Monthly Report BREBRE BankBank SecuritiesSecurities BRE Bank Securities 4 June 2009 Periodic Report Monthly Report Equity Market Macroeconomics June 2009
Equity market WIG 31 031 After reaching 2000-2150 pts on WIG20 (which will be a good opportunity to sell WIG20 companies), the market will begin a correction towards 1800- Average 2009E P/E 12.9 1700 pts. During the summer, stock markets will probably move sideways in Average 2010E P/E 13.5 anticipation of further economic developments (WIG20 will move in the 1700-2000 range). Avg daily trading volume PLN 1 275m Company News WIG vs. indices in the region Banks. In Q1’09, earnings fell by half y/y. The banks reduced loan supply sharply, which will impact volumes throughout 2009. Interest rates on 48000 pktpts deposits were under pressure, which will not disappear over the next two quarters but which should be abating as term deposits expire and loan 41800 margins increase. We reiterate our sell rating for the smaller banks and we recommend accumulating big banks in a medium-term perspective.
35600 Gas&Oil. Given the promising signals from the fuel market, good outlook for Q2’09 earnings and the possible developments concerning the EU 29400 mandatory reserves directive, we reiterate our positive ratings for Lotos and Orlen, although if there is a correction in commodity prices a temporary slump in sentiment is possible. We recommend reducing PGNiG. 23200
WIG BUX PX Telecommunications. TPSA’s dividend record day falls in mid-June; the 17000 summer could bring news about a buyback effort or additional dividends. An 2008-05-29 2008-09-19 2009-01-19 2009-05-14 attractive investment at the current prices.
Analysts: Media. Due to the dramatic rallies on media stocks seen over the past month, we are lowering our rating for TVN to hold. We remain neutral on Michał Marczak Cyfrowy Polsat and we still see upside potential for Agora and WSiP. (+48 22) 697 47 38 [email protected] IT. We maintain a positive outlook on Asseco, Sygnity and wholesale hardware distributors. We remain neutral on Komputronik. Marta Jeżewska (+48 22) 697 47 37 [email protected] Metals. The stock market correction will be accompanied by a correction in the commodity markets which, given the recent rallies, makes the sector Kamil Kliszcz one of the most risky short-term investments (high likelihood investors will (+48 22) 697 47 06 be cashing in on their gains). [email protected] Construction. The most interesting investment opportunities in the sector Piotr Grzybowski (+48 22) 697 47 17 include Rafako (good outlook for its segment), Mostostal Warszawa, [email protected] Polimex (attractive price) and Ulma. We are neutral on Budimex and Unibep and we consider Erbud and PBG overpriced. Maciej Stokłosa (+48 22) 697 47 41 Developers. The valuation of some of the developers is significantly in [email protected] excess of the value of their assets. We recommend selling Dom Development, reducing J.W. Construction and holding Polnord. Macroeconomic Analyst BRE Bank Macroeconomics Team Retail. We still recommend overweighting Emperia vs. Eurocash as we project systematic improvements in Emperia’s earnings.
Ratings. We are downgrading our ratings on the following stocks as of the release date of this monthly report: Elektrobudowa (Hold), Erbud (Reduce), J.W. Construction (Reduce), Mostostal Warszawa (Accumulate), PBG (Reduce), Polnord (Hold), TVN (Hold), and we suspend our rating for KGHM.
BRE4 June Bank 2009 Securities does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.
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Table of Contents
1. Equity market ...... 3 2. Macroeconomics ...... 5 3. Current recommendations of BRE Bank Securities S.A...... 8 4. Recommendation statistics ...... 9 5. Financial Sector ...... 10 5.1. BZ WBK ...... 17 5.2. Handlowy ...... 19 5.3. ING BSK ...... 20 5.4. Kredyt Bank ...... 21 5.5. Millennium ...... 22 5.6. Pekao SA ...... 23 5.7. PKO BP ...... 24 6. Gas & Oil, Chemicals ...... 26 6.1. Ciech ...... 27 6.2. Lotos ...... 29 6.3. PGNiG ...... 31 6.4. PKN Orlen ...... 33 6.5. Police...... 35 6.6. ZA Puławy ...... 37 7. Telecommunications ...... 38 7.1. Netia ...... 39 7.2. TP SA ...... 40 8. Media ...... 41 8.1. Agora ...... 42 8.2. Cyfrowy Polsat...... 44 8.3. TVN ...... 46 8.4. WSiP ...... 48 9. IT Sector ...... 49 9.1. AB...... 50 9.2. Action...... 51 9.3. ASBIS ...... 52 9.4. Asseco Poland...... 53 9.5. Komputronik...... 55 9.6. Sygnity...... 56 10. Metals ...... 57 10.1. Kęty ...... 57 10.2. KGHM ...... 58 11. Construction ...... 59 11.1. Budimex ...... 63 11.2. Elektrobudowa ...... 64 11.3. Erbud ...... 65 11.4. Mostostal Warszawa...... 66 11.5. PBG ...... 67 11.6. Polimex Mostostal ...... 69 11.7. Rafako ...... 71 11.8. Trakcja Polska ...... 72 11.9. Ulma Construccion Polska ...... 74 11.10. Unibep ...... 75 12. Real Estate Development ...... 76 12.1. Dom Development...... 78 12.2. J.W. Construction ...... 80 12.3. Polnord ...... 81 13. Retail\Wholesale ...... 82 13.1. Emperia Holding ...... 82 13.2. Eurocash ...... 83 14. Others ...... 84 14.1. Mondi ...... 84
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Equity market Against the expectations of many investors, no dramatic downturn took place in May in Polish stock prices. The WIG20 index was moving sideways (+0.2 m/m) as commodity stocks rallied while bank stocks declined. We think that markets were preparing for another rebound, which is already materializing, and which, in our view, is an emotional one driven by a closing out of short positions by bearish investors, and a transfer of capital from debt (yields on US 10Y notes have risen above 3.6%) to equities and commodities (like we predicted at the beginning of the year). Markets are supported by improving economic data (which, although they do not exactly herald a sustained recovery, are better than a few months ago). We maintain that, after the WIG20 moves close to 2000-2150 (accompanied by heavy buying fueled by widespread faith in a sustained bull market, which makes a good opportunity to speculatively sell WIG20 stocks), a downward shift in the stock market will bring it back down near 1800-1700 pts. This will coincide with a correction in commodity markets which, after a recent uptrend, will place commodity stocks among the riskiest of investments (which means now is a good time to cash in). During the summer, stock markets will probably continue to move sideways in anticipation of further economic developments (WIG20 will move within the range of 1700 and 2000). Trends in H209 will depend on leading indicators; if readings in July and August confirm that the economic pick-up is more than just a reaction to lower inventories, the WIG20 could reach a level of 2500 pts at the end of the year. Otherwise, if the readings imply zero GDP growth in Q409 (y/y in USA and EU), investors would be advised to sell shares in the summer and resume buying in late 2009 / early 2010. Looking at the differences of opinion between economic analysts, it is hard to predict which scenario is more likely. The picture should become clearer in 2-3 months.
In keeping with the outlook described above, the sectors that are most likely to lose value in the near term are commodities and banks, which are expected to report weak earnings for Q2 and Q309.
After leading indicators, time for improvement in production As we predicted, leading economic indicators in the USA and the EU exceeded expectations. We have arrived at a point in our view when these positive readings should start influencing industrial production. Partial ISM data from the United States indicate that the cycle of inventory reductions (by buyers as well as manufacturers) is almost over, and that manufacturers are gradually increasing production as reflected by a recent pickup in factory orders. The US has clearly lifted itself out of the depths of recession, but whether the economy will continue to move upwards remains to be seen.
One potential roadblock preventing sustained recovery is demand, without which increased production and the resulting improvement in jobs and services markets cannot last. US consumers at the moment are feeling the positive effects of the fiscal stimulus package, and of lower taxes and interest rates (disposable income up 1.1% m/m). But, because of widespread concerns about the future, consumption there continues to decline (-0.1% m/m) while savings continue to increase (5.7%). Similar trends are observed across Europe, including Poland.
Polish GDP may beat consensus Poland's gross domestic product increased 0.8% in Q109, faster than in most other European countries, raising the question whether GDP can beat the growth consensus for this year (-1-0%). Looking at exports, the answer seems yes. In the first quarter, exports contributed 1.9 ppts to GDP growth as less domestic consumption was met with imports. While the zloty remains weak, and so does internal consumption and investment, an improvement in export markets should drive exports’ contribution to economic growth.
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Q109 GDP trends in selected countries (Y/Y) Country GDP growth Country GDP growth Poland 0.8% Italy -5.9% Belgium -3.0% Latvia -18.6% Bulgaria -3.5% Lithuania -10.9% Czech Republic -3.4% Hungary -4.7% Germany -6.9% Holland -4.5% Estonia -15.6% Austria -2.9% Spain -2.9% Portugal -3.7% France -3.2% Romania -6.4% UK -4.1% Slovakia -5.4% Source: BRE Bank
However, such decomposition of GDP growth means problems for the government budget, which will probably run a deficit over 5% of GDP. Is that going to affect the zloty? Not necessarily, since most developed countries are operating at a deficit (Germany 5%, USA 12% in 2009), and compared to them Poland is enjoying economic growth which should attract foreign direct investment. In a less optimistic scenario, since the government deficit in Poland is more sensitive to the state of the economy than in neighboring countries (it is estimated that a 1% decline in GDP growth translates to a 1% increase in government deficit in Poland, and a 0.6%-0.8% increase in CEE countries), a slower GDP increases the possibility of a wider budget gap, creating pressure on the zloty.
Commodity prices, weak dollar, bond yields Global equity markets are significantly influenced by the situation in debt and forex markets. National governments and central banks, most notably the US administration, have pumped huge amounts of money into their economies to save them from collapse. This has helped to mitigate the crisis and restore some growth, reducing risk aversion among investors but at the same time widening government deficits. According to some estimates, all US stimulus packages combined are worth 30% of GDP. In line with the assumption that only inflation and a weak dollar can monetize the enormous national debt of the United States, yields on 10-year Treasury Notes there have increased to over 3.6%. The flight from US assets, which until recently were considered a safe haven, and the concurrent decline along the whole length of the yield curve, are stimulating an influx of capital into equity markets and commodities. This is consistent with our January predictions for 2009.
10Y Treasury yields in Germany and USA
5,5%5.5%
5,0% 5.0%
4,5% 4.5%
4,0% 4.0%
3,5%3.5%
Niemcy USA Germany USA 3,0%3.0%
2,5%2.5%
2,0%2.0% 07-04-04 07-10-04 08-04-04 08-10-04 09-04-04
Source: Bloomberg
Amid CPI deflation (-0.7% y/y in April), a consolidation of US 10Y Treasury yields at 3.5-4%, paired with a slowed depreciation in the value of the dollar, should coincide with a correction in global equity and commodity markets. In the long term, we expect to see growing inflation in the years 2010 and 2011 which may send commodity prices soaring to new all-time highs.
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Macroeconomics GDP growth in Q1 2009 In the first quarter, the Polish GDP grew by 0.8% y/y, which is an exceptional result in the CEE region (no other country recorded growth). Seasonally adjusted, GDP growth in Q1'09 amounted to 0.4% q/q vs. 0.0% q/q in Q4'08 (which was revised down from 0.3% q/q). We remain skeptical as far as these estimates are concerned - taking into account the annual growth rate, as well as the previously published seasonally-adjusted quarterly growth rates, we believe quarter-on-quarter GDP growth may have been below zero, at ca. -0.6%. Retail consumption increased by 3.3% y/y vs. 5.3% y/y in Q4’08. It is therefore obvious that consumption is slowing down (although the seasonally-adjusted data suggest that the difference vs. Q4’08 is slight, 1.2% q/q vs. 1.5% q/q). The year-on-year rate of investment growth plunged from 4.6% to 1.2% (by almost 1% q/q). Inventory estimates were thoroughly revised. According to the newest data, the process of fast inventory reduction started in Q4’08, when changes in inventories contributed -2.9pp to GDP growth. In Q1 2009, this contribution declined to -4.8pp. The Central Statistical Office also revised the data on the contribution of net exports to GDP growth: the revised figure is +1.9pp. In this context, it is worth pointing out that the balance of trade recorded a nominal surplus of PLN 1.5bn, which is in line with NBP's data and somewhat inconsistent with the speculation of some analysts that the balance of trade in goods is deteriorating. In the ensuing quarters, the contribution of net exports to GDP growth will likely increase. On the supply side, growth declined in all components. Industrial value added declined by 4.2% q/q (-5.9% y/y), and in construction, is grew by only 3.7% q/q vs. 7.2% q/q in Q4 2008. Growth rates in services and retail and repairs remained more or less unchanged (4.4% q/q and 5.6% q/q, respectively). In the upcoming quarters we expect retail consumption growth to decline (due to the further weakening in the labor market, slower salary growth, increase in the savings rate as consumers become more pessimistic about the future outlook for the economy), and investment to shrink (the economy is currently over-invested, and the falling capacity utilization, combined with the decline in companies’ earnings, suggests the reduction in investment demand will continue). As a result, domestic demand will remain below zero throughout 2009. When a rebound starts at Poland’s key trading partners, the main beneficiaries will be industry and exports; surplus in the balance of trade will help maintain GDP growth near zero. As for the upcoming GDP data, we expect a slight y/y decline in the second quarter. We do not believe the GDP data will make the Monetary Policy Council (RPP) move away from monetary loosening and withhold the interest rate cut already promised for June. We still consider the negative growth in internal demand and anti-inflationary factor that suggests it is necessary to continue with monetary loosening.
Core CPI In April, all of the core inflation measures published by the NBP increased. Inflation excluding food and energy prices increased from 2.5% y/y in March to 2.6% y/y. Inflation excluding administered prices increased from 2.7% y/y to 3.0% y/y, and inflation excluding the most volatile prices increased from 3.7% y/y to 3.9% y/y. The most stable measure of core inflation, 15% trimmed average, increased from 3.9% y/y to 4.1% y/y. The increase in core inflation reflects the persistent growth in consumer prices, which has been observed since the start of the year. We believe nonetheless that the y/y growth rates peaked in April, and a gradual, if slow, decline can be expected over the upcoming months. Inflation rate excluding food and energy prices will most likely fall to 2.5% y/y in May; then, by the end of the year, it should fall towards 2%. Only in 2010 can it be expected to drop below the 2% y/y level, due to the strong base effects related to this year's increases in regulated prices. Because of its underlying causes (increase in regulated prices, weaker zloty) and the prospects that demand pressure will decline in the upcoming quarters, the higher inflation will not bring about the end of the process of monetary loosening.
Business tendency In May, overall business tendency improved across all the sections: manufacturing (-5pts vs. - 8pts a month earlier), construction (-11pts vs. -17pts), retail sales (+1pt vs. -3pts) and services (+23pts vs. +19pts). In case of manufacturing, the increase in sentiment stems from the slight improvement in current output and the current order backlog. Inventories of finished good remain excessive, however, and companies are planning further layoffs (although not as far- reaching as a month ago). Business tendency surveys made by GUS appear in line with trends observed abroad (increases in the PMI and IFO indices), suggesting the gradual flattening of the downward trend in industrial production. If the signals indicating improvements in the German economy are confirmed, in the second half of the year we might see a northbound trend emerge in manufacturing. Thanks to its increased competitiveness brought about by a weaker zloty, Poland will be among the first to benefit from the global economic rebound. In turn, the improved tendency in sales is a consequence of increased revenues and the increase in the number of businesses surveyed (although growth in this area may be a consequence of seasonal influences). Skepticism remains, however, as to future
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developments (sales are expected to contract further), and inventories remain excessive (which suggests that companies did not expect the current slowdown). We still do not expect retail consumption to provide a boost to GDP growth in 2009. As the situation in the labor market deteriorates, and the over-optimistic expectations are confronted with reality, customers will have to rebuild their savings. As a result, we expect retail consumption growth of 0.5-1.5% in 2009.
Industrial production In April, industrial production declined by 12.4% y/y (vs. -10.8% y/y in the forecast consensus and -1.9% y/y in March). Month-on-month, output declined across the board. The disappointing figures are primarily a statistical effect, due to the difference in the number of working days: unlike in 2008, April was the Easter month this year. Seasonally-adjusted, industrial production dropped by 8.0% (vs. -10.8% in the preceding month), which suggests a slight improvement. It should be pointed out, however, that coal sales plunged, confirming recent press reports of a whooping 21.1% y/y decline in mining output. To a certain extent, the decline in coal sales reflects the difficult situation in other sectors of manufacturing (coke, chemical industry). Although industrial production keeps declining at a double-digit rate, certain signs of stabilization can already be seen. In the upcoming months, industrial production growth will remain negative, but as the German economy gradually reaches an equilibrium, Polish manufacturers will feel some degree of relief. Any revival in production may be deceptive, however, seeing that there are more and more indications that consumption growth will be very slow throughout 2009 (perhaps as slow as 0.5-1.5%) and that investment will be shrinking (in the previous cycle, the Y/Y rate in investment growth was negative for 9 quarters in a row). The depreciation of the zloty may be enough for exports to slowly regain strength, which will have an impact on manufacturing, but the economy will be weighed down by consumption and investment growth.
PPI In April, producer prices declined by the whooping 0.6% m/m (within that, by 0.9% in manufacturing), which entails Y/Y growth rates of 5.1% and 2.6%, respectively. These new data are a clear confirmation of strengthening disinflationary trends across the economy: despite the clear cost pressures (higher energy prices, weaker zloty), companies chose not to increase prices. Lower capacity utilization, slower salary growth and more stable situation in the forex market will slow producer prices down in the upcoming months (quite possibly, we will see several months on month-on-month declines in producer prices), in line with the trend observed for sentiment indicators. Another factor supporting reductions in producer prices will be the decline in gas prices (in June); gas prices affect producers much more than consumers.
Salaries In April, employment growth in the enterprise sector fell to 4.8% y/y from 5.7% y/y seen in March, which is in line with the downward trend observed in the preceding months (the March increase in the Y/Y rate was merely a one-off departure from the overall trend). The fairly fast growth of salaries – in “objective" terms – is by and large a consequence of the manner of presentation of the data: the Y/Y rate is inflated by salary increases that took place last fall. The M/M rates, seasonally adjusted, are approaching 0%. We expect that in the upcoming months salary growth will decline towards 2-3% y/y. The slower salary growth will soon push inflation in services down, which means that the Monetary Policy Council will by and large no longer need to monitor labor-market-driven pressure on prices.
Current-account balance In March, a surplus was recorded on the current account once again, amounting to EUR 75m vs. EUR 915m in February. The surplus was driven by a positive balance of trade in goods (EUR 77m), net transfers (EUR 458m, mostly due to accumulated EU transfers) and a positive balance of trade in services (EUR 125m, due to the weakening demand for foreign services); net factor income was slightly negative (-EUR 431m). It turns out (for a second month in a row) that it took a very short time for the depreciation of the zloty and the decline in the profitability of imports (which dropped by over 26% y/y) to help improve current account balance, and thus also the crisis indicators (as per the IMF methodology). In March, exports declined by a “mere” 16.3%, which is a consequence of a rebound observed in manufacturing, both in Poland and in Western Europe. It appears that the risk that Polish companies will not be able to finance their foreign position is declining as well. We believe that the trends governing the individual components of the current account (improvement in the balance of trade in goods and services and in the income account) should persist in the upcoming months. At the end of the year, current account deficit should fall to below 2-3% of GDP; therefore, we will not see the developments that are typical for emerging markets at the time of the crisis. What is more, positive net exports may serve as an important cushion for the Polish GDP; we estimate GDP growth in Q1 at 1.0%, which, compared to other countries in the region (in particular Slovakia, which does not have a floating currency) is a statistically decent result. Why only statistically? Although GDP will be growing, investment will plunge and consumption will barely crawl ahead
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– which is not the best environment in which to generate high budget revenues. The data should be seen as another indication that Poland’s country risk is declining, which in turn should have a positive impact on Polish securities. We are also reiterating our year-end EUR/ PLN forecast of 3.90.
Budget deficit Budget deficit after April 2009 stood at PLN 15,335.3m vs. PLN 11,219.8m after March; this amounts to 84.3% of the FY plan. As far as expenditures are concerned, debt servicing accelerated, as did subsidies to the Social Security Fund and local authorities. The one thing that is clear is the decline in revenues: after April 2009, budget revenues are lower in nominal terms than in the same period of 2008 (PLN 89bn vs. PLN 90bn). This can be felt most clearly in VAT revenues (PLN 34bn vs. PLN 37bn). The deteriorating outlook for domestic demand is a very bad harbinger for the budget (GDP growth driven by net exports will not generate additional budget revenue). We estimate that revenues may undershoot the plan by PLN 30- 40bn, which means that they will not exceed FY2008 revenues; taking into account the exclusion of expenses for roads from the central budget, an amendment increasing budget deficit to over PLN 40bn may be in order.
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Current ratings by BRE Bank Securities
Company Rating Target price Date issued
AB Buy 10.31 2009-04-30 ACTION Buy 12.30 2009-04-30 AGORA Buy 35.60 2008-11-14 ASBIS Buy 2.16 2009-04-30 ASSECO POLAND Buy 67.40 2009-05-27 BUDIMEX Hold 71.60 2009-05-11 BZWBK Accumulate 104.10 2009-05-20 CIECH Hold 31.80 2009-05-15 CYFROWY POLSAT Hold 14.55 2009-05-29 DOM DEVELOPMENT Sell 21.90 2009-05-06 ELEKTROBUDOWA Hold 162.70 2009-06-04 EMPERIA HOLDING Buy 70.30 2008-11-28 ERBUD Reduce 35.00 2009-06-04 EUROCASH Hold 9.90 2009-05-06 HANDLOWY Sell 40.90 2009-05-07 ING BSK Hold 313.00 2009-05-15 J.W. CONSTRUCTION Reduce 10.30 2009-06-04 KĘTY Buy 109.40 2008-08-04 KGHM Suspended 2009-06-04 KOMPUTRONIK Hold 10.48 2009-05-29 KREDYT BANK Sell 4.10 2009-03-05 LOTOS Buy 26.40 2009-05-28 MILLENNIUM Sell 1.80 2009-05-12 MONDI Hold 54.20 2009-04-02 MOSTOSTAL WARSZAWA Accumulate 65.60 2009-06-04 NETIA Buy 3.80 2008-11-14 NOBLE BANK Suspended 2009-01-29 PBG Reduce 201,60 2009-06-04 PEKAO Accumulate 133.20 2009-05-13 PGNiG Reduce 3.58 2009-05-14 PKN ORLEN Buy 40.10 2009-06-02 PKO BP Accumulate 30.20 2009-05-19 POLICE Sell 5.80 2009-06-04 POLIMEX MOSTOSTAL Accumulate 3.80 2009-05-25 POLNORD Hold 35.00 2009-06-04 RAFAKO Buy 8.70 2009-05-14 SYGNITY Buy 25.30 2009-05-27 TELEKOMUNIKACJA POLSKA Accumulate 20.30 2009-04-30 TRAKCJA POLSKA Buy 4.90 2009-05-18 TVN Hold 11.90 2009-06-04 ULMA CONSTRUCCION POLSKA Accumulate 40.20 2009-05-26 UNIBEP Hold 5.30 2009-05-26 WSiP Buy 18.90 2008-12-09 ZA PUŁAWY Hold 82.70 2009-05-28
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Ratings issued in the past month
Company Rating Previous rating Target price Date issued
ASSECO POLAND Buy 67.40 2009-05-27 BUDIMEX Hold Hold 71.60 2009-05-11 BZWBK Accumulate Accumulate 104.10 2009-05-20 CIECH Hold Hold 31.80 2009-05-15 CYFROWY POLSAT Hold Buy 14.55 2009-05-29 DOM DEVELOPMENT Sell Hold 21.90 2009-05-06 ELEKTROBUDOWA Accumulate Accumulate 162.70 2009-05-20 ERBUD Hold Hold 35.00 2009-05-26 EUROCASH Hold Accumulate 9.90 2009-05-06 HANDLOWY Sell Sell 40.90 2009-05-07 ING BSK Hold Hold 313.00 2009-05-15 J.W. CONSTRUCTION Hold Buy 10.30 2009-05-06 KOMPUTRONIK Hold Hold 10.48 2009-05-29 LOTOS Buy Buy 26.40 2009-05-28 MILLENNIUM Sell Sell 1.80 2009-05-12 MOSTOSTAL WARSZAWA Buy Buy 65.60 2009-05-22 PBG Hold Hold 201.60 2009-05-13 PEKAO Accumulate Accumulate 133.20 2009-05-13 PGNiG Reduce Reduce 3.58 2009-05-14 PKN ORLEN Buy Buy 40.10 2009-06-02 PKO BP Accumulate Accumulate 30.20 2009-05-19 POLICE Sell Hold 5.80 2009-06-04 POLIMEX MOSTOSTAL Accumulate Hold 3.80 2009-05-25 POLNORD Accumulate Buy 35.00 2009-05-06 RAFAKO Buy Accumulate 8.70 2009-05-14 SYGNITY Buy 25.30 2009-05-27 TRAKCJA POLSKA Buy Buy 4.90 2009-05-18 ULMA CONSTRUCCION POLSKA Accumulate Hold 40.20 2009-05-26 UNIBEP Hold Hold 5.30 2009-05-26 ZA PUŁAWY Hold Hold 82.70 2009-05-28
Ratings revised in this Monthly Report
Company Rating Previous rating Target price Date issued
ELEKTROBUDOWA Hold Accumulate 162.70 2009-06-04 ERBUD Reduce Hold 35.00 2009-06-04 J.W. CONSTRUCTION Reduce Hold 10.30 2009-06-04 MOSTOSTAL WARSZAWA Accumulate Buy 65.60 2009-06-04 KGHM Suspended Accumulate - 2009-06-04 PBG Reduce Hold 201.60 2009-06-04 POLNORD Hold Accumulate 35.00 2009-06-04 TVN Hold Buy 11.90 2009-06-04
Ratings Statistics
All Issuers who are clients of BRE Bank Securities
Statistics Sell Reduce Hold Accumu- Buy Sell Reduce Hold Accumulate Buy liczba 5 4 12 7 14 0 2 6 3 3 procent 11.9% 9.5% 28.6% 16.7% 33.3% 0.0% 14.3% 42.9% 21.4% 21.4% 4 June 2009 9
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Financial Sector Pengab down 2.6 pts in May to 13.5pts In May, the banking industry sentiment gauge Pengab fell by 2.6pts, to 13.5pts, A year ago, Pengab stood at 39.2pts. The aggregate assessment of the current situation declined by 4.1pts m/m to 5.6pts, while the outlook assessment declined by 1.1pts m/m to 21.4pts. According to the survey, a revival has been observed in lending, especially in foreign-currency loans in the retail segment (mortgages, consumer loans). Foreign-currency corporate loans are still stagnating. Shares and investment fund units have gained in popularity, which is projected to continue. Insurance policies have also become more popular, while the demand for bonds fell. This is a slight m/m fluctuation. The situation in the sector is still perceived negatively; the scores are much lower than last year. At the same time, Pengab remains above the current- cycle minimum of 11.4 (March 2009). It is much too early to proclaim a reversal in trends, but some sort of stabilization is slowly becoming a fact.
Sector-wide net income at PLN 2bn in Q1 2009 (-50% y/y) Revenues did not change much vs. Q1'08 (+2.8% y/y), despite the considerable expansion in volumes. Interest income fell by 2% y/y, while fee income went up by 2%. The banks recorded nice gains in the trading income category (+27% y/y), despite the options-related losses. Expenses went up by 12% y/y. Provisions amounted to PLN 2.6bn, which is 1.7% of the net loan portfolio. Return on equity plunged from 26.2% at the end of Q1'08 to 10.7%. Assets increased by 28% y/y, loans by 36% y/y and deposits by 19% y/y. The ratio of loans to deposits stood at 110% and the capital adequacy ratio at 11.2%, by and large flat vs. end of 2008. The ratio of equity to assets approached 8% (also flat vs. end-of 2008). The data confirm what the listed banks' earnings reports showed. The decline in revenues reflects the fight for clients' deposits, which impacts interest income. At the same time, banks recorded excellent gains on the valuation of financial instruments, which allowed them to offset the negative impact of client options and the drop in F/X gains due to the decline in F/X mortgage lending. For many banks, FY2008 was the year of network expansion; as a result, the comparison base for expenses is low Y/Y, despite the fact that banks are currently streamlining their spending (this can be seen in Q/Q comparisons, where a nearly 8% decline was observed). Operating income before provisions declined by 9.5% y/y, but provisions is what drove net income down by 50%. In the upcoming quarters, we expect increasing pressure on operating income, with the cost of credit risk remaining high. A Q/Q decline in earnings is a possibility.
Moody's may downgrade ratings for eight Polish banks Moody's placed the ratings of eight Polish financial institutions on review for a downgrade. Those affected are PKO BP, Pekao, BRE Bank, BRE Bank Hipoteczny, BZ WBK, BGŻ, Lukas Bank and Europejski Fundusz Leasingowy. Earlier, Moody had taken the same decision with regard to Bank Millennium and Bank Handlowy. The outlook for Getin Bank's ratings was not changed, but it is negative already. BPH remains on review for an upgrade due to the planned merger with GE Money. The Agency is worried about the quality of loan portfolios, but it does not expect significant changes. First-quarter earnings have been already published, both by the Polish banks and their foreign parents. This is another wave of rating reviews, once again driven by the situation of parent companies.
Volumes in the sector Total deposits stood at PLN 583bn at the end of April (-0.8% m/m, +16.1% y/y), with loans at PLN 673bn (-1.7% m/m, +30.2% y/y). Household deposits amounted to PLN 358bn (+0.2% y/y, +25.2% y/y), corporate deposits to PLN 137bn (+4% m/m, no change y/y). The ratio of loans to deposits was slightly above 115%. At the same time, M3 money supply declined vs. March by 0.6% (PLN 3.8bn). Adjusted for F/X differences (in April the zloty appreciated), this entails growth by a mere PLN 0.2bn. The biggest drop was observed for corporate deposits (-PLN 5.7bn, -PLN 4.1bn without F/X adjustment). Businesses are reaching for their savings as credit becomes less available. Corporate loans declined by PLN 5.3bn (-2.2% m/m); even when adjusted for F/X differences, this is a PLN 1bn decline. Household debt declined as well, by 1.4% (+1.2% when adjusted for the exchange rate). This is a much worse result than in the preceding months. According to Mr. Sobota of the NBP, mortgages are clearly slowing down; banks are partially offsetting this with the more lucrative consumer loans. Lending is affected down by two parallel factors: on the one hand, banks have tightened their credit policies; on the other, demand for loans has declined. The sharp drop in corporate deposits was accompanied by a PLN 1bn decline in the deposits of local authorities, who also recur to their savings as their tax revenues decline. It is becoming clear that our scenario is playing out (decline in corporate loan portfolio, with businesses offsetting the low availability of credit with their savings). We believe that household deposits will be slowing down as well, although the weak growth in April may have been a consequence of tax payments. The detailed data, which will be released later, will include information on NPL growth in April.
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Mortgages Last month, the retail mortgage portfolio contracted by PLN 7.9bn, to slightly under PLN 210bn (March: PLN 217.6bn), as a consequence of the nearly 6% appreciation of the zloty vs. the CHF. We estimate this effect at ca. PLN 9.6bn, which entails a PLN 1.7bn expansion of the portfolio at a fixed exchange rate. Such growth entails a significant reduction in FY2009 volumes. A month earlier, the mortgage portfolio expanded by PLN 2.5bn at a constant exchange rate. Zloty-denominated mortgages are on the rise, with the portfolio expanding by ca. PLN 960m in March and PLN 1.13bn in April.
NPLs on the rise The ratio of NPLs to total loans across the sector has increased again, from 5.3% at the end of March to 5.7% at the end of April. In nominal terms, NPLs increased by PLN 2bn, which is much slower growth than in March (PLN 3.65bn). Retail NPLs expanded by slightly under PLN 0.7bn, with the NPL ratio growing from 3.8% to 4%. Corporate NPLs grew by PLN 1.3bn (from 7.9% to 8.7% of total loans). NPLs are still rising, which entails high provisions in the upcoming quarters. The corporate sector is the source of trouble now; we believe the retail portfolio may deteriorate in H2 2009. The NPL ratio is influenced by the appreciation of the zloty through the revaluation of gross loans; a stronger zloty entails slower portfolio growth in nominal terms.
BIK: 1.5m credit reports in April The Credit Information Bureau said it had issued 1.5m credit reports in April. This is 7% more than in the same period last year. In March, 1.56m reports were issued.
First signs of improvement in margins The War for Savings is slowly dying out. The average interest rate paid on new deposits has decreased from 3.8% a month ago to 3.6%, with APRs on new retail deposits falling by 50bps, to 4.5%, and a decrease in interest on corporate deposits from 3.4% to 3.3%. Meanwhile, margins on loans continue to go up. We do not have the data on interest currently paid on the whole portfolio of deposits (the data cited above are for new deposits only). We can see an improvement, which in fact has been happening for several months. We believe, however, that data for the portfolio will be indicative of a high cost of financing once again. We like what the banks are doing as far as profitability is concerned, but we need to wait till Q3 2009 to see the impact.
Improved sentiment in equity market threatens deposit growth According to bankers, the recent revival in equity markets may threaten the banks’ efforts to expand their deposit portfolios, which could have a significant impact on lending. Last year, the banks benefited when clients withdraw money from investment funds and transferred them into bank deposits. Currently, market interest rates are also declining, and the banks are giving up on the “war for savings”, which makes their APRs less attractive. We believe the banks will not distribute investment fund units aggressively in the current situation, which might reduce deposit outflows. During the previous boom, distribution through bank networks was instrumental in boosting the funds' assets. We believe the current situation may be good for structured products, which provide the banks with long–term funds (2-3 years, sometimes 5 years) and a commission fee.
Treasury’s minority holdings in banks are not for sale The State Treasury is not planning to sell its small stakes in the Polish banks due to the unfavorable situation in equity markets. The treasury owns shares in the following banks: Pekao (3.95%), BGŻ (37%), BPH (3.68%), BZ WBK (1.93%), Bank Handlowy (2.48%), Millennium (0.10%) and BPS (1.58%). These shares should not hit the market this year, but this scenario cannot be precluded, because a decision like that can always be reversed.
Local authorities can count on banks Poland's biggest cities are applying for big loans (according to Rzeczpospolita, PLN 7.8bn total for the 23 biggest cities). Their investment plans sum up to PLN 13bn. The cities hope to get the required loans; an outstanding problem is the current cost of financing. In Q1’09, loans granted to cities amounted to a puny PLN 19m, but this is a normal situation (the closing of last-year's budgets). At the end of April, Warsaw issued Eurobonds for a total of PLN 200m; its FY2009 financing needs are PLN 2.4bn. Many banks are willing to lend to local authorities, as they are considered much more creditworthy than companies. There are, however, fewer offers than last year, but PKO BP can always be found among the bidders. At 2-3%, the cost of financing remains the biggest problem. Local authorities are the safest clients, but they will have to pay more. PKO BP has the biggest exposure to the segment, but other banks with strong corporate arms are not far behind.
Reserve requirement slashed The Monetary Policy Council (RPP) slashed the reserve requirement by 50bps, to 3.0%, effective on 30 June 2009. The union of Polish banks (ZBP) had previously demanded a deeper
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reduction of the requirement, to 2%. The move should free an additional PLN 3bn of cash. Whether a farther-reaching reduction is made in the future depends on the market's reaction to this one. Good news, but far from a breakthrough. The amount that was made available for lending is tiny; moreover, the current reduction in lending across the banking sector is not just a function of liquidity. From the banks’ perspective, the supply of loans depends on the estimated cost of credit risk, cost of financing and the situation in the interbank market (when it is in turmoil, banks are inclined to keep a bigger liquidity buffer). Seeing the deterioration in macroeconomic indicators, we can expect the demand for loans to contract as well as the financial standing of clients worsens.
Mortgage loan subsidies Yesterday, the government approved a bill concerning mortgage payment subsidies for people who lost their jobs after 30 June 2008. Contrary to previous speculations in the press, the bill does not limit subsidies to married couples and to situations in which both spouses are unemployed. The subsidy is capped at PLN 1,200 per month for a year, following which there will be a one-year grace period. Afterwards, the subsidy, which carries no interest, will have to be repaid (PLN 150 per month, assuming the maximum amount of PLN 14,400). If the property is sold, or if the subsidy has been obtained under false pretences, the funds will have to be repaid within 30 days, plus interest. Applications can be filed through 2010; decisions will be taken by local authorities. Since July, over 335,800 people have registered as unemployed. This structure of the program once again favors CHF borrowers. PLN 1,200 per month will be enough for a PLN 174,000 loan denominated in zloty, taken in May 2009 (at a 2.8% margin) and a PLN 216,000 loan denominated in CHF (4.3% margin, spread at PLN 0.2). The program will improve the quality of the existing mortgage loan portfolio; indirectly, it may improve the quality of the consumer loan portfolio (when squeezed, people stop repaying consumer loans before they give up on mortgage payments). We nonetheless believe the banks' current approach to creditworthiness analysis will not change, as one year of state subsidies has no impact on the clients' credit capacity. The program may have an impact on the demand for retail mortgages at this time of crisis; as a result, it should have a positive impact on developers.
BGK: guarantee granting rules accepted The Government has accepted the rules for business loan guarantees to be issued by the state- owned bank BGK, which has recently been injected with PLN 1.2bn of additional capital by the EU Guarantee Fund and the Loan Guarantee Fund. BGK will issue guarantees for smaller loans and the bigger ones will be guaranteed directly by the government. At the same time, the schedule of commissions was designed in a way that should support lending to the greatest extent possible. An estimated PLN 20bn may become available for lending. By the end of June, the state-owned BGK bank and commercial banks should sign the first agreements concerning the new rules for loan guarantees. The agreement with the Minister of Finance, which is necessary for the bigger loan guarantees, is being finalized. BGK will guarantee half of the loan. We approve of the plan, but the key question is whether it works operationally.
KNF criticizes bank mortgage policies In a report on property financing, Financial Supervision Authority (KNF) criticizes banks for their liberal approach to mortgage lending until the fourth quarter of 2008. Banks extended 130,000 property loans in 2008 compared to 190,000 in 2006 and 2007. The average loan amount increased last year, and LTV levels rose from 56% in 2007 to 65% in 2008. The LTV for new business decreased from 98% to 90%, and the LTV for foreign-currency mortgages fell from 96% to 80%. At the same time, average margins increased from 1.15% to 1.79% for zloty loans and from 1.63% to 2.48% for FCY loans. The KNF says that the tightening measures taken in Q408 were insufficient, and that banks should continue to work toward minimizing risks. Given last year’s exchange-rate trends, risks entailed in mortgage-loan portfolios built last year are significant. We expect that our costs-of-risk forecasts will prove accurate (100 bps for FCY loans, 50 bps for zloty loans). The KNF’s recommendation to minimize risks implies cutbacks in credit supply through tighter requirements, which is inconsistent with the government’s and central bank’s pleas to keep lending steady.
State-subsidized mortgages may exceed the plan by 20% The state-owned BGK bank expects that loans granted under the mortgage subsidy program may exceed the PLN 2.2bn target for FY2009 by ca. 20%. If this is the case, such mortgages will reach ca. 10% of all new mortgages (if the FY total is PLN 25bn). We believe they might even account for a slightly higher share of total mortgages.
NBP: access to loans will be getting more difficult A survey conducted by the NBP shows that banks are tightening their lending criteria; this tendency is expected to persist in the ensuing months. It is a consequence of the deteriorating economic situation, which makes risk assessment more difficult and leads to a decrease in the quality of the current loan portfolio. Almost half of the banks surveyed admit that in Q1 2009 they tightened their criteria due to their negative outlook on the individual sectors (especially
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real-estate-related and exports-dependent). The issue of capital availability became more prominent, especially in the context of big corporate loans. Decreasing demand was a factor as well, both among businesses and retail customers. In mortgages, most banks kept tightening their criteria for loans, although a few did the opposite. We expect further decline in loan supply, especially in the corporate segment. We believe banks will want to keep lending to retail customers, but they will tighten criteria and hike prices. Businesses cannot be sure that they get a loan even at a higher price.
Interest rates on deposits keep going down According to OF, banks are still cutting APRs paid on deposits, despite the fact that the Monetary Policy Council (RPP) has recently chosen not to cut its rates further. Within one month, as many as 15 banks changed their offering in deposits in a way that is less favorable to the clients. This is almost 45% of all the banks OF includes in its monthly overview. Pekao made the most changes, cutting interest on almost all its deposits, even though the old rates were very low anyway. Other banks that chose to do the same were Nordea Bank, Lukas Bank and ING BSK. Each of them changed the interest paid on online deposits as well. The other banks to cut their interest rates were BGŻ, Meritum Bank, Toyota Bank and Polbank. Not only regular deposits were affected, but those with insurance elements as well, at such banks as Allianz Bank, DnB Nord, Getin Bank and Noble Bank. The only bank to have swam against the current was Citi Handlowy, which increased the interest on all its deposit products, both the standard ones as well as those opened online. Nordea did hike interest on some of its deposits (but this appears to be a smokescreen for reductions elsewhere), as did Deutsche Bank. The banks started to promote deposits using arguments other than interest rates, throwing in various additional services and gifts, or offering higher rates to active clients. Quite clearly, the war for deposits is nearing its end. We are a little bit surprised that Bank Handlowy chose to pay higher rates.
Which banks for small companies? According to a survey by Indicator and the Warsaw Banking Institute on the recognizability of bank brands, PKO BP is the pick of 23.5% of those surveyed, followed by Pekao (14.7%) and BZ WBK (12.2%). The gap between PKO BP and Pekao has been shrinking, from 20.4pp two years ago and 15.1pp one year ago to the current meager 6.8pp. The improvement is by and large the delayed effect of Pekao’s merger with BPH. Direct contact with a bank employee remains the key source of information about its offering (70.1%), although the importance of online sources has been increasing (66.5%). The survey also indicates that companies very rarely decide to change their bank, because they find it difficult to reliably compare their frequently-changing offers. PKO BP has a much better exposure to small companies due to its wide network across Poland's smaller towns. The participants in the survey under discussion are companies classified with the retail segment. Pekao remains the key player in the corporate segment, after it was given a boost by the acquisition of a part of BPH (know-how, clients, branches).
Eurobank wants to have 140 franchised branches by the end of 2009 Eurobank, which currently has 100 franchised branches, wants to have 140 of them by the end of 2009. The first franchise was opened in March 2007. Eurobank has been present in the market since September 2003; it currently has over 480 branches. It belongs to the French group Societe Generale. Counter-intuitively, the slowdown may turn out to be a good time to build market position (the other banks may close branches down or not pursue franchisees so aggressively). At the same time, franchising is not a significant source of upfront expenses.
Nordea Bank Polska: PLN 26.5m profit in Q1 2009 In Q1’09, the Bank had PLN 26.5m in net income (-4% y/y). Operating revenues increased by 31% y/y, reaching PLN 130.8m, but they were outpaced by expenses, which increased by 38% y/y to PLN 92.4m as a result of intensive network expansion. Total provisions amounted to only PLN 2.1m (vs. PLN 1.3m a year ago). The Bank admits that while this level is good for now, there are symptoms of deterioration in retail loans. Deposits rose by 17%, i.e. PLN 8bn. We believe provision charges on account of retail loans will be higher in the second half of the year. These earnings look good, because the Bank did manage to keep its revenue growth rate high, despite the fast expansion of its network in such tough times. It has been helped by the changes in the mortgage loan market: Nordea is one of the few banks to still lend in the Swiss franc.
Financial intermediaries In Q1 2009, the members of the Polish Union of Financial Advisors brokered PLN 2.35bn worth of mortgages (-17% y/y from PLN 2.82bn in Q1’08 ) and sold over PLN 1bn in investment products. They employed a total of 2,100 advisors (+800 y/y). Open Finance is the runaway leader, with its 68% share in mortgages (63% if it is taken into account that of its PLN 1.6bn total, 20% are appendices to existing agreements). OF for sure dominated in the sales of investment products, but this is largely a consequence of its selling the savings products of its related companies. We are financial advisors to cut down employment during 2009.
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Banks force clients to buy unemployment insurance Due to the crisis, many banks are adding unemployment insurance to their mortgage offers, which entails an additional monthly cost of PLN 200–250 per month for an average PLN 300,000 mortgage. In return, the banks are willing to reduce their margin. According to brokers, over half of the banks currently offer this type of insurance. Theoretically voluntary, in practice it is a requirement. There are two underlying causes: (i) higher risk-aversion on part of the bank, but also, not less importantly, (ii) distribution fees the insurers pay to the banks. By hiking fees and commissions, the banks are attempting to find at least a partial replacement for revenues lost due to the crisis.
PZU to guarantee loans? According to Parkiet , PZU will create a company that will issue loan guarantees for banks. The new entity would have PLN 2–3bn equity; upon verification of the banks' loan-granting procedures, it would issue guarantees for corporate loans. It could be set up with PKO BP’s and BGK’s cooperation. Guarantees would be issued for PLN 0.3–20m loans, for up to 50% of their value; a single bank would be entitled to a PLN 5bn total in guarantees. The cost, depending on the outcome of the audit of credit procedures, would amounts to 50-80bps. The new entity would not be part of the sluggish BGK, which is supposed to issue loan guarantees. According to the CEO of PZU, however, it may take one–two years for this new company to be set up; by then, the supply of credit may be reviving of its own account. He did admit, however, that PZU was attempting to come up with a way of using its surplus capital, perhaps by entering the market for financial insurance in a more active way. The idea is commendable, but we believe this should be coming from a company fully controlled by the State Treasury. PZU is open to the charge that it is acting against the shareholders' interests, for instance if the guarantees were to be priced below market level. We agree with the CEO of PZU that the process might be very lengthy and that the supply of credit may rebound of its own before the new company is even launched. At the same time, the very fact that such a proposal is being discussed suggests that it will be difficult to change the way the "sluggish BGK" operates. We believe nonetheless that this should be easier than setting up a new company because it would suffice to create an appropriate department.
ZBP wants every employee to have a bank account The Polish Banks Union (ZBP) wants all forms and remuneration and social payments (salaries, pensions and disability pensions) to be paid into bank accounts. An alternative method of disbursement would come at a cost and require prior arrangements. According to the ZBP, this would bring savings to the employers as well as the Social Insurance Institution. A European Commission Report indicates that over half of Poles do not have a bank account. Polish experts believe that ca. 60% of all households have an account. There is therefore a clear upside potential for the banks, as far as the number of customers is concerned, and thus also the scale of the banks' business. ZBP is acting in the banks’ interest. It will take years for the Polish society reach saturation as far as the use of banking products is concerned. If having a bank account becomes mandatory, the number of clients will surge, especially in the case of banks with branches in smaller towns, where most of the nonbanking population lives. We believe, however, that such solutions are unlikely to be introduced; the social interest will prevail.
Raiffeisen Bank Polska Q1 2009 net income falls by 53.9% y/y In Q1 2009, net income of Raiffeisen Bank Polska fell to PLN 32.7m (-53.9% y/y). Income from banking operations dropped by 11.6% y/y to PLN 231.1m. Raiffeisen reported that its earnings were negatively impacted by provisions in the amount of PLN 42.7m. The cost/income ratio was at 61.9% vs. 54.4% a year earlier. Total deposits stood at PLN 17.34bn at the end of the quarter (+44% y/y and +PLN 2.3bn during the quarter). The loan portfolio amounted to PLN 16.9bn (+24.1% y/y). Equity exceeded PLN 1.87bn at the end of the year, and the capital adequacy ratio was 9.99%. The Bank announced that it was planning a capital increase with a view to further expansion. Earnings in line with sector-wide trends.
BOŚ starts a customer acquisition campaign By the end of the year, BOŚ is planning to sell ca. 50,000 personal accounts. The CEO said that since mid-February, when a new offer in deposits was introduced, BOŚ has collected PLN 1.2bn in client savings. Since mid-March, when its offer of mortgages was revised, the Bank has received applications for a total of PLN 481m. According to the strategy presented in May, the Bank wants to double its assets and acquire 100,000 new retail clients within three years. Capital increase is not on the agenda for the next meeting of shareholders. The Bank wants to increase it by PLN 150m, but it has not concluded all the necessary procedures. It is now taking advantage of its liquid balance sheet.
Santander Consumer Bank Polska to close all its branches in June SCBP is the first big bank to give up on its Polish branches. A fairly surprising decision, it could reflect a change in Santander’s overall strategy.
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Fortis Bank Polska records a PLN 52.07m net loss in Q1’09 Fortis Bank Polska recorded a PLN 52.07m net loss in Q1’09 vs. PLN 55.31m profit a year earlier. Interest income was PLN 103.09m vs. PLN 86.87m a year earlier, fee income was PLN 28.01m vs. PLN 48.34m. Losses were caused by further charge-offs on options (PLN 120m). We know now which listed banks recorded losses in Q1'09 (BPH, Kredyt Bank and Fortis Bank Polska). In the following quarter, unless provisions surge, Fortis may be back in the black.
BGŻ records a PLN 1.3m consolidated net profit in Q1’09 Net income of BGŻ declined in Q1'09 to PLN 1.3m from PLN 85.9m a year earlier, with the pre- tax income falling from PLN 99m to PLN 3.1m. The Company did not disclose its income from banking operations, nor its interest income. It only disclosed that the deterioration in quarterly earnings was a consequence of a decline in interest income, increase in operating expenses (due to network expansion) and charge-offs for client options. The capital adequacy ratio stands at 11%. with the loans-to-deposits ratio at 95%. Between January and March, BGŻ opened 40 new branches, which brought its network to 299. A further 30 branches are scheduled for opening this year, which will be a tough one for the entire banking sector. Continuing expansion means swimming against the current; the Bank is preparing for the next economic boom, but its current loans/deposits ratio does not leave much room for new lending.
Polbank cancels appendices to mortgage loans Polbank surprised everybody by cancelling appendices to mortgage loan agreements which were used to hike the cost of the loan and the individual payments. Earlier, the Bank argued that the appendices were still in force. Those affected are over 1,000 clients out of Polbank's 32,000 mortgage borrowers. Bad news for banks that built large mortgage portfolios during the last boom, when margins were at the historical low. Even worse for those that extended F/X loans, which are now more expensive to refinance than zloty loans.
UOKiK sues more banks The competition watchdog UOKiK has sued two more banks, Nykredit and Lukas Bank, alleging that they have been using illegal clauses in their loan agreements, such as the requirement that clients pay interest and an additional fee if their loan is called in by the bank. UOKiK is also unhappy about the fact that there are no specified procedures for collections; the agency believes that rules for collections should be formulated in clear and precise terms, rather than set on a whim. UOKiK has also questioned the fact that premiums for low downpayment insurance cannot be reimbursed after this risk factor ceases to exist. UOKiK has been a very active defender of customers as of late, especially in mortgages, thereby preventing banks from hiking prices on existing loans.
Increasing indebtedness Corporate and retail past-due liabilities (loans, taxes, utilities, rental rates, phone bills) amounted to PLN 70bn after Q1 2009 (+PLN 7.5bn since the end of 2008). Car loans, cash loans and consumer loans are the loans most commonly defaulted on. The debt of private businesses has been increasing the fastest, from PLN 14.2bn at the end of Q4 2008 to PLN 19.5bn at the end of March. According to the National Debt Register, credit card NPLs are on the rise as well. (+22% q/q, PLN 901.4m). Most defaults come from aged 26-45 (55%) and men (67%). Value-wise, 95% of past-due debtors have liabilities under PLN 6,000. According to KRD, there are 3.3m past-due debtors in Poland; 724,000 of them are in the register. This is total debt, i.e. not just at banks. We already know Q1 2009 earnings, which means that these data have been taken into account. We believe retail loan loss provisions will be on the rise in the upcoming quarters.
More franchised branches Due to the economic crisis, the banks are opening fewer new branches, or none at all, but their franchise networks are being expanded. Since the start of the year, 170 franchised branches have been opened. This year, banks are planning to open 634 (including 250 for Getin Bank, ca. 100 for BZ WBK and 40 for Eurobank). There are currently 3834 franchised bank branches across Poland. This is a good way to expand the network in these tough times. Banks get access to customers but do not incur expenses until products are sold.
Getin Holding: Q1’09 earnings At PLN 103m, Getin Holding’s Q1’09 net income was well ahead the consensus estimate (PAP) of PLN 66m. The main bottom-line driver in the period was fee income (PLN 119m reported vs. PLN 52m forecasted) generated on loans, primarily the loan portfolio built by Noble Bank. Further, GH booked a high trading income of PLN 119m which was boosted by proceeds from early redemption of Eurobonds. The resulting addition to net income according to the Bank was PLN 10.4m (the credit to pre-tax income was slightly higher). An additional boost to trading income was provided by a reversal of PLN 4.8m provision against legal expenses recognized in 2007, as well as value adjustments to derivatives. On a less positive note, loan-loss provisions were much higher than expected (PLN 155m, 2.7% of net loans) at PLN 245m (4.2% of net
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loans). The main “culprit” behind these charges was Getin Bank, or specifically its consumer finance arm (the quality of mortgage loans was intact in Q1’09 according to sector analyses). Provisions will probably continue to be high in coming quarters. These earnings beat the consensus by a wide margin. Even though some cost cuts can be observed within the bank, it is income growth that contributes most to the overall performance. Finally, GH successfully managed to reduce its ratio of loans to deposits to 100% in spite of a weak zloty.
Getin Holding: Getin Bank repaid the last tranche of Eurobonds Getin Bank repaid the last tranche of Eurobonds. The total value of Eurobond debt amounted to EUR 500m and USD 100m. In line with market expectations.
Getin Holding: Getin Holding offered AIG Bank Polska Mr. Leszek Czarnecki, the main shareholder of Getin Holding, received an offer to buy AIG Bank Polska after PKO BP withdrew from the negotiating table. Neither party has confirmed this piece of news. but it is known that AIG BP is engaged in negotiations. According to the press, GH was not admitted to the negotiating table in the first stage of the process. The price may be very low; according to Parkiet , PKO BP had managed to negotiate it down to under PLN 0.5bn before it withdrew due to concerns about the consumer loan portfolio, which could be a source of significant provisions. National daily Rzeczpospolita claims that GH is not interested in an investment in AIG BP, among others because of the permanent employment contracts which the bank signed with its top employees to make sure that they do not leave. We do not know whether GH is planning to buy AIG Bank Polska; everything comes down to the price. While nothing can be precluded, we do see several arguments against such a scenario: (1) the purchase of AIG Bank Polska offers know–how regarding consumer loans, which is something GH already has; (2) credit risk in the consumer loan portfolio; (3) the need to provide AIG BP with long-term wholesale financing.
BPH: Agreement with unions on further layoffs BPH reached an agreement with trade unions concerning the planned layoffs of 440 employees, to be conducted between June and November. Further downsizing costs, savings are yet to come.
BPH: Earnings still under pressure The Bank and the listed Paged have recently settled the issue of the latter’s options-related liabilities (PLN 37.5m at the end of 2008). BPH’s write-downs on account of options amounted to PLN 17.5m over the last two quarters. According to Parkiet , BPH “let Paged off the hook” on some of its payables; other sources suggest, however, that everything will be converted into loans. If this is the case, the provision to cover increased counterparty risk, recognized in trading income, may remain on the books, as the loan will most likely be considered an impaired one. Paged’s problems may have a significant impact on BPH’s Q2 2009 earnings. Coupled with the need to create a restructuring reserve for another wave of layoffs, BPH may be in the red once again.
BPH: Supervisory board candidates At the next meeting of shareholders, Messrs. Robert Green and Mathias Seide will be candidates for the Supervisory Board.
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BREBRE BankBank SecuritiesSecurities Monthly Report
BZ WBK (Accumulate) Analyst: Marta Jeżewska Current price: PLN 93 Target price: PLN 104.1 Last Recommendation: 2009-05-20 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Net interest income 1 286.7 1 635.1 27.1% 1 516.5 -7.3% 1 491.3 -1.7% Number of shares (m) 73.0 Interest margin 3.5% 3.3% 2.7% 2.7% MC (current price) 6 785.3 Revenue f/banking oper. 2 940.6 3 190.0 8.5% 2 869.5 -10.0% 2 949.9 2.8% Free float 29.5% Operating income 1 395.2 1 575.9 13.0% 1 264.3 -19.8% 1 328.1 5.0% Pre-tax income 1 391.4 1 211.4 -12.9% 400.8 -66.9% 642.8 60.4% Net income 954.7 855.4 -10.4% 276.8 -67.6% 469.0 69.4%
ROE 23.0% 18.4% 5.4% 8.6% Price change: 1 month -1.1% P/E 7.1 7.9 24.5 14.5 Price change: 6 month -8.8% P/BV 1.6 1.4 1.3 1.2 Price change: 12 month -44.0% D/PS 6.0 3.0 0.0 0.0 Max (52 w eek) 179.9 Dyield (%) 6.5 3.2 0.0 0.0 Min (52 w eek) 64.5
190 Earnings for Q1 2009 indicate that BZ WBK is doing well. The Bank’s net income was ahead of our forecasts (PLN 119m vs. PLN 78m), thanks to the slightly-higher banking 162 income and somewhat tighter cost control. Revenues were boosted by fee and trading 134 income. We doubt the success in the latter domain can be repeated in the upcoming quarters, but we do expect improvements as far as costs are concerned (we have not 106 seen the impact of restructuring programs yet). The costs of risk undershot our forecasts 78 at PLN 161m (vs. PLN 178m), but we believe the risk of loan portfolio deterioration BZ WBK WIG 50 remains high at BZ WBK due to its exposure to real-estate developers. We remain 2008-05-29 2008-09-17 2009-01-13 2009-05-06 conservative as far as costs of risk in 2009 and 2010 are concerned, projecting 2.6% (PLN 864m) and 2.2% (685m), respectively. We are reiterating an accumulate rating.
Q1 2009 results At PLN 119m, net income exceeded our expectations and the market consensus (PLN 78m and PLN 87m, respectively). Trading income provided a nice surprise (higher valuation of derivatives, lower write-downs for client options), as did operating expenses and the slightly lower-than-expected provisions. We are pleased with the quality of these earnings, even if some of them will not recur in the following quarters (trading income). At PLN 362m, net interest income was by and large in line with our expectations (a PLN 5m difference, i.e. 1.5%). The y/y decline, and in particular the q/q drop is a consequence of the “war for savings”, especially in retail loans, but to some extent in the corporate segment as well. We expect this trend to persist at least through Q3 2009. Fee income beat our expectations by PLN 8m. We had underestimated the income from loan fees and insurance sales and we had expected slightly higher write-downs for client derivatives (-PLN 33m vs. –PLN 24.3m in actuality). In addition, derivative valuation provided a big surprise on the upside. The Bank is still being negatively affected by its exposure to equity markets; the other items are showing y/y growth. We also like the Bank’s cost discipline. The cost of risk was 179pbs, i.e. within the bracket the Bank had earlier forecasted (150–200bps) and slightly lower than we expected (-200bps).
CEO on prospects for the upcoming quarters BZ WBK is expecting its provisions to be in three digits again, but not as high as in the first quarter; the FY2009 total is projected at PLN 550–600m. The Bank would like to keep payroll expenses at last year's level, but it will be difficult to achieve this for operating expenses; all in all, expense growth should be in single digits. The CEO admitted that it will be difficult to maintain revenues at last year's level. We are expecting a 10% y/y decline in banking income in FY2009, driven by the shrinkage in interest income (-7% y/y), which accounts for 52% of total income. Fee income will also decline (-14% y/y). We expect a nominal 1% decline in expenses, which makes us more optimistic than the Management. Our scenario as far as the cost of credit risk is concerned is much more pessimistic, however, as we project PLN 864m in provisions. Under a scenario in which expenses increase by 6% y/y in FY2009, and provisions amount to PLN 600m, the estimated net income (using our projections for revenues) amounts to PLN 400m.
AIB selling BZ WBK? According to Rzeczpospolita , there are currently three possible scenarios for the future of BZ WBK: (i) its shares will be taken over a company created by BZ WBK executives and Polish investors, (ii) the Irish sell the shares to another investor from the banking industry, (iii) AIB manages to weather the bad times and it does not need to dispose of the Polish “pearl in its crown". The paper claims the decision is to be taken by the end of the month. We believe in the event of divestment, AIB will pay close attention to the price.
4 June 2009 17
BREBRE BankBank SecuritiesSecurities Monthly Report
Loans will be slowing down On occasion of the publication of Q1’09 earnings, the CEO said that loans would be slowing down in the ensuing quarters. The Management has reiterated its projections of FY2009 credit risk at 150–200bps, more likely towards the lower end of this range. In line with expectations as far as loan volumes are concerned, but we are more conservative in our approach to FY2009 provisions.
EUR 50m loan from the EBRD for the leasing subsidiary The loan is for 5 years and it will be used to finance SME investment projects outside the biggest urban centers. BZ WBK and EBRD have been cooperating since 2003; the current loan is the fourth one. Good news, albeit irrelevant given the scale of the group’s operations (PLN 35bn loan portfolio at the end of 2008).
4 June 2009 18
BREBRE BankBank SecuritiesSecurities Monthly Report
Handlowy (Sell) Analyst: Marta Jeżewska Current price: PLN 53 Target price: PLN 40.9 Last Recommendation: 2009-05-07 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Net interest income 1 204.4 1 365.8 13.4% 1 467.5 7.4% 1 449.5 -1.2% Number of shares (m) 130.7 Interest margin 3.2% 3.4% 3.4% 3.3% MC (current price) 6 925.0 Revenue f/banking oper. 2 447.1 2 312.8 -5.5% 2 289.9 -1.0% 2 324.4 1.5% Free float 25.0% Operating income 990.3 909.6 -8.1% 894.6 -1.7% 882.9 -1.3% Pre-tax income 1 034.2 759.2 -26.6% 411.5 -45.8% 539.2 31.0% Net income 824.2 600.4 -27.2% 326.7 -45.6% 428.0 31.0%
ROE 15.0% 10.7% 5.6% 7.0% Price change: 1 month 0.4% P/E 8.4 11.5 21.2 16.2 Price change: 6 month 16.9% P/BV 1.2 1.2 1.2 1.1 Price change: 12 month -37.3% D/PS 4.1 4.8 0.0 1.3 Max (52 w eek) 84.5 Dyield (%) 7.7 9.0 0.0 2.4 Min (52 w eek) 28.0
90 The Bank recorded PLN 46.1m in net income in Q1’09. According to its CEO, the problems related to client derivatives have already peaked; the key risks in the ensuing 76 quarters are the decline in revenues and loan loss provisions. We concur. Although with 62 provisions for derivatives ignored, the Bank's Q1'09 pre-tax income amounts to the
48 handsome PLN 228m (vs. PLN 67m in actuality), in the ensuing quarters we are expecting a deterioration in recurrent income, with provisions remaining at a high level. In Q1’09, 34 the costs of risk amounted to 2.8% exclusive of derivative provisions and the staggering Bank Handlowy WIG 20 4.4% including them. The decline in volumes, sales and client activity will dampen 2008-05-29 2008-09-17 2009-01-13 2009-05-06 revenues, even if the profitability of individual products remains unchanged. We recommend selling Bank Handlowy.
Q1 2009 results Bank Handlowy’s net income for Q1’09 missed our estimate (PLN 52m) at PLN 46m, and fell far short of the analysts’ consensus of PLN 56m. The main factor weighing on profit were huge loan-loss provisions (which totaled PLN 152m, i.e. a staggering 4.4% of net loans). After adjustment for a PLN 56.8m provision against F/X option losses (which we expected to be charged against trading income), costs of risk decrease to a not-much-less alarming figure of PLN 96m (2.8% of net loans). If we exclude the total amount of the F/X option charges (PLN 161.5m through trading income and provisions), the Q1’09 pre-tax income amounts to PLN 177m. The high point of BH’s first-quarter results was net interest income which increased versus Q4’08. Margins remained high, but cost BH some market share in deposits. Interest expenses, elevated by loyalty programs for top clients, were offset by higher loan margins. All in all, BH’s first-quarter performance failed to meet expectations, and future earnings are under significant pressure due to a deteriorating quality of corporate loans.
Comments on quarterly earnings Bank Handlowy is not planning further downsizing. It believes that the problems stemming from client derivative contracts have already peaked and it want to keep its capital adequacy ratio above 10%. Towards the end of March, the ratio was 11.17%, but if last year’s profits are added, it is 13.2%. The CEO said that no final decision has been taken as to dividends from FY2008 profits, although the Supervisory Board's recommendation to retain the earnings is certainly something to pay a lot of attention to. The Bank might be able to sell its NPLs, for which provisions were earlier created; the transaction should be finalized in Q2 or in Q3.
Management Board also in favor of full profit retention The Bank's Management Board recommended that the entire FY2008 profit be allocated to equity, after the Supervisory Board made the same recommendation. As a result, the Bank’s capital adequacy ratio will exceed 13%. We should not forget its balance sheet is very liquid. We believe, however, that in the near future it will not use these trumps to expand its market shares.
Dividends after all? The Bank called a special meeting of shareholders for June 18. Seeing that PKO BP will pay dividends after all, the same could be the case at Bank Handlowy. It has by far the biggest equity vs. its operations; its lending capacity would not be affected even in the event of a payout. Excluding FY2008 net income, the Bank’s capital adequacy ratio at the end of Q1'09 was 11.2% (13.2% otherwise). The Bank is capable of paying out a significant part of its profit. The key arguments why this should not happen is the Supervisory Board recommendation and the KNF' standing. A payout of half of last year’s profits entails DPS of PLN 2.3 and gross dividend yield of 4.4%.
4 June 2009 19
BREBRE BankBank SecuritiesSecurities Monthly Report
ING BSK (Hold) Analyst: Marta Jeżewska Current price: PLN 328.5 Target price: PLN 313 Last Recommendation: 2009-05-15 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Net interest income 1 047.9 1 152.0 9.9% 1 217.5 5.7% 1 236.9 1.6% Number of shares (m) 13.0 Interest margin 2.1% 1.9% 1.9% 2.0% MC (current price) 4 273.8 Revenue f/banking oper. 2 008.5 2 060.5 2.6% 2 187.9 6.2% 2 306.7 5.4% Free float 18.5% Operating income 640.2 580.4 -9.3% 752.1 29.6% 817.2 8.7% Pre-tax income 787.0 563.1 -28.5% 241.4 -57.1% 491.3 103.5% Net income 630.7 445.4 -29.4% 191.6 -57.0% 390.0 103.5%
ROE 16.6% 11.1% 4.4% 8.5% Price change: 1 month 15.7% P/E 6.8 9.6 22.3 11.0 Price change: 6 month -22.7% P/BV 1.1 1.0 1.0 0.9 Price change: 12 month -39.2% D/PS 27.9 11.7 0.0 0.0 Max (52 w eek) 557.0 Dyield (%) 8.5 3.6 0.0 0.0 Min (52 w eek) 182.1
570 The Bank is taking advantage of its big surplus of deposits over loans: it remains an active player in the lending market, but it does not offer aggressive pricing on savings. 486 As a result, interest income exceeds last year’s levels; we have raised our forecast in 402 this respect. Loan loss provisions remain a negative factor that impacts all the banks.
318 We believe ING BSK’s provisions will be on the rise in the upcoming quarters. Our forecast for the costs of risk remains unchanged for FY2009 as a whole vs. our previous 234 report (2.3% of the net loan portfolio). In our report published May 15, 2009 we increased ING BSK WIG 150 the price target to PLN 313 per share, i.e. by 15%. Our valuation was impacted by revised 2008-05-29 2008-09-17 2009-01-13 2009-05-06 long-term forecasts, including an increase in the long-term ROE from the current 11.7% to 12.5%. The Bank is trading at ’09 P/BV of 0.9, i.e. at the level implied by our target price; we are reiterating a hold rating.
Q1 2009 results At PLN 81m, net income exceeded our expectations (PLN 70m) and was far ahead of the market's (PAP consensus PLN 49m). This outcome is a consequence of excellent interest income, slightly lower provisions (excluding provisions for client options; our forecast was PLN 77m, the market’s, PLN 126m) and lower-than-expected write-downs on account of the valuation of client options (PLN 113.6m total vs. PLN 130m we forecasted). Fee income continues to surprise on the downside. As promised last quarter, the Bank managed to keep its expenses in check. We like the fact that it remains an active lender (loans +13% q/q), but it is clear that the importance of retail loans is increasing. The Bank decided not to compete aggressively for client deposits, which unfortunately led to a q/q contraction in the deposit portfolio in the corporate and public-sector segments (retail deposits are still growing at a stable pace, +PLN 958m during the quarter, +3% q/q). The loans-to-deposits ratio increased from 55% at the end of 2008 to 63%, which is still the lowest level among all the banks in our coverage universe. The Bank's liquidity buffer is big enough to make it unnecessary to aggressively compete for deposits. Capital adequacy ratio was 10.1%; if the Bank continues to expand its loan portfolio, it will probably opt for a subordinated loan in order to keep it above 10%.
No more cost-free hedging for business clients The Bank announced that it will no longer offer its business clients cost-free currency hedges. No impact on our long-term forecasts (we expect a deep reduction in the clients’ activity in this area).
Moody's downgrades the outlook for ING BSK from stable to negative Moody's lowered its outlook for ING BSK’s long-term A2 rating from “stable” to “negative”, stressing that ING BSK’s rating may be impacted by the negative rating of its parent company. It is primarily the results of the latter that have triggered the current wave of rating reviews.
4 June 2009 20
BREBRE BankBank SecuritiesSecurities Monthly Report
Kredyt Bank (Sell) Analyst: Marta Jeżewska Current price: PLN 5.9 Target price: PLN 4.1 Last Recommendation: 2009-03-05 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Net interest income 871.5 1 059.9 21.6% 971.3 -8.4% 1 015.1 4.5% Number of shares (m) 271.7 Interest margin 3.5% 3.2% 2.6% 2.7% MC (current price) 1 602.8 Revenue f/banking oper. 1 360.2 1 585.9 16.6% 1 465.8 -7.6% 1 535.8 4.8% Free float 9.4% Operating income 468.1 531.3 13.5% 468.4 -11.8% 527.6 12.6% Pre-tax income 499.7 421.1 -15.7% 13.6 -96.8% 63.3 364.4% Net income 390.5 324.9 -16.8% 10.6 -96.8% 49.0 364.4%
ROE 17.9% 13.2% 0.4% 1.8% Price change: 1 month -5.4% P/E 4.1 4.9 151.8 32.7 Price change: 6 month -44.5% P/BV 0.7 0.6 0.6 0.6 Price change: 12 month -68.8% D/PS 0.4 0.5 0.0 0.0 Max (52 w eek) 18.9 Dyield (%) 6.3 8.8 0.0 0.0 Min (52 w eek) 4.8
22 In Q1’09, the Bank recorded a net loss of PLN 37m, due to its extremely high provisions (PLN 184m vs. PLN 94m we expected). The impact of this poor opening will be felt 18 throughout the year. We are still assuming that the Bank will be in the black in FY09, but 14 this may change if provisions are too high. Excluding PLN 59m provisions for FX
10 derivatives and PLN 5.7m downsizing provision, the Bank’s provisions would have amounted to PLN 120m, which would have entailed a small net profit in Q1. We are 6 pleased by the Bank's operating income before provisions, which was much higher than Kredyt Bank WIG 2 expected (PLN 137m vs. PLN 98m), after growing by 10%. The Bank’s main problems are 2008-05-29 2008-09-17 2009-01-13 2009-05-06 credit risk and loans/deposits ratio (the highest for all the banks we cover). Provisions will preclude significant profits over the next two years, while illiquid balance sheet will stump growth in upcoming quarters. We are reiterating a sell rating.
Subordinated loan Kredyt Bank (KB) received a subordinated loan from KBC Bank NV Dublin Branch in the amount of CHF 165m (PLN 472.71m), granted on an arm’s length basis (LIBOR + margin), payable in ten years. The agreement allows for early payment at any time five years after disbursement, subject to approval by the KNF. The condition precedent is that KB has to obtain the KNF’s approval to include the loan in equity. The Bank estimates that such a considerable capital injection can lift its capital adequacy ratio to 10% as of March 31st, 2009. KB had to ask for support from its owners sooner or later given that its CAR stood at just 8.46% at the end of Q1’09 – the lowest level of all the banks in our coverage universe. Taking into account the bank's risk-weighted assets, the injection could improve CAR by an estimated 1.6% to 10.4%, although KB could have increased its RWA in Q1’09 (for instance as a result of value adjustments on its loan portfolios), and recorded a change in capital levels. We are fairly certain that KB will report a loss in Q1’09.
Q1 2009 loss The Bank recorded a net loss of PLN 37m. We had expected a PLN 4m profit, but we were worried about provisions. Loan loss provisions were in fact the cause of the discrepancy, amounting to the whooping PLN 184m, which is equal to 2.7% of the average net loan portfolio. Most of these provisions were in the corporate segment, where the cost of risk amounted to 4.3% (!) of the gross loan portfolio. Of this amount, PLN 59m were provisions for F/X options. In the retail segment, the cost of risk was 1.6% of the gross loan portfolio; it had been increasing at an even pace. There were no one-offs such as those that had allowed the Bank to release provisions in the previous quarters. We are pleased by the Bank’s operating income before provisions, as it was much higher than we expected (PLN 98m) and than the market consensus (PLN 122m). Although interest and fee income surprised on the downside, trading income was much higher than expected (once again thanks to the valuation of derivatives hedging the loan portfolio at the time of widening PLN/FX spreads). Expenses also beat expectations, declining by 2.5% q/q. These earnings are bad. We see no grounds to revise our forecasts and change our outlook on the Bank.
Supervisory Board member appointed Mr. Dirk Mampaey was appointed to the Bank’s Supervisory Board.
New Board member The Supervisory Board voted to expand the Bank’s Management Board to six members and appointed Mr. G. Rommeloo a member in charge of retail distribution. Mr. Rommeloo has been working for the KBC group since 1985; since 2003, he has been a managing director at Kredyt Bank’s retail distribution division. No impact on the Bank’s strategy.
4 June 2009 21
BREBRE BankBank SecuritiesSecurities Monthly Report
Millennium (Sell) Analyst: Marta Jeżewska Current price: PLN 2.6 Target price: PLN 1.8 Last Recommendation: 2009-05-12 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Net interest income 771.7 980.9 27.1% 661.0 -32.6% 828.3 25.3% Number of shares (m) 849.2 Interest margin 2.8% 2.5% 1.4% 1.7% MC (current price) 2 216.4 Revenue f/banking oper. 1 648.2 1 827.5 10.9% 1 495.1 -18.2% 1 638.1 9.6% Free float 34.5% Operating income 651.1 657.0 0.9% 481.7 -26.7% 609.7 26.6% Pre-tax income 584.6 521.8 -10.7% 22.8 -95.6% 118.6 420.7% Net income 461.6 413.5 -10.4% 18.1 -95.6% 94.0 420.7%
ROE 19.5% 15.5% 0.6% 3.3% Price change: 1 month -6.1% P/E 4.8 5.4 122.8 23.6 Price change: 6 month -18.2% P/BV 0.9 0.8 0.8 0.8 Price change: 12 month -69.2% D/PS 0.2 0.2 0.0 0.0 Max (52 w eek) 8.5 Dyield (%) 6.5 7.3 0.0 0.0 Min (52 w eek) 1.4
9 Q1 2009 earnings have shown that due to its considerable needs in the area of loan financing, the Bank is incurring a negative margin on its deposit portfolio. We believe 7.2 that this trend will not be reversed in the next quarter (or even the next two quarters), 5.4 because: (i) the Bank will continue to pay high interest on deposits relative to market
3.6 rates as it needs to collect further funds from clients, (ii) its loan pricing is revised with a delay, (iii) the pricing of most of its loans cannot be renegotiated (long-term mortgages 1.8 account for 2/3 of the portfolio), (iv) new loan volumes will be low, (v) the cost of Millennium WIG 0 refinancing of FX loans will be high, although in this case a decline in pricing has been 2008-05-29 2008-09-17 2009-01-13 2009-05-06 observed, leading to an improvement vs. Q1 2009. The cost of credit risk (exclusive of client currency derivatives) amounted to PLN 74m (85bps), and was concentrated in the corporate segment. We expect the cost of credit risk in the retail segment to be on the rise in the ensuing quarters, as the situation in the labor market deteriorates. The Bank’s low ROA under its previous business model (’08 ROA of 1.1% vs. 2% for peers) was offset by higher volumes. In the current environment, the Bank must revise its entire sales model, which will take its time, even though the Management is acting quickly. We are reiterating a sell rating.
Q1’09 results Millennium’s first–quarter results fell far short of our estimates and analysts’ expectations (reported net income at PLN 12m vs. our estimated PLN 34m and PLN 28m PAP consensus) due mostly to: (i) higher cost of financing and (ii) credit risk in the corporate segment. Interest income (presented on a pro-forma basis) amounted to PLN 180.4m, that is PLN 55m less than we predicted. The bank recognized a significant portion of interest income under trading income because of considerable adjustments in the values of hedging instruments stemming from differences between Polish and Swiss interest rates and exchange-rate volatility. At the same time, the bank reversed a portion of a provision against customer derivatives set up in Q4’08 (+PLN 22m), contrary to our expectations of a PLN 73m charge in trading income. Instead, Millennium added option provisions to provisions (-PLN 54m direct, -PLN 5m indirect), and the resulting net charges amounted to a much lower-than-expected PLN 37m. Overall provisions were much higher than expected due to the provisions for derivatives, and their adjusted balance is PLN -75m (0.86% of the loan portfolio), slightly less than our forecasted PLN -84m (1% of loans). The increase in provisions is largely driven by corporate lending (PLN 51m out of PLN 75m total). On a positive note, Millennium cut expenses to PLN 258m from PLN 315m in the preceding quarter, achieving higher-than-expected savings (our expense estimate was PLN 290m), both in payroll costs (over half of the savings), and in non-payroll costs. Millennium’s financial results in the quarters ahead will continue to be affected by costs of financing. As businesses continue to struggle, costs of risk related to corporate lending are not likely to decline. What is more, loan-loss provisions in the retail lending segment will also increase in the course of the year. As of now, we see no potential for changing our outlook on Bank Millennium.
4 June 2009 22
BREBRE BankBank SecuritiesSecurities Monthly Report
Pekao (Accumulate) Analyst: Marta Jeżewska Current price: PLN 114.1 Target price: PLN 133.2 Last Recommendation: 2009-05-13 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Net interest income 4 323.0 4 509.5 4.3% 3 792.0 -15.9% 4 241.0 11.8% Number of shares (m) 262.2 Interest margin 3.6% 3.5% 2.8% 3.1% MC (current price) 29 918.5 Revenue f/banking oper. 8 314.2 7 578.2 -8.9% 6 686.1 -11.8% 7 409.1 10.8% Free float 36.7% Operating income 4 509.5 4 535.0 0.6% 3 126.6 -31.1% 3 731.0 19.3% Pre-tax income 4 342.4 4 346.0 0.1% 1 963.1 -54.8% 2 587.7 31.8% Net income 3 547.2 3 528.0 -0.5% 1 577.2 -55.3% 2 083.1 32.1%
ROE 23.1% 23.0% 9.4% 11.2% Price change: 1 month -7.7% P/E 8.4 8.5 19.0 14.4 Price change: 6 month 1.7% P/BV 2.0 1.9 1.7 1.5 Price change: 12 month -38.9% D/PS 9.0 9.6 0.0 0.0 Max (52 w eek) 195.3 Dyield (%) 7.9 8.4 0.0 0.0 Min (52 w eek) 67.9
200 The Bank’s Q1 2009 earnings show several strengths: it has kept a liquid balance sheet (91%, unchanged from the previous quarter), it has remained an active lender (with focus 170 on the retail segment), it has kept its expenses in check (-0.5% y/y) and its capital 140 adequacy ratio is high (13.07%, tier 1). Pekao's provisions are also very low compared to
110 its peers (-PLN 92m, 43bps of the net loan portfolio). For now, asset quality indicators suggest that the Bank's condition is good (NPL/gross loans up from 5.5% to 5.8%, NPL 80 coverage ratio down from 87% to 83%). Pekao’s professed conservative approach to Pekao WIG
50 credit risk entails much lower losses on loans; we believe nonetheless that in the 2008-05-29 2008-09-17 2009-01-13 2009-05-06 following quarters it will need to create more provisions. The weak point was interest income, which suffered due to the aggressive pricing across the sector (term deposits) and the decline in market interest rates (current deposits). Higher level of provisions and lower interest income will have a negative impact on the Bank's FY2009 earnings, but at the same time it appears that there are no risks as far as equity is concerned. In fact we believe that at its current levels the Bank would be able to pay dividends, but the decision to retain the entire profit for FY2008 has already been taken. We are making the conservative assumption that the same will be the case with FY2009 profits, but a payout cannot be precluded, given the Bank's good standing. This factor will support Pekao's valuation in the future. We are reiterating an accumulate rating.
Q1 2009 results At PLN 566m, net income exceeded our expectations, mostly due to much lower-than-expected cost of credit risk, i.e. 43bps of the net loan portfolio. This is much less than the market expected and much less than what the other banks have reported. As far as operating income before provisions is concerned, the Bank undershot our forecast by over 12%, due to lower- than-expected revenues (costs were in line). The Bank remained an active lender, increasing its net loans by 5% q/q, while its deposits started to expand, primarily in the retail segment. Generally speaking, the Q1’09 results of Pekao were in line with analysts’ expectations and better than our estimates. We doubt whether the bank can keep its costs of risk as low as in Q1’09 throughout the year, but we believe it is very well-prepared to absorb the much higher loan loss provisions we expect to see in the upcoming quarters. This is shown, among other things, by its very high (compared to peers) capital adequacy ratio (13.07%, consolidated). The loans/deposits ratio reached 91%, without a change q/q.
4 June 2009 23
BREBRE BankBank SecuritiesSecurities Monthly Report
PKO BP (Accumulate) Analyst: Marta Jeżewska Current price: PLN 26.2 Target price: PLN 30.2 Last Recommendation: 2009-05-19 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Net interest income 4 646.6 6 127.3 31.9% 5 056.9 -17.5% 5 327.7 5.4% Number of shares (m) 1 000.0 Interest margin 4.4% 5.0% 3.6% 3.6% MC (current price) 26 200.0 Revenue f/banking oper. 7 444.7 9 096.7 22.2% 7 993.2 -12.1% 8 257.4 3.3% Free float 48.8% Operating income 3 661.5 5 092.1 39.1% 3 872.2 -24.0% 4 130.7 6.7% Pre-tax income 3 609.2 3 977.3 10.2% 1 787.5 -55.1% 2 019.2 13.0% Net income 2 903.6 3 120.7 7.5% 1 436.9 -54.0% 1 627.0 13.2%
ROE 26.4% 24.1% 9.8% 10.0% Price change: 1 month -7.7% P/E 9.0 8.4 18.2 16.1 Price change: 6 month -17.1% P/BV 2.2 1.9 1.7 1.5 Price change: 12 month -48.4% D/PS 1.0 1.1 0.0 0.0 Max (52 w eek) 52.5 Dyield (%) 3.7 4.2 0.0 0.0 Min (52 w eek) 18.9
55 Q1 2009 earnings were slightly lower than forecasted, with net income at PLN 540m vs. PLN 580m. We were negatively surprised by revenues (the pressure on interest income 47 was higher than expected), but loan loss charges were lower than expected (PLN 374m 39 vs. PLN 442m). We expect sustained pressure on interest margin through the end of
31 2009: an ever-greater share of deposits will carry higher interest rates, and the cost of financing will be much higher than in the past. On the other hand, we can already see 23 PKO BP WIG that the Bank is adjusting deposit pricing to market rates, albeit slowly. Interest margin
15 will be rising slowly (new sales in the retail segment, margin revisions in the corporate 2008-05-29 2008-09-17 2009-01-13 2009-05-06 segment). Loan loss provisions provided a nice surprise. We have decided to adjust our forecasts in this respect for 2009-2010, by lowering the projected costs of risk from 2.5% (PLN 2.6bn) to 2.1% (PLN 2.1bn) in 2009 and from 2.3% (PLN 2.45bn) to 2% (PLN 2.13bn) in 2010. This has no impact on our long term forecasts, however, as we have not changed our projections of 0.5% cost of risk annually. In our report published May 19, 2009 we increased the price target only slightly, to PLN 30.2 per share (1.9%). We are reiterating an accumulate rating.
Treasury on capital injection, share offering The Ministry of the Treasury will take the decision of dividends from FY2008 net income and the potential share offering after it receives PKO BP’s report and growth plans. The share capital increase would be carried out through the state-owned BGK bank, as well as investors; the goal is for the Treasury to retail a controlling stake. The process would be carried out in H2’09. Already in March, the Treasury said it wanted PKO BP to issue new shares in order to amass funds for lending and prepare for potential acquisitions. We are awaiting further developments.
Q1 2009 earnings At PLN 541m, PKO BP’s Q1’09 net income fell short of our expectations (PLN 580m) and consensus estimate (PLN 645m) mainly because of lower-than-expected interest income and a significantly contracted net interest margin. Fee income also missed forecasts. Like most other banks, PKP BP posted a better-than-expected trading income (value adjustments on derivative hedges). Over all, however, the bank's first-quarter performance was disappointing, as a 6% drop in revenues could not be offset by other items. Costs were 6% lower than our estimate, and loan-loss provisions were nearly 16% lower (costs of risk at 1.4% vs. our expected 1.75%). First-quarter income figures were affected by downward pressure on interest margins, while volumes expanded thanks to an aggressive deposit offer. By increasing deposits to PLN 110.4 billion from PLN 103 billion in the preceding quarter, PKO BP reduced the ratio of loans to deposits to 96.5% from 98% in spite of a weak zloty and FCY loan value adjustments. If the bank keeps up its deposit acquisition efforts, in the long term volumes can be expanded enough to offset the impact of contracted margins.
PKO BP will not buy AIG Bank Polska PKO BP has withdrawn from the negotiations concerning the purchase of a 99.92% stake in AIG Bank Polska and a 100% stake in AIG Credit for an undisclosed reason. According to unofficial sources, the price it was willing to pay was below PLN 1bn, which is less than the AIG Group expected. Other reasons mentioned are worries that the quality of AIG's loan portfolio could deteriorate and political concerns – a transaction like this, using funds which could be used for lending, might meet with the Government's displeasure. If the Bank uses the funds obtained from the stock offering which is currently under planning to expand its lending business, the decision not to buy AIG Bank Polska may turn out to be a good one. The Bank will be able to exercise control over the loan portfolio it builds. We nonetheless believe that PKO BP will continue to look for acquisition opportunities.
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CEO change? Puls Biznesu speculates that after a recent reshuffle of PKO BP Supervisory Board, the CEO is the next candidate for replacement under the pretext of making the decision not to acquire AIG Bank Polska. According to the paper, the Supervisory Board wanted to shunt the takeover decision on to the Management Board. None of the persons involved gave a comment. Stories about PKO BP’s CEO being headed for dismissal have circulated before. We are awaiting further developments. The upcoming capital injection (following which the State Treasury will no longer have a direct controlling stake in PKO BP) will help increase the Management compensation budget at the bank.
PKO BP to pay out dividends? According to Rzeczpospolita , contrary to the politicians' declarations, a part of PKO BP's profits for FY2008 may be paid out as dividends. The government is searching for funds to boost the national budget, which foresees PLN 2.87bn in privatization gains. The consolidated profit of the PKO BP group in FY2008 was PLN 3.12bn, with the Bank earning PLN 2.88bn on standalone basis. If half of the standalone profit is paid out, this entails PLN 1.44 per share, with a gross dividend yield of 5.1%; a payout of 40% entails gross yield of 4.1%. Good news as far as valuation is concerned; due to the previous pronouncements by government officials, the market has not discounted any dividends on last year's profits.
KNF against dividends The KNF spoke out against PKO BP’s alleged plans to pay dividends, saying that banks should be reinforcing their equities as defense against increasing loan defaults. Dividend decisions are made by shareholders. In spite of being one of the two largest banks in Poland, and even though it is controlled by the Polish government, PKO BP is reportedly planning to ignore the KNF’s recommendation to retain profits. A payout by PKO BP could encourage other banks (specifically Bank Handlowy) with strong capital bases to follow suit.
PKO BP negotiates USD 500m loan with World Bank The World Bank and the Polish government are discussing the terms of a possible $500m loan that would be granted to PKO BP to support its SME-financing efforts. The Polish government will provide guarantees. Good news. The WB loan will boost PKO BP’s lending capacity, provided that the financing terms are reasonable.
Kredobank posts UAH 19.1m loss after Q1’09 In Q1 2009, PKO BP’s Ukrainian subsidiary Kredobank posted a net loss of UAH 19.1m. In its FY2008 report, PKO BP informed that Kredobank's last year's loss amounted to PLN 196.3m and was mostly due to loan charge-offs. Moreover, last year's loss was concentrated in the second half of the year and it was one of the drivers of PKO BP's high provisions in Q4'08. Kredobank is still incurring losses, but they are smaller in scale; this can entail lower allowances at PKO BP.
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Gas & Oil, Chemicals Russian threats concerning Odessa - Płock pipeline plans A Russian deputy prime minister reacted in a fairly strong way to the fact that Sarmatia approved a feasibility study for the Odessa - Brody - Płock pipeline project. The Russians threaten that if petroleum starts being transferred through the Odessa - Brody pipeline in the opposite direction, Russian companies may stop using the "Druzhba" pipeline in Ukraine, withholding supplies to Hungary, Slovakia and the Czech Republik. We believe the project is in its early stages and it is difficult to say that it will indeed be pursued. The Russian reaction is understandable from the political point of view, although it is hard to imagine that in the current situation Russia could give up on a sales channel that accounts for 30m tons per year, i.e. 15% of its total exports volumes (there are not alternative transportation routes as of now).
Mandatory reserves According to the press, the bill regulating mandatory reserves, which is currently being prepared by the Ministry of the Economy, will give the newly-created government agency several years to buy mandatory reserves from companies. This should come as no surprise; given the amounts involved, it would be hard to expect this issue to be solved in one go. We would like to point out, however, that most of Lotos’s and Orlen’s mandatory reserves are currently being built with loans. Therefore, it should be possible, even in the current situation of the state budget, for the state agency to assume these liabilities, which would decrease Lotos's and Orlen's net debt.
US crude oil and gasoline inventories In May, the trends in US crude oil and gasoline inventories were clearly reversed (declines of 3% and 4%, respectively), mostly due to the revival in Asian demand, which had a palpable impact on US imports (crude -5.7%, gasoline -13%). Another important factor was the increasing US consumption as the transportation season opened (the demand for gasoline in the last week of May was 4% higher than in the last week of April), and the fact that the American refineries increased their capacity utilization by 2pp on average. With such optimistic data, the depreciating dollar and the OPEC quotas steady, the price of crude oil went up by over USD 15/bbl. In the upcoming weeks, these trends should continue, all the more so that the positive signals from Asia are being confirmed (cf. OPEC announcements, the increase in the price of gasoline in China). It may be difficult, however, to achieve prices higher than USD 70/ bbl, given the risk of increase in OPEC’s output (official or unofficial).
US crude oil and gasoline inventories
390 000 160 250 000 1400 370 000 140 1200 230 000 120 350 000 1000 100 330 000 210 000 800 80 310 000 190 000 600 60 290 000 400 40 170 000 200 270 000 20 150 000 0 250 000 0
05 07 08 09 05 06 07 07 08 08 09 05 06 07 05 06 05 06 07 08 09 05 06 07 08 09 Jan May Sep Jan 06 May Sep Jan May Sep Jan May 08 Sep Jan May Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May
US crude oil inventories (l eft scale ) price of Brent crude, USD/Bbl US gasoline inventories (l eft scale ) pri ce of gasoline, USD/t
27 27 25 25 23 23 21 21 19 19 17 17 15 15
05 06 07 08 09 05 06 07 08 09 05 05 06 06 07 07 08 08 09 05 05 06 06 07 07 08 08 09 05 06 07 08 05 06 07 08 Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Jan Jul Oct Jan Jul Oct Jan Jul Oct Jan Jul Oct Jan Jan Jul Oct Jan Jul Oct Jan Jul Oct Jan Jul Oct Jan crude oil inventories in days of consumption ( exc. s trategic reserves ) gasoline inventories in days of consumption
Source: BRE Bank Securities analysis based on US Department of Energy data 4 June 2009 26
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Ciech (Hold) Analyst: Kamil Kliszcz Current price: PLN 33 Target price: PLN 31.8 Last Recommendation: 2009-05-15 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 3 415.0 3 781.3 10.7% 3 795.4 0.4% 3 861.9 1.8% Number of shares (m) 28.0 EBITDA 222.3 459.7 106.8% 476.8 3.7% 514.8 8.0% MC (current price) 923.4 EBITDA margin 6.5% 12.2% 12.6% 13.3% EV (current price) 2 606.9 EBIT 43.0 256.4 496.6% 228.5 -10.9% 261.0 14.2% Free float 35.6% Net profit -31.7 44.5 70.4 58.3% 99.5 41.4%
P/E 20.8 13.1 9.3 Price change: 1 month -0.1% P/CE 6.3 3.7 2.9 2.6 Price change: 6 month 28.3% P/BV 0.9 1.1 1.0 0.9 Price change: 12 month -58.8% EV/EBITDA 9.5 5.6 5.5 5.3 Max (52 w eek) 80.0 Dyield (%) 6.4 6.3 0.0 0.0 Min (52 w eek) 16.4
85 We revised our FY2009 net-income estimate for Ciech to PLN 70.4m to account for higher depreciation charges and a change of policy with respect to hedge accounting. At the 69 same time, we are raising our DCF valuation for the company to factor in proceeds from
53 cavern sales which, the company announced, will be PLN 40m higher than thought. Our rating remains neutral at the current price level. In our opinion, it is too early to be 37 discounting the possibility of a sustained recovery in the chemical industry. Further,
21 Ciech’s earnings going forward could be affected by a strengthening zloty after a period Ciech WIG of weakness which supported its competitiveness and diverted imports. There is nothing 5
2008-05-29 2008-09-17 2009-01-13 2009-05-06 in the near future than could act as catalyst for an increase in Ciech’s stock price. The cavern proceeds and successful negotiations with lenders are already priced in, and a recent court ruling has again indefinitely delayed the divestiture of PTU.
Ciech reports higher D&A charges, effective tax rate Ciech’s EBITDA for Q1’09 was in line with our estimate but EBIT missed expectations because of higher-than-expected depreciation charges (PLN 12m booked by the Soda Division). The biggest contribution to the consolidated operating profit came from the Soda Division (PLN 52m), which generated a gross margin of PLN 105m (in line with our estimated PLN 103m). The Organic Division did worse than we predicted (gross profit at PLN 14m vs. our expected PLN 28m), but was counterbalanced by better-than-expected results of the Agro Division owed to stronger sales of pesticides (sales of fertilizers remained modest, and the company did not manage to liquidate much of its inventories compared to Q4’08). Results of “other” operations were neutral. Finance losses were lower than expected at PLN 11m vs. PLN 23m, due mainly to lower negative F/X differences (loan interest charges were in line). Ciech further reported lower hedging losses, probably as a result of application of hedge accounting to some instruments (increase from EUR 120m in Q4’09 to EUR 132m in Q1’09, and a PLN 60m quarterly charge against equity), and due to options exercised at a below-average EUR/PLN exchange rate (total hedges as of 31st March stood at EUR 216m vs. EUR 247m at 31st December 2008). First- quarter net income fell short of our estimate because of a higher-than-expected tax charge (effective tax rate at 36%) which stems from a tax burden booked by the Organic Division in spite of a pre-tax loss.
Unfavorable ruling on PTU In its annual report, Ciech informed that on 28 April a court issued a ruling on the ownership dispute at PTU, namely, that it annulled the decisions taken by PTU's administrators in 2003, which first lowered its share capital and then increased it again (from PLN 100m to PLN 2m and from PLN 2m to PLN 64m, respectively). As a result of this decision, the then-owner FSO Daewoo lost control over PTU to Ciech (45.4%), PTR and Techwell (which was then called Matrix). Techwell's acquisition of shares in PTU turned out to be controversial as well (it made a contribution-in-kind of telecommunications assets of doubtful value). The decision is not final and binding, but it may delay the sale of PTU by Ciech. At present, the value of PTU in Ciech’s books is PLN 31m, but we do not expect that provisions will need to be created on this account even under the bleakest scenario – if this decision does become final and binding, Ciech will be able to demand that PTU reimburse it for the money invested in 2003, plus interest. This scenario would, however, have a significant impact on our valuation of Ciech, given that we did take into account its interest in PTU, valued at PLN 93m net. If Ciech were only able to recover the capital it invested, the difference would amount to -PLN 1.5 per share.
Ciech seals cavern sale Ciech sold four German caverns to RWE. Finalization of the deal is subject to approval by the German mining authority. Ciech’s gain from the sale will exceed EUR 60m by 2019. CEO Mr. Kunicki has said that Ciech will receive EUR 27m from RWE in Q2’09, and subsequent income
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will come from cavern leaching. The biggest boost to Ciech’s profits will come in 2009. We had expected a PLN 45m boost to Q2’09 EBIT (PLN 66m before taxes), but if the current news is confirmed, the cash-flow effect may be much greater.
Agreement with banks before the summer According to newspapers, Ciech and a consortium of banks should reach an agreement on the consolidation of the Company’s debt before the end of June. Allegedly, of Ciech's key creditors, PKO BP wants to increase its exposure to the Company and is the likely leader of the consortium. BRE and Pekao do not want to increase Ciech’s credit limit, and Handlowy wants to reduce it.
Go-ahead for Ciech/Lafarge joint venture The Office for Competition and Consumer Protection (UOKiK) allowed Ciech and Lafarge to build a system for separation of fly ash produced by Soda Polska Ciech. Ciech has a 29% stake in the PLN 40m project. Slated for launch in 2010, the ash separation plant is expected to facilitate savings on energy costs and reduce ash emissions.
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Lotos (Buy) Analyst: Kamil Kliszcz Current price: PLN 20.9 Target price: PLN 26.4 Last Recommendation: 2009-05-28 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 13 125.1 16 294.7 24.1% 12 469.8 -23.5% 19 029.4 52.6% Number of shares (m) 113.7 EBITDA 1 019.9 169.2 -83.4% 746.0 340.9% 1 154.7 54.8% MC (current price) 2 377.5 EBITDA margin 7.8% 1.0% 6.0% 6.1% EV (current price) 7 866.4 EBIT 713.7 -145.8 339.9 494.2 45.4% Free float 41.2% Net profit 777.2 -453.9 335.5 452.2 34.8%
P/E 3.1 7.1 5.3 Price change: 1 month 23.9% P/CE 2.2 3.2 2.1 Price change: 6 month 74.3% P/BV 0.4 0.4 0.4 0.4 Price change: 12 month -37.2% EV/EBITDA 3.1 35.3 10.5 8.3 Max (52 w eek) 33.3 Dyield (%) 1.7 0.0 0.0 0.0 Min (52 w eek) 7.3
35 The price of Lotos shares has soared almost 60% since our last update, but it still offers upside potential which warrants a reiterated buy rating. Our analysis of the Company’s 28 macroeconomic environment suggests that we will see a considerable upturn in Q2’09 21 earnings thanks to reversals of the negative forex differences booked in the first quarter
14 and positive effects of inventory revaluation. When it comes to financial performance, high numbers are not tantamount to high quality (cf. upgrades, slightly lower crack 7 spreads), but the fact that Lotos will finally be able to declare a quarterly profit is bound Lotos WIG
0 to boost investor confidence in its stock. In the second half of the year, as oil prices 2008-05-29 2008-09-17 2009-01-13 2009-05-06 stabilize and fuel demand continues to improve in Asia, crack spreads are expected to widen and help the refiner restore its full cash-generating potential. Finally, there is a chance for more clarity on the matter of strategic fuel reserve laws, the benefits of which, if passed, include the unfreezing of the cash currently tied in inventories, and a freeing up of working capital in 2011 (+PLN 7/share) on expected stronger sales.
Q1 2009: F/X losses, weak Refinery results Lotos’s Q1’09 EBIT figure of PLN 2m exceeded our estimate of a PLN 24m loss. The Refinery segment reported an EBIT loss of PLN 6m (less than our expected PLN -28m), but this result was shaped by a positive LIFO effect of PLN 83m (we expected a negative effect of PLN 32m; the difference stems from the reversal of Q4’08 inventory write-downs in the amount of PLN 158m). LIFO EBIT figures to a PLN 89m loss, and falls far short of our expected profit of PLN 4m. These variations are probably a consequence of lower-than-expected oil throughput (1.16MMT vs. 1.33MMT) which stemmed from a stronger-than-expected negative impact of scheduled downtime (the issue is allocation of these costs between the quarters, given that the downtime took place in late March / early April; the total cost in Q1 was PLN 56m, of which half is the unearned margin), as well as F/X losses on crude oil purchases (PLN 134m, there was a similar development in Q3’08 and the driving forces are exchange rate fluctuation and the transaction timing). The Q1’09 results of Refinery include earnings generated by the Retail segment which improved EBIDTA by PLN 7m over the year-ago figure. Upstream posted an EBIT loss of PLN 15m vs. a PLN 36m profit a year earlier and our expected profit of PLN 5.9m. However, Upstream results should be analyzed taking into account consolidation adjustments (before, Lotos included them in its segment presentations). And so, the adjusted EBIT of Upstream figures to PLN +15m vs. PLN 42m a year earlier (our estimate was slightly lower because of the oil output produced by Petrobaltic which exceeded expectations by 5.6 thousand tons, and probably also due to lower repair costs). Other operations generated a PLN 7m loss (we expected PLN -2m). The Q1’09 net loss was much higher than predicted, mainly because of finance losses which totaled PLN 791m (we expected PLN 562m). We underestimated most the F/X losses incurred on debt adjustments (PLN -612m vs. expected PLN -390m), but F/X conversion also resulted in higher-than-expected hedging losses (PLN -220m vs. PLN -160m, we did not take into account a PLN 52m charge on interest-rate hedges). Lotos’s debt increased to PLN 4.83 billion in Q1’09 (i.e. by PLN 1.6bn vs. Q408), as a result of F/X rate effects as well as disbursement of the next installment of the “10+” financing facility (the first-quarter CAPEX was PLN 860m). Operating cash flows amounted to PLN 56m after decreasing from PLN 83m in the same period a year earlier.
CHP project Energa, Lotos, and PGNiG signed an agreement to carry out a feasibility study for a project to build a 200MW combined heat and power plant in Gdańsk. The project is estimated at PLN 800m, and the tentative launch date is 2013. 75% of the financing would come from loans secured with long-term gas supply (PGNiG), and heat and power (Lotos and Energa) contracts. Energa will hold a 60% stake in the SPV created for this purpose, and PGNiG and Lotos 20% each.
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Management Board competition The Supervisory Board decided to announce a competition for Management Board spots; the term of the previous board expires on 30 June. CEO Olechnowicz has already said he would run. The decision may come as a surprise; until recently it appeared that the contracts of the current managers will simply be extended. Now, it appears that Mr. Olechnowicz cannot feel fully secure in his post. We believe potential reshuffles at the top would not be welcome by the market at the current stage of Lotos's investment projects.
Petrobaltic receives a PLN 150m loan Nordea Bank Polska granted a PLN 150m loan to Petrobaltic. It is a multi-currency loan which will be used to finance ongoing operations and investment projects in the Baltic Sea and the Norwegian continental shelf. The agreement expires on 18 November 2010.
Shareholders to vote on Petrobaltic Most likely, the agenda for the June 30 general meeting of shareholders will include a vote on the planned acquisition of the Treasury's minority stake in Petrobaltic in exchange for newly- issued Lotos shares. According to our estimates, the new share offering may encompass 14.5m new shares, which will amount to ca. 11.5% of the stock.
PGNiG wants to cooperate with Petrobaltic Responding to suggestions coming from Petrobaltic, PGNiG made an offer of cooperation regarding the exploration of Baltic Sea natural gas deposits covered by Petrobaltic's license. PGNiG role would be to provide partial funding for the project and to guarantee that the gas is sold. Total outlays on these deposits, which contain an estimated 3.8bn m 3 of gas, are estimated at PLN 1bn.
Nafta Polska to transfer Lotos and Orlen shares to the Treasury Nafta Polska is prepared for the process of transferring its holdings in Orlen (17.3%) and Lotos (51.9%) to the State Treasury. If this change in ownership is carried out in the next few months, the State Treasury will be in direct control of Lotos and the transfer of Petrobaltic shares to Lotos will not exempt Lotos from legal restrictions on management pay (this would happen if NP stopped being the majority shareholder after the Petrobaltic transaction). With the State Treasury holding a majority stake directly, the cap on Lotos executive salaries will increase from four to seven times the national average salary, however.
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PGNiG (Reduce) Analyst: Kamil Kliszcz Current price: PLN 4.1 Target price: PLN 3.58 Last Recommendation: 2009-05-14 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 16 652.1 18 432.0 10.7% 19 207.3 4.2% 18 601.2 -3.2% Number of shares (m) 5 900.0 EBITDA 2 291.3 2 264.9 -1.2% 2 930.7 29.4% 3 699.6 26.2% MC (current price) 24 190.0 EBITDA margin 13.8% 12.3% 15.3% 19.9% EV (current price) 25 008.5 EBIT 861.0 839.9 -2.4% 1 384.6 64.8% 1 897.2 37.0% Free float 15.3% Net profit 915.0 904.6 -1.1% 1 104.5 22.1% 1 521.2 37.7%
P/E 26.4 26.7 21.9 15.9 Price change: 1 month 4.9% P/CE 10.3 10.4 9.1 7.3 Price change: 6 month 17.1% P/BV 1.2 1.2 1.1 1.1 Price change: 12 month 1.0% EV/EBITDA 9.9 10.5 8.5 6.7 Max (52 w eek) 4.1 Dyield (%) 4.1 4.6 2.3 4.1 Min (52 w eek) 3.0
4.5 A higher-than-expected loss reported by the Trade & Storage business resulted in a downslide in the PGNiG stock price triggered by nervous investors. We would argue, 3.9 however, that, for operations which are subject to price regulation, such a loss is a one- 3.3 time occurrence rather than a sign of what is to come in the latter part of the year. Falling
2.7 prices of Russian gas, paired with an appreciating zloty, will facilitate a quick recovery in trading profits, additionally supported by a recently hiked distribution tariff. That said, 2.1 PGNiG’s stock seems overpriced at the current level, and is far from attractive both when PGNiG WIG 1.5 compared to the broad market, and to peers. The FY09E EV/EBITDA is 6.7 (after 2008-05-29 2008-09-17 2009-01-13 2009-05-06 adjustment for EuRoPolGaz, transmission asset leases, and interests in Norwegian gas deposits), compared to a European sector median of 5.7. We do not see any developments in the Company’s near future that could drive its share value further (the earnings improvement needed to fulfill our full-year forecasts is expected to take place in the third, and especially the fourth quarter). With this in mind, we are setting our price target on PGNiG at PLN 3.58 / share, and we recommend reducing positions at the current level.
Trade & Storage very weak due to high cost of imported gas PGNiG’s Q1’09 results fell short of our expectations and consensus estimates. EBIT was depressed by a huge loss posted by the Trade and Storage segment (PLN 1.1bn vs. expected PLN 433m) as a consequence of a considerable hike (108% vs. expected 86%) in the prices of gas imports. There were hedging gains of PLN 217m (we estimated +PLN 204m), but it appears that the gains from the sales of cheaper stockpiled gas turned out lower than expected. The better-than-expected results of the other business segments were not enough to offset the losses incurred on gas trade. The Distribution segment reported an EBIT of PLN 393m, ahead of our estimated PLN 327m and a year-ago first-quarter EBIT of PLN 267m, suggesting that we underestimated the positive influence of a higher gas-distribution tariff introduced in April 2008. Upstream also exceeded expectations with an EBIT of PLN 272m (we predicted PLN 31m), and this strong performance was supported by the fact that the company did not book a loss on an F/X hedge used to secure a loan granted to PGNiG’s Norwegian subsidiary (we predicted that the CIRS contracts would generate a PLN 150m loss, meanwhile, it looks like the company changed the approach to presentation of these hedges, possibly by applying hedge accounting), lower provisions, and a PLN 10m reduction in D&A expenses. On a consolidated basis, PGNiG generated a first-quarter EBIT loss of PLN 457m.
CHP project Energa, Lotos, and PGNiG signed an agreement to carry out a feasibility study for a project to build a 200MW combined heat and power plant in Gdańsk. The project is estimated at PLN 800m, and the tentative launch date is 2013. 75% of the financing would come from loans secured with long-term gas supply (PGNiG), and heat and power (Lotos and Energa) contracts. Energa will hold a 60% stake in the SPV created for this purpose, and PGNiG and Lotos 20% each. A gas-fired CHP would generate benefits for PGNiG.
UKE OKs Gas Tariff Polish energy regulator the URE revised the tariff prices of natural gas charged by PGNiG and its distribution companies. The regulator approved downward price revisions by 8.8% for industrial buyers and by 9.1% for users connected to the distribution system. Adjusted for increased transmission rates (which were raised by an average 14.7%) and the tariff for Gaz- System (+19%), the costs of natural gas paid by large users will go down about 7%. The revision has been factored in PGNiG’s stock price for a while (following statements by representatives of the company and the URE), but investors might be disappointed by the decision to keep the new tariff in force only until 31st March 2010 (PGNiG requested a price
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freeze until 31st December 2010). The tariff approval is neutral for PGNiG, but it will affect fertilizer producers which are not going to be satisfied with a 7% decline in gas costs, especially in the second half of the year when the zloty is expected to strengthen. The new tariff comes into force on 1 June.
Additional gas supplies are not coming PGNiG signed an agreement with Gazprom, under which it should be supplied with 1bn m3 of gas through September. These volumes are meant to partially offset the lack of supplies from RosUkrEnergo (2.5bn m3 per year). At today’s prices of petroleum derivatives, the value of the contract is USD 300m (the implied gas price of USD 300/thousand cubic meters is in line with our estimate of USD 320/thousand cubic meters for Q2 2009). The Russians have failed to ratify the contract and the additional gas is not flowing. At present, PGNiG has practically speaking no gas reserves except for the mandatory reserve of 360m m3. The total capacity of PGNiG’s storage facilities is 1.66bn m3. They are usually refilled between April and October; if the current stalemate persists, we might see gas shortages during the winter, which would be bad news not just for the chemical companies, but for PGNiG itself as well (in our estimate, with the tariffs currently in place, the Company will be making a profit on imported gas in Q4’09 and Q1’10).
PGNiG considers exploration of small domestic gas fields PGNiG is considering building natural-gas liquefaction units to help increase domestic gas output by exploring deposits which, to date, have been considered too small to warrant a pipeline system. The gas extracted from these deposits would be liquefied, delivered by tank trucks to the buyers, and regassified. Once resources in one field run out, the LNG units could be moved to new fields. PGNiG estimates that the project could provide around ten million cubic meters of extra natural gas per year. Additional production on such a small scale will not influence PGNiG’S earnings.
PLN 0.04/share dividend proposal During a general meeting on June 23rd, PGNiG’s Management Board is going to suggest payout of PLN 236m out of a 2008 net profit of PLN 546m as dividends (PLN 0.04/share). A ca. PLN 170m distribution to the State Treasury will be made in kind, i.e. in transmission assets. The suggested date of record is August 26th, with payout set for October 2nd. We expected a 100% distribution and dividends of PLN 0.09 per share. If that were the case, all the transmission assets leased by Gaz System would be transferred. It is hard to say whether the Treasury is going to demand a higher payout given the budget pressure created by the in-kind dividend.
Chemical companies negotiate with PGNiG A meeting was held between fertilizer producers and PGNiG. The initiative came from ZAP and ZAK, and the Ministry of the Treasury hosted the meeting. Representatives of the chemical sector demand a greater cut in the price of gas; they also want Gaz-System to be more flexible when transfer capacity is not fully employed. The producers claim that they have to pay 30% more for gas than their Western European peers; PGNiG questions this calculation. We believe the price of gas in Poland is still lower than in Western Europe; fertilizer producers compare spot prices to long-term prices, which leads to misunderstandings (things will change in H2 2009). For now, we see no chances for a deeper cut in gas price for the chemical sector, as legal regulations would have to be amended. We reiterate the view that in the current situation, the key threat for the Polish chemical sector is a strengthening of the zloty, which would make the companies less competitive and bring their sales volumes down.
PGNiG wants to cooperate with Petrobaltic Responding to suggestions coming from Petrobaltic, PGNiG made an offer of cooperation regarding the exploration of Baltic Sea natural gas deposits covered by Petrobaltic's license. PGNiG role would be to provide partial funding for the project and to guarantee that the gas is sold. Total outlays on these deposits, which contain an estimated 3.8bn m3 of gas, are estimated at PLN 1bn.
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PKN Orlen (Buy) Analyst: Kamil Kliszcz Current price: PLN 31.6 Target price: PLN 40.1 Last Recommendation: 2009-06-02 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 63 793.0 79 535.2 24.7% 65 818.5 -17.2% 74 645.2 13.4% Number of shares (m) 427.7 EBITDA 5 035.3 887.6 -82.4% 4 855.3 447.0% 5 027.6 3.5% MC (current price) 13 515.6 EBITDA margin 7.9% 1.1% 7.4% 6.7% EV (current price) 30 265.3 EBIT 2 603.9 -1 603.8 2 164.5 2 294.6 6.0% Free float 67.3% Net profit 2 412.4 -2 505.7 1 608.7 1 774.1 10.3%
P/E 5.6 8.4 7.6 Price change: 1 month 13.5% P/CE 2.8 3.1 3.0 Price change: 6 month 16.4% P/BV 0.7 0.8 0.7 0.6 Price change: 12 month -22.7% EV/EBITDA 5.0 32.4 6.2 6.2 Max (52 w eek) 40.9 Dyield (%) 0.0 5.1 0.0 0.0 Min (52 w eek) 19.3
45 After adjustment for an over-PLN 3bn investment in Polkomtel, PKN Orlen is trading at a nearly 20% discount to comparable CEE companies on FY09E EV/EBITDA. Considering 39 the company’s arrangement with lenders and the low risk of further trouble with debt 33 amid a favorable macroeconomic environment, we feel that this discount is undeserved. In the near term, PKN Orlen can look forward to the implementation of new EU 27 regulations concerning strategic fuel reserves, and the subsequent adaptation of Polish 21 laws. What is more, the current revival in global energy demand is likely to continue into PKN Orlen WIG 15 the second half of the year, and will be accompanied by a steadying in oil prices. The 2008-05-29 2008-09-17 2009-01-13 2009-05-06 combination of these two factors will drive PKN’s crack spreads. With these considerations in mind, we are reiterating our price target and buy rating on PKN Orlen in spite of the recent 40% rally on its share price.
Earning quality slightly below expectations, finance losses not as bad as predicted PKN Orlen reported a Q1’09 EBIT slightly ahead of our estimate and much below the consensus estimate (but it is possible that some analysts did not adjust their forecasts to account for the company’s preliminary first-quarter announcement). Refinery posted an EBIT loss of PLN 116m, more or less in line with our expected PLN -105m, but the EBIT result after adjustment for LIFO effects (PLN -246m vs. estimated PLN -300m) falls short of predictions at PLN 130m vs. PLN 195m. In turn, Retail booked an impressive EBIT figure of PLN 87m vs. our estimated PLN 51m, thanks mainly to strong margins generated on non-fuel sales (a PLN 32m y/y increase). The Petrochemical segment (which includes Anwil according to the new accounting policy) reported a disappointingly high EBIT loss of PLN 72m (we predicted PLN 36m), but that loss was offset by “unattributed” expenses (PLN 219m) which were lower than expected (PLN 242m) thanks to a reduced reserve against business risks (PLN 78m vs. PLN 150m previously announced by PKN). Finance losses were not as big as expected (PLN 951m vs. PLN 1159m), thanks to lower F/X losses on debt valuation (PLN 842m vs. PLN 1bn estimate which was based on our own guesses as to PKN’s debt structure; the actual breakdown was just disclosed in the FY2008 statements). PKN Orlen replaced considerable euro-debt amounts with dollar credit, and recognizes the USD/PLN conversion losses in equity because the debt in question is connected with the Mazeikiu Nafta acquisition. First-quarter net income was boosted by a higher-than-expected deferred tax asset (PLN 179m vs. PLN 83m). PKN Orlen’s consolidated net debt increased by PLN 1.75bn in the first quarter, but mostly as a result of F/X translation losses (which surged by PLN 1.9bn including the dollar debt) which were partly offset by strong operating cash flows (PLN 1.15bn vs. PLN 986m a year earlier).
Downsizing plans According to newspapers, the Management of PKN Orlen is planning to cut headcount across the parent company by as many as 600-800 out of the current 4,700. At present, negotiations with trade unions are being carried out. On the assumption that the workers being laid off are compensated according to Orlen’s current voluntary layoff regulations (PLN 50,000 and a further PLN 4,000 for each year of work), the Company may have to spend as much as PLN 50- 64m. Orlen has already signaled that it will need to streamline employment. Given the average annual cost per employee, we can assume that this year’s savings will be eaten up by layoff payments. Savings amounting to PLN 80-100m will come starting in 2010.
Capex set below PLN 3bn PKN Orlen estimates that its capital expenditure will not exceed PLN 3 billion this year (so far, projects in the pipeline total PLN 1.7bn). CAPEX plans through 2013 have also been revised from PLN 12.6bn. Our financial forecasts for PKN assumed a 2009 CAPEX budget approximating PLN 4bn. The savings, which do not appear to have been priced in, will help the
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Company reduce debt.
Moody’s rating downgrade Moody’s lowered the rating for PKN Orlen from Baa3 to Ba1 with a negative outlook to account for the deterioration in earnings and cash flows in the last 6-9 months amid an economic slowdown. At the same time, the agency noticed the positive effects of a working-capital reduction on operating cash flows, and acknowledged the arrangements with lenders. The financial liquidity of the oil producer is safe, and can be improved further after the implementation of new strategic-reserve laws. The rating downgrade does not affect the costs of existing debt service, and PKN’s credit needs are not likely to increase in the near future.
Compressor fire at Mazeikiu Nafta without impact on output As a result of the fire that erupted at Mazeikiu Nafta in the final days of May, the compressor of the HDS line was destroyed, but this had no impact on other installations and supplies. Causes of the fire are being investigated (most likely, a gas leak), and damage assessment is in progress.
Unscheduled maintenance in Litvinov PKN Orlen announced that it is forced to shut down its Czech refinery in Litvinov for 16-day unscheduled repairs on a propylene refrigeration system. The company will use the downtime to fix any other problems at the plant. During that time, supplies to customer will be secured from inventories. This is a drawback which may weigh PKN’s consolidated Q2’09 profit down by several dozen million zlotys. The refinery in Litvinov distills about 5.4 million tons of crude per year, of which PKN Orlen gets 51%.
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Police (Sell) Analyst: Kamil Kliszcz Current price: PLN 7 Target price: PLN 5.8 Last Recommendation: 2009-06-04 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 1 824.2 2 403.6 31.8% 1 993.3 -17.1% 1 846.6 -7.4% Number of shares (m) 75.0 EBITDA 235.1 230.1 -2.1% -40.2 107.6 MC (current price) 524.3 EBITDA margin 12.9% 9.6% -2.0% 5.8% EV (current price) 708.2 EBIT 187.5 164.0 -12.5% -122.7 20.2 Free float 26.2% Net profit 204.0 28.7 -85.9% -140.8 6.7
P/E 2.6 18.2 78.3 Price change: 1 month 30.4% P/CE 2.1 5.5 5.6 Price change: 6 month 20.3% P/BV 0.6 0.5 0.6 0.6 Price change: 12 month -67.4% EV/EBITDA 1.6 2.3 6.3 Max (52 w eek) 22.8 Dyield (%) 6.2 0.0 0.0 0.0 Min (52 w eek) 4.2
26 ZCH Police’s share price skyrocketed over 40% the past two weeks as investors
21 celebrated the fact that the company succeeded in securing its short-term liquidity by obtaining a commitment from the Industrial Development Agency (ARP) to provide loan 16 guarantees, and rewarded it for restructuring its hedging obligations. Both these
10 achievements are certainly welcome developments, however, the rally has caused the value of ZCH Police shares to become overinflated, prompting a downgrade to sell at a 5 per-share price target of PLN 5.8. Note also the growing pressure from eastern imports Police WIG 0 which stems from USD/PLN exchange rate trends, and which may negatively affect sales 2008-05-29 2008-09-17 2009-01-13 2009-05-06 volumes and fertilizer prices in the quarters ahead. Further, negative operating margins and growing debt (restructuring of PLN 115m-worth of option hedges, past-due trade payables totaling PLN 177m) will not support the stock in future quarters. Finally, the improvement in earnings expected next year does not justify the high share price, given a forecasted 2010 EV/EBITDA of 6.8 (which displays a 27% premium to peer ZAP in spite of higher investment risks).
Q1’09: inventories down at the expense of profitability In Q1 2009, Police had much higher revenues than we expected (+45%), which is mostly a consequence of higher volumes of fertilizer sales (309,000 tons vs. 250,000 tons). The Company was able to achieve such sales thanks to promotions. As a result, stockpiles declines significantly (from over PLN 600m at the end of 2008 to PLN 384m), but at the expense of a negative gross margin (-PLN 27m), despite the reversal of some write downs (+PLN 49m). In addition to high fixed costs (the company used its NPK capacity at 50% and NP capacity at 37%), EBIT was affected by other operating losses, mostly in the "other" segment (it was not explained what kind of costs these were). At the net level, the loss was exacerbated by F/X losses on hedges (PLN 80m, we estimated PLN 77m), of which PLN 23m were instruments that expired in Q1. The Management announced that thanks to high operating cash flows (+PLN 100m), the Company was able to repay some of its short-term loans; at present, it has ca. PLN 68m available on its credit lines. In order to secure ongoing liquidity, the Company is attempting to secure additional funding (PLN 150m), for which it should get a guarantee from the Industrial Development Agency. Furthermore, the Management is planning to restructure is hedges; its proposal addressed to the banks foresees closing structures amounting to ca. EUR 82m (conversion of losses to debt), with only EUR 59m worth of hedges kept (those with the highest strike price).
Loan guarantee The Industrial Development Agency (ARP) will guarantee the PLN 150m revolving loan the Company wants to obtain from PKO BP. ARP's commitment is conditional on Police’s restructuring of its FX options portfolio, changing its turnaround program and reaching an agreement with the unions. We believe this scenario has already been discounted by the recent increases in the Company’s share price. We think the guarantee will solve Police's liquidity problems; the Company should be able to cope with the current downturn in NPK fertilizers. As further plants are being closed across Europe (recently, Yara has decided to shut down another NPK plant, this time a smaller one in Hungary), Police may benefit from the next upturn because of its location. In the present situation, the best solution for the Treasury would be to sell the Company to an industry investor (Russian companies might be interested). This is, however, too remote a possibility for now to base investment decisions on.
Government approves Police’s turnaround plan The Treasury Ministry approved Police’s turnaround plan. The turnaround is to include downsizing, cutbacks in maintenance expenses, and asset divestment. The company put in place a voluntary separation scheme which is expected to reduce employee headcount by 300
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from over 3200 (4200 across the entire Group); 30 employees have chosen to use the scheme so far.
Board Member dismissed ZCH Police’s Supervisory Board dismissed Management Board member and CSO Mr. Sławomir Winiarski. The dismissal came as a surprise to investors as well as the Management Board.
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ZA Puławy (Hold) Analyst: Kamil Kliszcz Current price: PLN 85 Target price: PLN 82.7 Last Recommendation: 2009-05-28 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 2 503.5 2 413.0 -3.6% 2 148.2 -11.0% 2 370.4 10.3% Number of shares (m) 19.1 EBITDA 432.8 471.1 8.9% 173.8 -63.1% 234.7 35.1% MC (current price) 1 624.8 EBITDA margin 17.3% 19.5% 8.1% 9.9% EV (current price) 1 164.4 EBIT 358.7 402.9 12.3% 102.7 -74.5% 156.0 51.8% Free float 29.2% Net profit 330.8 259.7 -21.5% 127.7 -50.8% 143.8 12.6%
P/E 4.9 6.3 12.7 11.3 Price change: 1 month 6.9% P/CE 4.0 5.0 8.2 7.3 Price change: 6 month 49.9% P/BV 1.1 0.9 0.9 0.9 Price change: 12 month -36.0% EV/EBITDA 2.6 1.9 6.7 5.3 Max (52 w eek) 132.9 Dyield (%) 2.0 5.1 4.8 2.4 Min (52 w eek) 38.1
150 At the current market cap of PLN 1.5bn, ZAP no longer looks attractive compared to the broad market, even if we take into account its cash reserves (at the end of 2008/2009, the 124 Company's negative net debt adjusted for hedging liabilities amounts to -PLN 650m, i.e. 98 PLN 34 per share). In the upcoming quarters, earnings will deteriorate as the pressure
72 from imports mounts due to the appreciation of the zloty and to foreign competitors' cost advantage on natural gas. We estimate that on PGNiG’s current tariffs, in H2 2009 ZAP 46 will pay up to 40% more for gas than its major European competitors. We reiterate our ZA Puławy WIG 20 view that within the next 12 months these trends will not be offset by a major rebound in 2008-05-29 2008-09-17 2009-01-13 2009-05-06 the market for fertilizers. The Management's optimistic profitability estimates for the coal gasification project will not help the stock price either, as medium-term investors may be discouraged by the long payback period on this very costly investment. An additional risk stems from the uncertainty as regards gas supplies in wintertime.
New Management Board members The Supervisory Board selected additional members of the Management Board, appointing Mr. Andrzej Kopeć CFO (a Management Board member at DZ Bank Polska, previously at BGŻ and ING Bank Śląski), and putting Mr. Zenon Pokojski in charge of strategy and growth (an independent consultant, previously the CEO of Cheman).
PGNiG does not have a special offer for the chemical industry At a meeting held in May, PGNiG and representatives of the chemical industry failed to reach an agreement concerning specific solutions that could be used to reduce the cost of gas for the chemical industry. At present, PGNiG believes a special tariff cannot be introduced for legal reasons; the government would have to act first. We believe it is unlikely that a special tariff for the chemical sector will be introduced any time soon. The problems of the chemical companies will be exacerbated further in H2 2009 if the current trend towards zloty appreciation is sustained.
Unions resume dispute ZAP workers reinstated a labor dispute process suspended earlier this year on account of the economic crisis and interruptions in gas supplies. The workers’ original demands included a 15% raise and establishment of an investment plan for employees followed by monthly PLN 200 deposits into each personal investment account. As long as ZAP workers do not go on strike, their actions have no influence on their company’s stock performance.
ZAP targets Bogdanka coal mine ZAP shareholders are set to meet on June 12th to vote an acquisition of shares in an IPO. The IPO in question is made by hard coal producer Bogdanka. In our opinion, the acquisition is not going to generate any added value for ZAP shareholders, even if there is a plan to ultimately take a controlling stake in the mine. We cannot think of any sources of synergies between the two companies, which do not need to merge to carry out their joint plan to build a coal gasification unit.
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Telecommunications Polkomtel in Q1 2009 In Q1 2009, Polkomtel had a net income of PLN 213.0m vs. PLN 356.7m a year ago. Revenues were PLN 2,020.6m (vs. PLN 2,027.1m in Q1 2008), and EBITDA was PLN 678.8m vs. PLN 738.2m. At the end of Q1 2009, there were 14.576m customers, including 6.691m post-paid customers. A quarter earlier, these numbers were 14.473m and 6.564m, respectively. By keeping its revenues at last year's level, Polkomtel has become the leader of the Polish market in terms of revenues and EBITDA. It should be stressed however, that it is most likely still recognizing the full price of text messages in its sales revenues, rather than just the margin, which is what the other operators now do (this accounting change is one of the key reasons of the y/y decline in Centertel's revenues). Unlike the other operators, Polkomtel was able to keep its EBITDA margin above 30%. After the weak data PTC and Centertel reported, Polkomtel looks quite good. Nonetheless, a decline in earnings and less favorable regulatory decisions in the next quarters may have a negative impact on the valuation of the operator in the context of the expected transaction between its Polish shareholders and Vodafone. For now, we are not changing our earlier assumptions.
EC pushes for MTR reductions... Phone users can look forward to much lower bills thanks to the European Commission’s move to bring down mobile termination fees by 70%. The divergence between MTRs charged in different EU Member States ranges from € 0.02 in Cyprus to € 0.15 in Bulgaria. The Commission determined that, on average, mobile termination rates are 8.55 eurocents a minute, which is about 10 times higher than fixed-line termination rates. This means that major mobile carriers are in fact being funded by fixed-line users, and that fixed and small mobile operators are unable to compete with the majors. Following the recommendations, charges are set to drop between 1.5 to 3 eurocents per minute by the end of 2012. Being governed by one of Europe's most aggressive regulators, the UKE, Polish mobile operators are already charging very low termination fees which are set to decrease even further (to 3.5 eurocents) by the end of 2009. That is why they are not affected by the Commission’s latest recommendation. In fact, they will actually benefit from it because lower MTR abroad mean lower interconnect charges (lower prices, more call traffic).
... and opposes extreme MTR cuts in Poland The European Commission has warned that it will take action against Poland if our telecom regulator continues to violate EU policies with respect to mobile termination rates. The Commission criticizes the fact that the national regulatory authority (the UKE) uses a benchmark consisting of rates used by the three cheapest EU operators rather than, for example, the cost level in three countries whose profile is similar to Poland's. MTRs charged by Polish operators (3.7 eurocents) are already among the lowest in the EU. What is strange about the Commission’s threats is that, not long ago, it itself put forth a plan to accelerate MTR reductions across Europe to 1.5-3 eurocents within a few years, and Poland is already closer to that range than most other member states. But it is possible that the UKE did abuse its power as the NRA and violated EU procedures. From the point of view of TPSA, the worst-case scenario is if MTRs fall by a further 30%-50% within the next five years. The best-case scenario is if the UKE is made to stop and MTRs temporarily increase and then decline to levels assumed in scenario 1.
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Netia (Buy) Analyst: Michał Marczak Current price: PLN 3.5 Target price: PLN 3.8 Last Recommendation: 2008-11-14 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 838.0 1 121.2 33.8% 1 503.1 34.1% 1 640.3 9.1% Number of shares (m) 389.2 EBITDA 170.7 170.6 0.0% 234.0 37.1% 290.1 24.0% MC (current price) 1 362.1 EBITDA margin 20.4% 15.2% 15.6% 17.7% EV (current price) 1 056.0 EBIT -103.8 -99.7 -4.0% -23.4 -76.5% 36.6 Free float 100.0% Net profit -268.9 230.6 -9.9 43.3
P/E 5.9 31.4 Price change: 1 month -2.2% P/CE 241.5 2.7 5.5 4.6 Price change: 6 month 42.3% P/BV 0.8 0.7 0.7 0.7 Price change: 12 month 6.1% EV/EBITDA 8.2 6.8 4.5 3.4 Max (52 w eek) 3.6 Dyield (%) 0.0 0.0 0.0 0.0 Min (52 w eek) 2.0
4 We believe control takeover by investment funds will probably speed up the entry of a strategic investor into Netia. Netia is the only telecom at the moment which can fully (on 3.4 a national scale) capitalize on the liberalization of the fixed-line market (61.5% share of 2.8 BSA, 71.5% of WLR), which owns a fiber-optic infrastructure that is attractive for poten-
2.2 tial industry investors, and which is able to consolidate the market. The company is ex- pected to improve earnings in coming quarters; we are reiterating a positive rating on 1.6 Netia. Netia WIG 1 2008-05-29 2008-09-17 2009-01-13 2009-05-06 Second-quarter earnings warnings Netia warned investors that Q2’09 net income and EBIT could be lower than in the first quarter because of one-time charges related to downsizing (by 130 positions) and other activities in- cluding marketing. These expenses will be significantly reduced in subsequent quarters. The full-year EBITDA estimate is left intact at PLN 265m. Netia predicts a continuing increase in EBITDA margins to 23% in 2010 and 28% in 2012. The Company had warned investors about the effect of one-time charges on Q2 results earlier.
Solid first-quarter results Netia’s revenue for Q1’09 was in line with expectations, while EBITDA and net income ex- ceeded estimates. First-quarter sales were reported at PLN 375.7m (+64% y/y, +2% q/q, we expected PLN 371.5m), and EBITDA came in at PLN an impressive 69.9m (+108% y/y, we ex- pected PLN 61.9m) thanks mainly to advertising cost cuts (-PLN 8.5m vs. Q4’08). The first- quarter subscriber-acquisition results of Netia’s rival TPSA made us worried. As a reminder, the incumbent operator added 40,000 BSA users in the period, including 30,000 via Centertel, leav- ing a meager 10,000 lines to share between all alternative operators. Surprisingly, Netia re- ported adding 21,000 BSA users in Q1’09. Assuming that none of the carriers attempted to de- liberately mislead investors, the most plausible explanation for this seems to be that different operators apply different timing to officially recognize new BSA users (this timing can be execu- tion of the agreement, line activation, etc.) A less likely possibility are mass-scale defections from other altnets (TPSA showed a net increase in BSA lines after deducting churn). Netia’s other first-quarter numbers concerning subscribers look healthy as well. The number of WLR lines increased by 39,500 to 710,000, and ARPU was steady at PLN 51 (vs. PLN 56 in Q4’08 when there is a seasonal increase in call traffic). Net churn amounted to 2,700 lines, and was on a level with the churn rate recorded in previous quarters. As a result, the number of Netia’s active lines (direct voice services and WLR lines) amounted to 1.105 million, which was 40,000 more than at the end of 2008. ARPU from voice services stood at PLN 56 vs. PLN 60 in Q4’08. The number of broadband subscribers increased from 413.65 thousand at December 2008 to 441.3 thousand in Q1’09, and ARPU was PLN 59 (vs. PLN 60). There is some upside potential to our full-year EBITDA estimate for Netia.
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TP SA (Accumulate) Analyst: Michał Marczak Current price: PLN 17.3 Target price: PLN 20.3 Last Recommendation: 2009-04-30 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 18 244.0 18 165.0 -0.4% 17 284.2 -4.8% 17 030.0 -1.5% Number of shares (m) 1 335.6 EBITDA 7 721.0 7 630.0 -1.2% 7 012.1 -8.1% 6 759.5 -3.6% MC (current price) 23 120.1 EBITDA margin 42.3% 42.0% 40.6% 39.7% EV (current price) 27 713.9 EBIT 3 282.0 3 313.0 0.9% 2 888.2 -12.8% 2 844.1 -1.5% Free float 46.0% Net profit 2 273.0 2 188.0 -3.7% 1 850.3 -15.4% 1 973.7 6.7%
P/E 10.7 10.8 12.5 11.7 Price change: 1 month -1.0% P/CE 3.6 3.6 3.9 3.9 Price change: 6 month -9.4% P/BV 1.4 1.4 1.4 1.4 Price change: 12 month -17.5% EV/EBITDA 3.8 3.8 4.0 4.0 Max (52 w eek) 24.4 Dyield (%) 11.0 9.8 11.3 9.6 Min (52 w eek) 16.5
25 Dividend record day falls in mid-June; the summer could bring news about a buyback effort or additional dividends, as per the Management’s comments following Q1 2009 21 earnings release. In July, the Company should disclose the details of its cost-cutting 17 measures. We believe TPSA is a worthy investment at the current price level and we are
13 reiterating an accumulate rating.
9 TPSA WIG CAS on TPSA split
5 The Adam Smith Center (CAS) believes that TPSA should be split into several regional opera- 2008-05-29 2008-09-17 2009-01-13 2009-05-06 tions with exclusive rights to manage local calls, and an independent carrier of long-distance and international call services. The functional split put forth by telecoms regulator the UKE is going to change nothing according to the Center. Further, the CAS analysts are criticizing MTR asymmetry (which is creating a bias in favor of the Play mobile network), calling it a form of an unlawful subsidy for a private business. We do not agree with these opinions. Whereas a split as put forth by CAS would no doubt break TPSA’s monopoly of the phone industry, it would definitely not help accelerate the development of the Polish telecom market, which is the UKE’s first priority. The CAS is making its case based on the monopoly split which took place in the 1980s in the USA. After 20 years, the different US telecoms are trying to reconsolidate to facili- tate investment in new technology. The reality of the Polish telecom industry is that it functions based on an underdeveloped infrastructure, especially when it comes to landline communica- tions, and the elimination of TPSA will hinder any development. Finally, CAS’s proposal has no legal standing and is a purely academic exercise.
TPSA cuts costs TPSA’s savings plan for 2009 includes a freeze on hiring and new investment, renegotiation of supplier contracts, lower B2C and B2B advertising budgets, postponement of rebranding stud- ies, centralization and reduction of training expenses, lower consulting expenditure, a freeze on computer hardware and software purchases, cutbacks in sponsorship and charity allocations, fewer corporate events, reduction in outlays on open investment projects and a 25% reduction in the car fleet combined with the switch towards cheaper models. While these are undoubtedly necessary measures, the size of TPSA’s costs is also closely correlated with EUR/PLN trends (the stronger the zloty, the lower the costs). The company did not disclose what kind of savings it expects to achieve with the cost cuts.
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Media Ad expenditure expected to drop 10.3% in 2009 The latest projections by CR Media Consulting suggest that advertising expenditure may shrink 10.3% to PLN 6.7 billion this year. In the first quarter, ad spend plunged 11% compared to the same period a year ago and dealt the most painful blow to print media whose aggregate ad revenues sank 19.6%, with daily newspapers reporting a shrinkage by nearly 25%. Advertising revenues decreased 8.2% for television broadcasters and 7.5% for radio stations. In turn, online ad revenues increased 4.9%. The Q1’09 ad-market figures presented CR Media are much worse than data reported a few weeks ago by Starlink (which has not released its new FY fore- cast yet). There is a consensus that the second quarter of 2009 will be even worse than the first one. If CR Media’s projections prove accurate, the advertising industry will see a repeat of 2002.
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Agora (Buy) Analyst: Michał Marczak Current price: PLN 15.9 Target price: PLN 35.6 Last Recommendation: 2008-11-14 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 1 152.0 1 277.7 10.9% 1 282.2 0.4% 1 333.0 4.0% Number of shares (m) 55.0 EBITDA 198.6 155.6 -21.7% 160.6 3.2% 195.9 22.0% MC (current price) 873.0 EBITDA margin 17.2% 12.2% 12.5% 14.7% EV (current price) 740.7 EBIT 120.3 71.8 -40.3% 85.3 18.9% 121.7 42.6% Free float 37.0% Net profit 100.2 23.3 -76.7% 73.5 215.7% 103.8 41.1%
P/E 8.7 37.5 11.9 8.4 Price change: 1 month -0.7% P/CE 4.9 8.2 5.9 4.9 Price change: 6 month -0.7% P/BV 0.7 0.7 0.7 0.7 Price change: 12 month -55.4% EV/EBITDA 3.2 4.9 4.6 3.6 Max (52 w eek) 35.7 Dyield (%) 9.4 14.2 10.0 8.9 Min (52 w eek) 11.0
40 We stand by our positive rating on Agora. While the Management’s recommendation not to pay dividends is a negative surprise and the advertising market has been weak, the 33 announcement of the Dziennik-Gazeta Prawna merger is a breakthrough development. 26 Gazeta Wyborcza remains the only national paper to combine “broadsheet” status and
19 significant circulation. When Dziennik disappears, further price hikes will be possible.
12 Newspaper merger Agora WIG 5 Two national newspapers, Axel Springer’s Dziennik and Infors’s business daily Gazeta Prawna , 2008-05-29 2008-09-17 2009-01-13 2009-05-06 are set to merge in the fall. Axel Springer is taking a 49% stake in Infor Biznes in exchange for Dziennik and its online edition Dziennik.pl. The two publishers have cooperated before by bun- dling their respective papers into subscription packages. The title of the merged paper and its future executive editor are kept under wraps for now. The merger is subject to approval by com- petition watchdog the UOKiK. A confirmation of the rumors which had been circulating for weeks is good news for Agora and its Gazeta Wyborcza (GW) broadsheet. The fact that Dzien- nik , the paper launched to compete specifically with GW, is pretty much disappearing, allows Agora to reduce marketing expenses (nearly PLN 200m a year) and reestablishes GW as Po- land’s cheapest national broadsheet paper at a newsstand price of PLN 2/copy (the only other nationwide newspaper of record is Rzeczpospolita, which costs PLN 3.5). A copy of Gazeta Prawna costs PLN 5.99, and it is highly unlikely that the publisher will cut the price after the incorporation of Dziennik, which means that the new paper will compete primarily with Rzeczpo- spolita.
No dividends Agora’s Management Board is recommending that shareholders retain 2008 earnings in re- serves (the general meeting is scheduled for June 23rd). Deviating from the policy of annual dividend payments at PLN 0.50/share announced in 2005, the Management quote the eco- nomic slowdown and unusual market conditions. We would dispute the validity of these argu- ments. By distributing half-a-zloty per share during times of prosperity, Agora is hardly a gold mine for its shareholders (at a per-share price of PLN 45, DY is 1.1%), and they should be able to expect support when times are tough, especially since the company can afford a payout. Nei- ther possible acquisitions, nor the crisis argument, are a good reason for a zero payout – Agora is still generating solid cash flows.
Plans for the near future Agora is planning to take advantage of the current strain in the market for acquisitions, but no details were revealed. The Company will attempt to reduce its operating expenses in FY2009 at the Q1 rate (-7.6%). The CEO said that another hike in the price of Gazeta Wyborcza is possi- ble, if the competition makes a similar move. Cost-cutting is a consequence of the continuing weakness of the advertising market, which is expected to contract further y/y in the second quarter. This does not need to entail weaker EBITDA than in Q1 2009, given the high seasonal- ity of the media business. With advertising volumes higher in Q2 than in Q1, and with the Com- pany's high share of fixed costs, we are expecting a q/q improvement.
More layoffs at Agora The Management decided to expand layoffs and their timeline, from up to 300 people between 1 January and 31 July 2009 to ca. 400 people (10.4% of total payroll), carried out between 1 January and 31 November. The downsizing process will necessitate an additional reserve of approximately PLN 2.3m. This is probably a reaction to the greater-than-expected slowdown in the advertising market in H1 2009. Since the economic situation is likely to be priced in already, good news.
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Q1’09: somewhat better than forecasted nominally, revenues break down at GW Agora's Q1'09 earnings are slightly above our forecast in nominal terms, mostly due to lower operating expenses (especially advertising and promotions, -28.8% y/y) which illustrates the anti-crisis defensive mechanism we had hoped for. Nonetheless, consolidated revenues have surprised us on the downside (PLN 274.4m, -12.4% y/y, vs. PLN 284.5m forecasted), mostly due to the staggering collapse of Gazeta Wyborcza 's advertising revenues (-30%). Copy-sales revenues were also lower (-6.6%), despite the price increase. The revenues of the newspaper segment were salvaged somewhat by higher book sales (at last year’s level, while we expected a decline), the internet (+34% y/y) and, at the group level, the radio (+3.3% y/y). Magazines recorded a 10% decline in revenues; AMS, -3.8%. The combination of falling expenses and falling revenues (the latter concentrated in the areas that determine the Company's attractive- ness) put EBITDA at PLN 25.7m (-39.1% y/y, vs. PLN 17.5m forecasted), and net income at PLN 1m (vs. -PLN 2.8m forecasted). Operating cash flows amounted to PLN 40m, indicating that the Company is still able to generate a lot of cash for shareholders. Due to the very weak sales of Gazeta Wyborcza , these earnings look bad. The key question is whether any revival in the advertising market has already been observed (in April and May). If so – which may be the case as the start of the year saw the companies’ advertizing budgets frozen, which may be get- ting at least partially reversed now – then the worst quarter is already behind us (and it should be remembered that Q1 is seasonally weak), and any decline in share price after Q1 2009 earn- ings publication should be treated as a buy opportunity.
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Cyfrowy Polsat (Hold) Analyst: Piotr Grzybowski Current price: PLN 14.7 Target price: PLN 14.55 Last Recommendation: 2009-05-29 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 796.7 1 136.3 42.6% 1 351.4 18.9% 1 446.0 7.0% Number of shares (m) 268.3 EBITDA 165.9 347.8 109.6% 389.9 12.1% 491.9 26.2% MC (current price) 3 947.1 EBITDA margin 20.8% 30.6% 28.9% 34.0% EV (current price) 3 656.4 EBIT 145.1 324.3 123.4% 361.0 11.3% 462.2 28.0% Free float 31.8% Net profit 113.4 269.8 137.8% 296.2 9.8% 381.5 28.8%
P/E 34.8 14.6 13.3 10.3 Price change: 1 month 6.6% P/CE 29.4 13.5 12.1 9.6 Price change: 6 month 5.1% P/BV 64.6 13.3 9.5 6.6 Price change: 12 month -4.5% EV/EBITDA 23.0 10.9 9.4 7.3 Max (52 w eek) 15.5 Dyield (%) 0.0 1.0 4.5 5.0 Min (52 w eek) 12.0
16 A healthy first-quarter showing means that Cyfrowy Polsat (CP) coped quite well with unfavorable forex rates and a weak zloty, underpinned by a loss incurred by the MVNO 13.6 project launched in mid-2008 (PLN 11.3m). Earnings in the first quarter were mainly
11.2 driven by an increase in set-top box rentals in favor of sales, which allowed the DTH provider to recognize just the amortized value of the subsidized STBs. Further, an 8.8 upcoming hike in the prices of programming packages offered by rival Cyfra Plus shows
6.4 that there is room in the market to raise prices and transfer costs onto customers, and Cyfrowy Polsat WIG that there are opportunities to pinch subscribers away from weaker rivals. We are 4 2008-05-29 2008-09-17 2009-01-13 2009-05-06 reiterating our hold rating.
Q1 2009 results CP's first-quarter results fell slightly short of expectations. Revenues surged 35.4% from PLN 248.8m in Q1’08 to PLN 336.9m in Q1’09, driven by subscription sales which increased from PLN 216.6m to PLN 290.4m on an expanded (28.1% y/y) subscriber base and a higher ARPU (+3.1%). As usual, ARPU from family programming packages displayed the highest growth (7.8%), while the ARPU from Mini Packages rose 1.5% after the addition of the MiniMax Package. After an increase in set top box leases in recent months, STB sales fell 42% to PLN 12m. Since STB leases are free of charge except for an activation fee, the increase in the number of lessees did not result in an increase in lease revenues. In fact, there was 78% decline in revenues in this category and we expect it to be heading towards zero in the upcoming quarters. CP reported substantial “other” operating income for the quarter, stemming from the last payment of damages from Nagravision (PLN 8m), an addition to these revenues of the value of STBs produced by the company (PLN ~13m), and revenues from commercial space and call-center equipment leases (the latter operations are now outsourced). As far as operating expenses are concerned, CP was significantly affected by a surge in license costs (+92.6% to PLN 97.16m) in the wake of the zloty depreciation vs. the USD and the EUR (99% of these costs are denominated in these two currencies). Cost of STB sales fell 45% from PLN 31.9m to PLN 17.7m due to the launch of in-house production, a smaller number of connections in the period, and an increase in STB leases which are reported on the balance sheet and amortized. Sales and marketing expenses surged 29% on the back of a PLN 6.3m increase in mailing and call center costs and a PLN 2.1m increase in advertising costs. Salaries were another major cost driver, increasing 58.5% due to the staff hired to operate the MVNO business. The cost of STB sales decreased sharply for two reasons: first, the launch of in– house production the costs of which are charged against “other” operating expenses (ca. PLN 2m), and secondly an increase in leases (54% of all new subscribers connected in the period). After all this, Q1’09 operating profit amounted to PLN 85.4m vs. PLN 83.5m in Q1’08. As far as financial operations are concerned, valuation of realized FX derivatives added PLN 11.7m to pre-tax income. while unrealized hedges produced a PLN 1.6m charge and forex differences resulted in a PLN 6.8m charge. All told, first-quarter net income came in at PLN 72.6m after an increase from PLN 64.0m posted in the same period a year earlier.
PLN 300,000 fine The Office for Electronic Communications (UKE) fined Cyfrowy Polsat PLN 300,000 for failure to supply records requested during an UKE audit. This is not a big fine, and CP will probably appeal anyway.
Internet service in 2009 Cyfrowy Polsat is planning to add internet access to its offer, probably based on Sferia’s CDMA network; satellite technology may be employed as well. We agree with the Management that a broadband offering will make the Company significantly more competitive. As long as the relationship with Sferia remains a business one, with no pricey acquisitions, we consider it a
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good solution. As for the satellite broadband technology, we believe the costs of such a solution would be too high, which would clash with Cyfrowy Polsat's standing as the most economical provider.
Higher dividends? After the general meeting was resumed, shareholders voted in favor of higher dividends (PLN 0.75 per share, according to press reports). Such high dividends would be excellent news, indicating that an equity commitment to Sferia is not coming any time soon. PLN 0.75 per yields a PLN 200m total, i.e. ca. 75% of last year’s profits.
Cyfra Plus increases prices Cyfra Plus is raising subscription fees by an average 4% as of July. The digital satellite television provider explains that the hike is necessary to offset growing costs and investment in new services like Video on Demand, DTT reception, and multi-room systems. Cyfra’s competition, Cyfrowy Polsat and n, have no plans to raise prices. A weak zloty affects pay-TV providers, but current exchange-rate levels are not threatening the profits of major players. The price hike by Cyfra Plus is in effect a step toward normalization of its pricing policy after an aggressive downmarket move toward the end of last year. It looks like the operator now wants to reposition itself back to the highest end of the market. In our opinion, this move will break the platform’s upward momentum which started with the Q4’08 price cuts, but it will benefit rival pay-TV providers.
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TVN (Hold) Analyst: Piotr Grzybowski Current price: PLN 12.1 Target price: PLN 11.9 Last Recommendation: 2009-06-04 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 1 554.7 1 897.3 22.0% 1 955.2 3.1% 2 055.9 5.2% Number of shares (m) 349.4 EBITDA 552.6 711.4 28.7% 634.7 -10.8% 650.7 2.5% MC (current price) 4 227.5 EBITDA margin 35.5% 37.5% 32.5% 31.7% EV (current price) 5 697.8 EBIT 480.5 631.9 31.5% 543.6 -14.0% 549.5 1.1% Free float 40.9% Net profit 241.8 363.7 50.4% 338.1 -7.0% 330.3 -2.3%
P/E 17.4 11.6 12.5 12.8 Price change: 1 month 19.0% P/CE 13.4 9.5 9.8 9.8 Price change: 6 month -4.3% P/BV 2.9 2.6 2.3 2.2 Price change: 12 month -34.6% EV/EBITDA 8.8 7.4 9.0 9.2 Max (52 w eek) 19.3 Dyield (%) 3.1 2.9 4.3 4.0 Min (52 w eek) 8.4
20 Despite its not-that-good earnings in Q1’09, the price of TVN’s stock has gone up by over 27% since the beginning on May, thereby outpacing the market’s 8% growth by a huge 17.4 margin, regaining the ground lost since the start of the year and exceeding our price tar- 14.8 get. As a result, we are closing our positive rating and recommend holding.
12.2 Q1 2009: revenues slow down, costs don’t 9.6 We were negatively surprised by TVN’s first-quarter earnings. Revenues increased by PLN TVN WIG 7 34.5m (8.4%), to PLN 435.1m, of which ca. PLN 21m was due to the full consolidation of ITI 2008-05-29 2008-09-17 2009-01-13 2009-05-06 Neovision. Otherwise, most of the growth was generated through theme channels, Mango Me- dia and, to a limited extent, Onet.pl. The TVN channel generated lower revenues. These devel- opments were driven by the decline in advertising revenues (by 4.8%, to PLN 291.0m at the consolidated level). With this advertising-market weakness, growth was mostly driven by license fees for theme channels charged of digital platforms and cable providers. As a result of the fast growth of pay-TV users and the depreciation of the zloty, these revenues increased by 52.4% (from PLN 30.4m to PLN 46.3m), which was enough to offset the losses in the advertising mar- ket. Mango Media saw almost 30% revenue growth, to PLN 16m. Despite these decent sales growth rates – considering the economic crisis – the Company’s operating earnings declined, as its cost turned out to overly high in the new macroeconomic circumstances, with salaries and the amortization of licensing costs increasing the fastest. As for the latter, it cannot be attributed to the depreciation of the zloty vs. the USD, as the current amortization expenditure applies to licensing costs incurred at a much lower exchange rate. This growth is therefore a consequence of increased broadcasting activity (including the launch of TVN Warszawa and additions to the schedules of the existing channels). As for salaries, increases introduced last July and the hiring of additional people in the fall were the key factors; the takeover of ITI Neovision did not play a major role. D&A expenses increased sharply (from PLN 18.6m to PLN 27.1m), due to the con- solidation of ITI Neovision (set-top boxes). The surge in the “other” expenses category was driven by the PLN 15m spent on the majority stake in 'n'. Other lines of expenses grew as well, but much slower. An unusual line in the earnings report was the profit from the consolidation of ITI Neovision, driven by the market valuation of the 25% TVN held before assuming control (PLN 110.7m). As a result, operating earnings amounted to PLN 174.4m (vs. PLN 108.2m a year ago) but only PLN 63.7m without the consolidation adjustment. All segments saw a decline in operating earn- ings; broadcasting and TV were the only ones to show a profit, while the internet and the digital platform were both in the red (PLN 2.9m and PLN 12.9m, respectively). The latter loss was par- ticularly painful, seeing that the segment was consolidated for 20 days only. There were further disappointments in financial operations, with a PLN 217.7m loss driven by FX changes. The Company incurred a PLN 114.7m loss on the valuation of its Eurobonds and a PLN 25.1m loss on the collar used to hedge their value. Interest expenses increased to PLN 43m on mounting debt (the Company is consolidating a part of ITI Neovision’s debt now). In addition, TVN recognized its PLN 39.4m share in the loss incurred by ITI Neovision prior to con- solidation. As a result, pre-tax loss amounted to PLN 43.3m, and net loss to PLN 29.1m (including its share in the loss generated by ‘n’).
April ratings In April 2009, the overall rating of TVN fell from 17.05% a year ago to 14.63%. TVN dropped from the podium to the fourth spot, trailing TVP1, TVP2 and Polsat. TVP1 saw its market share fall from 23.30% to 21.98%, TVP2, from 17.35% to 15.45%, and Polsat from 15.37% to 15.07%. TVN’s ratings are very weak. It should be noted, however, that the data come from TNS OBOP, and advertisers do not take them into account in their decisions. Most likely, the data by AGB Nielsen will show a less drastic decline in ratings, but given the TNS OBOP data, its scale may be significant as well.
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Advertising market expected to shrink in Q1’09 According to Starlink, the advertising market shrank by 5.3% in Q1'09, to PLN 1.56bn. Only two segments managed to sustain growth: online and movie-theater advertising (Starlink projects 17% and 0.2%, respectively). All the other segments shrank year-on-year: television by 5.9%, radio by 7.1%, periodicals by 10.4%, outdoor by 10.6%, and, most drastically, newspapers (by13.1%). Starlink also indicated that its prior forecast of 0-3% growth must be revised. Starlink is the second media house after MPG to suggest a decline in the advertising market in Q1. We believe TVN’s Q1'09 earnings should not be affected, because the television segment did quite well – and we expect TVN’s performance within the segment was good as well. Problems might start in the second quarter, if the weakness of the advertising market "spills over" to other seg- ments. We believe that in such a situation, cost cutting will be a prudent way to go (including content expenses), so that the period of weaker revenues does not coincide with a period of high operating expenses.
Dividend confirmation TVN shareholders voted in favor of a PLN 0.57 per-share dividend payout. The total profit distri- bution will range between PLN 194.0m and PLN 200.0m depending on realization of the com- pany’s stock option plan by the date of record. We think that the payout is already factored in the stock price.
Court on TV Puls transmitters An administrative court in Warsaw dismissed a complaint filed by TVN, TVN4, and Telewizja Odra against a decision by Polish broadcasting council the KRRiTV to allocate terrestrial trans- mitters in Nowy Sącz, Katowice, Wrocław, Bytków, and Szczecin to TV Puls. TVN plans to ap- peal. The transmitter allocation took place last year, when TV Puls was still controlled by News Corporation. The other broadcasters claim that the station was not entitled to bid for the TV tow- ers because, at the time, it was not yet licensed as a universal broadcaster. In our opinion, now that TV Puls is left without NewsCorp as its main investor, the ruling does not have much rele- vance.
ITI Neovision gets Champions League broadcast rights ITI Neovision, operator of the HDTV n platform, bought rights to broadcast three seasons (2009/2010, 2010/2011, 2011/2012) of Champions’ League football games. The price has not been disclosed. Newspapers had pegged the price of the broadcasting rights at 45 million eu- ros, but there is no way to confirm these guesses. n has retained rights to show the sports events broadcast by the nsport channel for the past two years.
Two offers for Puls Out of seven parties that had previously expressed interest in buying the Puls TV station, two made formal offers. The CEO believes negotiations may be closed by the end of June. We reit- erate our view that after News Corporation withdrew from Puls, its standing in the market is neg- ligible. The case of News Corporation shows that even if an international concern invests in Puls in the future (the press speculates that Axel Springer and Bertelsmann may be interested), success is by no means guaranteed.
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WSiP (Buy) Analyst: Piotr Grzybowski Current price: PLN 14.9 Target price: PLN 18.9 Last Recommendation: 2008-12-09 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 224.9 194.5 -13.5% 190.6 -2.0% 192.5 1.0% Number of shares (m) 24.8 EBITDA 34.6 53.5 54.6% 46.4 -13.1% 47.1 1.3% MC (current price) 368.4 EBITDA margin 15.4% 27.5% 24.4% 24.4% EV (current price) 326.0 EBIT 29.8 49.8 66.8% 42.1 -15.3% 42.5 1.0% Free float 36.6% Net profit 49.2 41.5 -15.6% 35.6 -14.0% 35.7 0.2%
P/E 8.0 8.9 10.3 10.3 Price change: 1 month 6.4% P/CE 7.3 8.2 9.2 9.2 Price change: 6 month 7.1% P/BV 3.2 3.1 3.3 3.3 Price change: 12 month -6.7% EV/EBITDA 9.4 5.9 7.0 7.0 Max (52 w eek) 16.6 Dyield (%) 0.0 0.0 0.0 0.0 Min (52 w eek) 11.5
17 WSiP shares appreciated 9.3% in May, much more than the broad market which gained just 1.0%, most probably thanks to the announcement of a PLN 40m buyback suggesting 14.6 a dividend yield of 11.2% at the current share price. That is why we are reiterating a buy 12.2 rating on WSiP, and we recommend overweighting the stock in June.
9.8 WSiP posts in-line Q109 results 7.4 WSiP’s first-quarter results met our expectations. Sales were stronger than expected, surging WSiP WIG 5 66% to PLN 14.4m from PLN 8.7m a year earlier thanks to the addition of publishing company 2008-05-29 2008-09-17 2009-01-13 2009-05-06 "Zielona Sowa" to the WSiP family (the combined revenues from sales of children’s books generated by Zielona Sowa and Book House totaled PLN 3.9m), as well as a strong performance of the parent. The main sales drivers included early order placements by textbook wholesalers, and the book series on historic buildings ( Zabytki architektury ) added to national newspaper Rzeczpospolita . Stronger subsidiary sales negatively affected the consolidated gross margin, moreover, SG&A expenses were boosted by promotional campaigns. As a consequence, WSiP reported a Q109 EBIT loss of PLN 12.2m, compared to a loss of PLN 11.0m posted in Q108 and our estimated PLN -11.5m. The result of financial operations missed expectations by PLN 0.8m, probably due to a lower-than-expected cash balance in the period. After all this, WSiP booked a Q109 net loss of PLN 12.4m (vs. a loss of PLN 11.0m a year earlier and PLN 11.1m predicted by us).
PLN 40.4m buyback WSiP shareholders decided to carry out a PLN 40.4m share buyback. At a market cap of PLN 368m, the buyback suggests a dividend yield of 11.2%.
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IT Sector
ABS Management's outlook on 2009 In spite of a weak first quarter, Asseco Business Solutions expects to improve earnings this year thanks to a substantial backlog of orders which include mobile solutions (PLN 35.4m), outsourcing (PLN 35.4m), and ERP solutions for large and mid-sized enterprises (PLN 44.5m) and small businesses (PLN 4.2m). First-quarter results were affected by restructuring expenses and costs of system implementation. Given that providers of integration services are being hurt most by the economic crisis, a repeat of last year’s earnings results would be a big success for ABS, although it is not impossible considering that the company’s backlog today represents 60% of last year’s sales.
Comarch
Order from Lotos Comarch signed a three-year agreement for delivery of Microsoft Enterprise and Select Licenses to gas giant Lotos. The fee is EUR 1.53m. The order accounts for less than 1% of Comarch’s 2008 revenue.
Macrologic Shareholders approve profit distribution Macrologic shareholders approved payout of PLN 3.78m out of last year’s PLN 5.06m profit as dividends. The payout ratio is 75%, and the dividend yield given the current market cap (ca. PLN 58m) is 6.5%.
Qumak Sekom Order from Erbud Qumak-Sekom signed a contract for complete indoors and outdoors electrical and phone-wiring work during the construction of the AGORA BYTOM shopping mall. The consideration is PLN 13.02m net, and the deadline is mid-October 2010. Thus, despite the deteriorating economy, the company gets another contract in its backlog with a value amounting to ca. 5% of last year's revenues. However, only approximately half of the contract value can be attributed to the current year. The total value of Qumak's 2009 contract portfolio can be estimated at PLN 200m, i.e. 80% of last year’s sales.
Outlook on 2009 The Management of Qumak Sekom expect a 20% increase in 2009 sales, and a slight decline in profitability to 4%-5%. At the end of April, Qumak Sekom’s contract backlog totaled PLN 289.5m, of which PLN 194.5m-worth of orders had deadlines in 2009. The company is actively competing to supply phone and data wiring to Euro 2012 football stadiums. The company is offering fees ranging from PLN 15m to PLN 40m depending on the stadium.
PLN 0.35/share dividends Qumak Sekom shareholders voted in favor of a PLN 3.63m (PLN 0.35/share) dividend payout. The date of record is June 18th, with payout on July 8th. The dividend yield at the current market price is 3.2%. CEO Paweł Jaguś said that the company’s Management Board would consider another payout out of 2008 earnings after the end of 2009 (in the mean time, the payout ratio is 25%).
Qumak makes best bid A consortium consisting of Qumak Sekom and TB4 made the best bid (PLN 15.2m) for development of an emergency caller information and location platform and database ordered by the Office for Electronic Communications (UKE). Qumak’s counter-bidders included Asseco Poland and Comarch. The UKE’s budget for the project was PLN 13.1m, of which 85% is coming from the EU, but it looks like the Office will have to secure more resources to be able to pay the successful vendor. We can safely assume that the successful vendor will be Qumak, whose backlog will increase over PLN 300m.
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AB (Buy) Analyst: Piotr Grzybowski Current price: PLN 7.5 Target price: PLN 10.31 Last Recommendation: 2009-04-30 (PLN m) 2007/08 2008/09F change 2009/10F change 2010/11F change Basic data (PLN m) Revenues 3 012.2 2 700.6 -10.3% 2 749.4 1.8% 2 999.8 9.1% Number of shares (m) 16.0 EBITDA 39.5 79.6 101.5% 40.7 -48.9% 44.3 9.0% MC (current price) 119.5 EBITDA margin 1.3% 2.9% 1.5% 1.5% EV (current price) 267.8 EBIT 35.2 74.2 110.9% 35.2 -52.6% 38.8 10.1% Free float 51.3% Net profit 16.1 21.9 36.0% 14.3 -34.6% 19.3 35.0%
P/E 7.4 5.5 8.3 6.2 Price change: 1 month 10.1% P/CE 5.9 4.4 6.0 4.8 Price change: 6 month 56.4% P/BV 0.6 0.5 0.5 0.5 Price change: 12 month -63.8% EV/EBITDA 8.1 3.4 6.6 6.1 Max (52 w eek) 20.7 Dyield (%) 0.0 0.0 0.0 0.0 Min (52 w eek) 2.7
23 AB reported stellar quarterly results unaffected by a PLN 7.5m reserve, with earnings ` that, at the current market cap, suggest a P/E=5.5 and an EV/EBITDA of 3.4. Assuming as 18.4 we do that fourth-quarter results will be neutral for full-year profits, AB is trading at a 13.8 very attractive price, further confirmed by a considerable discount to equity. We recommend buying AB shares and overweighting the stock versus the broad index this 9.2 month. 4.6 AB WIG 0 Third-quarter results 2008-05-29 2008-09-17 2009-01-13 2009-05-06 AB reported good results for its fiscal third quarter, with revenues up 13.9% from PLN 650m to PLN 740.5m (7.2% more than predicted). This was mostly driven by the Czech subsidiary ATC, as the parent company saw its revenues shrink by over 12.3%. ATC, thanks to the appreciation of the CZK vs. the PLN and the problems faced by its local competitors, displayed spectacular performance in the quarter, starting with fast revenue growth and ending with a PLN 5m net income. Due to the consistent appreciation of the USD and the EUR vs. the CZK and the PLN, Q109 gross margins widened considerably for both the entire AB group and the parent company (from 5.5% and 4.9% to 7.4% and 7.1%, respectively), beating our expectations by 0.3ppt which, combined with higher sales, brought about a gross profit PLN 5.6m higher than expected. SG&A expenses surged to PLN 26.6m from PLN 20.5m a year ago (PLN 21.8m in our forecast), and were driven by ATC seeing that they remained at last year’s level at the parent company. Other net operating losses amounted to PLN 14m vs. PLN 2m expected, and included a PLN 7.5m charge against a claim which the company had filed against a bank regarding a seized collateral. As a result, operating income undershot our forecast by almost 29% (PLN 14.1m vs. PLN 19.7m forecasted). Finance losses amounted to a mere PLN 4.9m (vs. PLN 12.0m forecasted). As a result, the company recorded a pre-tax income of PLN 9.1m vs. PLN 7.7m forecasted. A higher-than-expected income tax led to a net income of PLN 6.3m, 0.2% above our projection. To sum up, we consider first-quarter earnings very good, and we are reiterating a positive rating on AB.
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Action (Buy) Analyst: Piotr Grzybowski Current price: PLN 11 Target price: PLN 12.3 Last Recommendation: 2009-04-30 (PLN m) 2006/07 2007/08 change 2008/09F change 2010F change Basic data (PLN m) Revenues 1 797.5 2 343.4 30.4% 3 320.6 41.7% 2 489.8 -25.0% Number of shares (m) 17.2 EBITDA 37.7 66.3 75.8% 59.3 -10.5% 50.5 -14.9% MC (current price) 189.4 EBITDA margin 2.1% 2.8% 1.8% 2.0% EV (current price) 300.2 EBIT 30.4 58.3 91.9% 46.3 -20.6% 41.5 -10.4% Free float 35.9% Net profit 22.0 33.8 53.4% 25.6 -24.4% 24.3 -4.8%
P/E 8.2 5.6 7.4 7.8 Price change: 1 month 18.2% P/CE 6.1 4.5 4.9 5.7 Price change: 6 month -28.6% P/BV 1.2 1.0 1.0 0.9 Price change: 12 month -53.0% EV/EBITDA 6.6 5.1 5.1 6.4 Max (52 w eek) 24.9 Dyield (%) 0.0 2.3 12.5 2.7 Min (52 w eek) 4.1
27 Action is slated to release the earnings results for the fiscal third-quarter later this month, and we expect the announcement to provide a boost to the company’s share 21.6 ` price. That is why we are reiterating a buy rating on Action, and we recommend 16.2 overweighting the stock in June.
10.8 Acquisition 5.4 Action is set to take a 75% stake in the increased equity of online video-game store Gram.pl for Action WIG 0 PLN 3m.Gram.pl filled 80,000 orders in 2008, and recorded 19.4m hits and 2.1m unique visits in 2008-05-29 2008-09-17 2009-01-13 2009-05-06 Q109. We would prefer it if Action refrained from acquisitions for at least six more months. The store is worth an estimated PLN 4m.
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ASBIS (Buy) Analyst: Piotr Grzybowski Current price: PLN 1.8 Target price: PLN 2.16 Last Recommendation: 2009-04-30 (USD m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 1 397.3 1 495.3 7.0% 1 252.0 -16.3% 1 339.9 7.0% Number of shares (m) 55.5 EBITDA 27.6 18.2 -34.2% 10.2 -43.7% 15.8 54.4% MC (current price) 101.6 EBITDA margin 2.0% 1.2% 0.8% 1.2% EV (current price) 118.9 EBIT 25.7 15.3 -40.4% 7.3 -52.2% 12.8 75.2% Free float 34.2% Net profit 18.7 4.0 -78.5% -1.1 4.9
P/E 1.7 7.9 6.5 Price change: 1 month 14.4% P/CE 1.5 4.6 17.9 4.1 Price change: 6 month -49.3% P/BV 0.3 0.3 0.3 0.3 Price change: 12 month EV/EBITDA 3.6 6.6 11.6 8.0 Max (52 w eek) 9.0 Dyield (%) 8.8 30.4 0.0 6.4 Min (52 w eek) 0.6
10 Asbis continues to trade at a considerable discount to equity. Favorable trends in forex
ASBIS `WIG markets, with the euro appreciating versus the dollar throughout May, will positively 8 influence the company’s second-quarter results. We are reiterating a buy rating on Asbis. 6 First-quarter results 4 Asbis’s first-quarter results undercut even the lowest of expectations. Sales fell from US $360m 2 to $238m (a drop by 59.4% vs. our expected 55.3%), mainly because of a downturn in Russia and the Ukraine in the wake of a strong dollar, weak economies, and a switch to dollar billing 0 2008-06-12 2008-09-19 2009-01-05 2009-04-15 which scared away many customers. The quarterly gross margin shrunk from 6.0% to 3.0% due to forex losses incurred because of volatile CEE currencies. The negative forex differences amounted to $5.7m, and weighed the gross margin down by 2.4 ppts. SG&A expenses decreased from $12.8m to $11.7m thanks to cost cuts implemented in late 2008 (which were expected to generate $1.4m in savings in the first quarter of 2009), and a strong dollar which brought down costs of salaries and rental charges. Operating profit plunged from $8.9m to a negative $4.5m. Net finance expenses rose to $1.7m from $1.4m a year earlier due to increased debt and higher loan margins charged in certain countries. All in all, Asbis reported a bottom-line loss of $6.2m for its fiscal third quarter versus a $5.7m profit a year ago.
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Asseco Poland (Buy) Analyst: Piotr Grzybow ski Current price: PLN 58.5 Target price: PLN 67.4 Last Recommendation: 2009-05-27 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 1 282.4 2 786.6 117.3% 3 023.5 8.5% 3 213.6 6.3% Number of shares (m) 77.6 EBITDA 274.5 591.8 115.6% 597.2 0.9% 653.8 9.5% MC (current price) 4 537.6 EBITDA margin 21.4% 21.2% 19.8% 20.3% EV (current price) 4 880.1 EBIT 236.7 494.3 108.9% 492.1 -0.4% 547.0 11.2% Free float 55.1% Net profit 161.0 321.6 99.7% 309.6 -3.7% 347.2 12.1%
P/E 28.2 14.1 14.7 13.1 Price change: 1 month 7.5% P/CE 22.8 10.8 10.9 10.0 Price change: 6 month 20.4% P/BV 2.1 1.2 1.1 1.0 Price change: 12 month -8.6% EV/EBITDA 17.3 7.9 8.2 7.2 Max (52 w eek) 68.0 Dyield (%) 0.6 1.7 2.0 2.3 Min (52 w eek) 40.0
70 Asseco's strong standing with clients, especially those in the financial sector, long term implementation and maintenance contracts, and an impressive order backlog for 2009, 60 make it a safe haven at a time when dark clouds gather over the entire economy and the 50 IT industry. We trust these factors will enable Asseco to not only sustain this year's
40 revenue at last year's level, but in fact to expand it significantly, while replicating FY2008 profits. Moreover, Asseco has enough contracts coming in 2010-2011 not to fear the 30 potential dead period in the IT market when the economy emerges from the slowdown, Asseco Poland WIG 20 and customers wait restart suspended technology projects. We recommend buying 2008-05-29 2008-09-17 2009-01-13 2009-05-06 Asseco Poland and overweighting its shares in June.
First-quarter results In Q1 2009, Asseco Poland surprised on the upside with its earnings. Revenues amounted to PLN 710m vs. PLN 414.6m a year earlier. This rapid growth was primarily a consequence of consolidation of new subsidiaries, which were not included in last year's comparable base, and an advantageous forex environment which led to an improvement in these subsidiaries' zloty earnings. The clearest increase (from PLN 53.4m to PLN 176.0m) was observed in public- sector revenues, mostly thanks to consolidation of the former Prokom Software and the contracts it had signed with the Social Insurance Institution (ZUS). The segment of private- sector services did well too, with PLN 223.1m revenues vs. PLN 143.6m a year ago. Revenues from financial-sector services increased by 42.8% (from PLN 217.7m to PLN 310.9m), but their share in total sales nonetheless collapsed from 52.5% to 43.8%. At the same time, Asseco continued to increase the share of proprietary software and services (sales at PLN 407.6m vs. PLN 183.5m in Q1 2008) in total sales from 44.2% to 57.4%, which did not, however, prevent the gross margin from sliding from 38.7% to 33.5%. This, however, can be attributed to a large volume of integration services within key projects, which yield lower margins. The decline in the gross margin was partially offset by lower SG&A costs (relative to revenues, 17.7% vs. 19.8%). As a result, the Q109 operating profit amounted to PLN 114.6m, and the EBIT margin came in at 16.1% (vs. PLN 78.7m and 19% respectively a year ago). Asseco's financial operations in the first quarter included successful hedging which offset the impact of FX fluctuations on the earnings generated from Polish contracts. All in all, the finance losses for the quarter amounted to PLN 9.5m. Net income attributable to the shareholders of the parent was PLN 76.9m vs. PLN 45.0m a year ago.
Order backlog amounts to PLN 2.1m CEO Adam Góral announced in May that Asseco's backlog was worth nearly PLN 2.1bn (ca. 75% of last year's revenues), of which software and services accounted for PLN 1.6bn (105% of last year's revenues). The standalone backlog of parent Asseco Poland is currently PLN 809m, including PLN 567m in software and services.
Contract for Asseco South Eastern Europe Asseco South Eastern Europe (ASEE) is going to roll out an intranet banking system for Volksbank Serbia. Installation is set for completion by the end of June, and will be followed by migration to the new system in September.
Dividend payout Asseco shareholders voted in favor of a PLN 1.03/share dividend payout.
ASEE may get financial investor in June CEO Adam Góral hopes to round off talks with the potential financial investor for Asseco South Eastern Europe in June, meaning that, if all goes well, ASEE could make a market debut as early as July.
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Scandinavian acquisition plans Mr. Góral revealed that Asseco had targeted a Scandinavian provider of consulting services and software for financial institutions, and that the acquisition will probably be completed in June.
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Komputronik (Hold) Analyst: Piotr Grzybowski Current price: PLN 11.1 Target price: PLN 10.48 Last Recommendation: 2009-05-29 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 519.3 757.9 45.9% 848.0 11.9% 980.8 15.7% Number of shares (m) 8.2 EBITDA 12.1 10.8 -10.5% 9.8 -9.5% 15.2 56.1% MC (current price) 91.0 EBITDA margin 2.3% 1.4% 1.2% 1.6% EV (current price) 149.9 EBIT 10.3 5.6 -45.4% 4.1 -27.5% 9.5 131.9% Free float 25.2% Net profit 10.3 5.6 -45.4% 4.1 -27.5% 9.5 131.9%
P/E 8.0 16.1 22.3 9.6 Price change: 1 month -2.6% P/CE 6.9 8.4 9.3 6.0 Price change: 6 month -0.9% P/BV 1.0 0.7 0.7 0.6 Price change: 12 month -69.4% EV/EBITDA 4.2 10.1 15.3 10.1 Max (52 w eek) 37.3 Dyield (%) 0.6 0.0 0.0 0.0 Min (52 w eek) 3.8
40 As expected, Komputronik failed to impress in the first quarter, mostly because of the ` ongoing restructuring of Karen (the subsidiary recorded an operating loss of nearly 32 PLN 3m). The second quarter is not likely to be very successful, either. Karen's losses, 24 which we believe will be comparable to those reported in Q109, will be exacerbated by a seasonal decline in sales and the persistent weakness of the zloty, which inflates the 16 cost of property rentals. A certain improvement in Karen’s financial performance may 8 come in H209, although, given the increasing impact of the economic slowdown on retail Komputronik WIG sales, we do not expect the Komputronik group as a whole to improve earnings vs. H2 0
2008-05-29 2008-09-17 2009-01-13 2009-05-06 2008. We recommend holding Komputronik, and underweighting its shares in June.
Q1 2009: Karen still weighs down on earnings First-quarter earnings were very much in line with our expectations. Revenues amounted to PLN 186.0m vs. PLN 149.9m a year earlier and PLN 198.9m forecasted. It should be noted that the 24.1% improvement in sales is almost entirely due to the consolidation of Karen, which was not a part of the group in Q108; in Q109, almost all its orders were processed by Komputronik. As a result, the consolidated revenue diverged only slightly from the parent company's standalone revenue. The consolidated gross margin declined from 13.1% to 12.3%, the blame for which can be divided between Karen, whose gross margin was a mere 8.2%, and the parent company, whose gross margin decreased from 12.9% to 12.1%. SG&A expenses increased from PLN 16.2m a year earlier to PLN 21.8m, which was due to the merger with Karen (it generated PLN 4.0m in SG&A expenses in Q1). In addition, other operating income of PLN 0.2m was recorded vs. a PLN 0.7m loss a year ago. As a result, Komputronik recorded a gross profit of PLN 1.2m vs. PLN 2.6m a year ago and PLN 1.5m in our forecast. Finance losses for the quarter totaled PLN 0.1m, and the parent’s share in KEN TI’s currency swap amounted to just PLN 0.4m vs. our expected PLN 1.1m. This discrepancy is a consequence of the fact that, even though Komputronik relinquished control over KEN TI on March 30, it consolidated 20% of its earnings throughout the quarter rather than the original 80%, which limited its exposure to the former subsidiary's losses and its F/X swap. Pre-tax income was PLN 1.1m. Taking into account taxes and minority interests, Q109 net income was PLN 1.2m vs. PLN 2.0m a year ago and PLN 1.0m we expected.
Expansion to the south After opening an online store in the Czech Republic last year, Komputronik is considering building a physical store chain there and in Slovakia. The first outlet could be opened as early as in Q209 and, if it meets certain predefined financial-performance indicators, more openings will follow. While the timing is hardly ideal for an international expansion, one store cannot do much harm.
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Sygnity (Buy) Analyst: Piotr Grzybow ski Current price: PLN 19.2 Target price: PLN 25.3 Last Recommendation: 2009-05-27 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 1 201.9 995.7 -17.2% 838.2 -15.8% 877.7 4.7% Number of shares (m) 11.9 EBITDA -16.3 56.6 51.1 -9.6% 49.6 -3.0% MC (current price) 228.4 EBITDA margin -1.4% 5.7% 6.1% 5.7% EV (current price) 187.7 EBIT -72.0 11.5 12.1 5.3% 12.8 5.1% Free float 64.5% Net profit -65.6 -1.5 -97.7% 4.3 8.1 90.1%
P/E 53.4 28.1 Price change: 1 month -9.3% P/CE 5.2 5.3 5.1 Price change: 6 month -23.1% P/BV 0.7 0.6 0.6 0.6 Price change: 12 month -16.1% EV/EBITDA 4.3 3.7 3.6 Max (52 w eek) 26.9 Dyield (%) 8.9 -0.2 0.6 1.1 Min (52 w eek) 14.9
30 After a tough two-year struggle with debt and loss-making contracts, Sygnity now has to brace itself for a general slowdown in the IT industry. As competition among IT suppliers 25 intensifies, Sygnity might not be able to meet the earnings targets set for this year as 20 revenues are under pressure from a shortage of contract opportunities offered by
15 financial institutions, manufacturers, and government agencies. Moreover, the company’s bonds are coming up for a rollover in July. We are confident that Sygnity is 10 well prepared to face and survive these lean times. By reducing debt and costs during a Sygnity WIG
5 successful restructuring exercise, the company gained an advantage over companies 2008-05-29 2008-09-17 2009-01-13 2009-05-06 which are just starting to adapt to a tougher marketplace. Last but not least, Sygnity is trading at an attractive EV/EBITDA multiple of 3.7 (or 4.6 without taking into account asset divestiture), and promises to deliver stronger earnings performance starting in 2010, which makes it an incredible bargain in the current market. We recommend buying Sygnity and overweighting the stock versus the broad index over this month.
First-quarter results Sygnity's Q109 results fell short of consensus estimates. Revenues were down 33% from PLN 211m to PLN 140m, mainly due to fewer government orders (a 58% drop), but also because of a slowdown across other lines. The company saw a decrease both in sales of proprietary products and services (-18.3%), and third-party goods (-71%). On the upside, the gross margin expanded 8.5ppts from 11.1% to 19.6%, thanks to stronger sales of in-house solutions and completion of low-margin contracts which affected margins in Q108. SG&A expenses were flat compared to Q108, and increased from 22.3% to 33.3% as percentage of sales. Sygnity posted an “other" operating profit of PLN 3.1m vs. a PLN 1.3m loss a year earlier and an EBIT loss of PLN 16.1m, ahead of PLN 12.3m predicted by analysts. Reduced debt led to lower financing costs, leading to a quarterly finance loss of PLN 2.0m. which compares to a lower, PLN 0.3m loss reported in Q108 as a result of an EFH divestment gain in the amount of PLN 2.1m. A tax charge reversal, paired with low minority interests, resulted in a net loss of PLN 17.2m vs. PLN 26.6m a year ago (the consensus estimate was PLN -14.7m).
Fine refund A court in Łódź ruled that the Agency for Agricultural Restructuring and Modernization (ARiMR) must reimburse Sygnity for a PLN 7.5m fine charged unfairly back in 2005. Once the ruling is in effect, Sygnity will be able to reverse the corresponding PLN 7.5m reserve, and can look forward to a considerable cash injection.
General meeting of shareholders Sygnity called a general meeting of shareholders for 18 June. The agenda includes a vote on divestment plans. Sygnity previously reported signing agreements for property sales, and that it was planning to divest its surveying subsidiaries (KPG and Geomar), as well as its outsourcing subsidiaries. The vote will most likely concern one of these issues. Divestment plans are of crucial importance given the plans to further reduce the company’s debt.
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Metals
Kęty (Buy) Analyst: Michał Marczak Current price: PLN 74.8 Target price: PLN 109.4 Last Recommendation: 2008-08-04 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 1 253.0 1 183.5 -5.5% 982.3 -17.0% 1 139.5 16.0% Number of shares (m) 9.2 EBITDA 194.0 190.2 -2.0% 170.3 -10.5% 181.7 6.7% MC (current price) 689.6 EBITDA margin 15.5% 16.1% 17.3% 15.9% EV (current price) 994.7 EBIT 141.9 128.3 -9.5% 108.1 -15.8% 119.6 10.7% Free float 46.0% Net profit 97.8 63.4 -35.2% 64.4 1.7% 77.3 19.9%
P/E 7.1 10.9 10.7 8.9 Price change: 1 month 3.8% P/CE 4.6 5.5 5.4 4.9 Price change: 6 month 8.9% P/BV 1.0 1.0 0.9 0.8 Price change: 12 month -31.5% EV/EBITDA 5.4 5.5 5.8 5.2 Max (52 w eek) 113.1 Dyield (%) 5.4 6.0 6.2 6.4 Min (52 w eek) 49.5
120 We are reiterating a positive rating on Kęty, which is benefitting from the economic momentum and a weak zloty. Second-quarter earnings should legitimize the company’s 104 PLN 62m earnings target. Financial results will be supported by positive forex
88 differences and decreasing debt.
72 Drop in aluminum systems sales, debt 56 Sales of Kęty’s aluminum systems are falling faster than predicted (the company expected a 4% Kęty WIG drop y/y). Kęty is implementing a cost-cutting plan (which includes job cuts, inventory trimming, 40 2008-05-29 2008-09-17 2009-01-13 2009-05-06 and adoption of savings measures by foreign subsidiaries), and is working to reduce debt to some PLN 300m by mid-2009 from PLN 450m a year ago. Kęty assumed that it would post a PLN 15m charge due to hedging transactions this year (the charge in Q109 was PLN 9m). The company believes that its Ukrainian subsidiary will generate a profit this year. As the zloty strengthens, Kęty should post a gain on forex differences in Q209 (the amount of the gain will depend on the exchange rate prevailing on 30 June). Combined with a seasonal upturn in demand for extruded products, this will produce a strong earnings showing for the quarter. We believe that the company can deliver, or even exceed, its PLN 62m bottom-line target for 2009.
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KGHM (Suspended) Analyst: Michał Marczak Current price: PLN 75.3 Target price: - Last Recommendation: 2009-06-04 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 12 183.0 11 302.9 -7.2% 7 442.0 -34.2% 7 423.9 -0.2% Number of shares (m) 200.0 EBITDA 5 034.0 4 077.7 -19.0% 1 139.7 -72.0% 937.6 -17.7% MC (current price) 15 060.0 EBITDA margin 41.3% 36.1% 15.3% 12.6% EV (current price) 13 307.4 EBIT 4 682.0 3 596.4 -23.2% 670.2 -81.4% 468.0 -30.2% Free float 36.0% Net profit 3 799.0 2 910.4 -23.4% 583.3 -80.0% 419.6 -28.1%
P/E 4.0 5.2 25.8 35.9 Price change: 1 month 19.4% P/CE 3.6 4.4 14.3 16.9 Price change: 6 month 162.5% P/BV 1.7 1.4 1.5 1.5 Price change: 12 month -27.6% EV/EBITDA 2.5 3.3 11.7 14.3 Max (52 w eek) 104.0 Dyield (%) 22.5 12.0 3.7 1.5 Min (52 w eek) 21.4
120 We suspended investment ratings for KGHM pending an update released a few days after the Monthly Report. 96
72 KGHM reports stellar Q109 results
48 KGHM’s Q109 net income exceeded our estimate (PLN 430m) and the consensus estimate (PLN 483m). On a revenue of PLN 2 377m, the company generated an EBIT of PLN 796.3m 24 and a bottom-line profit of PLN 627.9m. Copper sales volumes fell to 119,000 tons from KGHM WIG 0 132,000 tons a year earlier in spite of a production output of 123,000 tons. The unit cost of 2008-05-29 2008-09-17 2009-01-13 2009-05-06 copper stood at PLN 9 760/t (-12% y/y), and was lower than our anticipated PLN 10 690/t, partly because of higher-than-expected sales of silver (294 vs. 263 tons). A hedging gain of PLN 245m was ahead of expectations. After releasing the first-quarter earnings report, KGHM raised its full-year net-income estimate from PLN 430m to PLN 1.9 billion, to be achieved on sales of PLN 9.065 billion at an assumed average copper price for the year of $3 800/t and a PLN/USD exchange rate of 3.25. Investors must be pleased with both the quarterly results and the big upward revision in the full-year guidance, which is no doubt a sign that KGHM Management have accepted the inevitability of a dividend payout this year, and suggests that the plans to purchase copper deposits abroad fell through.
KGHM buys concentrate KGHM ordered copper concentrate from Salobo Metais which are expected to cost between $639m and $969m (PLN 2.07-3.14 billion) in the first five years (2009-2012). The guarantor is Companhia Vale do Rio Doce. KGHM’s usage of about 50,000 tons of concentrate per year facilitates optimal utilization of its smelter capacity (KGHM mines produce 420,000 tons of copper annually).
Unions score another victory As expected, KGHM workers had their demands met again. They will get special bonuses in the amount of PLN 5000 each (payable in two installments: PLN 3,500 on May 12th, and PLN 1,500 on September 15th, provided that KGHM’s financial standing remains sound), and had the company pay higher contributions toward the retirement scheme (a 2 ppts increase to 5% of salary). Combined, these latest concessions will cost KGHM 130 million zlotys. The workers’ victory was inevitable, and KGHM’s Management deserves kudos for holding out for so long before the final surrender. Keep in mind that the 2009 freeze on monthly salaries is still in place at KGHM. What is important is that the PLN 5000 bonuses will not count toward the average salary used as a basis for determining workers' compensation next year.
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Construction Construction growth in April According to official GUS statistics, construction output in April was 0.5% higher than a year earlier and 12% higher than in March. Seasonally adjusted output growth figured to 0.3% and 1.1% respectively.
Road Development
National road budget National road authority the GDDKiA could receive a PLN 7 billion loan from the European Investment Bank in June. The money can only be used to finance projects that are ready to go.
Poland applies for EIB loan Poland took out a EUR 565m (PLN 2.48bn) loan with the European Investment Bank to finance the construction of a bypass road around Warsaw. Moreover, road authority the GDDKiA applied for a EUR 1.25bn (PLN 5.5bn) loan to help further road-infrastructure projects estimated at EUR 2.5bn (PLN 11bn). Finally, the government decided to draw on a EUR 280m (PLN 1.23bn) unused EIB credit facility, and ask for another EUR 200m (PLN 880m) line. All in all, EIB is expected to lend PLN 7 billion to the Polish government.
EIB grants EUR 1.2bn loan to toll road operator The European Investment Bank agreed to lend a staggering EUR 1.2 billion to Autostrada Wielkopolska, the concessionaire of a 102-kilometer stretch of the A2 motorway, running from Nowy Tomyśl to the western border of Poland. The facility includes a EUR 1bn cash credit plus a EUR 200m borrowing option which can be exercised in case negotiations with commercial lenders should fail. The loan covers 75% of the construction costs (EUR 1.6bn). The concessionaire for a length of the A1 motorway, the Gdańsk Transport Company, was granted credit equivalent to 50% of the project's costs. Having secured EIB financing, Autostrada Wielkopolska is starting talks with commercial banks. Its own contribution to the financing pool for the A2 project will be between 5% and 15%. The fact that the EIB granted Autostrada Wielkopolska’s loan request came as a surprise after earlier signals to the contrary.
EIB almost set to wire infrastructure loan The EIB is set to disburse a loan for construction of the "Stryków-Konotopa” stretch of the A2 motorway which covers 50% of the total cost of the project.
Road construction gets cheaper Warsaw authorities earmarked 1.7bn zlotys toward the construction of a bypass road around the city. Meanwhile, the lowest bidder is offering over PLN 600m less than budgeted. Similarly, the total budget in eight tenders awarded since the beginning of the year was PLN 7.8bn, and the combined value of the lowest bids amounted to PLN 6.2bn. A spokesman for Budimex says that these variations stem from falling prices of building materials. The CEO of Hochtief Poland adds that contractors are able to offer lower prices thanks to lower subcontractor fees.
Railroad Construction New funding rules for PKP PLK National railroad operator PKP PLK and its owner, the Polish government, are working on new rules for allocating track-modernization funding. At present, PKP PLK plans maintenance according to available cash resources. In the future, its schedule would be decided, and accordingly funded, by the government. PKP PLK received PLN 680m in government funding this year, and is promised PLN 900m for next year. The company claims that an allocation this size assures upkeep of just a third of Poland’s railroad infrastructure. The actual annual cost of regular maintenance of the entire railroad network is estimated at PLN 3.5 billion (government plans provide for PLN 1bn annual allocations). Further, the government wants to divide PKP PLK into two operations, one dedicated to railroad maintenance, and the other to managing EU- funded projects (which are expected to reach PLN 2bn next year).
Building Materials Prices of building materials on decline Interior wall materials have lost most in value over the past year, with prices of ceramic bricks plunging between 30% and 50%. Prices of concrete blocks are down 21%, and prices of hollow tiles fell 10%. Insulation materials have depreciated 20% (prices of Styrofoam took an even deeper dive), steel prices have decreased 16%, and concrete prices have declined 11%.
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Have steel prices bottomed out? Steel distributors are noticing a recovery in sales. Builders have started to replenish steel inventories in reaction to price hikes by Czech and Slovak producers. For example, Złomrex recorded a 40% increase in sales in April. In turn, the CEO of Stalprofil is not ready to proclaim a sustained recovery yet.
Elektrotim Q1 2009 earnings commentary According to the CEO, Elektrotim's Q109 earnings were depressed by subsidiaries, but the parent itself had to cut margins as well. April was much better. The situation of the company should be good through Q3 2009, and Q4 is always tough to forecast. The company is expecting to see the biggest problems in 2010, due to a decline in public-sector orders and EU-subsidized contracts. The group’s current backlog amounts to PLN 95m (incl. PLN 87m in 2009). Under a negative scenario, revenues may decline by 20% this year; in an optimistic variant, growth is possible, but hard to achieve.
Management recommends dividends Elektrotim's Management is going to recommend payment of PLN 0.60 per share in dividends (5.5% yield). The company also wants to increase the funds earmarked for a share buyback from PLN 4.5m to PLN 6.5m. At the end of March, the order portfolio stood at PLN 96m (79% of 2008 revenues).
Energoinstal Energoinstal invests in laser-welding technology The CEO of Energoinstal expects good results going forward, though not as good as seen in Q109 (when the company generated a net margin of more than 10%). In the second half of the year, Energoinstal is going to trim production and focus on building new laser beam welding facilities. The project is estimated at PLN 30m, of which PLN 12m will be subsidized by the EU. The new technology is expected to boost Energoinstal’s hit rate and margins. The company is observing a slowdown in orders from Western Europe, but is hopeful about future waste-incinerator orders from Polish customers. The contract backlog for 2009 is already full.
Energomontaż Południe First-quarter results Energomontaż Południe (EPd) generated a revenue of PLN 54.1m in Q109 (vs. PLN 39.2m in Q108). and a gross margin of 13.5% (vs. 21.4% in Q408, 18.0% in Q308, 9.8% in Q208, and 10.4% in Q108). Expenses fell almost PLN 1.4m compared to Q408. Financial operations produced a neutral result, probably due to positive exchange differences (the company booked a considerable charge on derivatives revaluation).
PLN 420m backlog Energomontaż Południe has accumulated a contract backlog worth over PLN 420m (incl. PLN 300m to be booked in 2009). The company’s new CEO promises more successful contract acquisitions and solid Q109 results. Business in international markets (Germany, France, Belgium) is going better than at home at the moment. EPd has put on hold all buyback and M&A plans.
PBG targets Energomontaż Południe Energomontaż Południe is among the three companies targeted for acquisition by PBG.
Energomontaż Północ First-quarter results The first-quarter revenue of Energomontaż Północ (EPn) amounted to PLN 84.7m (vs. PLN 71.1m in Q108), pre-tax income was PLN 10.5m (vs. PLN 8.0m), EBIT was PLN 5.6m (vs. PLN 2.4m), and net income came in at PLN 5.3m (vs. PLN 2.0m in Q108). The Q109 net profit margin stood at PLN 6.2%. The production business (comprised of Energomontaż Gdynia, Energop, ZRE) generated the strongest gross margin (22.8%) in the period. EPn’s contract portfolio for 2009 is worth PLN 372m, and the backlog for 2010 and 2011 is PLN 100m and PLN 10m respectively (at EUR/PLN = 4.3). The company is competing with Rafako for an FGD plant project with a value of over PLN 100m, and hopes to land a PLN 60m order for steam and water pipes. First-quarter profitability was largely supported by EUR/PLN exchange rate volatility. We expect EPn to generate F/X gains of EUR 34.7m this year, including EUR 23.6m from unhedged positions (2010 gain is estimated at PLN 7.1m).
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Conditional contract (EUR 5.4m) Energomontaż Północ signed a conditional contract with STF concerning installation of a boiler an piping elements at Hungarian power plant Gonyu. The estimated value of the contract is EUR 5.4m, i.e. PLN 24.15m as of the date of signing. The contract will come into force upon approval by Siemens AG, for which STF acts as subcontractor.
Mostostal Płock First-quarter results Mostostal Płock’s Q109 revenue of PLN 35.5m was higher than a year earlier (PLN 27.8m), but lower than our estimate of PLN 37.8m. The gross margins was PLN 0.1m higher than our expected PLN 4.2m. SG&A expenses rose slightly compared to Q108. EBIT was PLN 2m, and net income came in at PLN 1.7m.
Mostostal wins damages A court granted Mostostal Płock’s claim for PLN 4.4m (plus interest accrued since March 2005) in additional contract fees from Bilfinger Berger.
Mostostal Zabrze First-quarter results Mostostal Zabrze’s Q1 revenue surged from PLN 146.6m a year earlier to PLN 193.0m, and was accompanied by strong profitability (gross priofit at PLN 29.0m, margin at 15%). SG&A expenses were up PLN 0.9m from last year. EBIT was PLN 18.2m, and net income came in at PLN 14.2m.
Naftobudowa First-quarter results Naftobudowa’s first-quarter revenue amounted to PLN 49.9m (vs. PLN 44.5m in Q408), and gross profit came in at PLN 7.4m (gross margin at 14.7%). EBIT decreased to PLN 4.8m from PLN 5.8m a year earlier, and net income rose to PLN 5.3m from PLN 3.8m.
Pol-Aqua First-quarter results Q109 revenue came in at PLN 335m, 25% ahead of the consensus estimate (PLN 267m). An EBIT of PLN 20.1m was a whopping 62% higher than expected (consensus estimate was PLN 12.4m), and bottom-line income was in line at PLN 1.82m vs. expected PLN 1.32m.
Pol-Aqua reiterates 20% sales growth plan Pol-Aqua is standing by its plan to increase 2009 sales by 20 percent. The company’s contract backlog was PLN 1,887m at 31 March 2009, with 55% of the contracts slated for completion this year. Pol-Aqua is hoping to capture subcontracting orders from builders of the Warsaw Metro system.
Business is slow for Gdańsk operations Employees of Pol-Aqua's operations in Gdańsk are worried about their future because of a continuing shortage of construction orders. The workers have agreed to work part time for three months, and some of them will be delegated to other branches. Building-construction orders acquired to date across the Pol-Aqua group total PLN 600m, the same level as was achieved a year ago, which means that there is no threat to sales results. The Gdańsk branch, which employs 460 people, generated a revenue of PLN 444m in 2008.
Projprzem First-quarter results Projprzem saw a year-on-year drop in revenues to PLN 25.4m in Q109 from PLN 46.6m. The industrial construction business displayed a particularly dismal performance, with sales dropping to PLN 7.6m from PLN 26.7m in Q108. Projprzem has just PLN 6m-worth of contracts left in its backlog. Revenues from steel frames increased to PLN 14.1m from PLN 5.5m a year earlier, and the gross margin hit an unprecedented level of 36%, probably thanks to lower steel prices. Sales of loading ramps fell to PLN 2.9m from PLN 13.8m. Overall, despite weak sales, Projprzem generated a strong gross profit of PLN 7.2m, and a gross margin of 28.3%, thanks probably to lower costs of steel. However, high SG&A expenses pulled the bottom-line result down to a negative PLN 0.8m.
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Q209 warning According to Projprzem’s CEO, the second quarter of 2009 is not looking great, and could end with a loss. Two-thirds of the company’s customers, in particular those who ordered loading ramps, have put supplies on hold due to financial problems. Orders for industrial construction services are also few and between, and profits from real-estate development will not materialize until Q309. On the upside, sales of steel structures are stronger than expected.
Remak First-quarter results Remak’s Q109 sales exceeded our expectations (PLN 55.9m) at PLN 67.5m. Gross profit amounted to 8.3%, and SG&A expenses were flat vs. Q408. Other finance expenses exceeded expectations due to F/X losses (PLN 3.2m reported vs. PLN 1m expected). Net income for the quarter came in at PLN 4.6m.
Żurawie Wieżowe ŻW looks for investors Suspended construction projects are expected to affect ŻW’s financial performance in Q2 and Q309. 2009 sales will probably decrease 30% over year-ago level. Prices of construction- crane rental have steadied after a 40-50% downturn observed since 2007. ŻW has shelved its plan to acquire Grohmann until later in the year. The company has no plans to increase its crane stock (150 machines).
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Budimex (Hold) Analyst: Maciej Stokłosa Current price: PLN 71.9 Target price: PLN 71.6 Last Recommendation: 2009-05-11 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 3 075.9 3 350.0 8.9% 3 451.0 3.0% 4 636.6 34.4% Number of shares (m) 25.5 EBITDA 51.7 134.2 159.8% 207.3 54.5% 179.0 -13.6% MC (current price) 1 835.6 EBITDA margin 1.7% 4.0% 6.0% 3.9% EV (current price) 1 719.6 EBIT 28.0 112.2 300.1% 184.4 64.4% 155.8 -15.5% Free float 26.7% Net profit 15.1 104.7 595.1% 150.5 43.7% 118.3 -21.4%
P/E 121.8 17.5 12.2 15.5 Price change: 1 month -3.5% P/CE 47.5 14.5 10.6 13.0 Price change: 6 month 20.8% P/BV 3.4 2.8 2.8 2.4 Price change: 12 month -11.2% EV/EBITDA 30.9 10.0 8.3 10.9 Max (52 w eek) 86.8 Dyield (%) 0.0 0.0 8.1 0.0 Min (52 w eek) 50.7
90 At the moment, Budimex is a less attractive investment than rival Mostostal Warszawa which has a larger contract portfolio and a cheaper equity. Budimex might attract 78 investors with generous dividends which, however, are not likely to reoccur in the future 66 (we could point out other dividend-paying stocks offering higher yields and guaranteed
54 future payouts). What is more, the real purpose of such a big payout is to address the cash shortage of the parent company, Ferrovial. If Ferrovial does not take measures to 42 deleverage soon (by reconciling intercompany debts and selling the assts of Cintra Budimex WIG 30 Concesiones), this will validate the concerns over whether the Group is able to fulfill the 2008-05-29 2008-09-17 2009-01-13 2009-05-06 contract for a stretch of the A1 motorway contract. The 2009 budget of national road authority the GDDKiA is enough, but 2010 could witness shortfalls (leading to a slowdown in the road-building industry). We are reiterating a hold rating on Budimex.
First-quarter results Budimex’s first-quarter results exceeded expectations, but mostly due to unexpected one-offs. In the comments to our forecast, we did note this might be the case. According to the company’s notes to the Q1 2009 report, provisions for contract losses were reduced by PLN 25.1m, and provisions for warranty repairs decreased by PLN 2.1m. These adjustments are a result of contract cost revisions (which might be due to slower cost growth, the fact that some technical risks failed to materialize, or arrangements with customers). Adjusted for the one-offs, the operating profit does not diverge very much from our forecast (1.5% difference in revenues, 1.9% in the adjusted gross margin). Other important discrepancies include a loss on derivative valuation, which turned out to be almost PLN 12m higher than we expected. It was mostly offset by unexpected foreign exchange gains (PLN 9.3m). In addition, the company recognized a slightly higher than expected tax charge.
Keeping sales intact Budimex hopes to keep 2009 sales at the same level as last year in spite of the housing downturn. First-quarter revenues were lower than a year ago due to colder temperatures, but profit was higher thanks to better contract margins.
Sewage plant contract A consortium consisting of Budimex and Cadagua (each with a 50% stake) signed a contract with the water and sewage utility (MPWiK) in Wrocław to expand and modernize the local sewage treatment facilities. The consideration is PLN 276.1m (Budimex’s share is PLN 138m, or 3.9% expected 2009 revenue). Deadline is 28 months.
No refund from PPPL Airport operator PPPL can keep the PLN 54.3m in performance bonds placed by a consortium involving Ferrovial, Budimex, and Lamela
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Elektrobudowa (Hold) Analyst: Maciej Stokłosa Current price: PLN 160 Target price: PLN 162.7 Last Recommendation: 2009-06-04 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 679.6 811.0 19.3% 819.9 1.1% 829.8 1.2% Number of shares (m) 4.7 EBITDA 49.6 79.0 59.3% 71.1 -10.1% 70.4 -1.0% MC (current price) 759.6 EBITDA margin 7.3% 9.7% 8.7% 8.5% EV (current price) 689.5 EBIT 44.2 71.3 61.1% 61.6 -13.6% 60.5 -1.7% Free float 39.1% Net profit 34.7 60.3 73.7% 52.7 -12.6% 55.7 5.7%
P/E 19.5 12.6 14.4 13.6 Price change: 1 month 8.6% P/CE 16.8 11.2 12.2 11.6 Price change: 6 month -2.4% P/BV 6.0 3.0 2.7 2.4 Price change: 12 month -18.3% EV/EBITDA 13.6 8.5 9.7 9.4 Max (52 w eek) 202.5 Dyield (%) 1.2 1.6 2.3 2.4 Min (52 w eek) 121.0
220 Elektrobudowa reported first-quarter results in line with expectations. We are downgrading the company to hold following an increase in share price. Future capacity 190 replacement projects in the Polish power industry, which will present lucrative 160 opportunities for Elektrobudowa, are already priced in. The company is not the cheapest
130 investment considering its expected earning performance in the next two years (FY09E P/E = 14.4, EV/EBITDA = 10.8, P/S = 0.9). Demand for switchgears is reported to have 100 increased over the past few months, and Elektrobudowa has already filled up its contract Elektrobudowa WIG 70 backlog for Q309. Switchgear demand (from the primary-distribution industry, including 2008-05-29 2008-09-17 2009-01-13 2009-05-06 power plants and heavy machinery manufacturers) is expected to remain strong going forward. Elektrobudowa set conservative earnings objectives for itself for 2009, which it will probably exceed, though not by margins as high as seen in previous years. The Management say that, this far into Q209, sales are going according to plan. First-quarter results were better than expected thanks to F/X gains.
Q1 2009 earnings in line Elektrobudowa’s first-quarter results were close to our expectations. Revenues missed our estimate by 7.7% (we underestimated seasonal factors), while the gross margin was almost 1.2ppt higher than forecasted. SG&A expenses we in line, while other net operating income was lower (lower FX gains). Operating profit was in line with expectations. The discrepancy at net income level was a consequence of a higher-than-expected income tax. Revenues in the Industrial-Engineering segment were much lower than last year due to seasonal causes and market trends. Due to the colder winter, some of the work was delayed vs. last year. Power- Engineering revenues were lower than last year, but generated higher profits. This may be a consequence of cost savings and FX gains. Energy Distribution revenues were slightly below expectations. We believe the observed improvement in profitability may be a consequence of high FX gains and/or cost savings. Automation revenues were much higher than last year, with a negative return; we believe this is a consequence of seasonal factors.
Q2 2009 earnings expected to improve Elektrobudowa expects to report a quarter-on-quarter increase in sales and flat margins ion Q209. A full picture of second-quarter performance will not be ready until all data comes in from the company’s Russian subsidiaries, both of which are expected to report at least a zero profit. Elektrobudowa is not experiencing delayed payments by customers. Among business segments, Automation is enjoying a steady influx of orders, while Power Engineering is struggling. The company’s contract backlog is worth about PLN 560m. Future business opportunities include a contract from Finland, and, later in the year, possible orders from Saudi Arabia. In Poland, Elektrobudowa is eyeing lighting contracts for football stadiums and the Warsaw metro system. The company is prepared for a 2-3 year hiatus with flat revenues,
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Erbud (Reduce) Analyst: Maciej Stokłosa Current price: PLN 44 Target price: PLN 35 Last Recommendation: 2009-06-04 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 663,1 1 059,0 59,7% 865,0 -18,3% 924,8 6,9% Number of shares (m) 12,6 EBITDA 34,6 71,3 106,0% 49,0 -31,3% 41,4 -15,4% MC (current price) 553,1 EBITDA margin 5,2% 6,7% 5,7% 4,5% EV (current price) 449,3 EBIT 32,8 64,8 97,7% 42,6 -34,2% 35,0 -17,9% Free float 21,0% Net profit 31,8 10,4 -67,4% 35,1 237,9% 31,0 -11,6%
P/E 17,4 53,2 15,8 17,8 Price change: 1 month 37,5% P/CE 16,4 32,7 13,3 14,8 Price change: 6 month 121,1% P/BV 2,9 2,7 2,3 2,1 Price change: 12 month -46,3% EV/EBITDA 14,0 7,6 9,2 10,5 Max (52 w eek) 82,0 Dyield (%) 0,0 0,0 0,0 0,0 Min (52 w eek) 19,9
90 We do not understand what drove Erbud’s share price so far ahead of peers like Unibep, Pol-Aqua, Mostostal Warszawa, ABM Solid, and Budimex (FY09E P/E = 16.1, EV/EBITDA = 73 11.4, P/S = 0.6). We are reducing our investment rating on the stock to reduce. We expect 56 a deterioration in Erbud’s financial results in Q209 on fewer contracts. In 2010, the company will probably record above-average margins thanks to a postponed shopping- 39 mall contract worth PLN 229m. Erbud’s 2010 backlog of construction orders from Polish
22 customers is worth PLN 370m, representing 59.3% of expected revenue, while contracts Erbud WIG from international customers account for 6.1% of target exports sales. 5 2008-05-29 2008-09-17 2009-01-13 2009-05-06 First-quarter results Erbud’s Q109 results exceeded expectations because the company completed as many as seven construction contracts in the period. Revenues from Polish construction jobs missed estimates, but were offset by international contracts. The gross margin was 19.8%, i.e. almost twice what we expected. Erbud reported high SG&A expenses after an auditor ordered it to recognize larger reserves. Other operating expenses were PLN 2.5m higher than expected. As a result, operating income was PLN 16.6m, i.e. PLN 5.9m higher than we projected. The effective tax rate was very high (32%). All in all, net income came in at PLN 12.3m (vs. PLN 7.5m forecast, +77%). The construction segment recorded a record high margin of 22.5% vs. the natural level of ca. 7-8%. Export profits exceeded expectations thanks to a high EUR/PLN exchange rate. The road construction segment also had record-high profitability, as did real- estate development (much higher return than in all the preceding quarters).
Erbud seeks to repeat 2008 margins Erbud will be aiming to achieve a revenue and margins at least as good as in 2008, and its targets take into account possible contract cancellations by customers. The sales drop seen in Q109 was not unexpected given the company's focus on capturing orders offering good margins. Erbud expects to see an increase in revenues from road contracts and exports to 20%-25% of total revenues vs. 12% in 2008. Erbud’s Management Board are going to recommend retention of 2008 earnings in the company.
PLN 157.4m contract Erbud inked a contract for a medical center in Gdańsk. The company’s total fee is PLN 157.4m, of which PLN 60m-worth of work is set for completion in 2009. The final deadline is in 20 months.
PLN 58.5m construction contract suspended Erbud's customer Dom Development suspended construction of "Winnica" residential estate in Warsaw. The contract is worth PLN 58.5m (6.4% of FY2009 revenue forecast), and Erbud has performed work for a total of PLN 12.2m to date. The project was supposed to be concluded in September. Under the agreement, if the suspension lasts longer than 90 days, the customer must adjust the cost of construction for inflation.
Dom Development extends housing project hiatus Dom Development decided to hold construction of a residential estate in Wrocław (for which Erbud is set to be paid PLN 102m) for another three months.
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Mostostal Warszawa (Accumulate) Analyst: Maciej Stokłosa Current price: PLN 59.1 Target price: PLN 65.6 Last Recommendation: 2009-06-04 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 1 928.4 2 154.2 11.7% 2 711.1 25.8% 2 809.4 3.6% Number of shares (m) 20.0 EBITDA 78.5 136.3 73.7% 167.3 22.7% 146.5 -12.4% MC (current price) 1 182.0 EBITDA margin 4.1% 6.3% 6.2% 5.2% EV (current price) 1 020.0 EBIT 58.9 113.4 92.6% 143.5 26.6% 122.4 -14.7% Free float 18.7% Net profit 52.9 75.5 42.6% 105.3 39.4% 92.4 -12.2%
P/E 22.3 15.7 11.2 12.8 Price change: 1 month 6.5% P/CE 16.3 12.0 9.2 10.1 Price change: 6 month 20.7% P/BV 4.1 3.6 2.8 2.5 Price change: 12 month -1.1% EV/EBITDA 12.7 7.5 6.1 7.0 Max (52 w eek) 61.0 Dyield (%) 0.1 0.0 3.2 4.5 Min (52 w eek) 36.3
65 Mostostal Warszawa surprised on the upside with first-quarter revenues and operating ` profitability. When releasing its Q1 2009 earnings, Mostostal changed its accounting 56 policies for EUR-denominated loans. While net income calculated according to standards 47 previously in force would have been lower, the changes made Mostostal's earnings comparable to those of its peers. Seeing that the company exceeded our revenue 38 forecasts, we decided to revise our projections for FY2009 and the following years. 29 Mostostal's order backlog for 2009 is virtually full, and 53% full for 2010, which is more Mostostal Warszawa WIG than in case of Budimex (39%), and less in case of Rafako and PBG (74% and over 80%, 20 2008-05-29 2008-09-17 2009-01-13 2009-05-06 respectively). The company’s valuation under our forecasts is attractive (2009 P/E = 12.8, 2009 EV/EBITDA = 6.8). At the end of Q1 2009, net cash amounted to PLN 285.4m (PLN 160.5m after balancing payables, receivables, prepayments and accruals on both sides of the balance sheet), and provides a good security buffer. We are downgrading MW to accumulate to account for the recent increase in share price.
First quarter shaped by new accounting policy Mostostal Warszawa surprised us with its revenue growth rate (3.7% y/y for the group, 69.0% for the parent). The Group’s gross margin was 13% vs. 10.1% under the old accounting method (forecast: 11.2%). The differences between our Q109 margin predictions and reported results must have stemmed from higher-than-expected cost savings and gains on derivatives valuation (the higher the gain posted in the income statement, the higher the margins on contracts completed in the quarter). SG&A expenses exceeded expectations (by PLN 3.8m), but other operating expenses undershot them. As a result, EBIT amounted to PLN 55.3m (vs. an EBIT of PLN 36.8m calculated using the old approach to revenue recognition, and our estimate of PLN 33m). Net finance losses exceeded expectations due to a PLN 26.5m charge against income incurred on value adjustments on derivatives. We had forecasted a mere PLN 5m. As per comments by a representative of Mostostal Warszawa, out of PLN 26.5m recognized in the income statement, ca. PLN 16m are instruments closed in Q1 2009. The higher-than-expected other finance income (PLN 10.4m vs. PLN 2.3m) is a consequence of FX gains. All in all, Mostostal Warszawa's net income amounted to PLN 26.9m, vs. PLN 21.9m forecast. Under the old accounting policies, net income would have amounted to PLN 11.9m. To sum up, Q1 2009 earnings beat our expectations as well as consensus estimates (PLN 610m revenue, PLN 28.3m operating profit, PLN 16.9m net income).
PLN 69.8m contract Mostostal Warszawa is going to build a humanities building for the Copernicus University in Toruń. The contract has a deadline in 2011, and the fee is PLN 69.8m (2.7% of 2009 revenue estimate).
PLN 54.7m contract Wrobis signed a contract to design and build facilities for the Medical University in Wrocław. The PLN 54.7m accounts for 2.2% of expected 2009 revenue.
Metro protests, CEO’s forecasts Mostostal Warszawa appealed to the Chamber of Appeals against the outcome of the tender for the second line of the Warsaw metro system. The CEO has reiterated the unofficial estimate of a 15% increase in revenues. He said the contract backlog exceeds PLN 3bn.
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PBG (Reduce) Analyst: Maciej Stokłosa Current price: PLN 222 Target price: PLN 201.6 Last Recommendation: 2009-06-04 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 1 376.8 2 089.3 51.8% 2 902.0 38.9% 3 198.8 10.2% Number of shares (m) 13.4 EBITDA 138.2 270.3 95.6% 360.1 33.2% 383.6 6.5% MC (current price) 2 981.5 EBITDA margin 10.0% 12.9% 12.4% 12.0% EV (current price) 3 745.4 EBIT 109.4 223.4 104.3% 313.4 40.3% 336.6 7.4% Free float 53.0% Net profit 102.1 158.0 54.9% 196.4 24.3% 217.6 10.8%
P/E 29.2 18.9 15.2 13.7 Price change: 1 month 5.7% P/CE 22.8 14.6 12.3 11.3 Price change: 6 month 8.8% P/BV 4.0 1.0 1.0 0.9 Price change: 12 month -28.4% EV/EBITDA 24.1 14.2 10.4 8.4 Max (52 w eek) 312.0 Dyield (%) 0.1 0.0 0.0 0.0 Min (52 w eek) 175.3
330 PBG’s 2009 first-quarter results were in line with expectations, and we do not expect the company to wow us with its earnings performance in future quarters. Even though PBG 288 ` has accumulated a backlog of orders set for completion in 2010 equivalent to 80% of
246 expected revenues, it still carries investment risks. We view the company’s subsidiary Hydrobudowa Polska as the weakest link within the PBG Group; its three stadium 204 contracts are one-time deals which are not devoid of risks (the penalty for each day of
162 delay in the completion of the National Stadium is PLN 3m), and, as competition in power PBG WIG engineering heats up, the subsidiary’s profit margins are likely to converge towards 120 average industry levels (2011 EBIT margins at ~3-3.5%). What is more, the speed with 2008-05-29 2008-09-17 2009-01-13 2009-05-06 which PBG has filled up its 2010 contract backlog is not a particularly remarkable achievement in the Polish construction industry. For these reasons, we are downgrading PBG to reduce.
First-quarter results PBG reported a Q109 revenue and gross margin in line with our estimates (variations were +1.9% and +4.2% respectively). EBIT exceeded expectations at PLN 34.8m vs. our forecasted PLN 24.9m and a consensus estimate of PLN 31.2m. We expected a PLN 7m reversal of a contract allowance by subsidiary Hydrobudowa 9, which in the end reported a gain of PLN 8.9m. At the same time, we predicted that the effects of revaluation of a provision against a euro-denominated contract would total PLN 13m, while the actual figure was reported at PLN 4.7m. All in all, the balance of provision reversals and adjustments figured to PLN 10.2m, and explains the higher-than-expected EBIT (our adjusted EBIT estimate would have been PLN 35.1m). Other finance expenses were lower than expected at PLN 4m vs. PLN 9.5m due to positive exchange differences. Income from financial-market operations came in at PLN 1.1m, and negative F/X differences were PLN 2.3m. Net interest expenses were reported at PLN 7m vs. our estimated PLN 8m. The effective tax rate was lower than expected at 9.1% (we predicted 13% due to a tax loss carryforward by Hydrobudowa 9). Minority interests were also lower than forecasted.
PBG inks National Stadium deal PBG and Hydrobudowa Polska, as 25% consortium stakeholders, signed a PLN 1.25bn contract to build the National Football Stadium in Warsaw. The contract has a 24-month deadline.
Contractors on expected National Stadium profits According to Mr. Sikora, General Manager of Alpine Construction, member of the consortium which will build the National Stadium, the net margin on the project will not exceed 2 percent.
New contracts PBG is going to build a gas compressor station in Goleniów for Gaz-System for PLN 54.9m (1.9% of 2009 revenue estimate). Further, Hydrobudowa 9 received an order for a water pumping station in Bydgoszcz for a fee equal to 70% of the total PLN 82.45m consideration (2.0% of 2009 revenue estimate for PBG).
Polimex denies interest in PBG Spokesman for PBG Jacek Krzyżaniak denied that Polimex was interested in merging with PBG through a swap of Hydrobudowa Polska shares for Polimex shares. Polimex’s CEO Konrad Jaskóła says that his company is focusing on organic growth at the moment.
Acquisition plans PBG’s three acquisition targets are Energomontaż Południe, ZRE Katowice, and Energoprojekt- Katowice (whose bylaws forbid mergers with larger firms). ZRE Katowice generated a revenue
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of PLN 260m and a net profit of PLN 10m in 2008 and sales of PLN 71m and a profit of PLN 5m in the first four months of 2009. Energoprojekt Katowice reported a PLN 2.1m profit on a PLN 80m revenue in 2008. In addition, PBG wants to take over a Slovakian design company.
Acquisition funding PBG is considering several financing options for future acquisitions. One option is to offer bonds and up to 4 million shares. The second is to issue 865,000 shares without a prospectus. Finally, PBG’s shareholders could authorize the Management Board to increase the company’s equity by 2.7 million shares within two years.
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Polimex Mostostal (Accumulate) Analyst: Maciej Stokłosa Current price: PLN 3.8 Target price: PLN 3.8 Last Recommendation: 2009-05-25 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 3 720.5 4 301.7 15.6% 4 909.0 14.1% 4 449.6 -9.4% Number of shares (m) 476.7 EBITDA 205.4 298.5 45.3% 332.5 11.4% 300.5 -9.6% MC (current price) 1 792.5 EBITDA margin 5.5% 6.9% 6.8% 6.8% EV (current price) 2 446.1 EBIT 160.4 228.1 42.2% 251.2 10.1% 201.3 -19.8% Free float 58.8% Net profit 100.1 120.1 20.0% 155.7 29.6% 129.1 -17.1%
P/E 17.9 14.9 11.5 13.9 Price change: 1 month -3.1% P/CE 12.4 9.4 7.6 7.9 Price change: 6 month 20.1% P/BV 1.8 1.7 1.4 1.3 Price change: 12 month -41.3% EV/EBITDA 11.1 7.9 7.4 7.5 Max (52 w eek) 6.4 Dyield (%) 0.5 0.3 0.0 0.0 Min (52 w eek) 2.0
7 Polimex remains one of the cheapest construction stocks traded on the WSE. The second quarter is looking good in terms of sales performance. Note that, as sales of 5.8 power-engineering services, road and railroad construction services, and building- 4.6 construction services increase, the role of the steel-frame manufacturing business as
3.4 revenue driver diminishes (the revenue contribution of this business line is expected to fall from 45% to just 18.1% this year, and 16.9% in 2010, which is shaping to be the 2.2 toughest year for steel-frame sales). As for trends in the respective revenue Polimex-Mostostal WIG 1 contributions of the other business segments, we envision them as follows: Power 2008-05-29 2008-09-17 2009-01-13 2009-05-06 Engineering: an increase from -1.8% in 2008 to 25.5% in 2009 and 35.6% in 2010; Roads and Railroads: an increase from 9.6% in 2008 to 10.0% in 2009 and 13.6% in 2010. We are revising downward our revenue forecast for 2010 to account for the upcoming change of accounting policies (revenues from road and railroad contracts will be recognized in amounts equivalent to Polimex’s consortium interests). We are reiterating an accumulate rating.
First-quarter results Polimex’s reported first-quarter sales and gross margin came in line with expectations (variations were less than 3.5%). SG&A expenses of PLN 53.9m were in line with our estimated PLN 51.8m. EBIT was also in line. Other net operating finance expenses were much lower than expected at PLN 10.4m vs. PLN 31.2m. W expected Polimex to report a PLN 20m loss on derivatives revaluation and small finance income, meanwhile the company generated an income of PLN 34.0m (we expected PLN 0.7m) thanks to positive F/X differences. Of the PLN 34m, 90% came from F/X differences, of which 50% were unrealized and may be reversed in Q209 if the EUR/PLN exchange rate decreases vs. Q109 (<4.70). Total finance expenses amounted to PLN 44.4m vs. our forecasted PLN 31.9m. Revaluation of derivatives resulted in a PLN 22m charge. The tax burden was higher than expected (PLN 10.5m tax, effective tax rate at 20.4% which compares to our forecasts of PLN 3.1m tax and an effective tax rate of 11%). Minority interests exceeded expectations (PLN 0.5m) at PLN 6.6m, among others due to strong results generated by Energomontaż Północ and positive F/X differences recorded by other subsidiaries.
First-quarter results by business segment Chemical-Plant Engineering posted Q109 results in line with expectations (PLN 172.8m sales, 11% gross margin). The Power Engineering segment reported in-line revenues (PLN 190m) and a higher-than-expected (8.5%) gross margin, which was owed to completion of old loss-making contracts, and which is not likely to recur in coming quarters. Construction generated stronger- than-expected sales and margins (our estimates were PLN 204m and 9.0% respectively). The Q109 revenue of the Steel Frames segment was in line with our expected PLN 163.2m, and the margin was ahead of our 22.5% estimate. Road and Railroad Construction reported lower-than- expected (we estimated PLN168.0m) sales due to a seasonal slowdown in business, and a weaker gross margin (we estimated 6.8%).
Polimex eyes 3.5% net margin in 2009 CEO Jaskóła expects to see a net margin of 3.1%-3.9% in Q209, and CFO Mr. Kiernożycki says that if the earnings momentum remains steady, the full-year net margin could amount to 3.5%. Polimex has accumulated a contract backlog worth PLN 7.7 billion.
MoA on 200MW combined cycle plant Polimex Mostostal signed a memorandum of understanding with ZA Tarnów, PGNiG, and Tauron Energia, concerning construction of a new combined-cycle power plant with 200MW capacity, and modernization of an existing 65MW CCPP operated by ZA Tarnów. Polimex is tasked with developing the designs and finding financing sources, and could later be hired to handle the
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construction and upgrades.
Subsidiary lands PLN 95m contract Polimex’s subsidiary signed a contract with PKP Energetyka for track modernization along railroad route E-65. The contract is worth EUR 21.7m (PLN 95m), an equivalent of 2% of Polimex’s 2009 revenue estimate. Deadline is December 2010.
Polimex to change accounting policy in 2010 Next year, Polimex is going to change its approach to accounting for revenues generated from contracts which it acquires as member of a consortium. Now, the company recognizes the total amount of expected revenue for contracts where it is the consortium leader, and books the revenues owing to the other consortium members under expenses. As of next year, it will recognize only the portion of contract revenues and expenses which are consistent with its interest in a consortium, in compliance with IAS 31. The result will be unchanged operating profits and lower revenues (under IAS 31, Polimex’s FY2008 revenue would have been PLN 240m lower), implying higher margins.
Polimex to pay PLN 4.6m dividends Polimex’s shareholders are set to vote on a PLN 4.6m earnings distribution, implying dividends of PLN 0.01/share (DY = 0.26%). The vote is scheduled for June 16th.
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Rafako (Buy) Analyst: Maciej Stokłosa Current price: PLN 8 Target price: PLN 8.7 Last Recommendation: 2009-05-14 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 1 137.5 1 125.6 -1.1% 1 062.0 -5.6% 1 121.2 5.6% Number of shares (m) 69.6 EBITDA 35.1 76.1 116.8% 68.4 -10.2% 64.2 -6.1% MC (current price) 553.3 EBITDA margin 3.1% 6.8% 6.4% 5.7% EV (current price) 339.7 EBIT 22.1 60.8 175.6% 52.6 -13.5% 48.0 -8.8% Free float 19.5% Net profit 12.2 -11.6 37.8 41.1 8.5%
P/E 45.4 14.6 13.5 Price change: 1 month 10.7% P/CE 21.9 147.6 10.3 9.7 Price change: 6 month 148.4% P/BV 1.6 1.6 1.5 1.3 Price change: 12 month -18.8% EV/EBITDA 9.3 4.0 5.0 4.7 Max (52 w eek) 9.8 Dyield (%) 0.0 0.0 0.0 0.0 Min (52 w eek) 2.8
11 Rafako reported 2009 first-quarter earnings ahead of expectations. The future outlook is
9 also looking good in spite of the economic crisis, as Polish power plants remain committed to upgrading capacity. The most advanced tender procedure is the one for a 7 new generator for the Siekierki power plant in Warsaw. There are four consortia in the
5 second stage of the procedure, including the one that comprises Rafako and Mostostal Warszawa which, we think, has a cost advantage over competition as long as EUR/PLN 3 exchange rates remain high (the other bidders are Polimex Mostostal and BWE, Foster Rafako WIG 1 Wheeler and Budimex, Alstom). Terms of reference are being prepared for the planned 2008-05-29 2008-09-17 2009-01-13 2009-05-06 new unit at the Opole power plant (900-1000 MW). Despite earlier concerns, EdF will be building a new generator at the Rybnik plant. It issued one joint RFQ for three different units around Europe; as a result, no Polish player can expect to become the general contractor. Subcontracting is a possibility, however. At present, Rafako's 2009 backlog is practically speaking full (74% for 2010). Within a month or two, the company is expected to ink an over-PLN 300m contract with the Bełchatów power plant as supplier of an FGD system. We are reiterating a buy rating on Rafako.
First-quarter results Rafako’s earnings exceeded our expectations, even though revenues undershot our forecasts. With boilers accounting for a higher share of the company's order backlog than in the preceding years, and with the coldest winter in two years, we expected fairly high sales. We projected that the company would generate 21% of its forecasted FY2009 revenues in the first quarter; in actuality, it achieved 19.7%. We do not consider this a harbinger of lower revenues in FY2009 as a whole. Gross margin and operating profitability beat our expectations. Increase in bonus and awards reserves may have pushed G&A expenses by PLN 0.4m vs. our projections; other differences are insignificant. We believe that minor movements in reserves may have inflated gross income by PLN 0.5m, which is not a material amount. All in all, Rafako’s operating results exceeded expectations. Other net operating expenses were in line, and the effective tax rate was higher than expected. As a result, while the discrepancy vs. our pre-tax profit projection was 26.9%, at the bottom line level the difference was just 10.2%.
CEO on first-quarter results The CEO of Rafako says that, even though some large projects have slowed down, sales are not going to decrease in coming quarters. Rafako hopes to add more major contracts to its PLN 2bn contract backlog in coming months. No acquisitions are planned in the near future.
FGD order Rafako signed a contract to build a flue-gas desulfurization unit for the Dolna Odra Power Plant. The PLN 258m contract has a deadline in March 2012.
Bank Millennium unhappy about Elwo contracts After Elwo was declared bankrupt, Millennium had to set aside reserves against lost receivables in the amount of PLN 50m (Elwo owes a total of PLN 150m in option-related dues to different banks, several of which will also have to make reserves). As a result, the bank is questioning whether the takeover of Elwo’s contracts and workers by Rafako was lawful (the contracts were worth PLN 350m and were mostly nominated in euros). Rafako’s CEO Mr. Różacki says that it was, and Elwo’s trustee has not found any violations so far.
Contract opportunities Rafako intends to bid for 500 MW power-generator contracts in tenders expected to be announced this year, and is preparing offers to build waste incinerators in several Polish cities. The company is also going to compete in three upcoming tenders for FGD systems.
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Trakcja Polska (Buy) Analyst: Maciej Stokłosa Current price: PLN 3.8 Target price: PLN 4.9 Last Recommendation: 2009-05-18 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 646.8 794.6 22.9% 879.4 10.7% 949.5 8.0% Number of shares (m) 160.1 EBITDA 35.6 60.9 71.0% 83.3 36.8% 70.1 -15.9% MC (current price) 613.2 EBITDA margin 5.5% 7.7% 9.5% 7.4% EV (current price) 397.7 EBIT 29.6 53.0 79.3% 66.9 26.2% 53.8 -19.6% Free float 38.8% Net profit 28.7 54.7 90.7% 65.0 18.8% 54.3 -16.4%
P/E 17.4 11.2 9.4 11.3 Price change: 1 month -10.9% P/CE 14.3 9.8 7.5 8.7 Price change: 6 month -10.1% P/BV 3.4 2.0 1.6 1.4 Price change: 12 month -30.4% EV/EBITDA 12.1 5.8 4.8 5.1 Max (52 w eek) 5.6 Dyield (%) 0.0 0.0 0.0 0.0 Min (52 w eek) 3.4
6 The first-quarter results of Trakcja Polska (TP) came in line with expectations. Going forward, the company is expected to report equally strong results thanks to cost savings 5.2 on the one hand, and to mark-to-market adjustments in euro-nominated contracts at a 4.4 very high exchange rate of 4.7 on the other. We were disappointed to hear about the rejection of TP’s bid on the “LCS Ciechanów” track renovation contract which, unless 3.6 ` successfully appealed, will have a minor impact on projected 2009 earnings (PLN 60m 2.8 deduced from revenue, PLN 3m from net income), and a bigger impact on 2010 results (a Trakcja Polska WIG drop in the ratio of acquired contracts to expected revenues from 50% to 20%). That said, 2 2008-06-02 2008-09-09 2008-12-17 2009-04-01 the national railroad operator PKP PLK is continuing its investment in rail infrastructure maintenance, and is expected to announce major new tenders in Q3 2009. We are reiterating a buy rating on Trakcja Polska as a medium-term investment. Note that the company’s contract backlog at the moment has a similar value as seen at the same time last year (the backlog for 2010 is PLN 200m).
First-quarter results The first-quarter results of Trakcja Polska came in line with our expectations and ahead of consensus estimates. Sales exceeded our forecast by PLN 9m thanks to a milder-than- expected seasonal slowdown (the track-laying industry is usually not very vigorous during winter months). Adjustments of in the values of hedging instruments to account for changes in EUR/ PLN exchange rates (4.7 in Q109 vs. 4.17 in Q408) depressed Q109 revenue by an estimated PLN 25m, and, on the other hand, the F/X trends enhanced revenues by PLN 15m (producing a net negative effect of PLN 10m). The gross margin for the first quarter exceeded our estimate by 0.6 ppts. SG&A expenses were slightly higher than predicted, as was other net operating income which contributed to better-than-expected EBIT and net-income results. Bottom-line profit was strengthened by considerable “other” finance gains, and weighed down by a higher- than-expected tax, but still topped the consensus estimate by PLN 1.4m. All in all, TP neither impressed nor disappointed us with its first-quarter performance. Our earnings forecasts for TP carry a margin of error because the company does not disclose the details of its hedging operations, which influence revenues. Note that the charges incurred on adjustments in derivative instrument values may be reversed in Q209, boosting revenues and margins (note also that the contracts were remeasured at a EUR/PLN F/X rate of 4.7 in Q109, and signed back when EUR/PLN stood at 3.5-3.8).
Rejected bid Railroad operator PKP PLK rejected TP's offer (PLN 429m) for the “LCS Ciechanów” track modernization contract on grounds of invalid guarantees. The winning offer was a PLN 40m more expensive bid by a consortium of Tchas, Leonhard Weiss, ZUE, and PNUIK Kraków. TP can appeal and correct the errors.
Earnings outlook TP made the lowest bid (PLN 429m) on the “LCS Ciechanów” track-modernization contract which, if awarded, will add PLN 80m to the company’s 2009 revenue which is very likely to reach PLN 850m. This year’s net profit according to analyst estimates could fall in the range of PLN 60m - PLN 65m. The 2009 contract portfolio is not likely to increase much more this year (the interval between a tender announcement and the award is usually several months). TP’s CEO predicts that national rail operator PKP PLK will spend the same amount this year as it did last year on construction and modernization of rail tracks, that is why his company's 2009 revenue will increase by no more than several percent over the year-ago figure, with support from EUR/PLN exchange rate trends. In the next few months, there will be a bout of new railroad tenders for contracts totaling PLN 3 billion, scheduled for completion in future years. In 2010, PKP PLK is expected to spend PLN 4.5bn (vs. PLN 3.6bn in 2009 and PLN 3.2bn in
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2008), and TP predicts that these contracts will boost the year’s revenue by 20%. The margin on the “LCS Ciechanów” deal will be less than 10%, but it is still “fair.” TP has accumulated a backlog of PLN 500m for 2010. The CEO expects profitability to remain strong in 2010 thanks to improved productivity, and says that he is not concerned about foreign competition, thanks to unfavorable EUR/PLN trends.
TP set on building a versatile construction group TP's CEO Mr. Radziwiłł plans to make a proposition to shareholders in the autumn to build a construction corporation by merging with road developers and environmental- and power- engineering companies. The company is currently bidding for track developer PRK Kraków and track sleeper manufacturer Kolbet. TP has approximately PLN 180m in cash, including PLN 110m in stock offering proceeds, and plans to spend most of it on acquisitions. The wind farm project is a joint initiative of TP and its majority shareholder Comsa to build 300 MW of wind power capacity. Mr. Radziwiłł predicts that 2009 is going to be less robust in terms of railroad contracts than 2008 because of delays.
TP branches out into wind energy Trakcja Polska purchased 25.2 million shares of Eco-Wind Construction from Precordia S.a.r.l, a firm incorporated in Luxembourg. The price of the shares was equal to their par value. TP is set to take up a further 7.5 million new shares, and increase its interest to 31.36%. TP and its parent company, Comsa, are aiming to acquire a combined 50% stake in Eco-Wind Construction. Trakcja Polska’s strategy with respect to wind farms is probably to build and then sell them. First profits from the new business will materialize toward the end of 2009.
TP eyes Kolbet TP’s CEO Mr. Radziwiłł revealed that his company is negotiating a takeover of a 60% stake in WPS Kolbet, manufacturer of prestressed concrete sleepers for railroad tracks with a 50% market share. NFI Progress bought the Kolbet shares from Polish Capital Investments in April for PLN 36m. The price has gone up since because the manufacturer has recently completed a PLN 55m leveraged acquisition of a sleeper factory (WPS Goczałków). In 2008, Kolbet generated a revenue of PLN 35m and a net profit of PLN 6.5m, and its earnings were influenced by one-time events such as a property sale for PLN 6m and costs of debt taken out to purchase WPC Goczałków (PLN 3m), which posted sales of PLN 38.7m and a profit of PLN 5.6m in 2008.
PLN 35.2m contract Trakcja Polska signed a contract for renovation and modernization of a stretch of the E-30/CE- 30 railway line worth PLN 35.2m (4% of 2009 revenue estimate). The contract has a deadline in 18 months.
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Ulma Construccion Polska (Accumulate) Analyst: Maciej Stokłosa Current price: PLN 41.3 Target price: PLN 40.2 Last Recommendation: 2009-05-26 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 222.6 241.5 8.5% 182.3 -24.5% 190.0 4.2% Number of shares (m) 5.3 EBITDA 108.4 103.4 -4.7% 72.9 -29.5% 76.6 5.0% MC (current price) 217.0 EBITDA margin 48.7% 42.8% 40.0% 40.3% EV (current price) 340.9 EBIT 66.6 40.9 -38.5% 17.8 -56.4% 22.1 23.9% Free float 24.5% Net profit 50.9 25.9 -49.2% 4.7 -81.6% 9.8 105.6%
P/E 4.3 8.4 45.7 22.2 Price change: 1 month -16.6% P/CE 2.3 2.5 3.6 3.4 Price change: 6 month -30.0% P/BV 0.9 0.8 0.8 0.8 Price change: 12 month -82.8% EV/EBITDA 2.6 3.8 4.7 4.1 Max (52 w eek) 240.0 Dyield (%) 0.0 0.0 0.0 0.0 Min (52 w eek) 27.0
250 Ulma’s earnings in Q1 2009 missed our expectations, but not by much considering the nature of the company's business (90% of the cost of sales is fixed and a slight change 200 in revenues has a big impact on net income). Let us point out that despite its net loss, 150 Ulma generated an EBITDA of PLN 15.6m and positive cash flows of PLN 15.1m. The high EBITDA is a consequence of the nature of Ulma's business (renting assets with an 100 average lifespan of 8 years, which generate high depreciation charges). We believe that
50 although rental rates for formworks may continue sliding down in the next few months,
Ulma WIG they are not far from the bottom. We do not expect losses in the income statement in the 0 upcoming quarters. Due to the timing of Ulma’s involvement in the construction cycle 2008-05-29 2008-09-17 2009-01-13 2009-05-06 (early stages of construction, and the number of projects being launched is low), FY2009 will be the toughest year for the company. The situation will improve in FY2010, but we need to wait until FY2011 to see attractive earnings. Ulma’s cycle is out of phase with that of the general contractors. In FY2011, when general contractors’ margins will be under pressure due to the expansion of costs in the industry, Ulma will be improving its earnings. We are reiterating an accumulate rating.
First-quarter results Ulma’s Q1 2009 earnings disappointed. While revenues were on target, both the cost of sales and SG&A expenses were higher than expected (by PLN 1.5m and PLN 0.7m, respectively). The former discrepancy stems from a difference in the estimation of the fixed cost of sales. The resulting difference in operating earnings is PLN 1.6m. There were no significant differences in other finance expenses. Net loss was PLN 3.1m, i.e. PLN 1.1m more than expected. EBITDA was PLN 15.6m (-8.8% vs. our forecast). Positive cash flows amounted to PLN 15.1m. Ulma has changed its segment-by-segment earnings breakdown. It now only distinguishes construction services and construction material sales. Geographical segments are no longer shown, which we believe is due to the low revenues generated in Ukraine and Kazakhstan. In Q1 2009, the company generated PLN 34.2m revenue from construction services (formwork rentals), and an operating income of PLN 1.4m. Construction material sales (formwork system and other materials) generated PLN 6.1m in revenues and operating profit of PLN 0.6m, which we believe was mostly driven by the sales of old, largely depreciated formwork systems at a price above their book value. To sum up, we believe the low revenues are a consequence of such factors as: weather (colder temperatures), lower rental rates, and loss of export revenue. We believe the cost of sales sold is 90% fixed; decline in sales generated losses.
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Unibep (Hold) Analyst: Maciej Stokłosa Current price: PLN 5 Target price: PLN 5.3 Last Recommendation: 2009-05-26 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 407.5 502.9 23.4% 545.7 8.5% 523.8 -4.0% Number of shares (m) 33.9 EBITDA 16.7 33.4 99.6% 28.1 -15.9% 18.3 -35.0% MC (current price) 169.6 EBITDA margin 4.1% 6.6% 5.1% 3.5% EV (current price) 191.7 EBIT 15.8 31.8 101.3% 23.6 -25.5% 13.8 -41.8% Free float 23.0% Net profit 11.7 27.6 135.3% 18.1 -34.5% 12.4 -31.3%
P/E 11.6 6.1 9.4 13.6 Price change: 1 month -14.8% P/CE 10.7 5.8 7.5 10.0 Price change: 6 month -23.1% P/BV 8.2 1.6 1.4 1.3 Price change: 12 month -53.2% EV/EBITDA 7.3 3.4 6.8 7.2 Max (52 w eek) 11.0 Dyield (%) 0.3 0.0 0.0 0.0 Min (52 w eek) 3.0
12 Unibep’s objective of achieving PLN 1 billion in sales in 2011 is both ambitious as it is risky. To accomplish its goals, the company has to take on construction projects with 10 which it has no previous experience (technology risks), and must boost its contract hit
8 rate by offering low prices (an approach which cannot succeed unless prices of building materials decrease). The Management’s determination to meet the strategic objectives is 6 ` reflected in the signing of two conditional contracts, one for an office building in
4 Warsaw, and the other for a residential complex in Moscow, Russia, both of which are Unibep WIG waiting for the respective customers to secure financing (Unibep’s fee in both cases is 2 quoted in euros). Such arrangements expose Unibep to foreign-exchange risks, and 2008-06-16 2008-09-23 2009-01-07 2009-04-17 possible losses if the zloty strengthens against the euro while the contracts are in progress. Unibep shares are relatively cheap, but, because of their limited liquidity and the contractual risks described above, we would not encourage investors to increase positions in the stock. We are reiterating a hold rating. We see potential to increase our earnings forecasts for Unibep if the company can secure new lucrative contracts.
First-quarter results Unibep’s first-quarter results exceeded expectations. Revenues fell slightly short of estimates, but the gross margin was better than forecasted. The margin on domestic construction services was particularly strong (16.9%), probably thanks to major completions. Margins on export sales and real estate were low. The segment of production also posted an impressive gross profit, though it was probably owed to non-recurring reserve reversals. SG&A expenses were nearly PLN 0.8m lower than estimated and PLN 0.4m lower than in Q308, resulting in an operating profit PLN 1m ahead of estimates. The company had a high other net operating income. Pre-tax income was PLN 5.6m, with net income at PLN 3.7m (PLN 1.1m more than we projected). Summing up, Unibep posted strong earnings in the first quarter, though this strength was mainly achieved on old contracts acquired during the building boom.
PLN 0.10/share dividend proposal Unibep’s Management are proposing distribution of PLN 0.10 per share as dividends to shareholders. The shareholders are set to vote during a special meeting on June 18th.
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Real Estate Development Housing completions vs. pre-sales in Q109 Dom Development sold 106 dwellings in Q109, and recorded 20 cancellations - numbers which are in line with the averages recorded in preceding quarters. Polnord sold 78 units (not taking into account its interests in different joint housing ventures) and recorded 23 cancellations, and J.W. Construction, which does not reveal its cancellation rates, sold 120 flats in the period.
Szybko.pl on home prices in April The average price of one square meter of living space in Warsaw was over 6% lower in April than a year earlier. For comparison, prices fell 12% in Krakow, 9% in Katowice, 8.2% in Wrocław, 7% in Poznań, Toruń, and Łódź, and only 1.5% in Gdynia. There has been a change in the composition of listings in the past 12 months: in Warsaw, over 35% of all sellers are asking less than PLN 8000 per square meter (up from 16% a year ago). Similar trends are observed in other cities: almost 25% of listings are less than PLN 6000 / sqm compared to 5.7% a year ago, and one-third of sellers in Wrocław are asking less than PLN 6000 per sqm). According to a Szybko.pl analyst, housing developers were the first to reduce prices because of lower demand, while existing homeowners are much less willing to offer discounts.
Gant plans new projects According to analyses by Wynajem.pl and CEE Property Group, rental rates in major Polish cities continued to fall in February and March. The trends in average per-square meter rent were as follows: Krakow: PLN 35 in March down from PLN 36 in February and PLN 38 in January; Poznań: PLN 31 in March down from PLN 33 in February and PLN 35 in January; Tricity: m/m decline to PLN 33 from PLN 35 in February and January, Warsaw: m/m decline to PLN 47 from PLN 49 and PLN 51 respectively; Wrocław: m/m decline to PLN 38 from PLN 40 in February and PLN 41 in January. Rental rates decrease and the supply of flats for rent increases. Price trends in coming months will be shaped by a slowing economy and an increase in demand generated by students coming back to after the summer break.
Retail space rental rates still high According to the CEO of clothing manufacturer Redan, shopping center owners are showing more sympathy toward retailers lately. They are willing to acknowledge that rent prices can be a problem, but are much less keen to actually offer reduced prices. For example, Echo Investment and GTC consider each case separately, although the latter’s price flexibility is limited by its euro debt. However, GTC it is not worried about losing tenants because its shopping centers are positioned in attractive locations. According to Mr. Jerzy Mazgaj, CEO of the gourmet grocery chain Alma Market and owner of luxury-brand distributor Paradise Group, there is absolutely no willingness to budge on the part of developers. Sports gear chain Intersport has been able to negotiate lower rent in two out of its 26 locations, and lifestyle retailer NFI Empik has been in negotiations with lessors for months.
Hiatus in commercial property deals Only four commercial property deals for a total of EUR 100m have been completed in Poland so far this year, all of them based on contracts executed last year. While 2008 saw transactions worth nearly EUR 2 billion, real-estate advisor ProDevelopment believes that this year’s sales may reach EUR 500m at best. Cushman & Wakefield predicts that small and mid-sized commercial properties (up to EUR 50m-60m) will be in greatest demand this year, and that buyers will mainly look at prices, but also at vacancy rates, other tenants, and durations of the lease agreements. Analysts with Colliers International foresee a greater number of forced sales at cheap prices, and sale-and-leaseback moves by companies seeking to untie cash. Investment in Polish commercial real estate still comes mostly from open-end funds from Germany, Scandinavia, and increasingly also investors from Canada and Saudi Arabia. Polish enterprises like insurance companies and pension funds are not allowed to invest in property.
Gant Development Gant plans new projects Gant is going to start at least five new developments this year to enhance its housing stock. The developer is also going to resume work on projects in Poznań and Opole, and take projects over from other firms, including two sites in Krakow (6500 sqm in 130 flats and 20000 sqm in 400 flats), and one office building project in Wrocław (20000 sqm). Funding will be provided by an in- kind stock contribution at a tentative price equal to the book value. Each of these projects is scheduled for at least a partial completion some time next year. The number of completions slated for 2009 is 1000, of which 250 were booked in Q109 results. According to the CEO, the bulk of the company’s short-term debt, which stood at PLN 150m at 31 March 2009, are investment loans secured by income from home sales.
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Gant looks for investors, faces slower sales Gant is talking to private equity funds from Germany, the Netherlands, and UK, as well as the two Polish investment funds which own its shares, about financial involvement in future real- estate projects. The developer expected to sell about 50 dwellings in May (compared to 68 in April, 66 in March, 60 in February, and 45 in January). Sales in coming quarters are not going to increase because of a shrinking housing stock. The 2009 sales target is 700 units. Gant is preparing to take over two housing developments in Krakow and one office development in Wrocław in exchange for its shares.
LC Corp LC Corp set to start next stage of residential complex LC Corp plans to start stage three of the residential complex “Przy Promenadzie” in Warsaw, which involves 85 small (1-2 room) flats of the type that sell best in the current economy, which 80% of which are eligible for government subsidies under the "Rodzina na Swoim" program (1 sqm costs PLN 7250). LC Corp sold 14 dwellings in April, and an average 10 units per month during the first quarter. The company’s CEO is a pessimist when it comes to the future of the housing market. Many projects are on hold, and buyer cancellations are adding to the unsold housing stock. In June, LC Corp is due to pay a PLN 20m loan.
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Dom Development (Sell) Analyst: Maciej Stokłosa Current price: PLN 40.4 Target price: PLN 21.9 Last Recommendation: 2009-05-06 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 878.8 698.2 -20.6% 605.5 -13.3% 556.8 -8.1% Number of shares (m) 24.6 EBITDA 243.2 168.1 -30.9% 122.1 -27.4% 34.4 -71.8% MC (current price) 992.2 EBITDA margin 27.7% 24.1% 20.2% 6.2% EV (current price) 1 061.8 EBIT 241.0 165.7 -31.2% 119.6 -27.8% 32.0 -73.3% Free float 20.0% Net profit 200.6 136.9 -31.7% 106.5 -22.2% 49.8 -53.2%
P/E 4.9 7.2 9.3 19.9 Price change: 1 month 24.5% P/CE 4.9 7.1 9.1 19.0 Price change: 6 month 133.5% P/BV 1.4 1.3 1.1 1.0 Price change: 12 month -30.3% EV/EBITDA 4.1 7.5 8.7 17.3 Max (52 w eek) 58.2 Dyield (%) 0.0 5.0 0.0 0.0 Min (52 w eek) 14.8
60 From a business standpoint, Dom Development is a successful company with relatively low debt, a strong asset portfolio (affordable housing), and a sales strategy which 49 prevents cancellations. The problem is that its housing stock is worth less according to 38 our appraisal than would follow from market valuations. For example, the land bank
27 which DD built using SPO proceeds was, in many cases, acquired at overpriced rates which will affect profitability from 2011 onward. Even if the book value of the land bank 16 were equal to the market value, our valuation model (NAV) would not yield a rating better Dom Development WIG 5 than sell. The summer vacation period is going to be marked by weak pre-sales because 2008-05-29 2008-09-17 2009-01-13 2009-05-06 of seasonally fewer deals, DD’s reluctance to reduce prices, and the fact that the values of its housing stock in remote districts of Warsaw are converging to levels seen in more upmarket locations. Summing up, we are rating DD as a sell based on the value of its assets and expected sales erosion.
First-quarter results Dom Development’s earnings for Q1 2009 are by and large in line with expectations. We reiterate our view that after the adoption of IAS 18, the profit and loss statement loses importance, while the valuation of the developer’s assets becomes the thing to watch. Sales revenues are directly impacted by completed homes delivered to customers. The company did not disclose its estimates of the number of homes delivered in individual projects, which is the source of the discrepancies. The gross margin was in line with expectations, which we believe confirms our estimates of project costs and selling prices. We are pleased by the drop in G&A expenses, which exceeded our expectations (PLN 10.6m vs. PLN 15.1m in Q4 2008 and PLN 13.2m expected). Selling costs are by and large in line with our forecast (PLN 6.2m vs. PLN 6.0m). Other financing expenses were slightly lower than expected (PLN 0.1m vs. PLN 0.5m). As a result, Q1 operating profit exceeded our expectations by 13.8%. A difference has also appeared in the category "other net finance gains/losses". We expected PLN 1.9m in other net finance gains, but the company reported losses of PLN 1.7m. These are unimpressive results. We ignore revenues or profit on sales, because in line with IAS 18, these merely reproduce the results recorded in previous quarters. What we do like are the lower-than-expected G&A expenses. These were reduced faster than expected, but it has already been factored into our forecasts for the ensuing quarters (we project G&A expenses at PLN 10.1 per quarter). The company recognized no write-downs on land value, which we believe is largely irrelevant (quarterly earnings are not audited, which means that the company has a lot of leeway as far as write-downs are concerned). According to our valuation, the company’s assets are worth much less than its current market cap. We would like to point out the slight increase in net debt (from PLN 272.1m at the end of Q4 2008 to PLN 314m at the end of Q1 2009). We believe this is due to the financing needs generated by ongoing projects and it constitutes no threat for the future.
Dividends Dom Development is recommending payment of PLN 19.6m (PLN 0.8/share, dividend yield = 2.0%) as dividends to shareholders.
Back to SPO plans DD’s shareholders are expected to authorize the Management Board to issue 1.7 million shares, including 0.7m for purposes of the corporate incentive plan, and the rest to be offered to the public. According to VP Mr. Zalewski, DD has an ample cash surplus, but it is good to have some reserves. Even though sales of new homes have started to pick up, DD will probably not start new projects earlier than in the summer.
CEO’s outlook on housing DD’s CEO does not expect an improvement in earnings results in coming quarters as a result of
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an increased number of affordable dwellings set for completion in the near future. DD sold 106 units and recorded 20 cancellations in Q109, April sales were reportedly better than in preceding months. The CEO predicts that demand in coming months will remain weak, and that the number of cancellations will be high. A sustained recovery in housing is not possible without easy access to mortgage loans.
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J.W. Construction (Reduce) Analyst: Maciej Stokłosa Current price: PLN 11.5 Target price: PLN 10.3 Last Recommendation: 2009-06-04 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 781.1 721.4 -7.6% 813.7 12.8% 792.4 -2.6% Number of shares (m) 54.7 EBITDA 211.9 158.5 -25.2% 199.6 25.9% 138.8 -30.4% MC (current price) 630.1 EBITDA margin 27.1% 22.0% 24.5% 17.5% EV (current price) 842.5 EBIT 198.6 141.1 -28.9% 180.0 27.6% 118.7 -34.0% Free float 18.0% Net profit 148.1 100.9 -31.9% 148.0 46.7% 120.8 -18.4%
P/E 4.1 6.2 4.3 5.2 Price change: 1 month 0.5% P/CE 3.8 5.3 3.8 4.5 Price change: 6 month 157.7% P/BV 1.1 1.0 0.8 0.7 Price change: 12 month -53.4% EV/EBITDA 5.3 8.0 4.2 1.1 Max (52 w eek) 24.7 Dyield (%) 0.0 0.0 0.0 0.0 Min (52 w eek) 4.0
25 The discount at which J.W. Construction (JWC) was trading versus peers has disappeared. In the near future, the developer could see a large number of cancellations 20 by customers who had booked flats in the “Górczewska Park” project in Warsaw (JWC 15 uses the “10/90” payment system in which buyers make a 10% downpayment and pay
10 ` the rest after their home is complete) which is slated for completion in July. To prevent that, the developer might have to slash prices. Note that the value of JWC’s land bank as 5 percentage of its NAV is the lowest among the developers in our coverage universe, J.W. Construction WIG 0 which means that the company will be most severely affected if home prices take a 2008-05-29 2008-09-17 2009-01-13 2009-05-06 stronger downward turn than currently predicted. JWC shares have overshot out price target, and this fact, combined with an expected slowdown in the housing market during the summer (weaker sales leading to price reductions) and the company’s large short- term debt, prompted us to downgrade the stock to reduce.
First-quarter results JWC reported Q109 revenues ahead of our forecast and the consensus estimate. The variation stems from a lack of reliable data as to housing sales in the quarter. The gross margin missed expectations (31%) at 26% (or 26.9% after adjustment for non-housing operations). To JWC’s credit, SG&A expenses were 22.6% lower than expected. The result on “other” operations was PLN 2m better than expected. EBIT fell 9.1% (or PLN 5m) short of estimate, while other finance expenses were PLN 5m higher. The Q109 bottom-line income came in at PLN 35.5m, and missed our estimate by nearly PLN 9m, and the consensus estimate by PLN 2.1m. A presentation of earnings results in accordance with IAS 18 has little value from the standpoint of investment decisions. However, reported first-quarter results result in a need to revise downward the margins budgeted for some of JWC’s developments. These revisions are offset by reduced SG&A expenses. Q109 saw a significant drop in the revenues and profits of the hotel business as well as the transportation business, both of which make marginal contributions to consolidated earnings.
JWC aims to sell 700-800 dwellings in 2009 JWC has a plan to sell between 700 and 800 flats this year (this estimate does not account for cancellations), and complete several acquisitions.
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Polnord (Hold) Analyst: Maciej Stokłosa Current price: PLN 34.8 Target price: PLN 35 Last Recommendation: 2009-06-04 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 131.5 391.1 197.4% 381.5 -2.5% 239.0 -37.4% Number of shares (m) 18.1 EBITDA 33.0 123.9 275.2% 115.3 -6.9% 17.2 -85.1% MC (current price) 629.5 EBITDA margin 25.1% 31.7% 30.2% 7.2% EV (current price) 992.2 EBIT 31.4 121.9 288.3% 113.3 -7.1% 15.2 -86.6% Free float 36.0% Net profit 25.1 90.5 260.5% 97.5 7.8% 28.4 -70.8%
P/E 19.6 7.0 6.5 22.1 Price change: 1 month 5.8% P/CE 18.4 6.8 6.3 20.7 Price change: 6 month 48.2% P/BV 0.6 0.6 0.6 0.6 Price change: 12 month -59.8% EV/EBITDA 23.6 9.9 8.6 41.9 Max (52 w eek) 90.1 Dyield (%) 0.0 0.0 0.0 0.0 Min (52 w eek) 19.8
95 Polnord remains the cheapest of the developers in our coverage universe, but its upside potential is largely gone, prompting a downgrade to hold. The company faces equity 77 dilution if its main shareholder Prokom Investments opts to deliver on its capital- 59 injection commitment by acquiring a new issue of its subsidiary’s shares. Polnord recently completed a secondary stock offering, and plans to use the proceeds to buy 41 cheap land which is currently in abundant supply, though we would wait a bit longer to 23 see if prices do not go down even further. The upcoming summer vacation season is Polnord WIG going to be challenging for real-estate developers (seasonal slowdown in sales forcing 5 2008-05-29 2008-09-17 2009-01-13 2009-05-06 price cuts).
First-quarter results One-offs resulted in significant variations between the reported and forecasted Q1 2009 results of Polnord. Revenues were weak due to a small number of completions in the quarter (40 dwellings after adjustment for joint-venture interests). The reported gross profit figure missed our estimate by a small margin of 10%. The gross margin was slightly lower than expected because we underestimated service sales. SG&A expenses were PLN 1.4m lower than predicted. Revaluation of land holdings produced a result PLN 3.9m higher than we predicted. The company dropped plans to build a four-star hotel and sold the site, resulting in a value adjustment. Polnord recognized other operating income in the amount of PLN 2.7m, of which PLN 2.2m was the amount of a penalty which the company managed to collect from a contractor (the actual liquidated damages were PLN 10.8m, but Polnord had to write an unrecoverable PLN 8.6m off). In addition to our expected PLN 4.4m charge, the company recognized a PLN 2.1m finance loss and a finance gain of PLN 5.4m of an undisclosed origin, resulting in “other net finance income” of PLN 1.3m. After all this, first-quarter net income came in at PLN 11.9m (vs. our estimate of PLN 4.0m and consensus estimate of PLN 3.6m). All in all, Polnord’s Q109 results were in line, except for lower-than-expected SG&A expenses. Adoption of IAS 18 accounting reduced the relevance of the income statement as a factor in investment decisions. Few dwellings completed in the quarter, combined with ongoing developments, led to an increase in net debt by PLN 55m. Going forward, debt growth will slow down thanks to a larger number of completions scheduled for upcoming quarters.
Pol-Aqua leases office space Pol-Aqua and Polnord signed a preliminary lease agreement for offices in a building which Polnord is set to build in Warsaw’s Wilanów district. Pol-Aqua is leasing the entire building (7299 square meters) plus 160 parking spaces for PLN 75 / sqm. Rent will be adjusted for inflation. The lease period is going to be 10 years.
Successful private placement to be followed by more stock offerings Polnord sold 1.5 million shares for PLN 28 apiece, raking in a total PLN 42m. The proceeds will be used to purchase cheap sites in attractive locations. The company is also considering more stock offerings in the future (capped at PLN 18.9m).
Debt offering Polnord signed an agreement with BRE Bank which will manage its PLN 50m bond offering. The company may issue unsecured and secured bearer bonds, and BRE Bank undertook to buy bonds which remain unpurchased between May 6th 2009 and May 5th 2010 up to the amount of PLN 35m. The latest agreement replaces a May 2008 agreement with BRE Bank and PKO BP concerning a PLN 400m bond offering.
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Retail
Emperia Holding (Buy) Analyst: Kamil Kliszcz Current price: PLN 56.5 Target price: PLN 70.3 Last Recommendation: 2008-11-28 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 4 479.6 5 263.1 17.5% 5 668.9 7.7% 6 046.3 6.7% Number of shares (m) 15.1 EBITDA 176.2 152.3 -13.5% 194.2 27.5% 220.5 13.6% MC (current price) 854.0 EBITDA margin 3.9% 2.9% 3.4% 3.6% EV (current price) 1 130.1 EBIT 136.2 94.9 -30.3% 128.8 35.7% 142.2 10.4% Free float 71.0% Net profit 88.4 60.1 -32.0% 92.0 53.1% 102.4 11.2%
P/E 9.7 14.2 9.3 8.3 Price change: 1 month 21.1% P/CE 6.7 7.3 5.4 4.7 Price change: 6 month 6.6% P/BV 1.2 1.1 1.1 1.0 Price change: 12 month -55.9% EV/EBITDA 5.5 7.4 5.8 5.1 Max (52 w eek) 134.6 Dyield (%) 3.1 1.6 3.0 4.3 Min (52 w eek) 40.5
140 As predicted, sentiment toward Emperia shares, which soured after weak first-quarter results, rebounded in May, lifting the share price by 15% (the biggest gain of all FMCG 116 companies; Bomi +14%, Eurocash -0.1%, Alma -18.5%). In future quarters, we expect 92 Emperia to consistently improve financial results as the burden of expenses incurred by
68 new distribution centers, and the ongoing integration, decreases. We are reiterating a positive rating on Emperia. 44 Emperia Holding WIG 20 First quarter ahead of expectations 2008-05-29 2008-09-17 2009-01-13 2009-05-06 Q109 sales generated by Emperia’s Retail business fell 10% short of our estimate, but EBITDA was nearly 20% ahead (EBIDTA margin at 2.5% vs. expected 0.5%). This result was partly offset by weaker-than-expected performance of Wholesale, which was still feeling the effects of newly launched distribution centers (EBITDA margin at 1.2% vs. expected 2% and 2.4% posted in Q408). Consolidated EBIT exceeded expectations thanks to lower-than-expected D&A charges (PLN 14.7m vs. expected PLN 19.9m and PLN 18.8m posted in Q408) booked by “other” operations, suggesting that the large charges posted a year earlier were a one-off. With lower-than-expected finance expenses, the first-quarter bottom-line result was PLN 2.6m in the black, topping our prediction of a small loss.
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Eurocash (Hold) Analyst: Kamil Kliszcz Current price: PLN 10.3 Target price: PLN 9.9 Last Recommendation: 2009-05-06 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 4 729.4 6 121.7 29.4% 7 399.4 20.9% 7 877.6 6.5% Number of shares (m) 130.4 EBITDA 121.9 158.4 30.0% 186.2 17.5% 205.5 10.4% MC (current price) 1 337.1 EBITDA margin 2.6% 2.6% 2.5% 2.6% EV (current price) 1 193.9 EBIT 85.8 115.5 34.7% 127.3 10.2% 142.1 11.6% Free float 30.0% Net profit 58.9 78.3 33.0% 105.1 34.3% 117.2 11.5%
P/E 22.2 17.1 12.7 11.4 Price change: 1 month 4.5% P/CE 13.8 11.0 8.2 7.4 Price change: 6 month 0.4% P/BV 5.6 4.7 3.5 3.0 Price change: 12 month -20.5% EV/EBITDA 10.3 8.0 6.4 5.4 Max (52 w eek) 13.0 Dyield (%) 2.2 0.9 3.0 3.9 Min (52 w eek) 7.6
14 Eurocash posted strong but in-line first-quarter results which failed to give a boost to its share price in May. June looks similarly uneventful, meaning that the Eurocash stock will 12 probably move in line with the broad market during the month. 10
8 Q109 in line with expectations As usual, Eurocash did not disappoint the market, generating very high earnings (revenues and 6 profits increased by 20% y/y). Of course, the fact that McLane’s sales (PLN 250m) were Eurocash WIG
4 consolidated is relevant in this context (it was bought in Q2 2008); given the decline in cigarette 2008-05-29 2008-09-17 2009-01-13 2009-05-06 sales (-21%), such fast revenue growth cannot be expected in the ensuing quarters. The Delikatesy Centrum network is still growing very fast, although with the growing base and deterioration of macroeconomic circumstances, its growth rates are already down (+31% vs. +36% in Q4 2008 and +37% in Q3 2008). DC’s like-for-like growth was 6% vs. 22% a year ago (LFL growth for cash&carry was 4.7%). The optimization of logistics and the integration of McLane made it possible to keep EBITDA margin flat y/y, and we expect this will be the case in the ensuing quarters as well. The slight discrepancy at the net level is a consequence of slightly higher finance expenses. One negative surprise is the negative operating cash flow (-PLN 36m vs. PLN 24.6m a year ago), and the decrease in net cash by PLN 48m, to PLN 27m. This should improve in the upcoming quarters, however.
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Others
Mondi (Hold) Analyst: Michał Marczak Current price: PLN 49.5 Target price: PLN 54.2 Last Recommendation: 2009-04-02 (PLN m) 2007 2008 change 2009F change 2010F change Basic data (PLN m) Revenues 1 610.4 1 406.3 -12.7% 1 594.6 13.4% 2 137.5 34.0% Number of shares (m) 50.0 EBITDA 400.0 305.5 -23.6% 320.7 5.0% 505.9 57.7% MC (current price) 2 475.0 EBITDA margin 24.8% 21.7% 20.1% 23.7% EV (current price) 3 134.3 EBIT 295.7 194.7 -34.1% 182.8 -6.1% 331.9 81.6% Free float 19.0% Net profit 246.2 141.2 -42.6% 130.7 -7.4% 254.6 94.7%
P/E 10.1 17.5 18.9 9.7 Price change: 1 month 6.5% P/CE 7.1 9.8 9.2 5.8 Price change: 6 month 20.7% P/BV 2.5 2.3 2.0 1.7 Price change: 12 month -1.1% EV/EBITDA 6.2 9.1 9.8 5.8 Max (52 w eek) 61.0 Dyield (%) 10.9 0.0 0.0 2.6 Min (52 w eek) 36.3
65 European prices of paper are stabilizing, and are likely to start climbing in the second half of the year. Investors were disappointed by weak first-quarter results which, 56 however, were mainly affected by one-time hedging losses. We expect much better 47 performance in Q209, followed by an increase in production output and sales enabled
38 by the launch of a new paper machine in Q409. We are reiterating a neutral rating on Mondi. 29 Mondi WIG 20 Mondi posts dismal first-quarter results 2008-05-29 2008-09-17 2009-01-13 2009-05-06 Mondi’s earnings results for the first quarter of 2009 fell short of our estimates and analysts’ expectations. The main reason behind weaker-than-expected figures were hedging transactions, which generated a PLN 63.88m loss (we expected a charge half the size). On the upside, the fact that the hedging losses were recognized in Q109 accounts means less pressure on Q209 numbers. Sales volumes increased 4.8% over Q408 level, beating our expectations of a 10% drop driven by the slowdown observed in European markets. Mondi sold off inventories in fulfillment of deliveries postponed from the end-of-year season in 2008, but the company notes in its Q109 release that the paper was sold at prices below FOEX levels. Production was 5% lower. EBIT was supported by lower prices of recycled paper (-33%) and wood (-2%). We are reiterating a hold rating on Mondi. Second-quarter results will be shaped by lower hedging losses on the one hand, and lower paper prices on the other hand. Production volumes should gradually increase, and the company’s bottom-line profits should go back to the PLN 35m-40m range.
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Michał Marczak tel. (+48 22) 697 47 38 Managing Director Head of Research [email protected] Strategy, Telco, Mining, Metals, Media
Research Department: Sales and Trading :
Marta Jeżewska tel. (+48 22) 697 47 37 Piotr Dudziński tel. (+48 22) 697 48 22 Deputy Director Director [email protected] [email protected] Banks Marzena Łempicka-Wilim tel. (+48 22) 697 48 95 Deputy Director Analysts: [email protected]
Kamil Kliszcz tel. (+48 22) 697 47 06 Traders: [email protected]
Fuels, Chemicals, Retail Emil Onyszczuk tel. (+48 22) 697 49 63
[email protected] Piotr Grzybowski tel. (+48 22) 697 47 17
[email protected] Grzegorz Stępien tel. (+48 22) 697 48 62 IT, Media [email protected]
Maciej Stokłosa tel. (+48 22) 697 47 41 Tomasz Dudź tel. (+48 22) 697 49 68 [email protected] [email protected] Construction, Developers
Michał Jakubowski tel. (+48 22) 697 47 44
Tomasz Jakubiec tel. (+48 22) 697 47 31 [email protected]
Grzegorz Strublewski tel. (+48 22) 697 48 76 [email protected]
"Private Broker"
Jacek Szczepański tel. (+48 22) 697 48 26 Director [email protected]
Paweł Szczepanik tel. (+48 22) 697 49 47 Sales [email protected]
Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/49 00-950 Warszawa www.dibre.com.pl
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Previous ratings issued for stocks re-rated as of the date of this Monthly Report:
Elektrobudowa Rating Buy Buy Buy Accumulate Accumulate Date issued 2008-09-05 2008-11-25 2009-03-09 2009-05-06 2009-05-20 Price on rating day 194.00 160.00 131.00 148.10 148.80 WIG on rating day 41263.03 26964.31 22948.51 29777.06 30312.26
Erbud Rating Buy Buy Hold Hold Date issued 2008-11-25 2009-03-25 2009-05-06 2009-05-26 Price on rating day 21.60 22.40 32.00 35.60 WIG on rating day 26964.31 24443.51 29777.06 29197.11
J. W. Construction Rating Buy Hold Date issued 2009-03-25 2009-05-06 Price on rating day 5.95 11.46 WIG on rating day 24443.51 29777.06
KGHM Rating Buy Accumulate Date issued 2008-11-27 2009-04-02 Price on rating day 27.30 46.45 WIG on rating day 27246.38 24145.69
Mostostal Warszawa Rating Buy Buy Buy Buy Date issued 2008-11-25 2009-02-20 2009-03-04 2009-05-22 Price on rating day 47.60 39.00 39.50 54.80 WIG on rating day 26964.31 22199.49 21999.05 29681.36
PBG Rating Hold Accumulate Accumulate Accumulate Hold Hold Date issued 2008-09-12 2008-11-05 2008-11-17 2008-11-25 2009-03-09 2009-05-13 Price on rating day 246.90 200.00 191.20 197.50 207.00 208.30 WIG on rating day 39572.33 29600.54 27110.59 26964.31 22948.51 30162.14
Polnord Rating Buy Accumulate Date issued 2009-03-25 2009-05-06 Price on rating day 25.40 32.85 WIG on rating day 24443.51 29777.06
TVN Rating Hold Buy Date issued 2008-11-12 2009-02-04 Price on rating day 13.26 9.38 WIG on rating day 28819.98 23009.76
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BREBRE BankBank SecuritiesSecurities Monthly Report
List of abbreviations and ratios contained in the report. EV – net debt + market value (EV – economic value) EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation PBA – Profit on Banking Activity P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales
Recommendations of BRE Bank Securities S.A. A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from –5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months.
The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The present report was prepared with due care and attention, observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which BRE Bank Securities S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, BRE Bank Securities S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts.
This document does not constitute an offer or invitation to subscribe for or purchase any financial instruments and neither this docu- ment nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. This document nor any copy hereof is not to be distributed directly or indirectly in the United States, Australia, Canada or Japan. Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation.
Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible. BRE Bank Securities S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any dam- ages incurred as a result of investment decisions taken on the basis of the present report.
It is possible that BRE Bank Securities S.A. renders, will render or in the past has rendered services for companies and other enti- ties mentioned in the present report.
BRE Bank Securities S.A., its shareholders and employees may hold long or short positions in the issuers’ shares or other financial instruments related to the issuers’ shares. BRE Bank Securities S.A., its affiliates and/or clients may conduct or may have con- ducted transactions for their own account or for account of another with respect to the financial instruments mentioned in this report or related investments before the recipient has received this report.
Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written agreement of BRE Bank Securities S.A. Recommendations are addressed to all Clients of BRE Bank Securities S.A. The activity of BRE Bank Securities S.A. is subject to the supervision of the Polish Financial Supervision Commission.
BRE Bank Securities S.A. serves as animator in relation to the shares of the following companies: Certyfikaty Skarbiec Nieruchomo- ści, Erbud, Es-System, Macrologic, Magellan, Mieszko, Mondi, Monnari Trade, Nepentes, Optopol, Pemug, Polimex-Mostostal, Torfarm. BRE Bank Securities S.A. receives remuneration from issuers for services rendered to the following companies: 05 NFI, Agora, Arkus, Bakalland, BRE Bank, Elektrobudowa, Erbud, Es-System, Farmacol, Fortis Bank, GTC, Komputronik, Macrologic, Mieszko, Mostostal Warszawa, Nepentes, Pemug, PGF, PGNiG, Polimex-Mostostal, Polmos Lublin, Polnord, Prokom Software, Seco War- wick, Sygnity, Torfarm, Unibep, ZA Puławy. Asseco Poland provides IT services to BRE Bank Securities.
The present Monthly Report exclusively contains information previously published by BRE Bank Securities S.A. and only comprises a comprehensive presentation of unaltered data. The information, including recommendations, contained in the Monthly Report has been published in separate reports, the publication dates of which are located on page 7 of the Monthly Report. In connection with the above, BRE Bank Securities S.A. does not consider the Monthly Report to be a recommendation as under- stood in the Order of the Council of Ministers, dated 19 October 2005 r., in regard to information comprising recommendations con- cerning financial instruments or their issuers.
Individuals who did not participate in the preparation of recommendations, but had or could have had access to recommendations prior to their publication, are employees of BRE Bank Securities S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendations.
Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Comparative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market better than DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.
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