After a decline in January, industrial production rebounded solidly in February from the previous month. The main contributor was automobile production, which rose by more than eight percent compared to January. The energy industry was also buoyant, with output rising by almost seven percent. Thanks to increased exports of cars and electricity, the foreign trade balance posted a higher-than-expected surplus of CZK 35 billion. 

After a decline in January, industrial production rebounded solidly in February from the previous month. The main contributor was automobile production, which rose by more than eight percent compared to January. The energy industry was also buoyant, with output rising by almost seven percent. Thanks to increased exports of cars and electricity, the foreign trade balance posted a higher-than-expected surplus of CZK 35 billion. However, the outlook for the coming months is highly uncertain in view of the tariff wars, and there is a risk of deterioration in both industrial production and foreign trade. The construction sector delivered mixed results, with building construction again in negative territory on a mom basis, while civil engineering posted solid growth.

Industrial production recovered after a decline in January, rising by 1.7% mom in February. However, it was down 1.4% yoy, mainly due to the lower number of working days in February compared to last year. This was surprisingly positive compared to the market consensus, as the median estimate was for a decline of 2.6%, while our estimate was for a decline of 3.5%.

The difference from our expectations was due to calendar and seasonal effects, as well as to revisions, when we had estimated that industrial production would increase by 1.5% mom. Adjusted for the effect of the different number of working days, industrial production in February was 1.5% higher yoy. Domestic industry may have played into the hands of efforts to get ahead of the tariffs. This could be a temporary boost. The tariffs announced by the U.S. are likely to have a significant negative impact on domestic industry, which is highly export-oriented, and not just because of the auto industry.

Manufacturing production rose 1.2% mom in February and was unchanged from February last year. This was led by higher automobile production, which increased by 8.2% compared to January. Meanwhile, leading sentiment indicators for the auto industry continue to point to an elevated outlook for future production. However, the announced tariffs on auto imports (effective April 3) and auto parts (May 3) will have a significant impact. However, direct imports of automobile production account for only a small share of exports to the US (less than 4%). The dominant items of industrial exports to the US are machinery and equipment, computers, electronic and optical equipment. Although only 3% of total exports go to the US, the US market is one of the most important destinations for Czech industrialists in terms of value-added exports, considering indirect channels through foreign subcontractors (in this case mainly Germany). According to OECD data from 2020, this share was about 6%.

The energy industry also made a significant contribution to higher production in February, with output rising by almost 7% mom. This was also indicated by high-frequency data from the electricity grid. The higher production was probably related to the unusually cold weather in February. Thus, a further increase in March is not expected, but a slight correction could occur.

The value of new orders in February was 1.3% lower than a year earlier, but 3.1% higher than in January. Like the manufacturing sector, the automotive industry was a major contributor, with the value of new orders rising by more than 10% mom. Overall, however, new orders have been volatile and, in general, manufacturers are still mainly concerned about weak demand for their inputs. This is now being compounded by heightened uncertainty and escalating tensions in global trade.

Unless there is a very sharp contraction in March, which leading indicators do not suggest, industrial production is likely to rise qoq in the first quarter of this year, after falling steadily last year. However, this would only be a correction of the poor performance at the end of last year. In addition, the frontloading may provide a temporary boost. Looking ahead, however, downside risks related to trade wars and heightened uncertainty play a dominant role. They could take the form of a significant negative shock to sentiment and lead companies to suspend investment activity.

Foreign trade surprises with significant surplus In February

The foreign trade balance was surprising with a significant surplus of CZK 35 bn, while the market consensus was for CZK 22 bn. Overall, however, the result is very good. It was mainly supported by a higher trade surplus in automobiles (CZK 9.6 bn), whose exports were 6% higher than last year. The trade surplus in electricity was also higher (CZK 2.6 billion). At the same time, the deficit in trade in oil and gas decreased (by CZK 2.7 billion) due to the development of prices on world markets. On the other hand, the overall balance was negatively affected by a decrease in the positive balance of trade in electrical equipment (by CZK 5.2 bln) and an increase in the deficit in trade in chemicals and preparations (by CZK 1.9 bln). The threatened introduction of tariffs did not have a significant impact on direct exports to the United States. The result was in line with developments over the past 12 months.

Since the beginning of the year, the foreign trade balance has reached a surplus of CZK 56.6 billion, which is CZK 13.5 billion more than in the same period last year. Exports increased by 6.4% yoy, while imports rose by 4.9%. For the year as a whole, we estimated a foreign trade surplus of CZK 127 billion, down from CZK 225 billion last year. However, the proposed tariffs from the United States will probably lead to a worse result. While direct exposure to the US is low (3%), EU exports to the US amount to 20%, so the Czech Republic would likely be significantly affected through this channel.

First signs of recovery in civil engineering

At the beginning of this year, construction output was in decline. The first two months of this year were marked by a seasonally adjusted mom decline; according to our calculations, after -1.2% in January, it was -0.6% in February. However, while in January both the main items (building construction and civil engineering) contributed to the decline, in February output in building construction fell sharply (-3.6% mom), while civil engineering showed a strong increase of 4.8% mom.

On an annual basis, construction output has been rising continuously since last November, i.e. for four months in a row. In February, however, growth was only 0.9% yoy, down from 7.1% yoy in January. This was mainly due to last year's high statistical base. While production in February was 0.7% higher than in February last year, it was 1.3% higher in the case of civil engineering.

There has been an improvement in civil engineering. From a level perspective, its volume in February climbed to its highest level since April 2022. Here, the improved performance can be seen in the context of higher public spending on infrastructure investment. On the other hand, building construction continues to stagnate, due both to the general economic uncertainty and to the still relatively restrictive monetary policy and more expensive financing.

The statistics for building permits issued in February were positive, although they were influenced by the approval of a larger number of large buildings (with a budget of over CZK 1 billion). The yoy increase in the indicative value of building permits was a high 30.2%. However, even after adjusting for large buildings, growth was more than solid at around 10%.

The housing sector remains subdued, but we may be seeing the first signs of improvement. The number of housing completions was down nearly 50% from February last year, with multi-family housing down 51.6%. More encouraging, however, are the statistics on the number of new housing starts. Here an increase of 40.1% was recorded, especially for multi-family houses (+237.8%!).

Confidence in the sector is slowly but surely improving. According to the March Conjuncture Survey, sentiment in the construction sector was at its highest level since July 2022. After last year's 1.4% decline in total construction output for the year, we expect growth of just under 2% this year. Lower financing costs because of lower interest rates yoy and the resulting higher investment activity should help.

4Q24 results are slightly weaker than expected at the operating level. This is probably due to lower trading margins. The halving of the dividend does not look optimistic at first glance, but it is now accompanied by share buybacks of the same amount as the dividend.

Colt CZ reported 4Q24 EBITDA of CZK1.6bn (+42% yoy), only slightly (-2.5%) below the market consensus. This was on revenues of CZK7.4bn (+50% yoy), which were +7.0% ahead of estimates. The FY results were ahead of Colt's revenue guidance and closer to the top end of the company's EBITDA target. Colt is considering a dividend of CZK15, half of last year's CZK30. However, it is also planning SBB at the same amount as the proposed dividend. Forecasts for this year point to revenue and EBITDA growth of 12% and 20% respectively.

4Q24 results are slightly weaker than expected at the operating level. This is probably due to lower trading margins. The halving of the dividend does not look optimistic at first glance, but it is now accompanied by share buybacks of the same amount as the dividend.

Colt CZ reported 4Q24 EBITDA of CZK1.6bn (+42% yoy), only slightly (-2.5%) below the market consensus. This was on revenues of CZK7.4bn (+50% yoy), which were +7.0% ahead of estimates. The FY results were ahead of Colt's revenue guidance and closer to the top end of the company's EBITDA target. Colt is considering a dividend of CZK15, half of last year's CZK30. However, it is also planning SBB at the same amount as the proposed dividend. Forecasts for this year point to revenue and EBITDA growth of 12% and 20% respectively.

Colt CZ reported strong 4Q24 sales growth of +50% yoy to CZK7.4bn. This is +7% ahead of the market consensus. The high yoy growth is mainly due to the consolidation of Sellier & Bellot and the increase in M&LE sales. This is probably related to the +17% yoy increase in long guns sales (with higher margins). All three key markets, which together account for almost 90% of sales, showed significant yoy growth. Sales in the Czech Republic increased by +59% yoy due to deliveries to the Czech Army. Sales in the US, the company's most important market, were up +48% yoy and the market there seems to be recovering as expected. In Europe (excluding the Czech Republic), sales grew by a massive +295% yoy. This is mainly due to the consolidation of the Group's ammunition business (S&B). In Canada, however, revenues declined (-54% yoy) due to the absence of a contract for Ukraine, which will not be repeated in 2024. Adjusted EBITDA reached CZK1.6bn in 4Q24, up +42% yoy. EBITDA was adjusted for current items (e.g. stock option plan) as well as for the write-off of investments in the Czech Republic and the US. Net profit was up +13% yoy to CZK640m.

Leverage: The net debt/EBITDA ratio was 2.26x at the end of last year. In 9M24, it was 2.83x. The decline occurred after the issuance of new shares in October to settle the S&B acquisition.

Achieving 2024 targets: For the full year last year, Colt CZ reported revenues of CZK22.4bn and EBITDA of CZK4.6bn. Colt slightly exceeded its revenue target and is close to the top end of its full-year EBITDA guidance.

Dividend & SBB: Colt CZ is proposing that shareholders approve a dividend of CZK847m or CZK15 per share. This would be less than the CZK30 paid last year. However, Colt also plans to buy back its own shares for the same amount, i.e. CZK847m. The proposed dividend represents approximately 43.8% of net profit and implies a gross yield of +1.9%. Our expectations for the dividend were more optimistic at CZK32.20, but we did not include the share buyback.

Guidance 2025: The current year will be the first year of full consolidation of S&B (2024 from 16 May). Colt's financial performance should increase as a result. According to our forecast, Colt should achieve total revenues of CZK25.2bn and EBITDA of CZK5.6bn this year. Colt's full-year guidance is for revenues of CZK25bn (+/- 7%, range CZK23.25-26.75bn) and EBITDA of CZK5.5bn (+/- 7%, range CZK5.1-5.9bn). This represents yoy revenue growth of almost +12% and EBITDA growth of +20%.