Prime Transaction: "Electrica, Hidroelectrica and Erste Bank - helped by the context of the markets in which they operate"

Electrica (EL) and Hidroelectrica (H2O), the two major issuers from the Bucharest Stock Exchange (BVB) involved in the supply of energy, together with Erste Bank (EBS), had very good financial results in the fourth quarter of last year, all three companies being helped by the context of the markets in which they operate, according to the latest analysis report of the Prime Transaction brokerage house.

According to the attached document, perhaps the best results among those analyzed in this report were from Sphera Franchise Group, with high profit growth even after the base effect from the pandemic period has passed. Romgaz had a big increase in profit, but due to a base effect. "The worst results were without a doubt Alro (ALR), with the worst result in history despite the subsidies received. On a smaller scale, Nuclearelectrica and Transelectrica had profit declines, driven by different reasons, in the first case of overtaxation, and in the second of the base effect compared to 2022.

• Hidroelectrica's profit - at a new historical high

Hidroelectrica remained the issuer with the best results among the energy producers, the main reasons being again this time the higher production and the balance brought by the supply segment, according to Prime. Revenues from contracts with customers increased in the last quarter of 2023 by 14.63%, to 5.11 billion lei, the increase coming entirely from the supply segment.

On the other hand, revenues from energy production decreased by 23.26%, to 2.55 billion lei, the decline being mainly determined by the 20.73% lower selling price (including the balancing market).

"It should be taken into account that, in total, the amount of energy sold increased by 14.71%, a rate of growth very close to that of revenues from contracts with customers. It is, therefore, a combination of higher production and its redirection to a segment where the selling price not only did not fall as much as the production price, but actually increased quite a bit compared to the previous year," it says in the report.

Net profit rose by 35.3% on a quarterly basis, to 2.39 billion lei. "For the whole year, the net profit reached 6.34 billion lei, increasing by 41.96%. It is a new historical maximum, and in this way Hidroelectrica officially reaches the first place among Romanian issuers from BVB and in terms of net profit, not just capitalization, exceeding by more than 50% the consolidated result of OMV Petrom from the year 2023", it is mentioned in the report.

• "We can expect a stabilization of Electrica's results, at least until the moment when the fixed-price energy purchase system is modified"

As for Electrica, Prime mentions that the end of the year brought a considerable improvement in results, which is otherwise expected given that the fourth quarter of 2022 was quite weak. As in the rest of the year, a parallel downward trend was visible in both revenues and expenses with the main raw material, electricity.

In the last quarter of 2023, the income from the main activities decreased by 3.8%, up to 2.66 billion lei, a decline that was compensated by the position "Other operating income", which mainly includes the income from subsidies. The operating profit was pushed up by the lower expenses for the purchase of electricity and gas and the higher subsidies recorded, while the quarterly net profit rose by 704.9%, to 203.03 million lei, while the loss net financial did not grow at such a rapid pace.

"We can expect a stabilization of Electrica's results, at least until the moment when the fixed-price energy purchase system will be modified again. If the price of energy in Europe remains below the equivalent of 450 lei/MWh, it is likely that at some point during the year either the elimination of the current mechanism or the downward adjustment of the price will be discussed, which could have a positive impact for Electrica," the Prime report states.

• Erste - the growth rate is maintained at a good level, but below that of the first part of the year

Erste Group Bank's net profit rose at a pace similar to the rest of the year, helped by income from core business but also by lower cost of risk, according to Prime Transaction. Net interest income and commission income followed the same trend observed in Romanian banks. In total, they appreciated by 14.61% (+319.73 million euros) in the fourth quarter, after an increase of 18.42% in January-September.

The cost of risk had, as in the first three quarters of the year, a positive evolution, this time more widely. The net expenditure with this element decreased by 140.96 million, from 141.26 million euros in the fourth quarter of 2022 to only 299 thousand euros in the fourth quarter of 2023, at the level of the whole year the decrease was 171.71 million euros, according to Prime. Net profit had a quarterly increase of 26.72%, and for the whole year the increase was higher, of 47.05%, up to 3.92 billion euros. "In the case of Erste, the forecasts for 2024 are more difficult to achieve, as the bank operates in several countries with different particularities, but all these markets have one thing in common, namely the tendency of interest rates to fall.

Therefore, in terms of revenues, it would be expected to witness a ceiling here as well, being more difficult to estimate, however, how the "non-core" operational revenues and the most important categories of operational expenses will evolve", it is stated in the Prime report.

• Banca Transilvania - decrease in quarterly profit, but annual profit reaches a new historical high

Banca Transilvania continued the trend of tempering the pace of growth for net interest income, with the focus starting to shift again to fee income, according to Prime. In the last quarter of the year, net interest income still had a higher percentage increase than that from commissions, but the difference narrowed considerably. Thus, net interest income increased by 10.86%, up to 1.42 billion lei in the fourth quarter of 2023, and those from commissions by 8.62%, up to 342.6 million lei.

"The evolution comes against the background of the decrease in interest rates on the money market, determined by the tempering of inflation during the past year", the report states. On the other hand, the increase in income did not materialize in a positive evolution of the profit, the expenses having a higher increase in total, the most contribution coming from the net cost of the risk. Quarterly net profit decreased by 14.5%, up to 693.01 million lei, while annual net profit remained above that of the previous year, increasing by 19.94%, to 2.98 billion lei, marking a new historical high.

"Profit could be helped by gains from the sale of government securities and possibly by the shift of the cost of risk from expense to net income, following the trend of other banks," Prime's report said.

• Sphera - big fourth-quarter profit growth, even without base effect

The operator of KFC, Pizza Hut and Taco Bell restaurants returned to the strong results it started 2023 with, helped by the fact that the end of the year usually brings the best quarter for the business it runs, according to the brokers report. Restaurant sales increased by 6.83%, to 394.44 million lei, well below the 12.7% percentage recorded in the first nine months of the year, given that in the first half of 2023 it benefited from a positive base effect compared to the similar period in 2022, when there were still effects of the COVID pandemic.

The net profit amounted to 36.42 million lei in the fourth quarter, increasing by 59.95%, and at the level of the whole year the increase was higher, by 83.17%, up to 69.51 million lei. Other companies whose results were dissected in this Prime analysis report are: Romgaz, Nuclearelectrica, Transelectrica, Transgaz, Conpet, MedLife, Digi Communications, Alro Slatina, One United Properties and Aquila.