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CAPITAL MARKET REPORT

Many firms register disappointing third quarter financial results

The amendment to the Securities Act that Parliament passed last month but was rejected by President Michal Kováč considerably accelerated an equity market already in decline.
It also caused a real shake-up in blue chip prices. After the amendment was passed on November 6, the SAX index fell almost 15% as prices of several blue chips fell more than 25% as foreign investors tried to sell their stakes. For example, Nafta slumped Sk594 to Sk1,306, its lowest price since January 1994, Chemolak fell Sk470 to Sk1,460, Plastika Sk290 to Sk814 and Slovnaft Sk200 to Sk700. Only a few shares did not drop - Slovakofarma, Považské Strojárne, VSŽ and VÚB. We expect a further decline in blue chips' prices over the next few weeks, we do not see any impetus changing the situation and restoring investor trust in the market.

The amendment to the Securities Act that Parliament passed last month but was rejected by President Michal Kováč considerably accelerated an equity market already in decline.

It also caused a real shake-up in blue chip prices. After the amendment was passed on November 6, the SAX index fell almost 15% as prices of several blue chips fell more than 25% as foreign investors tried to sell their stakes. For example, Nafta slumped Sk594 to Sk1,306, its lowest price since January 1994, Chemolak fell Sk470 to Sk1,460, Plastika Sk290 to Sk814 and Slovnaft Sk200 to Sk700. Only a few shares did not drop - Slovakofarma, Považské Strojárne, VSŽ and VÚB. We expect a further decline in blue chips' prices over the next few weeks, we do not see any impetus changing the situation and restoring investor trust in the market. Slovak blue chips published their 1-3Q96 results which are in most cases worse than in the same period last year.

VÚB reported a loss of Sk1.32bn ($42.6m) for 1-3Q96, while it posted a net profit of Sk2.2bn ($71m) in the same period of 1995. This year's decision by VŕB's management to reduce its doubtful loans was the main reason for these losses. Another factor influencing the performance was the creation of reserves worth Sk891.2m for risky assets, which translated into higher costs.

We expect the bank to remain in the red for the rest of 1996. Its provisioning is still inadequate (according to auditors at the end of 1995, under-provisioning was Sk9.2bn). Total non-performing loans equal about Sk40bn.

Loans increased 6% this year, and the bank's reserves still remain around 5%. The bank's privatization is pending and its future is unclear.

Nafta reported a gross profit of Sk663m ($21.4m) and a net profit of Sk336m ($10.8m) on revenues of Sk2.87bn ($92.6m). This year's results are disappointing when compared to those in 1995, and the company's entire year's net profit will probably be far below Sk510m ($16.5m). The company's future will hopefully be clearer after the EGM (planned for December 4), when the new owners intend to reveal their strategy until 2005.

Plastika announced a pre-tax profit of Sk76m ($2.45m) and a net profit of Sk41m ($1.32m) on revenues of Sk1.37bn($$44.2m), about half of last year's results. The company has decreased its prices and increased its marketing and advertising expenditures, causing a considerable decline in revenue. A gross profit of Sk100m ($3.2m) is anticipated for the entire year.

Chemolak made a gross profit of Sk127 ($4.1m) and a net profit of Sk76m ($2.45m) on revenues of Sk1.45 ($46.9m), below our expectations and last year's results. The company faces a decline in demand from construction, engineering, wood-processing and furniture industries, and it has had to increase its proportion of retail sales.

VSŽ posted a net profit (unconsolidated, according to Slovak standards) of Sk940m ($30.3m) on revenues of Sk35.9bn ($1.16bn). We remain optimistic about our forecast net profit of Sk1.254bn, despite lower 1H96 profits, caused by lower demand in the company's main export markets and a decrease in the prices of steel and steel products.

Pharmaceutical producer Biotika reported revenues of Sk1.46bn (ff47.1m), a pre-tax profit of Sk50m ($1.62m) and a net profit of Sk27m ($0.9m), which is 22% lower than for the same period last year.

Slovakofarma (pharmaceutical producer) sees total revenues of Sk4.4bn (sss142m) in 1996 and a profit increase of 2.7% above last year's figures. For 1-3Q96, sales reached Sk3.57bn ($115m), while operating revenues were Sk3.1bn - $100m. Slovakofarma made a gross profit of Sk879.8m ($28.4m), and a net profit of Sk528m ($14.6m). Slovakofarma exports 65% of its production to 26 countries (mainly Germany, Russia and Poland).

Ozeta reported a net profit of Sk2.9m ($94,000) on operating revenues of Sk1.53bn ($49.5m). Results improved this year mainly due to increased labor productivity; however, the company's stagnation continues due to its loss of Eastern markets, a slump in output prices with increasing input costs, and a lack of operating funds.

POSS ADDS

The Constitutional Court ruled that the government, not the FNM privatisation agency, is responsible for the direct sales (without tender) of state property (see story on page 1). There are two further possible outcomes from the ruling: bank privatization will be probably delayed until after the general elections in 1998, because it would be very difficult for the government to avoid the responsibility of privatizing the banks without tender and secondly, if the current opposition wins the next election, the temptation to reverse most of the FNM's privatization decisions will be very strong, as the Constitutional Court's ruling supports this with some degree of legal justification.

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

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