Market developments
The market failed to produce any surprises during the past two weeks, keeping its bearish mood. SAX, the stock market index, reached a year low of 153.98 on February 9.
The Security Traders' Association, in its analysis of the Slovak capital market, stated that the decline is caused by the lack of effective regulation. The Finance Ministry has not managed to regulate this market, the Association maintains, while suggesting further that the establishment of an independent security commission is the key to further development of the Slovak capital market. The Association also put forth a proposal for the legal anchoring of the commission, its financing and appointment of commissioners.
Dušan Koledzai, the director of the ministry's capital market department, reported that the ministry is preparing a new Securities Act which should be discussed by the government in the autumn. The new law should more effectively protect minority investors, and punish insider trading and the publication of false information by companies. The new law will also more strictly formulate the conditions for obligatory public offers.
According to Koledzai, state regulation of the capital market should be strengthened in the future. The Finance Ministry will prepare an Act on the Securities Commission and believes that it will come into effect from the beginning of 1999. The Commission should be enabled to issue by-laws, otherwise its effectiveness will suffer, Koledzai stated. Koledzai's statements in our view only prove the ministry's awareness of the seriousness of the situation on the capital market. However, sufficient political will is indispensable for passing the proposed laws. We believe that they are unlikely to pass in Parliament in the course of the election year 1998.
VSŽ and U.S. Steel Group signed a contract on establishing a joint venture called VSŽ U.S. Steel, Ltd., focused on the production and sale of zinc-coated metal packaging sheets. U.S. Steel provided investment capital worth 2 billion Sk ($57 million) and VSŽ provided technology for the production of zinc-coated sheets in the same value. According to VSŽ President Ján Smerek, the Slovak partner put 4 percent of its production and 9 percent of its sales into the joint venture, expecting these figures to double after the merger starts operations. Currently, VSŽ produces 140,000 tons of food-packaging metal sheets annually, and the venture will add a further 200,000 tons.
VSŽ-U.S. Steel's operations will begin in December 1999. Smerek said that his company's 1997 net profit will likely be below the 1996 figure of 1.35 billion Sk. The main reason for this decline was currency losses incurred by unfavorable developments in the dollar/mark versus the Slovak crown, and a price decline in the company's products on world markets in 1Q97. Since the market situation improved considerably in 4Q97, our forecast for VSŽ's FY97 consolidated net profit is 1.03 billion Sk ($29.2 million). This corresponds to EPS of 62.6 Sk and 97PER of 10.3x, which is considerably lower than the usual PER rate in the steel sector.
Železiarne Podbrezová (ŽP) announced it expected a pre-tax profit of 47.9 million Sk ($1.4 million) for 1997 on sales worth 3.6 billion Sk ($101 million), which translates into a net profit of about 28.7 million Sk ($0.8 million) and EPS of 12 Sk. This is 28 percent more than in 1996. The current PER is 9.1x. 80 percent of company's production was exported last year, which is an increase by 4 percentage points over 1996.
Net profit totaled 35 million Sk according to preliminary figures, which is worse than our expectations. Company's results moderately deteriorated in 2H97 due to the reintroduction of the import surcharge, the electricity price hike and multiple production shut-downs due to the pipe-rolling mill upgrade. The ŽP also planned quite extensive provisioning for non-recoverable receivables, although it is difficult to judge from preliminary results what size of provisions were created.
The National Bank of Slovakia (NBS) decided to call an extraordinary shareholders' meeting of the Investičná a Rozvojová Banka (IRB) on March 18, 1998. The shareholders will discuss changes in the bank's statutes and selling a part of its property. The bank is technically bankrupt and its shares are currently trading at 45 Sk.
It is rumored that the bank should be taken over by the state-controlled insurer, Slovenská Poisťovňa. We do not believe that the insurance company on its own would be able to revive the bank, re-establish its credibility, provide sufficient investment for the bank to meet the capital adequacy ratio set by the NBS, and to compete on the market. It is believed that Slovenská Poisťovňa will try to find a strategic foreign investor after it takes over the IRB.
Prepared by ING Bank N.V. Bratislava branch in cooperation with ING Baring Securities (Slovakia), o.c.p.a.s.
Author: Martin Barto
