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CAPITAL MARKET REPORT

Investors take a step back from market

Over the last two weeks, we have seen flagging investor interest on the Slovak capital market due to several factors: the unclear privatization process , the prospects of a slow-down in Slovakia's economic growth following 1H96 results, and unpredictable political interventions. In August, trade turnover on both stock exchanges (BSE and RM-System) was Sk 11.85bn ( $386m), which is a 10% decline compared with July. This is due to a fall in direct trades, which decreased to Sk 9.85bn. Anonymous trade turnover, however, increased to Sk 2bn. The most traded stocks were VÚB (turnover Sk 2.56bn), VÚB Kupón (Sk 1.1bn), Nafta (Sk 726m) and Slovenská Poisťovňa (Sk 668m).

Over the last two weeks, we have seen flagging investor interest on the Slovak capital market due to several factors: the unclear privatization process , the prospects of a slow-down in Slovakia's economic growth following 1H96 results, and unpredictable political interventions. In August, trade turnover on both stock exchanges (BSE and RM-System) was Sk 11.85bn ( $386m), which is a 10% decline compared with July. This is due to a fall in direct trades, which decreased to Sk 9.85bn. Anonymous trade turnover, however, increased to Sk 2bn. The most traded stocks were VÚB (turnover Sk 2.56bn), VÚB Kupón (Sk 1.1bn), Nafta (Sk 726m) and Slovenská Poisťovňa (Sk 668m). Nafta also was intensively traded in September when some investors were strengthening their position in the company before the scheduled EGM on 1 October. Permanent interest has caused Nafta's stock to stabilize well above the Sk 2,000 mark, and it reached a high of Sk 2,060.

After publishing its 1H96 results, Slovnaft slightly lost ground, with its share price slipping to about Sk 930. At this price, the share is a good long-term investment, but short-term players should know that full year results falling below market forecasts. We expect the company's net profit to fall about 30% of last year's.

Posting a loss of Sk 752m for 1H96 caused VÚB's stock to fall 17% to its price of Sk 1,840. We anticipate that the commercial bank will face serious problems in the near future due to insufficient provisioning for its substantial, non-performing loan portfolio and low (4.8% in 1995) capital adequacy. These problems are coupled with a high level of uncertainty about VÚB's future management direction when it is privatized.

VSŽ and Czech Třinecké Železárny (TŽ), signed an agreement according to which VSŽ may acquire 20% of TŽ and TŽ may acquire 10% of VSŽ. The acquisitions should occur within a period of one month. Both the form of the acquisition, and the amount of capital invested was not disclosed. However, VSŽ Director Ján Smerek did not rule out the possibility to purchase shares on the capital market and thus acquire a higher than 20% share in TŽ. This agreement is aimed at boosting VSŽ exports to the Czech Republic by 50%, up to one-third of total output. The company expects an annual net profit of Sk 1.3bn, helped by an expected increase in steel prices in 4Q96. VSŽ share price now stands at Sk 630 (perspective PER is 8.3x), which is quite cheap when compared to other European steel companies (PER is about 10x).

VÚB Kupón announced that it lost Sk 229m for 1H96. NAV per share is Sk 1,189 and present discount to NAV 40.3%. The fund's portfolio contains interesting stakes, mainly in Czech companies such as Komerční Banka, Česká Spoťitelna, CE_, Vertex, IPB Praha. It also holds stakes in Slovak blue chips Nafta, Slovnaft and Chemolak. The fund has three main shareholders, VÚB (10.04%), investment company VÚB Invest (5.25%) and Bank of Bermuda (6.23%). Of its assets, 60% are shares held in 80 - 100 joint stock companies, and 40% are debt securities and bank deposits. These assets will be invested over the long-term in Slovakia and the Czech Republic in a ratio 1:2 favoring the Czech Republic.

The Ministry of Finance narrowed permissible stock price limits on the Bratislava Stock Exchange (BSE) and RM-System. The amount of fluctuation from a common BSE and RM-System average stock price from one day to another are -10% for anonymous trades, -10% with no upward limit set for OTC deals and from -7.5% to +10% for block trades on the BSE. The Finance Ministry is trying to hinder price manipulation and thus avoid a fall in prices; however, such an effort is easily to bypass on the low-liquidity market. Moreover, any bureaucratic price setting is usually futile - the case involving FNM bonds which are now traded at 40 - 50% of their par value (despite the fact that the minimum price is 75%) speaks for itself.

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

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