Is it worth buying Krka shares even after the payment of the 7.5 EUR dividend

Krka recently paid the highest dividend ever 7.5 euros, while Krka shares reached new heights, as much as EUR 150 per share. For us investors, however, the question arises:  

Can investors still earn anything despite the fact that we will have to wait a whole year for the dividend and that Krka shares have reached the highest value of all time? 

Summary: 

• Overview of Krka's semi-annual report - is everything as good as it looks? 

• Why profits are really as high as last year 

• Are Krka shares still worth buying 

  
  

Semi-Annual Report: SUCCESS or Not? 

In the first half of 2024, Krka generated sales revenues of EUR 985.4 million, compared to EUR 920.4 million last year, which represents a 7% increase in revenues. 

Gross profit increased by 4% from EUR 543.7 million to EUR 566.4 million, i.e. costs grew faster than sales and they did, costs increased by 11% from EUR 376.6 million to EUR 418.5 million.  

The EBITDA margin fell from 31.8% to 28.8%. 

Earnings per share, on the other hand, rose by 31% from €5.49 to €7.20 per share. 

Key indicators ROE (return on equity(profits/equity)) and ROA (return on assets(profits/assets)): 

• Return on equity rose from 15.4% to 19.3%, but is still lower than in 2022, when it was 22.6%. 

• Return on assets rose from 12.4% to 15.4%, but is still lower than in 2022 when it was 17.6%. 

All the data show that the semi-annual report was a great success compared to last year's. 

However, it is necessary to look at the background - Net financial result and why profits of EUR 60 million are higher than last year 

Gross profits amounted to EUR 236.2 million last year and EUR 237.6 million this year. The difference in profits was made by financial revenues, last year's net financial result amounted to EUR -29.3 million due to the exchange rate difference between currencies (the main reason why Krka lost EUR 29.3 million last year was the fall in the value of the ruble against the euro), and this year the net financial result amounted to EUR +29.5 million,  which were in favor of Krka this year. 

For this reason, I will assess Krka's half-year report as successful, but not as much better than the previous ones, as the profits are higher only because the currency markets have turned in Krka's favour this year, which does not mean that this will happen in the future. 

So are Krka shares worth buying? 

So are Krka shares worth buying? To answer this question, I will use a discounted free cash flow analysis. I'm trying to predict the growth of profits over the next ten years. 

Assumptions: 

I used three scenarios in my analysis: normal, bad, and good. In all cases, I used as a basis the earnings per share at the end of this year, which is 11.28 euros. I calculated this figure by adding up earnings per share for the first half of this year and the second half of the previous year. 

In my analysis, I divided the assumptions according to three scenarios: normal, bad, and good. In the normal scenario, I projected growth of 7% in the first five years and 4% in the next five years. In a worst-case scenario, I expected slightly slower growth, at 3% in the first five years and only 1% in the next five. In an optimistic scenario, I predicted higher growth – 8% in the first five years and 5% in the next five. 

In the final analysis, I evaluated each of the scenarios according to the probability of their realization. The normal scenario has the highest probability, namely 60%. Both the bad and good scenarios have the same probability, namely 20%. I took these probabilities into account in the final calculation of the value. that is, how much each value represents in the final calculation). 

In addition, I also included the company's net cash or indebtedness in the calculation, which added EUR 4.5 per share due to Krka's considerable liquidity. 

Since the analyses are based on a number of assumptions, I also took into account a safety margin of 20% to insure myself against potential errors. If I want to achieve a return of about 10%, including the safety margin, I need to buy the share at a price of around 135 euros. 

Findings

For the final word, I will use what I wrote in the previous blog about the company Krka, because nothing has changed, since then my thesis has only been strengthened: 

In my opinion, Krka is a great company at a fair price. The balance sheet is excellent, the company is operating like never before.  

Krka as a stock is, in my opinion, currently better than 95% of all stocks on the global market.  

It pays a high dividend, with the increase coming in at just over 6% compared to other pharmaceutical companies such as Johnson & Johnson 3.32%, Bristol-Myers Squibb Co 5.46%, AbbVie Inc 3.79%, Merck & Co Inc 2.42%, AstraZeneca plc 1.89%, Amgen Inc 2.89%.  

And unlike most, it still has respectable revenue growth ahead of it.  

My prediction is that Krka stock will bring me more than the S&P 500 in the coming years when we include dividends.  

I've decided that Krka is currently selling at a fair price and I'm going to buy it as well. As Warren Buffet puts it:  

"It's much better to buy a beautiful company at a fair price than an honest company at a wonderful price"  

And Krka is a wonderful company at a fair price. 

If you are interested in a more in-depth analysis of Krka's 2023 Annual Report, read my previous blog entitled Krka Shares : A Great Company at a Fair Price at this link: https://www.oskarvolcansek.com/en/post/krka-stock-an-excellent-company-at-a-fair-price

Important: Past performance is not a guarantee of future results. I do not give any recommendations or advice as to whether any investment is suitable for a particular investor. I am not professionally trained and I am not a licensed securities dealer, broker or investment advisor or investment bank. I'm just an amateur enthusiast of the stock market, and all the records are just an expression of my observation.