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CAPITAL MARKET

SAX continues down dreary path to record lows

Market developments
Negative market sentiment continues to forestall any activity on the equity market. On May 13, the stock market once again reached an all-time low as the Slovak Stock Index (SAX) fell to 128.02, down 3.2% from two weeks ago. The decline was brought about by heavy losses to Nafta (-13.1%), VÚB(-11.4%) and VSŽ (-5.0%) which together account for one third of SAX capitalization.

Market developments

Negative market sentiment continues to forestall any activity on the equity market. On May 13, the stock market once again reached an all-time low as the Slovak Stock Index (SAX) fell to 128.02, down 3.2% from two weeks ago. The decline was brought about by heavy losses to Nafta (-13.1%), VÚB(-11.4%) and VSŽ (-5.0%) which together account for one third of SAX capitalization.

At its May 12 regular session, the government approved its Capital Market Report, which outlined the main problems of the Slovak capital market. According to the report, 23% of publicly traded companies did not fulfil their obligation to disclose information to the public in 1H97. The quality of provided information is questionable, the report continued, and cannot serve as a basis for investment decisions. Another negative feature of the Slovak capital market is that companies fail to declare public offers for purchasing remaining shares after they acquire at least 30% in another company. Insider trading also remains a serious problem, the report concluded.

We consider the approval the report as a positive signal that the cabinet has begun to be concerned about the currently dysfunctional state of the capital market.

Corporate developments

The largest Slovak paint producer, Chemolak, will pay out a dividend of 12 Sk per share for 1997, which at the current share price of 620 Sk corresponds to a dividend yield of 1.9% and a pay-out ratio of 10%. In 1996, Chemolak paid out a dividend of 10 Sk per share.

The annual sharelholders meeting, or AGM, of shipbuilder Slovenské Lodenice (SLK) last week approved a reduction in its registered capital from 656.3 million Sk to 626.3 million Sk. Chirana-Prema, which together with Slovenská Kreditná Banka owned 38% of the ship builder's shares, sold its stake prior to the AGM to Banka Slovakia. During 1Q98, SLK had a pre-tax profit of 7.3 million Sk on total revenues of 759.8 million Sk. We have not observed any signs of radical corporate restructuring within SLK, and hence have not changed our conservative view of the company's future performance.

Plastics producer Plastika Nitra posted a pre-tax profit of 75.5 million Sk for 1997, 26% down compared to 1996. The net profit was 45 million Sk, which translated into earnings per share, or EPS, of 65 Sk. After the AGM, the company decided to pay out a dividend of 25 Sk, up from 10 Sk in 1996. This corresponds to a 40% pay-out ratio, and at the current share price of 355 Sk, the dividend yield is 7.04%. In 1997, Plastika faced increasing difficulties with competition on both domestic and export markets. The company's profit was also adversely affected by a weak Czech crown and high interest rates. The company reported that its 1Q98 net profit was only 1.2 million Sk, a mere 30% compared to the same period of 1997, this despite a strong growth in the construction sector in 1Q98. This signals that problems with fierce competition are increasing. We have downgraded our forecast for the company's 1998 net profit to 40 million Sk ($1.2 million), which corresponds to 98PER of 5.8x. The results corroborate our opinion that the company will not be able to survive in the long run without merging with a strong multinational company. We expect that Plastika will become a target for acquisition by a multinational corporation in the mid-term horizon.

The extraordinary shareholder's meeting (EGM) at Investment and Development Bank (IRB) approved a two billion Sk increase in its registered capital, meant to enable the bank to meet its capital adequacy ratio and re-establish its credibility. According to the bank's caretaker administrator, Dušan Krkoška, none of the current shareholders will have a pre-emptive right for the newly-issued shares. IRB's major shareholders have not shown any interest in participating. Slovenská Poisťovňa announced it would underwrite a part of the new IRB shares. The participation of Slovenská Sporiteľňa, another capital hike contributor, has to be approved by its shareholders in May. We reiterate our pessimistic view of the bank's future prospects in the absence of radical restructuring, including heavy provisioning for bad loans. We do not believe that this low capital increase will enable the bank to carry out these necessary measures, and maintain that the entry of a strong foreign banking institution is indispensable to the bank's recovery.


Vladimír Zlacký is an analyst for Ing Barings.

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