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CAPITAL MARKET REPORT

Slovnaft makes '96 dividend payout, but SES won't

The Slovak equity markets were mostly quiet during the last two weeks. The SAX index reached its 1997 high of 207.44 due to small increases in Slovnaft, Slovakofarma and VÚB. However, only the most liquid shares such as VSŽ, VÚB Kupón, Slovnaft, Slovakofarma and Váhostav traded in considerable volumes. VSŽ peaked at a price of Sk737 per share and a few-day correction to prices around Sk700 followed and currently VSŽ again trades at Sk720-730.
Several remarkable reports concerning VSŽ popped up recently (see stories on this pg. and pg. 6). VSŽ also openly revealed its quite simple strategy - universal diversification. Alexander Rezeš, VSŽ's vice president and the minister of transportation, stated that the east Slovak steel king would expand to almost all sectors, including agriculture and media. They will not, however, establish their own political party since the HZDS's program is compatible with VSŽ's strategy, Rezeš added. VSŽ may also acquire a stake in the Czech company, Škoda Plzen.

The Slovak equity markets were mostly quiet during the last two weeks. The SAX index reached its 1997 high of 207.44 due to small increases in Slovnaft, Slovakofarma and VÚB. However, only the most liquid shares such as VSŽ, VÚB Kupón, Slovnaft, Slovakofarma and Váhostav traded in considerable volumes. VSŽ peaked at a price of Sk737 per share and a few-day correction to prices around Sk700 followed and currently VSŽ again trades at Sk720-730.

Several remarkable reports concerning VSŽ popped up recently (see stories on this pg. and pg. 6). VSŽ also openly revealed its quite simple strategy - universal diversification. Alexander Rezeš, VSŽ's vice president and the minister of transportation, stated that the east Slovak steel king would expand to almost all sectors, including agriculture and media. They will not, however, establish their own political party since the HZDS's program is compatible with VSŽ's strategy, Rezeš added. VSŽ may also acquire a stake in the Czech company, Škoda Plzen (see story on facing page).

The commercial bank Investičná a Rozvojová Banka (IRB), probably controlled by VSŽ, announced that it lost Sk1.2bn-1.3bn ($36.3-39.4m) last year. IRB's current equity capital is Sk1.13bn. Its capital adequacy fell to 2.93% at the end of 1996 from 7.25% at the end of 1995. IRB President Vojtech Vranay said that the bank had produced a controlled loss in order to complete bad loan provisioning. Classified loans constitute 23% of the bank's total loans of Sk36.5bn ($1.1bn). After covering these losses, IRB's provisions increased by Sk820m ($25m) in 1996, reaching Sk5.4bn ($164m), and its total assets rose Sk3.8bn ($115m) to Sk52bn ($1.6bn). IRB wants to increase its capital adequacy to 6.5% in 1997, while increasing its capital by means of a domestic subordinated debt issue and a capital increase. These issues will be voted on at the bank's May AGM.

The share price of the oil refinery Slovnaft oscillated around its par value of Sk1,000. The company announced that its unconsolidated pre-tax profit for 1996 was Sk2.3bn ($69m) and its unconsolidated net profit totalled Sk1.29bn ($38.8m, Sk78.3 per share) on sales of Sk33.8bn ($1bn). The pre-tax profit is 30% lower than in 1995. Taking into account petrol retailer Benzinol's pre-tax profit of Sk466m ($14m), which translates into a net profit of approximately Sk280m ($8.4m), Since Slovnaft owns 51% of Benzinol, we expect its consolidated profit to reach Sk1.43bn ($42.9m, Sk86.8 per share). The main reasons for the lower 1996 profits are extensive maintenance work during 1H96 and an increase in crude oil prices (which was not fully reflected in the company's products' prices). Slovnaft plans to strengthen its position in Poland by building a network of 30 petrol stations by 2000. It has already a good position in the Czech, Hungarian and Austrian markets. The company also announced that it intends to pay a dividend of Sk20 for 1996, corresponding to a 25.5% payout ratio.

Slovakofarma breached its Sk5,000 barrier, trading at Sk5,100. Demand for Váhostav pushed its share price up to Sk2,391. Shares of financial institutions traded in low volumes as investors were waiting for a key decision in parliament regarding banking privatization (see story on page 4). VÚB's privatization , however, will require clarifying cross ownership of the Czech and Slovak Funds for National Property in VÚB and Komerční Banka, respectively.

The engineering company SES signed several important contracts worth a total of Sk6.3bn ($192m), including a contract for the complex reconstruction of the fifth and sixth units of the Vojany power plant worth Sk5.3bn ($159m). SES will be involved in the extensive reconstruction of power plants and heat generators in Slovakia and the Czech Republic over the next few years. Under normal circumstances, SES shares at their current price of Sk450 would be a good long-term investment.

However, according to the Práca daily, the company's management is forming a new company SES Trading to which profits will be channeled to finance last year's MBO on expenses of minority shareholders. Moreover, SES is not planning to pay a dividend in the next 4-5 years, strengthening concerns about management's intentions, since it hardly has the sources to repay its MBO loans.

The bond market revived somewhat with the most liquid bonds such as Slovenské Elektrárne, ŽSR, Slovakofarma and Juhocukor being traded. Prices generally declined, decreasing yields for banking sector bonds to 11% and corporate bonds to 12-13%.

In news, The government approved a draft proposal for capital market development, which aims to improve capital market transparency and supervision as well as protectę

minority shareholders' rights. The plan also includes measures on investment funds, which would allow new types of companies and new forms of collective investing. Portfolio funds should be subject to an advantageous tax rate. Also, an amendment to the income tax law should stimulate long-term investment on the capital market.

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

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