CAPITAL MARKET REPORT

Lack of interest turns market bearish

A bearish mood predominated on the Bratislava Stock Exchange (BSE) floor in the last two weeks due to a lack of investor interest in Slovak shares. The SAX index fell to 189, its lowest level since mid-April. Slovnaft's price slumped even more to Sk800, its lowest level since January. VSŽ traded at Sk589 and Nafta below Sk1,900.
Total October turnover on both Slovak stock exchanges was Sk13.2bn ($426m), the second highest turnover this year. OTC deals played a major role as they made up more than 90% of the turnover. Among the most traded shares were traditionally the most liquid companies, such as VSŽ (Sk930m), Nafta (Sk750m), VÚB Kupón (Sk607M) and the Creditanstalt Slovak Investment Fund (Sk850m due to a 26% stake sell-off).

A bearish mood predominated on the Bratislava Stock Exchange (BSE) floor in the last two weeks due to a lack of investor interest in Slovak shares. The SAX index fell to 189, its lowest level since mid-April. Slovnaft's price slumped even more to Sk800, its lowest level since January. VSŽ traded at Sk589 and Nafta below Sk1,900.

Total October turnover on both Slovak stock exchanges was Sk13.2bn ($426m), the second highest turnover this year. OTC deals played a major role as they made up more than 90% of the turnover. Among the most traded shares were traditionally the most liquid companies, such as VSŽ (Sk930m), Nafta (Sk750m), VÚB Kupón (Sk607M) and the Creditanstalt Slovak Investment Fund (Sk850m due to a 26% stake sell-off).

The major factor likely to impact share prices in the coming months is the outcome of the government plan to allow securities issuers (i.e. a majority shareholder or shareholders) to convert dematerialized shares into a materialized form. As the BSE currently trades dematerialized scrip using a book entry system, this will force all trading with materialized shares off the exchange. Since shareholder levels currently are published by the Securities register, this will significantly reduce share prices and confidence in the Slovak market, as the entire market will be affected by the measure and the lack of transparency resulting from it.

The amendment's main aim is to shield the new owners of privatized companies. Therefore, we expect that mainly the shares of joint stock companies which acquired large stakes in privatized companies will be materialized first and that these shares will not be further publicly tradable. Thus nobody will be able to identify the real owners of privatized companies. We think it is less probable that the shares of companies privatised by means of coupon privatisation will be materialized and delisted. This was confirmed in recent discussions we had with several important companies such as VSŽ, Váhostav, Slovakofarma and Slovenské Lodenice.

VSŽ reported its 1-3Q96 results (unconsolidated, according to Slovak Accounting Standards) It made a net profit of Sk940m ($30.6m) and a pre-tax profit of Sk1.65bn ($53.7m). This result is slightly worse than that for the same period in 1995 and significantly worse than at the end of August when a pre-tax profit of Sk2.52bn ($80.6m) and a net profit of Sk1.48bn ($47.4m) was announced. We suppose that this was primarily a result of the fact that results are unconsolidated. Nevertheless, we remain optimistic about the entire year's forecast of net profits amounting to Sk1.25bn ($40.65m).

Slovakofarma forecast total revenues of Sk4.4bn ($42m) in 1996. The expected profit should increase by 2.7% from 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 Sk528 ($17m) in this period. In the same period, the company invested Sk452.2m ($14.6m). Slovakofarma exports 65% of its production to 26 countries (mainly Germany, Russia and Poland). The company performed better than our expectations and is likely to exceed the forecast net profit of Sk525m for the year.

An EGM has been called by Nafta for December 4 to discuss the investment strategy of the company to the year 2005. This is a very interesting announcement, and we believe that Druhá Obchodná will emerge from its obscurity to reveal its plans for the company.

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

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