Returns expected by investors, moderate advance

The cost of capital continued an upward trend in the third quarter of the current year, outlined since the second part of 2021, according to the EY Romania sector analysis.

From the perspective of developments compared to the same period last year, the largest increases in the cost of capital were recorded at the level of the medical services sector (+7.5 p.p.) and that of real estate properties (+6.3 p.p.). Notable exceptions are the raw materials and financial services sectors, where yield decreases compared to the second quarter of the current year are 1.5 p.p. (percentage points), respectively 3.2 p.p. A negative quarterly evolution was also recorded in the case of consumer goods (-0.1 p.p. compared to the previous quarter), recorded after solid growth in previous quarters.

Currently, the investment climate is significantly influenced by inflationary pressures, against the background of the continuous increase in the prices of energy and raw materials, generated mainly as a result of the military invasion launched by Russia in Ukraine, an event that had a direct impact on the supply and production chains. Corroborating these aspects with the current tightening of monetary policies by central banks and the tendency to maintain the behavior of increasing monetary policy interest rates in the near future, it can be seen that the balance increasingly leans towards a slowdown in global economic growth for the period next.

However, even though the effects of recent events on supply chains are still strongly felt and affecting economic activity, the pressure is beginning to ease, with the impact of constraints on production and economic activity lessening. In this sense, for the third quarter there was an increase in the return expected by investors in the industrial products sector (compared to the decrease recorded in the second quarter, compared to the first quarter of the current year). In addition, against the background of increasing fears of European states regarding energy security, the European Union is increasingly focusing its attention on efforts to support the transition to the green economy, by supporting sustainable investments and encouraging non-financial reporting by companies, especially in the field of ESG (environment, social, governance) and “green bonds” financing.

At the end of the third quarter, the trend from the previous quarter is maintained, namely the registration of the lowest returns at the level of the telecommunications and information technology sectors, while the real estate sector is, once again, at the maximum level.

In the third quarter of the current year, the cost of equity exceeded the psychological threshold of 10% for all analyzed sectors, thus marking a new stage from the perspective of investors’ appetite.

The analysis is based on financial data available at the end of the third quarter (Q3) of 2022, published by listed companies in 10 sectors: consumer and FMCG, energy, financial services, medical services, industrial products, technology information, raw materials, real estate and telecommunications services.

Against the backdrop of the tempering of estimates for the next period, generated by the macroeconomic and geopolitical context, the multipliers related to the real estate sector, respectively raw materials (which previously recorded increases), join the general downward trend. The values ​​related to the multipliers were also influenced by the evolution of the stock market, which recorded a decrease in the last year of the main indices at the global level, the Romanian market following the same trend.

Coupled with gloomy estimates of high inflation and aggressive monetary policy scenario, the real estate sector suffered the biggest decline in EBITDA multiplier (by 5.1x), reaching its lowest level in the last 7 years (11, 9x), followed by that of financial services (decrease by 3.7x), also at the minimum of the same period. These developments can cause reminiscences from the perspective of the sectors that were most affected as a result of the global financial crisis of 2008, thus requiring increased attention on them in the coming period, as well as on the potential cumulative impact at the level of the other sectors.

The only sectors that did not register quarterly stagnation or negative developments from the perspective of the EBITDA multiplier are telecommunications (increase by 0.3x, at the level of 9.4x) and consumer goods (increase by 0.3x, at the level of 11 , 4x).

“Despite the decrease in Romania’s gross domestic product, recorded in the first part of the current year, the economic growth forecasts for 2022 have been improved by 0.6 p.p. (from 2.9% to 3.5%), against the background of developments beyond expectations in sectors such as transport, IT services, business services, as well as the acceleration of growth in construction activity in the second half of current year. They were also stimulated by the measures regarding the implementation of the PNRR, as well as by the state aid programs. However, even if the estimates regarding the evolution of the economy for the next period are revised upward, the economic potential is restrained by inflationary pressures and the contraction of the industrial sector in Europe, against the disruptive background of problems related to supply chains and the increase in energy prices”, said Ileana Guțu, Partner and Coordinator of the Valuation, financial modeling and economic analysis department, EY Romania.