Adris reinitiated at HOLD, TP HRK 451 - Smart decisions lead to diversification advantages

Tourism business was negatively affected by the COVID-19 crisis but the food industry and insurance SBUs successfully mitigated part of the adverse effect on the groups top and bottom lines
Strong performance in cash generation is expected in the following years
We reinitiate our coverage with a HOLD recommendation for preferred shares and a HOLD recommendation for common shares

Adris grupa has proven its excellence in managing the operating activities of its three strategic business units (SBU) - tourism, food industry and insurance - and 2020 was no exception. Although the tourism business was negatively affected by the COVID-19 crisis, the food industry and insurance SBUs successfully mitigated part of the adverse effect on the groups top and bottom lines. In Q1-3 20 the business activities of all companies within the group were focused on liquidity preservation and implementation of cost optimisation measures in order to protect the investment potential and long-term sustainability of the group. Although Adris grupa refrained from paying a dividend for FY 19, it is still returning some of the value to its shareholders via share repurchases on the Zagreb Stock Exchange. The rationale for the latter is the groups net cash position (calculated without financial assets of Croatia osiguranje) and strong fundamentals. The high financial capacity, due to a relatively low financial leverage on the consolidated group level, was maintained throughout FY 20 and thus provided financial stability in unprecedented business surroundings. Hence, we reinitiate our coverage with a HOLD recommendation for preferred shares and a HOLD recommendation for common shares.

With the bitter taste of cash burn due to loans granted to Agrokor group behind us, we expect a strong performance in cash generation in the forecast period. The only exception should be FY 23e due to an assumed one-off cash outflow in the amount of HRK 222.7 mn. Namely, the group has a financial obligation on the basis of an Option Agreement from 2018 that will come due in less than five years. A net cash position and strong OCF generation should ensure a growing dividend policy of the group from 2022e (expected FY 21e DPS of HRK 18.2 to be paid out in FY 22e). We also reckon that the current share buyback programme will be rolled over until at least FY 24e. With the assumed dynamic, the group should hold 8.2% of treasury shares at the end of FY 25e, which is still below the threshold of 10%.

Valuation: We set our SOTP fair value at HRK 7,872 mn, which translates into a 12m TP for preferred shares of HRK 451 per share and a 12m TP for common shares of HRK 501 per share. Due to the lack of voting rights we set a targeted discount of 10% for preferred shares. Within the group we see Cromaris as a true growing company, potentially offering a nice pick-up in valuation at the end of the forecast period due to the assumed higher production capacities that should meet the growing demand. The operational restructuring of Croatia osiguranje is bearing fruit and thus we reckon with an evident effect on the companys profitability. Furthermore, Croatia osiguranje is investing more than HRK 200 mn into digitalisation and the development of new products. We reckon with a gradual recovery of business activities in the tourism segment and a bottoming-out in Q1 21e.