Quick thought on Krka (Rus/Ukr)

Feeling some indirect Rus/Ukr pain.

This is not investment advice. Please read the disclaimer. I might own discussed stock(s) currently or at a later time.

If you prefer to read the pdf version click here. (links may not work in pdf)

Krka lost a third of its market capitalization, trading down -30% from €120 (Jan 18th) to €80 (Feb 28th). The reason seems obvious: Russia + Ukraine accounted for 27.6% of sales in FY’21. Now with shares back at €89.80, Krka shows a market capitalization of €2,945m, based on 32.793m shares outstanding, thereof 1.706m treasury shares (eff. Mcap €2,792m). With 448m (Q1) of cash and equivalents and investments, eff. EV equals c. 2,343m.

Uncertainties around Rus/Ukr are numerous and include (1) losing Russian assets (seizures) or business permanently, (2) losing a big share of sales/profits and (3) unknown profitability level of Krka’s Rus/Ukr operations (above avg margins?).

There are not many assets in Ukraine since merely distribution is done locally, anyway, the business is operational. In contrary, Krka has lots of fixed assets in its single biggest market Russia to obtain status of domestic producer. Due to lower competition, and fewer tenders in Eastern markets, and its size, one can assume that Russia’s profitability is above average. Thus, in an adverse scenario of ‘losing Russian business’ Krka’s net income would be hit harder than Russian sales contribution would indicate. 

So far business is going surprisingly well in Rus/Ukr it seems and medical products were never sanctioned. RUB excess liquidity is converted to EUR at rates close to BBG data and upstreamed, Krka recently stated. Hedges are no longer possible increasing FX risk (but RUB strengthed recently). Thus, there seems a reasonable chance that Rus/Ukr is not truly impaired (that much), and might not be longer-term. Indeed, they might come out with a stronger market position.

Krka’s financial position is very solid and the busines profitable, which renders the possibility of catstrophic results for the whole firm rather unexistent. Further, initial profit guidance was not lowered, a rather high dividend payment can be expected, and though share buybacks have recently stopped — a legal neccessity according to the firm — they shall restart on the first possible day of H1 results release (July 21).
 

2022 guidance is for net income of €300m still. Q1 seems rather strong with 90.7m or 30% of FY guidance, but Q1 might have profited from some special effects (restocking) despite weakening RUB. Still, based on historic seasonality guidance seems conservative, especially if we account for a much stronger RUB (net RUB position) and a potentially better positioning due to Krka’s integrated model, whereas others might run into difficulties getting raw materials, ingredients.

Krka is attractive at current price levels or so it seems based on net income guidance of 300m indicating a 10x P/E and somewhat cheaper based on effective EV for an implied earnings yield of 12.8% for a non-cyclical business with profitable growth (>5% until 2026, 15%+ ROEs since 2019). A dividend per share of € 5.63 makes for a 6.2% yield. Using net cash and even taking on some debt for an acquisition might be a nice catalyst. Earnings yields (or price) would come down if some portion of its Rus/Ukr business is lost. Net income of 210m or merely 70% of guidance still results in 7.1% and 9.0% earnig yields.

(as of June 7, shares trade somewhat higher at €95)

Further reads

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