Prime Transaction: "Hidroelectrica, TTS and Purcari - large profit increases generated by the core activity"

Hidroelectrica ( H2O ), Transport Trade Services ( TTS ) and Purcari Wineries ( WINE ) had big profit increases in the third quarter, driven by core business, according to the latest analysis report from brokerage firm Prime Transaction.

"The largest producer of electricity on the local market continued to report very good results, in contrast to the other issuers in the sector, which managed, at best, to remain in the same area as last year", it is mentioned in the report, with reference to Hidroelectrica.

According to the document, the growth was mainly based on a short-term factor - the favorable hydrological conditions, which allowed for a 20% higher energy production on a quarterly basis, up to 3.48 TWh in the third quarter of 2023. The amount total energy sold increased even more, by 25.7%, to 3.95 TWh, the difference coming from energy purchases from the market. Revenues did not have a growth rate as high, appreciating by only 11.86%, up to 2.58 billion lei in the third quarter of 2023.

"The difference comes from the 11% lower average selling price , decreasing from 732.4 lei/MWh to 651.72 lei/MWh, caused by the change in the legislative framework and the introduction of the mechanism for the centralized purchase of electricity. Thus, most of the energy produced by the company must be sold at the fixed price of 450 lei/MWh, far below what could normally be obtained on the free market", according to the report.

On the other hand, the expenses for the purchased electricity decreased, so that the operating profit amounted to 1.4 billion lei, with 30.6% above that of the third quarter of 2022.

"Considering that the improvement in results occurred without the influence of important conjunctural elements, we can expect that in the fourth quarter we will see a profit at least at the level of the same period last year. Entering the supply market, which at first seemed a questionable idea to say the least, ended up being, for the time being, the difference between some capped results, as in the case of Romgaz or Nuclearelectrica, and a continuation of profit growth", it is stated in report.

• "The net profit of Purcari for the last twelve months reached 65.6 million lei; if it remains the same at the end of the year, it will be a record for the period after 2017"

Purcari Wineries reported a net profit of 18.2 million lei, 25.8% higher than in the third quarter, the increase being mainly based on higher revenues and to a lesser extent favorable developments on the expenses side .

Revenues increased by 20%, to 91.1 million lei in the quarter of 2023, while the percentage gross margin remained in an area close to that of the third quarter of last year, namely 40.5%.

By category, wine sales delivered the biggest growth for both revenue and gross profit, according to the report. "The net profit for the last twelve months at the group level reached 65.6 million lei, and if it remains there at the end of the year it will set a record for the period after 2017, for which we have available data".

• "The port operation segment of Transport Trade Services will most likely continue to have percentage increases above the group average"

Transport Trade Services had a quarterly profit increase of 27.1%, up to 95.5 million lei, a dynamic that appeared even without the base effect of the past "Without the base effect from 2022, Transport Trade Services' revenue and profit are starting to grow at a slower rate, but still at a good level," the report states.

By segment, the largest increase in revenues came from forwarding, which also has the largest share in total revenues, reaching up to 248 million lei, followed by the river transport segment, with an increase of 17.5% , to 164.9 million lei and that of port operation, with an increase of 64.5%, to 50.6 million lei.

"The port operation segment will most likely continue to have percentage increases above the group average, TTS recently expanding in this area by purchasing the port operator Decirom, which was included in the consolidation starting from August 1, 2023", it is stated in report.

• Alro deepened its quarterly loss despite the return of subsidies

Alro Slatina probably had the weakest results of those analyzed, with the aluminum producer deepening its quarterly loss despite the return of subsidies.

Revenues from contracts with customers and cost of goods sold had divergent developments, with revenues falling by 7.7%, to 682.8 million lei, while expenses increased by 9.6%, to 682.8 million lei.

"This caused the gross profit to become a gross loss of 78.2 million lei, compared to a positive result of 45.6 million lei, in the same period of 2022," the report states.

The decrease in gross profit to the negative territory is also due to the downward modification of the estimates regarding the subsidies to which the group is entitled based on the scheme for subsidizing indirect costs with emissions, the report also mentions.

"At the end of the year, it's hard to believe that the loss could be avoided, and it's even possible for it to climb even higher than it is nine months ago. The situation is not entirely new, Alro's business has been over time exposed to fluctuations on the international commodity markets, which brought it years with high profits, but also others with commensurate losses", according to the document.

• "It was most likely a minimum point for Transelectrica"

According to the team at Prime, among the issuers with poor results, the "triplet" of state companies consisting of Electrica (EL), Transelectrica (TEL) and Transgaz (TGN) stand out, the first two with negative base effects compared to 2022, and the third with a cyclical decrease in income.

Electrica had a decrease in quarterly profit of 55.9%, to 312.7 million lei, but without the base effect the results would have increased quite a lot, according to the report.

In the case of Transelectrica, the net result decreased even more strongly, by 88.5%, to 44.9 million lei, in the third quarter of 2022, the results being affected by three negative base effects, as well as by a negative influence of zero operations -advantage.

"Most likely it was a minimum point, in the last quarter of the year we are expected to see at least a maintenance at a level close to last year, if not an improvement," according to the report.

For Romgaz and Nuclearelectrica, the results remained, by and large, in the same area as last year. In the case of the gas producer, there were two important factors that influenced its financial performance, both originating from state decisions.

"The first and most important of these factors was the capping of the price of natural gas, the main effect of which was the drastic decrease in the turnover of the group, to 1.91 billion lei, in the third quarter of 2023 (-42.3%) ", according to the report.

The profit of the last twelve months remains in the area of 2.5 billion lei, which seems to be the profit ceiling allowed by the State, but includes a weak fourth quarter 2022, in which the "solidarity" contribution was recorded for the first time , in a higher amount than in the following quarters. "Therefore, it is possible that at the end of the year things will be a bit better, and the net profit in 2023 will be even higher than last year," the document states.

Nuclearelectrica was unable to benefit from the increase in average selling price due to higher taxes, according to Prime's Analysis Department. "The outlook remains neutral for the end of the year, as it is expected, on the one hand, that the effect of the bilateral contracts concluded in the past on the average price will become more and more diluted, and on the other hand, that the additional income tax will decrease compared to the level from the first three quarters of the year", the document states.

Digi Communications (DIGI) was hit by rising interest expenses and Aquila Part Prod Com (AQ) by weak results of a business segment with a marginal weight in the group, according to Prime Transaction's analysis report.