CAPITAL MARKET

SAX downfall continues on blue chip losses

Market developments
The equity market continued its downfall during the two weeks ending June 10, reaching several consecutive historical lows. The SAX index fell on June 10 to a new all-time low of 109.78, breaking yet another critical mark of 110. The decline was spurred by falling blue chip prices, with Nafta and Slovnaft falling to new historical lows of 518 Sk and 650 Sk, respectively.
With the holiday season and general elections approaching, no impetus exists for a reversal of the current trend. Nevertheless, almost all central and eastern European stock markets experienced a decline in the week ending June 5. The Russian market has lost 49% in dollar terms since the beginning of this year. The Slovak market has lost 39%, while the Czech and Hungarian markets have reported only marginal declines over the same period.

Market developments

The equity market continued its downfall during the two weeks ending June 10, reaching several consecutive historical lows. The SAX index fell on June 10 to a new all-time low of 109.78, breaking yet another critical mark of 110. The decline was spurred by falling blue chip prices, with Nafta and Slovnaft falling to new historical lows of 518 Sk and 650 Sk, respectively.

With the holiday season and general elections approaching, no impetus exists for a reversal of the current trend. Nevertheless, almost all central and eastern European stock markets experienced a decline in the week ending June 5. The Russian market has lost 49% in dollar terms since the beginning of this year. The Slovak market has lost 39%, while the Czech and Hungarian markets have reported only marginal declines over the same period. The only market still on the rise is the Polish market, which has gained 11.7% since January 1. The stable political situation in this country, persistently strong economic growth, continuing reforms and a transparent capital market are the main reasons for investors' faith in the Polish equity market.

Corporate trends

Nafta's AGM decided recently that the company would pay out a dividend of 16 Sk for 1997, which translates into a dividend yield of 2.8% and a pay-out ratio of 16.3%. The company's plan for this year forecasts sales of 5.69 billion Sk ($165.2 million) and a pre-tax profit of 688 million ($20 million). The company said it expected flat earnings in 1999, but was awaiting a strong resumption of earnings growth after 2000. Between 1998 and 2000, Nafta plans to invest 7.2 billion Sk ($209.3 million), and pump another 3.1 billion Sk ($90.1 million) into geological surveys. The company plans to finance these investments with internally generated funds and loans. This year, the company will invest 1.6 billion Sk ($46.5 million), mostly into an underground storage facility in Gajary, and reconstruction of Láb I-III underground storage facilities. Expenditures for the geological survey will total 481 million Sk, which should help maintain annual oil extraction at 50,000 tons and gas extraction at 300 million m3.

Nafta is currently trading at historical low of 518 Sk, and its valuation is very undemanding at 98 and 99PER's of 4.2x. The very low valuation is caused by extremely weak market sentiment over the past few weeks, and increasing country political risk. The issue of political risk is particularly exacerbated in the case of Nafta, as some opposition parties have threatened to revise certain privatization decisions of the current government, citing Nafta as a case in point. Although the current opposition is unlikely to actually change the current state of ownership rights, some investors might perceive it as a factor in their valuation. For this reason, a price recovery of the stock should not occur before the September national elections.

The insurance company Slovenská Poisťovňa (SP) will pay out a dividend of 100 Sk for 1997, which represents a 48.8% pay-out ratio and a dividend yield of 15.4%. 1997 net profit was 307.5 million ($8.9 million), EPS was 205 Sk and 97PER is 3.17x. In spite of its 62% market share and dominant position on the Slovak insurance market in 1997, the company's net profit declined by 14.4% compared with 1996, mainly because SP paid 7.6 billion Sk in compensation for damages, up 25.2% over 1996.

The compensation figure was jacked up by the July floods. The stock's low liquidity and the company's intransparency explain the currently very low valuation. Also, the insurer is controlled by the state and its decisions are not geared towards maximizing shareholder's value. Should the elections bring a change in the government, a sell-off of the 51% stake would become likely, which could make the stock an interesting investment opportunity.

SP underwrote the entire volume of the new share issue of the IRB commercial bank, worth 2 billion Sk ($58 million). SP is one of the bank's largest creditors, with outstanding claims worth approximately 4 billion Sk. The IRB has been under the National Bank of Slovakia's (NBS) caretaker administration since last December because of severe capital inadequacy. The new issue increased the bank's registered capital to a mere 3 billion Sk. SP became the owner of a 66.67% stake in the bank. Consequently, the stakes of IRB's previous main shareholders, the FNM and VSŽ, dropped from 34% to 11.34% and from 15% to 5%, respectively. However, the real influence of these shareholders could be much higher, since both are SP shareholders, with the FNM holding a controlling 50.5% stake and the steel giant a 20% stake. IRB's future remains bleak, since the recent capital increase is too low to enable the bank to take measures such as a radical restructuring of its loan portfolio, including heavy provisioning for bad loans. The entry of a strong foreign banking institution is vital to the recovery of this troubled bank.


Vladimír Zlacký is an analyst for ING Barings.

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