- Romania’s most important indices are at all time high levels, BET exceeding a psychological threshold of 10.000 points.
Main indices Evolution
| BET (EUR) | BET-FI (EUR) | RON/EUR (eop) | |
| 2002 | 80.0% | 82.4% | 25.2% |
| 2003 | 11.2% | 13.16% | 17.7% |
| 2004 | 111.5% | 127.0% | -3.5% |
| 2005 | 59.6% | 191.1% | -7.3% |
| 2006 | 32.2% | 43.9% | -8.7% |
| 2007* | 38.4% | 55.5% | -7.17% |
* July 10, 2006
SIFs regulatory environment
- Probably the most important event in the second quarter was SIF3’s share capital increase which boosted the liquidity on the stock exchange. SIF3 decided to increase it’s share capital in the general shareholders meeting . This share capital increase was made by incorporating the prior years’ reserves. In doing so the company doubled it’s share capital and distribuited one share for every share held prior to the increase. The decision was contested by one of the shareholders COCOR SA. The first court decision was favorable for COCOR SA but the second one was in favor of SIF3. The process is far from over, COCOR SA already filling for a Court appeal.
- the Romanian authority in the stockmarket (CNVM) issued a decision that redefines the concerted shareholding. CNVM issued a statement that enables the asset managers that manage more than one mutual funds or individual accounts to buy shares in the SIF’s up to 1 percent on each of these accounts. This actions are assumed not to be concerted.
- another project linked to the activity of the SIF’s was the proposal to increase the minimum allowed holding in any one of the SIF’s from 1 percent to 5 percent. This project was rejected by the Parliament, but the issue can come again.
Compensation schemes : Fondul Proprietatea, Transelectrica (TEL) shares
- The project that modifies the legislation regarding “Fondul Proprietatea”, that was created to compensate for the expropriation done by the communist regime, was discussed and approved by the government. This was an important step toward the listing of the fund, which is expected to be finalized in early 2008.
- Other individuals preferred to convert their compensation amounts into Transelectrica (TEL) shares. The first individuals compensated in such manner, received Transelectrica shares at the beginning of July
Ex-rasdaq shares coming in the foreground
- Changes were made also on the Rasdaq market which led to an increase in daily liquidity. Also there has been an observed trend of increasing transparency from the companies listed here, made possible by their managers which are starting to take advantage of the opportunities offered by the market.
- In this last quarter all the major companies published the results for the first quarter of the year, some of which will be presented later in the material.
- The political turmoil ended in some way, with the rejection of Parliament’s proposal to dismiss president Basescu in May.
| Capitalization BVB + Rasdaq (EUR mn) | |
| 2002 | 4,356 |
| 2003 | 4,915 |
| 2004 | 10,894 |
| 2005 | 17,589 |
| 2006 | 24,540 |
| July 16th, 2007 | 38,850 |
Top 25 market Capitalization as of July 13th, 2006 (table)
Liquidity distribution over the last six-month period (Jan’07 – Jul’07):
- We computed the daily average turnover for the 50 most liquid shares, in EUR terms, considering the transactions during the last 6 months (Jan 2007 – June 2007).
- Compared to the previous quarter, 6 stocks were traded above EUR 1,000,000 daily average, as opposed to 7 stocks, three months earlier;
- 24 stocks were traded above EUR 100,000 daily average, which was a significant increase, more than doubling vs. last quarter ;
- 50 most liquid shares were traded more than EUR 35,000 daily average.
Top liquidity (Jan 2007 – Jul 2007) (table)
Deals on the market in H1’07
Chocolate maker Kandia-Excelent (EXC), one of the main players in the local market was taken over by the British group Cadbury Schweppes in exchange for EUR 99.5 mn. There were two deal trades carried out with over 93.3% of the Kandia Excellent share capital. Meinl Bank sold 9.16% of the sweet maker’s shares and Axis investments Ltd sold 84.16% of the company’s share capital .The buyer was Cadbury Schweppes, one of the main players in the worldwide sweets market. The shares were transferred on the deal market section at 2.9 RON/share, 14.71% below the regular market section reference price at that time ( June 10th). The shares are now trading at 2.8 RON/share. P/E ratio is 12.5.
Two share packages representing 65.8% of Ceramica Iasi (CERE) capital were sold in June, through 2 special deals. 10.7 mn shares were sold at 6.58 RON/share. The share price was 40% bellow the one on the stock exchange. The company had a receding profit in 2006 , due to massive investments into a new production line. The ratios for this deal are : P/E 2006 of 20, P/S of 1.7.
This month, Loulis Foods International Foods Grecia sold60% of Loulis Romania (MPN) to the Austrian holding Leipnik Lundenburger Invest . The value of the transaction was EUR 34.1 mn, equivalent to EUR 56 mn for the entire company. The local bread manufacturing market totals around EUR 1.3 bn. The P/S ratio for this transaction is 1.22.
Main sectors at the Bucharest Stock Exchange:
1. Oil Sector
Petrom (SNP)
| Price : | 0.575 RON/share |
| Capitalization: | RON 31.36 bn (10.2 EUR bn) |
| sales Q’1 2007: | RON 2.75 bn (EUR 0.84 bn) |
| Net Profit Q1’2007: | RON 381 mn (EUR 113 mn) |
Q1’ 2007 financial results:
The first quarter of the year was characterized by a very challenging environment in the oil and gas sector, due to lower crude prices (falling 7% for Ural oil) and appreciation the RON against the dollar(+13%).
SNP Petrom posted an EBIT of 117 mn EUR, lower by 63% compared to last year’s first quarter . sales also decreased by 10% from 0.93 bln EUR to 0.84 bln EUR. The net profit decreased to 113 mn euro from an impressive 262 mn EUR , equivalent to decline of 57%.
The environment:
The demand for crude oil increased in the first quarter by 0.7%.
Q1/07 boe – USD 57.8 (declining 4$/boe compared to Q1’06)
In the first quarter the demand for oil in the world was weaker, following a milder winter. The only exception to this general trend was China where demand for oil increased.
The oil price started to increase in the second quarter, reaching these last few days a maximum of 78 $/barrel . The increase in crude oil prices was largely driven by political concerns that might disable the necessary supply of oil in the highly industrialized countries.
The world production of crude oil increased in the first quarter of the year by 0.2 mn bbl/day.
SNP Projections 2007 – 2010
| RON mn | 2006 | 2007e | 2008e | 2009e | 2010e |
| Boe production volume (mn) | 74 | 68 | 76 | 90 | 105 |
| Price/ barrel - RON | 176 | 153 | 156 | 168 | 168 |
| sales | 12999.0 | 10331.3 | 11843.5 | 15120.0 | 17662.8 |
| Increase (%) | -21% | 15% | 28% | 17% | |
| EBITDA | 3596.0 | 2634.5 | 3434.6 | 4687.2 | 5475.5 |
| EBITDA Margin (%) | 27.7% | 25.5% | 29.0% | 31.0% | 31.0% |
| EBIT | 2777.0 | 2014.6 | 2984.6 | 4112.6 | 4804.3 |
| EBIT Margin (%) | 21.4% | 19.5% | 25.2% | 27.2% | 27.2% |
| Net Profit | 2282.0 | 1498.0 | 2392.4 | 3356.6 | 3921.2 |
| Net Profit Margin (%) | 17.6% | 14.5% | 20.2% | 22.2% | 22.2% |
An important event marked the recent evolution of Petrom’s share price. Arpechim Pitesti, one of two refineries in Petrom’s portfolio was notified by the Regional Agency of Protection for the Enviroment that it will have to suspend it’s activity for the next 6 months, due to unsatisfactory safety measure. The share price fell to a minimum of 0.495 RON/share immediately afterwards .
Following this process Petrom made an agreement with the Agency what allows the company to continue its gasoline production and petrochemical products for the next three months. Arpechim will continue its activity until the start of October, in the meantime working to comply with environmental restrictions.
Our projection for 2007 remains unchanged until further Information about the effect of this incident will be published by Petrom. We had already priced in our evaluation model used last time a decrease in sales and profits, but we estimate that in 2008 the upward trend will resume, and starting in 2009, the company will manage to attain positive margins in the refining sector as a result of investments made in the two refineries. Currently, the weight of E&P revenues account for 60% of total revenues, while 40% pertain to the R&M segment. The company intends to make the Petrobrazi refinery the largest and the most efficient refinery in Romania by 2011.
Multiples evaluation
| SNP Petrom | 2006 | 2007e |
| P/E | 14.5 | 21.7 |
| P/BV | 2.7 | 2.3 |
| P/Sales | 2.5 | 3.1 |
| EV/EBITDA | 10.2 | 13.9 |
The distribution of share to Petrom’s employees hasn’t come to a finalization in the last three months. We remind you that according to the privatization agreement, some 90,000 actual and former Petrom employees are entitled to acquire a combined 8% stake from the Romanian government at the privatization price of EUR 0.525. The government decided to individually allocate the shares and not through the Employees Association. However, neither a precise date nor the existence of any restrictions on the date of distribution was announced. The latest news on this subject sees the Ministry of Economy having been countered by the Ministry of Justice, which supports the distribution of the 8% stake to current employees, all of this leading to a stalemate.
Rompetrol Rafinare Constanta (RRC)
| Price : | 0.1050 RON/share |
| Capitalization: | EUR 710 mn |
| Net Revenues Q1’2007: | USD 530.6 mn |
| Net Loss Q1’07: | USD 3.26 mn |
Rompetrol Rafinare Constanta (RRC) started the year on a more favorable basis, registering an increase in net revenues of 30% to 530 mil dollars. EBITDA for Q1 stood at USD 28 million (1,5 times higher than Q1 2006) . The negative aspect still remained because Rompetrol Rafinare Constanta continued to register net losses of 3.26 mil USD.
Environment
In the first quarter of the year, the crude oil prices started on an upward trend compared to year’s end, but compared to the first quarter of last year, the prices were lower by 6.5%. The second quarter continued with increases reaching the 78$/barrel mark.
The sour crude oil in the Urals also registered an important increase of prices due to increasing demand from the USA and EU. The Brent Ural differential differential reached 3.47 $/bbl. Rompetrol expects a decrease in the price of oil in the Urals in to coming period.
| RRC (EUR mn) | 2005 | 2006 | Q1’2007 | 2007- budget |
| Net revenues | 1608.9 | 1619.2 | 392.6 | 1468 |
| Growth y/y (%) | - | 0.6% | 30% | -9.3% |
| EBITDA | 131.7 | 95.9 | 20.8 | 64 |
| EBITDA margin (%) | 8.2% | 5.9% | 5.3% | 4.4% |
| EBIT | 57.0 | 45.5 | 14.8 | 35.3 |
| EBIT margin (%) | 5.6% | 2.8% | 3.7% | 2.4% |
| Net Profit (loss) | 52.0 | 3.0 | (2.4) | 4.8 |
| Net profit margin (%) | 3.2% | 0.18% | - | 0.32% |
For the second quarter we estimate better results due to favorable market conditions, of oil prices increasing and the coming of the summer season, where the focus is put on gasoline consumption.
We estimate an overall improvement in Rompetrol’s activity in 2007, meaning better refining margins due to a stabile oil price and to the modernizations that are underway. The company has plans to double its market coverage from the estimated 280 stations as of now to some 500 in 2010.
(RRC) Multiples:
| Non-diluted | 2006 | 2007 - BVC |
| P/E | 183.5 | 147 |
| P/Sales | 0.4 | 0.5 |
| P/B | 1.32 | 1.27 |
| EV/EBITDA | 10.8 | 9.8 |
Weused in our calculations the figures used in the the budget published by Rompetrol, which assumes a net profit at the end of the year of 6.7 mil $ (or 4.8 mil euro at EUR/$ - 1.35 ).
The dilution effect scenariois still present, nothing having been done yet to change that possibility. A dilution effect might arise in 2010, when a convertible bond issue will fall due. In a pessimistic scenario that doesn’t account for future capital increases or for partial repayment of debt, the resulting number of shares will be almost double. In this case, the current multiples are as follows:
- P/S 07e 0.90
- P/B 07e 2.54
The Rompetrol Group NV (that owns 77.4% of RRC) also bought in 2006 100% of Dyneff – a Frech Downstream company. The entire Group has sales of about 6 bn dollars and is now interested in participating in the privatization of NIS Belgrad – the Serbian oil&gas company.
The Rompetrol Group NV sold recently part of Rompetrol Well Services (PTR), and is interested in selling 10-25% of the entire holding to a big investor. The long-term intention of The Rompetrol Group is to enter Top 10 European oil&energy groups.
2. Banking Sector
Romania:
- BRD – Groupe Societe Generale and Banca Transilvania ended 2006 on a positive result basis, and continued to do so in the first quarter of 2007.
- BRD posted in Q1’07 a net profit of 168 mil RON up 12% compared to March 2006. Banca Transilvania also increased it’s net profit by 14.2% to 31.25 mil RON, from a value of 27.36 in Q1’2006.
BRD Groupe Societe Generale (BRD)
– market capitalization: EUR 6.12 bn ;
– Since our last review, the share price hiked an impresive 37.2%, due to positive results in the first quarter;
– The number of offices reached 600 at the end of the first quarter, 1000 ATMs and 10.000 POSes used. The total number of active customers is said to be 2.2 million.
– The financial ratio (ROE) is still at an attractive level of 30%.
– Loans reached RON 19 bn at year-end, while deposits summed up to RON 20 bn; assets increased 48.5%(euro terms) in the last 12 months, to EUR 8.96 bn;
Banca Transilvania (TLV)
- market capitalization: EUR 1.75 bn
- Since our last review, Banca Transilvania, increased it’s share capital, incorporating the profit from last year. Out of 393.3 million shares offered at 0.35 RON/share, 387.5 million shares were subscribed by the shareholders.
- The market capitalisation increased in the last three months by 41.1%.
- In Q1’2007 the total assets increased by 10% YTD, and the net profit by 14.2% y/y.
- The market share of the bank is at 4.61%, ranking fifth in the top banks in the system; The bank reached 467 units in the first trimester , and a total of 5000 employees.
- Our calculations show that Banca Transilvania is currently fairly priced, but the possibility of a takeover would probably increase the share price even more.
| BRD | TLV | |
| Average price July, 10th | 27.4 | 0.89 |
| Capitalization – EUR bn | 6.12 | 1.75 |
| P/BV 07e | 6.8 | 5.5 |
| P/E 06 | 31.8 | 51 |
| P/E 07e | 27.7 | 43 |
3. Pharmaceuticals
Romania:
- The Romanian pharmaceutical market managed to obtain excellent results in 2006, expanding by 20%. Total sales were around 1.43 billion euro.
- The pharmaceutical market had its biggest increase in the retail sector – 23.3%. The prescription drugs released also increased by 23%, and OTCs by 24%.
- The net profit margins for both companies are expected to increase by the end of 2007.
Antibiotice Iasi (ATB)
sales Q1’2007 : EUR 12.3 mn (+19.5% y-o-y);
market capitalization: EUR 308 mn;
- Antibiotice is state-owned, the majority shareholder here being “the privatization Authority” owning 53%;
- The privatization process is still expected to take place. The pharmaceutical company attracted several important buyers such as Ozone Laboratories, Acic Pharmaceutical and a consortium led by Biofarm Bucharest in association with the SIFs.
(ATB) Financials
For the first quarter ofthe year Antibiotice posted sales of 12.3 mil EUR, representing an increase of almost 20%. The net profit also increased 10.8% in euro terms, to 3.24 million euros compared to the same period of 2006. For this year, the company budgeted +20% sales growth and slightly higher profit.
The share price followed the trend of the market and continued to appreciate, up by19% in the last three months. The perspective for this year are positive. We estimate that the company has the potential to develop at a rate of 15-20% in the coming years.
Biofarm Bucharest: (BIO)
sales Q1’2007 : EUR 4.28 mn (+5.3% y-o-y)
market Capitalization: EUR 132 mn;
- For the first quarter, the drug producer BiofarmBucharest, increased it’s sales by 5.3% in euro terms to EUR 4.28 mn . The net profit increased by 11.7% to EUR 1.25 mn. According to the company report , the number of units sold increased by 12.11% higher than the average market increase of 5.6%.
- The company budgeted for this year an increase of 14% in sales(EUR 19.7 mn), and 4.5% in net profit (EUR 3.9 mn)
- Biofarm increased it’s sharecapital by issuing 117 million new shares distributed at no cost to the shareholders. The allocation rate is 1 new share for every 4 old shares held.
- The market capitalization increased by 11.6% since our last review.
- Biofarm is aprivately owned company, the only producer of gelatinous capsules in Romania, one of the most important producer of tablets, and the leading syrup producer, with a market share of some 15% on this segment (including the imports). The company has 80 brands in it’s portfolio, some of which have a long tradition, such as Bixtonim, Triferment, Colebil, Cavit, Anghirol, over 80% of the company’s income being generated by OTCs and nutritional supplements.
| ATB | BIO | |||||
| EUR mn | 2006 | Q1'07 | 2007e | 2006 | Q1'07 | 2007e |
| sales | 56.0 | 12.3 | 64.9 | 16.5 | 4.3 | 19.8 |
| EBIT | 7.3 | 3.79 | 9.7 | 4.2 | 1.46 | 5 |
| Operating margin | 13.0% | 13.9% | 14.9% | 25.4% | 26.0% | 25.3% |
| Net profit | 5.4 | 3.24 | 8.3 | 3.6 | 1.25 | 4.6 |
| Net profit margin | 9.6% | 10.1% | 12.8% | 21.8% | 22.3% | 23.2% |
| INDICATORS | ATB | BIO |
| Average price July, 10th (RON) | 2.1 | 0.74 |
| Capitalization - mn Euro | 308 | 132 |
| P/BV07e | 5.2 | 5.4 |
| P/E 06 | 43.1 | 37 |
| P/E 07e | 37.1 | 29 |
| P/S 07e | 4.7 | 6.7 |
4. Financial Investment Companies (SIFs):
Compared to the last model we used a 15% discount forthe BCR position included in net asset value of each SIF. We also took into consideration the succesfull completion of the sharecapital increase in SIF3, in doing so we used the number of shares that will result. SIF3 incresed it’s sharecapital by distributing 1 free share for every share held.
The is still upside potential for 4 of the 5 SIF’s between 11% and 22% . The most undervalued asset here appears to be SIF5. SIF3 grew more than the other SIF’s following the capital increase announcement.
INPUTS FOR THE MODEL
We remind you that each of the five financial investment companies owns a 6% stake in BCR’s share capital (except SIF Oltenia, which holds 6.12%). The sale of 61.88% of BCR to Erste lead to an overall value of the bank of EUR 6.06 bn at that time representing 5.8 x BV’05.
We have re-estimated the growth potential of SIFs prices on a fundamental basis, considering the following:
a) the value of BCR resulted from the assumption that the value of one BCR share is 1/6 * share price of Erste, we have discounted this 15% (vs. 30% in our prior model): the uncertainty regarding the value is decreasing, as the listing of Erste on the BSE becomes more and more likely in the next 6-12 months. We imagine a possibility of share exchange BCR vs. Erste.
b) We have considered the other holdings in SIFs portfolios at their reported value in June 2007.
Thus, we have recalculated the NAV/share for each SIF, considering them as target-prices for an interval of 6 - 12 months.
| EUR mn | SIF1 | SIF2 | SIF3 | SIF4 | SIF5 |
| BCR stake | 475.1 | 475.1 | 475.1 | 475.1 | 475.1 |
| 15% discount | 403.9 | 403.9 | 403.9 | 403.9 | 403.9 |
| Other shares and holdings (June 2007) | 444.7 | 346.1 | 548.5 | 463.6 | 650.4 |
| Recalculated Total assets | 848.6 | 750.0 | 952.4 | 867.4 | 1054.3 |
| Liabilities | 10.8 | 7.8 | 12.8 | 25.9 | 12.3 |
| Recalculated total NAV | 837.8 | 742.2 | 939.6 | 841.5 | 1042.0 |
| Recalculated NAV (EUR) | 837.8 | 742.2 | 939.6 | 841.5 | 1042.0 |
| Recalculated NAV (RON) – target price | 4.8846 | 4.5760 | 2.7533 | 3.3369 | 5.7490 |
| Reported unit NAV (RON) | 2.9359 | 2.9405 | 3.7272 | 1.8949 | 3.8338 |
| Closing price July, 16th 2007 | 4.3000 | 3.9700 | 2.8200 | 2.9400 | 4.6600 |
| Upside % | 14% | 15% | -2% | 14% | 23% |
Our recommendation for SIF2 and SIF5 is “Buy”, and “Hold” for SIF4. We don’t provide a
recommendation for SIF3, as the situation is unclear regarding the share capital increase. Investors should be aware of the fact that if the share capital increase doesn’t succeed the free shares that should be distributed won’t become available to the shareholders. The primary risk for an investor is to have sold it’s shares following the price decrease after the capital increase.
Other issuers
Transelectrica (TEL) – the national power-grid company
| Price: | 46.5 RON/share |
| Capitalization: | RON 3.40 bn |
| sales Q1’07: | EUR 173 mn |
| Net Profit Q1’07: | EUR 13 mn |
After publishing great 2006 year’s-end results of 57% increase in sales and a profit margin of 11.4%, Transelectrica planed to achieve for this year a declining sales and profit figures (772.3 mil EUR vs. 783.6 mil EUR) and a more conservatory net profit, of only 18.5 mil EUR. This scenario would correspond to a profit margin of 2.4%. The company’s management believes that the favorable situation registered in the prior year was temporary, due to lower maintenance costs and investments.
The results achieved in the first trimester already indicate higher figures at the years end. The net profit for Q1’07 was EUR 13.5 mn.
Financial results 2006 - 2007
| mil EUR | 2005 | 2006 | Q1'07 | Budget 2007 |
| sales | 501 | 783.6 | 173.0 | 772.3 |
| EBIT | 53.3 | 84.8 | 18.4 | 32.9 |
| EBIT margin (%) | 10.6% | 10.8% | 10.6% | 4.3% |
| Net profit | 35.0 | 89.1 | 13.0 | 18.5 |
| Net profit margin (%) | 7.0% | 11.4% | 7.5% | 2.4% |
The budget reflects an unfavorable scenario of losing the litigation with the national Energy Authority, case in which the company will have to purchase electricity at a higher cost than that of the market, incurring higher expenses. The
Romanian Capital Market Outlook July07.pdf, 190 Kb
