CEE companies survived the crisis very well
One third of firms even grew during the economic slump
Most Central and Eastern European companies made it through the crisis in one piece, sales have returned to pre-crisis levels, profits are not quite back there yet. One third of companies were even able to increase their sales and profits during the crisis. Polish, Czech and Austrian firms saw their business develop disproportionately well. Although the returns are lower than the cost of capital, and have been so since 2008, investors are confident of the region’s future development: EBITDA multiples are back at pre-crisis levels. These are the findings of the study on "CEE after the crisis – Back to business as usual?", which analyzed data from 1,200 companies – 89% of them listed on the stock exchange – from 13 CEE countries.
The examined companies survived the crisis very well. Sales tended to be above pre-crisis levels even before the end of 2010, although profits still have a way to go. What is noticeable is that the gap between small companies (< EUR 50 m in sales) and their larger peers is growing all the time in terms of sales and profitability: Small companies were already growing much slower before the crisis, reacted relatively late to the crisis and are now struggling to catch up again.
This is apparent in profitability (EBIT margins) above all else. Whereas CEE companies enjoyed average profitability of ten to twelve% before the crisis, the figure is now one third lower (5-7%). Small companies even had to stomach negative EBIT (-5%) in 2009 and were able to raise their EBIT margins to just four% in 2010. Generally speaking, we do not think EBIT margins will reach pre-crisis levels anytime soon; we expect to see a sideways trend in the coming years.
The crisis separates the wheat from the chaff
The cleft between low and top performers is widening in Central and Eastern Europe, and the crisis served to accelerate this development even more. In the period 2004 through 2010, 58% of the companies surveyed saw sales increase and profits rise. In the years between 2007 and 2009, the figure was 28%. The low-performers group, on the other hand, has stagnated since 2004. So, almost one third of companies grew even during the crisis, while another 12% were at least able to improve their profit. This shows that well managed companies can develop in any market environment.
Poland ahead of Czech Republic and Austria
How little correlation exists between company development and the trend in GDP is shown by an international comparison: Polish companies generated more than 12% sales growth per year between 2005 and 2009, while Czech and Austrian firms managed around 8%. GDP growth in these countries was much lower. In Romania and Russia, on the other hand, sales grew less than 2% per year – in spite of the economy growing almost 4%. The success factors also vary from country to country: Poland has above all benefited from the strength of its domestic demand and – in its automotive industry – from the scrapping bonus in Germany. The Czech Republic, the CEE's most mature market, was able to benefit from its status as a production site with an attractive tax framework and a well developed infrastructure. Austrian companies, for their part, used their international links – including those with Germany – to cushion the blow from the crisis.
Taking an industry perspective, the construction and real estate sector, services, consumer goods and retail are among the outperformers in sales and EBIT growth. The manufacturing industry and the metal & mining sector saw a negative development. The construction industry is a special case, though: the full extent of the crisis is only now being seen as a result of the long project lead times. Pre-crisis contracts have now been completed and economic stimulus programs are drawing to a close.
Equity ratio disproportionately high
The surveyed companies have on average a 50% equity ratio and are therefore better capitalized than their Western European counterparts. This figure is primarily down to the ownership structure featuring a strong core of shareholders and the limited opportunities for debt financing. In this aspect, too, it is apparent that small companies lost a significant amount of equity in the crisis, whereas the losses suffered by medium-sized and large companies were more moderate.
The companies have now returned to pre-crisis levels with respect to liquidity as well: their cash balances in 2010 averaged 8.8% of total assets, while in 2009 the average was 7.7%. However, the risk of default remains high, especially in the construction and energy sector. More than a quarter of the companies analyzed are still at high risk. Generally speaking, CEE companies were not profitable for investors in the past three years: The cost of capital has been higher than the returns since 2008, the owners are losing money. Investors are nevertheless optimistic: the EBITDA multiples have come back to their pre-crisis levels, even though the macroeconomic prospects are drastically diminished. This attests to the great confidence of the investors, who believe that the analyzed companies are capable of outperforming the market.
Most Central and Eastern European companies made it through the crisis in one piece, sales have returned to pre-crisis levels, profits are not quite back there yet. One third of companies were even able to increase their sales and profits during the crisis. Polish, Czech and Austrian firms saw their business develop disproportionately well. Although the returns are lower than the cost of capital, and have been so since 2008, investors are confident of the region’s future development: EBITDA multiples are back at pre-crisis levels. These are the findings of the study on "CEE after the crisis – Back to business as usual?", which analyzed data from 1,200 companies – 89% of them listed on the stock exchange – from 13 CEE countries.
The examined companies survived the crisis very well. Sales tended to be above pre-crisis levels even before the end of 2010, although profits still have a way to go. What is noticeable is that the gap between small companies (< EUR 50 m in sales) and their larger peers is growing all the time in terms of sales and profitability: Small companies were already growing much slower before the crisis, reacted relatively late to the crisis and are now struggling to catch up again.
This is apparent in profitability (EBIT margins) above all else. Whereas CEE companies enjoyed average profitability of ten to twelve% before the crisis, the figure is now one third lower (5-7%). Small companies even had to stomach negative EBIT (-5%) in 2009 and were able to raise their EBIT margins to just four% in 2010. Generally speaking, we do not think EBIT margins will reach pre-crisis levels anytime soon; we expect to see a sideways trend in the coming years.
The crisis separates the wheat from the chaff
The cleft between low and top performers is widening in Central and Eastern Europe, and the crisis served to accelerate this development even more. In the period 2004 through 2010, 58% of the companies surveyed saw sales increase and profits rise. In the years between 2007 and 2009, the figure was 28%. The low-performers group, on the other hand, has stagnated since 2004. So, almost one third of companies grew even during the crisis, while another 12% were at least able to improve their profit. This shows that well managed companies can develop in any market environment.
Poland ahead of Czech Republic and Austria
How little correlation exists between company development and the trend in GDP is shown by an international comparison: Polish companies generated more than 12% sales growth per year between 2005 and 2009, while Czech and Austrian firms managed around 8%. GDP growth in these countries was much lower. In Romania and Russia, on the other hand, sales grew less than 2% per year – in spite of the economy growing almost 4%. The success factors also vary from country to country: Poland has above all benefited from the strength of its domestic demand and – in its automotive industry – from the scrapping bonus in Germany. The Czech Republic, the CEE's most mature market, was able to benefit from its status as a production site with an attractive tax framework and a well developed infrastructure. Austrian companies, for their part, used their international links – including those with Germany – to cushion the blow from the crisis.
Taking an industry perspective, the construction and real estate sector, services, consumer goods and retail are among the outperformers in sales and EBIT growth. The manufacturing industry and the metal & mining sector saw a negative development. The construction industry is a special case, though: the full extent of the crisis is only now being seen as a result of the long project lead times. Pre-crisis contracts have now been completed and economic stimulus programs are drawing to a close.
Equity ratio disproportionately high
The surveyed companies have on average a 50% equity ratio and are therefore better capitalized than their Western European counterparts. This figure is primarily down to the ownership structure featuring a strong core of shareholders and the limited opportunities for debt financing. In this aspect, too, it is apparent that small companies lost a significant amount of equity in the crisis, whereas the losses suffered by medium-sized and large companies were more moderate.
The companies have now returned to pre-crisis levels with respect to liquidity as well: their cash balances in 2010 averaged 8.8% of total assets, while in 2009 the average was 7.7%. However, the risk of default remains high, especially in the construction and energy sector. More than a quarter of the companies analyzed are still at high risk. Generally speaking, CEE companies were not profitable for investors in the past three years: The cost of capital has been higher than the returns since 2008, the owners are losing money. Investors are nevertheless optimistic: the EBITDA multiples have come back to their pre-crisis levels, even though the macroeconomic prospects are drastically diminished. This attests to the great confidence of the investors, who believe that the analyzed companies are capable of outperforming the market.
