas producer Romgaz, while second came Croatia’s state-owned power utility HEP with 213 million euro, followed by Romania’s hydropower producer Hidroelectrica, which is exiting insolvency after four years, with 199 million euro.

Slovenia and Bulgaria had 11 entrants each in the 2016 Top 100 SEE list. Although Bulgaria is bigger than Slovenia both in terms of GDP and population, Slovenia’s representatives achieved a bigger revenue of 13.4 billion euro in 2015, compared to Bulgarian companies’ 12.2 billion euro, showcasing the more advanced development of Slovenia’s corporate sector. However, Bulgarian firms made a profit of 70 million euro, as compared to Slovenian companies’ combined earnings of 51 million euro.

Close behind, Serbia and Croatia had 10 entrants in the ranking each, with 10.1 billion euro and 9.9 billion euro of revenues, respectively. These countries fared much better in terms of money making, with combined corporate earnings of 427 million euro and 385 million euro, respectively.

In addition to the five Romanian representatives in the top 10 list, one Slovenian, two Croatian, and two Bulgarian companies also came in. Ljubljana-listed energy group Petrol, which runs 464 fuel stations in the region, retained its fourth position in the ranking despite a 6.4% drop in revenue, while fifth-ranked Lukoil Neftochim Burgas, a Bulgarian refinery owned by Russia’s Lukoil, lost two places due to a 22% plunge in revenue. With a slightly smaller revenue drop, oil and gas group INA, jointly controlled by the Croatian government and Hungary’s MOL, lost one position to no. 6, while the Bulgarian unit of Hamburg-based international copper group Aurubis climbed one spot higher to no. 7 with a modest 2% rise in revenue. At no. 9 and 10 came two retailers – Kaufland Romania, part of German’s Schwarz Gruppe, and Croatia’s Konzum, part of the country’s biggest privately-owned group Agrokor – both gaining two positions from last year, with 15% and 11% jumps in revenue, respectively, underlining the rising consumption trend, which has been one of the main drivers of the region’s accelerating economic growth. Thus compiled, the top 10 companies list clearly shows the dominance of foreign ownership, with all but two of the entrants controlled by big foreign majors.

Upbeat sentiment returns as revenue, profits resume growth

Looking at the development of the corporate sector in SEE, as characterised by the region’s 100 biggest companies, we can say that optimism is returning in line with economic recovery. Although the top 100 companies’ cumulative revenue could not reach its 2013 level of 104 billion euro, it returned to growth, rising to 102.5 billion euro in 2015 from 100.6 billion euro in 2014. The progress is more remarkable on the profitability side – the combined net profit of the region’s biggest companies increased 1.3% last year to 2.37 billion euro following an 11% drop in the earnings of the 2015 ranking entrants..

Serbia had the strongest contribution to the rise in total revenues, closely followed by Romania. The revenues of Serbia’s 10 representatives in the 2016 ranking hit 10.1 billion euro, well above the 6.3 billion euro recorded by the six entrants in last year’s ranking. Romania, with two representatives more this year, saw a 2.7 billion euro rise in total revenues.

On the negative side, Croatia recorded the biggest decline, by 1.4 billion euro, as it lost one entrant, while Slovenia, with two representatives less, posted a 552 million euro fall, and Bulgaria, with the same number of entrants, recorded a 903 million euro drop.

At the same time, Bulgarian companies had the most meaningful contribution to earnings growth, as they swung to a combined profit of 70 million euro from a loss of 401 million euro a year ago. Next, Serbian entrants gained 333 million euro more to a cumulative profit of 427 million euro. On the opposite end of the table, Romania recorded a 378 million euro drop in aggregate earnings to 1.3 billion euro, and Croatia and Slovenia saw declines of 325 million and 256 million euro to 385 million euro and 51 million euro, respectively.

Individually, Romania’s oil and gas major OMV Petrom, which posted its first negative result in 12 years, badly hit by the global oil price slump, was the top underperformer, with a bottom line by 550 million euro worse than in 2014, while its Serbian state-owned peer Srbijagas turned into profit with an improvement by nearly 400 million euro. Romania’s state-owned railway infrastructure operator CFR was the biggest revenue gainer with a 522 million euro rise, while Kazakh-owned refinery Rompetrol was the most prominent revenue loser with an 833 million euro drop.

The number of newcomers to the 2016 Top 100 companies ranking was 17, up from 15 last year, whereas the entry threshold rose to 440 million euro from 420 million euro.

Oil and gas firms cede ground, retailers pocket good profits

The oil and gas sector retained its dominant position in the SEE Top 100 2016 ranking, accounting for one third of the biggest companies’ total revenue despite a 12% drop, amid tough global conditions last year. Wholesalers and retailers came in second with an 18% share, but shined with a 14.4% growth in revenue, more than double from 7% a year ago.

While oil and gas companies in this year’s list decreased by three to 24, that of retailers and wholesalers increased by the same number to 20, underscoring the growing significance of the sector for the local economies that have been fuelled by robust domestic consumption.

The profitability of the retail and wholesale segment also improved significantly, with average return on revenue jumping to 3% from 1.7% for 2014, as total earnings more than doubled to 561 million euro. The only company that saw a decline in revenues – of 4% – was Slovenian retailer Mercator, which has explained that its results were not entirely comparable to the preceding year due to structural changes such as the transfer of some of its foreign retail units to sister companies.

* These figures exclude insolvent Romanian chemicals producer Oltchim, a newcomer at 63rd place the ranking with outstanding improvements in both revenue and profitability based on factors not related to normal business operations.