Market Monitor - Focus on machinery - Czech Republic

• Growth helped by demand from automotive sector and exports
• Profit margins expected to remain stable
• Suppliers to construction still face more payment delays

The Czech machines/engineering industry will benefit from the solid performance of the Czech economy, which is expected to grow 3.0% in 2015 and 3.1% in 2016, with investments up 4.1% and 4.2% respectively. Industrial production is expected to increase 5.2% in 2015. The 3% growth in machinery production in 2014 was mainly due to the solid performance of the automotive industry, which is the main customer for machines. The very export- oriented Czech machinery industry also benefits from the recovery in the eurozone and a stable exchange rate of the koruna against the euro. Additionally the appreciation of the USD against the koruna helps machinery businesses when exporting to overseas markets. Just a few Czech machinery businesses are negatively affected by the repercussions of the Ukraine crisis.

In contrast to 2013, profits and losses of machinery businesses were not negatively affected by exchange rate volatility in 2014. Throughout 2014 and into 2015, profit margins have remained stable, and are expected to remain so in the second half of 2015. Machinery companies’ equity is above the average of all manufacturing sectors. Because Czech banks are quite conservative, few machinery companies are highly leveraged. While dependence on bank finance is average, banks are positive about the sector in general, providing enough liquidity.

Payments in the Czech machinery sector take around 40 days, with ‘days sales outstanding’ (DSO) for smaller businesses of about 50 days. However, machinery businesses focused mainly on the construction sector are still experiencing higher DSO in that market, despite a modest rebound of construction activity in the first half of 2015. But this rebound is mainly due to public infrastructure projects, while construction demand in the private sector is still low. Projects are still realized with low or even negative margins and the payment morale remains poor.

Over the past six months the number of notifications of non-payment levelled off, while machinery insolvencies even decreased. It is expected that the machinery sector´s credit risk environment will remain benign in the coming months. As a result, our underwriting approach to the sector remains relatively open.

When asked by a client in this sector to assess a buyer’s creditworthiness, we look at our client’s own trading experience with the buyer, check the buyer’s key financial figures, distribution of receivables, creditors and stocks to ensure that they are within an acceptable range. However, we still pay extra attention to those machinery companies dependent on the construction industry.