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CAPITAL MARKET REPORT

Thin trading reflects lack of interest by foreign investors

The Slovak capital markets experienced thin trading, decreasing prices and volumes during the last two weeks. VSŽ remained the most traded share at prices fluctuating around Sk745. Slovnaft eased 2% to Sk980, VÚB Kupón to Sk615 and Slovakofarma slumped to Sk4,200. Other blue chips almost ceased trading completely. The situation reflects a lack of interest by foreign investors who have reduced their exposure to Slovak equities. We expect that the bearish mood on the markets will continue in the coming weeks, since we do not see any impetus which would increase investor interest in Slovak securities. Prices and trading volumes will continue their downward trend.

The Slovak capital markets experienced thin trading, decreasing prices and volumes during the last two weeks. VSŽ remained the most traded share at prices fluctuating around Sk745. Slovnaft eased 2% to Sk980, VÚB Kupón to Sk615 and Slovakofarma slumped to Sk4,200. Other blue chips almost ceased trading completely. The situation reflects a lack of interest by foreign investors who have reduced their exposure to Slovak equities. We expect that the bearish mood on the markets will continue in the coming weeks, since we do not see any impetus which would increase investor interest in Slovak securities. Prices and trading volumes will continue their downward trend.

Two listed investment funds recently published their portfolio compositions and NAVs. VÚB Kupón fund's NAV per share is Sk1,281 as of 31 March and its discount to NAV is 52%. VÚB Kupón's portfolio contains interesting stakes such as 4.71% of VÚB, 4.25% of Slovenská Poisťovňa, 9.31% of Chemolak and stakes in Czech Komerční Banka, IPB and Česká Sporiteľňa. The fund sold its stake in Biotika (from a convertible bond issue) to VÚB as well as its stake in textile company Maytex. However, a recent sale of more than a 15% stake in VŢUB Kupón by Wood & Co. to a domestic investor triggered doubts about its future.

Tatra Kupón Fund announced that its NAV per share is Sk3,586, a 55% discount to its NAV. The fund's portfolio contains top quality bonds such as CSOB 1999, Tatra Banka 1997, VUB zero coupon and Slovenske Elektrarne. Taking into consideration the present discount to the NAV, we believe that this share may be a good long-term buy.

Slovnaft officially started a project to increase its production of petrol and light fractions, the demand of which is expected to increase strongly. Of the total $526m investment required for the project, Slovnaft will provide $276m (of which $164m will be from its own funds and $112m will come from a previous share issue). The remainder will be covered by a syndicated loan which will not have a state guarantee. The high internal rate of return, at 14%, facilitates a payback period of only 7 years. According to Slovnaft president Slavomír Hatina, the EFPA project will also enable Slovnaft to increase its foreign sales by approximately Sk3bn annually. The new unit should commence production in 1999.

According to SDĽ deputy Brigita Schmögnerová, the FNM transferred Slovnaft shares at a nominal value of Sk900m ($26.9m) representing 5.46% shareholders' equity, for Sk230m ($6.9m), or Sk254 per share to Banka Slovakia at the beginning of this year. Part of the stake was probably used in a repo deal by which the FNM increased its liquidity. The FNM still retains a 20.36% stake in the refinery. Banka Slovakia is slated for privatisation this year.

The IRB EGM, initiated by the NBS, approved the supervisory board elected at the bank's August 1996 EGM. IRB's largest shareholders, as of 7 April are: FNM privatisation agency 35.14; VSZ 14.64%; Tetrapetrol Kezmarok 8.24; Slovrea Kosice 6.75%; Tectum Banska Bystrica 5.79%.

Chirana-Prema, the health care equipment manufacturer, reported a 1996 net profit of Sk8.1m ($240,000, Sk7.83 per share) on sales of Sk1.54bn ($47m). This is a preliminary result and no details have been released. The result is worse than expected. This is probably due to higher financial costs stemming from last year's take-over of Slovenské Lodenice.

Last week, Považské Strojárne signed a contract to supply the first 10 engines (of a total 25 - 30 engines to be supplied between 1998 and 2000) for Russian Army airplanes. The airplanes will be produced by a consortium of Russian JAK and Sokol and Italian Aeromacchii.

Clothing company Ozeta Trenčín announced that it lost Sk36m ($1.1m) in 1996 after a tiny net profit of Sk660,000 ($22,000) which the company made in 1995. The loss was caused by higher operational and financial costs in spite of revenues which increased by 5% last year. The company said that these higher costs resulted from a need to restructure its production facilities and marketing. Ozeta increased its domestic sales considerably and its share of the market was 12.4% in 1996.

The bond market remained quiet during the last two weeks. There was thin trading and prices generally declined, increasing yields. We would like to mention MoF 21 and 23 bonds which yield 17.8% and 16.7%, respectively. However, these are short-term securities which will mature within 6 months.


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

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