ECONOMIC & STRATEGY RESEARCH
10 April 2017
Equity Research Extract from a report
Equity Outlook
Global equity market gets the green light
■ The global stock market followed its successful final quarter of last year and
Miroslav Frayer shares also grew in 1Q17. The MSCI world equity index has increased more than (420) 222 008 567 miroslav_ frayer @kb.cz 6% since the beginning of the year.
Richard Miřátský ■ The PSE’s PX index has slightly surpassed the performance of major U.S. and (420) 222 008 560 [email protected] European indexes. It has added more than 6% since January. In comparison with Jana Steckerová regional competitors, the Polish WIG20 became a clear winner, jumping 15%. On the (420) 222 008 524 jana _steckerova @kb.cz contrary, the Hungarian BUX’s profit of less than 1.5% has not enthused investors.
■ A positive for the PSE is the fact that we have found no company whose shares remained in the red in the first quarter of the year. Shares of petrochemical group Unipetrol became a clear winner, on the contrary, the largest issuance, CEZ, added the smallest gains from the Prague peloton.
■ The average daily trading volume for the past two quarters was more volatile. Nevertheless, it is evident that Moneta Money Bank’s entry supported trading activity on the domestic market. For the first three months, the newcomer became the No. 1 among the most traded stocks on the Prague Stock Exchange.
■ SG increased the weight of equities in its global portfolio from 58% to 63%. Improving macroeconomic environment, reflation and the structural switch from monetary to fiscal policy impetus in developed countries are strong incentives for investors to switch out of expensive bonds into equities.
■ We maintain a positive stance on most stock indices for this year. With major indexes at their record heights, the US equities look overpriced with limited upside. Once political uncertainties fade away, European equities that trade at 47% price to book discount compared with their US counterparts, should provide strong growth potential.
■ Our most preferred sectors include automobiles & parts, construction & materials, financial institutions and newly also Aerospace & defence. On the contrary, telecommunications and utilities belong among our least preferred sectors.
■ The PSE could deliver a return of 6-7% in the next 12 months. We believe financial stocks are among the most attractive. From other stocks under our coverage, we recommend buying Pegas Nonwovens, Philip Morris CR and CME.
Please see back page for important disclaimer.
Economic & Strategy Research Equity Research
Prague Stock Exchange statistics
2012 2013 2014 2015 2016 03/2017 PX Index (eoy) 1,039 989 947 956 922 981 Change (CZK) 14.0 -4.8 -4.3 1.0 -3.6 6.5 Change (USD) 18.4 -8.9 -16.7 -7.0 -6.9 8.0 Traded volumes (CZK m) 250,608 184,571 158,222 169,202 163,580 41,239 Traded volumes (USD m) 12,810 9,461 7,648 6,941 6,687 1,626 Market capitalization (CZK m) 1,093,799 1,074,426 1,018,162 1,011,989 1,020,891 1,091,333 Market capitalization (USD m) 57,540 54,189 44,434 40,696 39,844 43,204 Source: PSE, Bloomberg, Economic & Strategy Research, Komerční banka
KB/SG recommendations for the PSE titles
Company Price Target price Recomm. From date Year high Year low CEZ 431.1 448.0 Hold 14.IX.16 477.2 387.0 CME 74.3 88.4 Buy 10.III.17 81.8 49.0 Erste Bank 816.0 931.4 Buy 1.III.17 840.0 480.1 Fortuna 105.5 96.0 Hold 20.V.16 110.0 74.2 Kofola 402.7 - - - 436.8 353.0 Komercni banka 946.8 - - - 1,039.8 808.6 Moneta Money Bank 88.1 90.0 Buy 6.IX.16 90.8 68.0 O2 CR 291.8 267.0 Hold 8.XII.16 292.2 197.3 Pegas Nonwovens 835.9 863.0 Buy 20.V.16 853.1 702.5 Philip Morris CR 13,870.0 13,500.0 Buy 13.VI.16 13,900.0 11,910.0 Stock Spirits 57.4 - - - 59.5 45.0 Unipetrol 231.0 - - - 235.0 155.0
VIG 608.5 691.0 Buy 3.III.17 642.2 411.0 Source: PSE, Bloomberg, Economic & Strategy Research, Komerční banka
Companies overview
Price Monthly year-to-date change Avg. daily volumes CZK change CZK USD 1-3/2017 1-3/2017 Company 7-Apr-17 (%) (%) (%) (CZK m) (USD m) CEZ 431.1 -4.6 0.3 3.0 145.2 5.8 CME 74.3 -5.4 11.6 14.6 2.2 0.1 Erste Bank 816.0 4.5 7.6 10.5 76.8 3.1 Fortuna 105.5 4.2 23.0 26.3 5.9 0.2 Kofola 402.7 -0.8 9.8 12.7 1.2 0.0 Komercni banka 946.8 1.9 7.0 9.9 139.5 5.6 Moneta Money Bank 88.1 2.4 6.3 9.2 153.0 6.1 O2 CR 291.8 7.3 12.3 15.3 67.4 2.7 Pegas Nonwovens 835.9 -1.6 8.7 11.6 8.6 0.3 Philip Morris CR 13,870.0 2.6 5.9 8.8 9.2 0.4 Stock Spirits 57.4 4.4 1.7 4.4 1.3 0.1 Unipetrol 231.0 5.7 25.7 29.1 8.4 0.3
VIG 608.5 -2.8 5.8 8.6 15.5 0.6 Source: PSE, Bloomberg, Economic & Strategy Research, Komerční banka
Economic & Strategy Research Equity Research
The PSE entered the year with decent growth
Global equity market The global stock market followed its successful final quarter of last year and shares also
460 grew in 1Q17. The MSCI world equity index has improved more than 6% since the beginning of the year. This development was attributed mainly to persisting favourable economic trends. 448 Shares are driven up by anticipated expansionary U.S. fiscal policy with a significant 436 investment in infrastructure and a reduction of regulation after Donald Trump became 424 president in January. Neither the Fed’s decision to raise interest rates nor growing
412 speculations on faster monetary policy tightening has halted rising stocks. Only 15 of the 96 major indices tracked by Bloomberg have headed downward. The main U.S. index, S&P 500, 400 VII-16 IX-16 XI-16 I-17 III-17 and the European Stoxx 600 index have added roughly 5% since the beginning of the year.
Source: Bloomberg, MSCI World index Thus, emerging markets in particular have pulled up the global equity index. The MSCI Emerging Index rose more than 12% in 1Q17. One of the few unprofitable indexes is the Japanese Nikkei 225, which has given up 2.7% since the beginning of the year. The main cause was the Japanese yen, strengthening against the U.S. dollar since January by more than 5%, which worsened the performance of local exporters especially.
Development of main equity indices from the beginning of the year
S&P 500 Stoxx Europe 600 MSCI World Index MSCI Emerging Index 115
111
107
103
99
95 30-XII. 9-I. 19-I. 29-I. 8-II. 18-II. 28-II. 10-III. 20-III. 30-III.
Source: Economic & Strategy Research, Komerční banka, Bloomberg; *data as of 7 April 2017
The Prague PX index has added The PSE’s PX index has slightly surpassed the performance of major U.S. and European more than 6% and beats the indexes. It has added more than 6% since January. In comparison with regional competitors, world's major stock indexes. the Polish WIG20 became a clear winner, jumping 15%. On the contrary, the Hungarian BUX’s profit of less than 1.5% has not enthused investors.
The end of the CNB’s FX Waiting for the end of the CNB’s FX commitment was a story on Czech financial markets from commitment should not the beginning of the year. This happened on 6 April. The exit did not affect the Prague stock significantly influence the domestic stock market. market significantly. In an immediate reaction, we could see larger movements only of stocks with dual listings in Prague, where shares of Erste and VIG dropped in the Czech crown. We do not think abandonment of the CNB’s instrument should have a significant impact on stock prices or, respectively, company results. It is difficult to pinpoint a company that would significantly profit from this decision. Most companies operate either on the domestic market or earn a small percentage of revenue abroad.
The following several factors lead us to this conclusion: First of all, it is mainly about how much CZK will strengthen. Second, we have already incorporated a gradual strengthening of the Czech crown into our models. Finally, it is necessary to say that companies use natural or financial hedging to a large extent, which eases the impact of further CZK appreciation.
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Overall, we think the strengthening will have no substantial impact on the performance of companies. The share price impact can be observed in companies that have a dual listing in Prague and a main trading market abroad. There, with CZK strengthening and the same EUR price, stock prices in CZK will fall to avoid arbitration trades.
PX vs. other stock indices in 2017 (%) Prague stocks in 2017 (%)
30 30 year to d ate in CZK te rms 25 20 20
15 10 10
5 0 0 PX KB O2 VIG
-10 CEZ CME Erste UNIP Stock Pegas Kofola PX WIG20 BUX Stoxx600 S&P500 Nikkei225 PMCR Moneta Fortuna
Source: Economic & Strategy Research, Komerční banka, Bloomberg
Unipetrol, CME and Fortuna A positive for the PSE is the fact that there has been no company whose shares formed the trio of the most remained in the red in the first quarter of the year. Shares of petrochemical group Unipetrol successful stocks. (+26.5%) became a clear winner, benefiting from the persisting favourable trend in the sector and renewed production at its plants amid growing speculation of a more generous dividend policy. Although management was lenient during the presentation of its new medium-term strategy regarding this topic and it did not want to reveal the details of necessary investments in Spolana, a negative reaction by the stock price did not last long. Betting company Fortuna was the second most successful stock (+21.8%), supported by the legalisation of electronic casinos in the Czech Republic, undertaken acquisitions and the improving regulatory situation in Poland. Its majority owner, Forbet Holdings, in the hands of investment group Penta, however, announced a few days ago its intention to buy out the stake from minority shareholders. But the bid was roughly 9% below the market price, which is not definitely attractive for them. CME’s shares complement the podiums (+15.4%). The company is doing well to reduce debt, and the favourable economic developments support the advertising market.
Development of Czech stocks (performance in %) 30
Q2 16 Q3 16 Q4 16 Q1 17 YTD
20
10
0
-10
-20 PX O2 KB VIG CEZ CME Erste UNIP Stock Pegas Kofola PMCR Moneta Fortuna
Source: Economic & Strategy Research, Komerční banka, Bloomberg; *data as of 7 April 2017
CEZ lags behind the rest of the The largest issuance, CEZ, added the smallest gains from the Prague peloton (+0.2%) Prague market. while the European utility sector has scored 6.0% since the beginning of the year. Share price stagnation was attributed to a correction in electricity prices, 4Q16 financial results were not
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impressive for investors, and management’s dividend proposal in the amount of CZK33 per share came as a mild disappointment. Domestic Komercni banka and Moneta, tobacco manufacturer Philip Morris and distillery Stock Spirits lagged behind the PSE’s performance.
Moneta became the most traded The average daily trading volume for Average daily trading volume (CZKbn) stock. the past two quarters is more volatile. 1.25 Nevertheless, it is evident that Moneta Money Bank’s entry supported trading 1.00 activity on the domestic market. For the first three months, the newcomer became 0.75 the No. 1 among the most traded stocks 0.50 on the Prague Stock Exchange with a share of 24%. In a close second, a long 0.25 valedictorian, CEZ, followed with 23%. I/14 VII/14 I/15 VII/15 I/16 VII/16 I/17
The share of Komercni banka was 22%. Source: PSE, Bloomberg, Economic & Strategy Research, Komerční banka Erste Group (12%) and O2 Czech Republic (11%) complement the five of the most desirable stocks. These five titles will then take care of 92% of the total volume traded on the Prague market from the beginning of this year.
Miroslav Frayer +420 222 008 567 [email protected]
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Economic & Strategy Research Equity Research
Global economic outlook
United States: tax reform to support GDP growth Household consumption is likely US GDP growth will continue to be driven by domestic demand. Household consumption is to remain the key driver of GDP supported by real wage growth while planned tax cuts will raise household disposable growth. income. Business investments are expected to revive as well, mainly thanks to improvements in the energy sector. Net exports are likely to remain a drag on GDP growth. This year, the US economy is expected to add 2.2%, after 1.6% seen in 2016. Inflation in the United States probably already peaked in February at 2.7%, and in the coming months it is likely to decelerate once again. Headline inflation should average 2.1% this year, and core inflation 1.9%. Fiscal spending and implementation of tariffs represent upside risks to our prognosis. The headline PCE deflator, the preferred inflationary indicator of the Fed, is likely to reach the Fed’s 2% target for the first time in the past five years.
US: Business investment US: Unemployment rate
40 12 % Unemployment Rate % Business Investment - Structures 30 10 20 8 10
6 -10 4 -20 Unemployment rate Full Employment NAIRU - CBO -30 Total Ex-Petroleum Wells 2
-40 0 2001 2003 2005 2007 2009 2011 2013 2015 1998 2001 2004 2007 2010 2013 2016 Sources: BEA, SG Cross Asset Research/Economics Source: CBO, US Labor Departrment, SG Cross Asset Research,
Expected tax cuts support the US The prospect of further rate hikes and marked fiscal stimulus to work in favour of the US dollar. dollar. From November, the EUR/USD traded mostly within a tight range of 1.04- 1.08 EUR/USD. According to SG economists, maintaining the dollar’s current strength lies in president Trump’s success in pushing through tax reform, and considerable tax cuts will be needed. There is widespread agreement among Republicans regarding the need to reform income tax on individuals. Corporate tax reform is, however, more controversial. Moreover, confidence that president Trump will achieve his goals was shaken in March when he failed to get support for the dissolution of Obamacare (Patient Protection and Affordable Care Act).
Fed to hike rates two times this Obamacare and changes in the Dodd-Frank law , whose aim it is to support the financial year. stability of the US, are the main legislative priorities of president Trump. Their impact on GDP growth, at least in the short-term, would, however, be minimal. Conversely, the consequences of tax reform and tax cuts for the real economy would be very significant and now represent one of the biggest uncertainties for the US economy. The final shape of tax reform will impact US central bank policy as well. SG economists, the market and even the Fed itself expect another two rate hikes by the end of this year, and three rate hikes are expected in 2018. The tightening of monetary conditions could be even more pronounced in the event of more significant fiscal stimulus. Fed representatives Rosengren and Williams already have stated that the Fed could even hike rates three times by the end of 2017. Regarding the impact on the EUR/USD, we expect it to slightly strengthen by the end of this year. In December we expect it to stand at 1.10EUR/USD.
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Economic & Strategy Research Equity Research
Euro area: tapering to be announced in September GDP growth will be driven by GDP growth in the euro area continues to be driven by domestic demand. Wage growth is domestic demand. likely to be only a moderate (1.6%), while inflation is much higher than last year. Consequently, real gross disposable income will grow at a slower pace. Employment growth is set to slightly decelerate as well. Still, consumer confidence is forecast to stay at solid levels, which should lead to a lower savings rate. Looking ahead, investments should become an important engine of growth. In 2016, investments contributed 0.5pp to GDP and are likely to add another 0.5pp in 2017 and 2018. Even so, the distribution of investments will remain very uneven. 75% of investments are likely to be realized in Germany, France, Italy and Spain. Given the better-than-expected performance of the German economy, we have revised our GDP forecast for the euro area for this year from 1.5% to 1.7%.
QE programme to be complete in Inflation in the euro area hit the ECB’s 2% target. However, in March decelerated to September 2018. 1.5%, according to preliminary estimates. We expect headline inflation to average at 1.6% this year. The ECB's inflation target will probably not be achieved in 2018-2021 , when inflation should average 1.5%. Core inflation remains at low levels. We expect it to average 1.0% this year, while over 2018-2021 it should be 1.3% on average. Low inflation is the reason why the ECB’s rhetoric remains dovish. According to SG economists, the ECB is likely to announce it will further reduce its asset purchase program in September. The QE program should be reduced by EUR20bn as of October. In December, another reduction of EUR10bn is expected to be announced for January, followed by a similar reduction in March, June and September, when the programme should be complete. SG economists substantially revised their outlook for interest rates. They estimate one rate hike in December 2018, in light of the delayed US recession (by one year, until 2019) and rising euro area GDP growth above potential in 2018. Another rate hike should follow in March 2019. After that interest rates should remain unchanged until 2021.
Euro area: Inflation (%, yoy) EUR/USD
5 1.6 SG SG forecasts Euro area HICP Euro area Core forecasts 1.5 4
1.4 3
1.3 2 1.2 1 1.1 EUR/USD 0 1.0
-1 0.9 2005 2007 2009 2011 2013 2015 2017 1Q05 3Q06 1Q08 3Q09 1Q11 3Q12 1Q14 3Q15 1Q17 3Q18 1Q20 3Q21 Source: Eurostat, Datastream, SG Cross Asset Research/Economics Reuters, Datastream, SG Cross Asset Research/Economics
China: GDP grow is likely to decelerate from 2H17 Government authorities likely to The Chinese economy started the year on a positive note. The significant increase of lending maintain the highest stability activity last year is likely to translate into higher economic growth in 1H17. As a result, SG possible until the Party Congress in autumn. economists raised their GDP forecast for this year from 6.3% to 6.6%. The lagged impact of credit stimulus last year is however likely to diminish, and the Chinese economy will likely decelerate. The 19 th Congress of the Communist Party, which will take place in autumn, could give a clue as to how the Chinese government will handle GDP growth below a medium-term target. Approval of a medium-term GDP growth target below 6.5% would be a good sign, indicating the government is taking structural reforms seriously. Inflation is likely to stay below 3% this year, which could prompt the People Bank of China to leave deposit rates unchanged, at least until the autumn government congress. The Chinses authorities are likely to attempt to maintain all areas as stable as possible ahead of the autumn Party Congress, which means that it will continue its infrastructure projects and try to maintain a relatively
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stable exchange rate. The RMB/USD is likely to be traded at 7.2 at the end of this year. The biggest risk for the Chinese economy would be an excessively strong dollar, which could force the PBoC to float RMB prematurely. SG economists however do not assume this scenario. They expect a gradual approach to increasing the flexibility of the CNY/USD.
Japan: yen likely to weaken No additional easing by the BoJ is The Japanese economy is like to grow above potential even this year. The main engine of the expected. economy will be domestic demand. This is supported by tight conditions on the labour market, which pushes wages higher. This year, not only are nominal wages expected to grow but real wages are expected to rise as well. The unemployment rate should fall further, to as low as 2.5%. Accommodative fiscal policy also supports household consumption. The situation is improving for corporates as well, as the global economy recovers and the yen weakens. The labor shortage is forcing corporates to invest more to maintain their profitability and productivity. The corporate savings rate has started to decline again and should gradually approach zero. The decline of the corporate savings rate into negative territory should help to complete exit from deflation as well. The 2% inflationary target, however, will not be reached this year. Inflation is likely to remain around 1% at the end of this year. SG Economists forecast no additional easing by the BoJ, but expect it to keep its long-term yield at around 0.0%. In the event of rising global yields, this will help to weaken the yen further. The USD/JPY is likely to head towards 120, which should also help a complete exit from deflation. We expect the BoJ to raise its long-term yield target only once core CPI reaches above 1% and the USD/JPY is above 120. However, this is unlikely to be before 1Q18.
Yen set to depreciate further
140 -30
130 -20 120 -10 110 0 100 10 90 20 80
70 30
60 40 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 USDJPY
Macro Index (2.4*Net domestic fund demand + 4.1 (Current Account - Net FDI) - 11.2*ln(2yr bond spread between US and Japan), RHS, Axis Flipped)
Source: Bloomberg, BoJ, Cabinet Office, SG Cross Asset Research/Economics
Jana Steckerová +420 222 008 524 [email protected]
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Economic & Strategy Research Equity Research
Outlook for equity markets
SG continued to raise the weight Our outlook for equity markets is based on the forecasts and recommendations of Société of equities in its global portfolio Générale’s report Multi Asset Portfolio – back to fundamentals: favour equities, commodities from 58% to 63%. and EM (published on 21 March). An improving macroeconomic environment, reflation and the structural switch from a monetary to fiscal policy impetus in developed countries are strong incentives for investors to switch from expensive bonds to equities. Société Générale therefore further increased the weight of equities in its global portfolio from 58% to 63%. On the contrary, it decreased the weight of government bonds by 3bp to 11% and inflation- linked bonds by 2bp to 3%. From other asset classes, SG keeps the weight for corporate bonds at 10% and left 7% in commodities. Cash remained underweight at 6%.
The outlook for the global stock Considering clearly improving global growth, inflationary momentum in the coming market is positive for the next 12 quarters, and the Fed and other G10 central banks moving away from super loose months. monetary policy, we maintain a positive stance on most equity indices for the next 12 months. Reallocation from bonds into equities and other growth-related assets will continue to be fuelled by a further impetus for necessary infrastructure spending, scaling back of (at least) U.S. regulations and a continuation of a strong M&A cycle. Although we see political risks continuing to play a dominant role in Europe, it seems that after falling short in Austria and the Netherlands, the chances of populist candidates in major French and German elections are diminishing, which is a clear positive for equity markets. Furthermore, global equities should not start pricing in the next U.S. economic slowdown before 2019.
With high valuations, the upside With equity indices at record heights, U.S. stocks are starting to look overpriced and, in for U.S. stocks looks limited. combination with the first setback of Trump’s efforts to push through healthcare reform, provide limited space for fundamental growth. Despite this, we expect the S&P 500 to peak at 2,500 by end-2018, supported by economic growth, rising inflation and expansionary fiscal stimulus.
Italy is our favourite market in Meanwhile, eurozone equities, constrained by political risks, are trading at a 47% discount to Europe, followed by France. their U.S. counterparts on price-to-book value. A weaker euro, better economic momentum, a
pickup of inflationary expectations and more fiscal easing should support the EuroSTOXX 50. French and Italian equities appear particularly attractive in a scenario where the eurozone political risks fade and bond yields normalise. In the United Kingdom, we expect the FTSE 100 to perform in line with the rest of Europe, as higher commodity prices and a weaker pound sterling should offset the negative impact of Brexit on the domestic economy.
China and India: our favourite In Asia, firmer growth and normalising inflation should support a recovery in profit - the markets in Asia. missing link in the Asia equity story since the start of the decade. We reflect the earnings growth improvement in our expectation of high single-digit growth in MSCI Asia by end-2018. In emerging Asia, China offshore and India are our preferred markets. We are positive on Chinese equities due to diminishing hard-landing expectations for this year, improving corporate profits, continuing openness to foreign investors and lower sensitivity to CNY depreciation. Our stance on India is more structural: The higher potential growth caused by the implementation of reforms factors into higher equity valuations. Taiwan and South Korea could be potentially more impacted by a rise in protectionism and a more isolationist U.S. stance.
Emerging market equities and The clear support for growth by policymakers, especially through tax cuts and infrastructure commodities have strong growth spending, alongside a resilient Chinese economy, should support demand for EM and potential. commodity assets. SG significantly raised the weight of global EM equities in its portfolio from 2% to 7% and doubled its EM currency exposure to 13%. Given the little investment in
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new capacity in the past few years and growing demand for raw materials, the balance of supply should favour rising prices of commodities, in which SG maintains strong exposure at 7%. Commodity currencies have recently lagged behind commodity prices and should be bought aggressively.
SG/KB outlook for equity indices
Last price VI.17 IX.17 XII.17 III.18 XII.18 change Index 7-Apr est. est. est. est. est. 1 year (%) S&P 500 (USA) 2,359 2,400 2,425 2,450 2,475 2,500 4.9 DJ Stoxx 600 (Europe) 381 390 400 410 415 440 9.0 FTSE 100 (UK) 7,339 7,600 7,800 8,000 8,200 8,600 11.7 CAC 40 (France) 5,127 5,250 5,400 5,500 5,600 6,000 9.2 DAX 30 (Germany) 12,209 12,250 12,500 12,750 13,000 13,500 6.5 FTSE MIB (Italy) 20,295 21,000 21,500 22,000 22,500 24,500 10.9 IBEX 35 (Spain) 10,502 10,500 10,800 11,000 11,200 11,800 6.6 Nikkei 225 (Japan) 18,665 19,800 20,400 20,800 21,000 21,800 12.5 HSCEI (China) 10,274 10,600 10,800 11,200 11,300 11,800 10.0 Hang Seng (Hong Kong) 24,267 24,500 24,800 25,200 25,300 25,800 4.3 KOSPI (South Korea) 2,152 2,140 2,120 2,140 2,150 2,160 -0.1 SENSEX (India) 29,707 30,000 30,600 31,500 32,000 33,500 7.7 PX (KB/SG, market prices) 984 960 980 1,010 1,030 1,112 4.7 PX (KB/SG, consensus) 984 960 990 1,020 1,050 1,134 6.7 Source: SG Cross Asset Research (Multi Asset Portfolio from 21 March 2017); Economic & Strategy Research, Komerční banka
SG adds aerospace & defence to From a sectoral perspective in Europe, the recovery of the EMU economy, the return of its preferred sectors. inflation and decreasing unemployment should support consumption and growth in cyclical sectors. From the consumer sector, we prefer automobiles & parts. The return to fiscal stimulus and the growing need for infrastructure investments should favour the construction & materials sectors. Trump’s pressure on NATO, Russia’s assertive foreign policy and Brexit are catalysts for further European cooperation and defence spending. Therefore, SG recommends to overweight the aerospace & defence sector. Banks should benefit from higher inflation, furhter interest rate hikes in the United States and expected tapering by the ECB.
Rising interest rates do not bode Among the losers in this environment are telecoms & utilities, two sectors where SG has well for highly leveraged telecoms had structural large underweight positions. Despite 5% dividend yield, which in our view is not & utilities. sustainable, telecoms are constrained by rising capex and poor earnings momentum. As for utilities, stretched balance sheets and poor earnings do note bode well for rising interest rates.
Our outlook for the Czech equity Similar to global equity markets, the Prague Stock Exchange could deliver a higher market is positive. single-digit return in the next 12 months. We adopt a bottom-up approach because the PX index consists of only 13 issues, with the four largest usually having a combined weight of around 70%. Of the most traded blue chips, we actively cover nine companies (including SG’s coverage of Erste Group shares). For valuing other stocks, we use two approaches, i.e. the actual market price and market consensus. An average of these two estimates shows potential growth of 6-7% over the one-year horizon (see the table on the previous page) with an estimated dividend yield at 6%.
We see financial stocks as among We believe financial stocks are among the most attractive on the Prague Stock the most attractive on the PSE. Exchange. For financial institutions, we give a Buy recommendation to Moneta Money Bank and VIG, which both offer a total return of 16%. Erste Group Bank shares are covered by SG with a Buy recommendation and an expected total return of 20%. In general, the undervalued European banking sector should benefit from rising inflation expectations. Additionally, Czech banks are well capitalised. The insurance sector should also profit from rising inflation and bond yields, as predicted by our economists.
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Among other stocks, we have a Buy recommendation for Pegas Nonwovens, Philip Morris Czech Republic and CME. According to our estimates, the tobacco producer offers a very attractive dividend yield of almost 6%. The textile company should benefit from future expansion of production capacities and cost savings. Shares of media group CME should profit from an improving financial performance, supported by the growing media markets of CEE, and a significant reduction of debt service. For other companies under our coverage, we keep a Hold recommendation.
Richard Miřátský +420 222 008 560 [email protected]
Expected domestic corporate events in the following months Date Company Event 17 April O2 Czech Republic Last trading day with dividend 18 April Philip Morris ČR Last trading day with dividend 19 April Vienna Insurance Group 2016 Annual report 20 April Fortuna Entertainment Group 2016 Annual report 24 April Moneta Money Bank Annual General Meeting 26 April Fortuna Entertainment Group Extraordinary General Meeting 27 April Unipetrol 1Q17 earnings announcement 28 April O2 Czech Republic 1Q17 earnings announcement 28 April Pegas Nonwovens 2016 Annual Report 28 April Philip Morris ČR Annual General Meeting 3 May CME 1Q17 earnings announcement 5 May Erste Group Last trading day with dividend 5 May O2 Czech Republic Last trading day with dividend 10 May O2 Czech Republic Annual General Meeting 11 May ČEZ 1Q17 earnings announcement 11 May Pegas Nonwovens 1Q17 earnings announcement 11 May Moneta Money Bank 1Q17 earnings announcement 11 May Fortuna Entertainment Group 1Q17 earnings announcement 12 May Vienna Insurance Group Annual General Meeting 15 May MSCI Announcement of MSCI rebalancing 16 May Vienna Insurance Group Last trading day with dividend 19 May Vienna Insurance Group Dividend Pay Date 22 May Erste Group Last trading day with dividend 23 May Vienna Insurance Group 1Q17 earnings announcement 26 May Erste Group Dividend Pay Date 29 May Philip Morris ČR Dividend Pay Date 1 June MSCI MSCI rebalancing effective date 9 June O2 Czech Republic Dividend Pay Date 15 June Pegas Nonwovens Annual General Meeting Source: Bloomberg, companies
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Foreign markets
S&P 500 (USA) Stoxx600 (Europe)
2 500 395
2 400 380
2 300 365
2 200 350
2 100 335
2 000 320 28/09 28/10 28/11 28/12 28/01 28/02 31/03 4/10 4/11 4/12 4/01 4/02 4/03 4/04
Zdroj: Bloomberg Zdroj: Bloomberg
Nikkei 225 (Japan) HSCEI (China)
20 000 11 000
19 000 10 600
18 000 10 200
17 000 9 800
16 000 9 400
15 000 9 000 4/10 4/11 4/12 4/01 4/02 4/03 4/04 4/10 4/11 4/12 4/01 4/02 4/03 4/04
Zdroj: Bloomberg Zdroj: Bloomberg
WIG 20 (Poland) BUX (Hungary)
2 350 36 000
2 200 34 000
2 050 32 000
1 900 30 000
1 750 28 000
1 600 26 000 28/09 28/10 28/11 28/12 28/01 28/02 31/03 28/09 28/10 28/11 28/12 28/01 28/02 31/03
Zdroj: Bloomberg Zdroj: Bloomberg
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Economic & Strategy Research Equity Research
Utility ČEZ Results slightly above expectations but further weakening in 2017 expected
CEZ results for 4Q16 Hold CZK bn 4Q15 4Q16 change KB estimate consensus* Revenues 59.56 58.60 -2% 58.60 56.25 EBITDA 16.82 14.30 -15% 13.05 13.05 Price 07.04.17 CZK 432 EBIT 4.34 4.50 4% 4.38 4.73 12m target CZK 448 Net profit 3.90 -0.10 -103% 1.82 2.30 Adjusted net profit 9.10 2.90 -68% 1.92 1.54 Upside to TP 3.8% Source: CEZ, Economic & Strategy Research, Komerční banka. *CEZ poll of 13 analysts including KB Dividend CZK 35 Total return 11.9% Results: The 4Q16 and full-year 2016 results slightly exceeded the company’s guidance and market expectations but remained deeply behind the results of the previous year. Sector stance Underweight Due to increased production from coal and gas and higher sales of gas and heat, revenues decreased only marginally by the low single digits and reached CZK203.7bn for 2016. Investment type However, profitability declined significantly due to weaker power price s and lower utilisation Commodity price exposure V of the nuclear fleet. In comparison with 2015, EBITDA dropped 11%, reaching High dividend yield V CZK58.1bn. Due to asset impairments, goodwill write-off s, significant weakening of the 1 year performance Turkish lira and revaluation of the MOL option, whole-year net income slid 30% to
550 CZK14.6bn. Adjusted for one-time impacts, net income reached CZK19.6bn. The 500 company proposed a CZK33 per share dividend for 2016, which is below the CZK40 per 450 share paid out in recent years (see more http://bit.ly/CEZ2016e ). 400
350 Further decrease of outlook: For 2017, the company expects a further decrease of
300 04/16 07/16 10/16 01/17 EBITDA down to CZK52bn and net income in the range of CZK12-15bn. We perceive
Source: Bloomberg the guidance as quite conservative, considering the expected pickup in nuclear generation to 28TWh compared with 24TWh last year. Furthermore, this year’s results could be Trading volume (in ths of shares) boosted by positive impacts from the SZDC payment (CZK1.1bn) and the sales of power 1500 plant Pocerady (CZK4bn), Prague residential housing (CZK1bn) and MOL shares 1200
900 (CZK3.4bn).
600 Sale of MOL shares: The recent sale of 7.7m of MOL shares should generate a profit of up to 300 CZK3.4bn. The proceeds from the sale will be used for early repayment of convertible bonds, the 0 04/16 07/16 10/16 01/17 company issued on MOL shares in 2014 (see more http://bit.ly/CEZ_MOLen ). Source: Bloomberg CEZ is hedged against koruna strengthening: A majority of the revenues CEZ generates from
Share data electricity wholesale is denominated in E UR. The negative impact would be largely offset by a RIC CEZsp.PR Bloom CEZ CP revaluation of debt the company raised in EUR. The level of natural hedge for 2017 surpasses 85% 52-week range 387-477.2 Market cap. (CZKbn) 231.9 and, together with financial hedging, the total coverage reaches 95% (see more Market cap. (EURbn) 8.7 Free float (%) 30 http://bit.ly/CEZczkEN ). Performance (%) 1m 3m 12m Share -4.6 2.5 8.6 Main risks: The return of low electricity prices from the beginning of last year, ongoing Rel. PX Index -5.6 -2.1 -2.2 Source: Bloomberg prolongation of nuclear outages, sizeable increase in investments and a significant decrease in dividend payout. The latest reports: http://bit.ly/CEZ_analysis Upcoming events: The announcement of 1Q17 results will be made on 11 May. http://bit.ly/CEZczkEN
Richard Miřátský (420) 222 008 560 [email protected]
10 April 2017 13
Economic & Strategy Research Equity Research
Media CME Strengthening results and lower interest expenses, we change recommendation to Buy
CME 4Q16 results Buy USD m 4Q15 4Q16 change KB estimate consensus Revenues 195.6 207.1 5.9% 214.7 201.6 OIBDA 56.2 61.3 9.1% 68.5 62.5 Price 07.04.17 USD 2.95 Operating Income 46.5 51.6 11.0% 57.9 53.7 CZK 74.3 Net profit -11.4 21.1 nm 29.4 20.1 12m target USD 3.7 Source: Economic & Strategy Research, Komerční banka; *estimate in Thomson Reuters poll CZK 88 Upside to TP 25.4% Dividend USD 0.0 We changed our recommendation to Buy: We expect the improving operating CZK 0 performance, supported by positive developments on the company’s main media markets,
Total return 25.4% and a significant decrease of interest expenses due to successful refinancing and a new guarantee agreement with Time Warner will allow the company to start reducing leverage, Sector stance which is the main constraint of its valuation. We expect that solid growth prospects, a Overweight strengthening financial performance and decreasing debt service will brin g potential for future growth in the share price. After incorporating these positive factors into our models, Investment type we increased our target price to USD3.7 and changed our recommendation to Buy. Cyclical sector V 2016 results: Thanks to growth of revenues and strengthening of profitability in the main markets of Romania, the Czech R epublic and Slovakia, the company generated 5.3% 1 year performance higher revenues at USD638m and OIBDA profitability improved 22.2 % to USD150m last
80 year. The solid cash flow generation enabled the company to stop growing leverage. The 74 successful debt refinancing and renegotiation of guarantee agreements with Time Warner 68 helped the company to improve its debt maturity profile and singnificantly reduce debt 62
56 service. Although the reduction of interest expenses positively impacted net income, the
50 company reported a huge net loss of USD180m due to the cost of debt refinancing. We 04/16 07/16 10/16 01/17 understand the costs were of a non-cash character; however, we perceive negati vely the Source: Bloomberg fact that the loss resulted in negative equity. Trading volume (in ths of shares) Mid-term strategy: We expect the continuation of gradual improvement of CME’s 250
200 operating performance due to convergence of the average TV advertising exp enses per 150 capita in CEE toward the levels observed in Western Europe. An i mproving financial profile 100 in combination with decreasing interest expenses should enable the company to return to 50
0 bottom line profitability and start gradually reducing leverage. 04/16 07/16 10/16 01/17 Source: Bloomberg Risks: We consider deterioration of the macroeconomic environmnent in the company’s main CEE markets, USD strengthening, rising interest rates and new equity issuance to Share data represent the main risks to our recommendation. RIC CETVsp.PR Bloom CETV CP 52-week range 49-81.8 Market cap. (CZKbn) 10.7 Upcoming events: The financial results for the first quarter of 2017 should be annou nced Market cap. (EURm) 423 Free float (%) 44 on 3 May. Performance (%) 1m 3m 12m Share -5.4 11.6 16.1 Rel. PX Index -6.4 6.5 4.5 Source: Bloomberg
The latest reports (in Czech only): http://bit.ly/CMEanalyza http://bit.ly/CME_100
Richard Miřátský (420) 222 008 560 [email protected]
10 April 2017 14
Economic & Strategy Research Equity Research
Sports betting Fortuna Acquisition in Southeast Europe and departure from Prague and Warsaw exchanges
Fortuna 2016 results Hold EUR m 2015 2016 change KB estimate consensus Amounts staked 847.7 1039.6 22.6% 1041.2 1036.4 Gross Wins 147.4 163 10.6% 165.5 165.4 Price 07.04.17 CZK 105.5 Revenues 102.8 106.2 3.3% 105.8 na 12m target CZK 96 EBITDA 27.2 22.1 -18.8% 22.9 23.1 Operating profit 22.6 16.7 -26.1% 17.5 na Upside to TP -9.0% Net profit 19.5 11.2 -42.6% 12.1 13.5 Dividend EUR 0 Source: Economic & Strategy Research, Komerční banka; *estimate in Reuters poll CZK 0.0 Total return -9.0% Results: The amounts staked grew in 2016 22.6% to EUR1.04bn, beating the market Sector stance expectations, mainly due to significant growth in on line and mobile betting. Slovakia experienced No rating the highest growth from all the regions (28.7%), reaching amounts staked of EUR334.5m mainly due to the abolishment of fees for Internet and mobile betting. In the Czech Republic, the Investment type Defensive V company’s main market, th e amounts staked grew a solid 21.5% and reached EUR561.3m. Despite strong growth in amounts staked, profitability steeply declined with EBITDA falling 18.8% to EUR22.1m and bottom line profit plunged 42.6% to EUR11.2m. Profitability missed the both 1 year performance company ’s guidance and market expectations mainly due to increased personnel costs and the 110 start of a sponsorship agreement with the Czech football association. The company expects 100
90 amounts staked to reach up to EUR1.3bn and EBITDA to grow 20-25%.
80 Acquisition: At the end of February, Fortuna acquired from Hattrick Sports Group its betting 70 businesses in Romania (Casa Pariurior), Croatia (PKS) and Spain (Luckia) for a consideration of 60 04/16 07/16 10/16 01/17 EUR85m. We perceive the acquisition to be in line with Fortuna’s strategic goal to become a Source: Bloomberg leading betting house in CEE and to complement its current strong market positions in the Czech Trading volume (in ths of shares) Republic, Poland and Slovakia. Subsequently, the company announced the acquisition of betting
500 activities in SEE owned by other entities within the Penta group for approximately EUR50m. As 400 both transactions will be financed predominantly by additional bank debt, it will significantly 300 increase its leverage with net debt/EBITDA rising up to 3.5x, which we perceive as still reasonable 200 for the company. 100
0 04/16 07/16 10/16 01/17 Minority share buy-back: Fortuna´s majority shareholder Fortbet Holdings announced at the end
Source: Bloomberg of March a tender offer to buy back the approximately 32% share from minority shareholders and offered CZK 98.69 per share. The buy-back will start on both the Prague and W arsaw stock
Share data exchanges on 21 April and will run until 20 June. As the company is incorporated in the RIC FOREsp.PR Bloom FOREG CP Netherlands, the majority shareholder needs to reach 95% share to be allowed to squeeze out 52-week range 74.2-110 Market cap. (CZKbn) 5.5 minority shareholders. We perceive the offered price as lo w and expect majority shareholder will Market cap. (EURm) 206 Free float (%) 33 have to increase it to gain 95%. Performance (%) 1m 3m 12m Share 4.2 20.2 22.2 Risks: Further increases in taxation of betting, uncertainties about future investments, Rel. PX Index 3.2 14.8 10.1 reluctance to reinitiate dividend payouts. Source: Bloomberg
The latest reports (in Czech only): Upcoming events: The financial results for 1Q17 will be announced on 11 May 2017. http://bit.ly/Fa_analyza http://bit.ly/Fa2016
Richard Miřátský (420) 222 008 560 [email protected]
10 April 2017 15
Economic & Strategy Research Equity Research
Banking MONETA Money Bank The management proposed a dividend in the amount of CZK9.8 per share
MONETA Money Bank results for 4Q16 Buy CZKm 4Q15 4Q16 Change KB estimates Consensus Net interest income 2,306 1,973 -14.4% 1,990 2,048 Net fee and commission income 605 472 -22.0% 493 506 Price 07.04.17 CZK 88.1 Total operating income 2,994 2,720 -9.2% 2,599 2,746 12m target CZK 90.0 Net income 1,003 867 -13.6% 756 775 EPS 1.97 1.70 -13.7% 1.48 1.52 Upside to TP 2.2% Source: MONETA Money Bank, Economic & Strategy Research, Komerční banka, consensus of MONETA Money Bank Dividend CZK 9.8 Total return 13.3% MONETA Money Bank surprised with a higher-than-expected profit for 4Q16. However, Sector stance both net interest and non-interest income were worse, offset by a higher profit from Overweight financial transactions. Overall, the company fulfilled all the objectives set by management and confirmed its high capital adequacy. The biggest surprise was the proposed dividend Investment type High dividend yield V in an amount of CZK9.8 per share. Sensitivity to economic cycle V The company’s new guidance for this year is not too optimistic and lags behind the
1 year performance average market estimates. The management expects profit at a minimum level of CZK3.4bn (consensus CZK3.56bn) and operating profit of CZK10.3bn at least 90
85 (c. CZK10.7bn). The CEO said in a conference call that strong pressure would persist on
80 the net interest margin and he expects a more significant impact on the retail segment. 75 According to him, 2018 will be the year the bank is able to turn a corner on reven ues and 70 return to stability and growth, although the CEO did not want to comment on whether 2018 65 05/16 07/16 09/16 11/16 01/17 03/17 net income would be higher. Our outlook is only slightly more optimistic in comparison with
Source: Bloomberg the management’s set targets. We expect a further drop in both net interest and non-
Trading volume (in ths of shares) interest income with a negative impact on net income.
15000 Dividend policy: The proposed dividend distribution in the amount of CZK5bn represents
12000 123% of net income including a part of excess capital connected with RWA management 9000 and representing a dividend yield of 11.4%. The management repeated that its mid-term 6000 dividend policy was to pay out at least 70% of net income. However, we think the excess 3000 capital will be a source of higher dividend distribution in the following years. 0 05/16 07/16 09/16 11/16 01/17 03/17 Risks: We consi der the low interest rate environment with a negative impact on net interest Source: Bloomberg margins as a major risk. The trade volume is increasing, which is one of the main pillars of the company’s strategy and which helps to partly offset lower margins. If growth does not Share data RIC PGSN.PR Bloom PEGAS CP accelerate, it will represent a negative effect on Moneta’s performance. The proposed tax 52-week range 68-90.8 changes by the leading coalition party CSSD are another actual risk. The tax rate would be Market cap. (CZKbn) 45.0 Market cap. (EURm) 1691 dependent on asset size. For Moneta, there could be additional taxation of CZK300m. Free float (%) 57.49 Performance (%) 1m 3m 12m Unicredit CZ&SO acquisition: Information about the sale of Czech and Slovak Unicredit Share 2.4 6.3 n/a Rel. PX Index 1.4 1.5 n/a and Moneta as a potential buyer has appeared in the media. In our opinion, this acquisition Source: Bloomberg is not realistic owing to the size of both companies and would re quire a capital increase by
The latest reports (in Czech only): Moneta. Moreover, we think the purchase of this bank does not suit its strategy as Moneta
http://bit.ly/MONET_1609 wants to focus on increasing market share in the retail segment. http://bit.ly/MONET_1702 Expected events: The shareholder meeting takes place on 24 April. 1Q17 re sults will be announced on 11 May.
Miroslav Frayer (420) 222 008 567 [email protected]
10 April 2017 16
Economic & Strategy Research Equity Research
Telecommunications Services O2 Czech Republic We downgraded our recommendation to Hold after it hit our target price
O2 results for 4Q16 Hold CZK bn 4Q15 4Q16 Change KB estimate Consensus Sales 9.70 9.83 1.4% 9.76 9.69 EBITDA 2.63 2.60 -1.1% 2.65 2.60 Price 07.04.17 CZK 292 Operating profit 1.75 1.69 -3.4% 1.79 1.69 12m target CZK 267 Net profit 1.35 1.25 -7.8% 1.39 1.34 Source: O2 Czech Republic, Economic & Strategy Research, Komerční banka, consensus of ThomsonReuters Upside to TP -8.6% Dividend CZK 21 Total return -1.4% 4Q16 results were more or less in line with market expectations but slightly lagged behind our estimates. The company showed slightly higher revenues, offset by lower net income. Sector stance From this point of view, EBITDA margin (26.5% in 4Q16) can come as a mild Underweight disappointment. The company’s management proposed a dividend in the amount of CZK17 per share in addition to the earlier announced share premium distribution of CZK4 Investment type Defensive V per share. High dividend yield V 2016 results: Net incom e rose 3.6% to CZK5.3bn; EBITDA went up 3.0% to CZK10.5bn.
1 year performance The EBITDA margin increased 0.7pp to 27.9%. The company thus fulfilled its guidance.
290 Impact on estimates and recommendation change: O2 Czech Republic has not 270 provided us with its guidance for 2017 and has not commented on it at all. We did not 250 change the outlook for this year, and we expect an improvement in operating margins and 230 a slight increase in net income with practically zero growth of revenues. The question mark 210
190 hangs over the amount of ordi nary dividend whose proposed size is CZK1 lower in 04/16 07/16 10/16 01/17 comparison with our prediction. We suppose a stable total distribution (including share Source: Bloomberg premium) to shareholders, which would mean a downward shift of the predicted trajectory. Trading volume (in ths of shares) In reaction to this news and our target price being hit, we downgraded our 1500 recommendation from Buy to Hold by the end of January. 1200 The amendment to the Telecommunications Law: The lower house of parliament 900
600 approved the draft amendment to the Electronic Communications Act. However, it does
300 not limit final prices for retail customers. The current regulation can have an impact only on 0 wholesale prices; nevertheless, room is also limited. If the amendment to the 04/16 07/16 10/16 01/17 Telecommunications Act in this wording is approved, any impact on the valuatio n of O2 Source: Bloomberg Czech Republic’s shares will be only marginal. See also http://bit.ly/O2CR_1704e .
Share data Roaming fees: As of mid-2017, roaming fees should be terminated definitively in Europe. RIC SPTTsp.PR Bloom TELEC CP 52-week range 197.3-292.2 This is further pressure on telecomm unications operators to cut prices for provided Market cap. (CZKbn) 90.5 services. However, companies will likely compensate for the missing roaming fees in the Market cap. (EURm) 3402 Free float (%) 28 data segment. Performance (%) 1m 3m 12m Share 7.3 7.9 16.7 Risks: We consider tighter regulation as the biggest risk. The potential entrance of a new Rel. PX Index 6.2 3.0 5.1 Source: Bloomberg operator repres ents another risk although this could be limited by the fact that O2 is
The latest reports (in Czech only): successful in transferring customers from prepaid to contractual services, which helps http://bit.ly/O2CR_1612 reduce customers’ willingness to switch to a new operator. http://bit.ly/O2CR_1701 Expected events: The company will publish 1Q17 results on 28 April. The ex-date is on 9 May. The shareholder meeting takes place on 10 May.
Miroslav Frayer (420) 222 008 567 [email protected]
10 April 2017 17
Economic & Strategy Research Equity Research
Textiles Pegas Nonwovens Management proposed an increase in dividends to EUR1.30 per share
4Q16 results Buy EUR millions 4Q15 4Q16 yoy KB estimate Consensus Sales 59.56 48.58 -18% 52.08 52.07 EBITDA 14.58 12.58 -14% 12.21 11.59 Price 07.04.17 CZK 836 Operating profit 10.47 8.52 -19% 7.94 7.71 12m target CZK 863 Net profit 8.15 1.82 -78% 9.46 8.02 Source: Pegas, Economic & Strategy Research, Komerční banka, consensus Thomson Reuters Upside to TP 3.2% Dividend EUR 1.3 The results of Pegas Nonwovens slightly surpassed both our and market expectations. CZK 34.6 The drop in revenues was more significant, related to a decline of polymer prices. 4Q16 Total return 7.4% EBITDA of EUR12.6m helped the full-year result of EUR46.7m, meaning fulfilment of Sector stance management guidance of EUR43-49m. The 2016 EBITDA margin reached 22.6%, rising Neutral 3.3pp yoy. Significantly lower net income was attributed to unrealised FX profits/losses, especially due to the Egyptian pound, which robustly depreciated in 4Q16. Investment type High dividend yield V Management guidance for 2017: Management expects this year’s EBITDA to be within a Low market capitalisation V range of EUR43-50m. We expect it to rise roughly 4% to almost EUR48.5m. We think any
1 year performance decline below the 2016 level would be a disap pointment, owing to the start of the new production line. We consider the set lower border at EUR43m is a conservative estimate 900
850 and a certain safeguard against an increase in polymer prices and a potential deterioration
800 of management guidance. 750 Investments: Management expects investments will not exceed EUR30m, of which 700 maintenance expenses should amount to EUR4.5m. We expect an additional EUR5m for 650 04/16 07/16 10/16 01/17 finalising the investment in Znojmo. The rest should be used for a new production plant in Source: Bloomberg South Africa. Its total amount is expected at EUR30-35m. Pegas has signed a Trading volume (in ths of shares) Memorandum of Understanding with the supplier of production technology in which it
100 confirmed its intention to order a new production line. The plant should start working in 80 commercial operation from 2019, and its capacity will be 10,000 tonnes. The conclusion of 60 the final contract for delivery of the production line is expected in July 2017. The signing of 40 the memorandum is in our opinion confirmation that the company’s management is 20 successful in neg otiating with potential customers about future deliveries. We believe the 0 04/16 07/16 10/16 01/17 company has agreed contracts for more than 50% of production capacity. Source: Bloomberg Dividend policy: Management proposed an increase in dividends of 5 cents to EUR1.30 per share, in line with exp ectations. Despite ongoing investments, we expect Pegas to Share data RIC PGSN.PR Bloom PEGAS CP continue its progressive dividend policy. 52-week range 702.5-853.1 Market cap. (CZKbn) 7.7 Issuance of senior unsecured bonds: Proceeds will be used primarily for refinancing Market cap. (EURm) 290 public bond issuance in Nov 2018. Bonds in the amount of EUR50m mature on 20 January Free float (%) 99 Performance (%) 1m 3m 12m 2024, and the coupon rate is 1.875%. Bonds matured in November 2018 yield 2.85%. Share -1.6 8.8 5.3 Rel. PX Index -2.6 3.8 -5.2 Risks: We consider significantly rising polymer prices and lower investments as the biggest Source: Bloomberg risks. CEO František Řezáč said management would not be surprised by a price increase The latest reports (in Czech only): http://bit.ly/Pegas_1605 after a longer period of stability. http://bit.ly/Pegas_1703 Expected events: 1Q17 results will be published on 11 May. The shareholder meeting takes place 15 June.
Miroslav Frayer (420) 222 008 567 [email protected]
10 April 2017 18
Economic & Strategy Research Equity Research
Tobacco Philip Morr is CR Results above expectations; new ban on smoking could constrain growth
Philip Morris CR 2016 results Buy CZKbn 2015 2016 change KB estimate consensus Revenues 10.87 11.45 5.4% 11.31 11.27 EBITDA 3.70 4.16 12.6% 3.67 3.72 Price 07.04.17 CZK 13870 Operating profit 3.20 3.47 8.3% 3.16 3.21 12m target CZK 13500 Net income 2.57 2.77 7.8% 2.53 2.58 Source: Philip Morris Czech Republic; Economic & Strategy Research, Komerční banka Upside to TP -2.7% Dividend CZK 1000 Company results: The 2016 results surpassed market and our expectati ons. Revenues Total return 4.5% increased 5.4% yoy to CZK11.5bn, driven mainly by growth in the Czech R epublic. Despite stagnation of the whole market, the company managed to increase volu me in its main Sector stance market by 3.9%. Revenues from manufacturing services also grew a strong 10.2%, Overweight reaching CZK2.7bn. Despite a slight decline of cigarette sales in Slovakia (-0.3%), the
Investment type company managed to preserve its market share and sustain revenues of CZK2. 7bn. High dividend yield V Profitability improved significantly as the company managed to control costs that grew only 3%, supporting growth of EBITDA by 12.6% up to CZK4.2bn. The profitability
1 year performance strengthening was supported by slower growth of production costs per unit and decrea se
14000 of personnel and marketing expenses. Operating and net income strengthened 8.3% and
13600 7.8%, respectively, and reached CZK3.5bn and CZK2.8bn.
13200 Dividend: The company suggested a dividend of CZK1,000 per share. The amount and 12800
12400 payout has to be approved by the shareholder general meeting planned for 28 April 2017.
12000 04/16 07/16 10/16 01/17 New law on smoking: A new legislation that among other things ban s smoking in
Source: Bloomberg restaurants will come into force on 31 May 2017. Cigarette sales in most other European
Trading volume (in ths of shares) countries declined in the year of implementation of similar laws; however, in a majority of cases it returned to the original trend within the next couple of years. We expact the impact 5
4 to be similar in the Czech Republic, and we adjusted our models by decreasing forecasts
3 for cigarette sales for 2017-19 by 3, 7 and 3%. Although we kept all costs intact with the 2 exception of the direct production cost per unit, the impact on the company’s financial 1 performance is relatively limited (the Czech Republic represents approx. 50% of revenues). 0 04/16 07/16 10/16 01/17 The forecasted dividend decreased only by approximately CZK100 per share, and our Source: Bloomberg target price weakened to CZK13,400.
New platforms: Philip Morris has invested almost USD3bn worldwide in new smoking Share data RIC TABKsp.PR Bloom TABAK CP platforms like IQOS, an appliance that heats tobacco without burning it. PMI sold 7.4bn 52-week range 11910-13900 packs of special cigarette packs last year and expects to sell 32bn packs in 2017. That Market cap. (CZKbn) 38.1 Market cap. (EURm) 1431 could result in 6% revenue growth (USD1.6bn). The company estimates a mark et share of Free float (%) 22 Performance (%) 1m 3m 12m 2-3% is vital for mass adoption of the new product. In the case of the Czech Republic, with Share 2.6 4.3 2.0 19bn cigarettes sold annually, a 3% share could bring CZK3-4bn into the company’s Rel. PX Index 1.5 -0.4 -8.1 Source: Bloomberg reveneus.
The latest reports (in Czech only): Risks: The stricter regulations for smoking and stronger increases in excise duties would http://bit.ly/PM_analyza http://bit.ly/PM_IQOS be reflected negatively in the results and the company valuation.
Upcoming events: The general meeting will be held on 28 April and dividend payout on 29 May.
Richard Miřátský (420) 222 008 560 [email protected]
10 April 2017 19
Economic & Strategy Research Equity Research
Inurance Vienna Insurance Group A surprising proposal of a higher -than-expected dividend; PBT above the guidance
VIG results for 2016 Buy EURm 2015 2016 change KB estimate consensus Gross premium written 9,020 9,051 0.3% 9,130 9,138 Net earned premium 8,181 8,191 0.1% 8,344 8,233 Price 07.04.17 EUR 22.8 Financial result 1,059 959 -9.5% 954 988 CZK 608.5 EBT 157 407 159.5% 403 407 12m target EUR 26.0 Net attributable profit 83 288 247.3% 290 288 CZK 691 Source: Vienna Insurance Group, Economic & Strategy Research, Komerční banka, Thomson Reuters Upside to TP 14.1% 2016 preliminary results more or less met both market and our expectations. The insurance Dividend EUR 0.7 CZK 18.9 company fulfilled all its targets for 201 6. The premium volume of EUR9.1bn was stable in a yoy Total return 17.2% comparison and increased significantly in all lines of business with the exception of single- premium life insurance (-19.2%) as a result of a restrictive underwriting policy in this area due to a Sector stance low in terest rate environment. Profit before taxes at EUR406.7m surpassed management Overweight guidance to at least double the profit achieved in 2015 up to EUR400m. VIG’s combined ratio
Investment type stabilised at the 2015 level of 97.3%. The financial result of EUR959m represented a 7.8% yoy EMG markets exposure V drop, affected mainly by lower realised gains on the disposal of investments in bonds, loans and equities. 1 year performance Expansion of business activities in three areas: (1) The company identified the following five
25 markets where it will focus on expansion of h ealth insurance: Poland, Romania, Bulgaria, Hungary 23 and Turkey. (2) Expanding bank insurance business through an offer of further insurance solutions 21 to bank customers. This project is being formed with VIG’s partner Erste Group. (3) VIG wants to 19 further d evelop its reinsurance business through its group company VIG Re, which now plans its 17
15 next international initiatives, namely a gradual expansion of its business in Germany and gradual 04/16 07/16 10/16 01/17 04/17 entry into the market in Western Europe, with a focus on France, Belgium , Luxembourg and Source: Bloomberg Switzerland. Trading volume (in ths of shares) Mid-term strategy in numbers: The insurance company announced last year its intention to 500 achieve a market share of at least 10% in its markets in Serbia, Croatia, Hungary and Poland. The 400
300 management plans to steadily increase i ts premium volume to EUR9.5bn by 2019. VIG aims to 200 raise its profit before taxes to EUR450-470m by 2019. The target of 95% continues to apply for 100 the combined ratio within which claims expenses can be reduced up to 3% over the next three 0 04/16 07/16 10/16 01/17 04/17 years. Source: Bloomberg Dividend policy: The management proposed an increase in dividend of EUR0.2 to EUR0.8 per share (above expectations). In the future, dividend development will follow a results increase Share data RIC VIGR.VI Bloom VIG AV based on a minimum distribution of 30% of net group profits after minorities. 52-week range 15.8-23.8 Market cap. (CZKbn) 77.6 Our recommendation: We initiated coverage of VIG shares at the beginning of March with Buy Market cap. (EURm) 2917 recommendation and a target price at EUR26 per share. We consider the latest figures as positive, Free float (%) 30 Performance (%) 1m 3m 12m and the proposed dividend was a nice surprise. We keep our Buy recommendation. Share-2.0 1.5 19.4 Rel. to ATX Index -5.1 -5.2 -8.6 Main risks: Natural disasters and insurance frauds are the main risks. Source: Bloomberg Upcoming events: The shareholder meeting takes place on 12 May. The ex-date is 17 May. VIG The latest reports (in Czech only): will announce its 1Q17 results on 23 May. http://bit.ly/VIG_201703 http://bit.ly/VIG_Q416
Miroslav Frayer (420) 222 008 567 [email protected]
10 April 2017 20
Economic & Strategy Research Equity Research
KB ECONOMIC & STRATEGY RESEARCH Chief Economist and Head of Research Jan Vejm ělek, Ph.D., CFA (420 ) 222 008 568 [email protected]
Economists Viktor Zeisel Marek Dřímal David Kocourek Jana Steckerová (420 ) 222 008 5 23 (420) 222 008 598 (420) 222 008 569 (420) 222 008 524 [email protected] [email protected] [email protected] [email protected] Equity Analysts Miroslav Frayer Richard Miřátský (420 ) 222 008 567 (420 ) 222 008 560 [email protected] richard_miratsky @kb.cz
SG IN CENTRAL AND EASTERN EUROPE Chief Economist of SG Poland Head of Research of Rosbank Chief Econo mist of BRD -GSG Jaroslaw Janecki Yury Tulinov, CFA Florian Libocor (48 ) 225 284 162 (7) 495 662 13 00 (ext. 14836) (40) 213 016 869 [email protected] [email protected] [email protected]
Head o f Fin . Markets Research BRD -GSG Economist Equity Analyst Carmen Lipara Ioan Mincu Laura Simion, CFA (40 ) 213 014 370 (40 ) 213 01 4 472 (40) 213 014 370 [email protected] george.mincu -radulescu @brd.ro [email protected]
SG GLOBAL ECONOMICS RESEARCH Head of Global Economics Michala Marcussen (44 ) 20 7676 7813 [email protected]
Euro area United Kingdom Anatoli Annenkov Michel Martinez Yvan Mamalet Brian Hilliard (44) 20 7762 4676 (33) 1 42 13 3421 (44) 20 7762 5665 (44 ) 20 7676 7165 [email protected] [email protected] yvan.mamalet @sgcib.com [email protected]
North America Latin America Stephen Gallagher Omair Sharif Dev Ashish Ankur Shukla (212) 278 4496 (1) 212 278 48 29 (91) 80 2802 4381 (91) 80 6731 4432 [email protected] [email protected] [email protected] [email protected] Asia Pacific Japan Klaus Baader Takuji Aida Kiyoko Katahira Arata Oto (852) 2 166 4095 (81 ) 3 5549 5 187 (81 ) 3 5549 5 190 (81) 3 6777 8064 [email protected] takuji.aida @sgcib.com [email protected] [email protected]
China Korea India Inflation Wei Yao Suktae Oh Kunal Kumar Kundu Vaibha v Tandon (852) 2166 5437 (82) 2195 7430 (9 1) 80 6716 8266 (91) 80 6731 9449 [email protected] suktae.oh @sgcib.com [email protected] [email protected]
SG CROSS ASSET RESEARCH – FIXED INCOME & FOREX GROUPS Global Head of Research Brigitte Richard -Hidden (33) 1 42 13 78 46 brigitte.richard [email protected]
Head of Fixed Income & Forex Strategy Vincent Chaigneau (44) 20 7676 7707 [email protected]
Fixed Income Bruno Braizinha Frances Cheung , CFA Jean -David Cirotteau Cristina Costa (1) 212 278 5296 (852) 2166 543 7 (33) 1 42 13 72 52 (33) 1 58 98 5 1 71 [email protected] [email protected] jean [email protected] [email protected]
Jorge Garayo Ciaran O'Hagan Shakeeb Hulikatti Adam Kurpiel (44) 20 7676 7404 (33) 1 42 13 58 60 (91) 80 2802 4380 (33) 1 42 13 63 42 [email protected] [email protected] [email protected] [email protected]
Head of US Rates Strategy Subadra Rajappa Jason Simpson Marc -Henri Thoumin (1) 212 278 5241 (44) 20 7676 7580 (44) 20 7676 7770 [email protected] [email protected] marc [email protected]
Foreign Exchange Jason Daw Alvin T. Tan Olivier Korber (Derivativ es) (65 ) 63267890 (44) 20 7676 7971 (33) 1 42 13 32 88 [email protected] alvin [email protected] [email protected]
Head of Emerging Markets Strategy Guy Stear (33) 1 41 13 63 99 guy.st ear @sgcib.com
Amit Agrawal Régis Chatellier Jason Daw (91) 80 6758 4096 (44) 20 7676 7354 (65) 6326 7890 [email protected] [email protected] [email protected]
Phoenix Kalen Frances Cheung , CFA (44) 20 7676 7305 (852) 2166 543 7 [email protected] [email protected]
10 April 2017 21
Economic & Strategy Research Equity Research
The recommendation in this document and/or the document itself was not disclosed to the issuer before its dissemination.
This recommendation is not updated at regular intervals. The date of the next update has not yet been determined and finally will be influenced by relevant changes of the facts used as the ground for this recommendation to reflect proper development in the industry and/or the analyzed company.
The main methods Komercni Banka is using for setting target price for stocks are discounted free cash flow analysis and sector comparison. Other methods may also be used if deemed appropriate by the analyst (e.g. sum of parts valuation, discounted dividend valuation, discount / premium to NAV). Target price is set for the time period of 12 months. Komercni Banka is using three grades of investment recommendation: buy, hold and sell. The recommendation is set for the time period of the next three to six months. The most important factor for setting the recommendation is the difference between actual market price and target price calculated by KB equity research. The recommendation should reflect also other factors the analyst expects to influence the stock and market in the time period of the next 3-6 months, i.e. target price substantially above current price does not automatically mean a buy recommendation for the next 3-6 months. Valuation methods and factors key for setting the recommendation are explained in the text of each analysis.
The chart below shows the structure of grades of valid investment recommendations of equity research of KB Economic & Strategy Research (8 recommendations).
Investment recommendations of KB equity research (as of 7 April, 2017)
Sell 0%
Hold 38%
Buy 62%
Source: Economic & Strategy Research, Komerční banka
10 April 2017 22
Economic & Strategy Research Equity Research
CEZ O2 CR CME Philip Morris NWR Pegas Vienna Fortuna MONETA CR Nonwovens Insurance Money Bank Overview of last investment research and recommendations related to stocks of particular issuers Coverage Recommendation Hold Buy Buy Buy Buy Buy Hold Buy termination CZK Target Price CZK 448 CZK 267 USD 3.7 n/a CZK 863 EUR 26 CZK 96 CZK 90 13500 Date 14/9/16 9/12/16 10/3/17 13/6/16 20/6/16 20/5/16 3/3/2017 20/5/16 6/9/16 Overview of investment researches and recommendations for last 12M (quarterly) Recommendation Buy Hold Hold Buy Sell Buy In revision CZK Target Price CZK 420 CZK 260 USD 2.5 - CZK 800 In revision 11890 Date 12/2/16 22/3/16 12/8/15 2/9/15 11/12/15 3/12/15 10/3/16 Recommendation Buy Buy Sell Buy Target Price CZK 608 CZK 251 CZK 819 CZK 79 Date 18/9/15 12/11/15 11/9/15 28/8/15 In Recommendation In revision revision In Target Price In revision revision Date 27/8/15 27/8/15 Recommendation Target Price Date Direct or indirect share (5% or more) of the issuer of the registered capital of no no no no no no no no no KB Other significant financial interest of KB and/or its linked persons in the no no no no no no no no no issuer KB direct or indirect share (5% or more) of the registered capital of the no no no no no no no no no issuer. Significant financial interest in the issuer of the persons participating in no no no no no no no no no elaboration of investment researches and recommendations. Relationships of Komerční banka with particular issuers
KB Management or co- management no no no no no no no no no of public offerings in the past 12 month Agreements or contractual relations for KB can have concluded agreements with the issuer for providing investment services. This information providing investment services with the is protected by bank secret and could not be disclosed. issuer. Agreement with the issuer on production and dissemination of the no no no no no no no no no research KB market making** for common no no no no no no no no no stocks of the issuer? Source: Economic & Strategy Research, Komerční banka
10 April 2017 23
Economic & Strategy Research Equity Research
Disclaimer
The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell any securities. All information and opinions have been obtained from or are based on sources believed to be reliable, but their completeness and accuracy are not guaranteed by Komerční banka, a.s., even though Komerční banka, a.s. believes them to be fair and not misleading or deceptive. The views of Komerční banka, a.s. reflected in this document may change without notice.
Komerční banka, a.s. and its affiliated companies may from time to time deal in, profit from the trading of, hold or act as market makers of securities, or act as advisers, brokers or bankers in relation to securities or derivatives thereof emitted by persons, firms or entities mentioned in this document.
Employees of Komerční banka, a.s. and its affiliated companies, or individuals connected to them including the authors of this report, may from time to time have a position in or be holding any of the investments or related derivatives mentioned in this document. Komerční banka, a.s. and its affiliated companies are under no obligation to provide any services to their clients on the basis of this document.
Komerční banka, a.s. does not accept any liability whatsoever arising from the use of the material or information contained herein beyond what is required by law. This research document is primarily intended for professional and qualified investors. Should a private customer obtain a copy of this report, they should not base their investment decisions solely on the basis of this document and should seek independent financial advice. The investors must make their own informed decisions regarding the appropriateness of their investments because the securities discussed in this report may not be suitable for all investors.
The performance attained by investment instruments in the past may not under any circumstance serve as an guarantee of future performance. The estimates of future performance are based on assumptions that may not be realized. Investment instruments and investments are connected with different investment risks, the value of any investment can rise and fall and there is no guarantee for the return of the initial invested amount. Investment instruments denominated in foreign currencies are also subject to fluctuations caused by changes in exchange rates, which can have both positive and negative influences particularly on the prices of the investment instrument and consequently on the investment return.
This publication is issued by Komerční banka, a.s. which is a bank/stockbroker according to the applicable legislation and thus regulated by the Czech National Bank. Komerční banka, a.s. applies various measures to prevent conflict of interests in the process of creating investment recommendations, such as the implementation of an appropriate internal separation including information barriers between different departments of Komerční banka, a.s. in compliance with the requirements imposed by applicable regulation. The employees of Komerční banka, a.s. proceed in accordance with the internal regulations governing conflict of interest.
The evaluation of employees creating investment recommendations is never by any means tied with the volume or profit of the trades with instruments mentioned in this document done by Komerční banka, a.s., or the trades of Komerční banka, a.s. with the issuers of such instruments.. However, the evaluation of the authors of this document is linked to the profits of Komerční banka, a.s. which also partially include the results of trading with investment instruments.
The recommendations mentioned in this document are intended for the public and the document before its publication is not available to persons not involved in the creation of this document. As per our practice, the issuers usually do not receive a copy of research reports prior to their publication. Each author of this research report hereby states that (i) the views expressed in the research report accurately reflect his or her personal views about any and all of the securities or issuers at stake.
This document and its contents is not designed for persons with permanent residence or seat in the United States of America and to persons who are deemed as “U.S. persons”, as defined in Regulation S under the US Securities Act of 1933, as amended.
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