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

Top 100 See - - Top 100 Companies -

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 fron­trun­ner 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.

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