EY Romania: Yields expected by investors show fluctuating trends

Most of the analyzed industries continue to register a decrease in the cost of capital, a trend observed since the second part of 2021. However, there are also different developments in the case of certain sectors, according to the sectoral analysis of EY Romania.

At the end of the first half of 2023, the Telecommunications and Information Technology sectors were once again recording the lowest yields, while the Healthcare and Financials sectors are leading the top of the highest yields. The Financials sector recorded the most significant quarter-to-quarter fluctuation in the first part of the year.

Compared to the same period last year, the largest decreases in the cost of capital were recorded at the level of the Materials (-3.5 p.p.) and Consumer staples sectors (-3.1 p.p.). For the second quarter of 2023, the Real estate sector was also on a downward trend, with a decrease of 1.9 p.p., respectively the energy sector, which recorded a decrease of 1.2 p.p.

On the other hand, there were also significant increases in the cost of capital, both compared to the same period last year and compared to the previous analyzed quarter. The biggest increases were recorded in the Financials sector (+6.3 p.p. compared to the first quarter and +1.8 p.p. compared to the second quarter of 2022) and that of Consumer discretionary (+2.3p.p. compared to the first quarter and +3.2 p.p. compared to the same period of the previous year).

The evolution of yields was based on trends recorded by the component parts / constituents of the cost of capital. Compared to the previous quarter, there is a decrease in the risk-free rate and implicitly in the country risk premium, but also in the cost of debt, which has caused, for most sectors, the cost of capital to maintain its downward trend compared to the previous period. In contrast, the beta coefficient has increased, which contributed to the increase in the cost of capital, compared to the previous quarter, for several industries.

In the second quarter of 2023, albeit at a slower pace, central banks continued to raise interest rates to moderate rising inflation. Towards the end of the first semester, inflation appears to have peaked, with a high level of core inflation (characteristic of essential goods and services). Sustained growth in food prices, as well as volatility in energy prices continue to cause signs of concern, which could impact economic growth forecasts.

Nevertheless, Romania’s economy continues to show resilience in a difficult global context. In the second quarter of the current year, according to preliminary data published by Eurostat, Romania reported the second best annual growth rate in the EU, after Ireland, recording an advance of 2.7%. On a quarterly basis, the growth rate was 0.9% compared to the first three months of 2023.

In the context of persistent geopolitical and macroeconomic challenges, the outlook for some sectors shows signs of improvement, while for areas vulnerable to delicate budgetary and trade conditions, as well as for those targeted by new fiscal measures packages, the market experiences imbalances, higher economic costs and fear of recession.

“The current macroeconomic volatility, with positive signs on the supply side, but with geopolitical outlook still uncertain and a potential slowdown in economic growth, has caused the yields expected by investors to evolve differently, with declines for most sectors, but also significant increases for certain sectors, such as the Financials or the Consumer discretionary sectors. Against the background of the current macroeconomic and geopolitical context, we expect the cautious approach of investors to continue and this will be reflected in the future developments of yields. Adaptability will remain an important aspect for the period ahead,” declares Ileana Guțu, Partner and Coordinator of the Valuation, Financial Modeling and Economic Analysis department, EY Romania.

The analysis is based on financial data available at the end of the second quarter (Q2) of 2023, published by listed companies in 10 sectors: Consumer discretionary and Consumer staples, Energy, Financials, Healthcare, Industrials, Information technology, Materials, Real estate and Telecommunications services.

• Most of the financial multiples continue the downward trend of the last period, but there are sectors that recorded increases in the second quarter of the current year

The Healthcare sector (2.2x increase in the EBITDA multiple) and the Financials sector (1.6x increase in the PER multiple – Market Capitalization / Net Profit) registered notable increases compared to the previous quarter, the values being at a maximum of the last year and a half. At the level of the Real estate sector, increases were recorded in the second quarter of the current year (2.1x increase in the EBITDA multiple), but they are far from the historical highs recorded in the period immediately following the pandemic. For most sectors, the mid of 2023 indicates a slight decrease in financial multiples, justified by the prudence of investors who stay alert given the macroeconomic and geopolitical context.

“The mixed evolution of the financial multiples indicate the presence of a volatile environment in the market. The effects of the events of the first half of the year in certain sectors are incorporated in the level of multiples, such as for the Financials sector, which increased. At the same time, despite positive signals such as the disinflationary trend that began in the second quarter of 2023, we continue to observe an erosion of macroeconomic stability and lower economic growth forecasts, both for Romania and for neighbouring countries,” declares Ileana Guțu.

The sector analysis tool is developed by the Valuation, Economic Analysis and Financial Modelling Team (VME) within the Strategy and Transactions department of EY Romania, and the sectoral analysis can be accessed in the section of the EY website “Valuation Insights”/”Valuation Perspectives”, the database being updated on a quarterly basis.

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