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CAPITAL MARKET REPORT

VÚB Kupón still without strategic owner

The Slovak capital market has slowed down for the summer. Trading volume have been low and prices haven't changed dramatically. VÚB Kupón dominated floor trading at the Bratislava Stock Exchange (BSE), continuing its long upward trend and reaching 775 Sk. The present discount of 40% is one of the lowest of BSE listed funds. This fund still does not have a strategic owner, and therefore we expect that it will remain in strong demand. Chemolak has firmed above 1,950 Sk as a result of increased investor interest. The OTC market was the scene of several transfers of Drôtovňa shares at prices between 1,000 Sk and 1,330 Sk per share, considerably higher than its listed price. More than 35% of this company has recently been transferred.

The Slovak capital market has slowed down for the summer. Trading volume have been low and prices haven't changed dramatically. VÚB Kupón dominated floor trading at the Bratislava Stock Exchange (BSE), continuing its long upward trend and reaching 775 Sk. The present discount of 40% is one of the lowest of BSE listed funds. This fund still does not have a strategic owner, and therefore we expect that it will remain in strong demand. Chemolak has firmed above 1,950 Sk as a result of increased investor interest. The OTC market was the scene of several transfers of Drôtovňa shares at prices between 1,000 Sk and 1,330 Sk per share, considerably higher than its listed price. More than 35% of this company has recently been transferred.

Several companies published their 1H96 results, which are, in several cases, lower than last year's. Poorer corporate performance was also reflected in 1H96 statistics. According to these, industrial output was only 3.4% higher than the same period last year. 1H95 industrial output y-o-y growth was 7.7%. Industrial production declined in May and June.

Slovenské Lodenice ended 1H96 with a loss of 34.85m Sk according to Slovak accounting standards. This was a better result than IQ96's 90m Sk loss. The main reason for the loss was additional work on three ships sold last year. According to management, there is no reason to change the company's anticipated annual profit of 38.5m Sk. This year, the company has 14 orders for ships. On August 14, Lodenice will hold an EGM, during which the current supervisory board will probably be replaced and the company's articles amended. This relates to recent changes in the ownership structure of the company, in which the Slovak brokerage house Danubia Invest has acquired at least 16.6%.

VSŽ's price has established well below 700 Sk, and we are not expecting the share price to rise significantly in the near future due to considerable investor resistance at prices of more than 700 Sk. VSŽ made an unconsolidated net profit (according to Slovak accounting standards) of 776m Sk ($25.4m) for 1H96, compared with 650m Sk ($21.2m) in 1H95. The result is more impressive when considering that steel prices are lower this year. On the other hand, investors are likely to be discouraged by the company's extensive non-core investments, such as its purchase of the soccer team Sparta Praha, the acquisition of a 20% stake in Slovenská Poisťovňa for approximately 650m Sk and the 14.64% stake in the retail bank IRB. The VSŽ-organized consortium Digifon recently failed to win the tender for a GSM licence in Slovakia.

Additionally, VSŽ affiliated brokerage firm ARDS (owned by senior VSŽ managers) holds another 15.06% stake in IRB. VS_ is strengthening its position in IRB and SP before planned bank privatisation, in which it will play an important role. The banking law states that any acquisition of more than 15% of a bank's basic equity must be approved by the NBS.

The National Property Fund (FNM) approved 41 privatisation projects. Privatised companies include construction company Hydrostav Bratislava, three important printing companies, several agricultural sector companies, 30% of JCP and 45.9% of Nafta Gbely. Nafta's share price declined to 2,145 Sk after a 45.9% stake was sold by the FNM to the totally unknown Druhá obchodná s.r.o..(Second Trading, Ltd.) at a price of 337 Sk per share. However, the new owner will pay only 101 Sk as an initial payment, with the difference to be invested in the company. According to FNM President Gavorn'k, the new owner promised not to sell the shares to a foreign party.

We expect the generally relaxed level of market activity to continue in August. Nevertheless, increasing activity stemming from the privatisation of financial institutions may provide some excitement in September. Recent NBS measures to curb loan expansion are likely to put pressure on recent leveraged purchases of majority stakes in Chirana-Prema, Slovenské Lodenice, Považské Strojárne or Drôtovňa.

POSS ADDS

The company has been very successful in selling large diameter pipes (up to 1,000 mm) for which it has not been able to satisfy demand. This year, it focused on producing pipes for the gas industry. A new production line for this purpose is being installed. The company has also started the production of a new types of plastic foil on which up to eight colours can be printed.

The projects were approved despite a written promise by Prime Minister MeŹiar to the SD_ (the opposition, left-wing Party of Democratic Left) that the FNM will not approve any privatisation projects until changes in the FNM Presidium are made. FNM President Gavorn'k said that SD_ should consider whether anyone has the power to stop the FNM's activities and that the FNM will privatise approximately 80 companies by the end of this year.

Trading in FNM bonds (with a face value of Sk10,000 and a coupon equal to the NBS discounting rate, all payable in 2001) for the so-called bond privatisation began 5 August. The FNM estimates that this year, 1.6m citizens will sell their bonds, and the total volume of bond trading will reach Sk6 - 6.5bn. The FNM said half of the bonds may be purchased by three banks (VÚB, IRB and the Slovak Savings Bank), although they are not presently buying the bonds. The FNM now has 600 debtors, of which only 148 have expressed an interest in repaying their debt by means of the bonds. During the first four level of debtor interest. It expects that the majority of the bonds will be used for repayment of privatisation debts. Otherwise, the FNM will have to collect about Sk55bn by the end of the year 2001, which seems to be unrealistic.

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

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