Krka stock: an excellent company at a fair price

In this blog I will analyze the company Krka and whether the Krka shares are a good purchase at today's price. This blog is the first in a series of blogs in which I will analyze stocks in the Slovenian stock market. 

What Krka does? 

The Krka Group opeartes in the development, production, marketing and sale of products for human use (prescription drugs and over-the-counter drugs), veterinary products and health resort and tourist services.  

Production of products takes place in the controlling company in Slovenia and in Krka's subsidiaries in the Russian Federation, Poland, Croatia and Germany. In addition to production, these subsidiaries, with the exception of the Krka-Rus company in the Russian Federation, are engaged in marketing and sales. In China, production takes place in rented production facilities. Other subsidiaries outside Slovenia are engaged in marketing and/or sales and do not have production facilities.  

Company Terme Krka, d. o. o. Novo mesto is engaged in health resort and tourism activities and combines business units of Terme Dolenjske Toplice, Terme Šmarješke Toplice, Hotels Otočec and Talaso Strunjan. Terme Krka is also the majority owner of Golf Grad Otočec, d. o. o. 

Record Ebitda and lower earnings

In 2023, Krka generated the largest EBITDA (earnings before interest, taxes and depreciation) so far, namely EUR 504.2 million, which is 3% more than in 2022. Net profit amounted to EUR 313.7 million, and a year before just over EUR 360 million. The reason for the lower profit is due to the depreciation of the ruble's exchange rate against the euro in 2023 and the strong appreciation of the ruble the year before. 

In abusolut figures, sales in rubles in Russia grew by 15%, and in volume - by 7%, but due to the above-mentioned ruble instability, sales in euros fell by 10%. 

Growth in the future 

Under its strategic goals, Krka states as one of its objectives, and I quote : 

"In the next five years, our strategic goal is to achieve an average annual sales growth of at least 5% and achieve an above-average sales growth rate according to market dynamics. In individual markets and in selected therapeutic groups, we will continue to consolidate our position among the leading generic providers with our own brands or will rank among them." 

They set a target EBITDA margin for the next 5 years as 25% as it has been so far. 

As far as growth is concerned, I don't worry, Krka has achieved high sales growth in the past and I think they are able to achieve this in the future. 

I have not seen more beautiful balance sheet in my life

When I looked at the balance sheet of Krka, a smile was drawn on my face. First, Krka has over €2.7 billion in assets, on the other hand it has nearly €2.2 billion of capital and only under €600 million of long-term and short-term liabilities. Krka has €1.7 billion of short-term assets, compared to €433 million in short-term liabilities. 

The money position fell by just over EUR 300 million, for the following reasons:  

"Cash and cash equivalents amounted to €174.0 million, which is €344.9 million less than at the end of 2022, and represented 6.3% of the Krka Group's assets. The decline in cash and cash equivalents from the beginning to the end of 2023 is mainly due to the reallocation of investments of surplus cash. Part of the cash and cash equivalents were transferred to current loans and the majority to investments at fair value through profit or loss." 

Negative cash flows 

When I first flipped over Krka's annual report, the only thing that worried me about negative cash flow and the decline in operating cash flow, but after a better review, I don't worry anymore was to explain: 

• First, operating profit before changes in net current assets was €105 million lower, which was because net profit was basically lower. 

• Secondly, receivables have increased by EUR 100 million and, for this, the change in the stock of operating receivables is shown as negative ( because receivables are a promise of payment in the future and the money will come to the account in the future) 

• Krka paid almost €40 million more tax on profits 

INVESTING CASH FLOWS 

Was negative compared to the previous year: 

• Krka lent more money this year than usual 

• Outflows from acquisitions of short-term financial investments increased by just over EUR 400 million than usual 

CASH FLOWS FROM FINANCING 

They were more negative than last year, because Krka increased dividend payments. 

In summary, cash was negative due to slightly lower operating cash flow (due to more receivables and more taxes paid). Cash flows from investing activities were negative due to the distribution of money, as I wrote on my balance sheet. 

Receivables

As I said with the balance sheet and cash flow, the receivables are increasing and this could be a problem, because what happens if receivables are not paid? According to the annual report, 95% of receivables are secured and therefore the risk is lower. 

Return on assets and capital 

Another important thing when analyzing a company is how well the company manages its money, and the two indicators that tell us this are equity and asset endowment. 

Krka has ROA of 11.5%, and ROE is 14.5%, which is generally above average and also good. 

Valuation

This year, Krka will propose a new dividend at the General Meeting, which is expected to amount to 7.5 EUR, which would mean 14% more than last year. But just in case, I will use last year's dividend, which amounted to EUR 6.6 per share, for my analysis. 

In my analysis, I made three scenarios, normal, good and bad. 

In the normal scenario, I assumed that Krka's projected would grow by 10% for the first five years of analysis, and the other five years 5%. 

In the bad scenario, I assumed that Krka's projected will grow by 5% for the first five years of analysis and 3% for the other five years. 

In a good scenario, I assumed that Krka's projected will grow by 15% for the first five years of analysis and 10% for the other five years. 

When I weighed all the scenarios (normal 60%, good 20%, bad 20%), I got that the value of Krka based on dividends for the desired 10% return is around 119 EUR per share, which is slightly lower than the current share price. 

In my opinion, good case is difficult to implement, because when Krka probably confirms a new dividend this year, the payment will represent 75% of the profit, and if Krka wants to continue to increase dividends so quickly, profits will have to rise as quickly as a dividend. 

Conclusion

Krka is, in my opinion, a good company at a fair price. The balance sheet is excellent, the company operates like never before. 

Krka as a stock is currently a better buying than 95% of all shares on the market. 

It pays high, with an increase of 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 respectful revenue growth ahead of it. 

Krka is for anyone who wants their portfolio to be exposed to the pharmaceutical industry and at the same time wants a dividend + share growth. My prediction is that the Krka stock will have a higher return in the coming years than the S&P 500 when we include dividends. 

I have decided that Krka is currently sold at a fair price and I will buy it. As Warren Buffet says:

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price" 

And Krka is a wonderful company at a fair price.