Korado revenues declined in Q2’20 but margins and dividend kept intact

Korado Bulgaria

Korado Bulgaria

Revenues of Korado Bulgaria contracted by 27.5% y/y to BGN 8.4m in Q2’20. Profit margins remained solid with EBITDA margin at 19% and net income margin at 14%.

Sales decline of Korado in Q2

Q2’20 will be remembered with the enormous decline of sales to key markets like Romania (94% y/y drop), Ukraine (45% y/y drop) and Russia (100% y/y drop). However, deliveries to the parent company, which is the biggest buyer of Korado production, fell only 2% y/y during the quarter. The domestic market also posted similar decline. A look beyond the past results give us a picture of weaker construction volumes in Eastern Europe between 5% and 10% for different countries, according to the Eastern European Construction Forecasting Association (EECFA). Considering the already huge impact of COVID-19 during the second quarter, it is safe to expect that sales will rebound in H2’20 and FY2021.

Volumes slashed 25% y/y in Q2’20

Korado sold a total of 107k radiators or 25% lower in volumes in Q2’20. The drop in end product prices is relatively small but persistent since the beginning of the year. Tubular radiators were only 14% y/y down and continued to outperform the total sales volumes.

Margins remained solid

Total operating expenses fell less than the contraction of revenues, thus pressuring margins. However, the difference was not as big as one could expect regarding the severity of economic contraction in the region. Korado’s EBITDA margin fell from 20% to 18.8% as compared to year ago. This is still one of the best quarterly margin for the last 5 years. Net income stood at BGN 1.17m or BGN 0.09 EPS, the result mirroring the performance during Q1’20 but was 36% lower y/y.

Post-COVID opportunities

Effects of the COVID-19 pandemic started to unfold in mid-Mar’20. It is still unclear how the crisis would develop further in 2020 but similar containment measures are less likely in Europe. Korado managed to maintain its deliveries without major disruptions.

Steel prices recovered from the 4-year lows, recorded in March and added some pressure on Korado’s margins in second half of 2020. Further appreciation of steel will depend on the recovery of construction and other cyclical sectors, which will support the demand of radiators. ELANA Trading research team does not consider price pressure as an imminent risk for Korado’s profit. A significant factor for Korado continues to be the consolidation in the radiators production sector that has been in place for the past few years. The COVID-19 crisis could intensify this process as some of the smaller and weaker players would be pushed out of the market.

ELANA Trading research team comments that this would give Korado an opportunity to take over part of competitors’ shares, thus surmounting the negative effect from the slowdown in construction activity.

Dividend policy kept intact

Despite the pandemic’s emergence and the economic slowdown coming along with it, Korado has kept its dividend policy intact. The company distributed BGN 0.19 semi-annual dividend in June, bringing the annual dividend for FY2019 to BGN 0.29, flat y/y, yielding 4.73% annually (based on ex-div prices).

Read in detail in the ELANA Trading equity research report on Korado Bulgaria Q2 financial results in ELANA Online