Sectoral analysis of EY Romania: Yields expected by investors show fluctuating trends, in the context of rising monet

• Expected returns for the analyzed industries recorded a mixed evolution in the second quarter of the current year compared to the first three months of the year, with increasing volatility observed

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 of 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 (+2.3 p.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 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 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. 

About Sector analysis tool:

The tool provides estimates of the evolution of the yield, but also of the relative value in 10 sectors, based on the data recorded from 30 September 2016 to the present (30 June 2023). The return on each sector was estimated by determining the cost of equity (for the financial services sector) and the weighted average cost of capital (for the other sectors analyzed). More details on the calculation methodology are available here.

The relative value of each of the analyzed sectors was estimated by quantifying the financial multipliers, which are valuation indicators widely used for company valuations.

According to the principle that similar assets are sold on the market at similar prices, by using multipliers resulting from an analysis of a group of comparable companies and applying it to specific indicators of the subject company, one can obtain its value from a market perspective. More details on the calculation methodology are available here.

The analysis is based on data processing generated by the S&P Capital IQ database and considers a sample of representative listed companies from Europe (including Romania), related to each analyzed sector, as they are classified by the cited source. More details about the analyzed sectors and the main players within each are available here.

It should be considered:

• This exercise did not include a liquidity analysis or an analysis of the individual characteristics (e.g. company size, income level) of each company in the comparable group used. The criteria based on which the selection was made takes into account the geographical region and the sectoral classification, as presented in the database used (S&P Capital IQ).
• The substantiated discount rates do not include specific premiums (e.g. the premium for the size of the subject company), as this analysis is sectoral and not an individual analysis, specific to a particular company. This premium may be applied, where appropriate.
• The levels of the cost of capital presented shall be expressed in euro. To ensure data comparison as well as the correctness of the calculation, they should be applied to cash flows denominated in the same currency.
• In the application of multipliers, it should be considered that there are no two identical companies, as they are differentiated by multiple individual characteristics. Thus, the approach should be applied taking this into account with the necessary adjustments where appropriate. Also, in the application of multipliers is very relevant the financial indicator of the company to which it is applied (e.g., revenue, EBITDA). To have a clear perspective and as close to reality as possible, the indicator should be an adjusted one, that is, to reflect a level that the company expects to be able to achieve constantly.