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CAPITAL MARKET

SAX struggles in aftermath of disappoining 1997 results

Market developments
Thin trading activity on the Bratislava Stock Exchange floor contibuted to the continued bearish mood of the Slovak equity market over the past two weeks. During the two week period, the SAX index again tested its historical lows, falling to 132.47 on April 2 and stabilizing at 134.16 on April 16. The market did not observe any dramatic price changes of the main traded companies and only 7.3 percent decline in Nafta share price and 18.5 percent increase in ZSNP share price are worth mentioning. The market seems to be well priced at the moment and we believe that any turnaround in the market sentiment is unlikely unless blue-chip companies report extremely strong interim results.

Market developments

Thin trading activity on the Bratislava Stock Exchange floor contibuted to the continued bearish mood of the Slovak equity market over the past two weeks. During the two week period, the SAX index again tested its historical lows, falling to 132.47 on April 2 and stabilizing at 134.16 on April 16. The market did not observe any dramatic price changes of the main traded companies and only 7.3 percent decline in Nafta share price and 18.5 percent increase in ZSNP share price are worth mentioning. The market seems to be well priced at the moment and we believe that any turnaround in the market sentiment is unlikely unless blue-chip companies report extremely strong interim results.

The Ministry of Economy announced partial results of its analysis of the industrial sector which can shed some light on the health of Slovak industrial corporations. The report revealed that last year, pre-tax income of industrial companies declined by average of 23.2 percent to 15.4 billion Sk ($452 million). This brought the return on equity down from 4.8 to 3.6 percent. This further proves the fact that the tight monetary policy and slow corporate restructuring are taking their toll on the industrial sector's performance.

Corporate developments

Slovakofarma announced that it had made a net consolidated profit (calculated in accordance with international accounting standards) of 401 million Sk ($11.7 million) last year, which is a 27.6 percent decline compared to 1996. Consolidated sales reached 5.4 billion Sk ($158 million), up by 10.5 percent, an upward trend that occured mainly due to incorporating a Czech wholesale subsidiary in the consolidation. The company performance was adversely affected mostly by the Czech crown weakening against its Slovak counterpart last summer, the import surcharge reintroduction last July, and allotments to the Fund for Supporting Export. The company exported 65 percent of its production last year. Exports to countries other than the Czech Republic increased by sound 55 percent to 1.1 billion Sk ($32.3 million). A strong growth was seen primarily in exports to Russia, which rose from 187 million Sk ($5.5 million) in 1996 to 350 million Sk ($10.2 million) last year. Slovakofarma forecasts 1998 consolidated sales of 5.5 billion Sk ($161 million) and an income of 550 million Sk ($16.1 million). We consider the reported 1997 net profit very disappointing as our expectations were closer to the upper end of the market expectations range of 480-530 million Sk ($14.1-15.5 million). The reported figure places the company in a relatively demanding situation and we do not see much room for the short-term share price appreciation unless the company introduces a new medical products that could generate additional earnings growth.

The construction company Doprastav made a pre-tax income of 382 million Sk ($11.2 million) last year, up by 20 million Sk ($588,000) compared to 1996. Since its 1997 net income of 268.7 million Sk ($7.9 million), was way up from 186.9 million Sk ($5.4 million) in 1996, the shareholders at an annual general meeting (AGM) decided to pay out dividends of 75 Sk per share. At the current price of 1000 Sk, this translated into a significant 7.5 percent dividend yield, most likely the highest yield on the Slovak stock market. This announcement is certainly positive for the company's track record and will not pass unnoticed by the financial community. A sound track record in treating minority shareholders can be beneficial to the company should it decide to obtain further equity financing or should its main shareholders decide to sell-down their stake in Doprastav.

Chemolak reported a preliminary 1997 net profit of 60.5 million Sk ($1.7 million), down by 22.2 percent compared to 1996 figure. Declining sales in the Czech Republic and fiercer foreign competition on the market were cited by the management as primary reasons for the income decline. The company invested 144 million Sk ($4.2 million) in 1997 and plans to invest some 150 million Sk ($4.4 million) more in 1998 in order to upgrade its energy system and water-cleaning device. We maintain that at the current price of 760 Sk, Chemolak is cheaply valued as it trades at 97 PER of 6.3x and 98 PER of 4.9x. However, we warn investors of a certain risk involved in investing in Chemolak shares as the stock liquidity is low and the management has not been very open to investors.


Vladimír Zlacký is equity analyst with ING Barings.

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