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CAPITAL MARKET REPORT

Nafta Gbely dominates market activity

The market continued its downward trend over the last two weeks. The SAX stock market index was negatively affected mainly by declines in VÚB and VSŽ. In relatively low trading volume for both shares, VÚB lost 22% and is now trading at a price of 1,650 Sk per share. VSŽ declined by about 6% to 620 Sk. Two financial sector shares, Investična a Rozvojová Banka (IRB) and Slovenská Poisťovňa (SP), also weakened, which we attribute to lessened investor interest primarily due to ongoing doubts about their privatization. IRB is now trading at 1,225 Sk and SP at 1,680 Sk.Nafta Gbely dominated the stock market in September, announcing an EGM for October 1. Foreign investors sold their stakes in the company, and domestic investors expanded theirs. The share price stabilized at over 2,000 Sk.

The market continued its downward trend over the last two weeks. The SAX stock market index was negatively affected mainly by declines in VÚB and VSŽ. In relatively low trading volume for both shares, VÚB lost 22% and is now trading at a price of 1,650 Sk per share. VSŽ declined by about 6% to 620 Sk. Two financial sector shares, Investična a Rozvojová Banka (IRB) and Slovenská Poisťovňa (SP), also weakened, which we attribute to lessened investor interest primarily due to ongoing doubts about their privatization. IRB is now trading at 1,225 Sk and SP at 1,680 Sk.

Nafta Gbely dominated the stock market in September, announcing an EGM for October 1. Foreign investors sold their stakes in the company, and domestic investors expanded theirs. The share price stabilized at over 2,000 Sk. The EGM approved the switch of five of the nine members of the Supervisory Board, in which representatives of the state privatization agency, the National Property Fund (FNM), were substituted by representatives of Druhá Obchodná, which recently purchased 45.9% of the Nafta Gbely from the FNM. Among these were two academics, one Druhá Obchodná and a lawyer from a private law firm. The government now has completely relinquished its influence in Nafta, but the company is still listed as a strategic company. The EGM did not discuss Nafta's future plans and changes in management, and we remain cautious regarding the company's further development.

VSŽ continues its strategy to become a multi-national corporation and to create a strong and integrated group of central European steel mills. After signing an agreement with Czech Třinecké Železárny (TZ), in which VSŽ may acquire 20% of TZ, VSŽ has been trying to aquire a 19% stake in the two largest Czech steel mills, Vítkovice and Nová Huť. The sale of these mills was recently approved by the Czech government, and should be completed by the end of this year. The steel mill has also established contacts with the Polish steel mill Huta Katowice, one of Poland's largest companies.

We expect that VSŽ will continue to expand domestically and could try to acquire control over DMD Holding, a holding of 20 large Slovak arms producing companies. DMD Holding's president is Július Tóth, a former VSŽ vice president and ex-Finance Minister. Tóth recently spoke about the necessity of close cooperation between VSŽ and DMD Holding.

The Tatra Kupón investment fund announced that it made a pre-tax profit of 10.3m Sk for 1H96. NAV per share was 3,484 Sk, and the current discount to NAV is 34%. The Creditanstalt-Slovak investment fund made a pre-tax profit of 108.4m Sk for 1H96. NAV per share is 2,608 Sk and the current discount is about 65.5% at a price of 900 Sk per share. The two funds are the only major Slovak investment funds which made a profit for 1H96. Both funds' NAV increased during this period. We consider these funds (and especially Creditanstalt) as very good investment opportunities. An attempted takeover of the Creditanstalt fund (which so far does not have a strategic owner) could bring a dramatic price increase in this share and considerable profit for individual investors.

In the coming weeks, we anticipate a further decline in Slovak share prices and volumes due to low foreign investor interest and a lack of strong domestic institutional investors. We believe that this situation could last from one to two months, since there is no new stimulus in the market except for the planned disposal of shares from the FNM's portfolio in exchange for FNM bonds, which should begin by the end of this year. The amount of shares exchanged could reach 20bn Sk ($650m). The portfolio contains stakes of between 5% and 46% in companies such as Slovnaft, SES, several spas and the petrol retailer Benzinol. The list of shares offered has already been approved and should be published soon.

VSŽs expansion into the banking sector continues, in spite of the NBS's Bank Council refusal of VSŽ's request for the acquisition of more than 20% of IRB's shares. The NBS reasoned that if VSŽ acquired more than its current stake in IRB, it would gain control of the bank. According to the NBS, IRB is among three banks that must undergo loan portfolio restructuring with the assistance of the state. VSŽ has not submitted its own concept of participation in this process.

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

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