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CAPITAL MARKET

BCPB to introduce stock derivatives, options in 1Q98

The Slovak stock market showed signs of recovery during the last two weeks, primarily fuelled by the return of foreign investors to the market.
We expect a temporary upswing of the Slovak stock market in the next few months as bargain hunters may be attracted by very low valuations. At the moment our universe of Slovak industrial stocks is trading at 1997 PER of 9.4 while Czech and Polish industrial stocks are almost twice as expensive.
However, sustained growth of the market cannot be expected before the elections as foreign investors attribute a discount to Slovak equities such as weak protection of minority shareholders and weak legal enforcement, the market's opaque transparency and political uncertainty.

The Slovak stock market showed signs of recovery during the last two weeks, primarily fuelled by the return of foreign investors to the market.

We expect a temporary upswing of the Slovak stock market in the next few months as bargain hunters may be attracted by very low valuations. At the moment our universe of Slovak industrial stocks is trading at 1997 PER of 9.4 while Czech and Polish industrial stocks are almost twice as expensive.

However, sustained growth of the market cannot be expected before the elections as foreign investors attribute a discount to Slovak equities such as weak protection of minority shareholders and weak legal enforcement, the market's opaque transparency and political uncertainty.

Also, Slovak blue-chips are unlikely to post strong earnings figures, so a dramatic change in market sentiment is not likely.

Those feelings could change, however, if the Bratislava stock exchange makes good on its announcement to organise trading with options and termed contracts in Slovnaft, VSŽ and Nafta shares in the first quarter of next year.

In addition to stock derivatives it also plans to organise options in SAX, derivatives on BRIBOR and SKK/DEM and SKK/USD exchange rates. We welcome the stock exchange's plans to establish an organized market for derivatives and hope it will increase activity on the market here.

During the last two weeks, investors' interest focused on the most liquid shares - Slovnaft, VSŽ, Nafta and Slovakofarma, which is getting popular due to its upcoming GDR issue.

VSŽ shares traded in a range of 585-650 Sk. The steel maker's winning of the tender for the Hungarian steel mill DAM Diosgyor (see notes on page 6) is another step in the firm's strategy to integrate central European steel producers and become a leading steel maker in central Europe.

We believe that VSŽ wanted to acquire DAM Diosgyor to complete its product mix as the Slovak steel maker produces mostly flat-rolled sheet steel. The steel maker also announced that it plans to ask world rating agencies to work out a rating for the company in the near future.

This is the first step toward issuing Eurobond or Yankee bond issue and is in line with the company's strategy to increase its foreign currency debt and reduce domestic debt. The company's vice-president for finance also said that VSŽ plans to continue diversifying into other fields to eliminate the negative influence of cyclical developments in the steel industry.

During the last two years, the company has diversified into banking, insurance, engineering, media, and services. It also plans to penetrate telecommunications and is negotiating with foreign manufacturers about establishing an automobile joint-venture in Slovakia.

While we positively evaluate VSŽ's possible diversification into telecommunications and the automobile industry, we warn that the Group may face bottlenecks in its managerial abilities to run the growing conglomerate. As well we are concerned that all diversification plans might not be motivated to maximize shareholders' value.

Slovnaft traded in a range of 915-1021 Sk. The oil refiner said that it expects to post a full year pre-tax profit of around Sk3bn up from Sk2.31bn in 1996. This translates into a net profit of around Sk1.8bn. At current prices, Slovnaft trades at prospective 1997 and 1998 PER's of 9.2 and 7.3, respectively, which is far below other oil refineries in the region such as the Hungarian MOL which is almost twice as expensive.

We expect that foreign investors' interest in Slovnaft will continue, as this stock may be a good buying opportunity.

Železiárne Podbrezova, a steel pipe producer, announced that its pre-tax profit in the first half of this year reached Sk54m. Exports constituted 75% of the company's Sk1.83bn sales. ZP originally planned a 1997 pre-tax profit of Sk100m; however, the electric arc mini-mill's costs will be affected by the government's decision to increase commercial electricity rates by 10%. Also, the company calculated that the 7% import surcharge will increase its costs by extra Sk30m, if ŽeleziÁrne fails to obtain an exemption from the Ministry of Finance. The company also must create provisions for doubtful receivables worth Sk88m($2.5m), owed by the Russian company Ferromet which will reduce its profits significantly.

The Slovak sole ship-builder, Slovenské Lodenice, announced that it will issue two Sk300m($8.7m) tranches of five-year bonds on September 19. If all bondholders exercise the convertible bond option, Lodenice's registered capital will increase by 48%. The company also plans to issue employee shares at a nominal value of Sk30m, which will increase the registered capital by 4.8%.

In light of the announced half year pre-tax profit of Sk32m, we are rather skeptical that the company can meet its profit target. The company's profitability has been decreasing since 1995, and unless strict measures to cut costs are taken, we do not expect improvement in its margins. Furthermore if the options to convert bonds into shares are exercised and employee shares are issued, profits will be significantly diluted, clearly negative news for current shareholders.


Prepared by ING Bank N.V., Bratislava branch in cooperation with ING Baring Securities (Slovakia), o.c.p.,a.s.

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