The March data from Czech industry and construction was disappointing. While both statistics showed solid growth in the previous month, they did not build on their successes in March and declined in both mom and yoy terms. The only positive surprise was a significant surplus in the foreign trade balance. However, this was to some extent due to lower imports, which were caused by a shortfall in deliveries of electric motors to Skoda Auto from the German plant in Kassel. The coming months, however, should bring both higher construction activity and industrial production, according to our forecast.

The March data from Czech industry and construction was disappointing. While both statistics showed solid growth in the previous month, they did not build on their successes in March and declined in both mom and yoy terms. The only positive surprise was a significant surplus in the foreign trade balance. However, this was to some extent due to lower imports, which were caused by a shortfall in deliveries of electric motors to Skoda Auto from the German plant in Kassel. The coming months, however, should bring both higher construction activity and industrial production, according to our forecast.

Industrial production weakened in March, declining by 1.6% mom. This did not follow the 2.2% increase in February. On the contrary, domestic production statistics continued their volatile trend, primarily reflecting fluctuating car production. In yoy terms, industrial production was down by a significant 11.1% in March, in line with our expectations (11.0%) but below the market consensus, which had expected a more modest decline of 8.4%. The significant drop reflects the lower number of working days this March compared to last year, with three fewer days. Adjusted for this effect, the March decline was "only" 2.7%.

Manufacturing production fell by 1.9% compared to February, partially correcting the previous 2.5% mom increase. Output weakened in most manufacturing sectors in March. The most significant contributors to the mom decline were car manufacturing (-2.5%), machinery ( 4.5%) and fabricated metal products (-2.7%). In the automotive industry, a shortage of parts apparently had an impact, which curtailed production at the country's largest carmaker in March. The gradual resolution of these still-persistent problems should help recover production in the automotive industry, which remains strong despite the fluctuating trend. This probably reflects the completion of previous orders that continue to support production in this sector, which is then primarily reflected in the high foreign trade surplus.

Although insufficient demand remains the biggest barrier to production growth according to the survey of industrialists for the second quarter of this year, the development of new orders has shown a rather positive trend since the end of last year. Although the value of new orders fell by 1.5% in March compared to February, it was still 5.1% higher in annual terms. In the automotive industry alone, the value of new orders is growing at an even higher pace (by 11% yoy), although it also declined slightly in March (by 0.8% mom).

The outlook for industrial production this year remains uncertain. Sentiment indicators have improved slightly since the beginning of this year, but their low levels still indicate a strong slowdown in activity. The positive development in German industry at the beginning of the year (January and February), which we believe did not continue in March, is also a source of moderate optimism. A convincing recovery in German industry is therefore not yet possible. While production in the key automotive industry will continue to benefit from the completion of previous orders, this effect is likely to weaken noticeably. Weak external demand in the context of the lacklustre performance of the German economy is thus likely to be a limiting factor in the recovery of domestic industry.

Foreign trade results were surprising again with a significant surplus

The balance of foreign trade was surprising with a high surplus of CZK 39.3 billion, while our estimate and the market consensus was below CZK 20 billion. The March result was CZK 22.3 billion higher compared to the same month last year. The balance sheet was in positive territory for the seventh month in a row.

This time, the surplus was mainly due to a decline in imports. They were lower by more than CZK 36 billion yoy, of which almost CZK 32 billion were lower imports of products in the manufacturing industry. This was probably due to the loss of deliveries of electric motors to Škoda Auto from the German plant in Kassel. This was then reflected in a swing in trade in electrical equipment from a liability to an asset, where the overall result was CZK 9 billion better yoy. The machinery and equipment category (CZK +2.8 billion) and motor vehicles (CZK +2.3 billion) also showed a balance increase. At the same time, the deficit in base metals narrowed (by CZK 2.3 billion) and trade in other transport equipment posted an asset instead of a liability in February (CZK +1.4 billion). The trade in petroleum products and electricity had a negative impact on the March result.

In the coming months, foreign trade should be boosted by exports of automobiles, where we are still seeing orders from previous periods being processed, but at the same time the resumption of deliveries of German electric motors will probably lead to an increase in imports. Overall, we expect a solid performance from Czech foreign trade to continue. For the whole of this year, we estimate a surplus of more than CZK 200bn after last year's CZK 124bn.  

Despite favourable weather in March, construction activity froze

While February's construction output was pleasing, March's numbers were a big disappointment. From December to February, the sector's output grew continuously mom, cumulatively by around seven percent, but in March alone a 7.8% mom decline was recorded. Thus, in real terms, the volume of construction output has fallen back two years.

March marked a significant reversal of the dynamics also in terms of yoy development. Whereas in February, engineering construction output was still growing by 3.6% yoy, March showed a significant 8.3% yoy decline. In terms of structure, civil engineering is significantly better off, with a yoy decline of only 0.9% in March, compared to -11.1% for building construction.

At first glance, the statistics on new building permits issued were pleasing. The indicative value of new building permits was up by a significant 49.1% yoy. However, as the CZSO points out, this is mainly due to the impact of permits for six buildings with a budget of over CZK 1 billion. This supports the hypothesis of a significantly better situation in civil engineering, where the investment activity of the public sector is positively reflected. Adjusted for these six buildings, the indicative value of permits issued was 7% lower yoy.

Statistics from the residential market did not bring much joy either. Here, primarily subdivided projects are being completed. However, developers have not rushed into new ones in the light of economic uncertainty and still more expensive financing. Yoy, 0.22% more flats were completed, but the number of new starts was 17.6% lower than in March last year.

In the first three months of this year, construction output fell by an average of 4.0% yoy. However, in the context of continued solid investment activity, further interest rate cuts and thus cheaper financing, and an overall improvement in the economic situation, we expect this turnaround to be reflected in construction activity as the year progresses. For the whole of this year, we therefore expect the construction sector to eventually show modest growth in the low single-digit percentages after last year's 2.6% decline.

The results for the first quarter of this year will be higher than last year. One of the reasons for this is the absence of excess sales levies. We expect EBITDA of CZK38.4bn (+18.2% yoy) and net profit of CZK12.1bn (+11.4% yoy). Earnings will continue to be negatively impacted by the special tax on windfall profits, which still applies this year. We expect a dividend proposal at the upper end of the current dividend policy (CZK39-52). We expect CEZ to reiterate its full-year guidance.

Announcement date: Tuesday, 14 March 2024 at 7:00 a.m. CET

The results for the first quarter of this year will be higher than last year. One of the reasons for this is the absence of excess sales levies. We expect EBITDA of CZK38.4bn (+18.2% yoy) and net profit of CZK12.1bn (+11.4% yoy). Earnings will continue to be negatively impacted by the special tax on windfall profits, which still applies this year. We expect a dividend proposal at the upper end of the current dividend policy (CZK39-52). We expect CEZ to reiterate its full-year guidance.

We expect the realized power price in 1Q24 to be roughly the same as in the previous year. Total sales should increase by +7.6% yoy to CZK100.5bn. The main difference is in the levies on excess sales (CZK 10bn), which only applied in the first quarter last year. According to our forecasts, EBITDA profit should reach CZK38.4bn, up +18.2% yoy. Net profit will again be impacted by the special windfall profits tax, which will be in effect for 2023-2025. Together with the increase in the standard corporate tax rate from 19% to 21%, we expect the effective tax rate to be around 55%. We estimate net income at CZK12.1bn (+11.4% yoy).

Dividend: We see the reporting of quarterly figures as an opportunity to announce the dividend proposal from last year's results. Please note that the dividend proposal must be on the agenda of the Annual General Meeting. It must be published at least one month before the meeting. The date of this year's AGM has not yet been set. However, it is traditionally held at the end of June (last year on June 26). The dividend policy of 60-80% of net profit suggests a dividend of CZK39-52 per share. We expect the CEZ Board's proposal to be in this range. In our bull-case scenario, like last year, the Ministry of Finance will make a counterproposal to the Board’s proposal and will want to pay out the whole of last year's profit. This would be equivalent to CZK65 per share, i.e. a gross dividend yield of +7.3%.