Industrial production for December ended with a worse result than we and the market expected. This was due to lower auto production as well as a decline in output in energy-intensive industries. In contrast, automobiles, along with computer and electrical and optical equipment production, improved December's foreign trade result significantly. The Czech construction output data was also better than expected.

Industrial production for December ended with a worse result than we and the market expected. This was due to lower auto production as well as a decline in output in energy-intensive industries. In contrast, automobiles, along with computer and electrical and optical equipment production, improved December's foreign trade result significantly. The Czech construction output data was also better than expected.

Industrial production rose 0.2% mom in real terms in December, following a high growth of 3.1% in November. In annual terms, it was 4.0% higher in real terms. For the full year 2022, this meant that industrial production rose by 1.7%. December's industrial result finished below expectations, with analysts' consensus forecasting 3.3% yoy growth, but the reality was just 1.3% NSA.

December's growth was significantly held back by manufacturing output. It fell by 1.1% mom after rising by a strong 2.5% in November, mainly due to a recovery in automotive production. In contrast, the motor vehicle manufacturing sector recorded a mom decline of 0.6% in December. However, for the whole of last year, it was the automotive industry that made a significant contribution to the growth in total output, with production rising by a strong 11.7% last year, also due to a lower comparative base. The decline in production continued in December, particularly in energy-intensive industries, which were still apparently suffering from the effects of high energy prices. The production of electricity, gas, heat and air conditioning again contributed to overall output growth, rising by 12.1% mom, as output appeared to be still recovering from the slump in October and partly in November. For the whole of this year, we expect Czech industry to grow by 1.7%.

While industrial production was dragged down by car production, the foreign trade result was, on the contrary, significantly improved by car exports. The deficit at current prices was only CZK1.2 billion and was CZK15 billion lower compared to the same month in 2021. In particular, the balance was favourably affected by the yoy improvement in trade in computers, electronic and optical equipment (CZK +11 billion) and a higher surplus in trade in motor vehicles (CZK +9.1 billion). Conversely, the balance was negatively affected by a deeper deficit in trade in oil and natural gas (CZK -8.8 billion), which reflected higher commodity prices and higher imported quantities. The deficit on electrical equipment was higher by CZK3.1 billion. Exports fell by 0.8% mom on a seasonally adjusted basis, while imports fell by 6.8%. For the full year 2022, the foreign trade balance reached a deficit of CZK198 billion, which was CZK189.2 billion more than in the previous year. This year, we expect the trade balance deficit to be roughly halved (CZK -110bn).

December's construction output data was also pleasing after November's disappointment. It grew by 1.2% mom, with civil engineering making a significant contribution. It improved by a significant 5.8% in December. On the other hand, building engineering declined by 0.6% compared to November. For the whole of last year, construction output grew by 1.9% in real terms, broadly in line with the result for 2021 (+2.0%). Growth was evenly split between the two segments, with both civil and building engineering growing at a rate of 1.9% last year.

Statistics on building permits issued show that civil engineering should fare slightly better this year, while ground construction is likely to be under pressure. In December, 6,700 building permits were issued, a significant 15.6% less than a year ago. In contrast, the indicative value of total building permits issued rose by 8.5% yoy. This is mainly due to the permits issued for large transport infrastructure construction. Mixed news came from the residential housing market. The number of completed dwellings rose by 31.6% yoy to 4 786 dwellings, but the number of housing starts fell by 21.9% yoy to just 3 597 dwellings. Overall, we are concerned about a slight decline in construction output this year; we estimate a 0.6% decrease.

CEZ announced its outlook for this year. CEZ management's estimates take into account the impact of the windfall tax. At the EBITDA level, management estimates earnings at CZK105-125bn and adjusted net profit at CZK30-40bn. CEZ estimates the average realised electricity price at EUR120-160/MWh, for 45-47MWh of generated electricity. The levy on generation revenues should be in the range of CZK7-33bn, while the windfall tax should be CZK20-30bn. The standard corporate tax will be CZK13-17bn.

CEZ announced its outlook for this year. CEZ management's estimates take into account the impact of the windfall tax. At the EBITDA level, management estimates earnings at CZK105-125bn and adjusted net profit at CZK30-40bn. CEZ estimates the average realised electricity price at EUR120-160/MWh, for 45-47MWh of generated electricity. The levy on generation revenues should be in the range of CZK7-33bn, while the windfall tax should be CZK20-30bn. The standard corporate tax will be CZK13-17bn.

In 2025 CEZ expects EBITDA of CZK100-110bn (previous CZK65-70bn) at an average price of EUR165/MWh and for 2030 CZK125-132bn (previous CZK80-85bn) at a price of EUR 105/MWh.

CEZ's outlook for the windfall tax burden is more optimistic than our projection. Our estimate assumed a net profit of about CZK30bn this year, which is the lower end of the company's new estimate. In addition, there is still an open (not yet sold) production volume of about 20%. This could further increase average realised electricity prices. 

CEZ's new estimate for net profit of CZK30-40bn suggests a dividend of CZK45-59 (from 2023 profits, i.e. payout in 2024) per share, at a payout ratio of 80% of net profit. This corresponds to a gross yield of 5-6.5%. We still see the possibility of a 100% distribution, which would imply a dividend of CZK56-74 with a yield of 6-8%. 

Please note that according to the target (net profit of CZK65-75bn) for 2022 and the current dividend policy, CZK100-110 per share (10-12% yield) should be paid this year (from 2022 profits). The results should be published on 21 March 2023.