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CAPITAL MARKET

Markets take all-time record tumble, no relief in sight

Market developments
The stock market's bearishness was accentuated during the past two weeks. On March 4, SAX fell to its four-year low of 144.27. The protracted non-attractiveness of the Slovak stock market is caused by traditional problems, such as insufficient minority shareholders protection, opaque privatization sales of stakes in listed companies and the government's loose attitude toward stricter market regulations.
But the main trigger for the most recent decline was unimpressive preliminary 1997 corporate results, increased political tension stemming from the presidential election stalemate and a stagnant mood on the region's other equity markets.

Market developments

The stock market's bearishness was accentuated during the past two weeks. On March 4, SAX fell to its four-year low of 144.27. The protracted non-attractiveness of the Slovak stock market is caused by traditional problems, such as insufficient minority shareholders protection, opaque privatization sales of stakes in listed companies and the government's loose attitude toward stricter market regulations.

But the main trigger for the most recent decline was unimpressive preliminary 1997 corporate results, increased political tension stemming from the presidential election stalemate and a stagnant mood on the region's other equity markets. We believe that the lower-than-expected corporate results of major listed companies are partially due to higher financial costs caused by higher interest rates induced by the central bank's tight monetary policy. We also believe that the crux of the problem lies in the structural deficiencies of the capital markets and financial sector, which are not creating incentives for the listed companies' managements to restructure quickly and deliver adequate return to company shareholders.

As a result of the market decline, the value of some stocks seems to be attractive. We are optimistic for Slovnaft and Slovakofarma and we recommend the less liquid Plastika and Chemolak to those investors who have an appetite for riskier investment. We do not envisage across-the-board market recovery in March in spite of very undemanding valuations of the whole market. On the other hand, we believe that the market is yet to reach its nadir.

Corporate developments

Shipbuilder Slovenské Lodenice (SL) posted revenues of 3.3 billion Sk last year, 4 percent lower than 1996. SL expects a pre-tax profit of 38.1 million Sk, higher than the 11.2 million Sk in 1996, but lower than the 71.2 million in 1995. The 1997 pre-tax profit translates to a net profit of 22.9 million Sk and earnings per share of 36.5 Sk. The preliminary FY97 net profit is lower than our expectations of 35 million Sk and we do not believe that the stock has the potential to perform better until significant market restructuring is carried out.

Slovnaft Benzinol (SB), a petrol retailer 64 percent owned by Slovnaft refinery, reported a 1997 preliminary pre-tax profit of 500 million Sk, up 7.3 percent against last year. Sales totaled 16.9 billion Sk, a 5.6 percent increase over 1996. SB currently operates 312 petrol stations in Slovakia, 207 of which it owns and 105 it rents from Slovnaft. SB contributed some 190 million Sk to Slovnaft's 1997 consolidated net profit which is in line with our expectations. Shortly after this announcement, the state privatization agency FNM sold 1.35 million Slovnaft shares (8.19 percent of Slovnaft's share capital) to an unknown Žilina-based company Colorin for a total price of 620 million Sk. The implied share price was 460 Sk, which was 47.7 percent below the market price. We consider this a plain transfer of wealth from state hands to the current political elite and do not believe that it should have an impact on the position of minority shareholders. At the current price of 851 Sk, Slovnaft trades at a low 97PER of 6.6x and a 98PER of 6.3x, and we recommend investors to buy into this well-run refinery.

Váhostav, a construction company, announced a revised preliminary 1997 pre-tax profit of 88 million Sk, 16 million lower than the results announced at the end of January. The revised pre-tax profit translates into a net profit estimate of 53 million Sk, implying earnings per share of 118.4 Sk. The company expects that 1998 will be a difficult year due to the reduction in government expenditures on highway construction and a similar lack of state financing for the completion of the Žilina water dam. On the basis of the announced results, we recommend investors reduce their holdings of this stock. At the time of the announcement the stock traded at 1,477 Sk (97PER of 12.5x), but a price correction followed shortly and Váhostav share price fell by 64.3 percent to 527 Sk. We believe that the market priced in the uncertainties regarding the company's future performance and at the current price the stock will perform in line with the market.

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